Startable - Healy Jones’ & Prasad Thammineni’s Blog

Mass High Tech is reporting that my company, OfficeDrop, has some extra office space available in our new facility in Cambridge. They are right!! While we hope to grow into this space eventually we’d like to offer desks, chairs, fast internet connections, diet coke and coffee to other startup(s) in the area looking for some month to month office space.

We’ve got four spaces available, two that are small and would be great for a single worker (but these spaces can handle two workers who are friendly!) There are also two larger spaces that can fit three to four comfortably. Probably actually three comfortably and four OK.

We are located a healthy walk from the end of the red line at Alewife. Since we’ve been here there has been well available, free street parking. A Whole Foods, Trader Joes, CVS and Chipolte are a short drive away from the space.

Ping me at healy (at) officedrop (dot) com if you are interested in learning more.

I’ve decided that the biggest threat to a software as a service startup isn’t anything sexy or mysterious. No, it’s the annoying fact that so many credit cards get cancelled by no fault of the user. SaaS companies, like Pixily, rely on retaining customers to achieve our target lifetime value and to recoup our marketing costs/costs of customer acquisition. When MasterCard or whoever cancels a user’s credit card it is a real pain to gently remind them to enter a new card number.

As Bessemer Venture Partners says, “It’s very difficult and expensive to grow subscription businesses if you have moderate customer churn– and prohibitive if your churn is high.” Pixily’s users are really important to us. We work really hard to get them and it is painful when one cancels.  When some one’s credit card fails, we email and eventually phone to follow up and get them back into our system. We’ve had customers who have been “gone” for more than a couple of months re-engage and pay for past months/bring their accounts up to date. It’s worth the effort to try to keep them in our system, even if it is a pain. But since the majority of our churn comes from credit card cancellations, everything we can do to reduce it really helps our metrics and helps the company grow. And when technically do they count as churned, if so many of them eventually come back?

I know that large SaaS companies have these problems too. I’ve spoken with the heads of very large SaaS businesses, and they have a person or even a small group in charge of trying to get customers to re-enter their billing information. This is a real issue.

I’m afraid that this problem will get even worse. It seems like credit card companies are becoming pretty nonchalant about canceling cards. I only really use two cards; one was re-issued to me this year and last year the other was. Both were canceled by my card company because one of the vendors I bought something from had a security breach. I actually think it is nice that they were able to cancel my card before any fraud could possibly have happened, but I did get some emails from the subscriptions I used asking me to re-enter my credit card information. And it was a pain, and I’m sure there were a few that I didn’t end up updating.

I hope that credit card companies don’t end up being the achilies heel of the SaaS business model. Anyone else seeing this problem with their SaaS businesses?

Vivek Wadhwa had an interesting post today on selling in TechCrunch. I’m learning some serious lessons on selling now that I’m the head of marketing at Pixily - although I am very much still a novice sales manager! I reserve the right to be completely wrong/change my mind on any or all of these points

1. Aspiring to a touchless sales model is great, but small business customers like to know they can reach you on the phone. Many great SaaS companies have a great sales funnel that terminates when a customer signs up online without speaking to a sales rep. I think most small business SaaS startups hope to create this type of sales cycle. After all, how can you have a profitable company if you need to have a sales person on the phone closing $15 per month sales? But, at Pixily, we’ve found that phone calls result in sales and great free to paid user conversions. We offer a free trial, and a decent number of our paying customers choose to sign up for the free trial and eventually convert to paying customers. The highest converting (free to paid) lead source is the customers who call us and who we sign up for the free trial over the phone. The convert to paying customers by over 3x vs. the next best source. (Note: “source” is probably not the right word to use, but it’s Saturday and my coffee isn’t kicking in quite yet…) Is this sustainable in the long term? I’m not experienced enough to know at this point.
2. Customer service reps make great sales people too! Vivek mentions how developers make great sales people. I’d very much agree, since our developers often drive closed leads from networking events they attend and from conferences they speak at. But we are having success with our customer service reps doubling as sales people. First of all, they know the product. Secondly, they understand how live customers are using the product. Third, when a free user calls in to ask a question it’s the time to try to sell them on an upgrade!
3. Customers do the darnedest things with the product - asking them “why are you interested in my product” is really helpful in selling. For example, one of Pixily’s products is a simple document scanning service. We happen to be pretty good at scanning documents, and can offer it profitably as a stand alone service. We had a bulk scanning customer who was a magazine publisher. He wanted to get his old magazine issues (from the 80’s and beyond) online, but only had them stored in print. Once we actually really understood how he wanted to use our product we were able to sell him - even though we were more expensive than a couple of local scanning providers in his area. We’ve sold this particular product a few more times, mainly because we “get” what the customer’s end goal is.
4. Managing a sales pipeline is harder than it looks. When you are the VC, you get to see all these pretty sales funnels at board meetings. When you are the person trying to grow the business, keeping the different campaigns and leads all moving along in the funnels is much more challenging! I guess it’s just in my nature to enjoy playing/measuring our sales channels by output, but I have to fight the instinct to not spend too much time in analytics and not enough time in selling/content creation.
5. When selling online, content is king. I’ve had a ton of luck getting great content out of a marketing intern we recently hired. Not only has he built an entirely new site dedicated to document scanning, he’s also put out some very helpful blog posts and made content upgrades to our web site. All this content is producing - both in terms of us moving up on Google, getting more traffic and improving our conversion rate.

