Over the years as an investor, I have come to realize just how much a start-ups’s DNA is driven by the original founders. The personalities, strengths, and focus of those first founders shape a business long after the individuals have moved on.
In the early days, it is incredibly hard for a founding team to fill any holes by bringing someone aboard from the outside. That’s because few start-ups are in the position to pay a top executive’s salary or deliver the upside they are looking for. This makes it all the more critical to have a well-rounded founding team that covers most of the bases.
As an example, sales is key to most start-up’s success, so the founding team needs to include someone who loves to hustle for the sale – whether or not he or she has been formally trained or has any experience in sales. Once you have millions in revenue, you can hire a VP of Sales to take things to the next level. But until then, your founding team needs to take matters into its own hands.
When we are evaluating start-ups, we look for several key ingredients in the founding team. This includes both innate sensibilities and the ability to execute on them…
- Technical chops (for highly technical products)
When you are putting the band together, think about everyone’s skills and expertise. Do the skill sets complement one another? Are there any major weaknesses? A team of three marketing/business-oriented people is just as bad as three techies who don’t know how to sell or position their product.
The founding team represents the people who will carry the start-up at the beginning. In the first few years, you need to play the cards you are dealt, so be sure to stack the deck as much as possible from the start.
Rick Perreault of my portfolio company Unbounce recently called my attention to an interesting comparison between two SaaS models: Hubspot & Moz – A Tale of Two (Very Different) SaaS Business Models.
At first glance, Hubspot and Moz are very similar companies: both are popular marketing platforms, use web-based subscription models, and primarily target the SMB market (although larger brands use both). However, as Scott Krager points out in his post, the companies have vastly different approaches for generating revenue. You can read Krager’s article for all the figures (many of which are from Hubspot’s S1 SEC filing and from Moz directly), but here are some of the key differences:
- Hubspot spends $11,233 to acquire a new customer. Moz spends $131 to acquire a new customer
- Hubspot’s average revenue per customer: $8,670 per year. Moz’ average revenue per customer: $1,295 per year
- Hubspot made $161.8 million from 2009-2013. Moz made $72.5 million from 2009-2013
Hubspot has grown revenue much faster than Moz, but has also spent much more to do so. Its customer acquisition costs are roughly 85 times that of Moz (if Krager’s figures are accurately comparing apples to apples).
So, is one company right? The answer is no. Since investors (whether private or public) like to see growth, Hubspot’s story is more impressive from that standpoint. Likely, Hubspot’s founders and investors pushed for market growth and dominance regardless of cost. After the IPO, they can recover those losses.
However, Hubspot’s high-flying approach is much higher risk and harder to execute on. Things are great as long as you can maintain growth. As soon as your business stops growing, your valuation multiples come crashing down and you can be in serious trouble.
The right strategy all depends on the comfort level of the founder team and where they want to play on the risk/reward scale.
Finding the right engineer, UX designer or marketer can make all the difference for your start-up. After all, the caliber of talent makes or breaks a company, no matter its size. But recruiting is hard, particularly in these bubbly times when top tech talent can pretty much go wherever they choose.
This hiring challenge has pushed several startups to get creative and take an innovative approach to recruiting. Here are a few examples:
1. Look for acquired teams
Today’s trend of acqui-hires can result in some dissatisfied technical teams post acquisition. Engineers who were attracted to the pace and dynamics of a start-up can get bored and frustrated with life in a big, public company. After a few years, they might be ready to move on. If you look hard enough, you might find really smart teams with a history of working well together who are willing to jump over to your start-up.
2. Run a contest
Put together a really hard problem to solve and run it as your own contest, or use a platform like HackerRank or Talentbuddy. These are good avenues for finding very smart people in your vertical, particularly global or small market candidates who may not be visible otherwise.
A well-known example was the Quixey Challenge, where Palo Alto-based Quixey offered a monthly programming contest. Anyone who could solve the coding puzzle in less than a minute won $100 and a Quixey t-shirt. The contest cost Quixey about $10,000 each month, but that’s far less than what it might cost to hire a good engineer through a recruiter.
3. Onshore immigrant employees in Canada
It’s no secret that there’s a shortage of H1-B visas for highly skilled workers in the U.S. That’s one reason there’s a growing trend for tech companies to open offices in Canada, as Canada is willing to grant visas to practically any highly skilled worker with a salaried job.
Last year Facebook opened a temporary office in Vancouver to train newly hired developers while they wait for U.S. visas. Likewise, Microsoft (which applied for about twice the H-1B visas it received for 2015) opened a Vancouver office where they’ll hire and train about 400 software developers. Those are high profile examples, but many smaller companies are adopting this strategy as well.
4. Acquire a smaller development shop
If you are looking to build out an entire team or department, you can always look into making your own acquisition. For example, Shopify acquired Jet Cooper, one of Canada’s top user experience and design firms. Look for an agency or firm specializing in whatever core competency you need to fill.
The bottom line is every start-up needs good talent and you can’t sit around and wait for the perfect hire to walk through your doors. Get creative in order to bring the best talent to you.
