Where’s Marc?

The importance of the entrepreneur to the success of a technology company cannot be over-stated.

The holiday season is a terrific time to reflect back on the year, and looking back on 2009, if I can say one thing about the enterprise software pitches we’ve seen, it’s that many if not all started out with, “We’re like Saleforce.com…”

A lot of these businesses do, in fact, look a lot like Salesforce.com, from a growth perspective. There are, however, a few differences, the most important of which is, none of them include Marc Benioff as part of the pitch!

Some might minimize the impact of this missing factor on the potential success of their business. But if you look at the most successful tech companies of the last 20 or 30 years, there are almost always one or two key people you can point to who made the company. The list comes easily to mind: Steve Jobs, Bill Gates, Larry Ellison, Larry and Sergei, Marc Benioff, and Jeff Bezos, to name a few.

So when someone comes in with an incredible idea and the pitch starts with, “We’re like Salesforce.com,” the #1 question in everyone’s mind in the room is not, “Does this revenue ramp look like that of Salesforce.com?” It is: “Where’s Marc?”

Because without Benioff, I would argue, Salesforce.com would not have become the SaaS category creator and market defining company that it did.

There are a lot of differences one can look to when a company pitches itself as analogous to another. Two easily quantifiable factors are capital and revenue. Salesforce.com, no doubt in part due to the market conditions of the time, was able to raise a whopping $64M of funding in its first two years in business. I have argued in the past that the cost of building and delivering product to market has markedly decreased in recent years – due to the very existence of companies like Salesforce.com. Certainly software companies today should require far less capital than Salesforce or NetSuite from creation to liquidity. But the point remains that Salesforce.com had a significant amount of capital to work with to get the fly-wheel spinning — a lot of which it could apply to fund the cost of customer acquisition. The other measurable factor, as shown in the chart below, is Salesforce.com’s revenue growth ramp from 2001 to 2004: from less than $10M to greater than $90M.

More subjective, however, is measuring the entrepreneur whose vision it was to create Salesforce.com to begin with. That factor is a much harder one to quantify, and certainly is more easily measured with the benefit of hindsight. The real challenge of course, is convincing potential investors, as Jobs, Gates, and Benioff were able to, that you are going to be hugely successful as an entrepreneur before you are. When it comes to pitching your own company, the benefit of comparing yourself to Salesforce.com – or any other wildly successful public company for that matter – may be vastly diminished unless you are in fact the next Marc Benioff, Steve Jobs, or Bill Gates. And if you are, then compare away – just be ready to make your case.

When You Are The Product

When you’re pitching to customers, your product is a piece of software or hardware, a service, or a web site. When you’re pitching investors, the product is you.

It may seem obvious, but a pitch isn’t just about the content. You’re evaluating your potential investors based on the questions they ask and the knowledge they show of your space. Meanwhile, your investors are evaluating the whole product that is you: The market opportunity, your strategy for capturing that opportunity, and you and your team.

When I say you as a whole product, I mean whether you:

• Present effectively
• Can recruit, sell, and communicate a big vision
• Know more about your domain than anyone else
• Think strategically
• Have the appetite to build something really big
• Are a great fund raiser

That last bullet may seem a little bit of a chicken and egg problem. But part of what investors are evaluating is whether they think other investors will want to give you money in the future.

With VC purse strings tight, raising money has become a lot harder than it was in recent years. Since I wrote Perfecting Your Pitch last summer, I’ve seen almost another 200 pitches. My hope is that this entry will give you as much insight into what we look for when making an investment decision as into how to pitch.

Address Your Audience

As with any presentation, it’s critical to consider your audience. Many entrepreneurs and CEO’s present a modified version of their customer deck. It has a few obligatory market sizing slides up front, but ultimately it’s trying to convince someone to buy the product the company sells, rather than to buy the company itself.

It’s easy to forget that potential investors aren’t buying your product. They’re buying a piece of your company – the opportunity, the team to go capitalize on that opportunity, and the customers or users who are going to spend money to use that product.

