Wednesday, July 30, 2014
Becoming an entrepreneur and building a startup may be trendy, but that doesn't mean any group of college kids with an idea, a laptop, and some Ramen noodles can build a viable company.
One person who has figured out what it takes to start a successful business is Jason Lemkin, the managing director of Storm Ventures, a $600 million fund that invests in business-to-business SaaS companies. Before becoming a venture capitalist, Lemkin co-founded EchoSign, an electronic signature service, which was acquired by Adobe for a nine-figure sum in 2011. Lemkin stayed with EchoSign after the acquisition, helping to grow its revenue to $100 million by 2013.
EchoSign wasn't Lemkin's first lucrative venture. In 2001, he started his first company, NanoGram Devices, which made implantable nanoparticle power cells for medical devices. After 13 months and $6 million in sales, the company was acquired for $50 million.
Lemkin tells Inc. that overcoming the daunting initial hurdles a new business faces is perhaps the biggest difficulty for entrepreneurs. If you can weather that early period, your prospects will improve markedly.
"At $1.5 million in revenue, you finally have enough customers that it becomes repeatable. You start to know where the next customers are going to come from, you start to have enough sense of how the hell you're going to make next month. When you get to initial traction, you finally see it," Lemkin says. "Everyone is faking it until this point."
This is the juncture, between initial traction and when the company begins to scale, where most entrepreneurs make the mistakes that can set the company back a year or two, or cause it to it fail completely. If you want to grow your business to $100 million, Lemkin says, it's going to take seven to 10 years. So, hop aboard and commit, make sure you have the right co-founder, and avoid these mistakes.
Don't rush hiring a VP of Sales
Lemkin says about 75 percent of the companies he invests in hire the wrong person as vice president of sales during the initial traction phase. "You're stepping on the gas and just made the most expensive hire you're going to make and all of a sudden, everything falls apart--not as many leads close, all the customers and prospects get angry, he or she starts to hire all these sales reps that costs a lot of money and don't close anything. It's a disaster."
He says most startups make this mistake because they are under a lot of pressure to grow quickly--especially when they are venture-backed--so once you're making $1.5 million in revenue and it's time to hire a VP of sales, you make a decision too fast. Lemkin says startups usually hire one of two bad VP candidates. One type is someone who has worked at Salesforce, LinkedIn, and other well-known companies, but turns out not to be as great as expected. "If you make the 'fancy resume' mistake, that means one thing about the candidate--they are a loser," Lemkin says. "Why else would a VP of sales jump ship in one week and join a startup?" The other type is what he calls "the evangelist," someone who has little experience, can "talk a good game, is smart, and you'd buy from them but they've never hired any sales reps and cannot help you scale your business."
His advice? "You have to start way early and meet everyone you possibly can." He explains the VP of sales is "cash and equity motivated" and if you want a great one, you need to give yourself at least six months.
Don't underinvest in customer success
"Customer success is a relatively new category of thinking, but it's taking relatively seasoned and experienced folks and having them proactively manage customers throughout their time with you," Lemkin says. "Even if you have a recurring revenue model, you close the customer but then they will last six to seven years. Sales is just the beginning of this long journey. You can't just do tickets and customer support, answering questions reactively. If you close a customer for $200,000 a year, you better go to their office and help them and make sure everything is working."
Lemkin says founders erroneously think of customer success as a cost center instead of a source of increased profits. "When people underhire in customer success, what happens is that as the months go on the customers don't renew. Even more importantly, they don't become loyal--meaning they don't buy more from you," he says. In Lemkin's experience, happy customers will generally buy 110 to 120 percent more from you each year over the past year. But unhappy customers will only buy 90 percent compared to the previous year. "As soon as you have 10 customers, hire customer success managers. If you make the first 10 customers happy, they'll beget another 10. It doesn't work in a day, but in year two and year three, you'll get all the low-hanging fruit," he says.
Don't burn out
Lemkin says after all your hard work, you have to protect your mind and body from exhaustion. "As you go from initial traction to initial scale, it's nonstop work. Once you get to $10 million, you have accomplished a lot but you still have to make sure you don't get too tired," he tells Inc. "If you're a single founder, or have a really bad co-founder, you're doing too much alone and need to find an ex post facto co-founder." Finding the right person for that role is not as hard as it might sound. "Startups are like religion. People want to believe and they want to join you on your journey," he says.