There are many great articles that outline what an entrepreneur should cover during a pitch, but very few discuss how to deliver that message in a compelling manner. That’s why I wrote, “A good story is the key to any pitch”, earlier this year.
I thought I’d revisit this topic with my visual guide to storytelling.
At nearly every meeting with an entrepreneur or fellow investor, I’m asked what we are looking for when we evaluate an investment opportunity. The obvious answer is a stellar team, but there’s more to it than that. Below, I’ve drawn how I map a typical checklist into a framework to help you better understand what we are listening for in a pitch.
- Start by sharing your vision (the “Why”). I like knowing why a founder is building his or her business. I get excited when I can understand and align myself with the founder’s motivations, values, and overarching views or perspectives of the world. That’s why conveying your vision is the best way to set the stage for your pitch.
- Describe and demo what you’ve build so far (the “What”). The initial validation of your grander vision is your MVP. I always recommend going through a short demo of your product because it provides grounding for your future goals and helps us answer that vital question: is it possible to be a category leader or is it an unrealistic pipedream? At Version One, we rarely invest at the ideation stage. We want to see traction – specifically, how quickly you can capture the initial market or vertical** that you are targeting, and how engaged these early users are.
- Walk through your plan for growth (the “How”). After you demonstrate your strong sense of product design and development, we want to know how you will build a real business beyond just features. The core questions to answer are therefore on distribution and scale, and on your business model. Some example questions include: what are your strategies for customer acquisition? Paid or organic via network effects? What does your inbound and outbound sales pipeline and process look like? How can you expand TAM**? How do you move from building for an underserved user who is most passionate about your product to a greater audience in a more competitive space? Do you “sell to few” or “sell to many”? And how does your product evolve into your grander vision (i.e. your product roadmap)? We know that a lot changes in a startup’s lifecycle. While we won’t hold founders to every answer, we certainly want to understand how they think about their business and the opportunities ahead.
**Note: I’m using the word ”market” or ”vertical” which applies to companies that can expand this way (i.e. Amazon, eBay, etc.). However, this diagram is still applicable for platforms where there is expansion from a niche audience (by demography, geography) to the masses, and for SaaS, expansion from an individual user or SMB to the enterprise.
Pitch your why, what, and how
Many entrepreneurs make the mistake of pitching to an investor in the same way they sell to a customer. Yes, we invest in companies that are solving a real pain point for the customer and it’s important for us to understand that pain point and how you help. However, we’re investing in the future in addition to what you’ve already built.
Sell the “what” as proof that you are onto something big, but always keep in mind that investors are buying into the “why.” There is no doubt that you have epic plans on how you are going to make it happen, now just let us know.
Shipping is a huge pain point for smaller e-commerce stores. They don’t process enough volume to grant them bulk discounts from the major providers. It’s hard to find smaller courier companies to work with. Prices aren’t transparent and negotiating as a small business is next to impossible.
Shipping is one of those unsexy, not-often-talked-about areas that is critical to an e-tailer’s bottom line. While most e-commerce companies these days use an existing payment solution (PayPal, Stripe, Balanced, etc.) to handle payment processing, they are still handling the shipping aspects on their own.
That’s why we are so excited about our latest investment, Shippo. They simplify shipping by giving e-commerce stores one streamlined solution to work with different shipping providers at once. This allows them to leverage economies of scale to pass on discounts. At the moment, Shippo offers up to 80% off compared to retail prices. They also provide an API that connects online stores to all the relevant shipping providers both locally and internationally.
The opportunity is huge as the shipping industry related to e-commerce is $360B in the US and Western Europe alone. The annual rate at which e-commerce is growing is 20%.
Other mashup APIs already exist that aggregate data from different carriers, but there’s yet to be any clear winner in the space. We believe that Shippo offers the right algorithm, API, and web interface to change the game for mid-sized e-commerce shipping. The ultimate vision is to do what ITA did for the air flight industry: enable dynamic pricing in the shipping industry and make shipping cheap, easy and efficient, across the world.
E-commerce businesses can either use Shippo’s apps or API to get shipping rates and labels within minutes. It offers direct integration with shopping cart platforms like Shopify, Etsy, Magento, and Bigcommerce. Or, developers can integrate the Shippo API directly to their own website. Since Shippo negotiates pricing by aggregating its users, the more e-commerce companies that join Shippo, the greater the discounts for everyone.
Co-founders Laura Behrens Wu (CEO) and Simon Kreuz (CTO) launched Shippo in October 2013 and the company has already seen intense growth since launch. Laura and Simon are first-time entrepreneurs and alumni of 500 Startups (Batch 8).
We are thrilled to be investing alongside SoftTech VC with participation from 500 Startups LP, Accelerate FC, Funders Club, East Ventures Investment LP, Mena Ventures Investment, DBF Digital Business Factory, Slow Ventures, Joanne Wilson, Fabrice Grinda, Dave Shen, and Karl Jacob.
To learn more, visit https://goshippo.com/ or follow @goshippo on Twitter.