Some entrepreneurs think of spending time revising their presentations as a waste of time. Each VC seems to want something slightly different and it’s easy to become disillusioned with the process, especially when it takes a long time. That’s valuable time away from acquiring users or selling customers.

As an entrepreneur I found the fund raising process highly subjective and time consuming. But I had to remember that pitching is just like any other sales opportunity: it requires preparation, psychology, and ultimately, a product that people want to buy.

Three Key Messages

Last time I wrote about perfecting your pitch, I described individual slides that might make up a slide deck. This time my goal is to take a step back and articulate three key messages your presentation – that is, you and your deck together – needs to communicate.

1. This category will be big, and the time is now.

It’s all too easy to throw up a slide that says you’re playing in a $20B market. For example, some estimates put the Internet advertising market at $21B in 2008.

Your goal is to tell your investors what part of that $21B you’re going to crack, and why. The $21B is the Total Available Market (TAM). The segment of the market you’re going to own is the Served Available Market (SAM).

To devolve into tactics for a moment, one way to make the case for why you’re going after something big is to show the SAM and the TAM with a colorful pie chart. Make the TAM the overall size of the pie. The SAM is the slice you’re going to eat over the next 5 or 10 years. To show that the market is a growth market, you can add a second pie chart showing the market three or five years out – the value of the slice is bigger, as is that of the pie itself.

At this point in your presentation, you’re not trying to convince the potential investor that you are going to be big. You’re just trying to convince them that there is something big here. Don’t try to reel the fish in yet, just try to get the fish on the line.

This is a big opportunity now.

It’s time to set the hook and lend an air of urgency to what you’re doing. Investors are presented with a number of seemingly big opportunities every day. Make the case for why the time is now.

What big next wave are you riding? What confluence of forces are coming together to make this make sense? Surely people have thought about what you’re doing before, but now is the time. Why?

This is a whole category, and it’s a category that matters.

Participating in category creation is a big part of what venture capitalists look for. If you’re building a feature, or a product that is marginally better in an existing space, that probably isn’t a good match for venture capital. Why does what you’re doing matter? Why is it important? Why is it going to fundamentally change things?

Now that you’ve set the hook, it’s time to start reeling.

2. Show and tell: How you win

Don’t just say you’re going to win. Show it. Inspire confidence.

By knowing more about your industry than anyone else, knowing your numbers inside and out, being clear and articulate, and having the best team possible to build the business, you show that you’re going to win.

Then, try to address the following questions:

What makes you more qualified than just about anyone else to do this?

Why is your offering better?

Why is your offering a must have?

How are you going to win?

What is your unique insight?

What asset are you building up that some other venture capital firm can’t just throw more money at to reproduce? Examples include: a huge mass of users; a database of historical data that can only be created over time, not just with money; customer or user data that once imported into your system would be a real pain for your customer or user to transfer to a new system; or a hardware design that only a handful or two of people in your industry could have a chance of building.

Competition is good. It means that this really is a category that matters. Don’t just leave that competition slide hanging without telling people why you’re going to win. What’s the competition doing, and what are you doing to beat them?

3. This is valuable and strategic

I know from being an entrepreneur just how incredibly hard it is to balance the day to day challenges of operating a business with presenting a long term vision that investors will buy into.

As much as possible, be clear and realistic about your business model, and provide supporting data that this is the right business model for your company. Why will it work?

Try to answer questions like:

How will you get to $100M in revenue in five years? Again, it’s not enough just to show a chart with revenue going up and to the right. It’s critical to articulate how you’re going to get that revenue.

Why are you a must have?

Most importantly, why are you strategic? What is the larger ecosystem you’re playing in? Why will multiple large companies care about you? Why will they compete to buy you if you don’t IPO?

Conclusion

Investors spend a lot of time on the potential risks of an investment. Your goal is to get them excited about the opportunity and demonstrate that you will address the risks.

It’s one thing to tell investors you’re going to be successful. But show them you are and you’ll not only give a great pitch, you’ll inspire them to invest.