Dharmesh Shah has yet another great post on his blog about building a sales team. He mentions the need to set compensation structures correctly, making sure you are tracking sales metrics thoughtfully and talks about the culture shock of experiencing a sales team from an engineer’s perspective.

When I was a VC I noticed that portfolio company boards spent a long time talking about the sales team. Assessing progress vs. the company’s goals, talking about lifetime value of customers vs. acquisition cost, and putting together compensation plans. Now that I’m playing the entrepreneur game, I myself am trying to understand exactly where the the fine line lies in setting a company’s sales projections. I’m really getting the feeling that it is much more of an art than the illusion of “science” given by spreadsheets! It is much harder on the inside, and now I wish I had provided more support to my portfolio companies when I was a VC and when they were working through these issues. I guess the numbers have to “come from the management” so that they are totally bought in, but the amount of effort required to do this thoroughly is pretty amazing.

Wow, there is an incredible amount of customer feedback that can be collected through a customer support number. I’ve learned some interesting stuff by listening on conversations the Pixily team has had with users of their service. This got me thinking - why don’t more internet-based businesses have phone numbers?

I guess it’s pretty simple to understand why Google doesn’t have a help desk. Think of the calls they would get: “Hey, I can’t find the address of the restaurant I’m going to on Google Maps,” or even more likely, “Why isn’t my company at the top of your search results?” (Or me a few weeks ago: “what the hell just happened to gmail?” This afternoon at TechStars I attended a talk by Nitzan Shaer, who was at Skype for a few years, and he mentioned that Skype consciously did not have a customer service number available because there was no way the service could handle the number of calls they would receive. I can buy that.

But what about smaller/startup internet companies? Can they have a help desk and actually not get overwhelmed helping customers? Should they? I’m starting to think that maybe… I’m pretty sure that for each customer who cares enough to contact a startup there are many, many other users who don’t bother. When you are trying to get something totally novel accepted by an as-of-yet undefined market, any customer feedback that you can get sounds pretty good, even if it is negative feedback. Early product decisions should probably be based on more than just the founders’/programmers’ gut instinct. Most startup internet companies have such a short runway to develop a product that will actually be accepted by the market that minor tweaks to the UI, content, etc. can have a huge impact on customer acquisition and retention.

I realize that actually talking to people is sometimes scary. And constantly picking up the phone can be very distracting. But you may be able to carefully expose a customer support phone number and not only help your business but also help some customers.

I’d imagine that the right way to have a customer service number starts with an easy way to REMOVE the customer service number. After all, if you end up having a Skype level of user adoption you just can’t support a support line very easily. So I’d go with one of those easy to throw away 800 services for the original number. I mean, you don’t want mooches like Mark MacLeod constantly bugging you… On the other hand, if you are an accounting software company and a well known startup CFO is constantly raving about how great your service is, maybe you do.

I’d also think that you will want your developers/product managers to answer a lot of these calls. I know this will slow them down, but on the other hand get the customer info into their hands asap. Also, if they build something that sucks shouldn’t they be the first to hear?

The feedback you get should also be taken in the context of customer segmentation. Maybe the particular user group that you are targeting just can’t “get” your product. Or maybe you want a help line specifically for bigger or corporate customers, or as a way to differentiate your free vs. premium app.

I obviously don’t have most of the answers on this topic. I’d love to learn from others who have or have not had a successful experience with their customer support line.

Has your startup failed before? I don’t mean the exact company that you just founded, but the business idea that you are attacking. It’s not necessarily a bad thing to try to take on a problem that has already gotten the best of other entrepreneurs. Difficult problems can be the most rewarding and can offer great opportunities. But when I was a venture capitalist hearing one of these pitches, it was very frustrating when the founders didn’t realize that there have been other, failed companies in the same space.

If you are pitching something to VCs that has failed before, you need to be able to talk intelligently about what caused the previous failures and how your startup is different. Venture capitalists will want to know that you are aware of the risks in your space and that you are taking intelligent steps to overcome them. Not knowing about other startups that have failed is fine if you are starting a company on your own (I guess), but if you are approaching funding sources you better know if there have been big-time venture funded failures with a business plan similar to yours.