The Current Environment

The holiday season has arrived none too soon for investors looking to get out of town before they experience any more market volatility. With many saying they’re closed for business until next year – some until Q2 – these are hard times for entrepreneurs who need to raise money.

Having only ever raised money during a recession, I feel your pain. In the new reality, a flat to slightly up round should be considered a victory and a down round not unusual. The days of the 2X or 3X step-up won’t be with us again for some time.

I recently urged a CEO – a company that had doubled its revenue in the last year – to accept a venture investment at a pre-money valuation only slightly higher than the previous round.

He looked me straight in the eye and in a weary voice said, “Do you really think this is our only alternative? Is this the best we can do?” I share his frustration. We’ve all had the experience of working hard – on all cylinders – only to have our efforts go unnoticed and unrewarded.

“For every one of you, there are 10 companies out there that aren’t going to get funded,” I told him. “They’ll need to find some other way to survive. What’s more likely is that they’ll just go away.” He nodded. Could they get by without raising money? Yes. But capital is critical fuel for growth. With money in the bank, a company can continue to build for growth when many of its competitors are struggling.

Investors aren’t known for their optimism. Just that morning a colleague had told me: “We just don’t have any visibility into 2009. It’s going to be a write-off year.”

Ironically, some “high concept” deals, companies with a big vision to change an industry, are raising money faster and more easily than those with revenue. That’s because VCs want to back the game-changing leader with a vision for the future. They want the winner-take-all bet that will deliver a fund impacting return due to its strategic and therefore inherently valuable nature.

The environment is most frustrating for those with revenue. If 2X or 3X multiples are depressing for a public market CEO with $100M in revenue, they are that much more depressing for those still trying to grow out of the law of small numbers. Consider the plight of those with good growth and $2M, $5M, or $10M in revenue being valued on those same multiples.

The good news is that investors seem to be a lot less shell shocked than they were even just a few weeks ago. A month ago they were still reeling from the suddenness of the market change.

Today, some smell opportunity. According to an entrepreneur friend of mine who just raised money from another top firm, a small handful of VCs “are laughing. While everyone else is running scared, they’re doing deals.”

The current environment might most aptly be compared to an emotional journey through the five stages of grief – denial, anger, bargaining, depression, and acceptance. As for me, always the pragmatist, I have reached acceptance. I find myself busier than ever helping our portfolio CEO’s with 2009 planning, working with those who are fundraising, reconnecting with those I haven’t seen in a while.

And, of course, I’m still looking for that next great investment.

Thanksgiving 2008 (with a nod to Stanley Bing)

Dear Shareholders,

This year we have many things to be thankful for, not the least of which is our hard earned capital in the bank raised just weeks before the crisis. Thank god we aren’t raising money now or we’d be stuck in deep do-do trying to sell our wildly optimistic (some might say delusional) Web 2.0 business model. If you think we have any chance of making money in this lifetime, well let’s just say you guys must still believe in Santa Claus. (Hell, after our first round I believed Santa had relocated to Sand Hill Road.)

I guess now is the time to let you in on the “real” plan. We never planned on building this thing. What we’ve always wanted to do was to raise money from saps – whoops, I mean nice guys – like yourselves – and then flip this sucker to Google or … well, to Google, anyway.

I am very thankful that I’m not Jerry Yang, who, when he was offered a nice piece of change from Microsoft, turned it down even though he had no real business strategy after 392 days as Chief Yahoo and employees were jumping ship faster than I can say “free beer in the lobby.” If Mr. Schmidt comes knocking on our door with money in hand – as I pray he will – you can be sure I will take it.

Now, to my fellow entrepreneurs who are busy raising money, I want you to know that I feel your pain. If only I could share some of that $25 million we recently put in the bank. Some of our investors – now that I’ve let them in on the real plan – might want us to do just that. Although I’m generous with my sympathy I’m a little less so with my money. I mean think of how hard I worked on my story (an epic worthy of the greatest storytellers in history like Homer, Steve Jobs, and P.T. Barnum) to get all that cash.

On a final note, I want to thank our employees, whose dedication to our cause is nothing short of incredulous – I mean, incredible – and we appreciate that you were willing to take a 10% salary cut in order to stay. We firmly believe that despite the public market comps, we will be worth a whole lot more in the not too distant future. Some would say there’s nothing but upside for us. I believe that 2013 is looking like a really great year.

Dear friends, this year has had its challenges and while many VC’s are already calling 2009 a “write off” year, we remain optimistic. We look forward to welcoming Jerry Yang’s replacement. We think our two companies could benefit from working together. They have a service and we have proven ourselves experts at marketing. I can only hope the new CEO is as much of a Yahoo as the old one was.

Happy Thanksgiving.

10 Ways For Companies To Grow In Rough Times

It’s all too easy in an environment of uncertainty and paralysis to focus on cost-cutting to the exclusion of all else. As the old saying goes, “you cannot save your way to success.” Making cash last is critical, but the reality is that startups – even the most capital efficient ones – burn through capital every day. Eventually, no matter how much you save, cash runs out.

The answer is growth.

Why are companies that just announced new rounds of funding cutting 10% or 15% of their workforce? Because the environment gave them – and every other startup – the reason to do so. Run lean and mean. And if your product isn’t selling, cut the burn way, way down. But startups must exit the next 18 or 24 months with growth under their belt. Otherwise they will have tread water while their competitors leapfrogged ahead.

The Myth of CFBE
The great myth of cash flow break even (CFBE) is that few, if any of tech’s successful companies saved their way to success. Certainly, many of them were incredibly capital efficient. As a boot-strapped entrepreneur myself, I recognize the value of running a lean and mean company, and I have been drawn to other highly capital efficient entrepreneurs as an investor. In this environment, as in any, it’s critical to take the pulse of the business, and especially new hires and sales, monthly if not weekly. But simply put, those companies found ways to grow even in the most difficult of environments.

From speaking with portfolio companies and my partners, here are:

10 Ways For Companies To Grow In Rough Times

1. Focus – put all the wood behind one arrow. Have the courage of your convictions to pick one.

2. Be brutally honest with yourself about how compelling your product/service offering is. It must be a must have, and if it’s not, fix it. But don’t kid yourself. It isn’t what you think, it’s what your customers think.

3. All hands on deck. Get the most out of your company. Make sure everyone understands the strategy and plan and what their role is. If they aren’t fully signed up and motivated and part of the team, let them go.

4. Qualify the heck out of your leads. Be brutal. Don’t waste time with customers or users who won’t close or a sales process that doesn’t converge.

5. Make it really easy to try out your product or service. Make sure it delivers very short time-to-value.

6. Ask your best customers or users to help you find other prospects or users within their “network.” They want you to be successful. It’s in their interest. So asking them for introductions and referrals – have them “sponsor” you into new opportunities.

7. Equip your best customers and users to be evangelists for you, and reward them for it. They can tell your story like no one else.

8. Make sure you’re delivering a “whole product.” If your customers or users don’t have time or resources to do integrations or customize your product to meet their needs, then make it easy for them to buy those services from you.

9. Be bold – be larger than life. Don’t be afraid to make mistakes. Startups are about risk/reward and in rough times, people decide that playing it safe works. It doesn’t.

10. Be totally transparent. Communicate more often. Fight the urge to hide bad news. Stand on a table every week and look your employees in the eye. Make this the most important meeting of your week and never skip it.

What Makes A Winner?
In good times, most companies don’t focus as much as they should and aren’t maniacal about their value proposition and religious about strictly qualifying leads early. They “waste a lot of calories,” so to speak.

In tough times, the winners have a combination of perfect execution and a compelling value proposition for the time – whether it’s “cut costs and do more with less $,” “drive the top line,” “provide peace of mind,” or “entertain” (to give people a break from a harsh reality) – they help the customer with the particular pain he has.

Know your customer, personally and often. Don’t take anyone else’s word for it. It doesn’t matter what size you are or what you already know. The world changes too quickly in these times. It’s what your customers think that really matters.