I was always a bit surprised when I knew more about companies that had failed in a space than an entrepreneur trying to pitch me. That really shouldn’t happen. You’d be surprised at how many entrepreneurs present business plans to venture capitalists that have flamed out spectacularly and don’t know it. A little internet research can go a long way, as can some networking in a space before putting together a business plan and starting the fund raising process.

A venture capitalist’s natural response, when hearing about a startup in a space where a number of other venture backed businesses have met an early demise, is to assume that there is something wrong with the particular industry. “It must be a bad market,” goes the typical thinking. Read the rest of this entry »

Broadstuff (a blog that I follow) has a good summary of a recent McKinsey article on the differences between how technology winners and losers navigate a recession. The key take away, besides the fact that technology spending falls really fast during a recession, is that successful technology companies are smart about how they cut SG&A and thoughtful on core vs. non-core investments. I’ve listed the McKinsey findings below (as quoted in Broadstuff); see Broadstuff’s site, linked above, for a more detailed explanation of each.

Successful technology company tactics during a recession

1. Manage working capital aggressively
2. Rationalize SG&A expenses and overall headcount
3. Make frequent, significant acquisitions (later)
4. Divest non-core assets early in the cycle
5. Maintain a stable level of leverage relative to equity

An important point to note is that for #2, the rationalization of headcount, successful companies actually slightly increased their headcount expenses (relative to their loser technology company competitors) during the recession.

This speaks to the need to focus on what works, get the right team on board and focused on the goal and get rid of non-core/distractions. This is very similar to what I am hearing board members say to portfolio company executives right now - figure out what the market needs now/what will be needed and cut out any other projects that are not aligned with this core task. Focus is a good thing.

It’s tough for me to give solid advice during these times. I’ve only lived (during my working career) through the dot.com downturn, and the current recession feels more dangerous/more wide spread. I welcome any suggestions/advice from the Startable readership on how smart technology executives navigate this market.

My (occasional) co-blogger, Prasad Thammineni, had his company featured in a great BusinessWeek article. BusinessWeek’s well known technology reviewer, Arik Hesseldahl, wrote a solid review of Pixily. 

First of all, this is a really cool acknowledgement of Pixily’s growing success. The article has a very realistic description of Pixily’s service. As a happy user of Pixily, I agree with Arik’s positions around how easy it is to use and search within formerly dumb paper documents. I also agree with his opinion that it would be great if users could merge documents and delete pages from within a document. 

Secondly, this is an example of  great PR for a startup. I’m sure we can all learn a bit about developing solid PR from Prasad… like, how did he get BusinessWeek to review his product, how did he get in touch with Arik, what did it take to convince him that the service was worth reviewing, etc. 

Finally, I’d love to hear from Prasad what this review has done to his site’s traffic and new customer sign ups. Is it creating buzz that is translating into sales??

Thankfully I’ll be getting lunch with Prasad today so maybe I can learn a bit about this stuff… and not to steal any thunder, but I think Twitter might have been involved…

Little overwhelmed right now, but thought I would share two links I’ve recently come across that I’ve found quite interesting. One is on the freemium business model for startups and the other is data on recent Series A venture capital financings in New England.

Freemium is Not a Business Model, by Mark Evans. Mark is a Canadian writer/entrepreneur. The comments section here is really interesting; worth scrolling through. I agree that many startups underestimate the difficulties of making a real business via a freemium. However, enough startups have succeeded with this model that it has to be taken seriously. To prove that you’ve got a startup capable of really creating huge revenues via a freemium model you’ve got to have a serious marketing and conversion engine (that’s my two cents…)

Quarterly Review of Series A Financings in New England, by Foley Hoag. (download the pdf for the report) Foley Hoag is a respected corporate law firm. Their attorney’s provide the following commentary: “Series A rounds are getting done despite the general economic climate; and yes, they are getting done at a more modest level because of it.” “The first two quarters in 2008 saw a general decline nationally in Series A transactions (down 8% from the same period in 2007), with a more marked downturn felt in New England (down almost 30% from 2007).” Keep in mind they are using a small sample set for their analysis, but it’s still an interesting read.

This is just a quick post to let startups who are using Amazon’s web services know about “AWS Startup Tour.” Amazon’s web services team is on the road meeting with startup CEOs this month, and will be in Boston on September 22nd. I think, besides me, several other venture capitalists will be there as well.

Prasad has posted on the cloud computing revolution and how it is enabling a new wave of startup innovation. As the cost of launching a new business drops we are seeing some very interesting web-based companies that would not have been possible just a few short years ago. AWS seems to be dominating the startup cloud services market. Here is a great chance for startup CEOs and CTOs to interact with the team behind AWS. I’ll be there and I hope you are too!