Focusing On Growth

One of the biggest challenges for entrepreneurs right now is valuation. Simply put, multiple compression in the public markets combined with frantic missives from investors has translated into vastly reduced valuations in the private markets.

Some companies are raising up rounds. Typically they are in “must have” large markets that are relatively unaffected or even rewarded in this environment. Security and cost-savings are two such examples. Often, they have out-executed since their last round, were already incredibly cash efficient, and have revenues that are doubling or tripling year over year. Or they are a combination of some of the above and hugely strategic. That is, if they win in their market the bet is that they will be incredibly valuable.

But the challenge faced by many CEO’s is growing into their last round valuation. While next year is likely to be better in terms of the willingness of private market investors to invest, valuations are not likely to move much until those investors see liquidity opportunities. And by all accounts, that is going to be a long while in coming.

As one CEO aptly put it in a board meeting this week, investors should not have to tell their management teams to initiate discussions around expenses. Savvy entrepreneurs and CEO’s took the initiative to do this themselves. Productive board discussions followed and that is just good business.

The real challenge and opportunity in this climate is for companies to find innovative ways to grow. That is where investors can be most helpful to their CEO’s and entrepreneurs. Because if cost-cutting is a company’s only accomplishment in the next 12 months, the likelihood of getting funded at an up round — or even getting funded at all — is incredibly low. For those companies with products that are selling, re-deploying some spending in their organization, from product to sales, for example, can be a whole lot more valuable than absolute dollar savings.

As Alan Patricof eloquently stated earlier this month, “Find a way to use this moment to gain your greater share of the market by providing a solution that is needed by others to improve their prospects in the difficult environment ahead.”

Growth is always attractive to investors. In a market filled with fear, uncertainty, and doubt, it’s more important than ever to stay focused on that goal.

We’re Open For Business

Last week I met with the talented CEO of a growing company. His first question: “Are you still investing?”

Yes. We’re open for business.

The irony was that I had specifically stopped off to see him. I clearly had interest. But after watching the public markets and reading all the associated news, he felt compelled to ask. And rightly so, because a lot of investors have stopped investing altogether.

As reported in Private Equity week (September, 2007), MDV is currently investing out of our $580 million ninth fund. The firm has been working with entrepreneurs through thick and thin for nearly 25 years.

When I started my first company, I found it very hard to raise money. The market was grim and I had little startup experience. My two co-founders and I boot-strapped the business. The path was never easy. But we did it.

When I formed my second company in 2002, the market was just as grim. I was fortunate enough to have venture investors who believed in me and were open for business. As you have no doubt read elsewhere, some of the best tech companies were started during recessions.

There is no one-size-fits-all message we are delivering to our portfolio companies. With a diversified portfolio across sectors and within tech itself, no one message would fit them, nor would they want to be treated as numbers rather than as individuals. We’ve sat down with each portfolio company to take a hard look at their operating budgets, sales plans, and market approach.

Many of our entrepreneurs have seen it before. Coming from cash efficient or boot strapped backgrounds, they have been running lean and mean operations all along. Others see the current market as an opportunity to consolidate. They have a product that is selling well and they are going to keep on selling it, some even more aggressively than before.

Some rightly worry that customers will buy less. But some areas are selling better than ever before. Which ones? Those delivering peace of mind, such as security, compliance, or better customer service; cost savings; or incremental revenue.

Many have highly evolved sales models that don’t require customers to buy in big to get started. They have pricing models that align with the customer – no huge up front investment, but rather, pay as you go. Customers of companies like PBWiki and Ironkey, to name just two, are able to get started with a small purchase and then grow their spending as their needs grow. The result is large per customer revenue even with a small initial start.

Tech companies, especially those with SaaS models, are finding innovative ways to increase their runway. They are giving customers a discount for paying a full year up front. They’re incenting their sales forces to close one year deals with up front payments. And they’re charging for incremental usage such as bandwidth, storage, or transactions.

The bottom line is, great companies are still being built. They are doing it lean and mean, and they are doing it with the pain of experience under their belts. These days, there’s clearly no more security working for a large company than in running your own shop. If anything, doing a startup gives you more control.

Great entrepreneurs are continuing to invest their own time and energy, and we’re continuing to invest in great entrepreneurs.

We’re open for business.

Put Customer Backgrounders To Work For You

You’ve scaled back development plans but are aggressively selling the product you already have. It’s one that’s compelling to customers, offering either increased revenue generation or cost savings. You’ve decided to hire more sales people. But you need to get them fully productive in record time, in a tough market. Here’s an exercise one of our early stage portfolio companies recently did en route to scaling sales, and why you should too.

The Value of Customer Backgrounders
Early in a company’s life, the founders and perhaps one or two BD-ish sales guys are out selling. They’re doing whatever works to close deals – as they should. But the real challenge is how to replicate their approach. Customer backgrounders are the first step.

A Real Life Example
On a recent morning, in the office of the CEO and founder of this particular company, I had the privilege of sitting in on a sales backgrounder meeting. Using a detailed list of questions, everyone who had been involved in selling product to a customer went through and described the sales process. It was incredible how much knowledge was shared and how efficiently. Sure, there’s historical data contained in Salesforce.com, but the nuances of the sale – from the details that differentiate prospects from qualified leads to the unique aspects of the value proposition that mattered to each customer – can only be gotten through open and detailed dialog.

One thing that made the meeting incredibly successful was the very clear time limit. The team probably could have spent an entire day going through their numerous customers, but the clock kept us on track.

Like many of the best management exercises, customer backgrounders serve two purposes at once. First, they let you go back and fully understand how each sale occurred – knowledge that can be gathered, summarized, and put into a form that future hires can use. At the same time, they provide a way for you to transform initial customer wins into case studies and other marketing material that can be leveraged to win future customers.

Often, good startups are in a large overall market, but not in quite the right segment of that market. Either the market shifts or the company does. The best entrepreneurs iterate on customer learning – and leverage a whole lot of luck and good timing – to catapult themselves into really big markets.

Customer backgrounders are a great forcing function to not only make you go back and capture what you’ve learned from selling to your customers, but to hire more sales people and to do it at scale. Moreover, going through the customer backgrounder process educates your entire organization on which customers are likely to produce real, immediate revenue, and which ones will be more trouble than they’re worth.

The Backgrounder Questionnaire

Although there are many forms the backgrounder questionnaire can take, I’ve included the actual key questions used in the discussion I described, below. Of course, you should tune the questions to your own company, target market, and sales approach, and only spend timing answering the relevant questions.

1.      Customer name and location

2.      Brief description of customer’s business

3.      Size of business (in revenues, locations, operations, other relevant metrics)

4.      Solution(s) sold (specific to your product offerings)

5.      Description of current implementation

6.      Potential growth

7.      Success metrics (specific to your business, typically around ROI)

8.      How we got lead

9.      Length of sales cycle

10.  Describe the sales “process”

a.       Number of meetings. demos, downloads, proposals, etc.

11.  Who was on sales team from company and level of involvement

12.  Who was/were the buyer(s). Describe all involved:

a.       IT

b.      Business

c.       Procurement

d.      Executives

13.  Was there an RFP, competitive evaluation, etc.?

14.  Contract – Standard or custom – if custom, provide detail.

15.  Competition

16.  Major buying criteria (from their point of view)

17.  Customer’s business case – if we know what it was

18.  Technology infrastructure (e.g. major related software in use at customer)

19.  Implementation timeframe

20.  Hurdles/Obstacles

a.       IT

b.      Features

c.       Scale

d.      Price, terms

e.       Company viability issues

f.        Integration

21.  References – if applicable, how many did they do and with whom

22.  Status today – are they referencable and do we have metrics we can share?

23.  Futures:  Technical requirements/Features requested by customer

Summary

As you can see, the above list is quite exhaustive. But whether you’re selling a low price product via tele-sales, or a high priced enterprise offering, this is the level of detail you need to have on your customers to gain real insight. Customer backgrounders are highly effective whether you’re just starting out or looking to scale sales after having been in market with a few versions of your product. In an era of ultra constrained resources, customer backgrounders provide the highly disciplined approach necessary to inform your marketing, product, and sales initiatives. If you don’t do everything possible to understand your customers and get to the big market fast, don’t worry – your competitors will!

Revenue 2.0

What’s after Web 2.0? People have been asking that question for a long time and the answer is crystal clear: Revenue 2.0.

What’s changed since Revenue 1.0?

High speed Internet. The Internet and widely available ecommerce resources have made it infinitely easier to reach the consumer. According to the Pew Internet study, some 55% of Americans now have high-speed internet connections at home. At the height of the last dot com bubble in mid 2000, fewer than 5% did. In June of 2000, only 22% of Americans had ever bought a product online. As of September of 2007, about 50% had. Simply put, the location of where the battles are fought has changed, from the desktop to the browser.

Whether it’s the local camera store, the mid size retailer, or WalMart, every business is now online. These merchants need the tools to reach their customers, sell to them, and have an on-going relationship with them that keeps them coming back. Better email marketing, the presentation of more relevant products for the customer to buy, and more automated customer service and selling tools are the kinds of solutions every business is looking for.

Hosted delivery. Hand in hand with high speed Internet has come hosted delivery. In Revenue 1.0, hosted delivery was a thought but buyers were far too wary of vendors to rely on it. Now Salesforce is in practically every organization and businesses are integrating consumer and business Internet services into all levels of the organization. Acceptance of hosted delivery is a reality.

Hosted delivery has also dramatically changed the services model. In Revenue 1.0, on the ground services teams had to be at the customer, and much of their learning was lost. With hosted offerings, on the ground teams are still necessary, from time to time, but because all changes are made across a single hosted product, service learning is captured and reflected to all customers.

Hybrid pricing model. A compelling, hybrid pricing model is emerging to support hosted delivery. The challenge with Software as Service businesses has been the high up front cost and relatively slow payback to companies delivering service (the vendor has to deliver the service up front, but the buyer only pays for it over time).

But now startups and large companies alike are bringing to market a hybrid model that takes the best aspects of the old licensed software model (that is, charging up front) and combines it with the best aspects of the SaaS model (recurring revenue independent of product upgrades). While SaaS companies don’t typically charge for two or three years of use up front, many have started charging up front for minimum usage or a period of service – say the first year.

Open source. Open source has changed the landscape not only in terms of lower cost of initial delivery but also in terms of customer adoption. That a startup can get a beta up and running by leveraging a lot of pre-existing, low-cost building blocks that were unavailable just a few years ago is not news. But what is news is that open source has become a viable, effective sales model. Open source is the Trojan horse way into IT buyers, even in a down economy. IT can try out, pilot, and use products available on the open source model, but delay paying for them until budgets stabilize. And in some cases, IT can continue to spend on services to support and manage existing offerings, without committing to capital expenditures.

Efficient customer acquisition mechanisms. Hosted delivery, open source trials, and key learnings from the consumer world have found their way into the business of Revenue 2.0. Forms of viral user acquisition, pioneered in the Web 2.0 world have become embedded in many business products. Whether it’s a simple link to refer a friend, a full affiliate program, or offerings that are more and more specifically designed from product inception to leverage existing customer bases (once jump started) to upsell and cross-sell, today’s business entrepreneurs are learning from consumer offerings.

In Revenue 1.0, product engineering and product marketing and selling were, in most cases, independent. In Revenue 2.0, marketing, sales, and customer feedback mechanisms are considered up front and built right into the product.

Customer acquisition cost – the cost of the channel – is where startups spend the majority of their venture dollars. These dollars, unlike product investment, cannot be leveraged if a company is trying to sell product consumers or customers simply don’t want to buy. Revenue 2.0 provides opportunity to innovate not just on product itself, but on marketing approach, sales model, and sales efficiency as well.

New consumer monetization approaches. 10 years ago it would have been hard to imagine consumers spending money on things like virtual goods or using their mobile phones as payment mechanisms. In 2007 there were over 2.7 billion mobile phones in use (compared with just 850 million PC’s) and some $1.5 billion spent on virtual items. The reality is that the consumer market is a world-wide one, and consumers now have multiple ways to spend small amounts of money – an especially desirable fact in a down economy.

Entrepreneurs have seen this movie before. Perhaps the biggest difference from Revenue 2.0 is that many of today’s entrepreneurs have seen the boom/bust movie before. Many of today’s founders were at other startups during the crash and have been running lean operations all along. One entrepreneur at a growing company recently emailed me asking what the real motivations were behind some of the recent messages to startups. “We have been doing these exercises all along, but especially for the last 9 months.” The magnitude of the market changes is shocking for many, but the response of entrepreneurs this time is swift, smart, and prudent. They recognize the value of operational experience and capital efficiency.

What hasn’t changed?

What hasn’t changed since Revenue 1.0 is just how difficult it is to build highly compelling offerings consumers and business customers want to use and pay for. While products have become easier to prototype, the fundamental challenge of creating innovative, unique, and pain-solving solutions remains the same.

Opportunities abound to deliver cost savings, produce incremental sales lift, or simply give consumers living in uncertain times a place to find a little refuge with their friends.

Panicky messages from investors not withstanding, many of today’s Revenue 2.0 entrepreneurs have all along made operational and capital efficiency a core competency. Even in a challenging market, they will continue to thrive.

How To Run Lean And Mean

It’s all too easy for investors to hand out pithy messages like “manage what you can control” and “focus on quality.” This is advice they obviously should have been giving their startups all along.

I learned how to run lean and mean while bootstrapping, before raising venture capital. Many entrepreneurs who haven’t bootstrapped may have learned similar lessons, but there’s no substitute for the learning that comes from bootstrapping.

There’s also no one size fits all set of rules for building a great company. Scarcity of resources creates immediate focus. Focus wins. But capital enables speed and scale. Navigating the difficult path between capital and scarcity is an art that is company and entrepreneur-specific.

With that in mind, I sat down with Clate Mask, CEO of fast-growing Infusionsoft, to find out what he’d learned from bootstrapping. Here’s what he shared with me:

• Focus more on revenue than on product.  It pains me to say it, but the better mousetrap does not sell.  The whole company needs to be aligned to drive revenue (which will offend some non-sales folks, who will wonder if they’re second-class citizens).  Build a zero-based budget.  Be aggressive in sales.  Expand expenses as revenue expands; make it a reward for employees.
• Build the business incrementally.  We all want to build the best product, process, team, etc. TODAY, but that’s not a wise use of capital and you won’t get the ROI you need for quarters or years down the road.  The less capital you have, the more immediately you need ROI-measured in days, not months, quarters or years.  Sounds easy, but I’ve found few people do this.  This skill comes down to understanding WHAT to invest in today and what you need to wait to invest in next week, month, quarter or year.
• Hire slow.  Easy to say, but human nature wants to bring “help” on board as fast as possible to ease the pain.  Get used to the pain.  Only hire when you absolutely have to.  Hire people who are optimistic, energetic and adaptive… and have a high pain tolerance.  Most people in start-up or growth stage hem and haw over a $100k capital expense, but hire a new $100k (per year) employee in a heartbeat.  I love employees, but it’s important to remember they are recurring expenses, so they need to deliver ROI on an ongoing basis.  If they’re not delivering, you’ve gotta let them go.
• FOCUS the strategy and operations.  Know your BHAG, align everything with it, and connect your strategy to your operations.  A great resource to help you do that is www.gazelles.com and Verne Harnish’s book, Mastering the Rockefeller Habits.  This helps you develop the rhythm in your business that comes from annual, quarterly, monthly, weekly and daily meetings that enhance focus and eliminate waste.
• Teach frugality to everyone.  Set the example as the leader.  If you are indulgent, your executive team will be… and so will the rest of the employees.  Understand that a dollar saved multiplies very fast in your hi-growth company.  Make it easy for people to see by teaching them a dollar saved is really $10 saved.