Greg Head’s Post

Creating software to improve your own services business can be a great way to create a standalone SaaS business. But there are some major pitfalls that trip up most founders who are trying to make this services-to-software transition. First, the good news: - Creating custom software for your own business can be a great investment for your services business, whether you spin it out or not. More profit and differentiation are always good. - Building for your own use and "eating your own dog food" is like having a great beta customer who will try anything and give you feedback. - You can often build a complete solution before you try to sell it to other customers. It's much more than minimum and very viable. This takes time and tries, generally longer than you think it will, but that's OK. - Building software for your own use gives you time to try things, fix them and keep improving. This slower pace and customer-focused iteration is the magic trick of building great software, not speed and big funding. - When you start selling it to others, you already speak as your best expert reference customer. "Here are the problems we had, here's how we use it now, and here's how our business got way better" in exactly your customer's language. Does this services-to-software business transition always work? Of course not. Most entrepreneurs get stuck on at least one of these big challenges: - Underestimating the very different business DNA of a software business versus a services business. They are very, very different. (I'll address the main differences in a post later this week). - Underestimating how darn hard it is to create great software that makes someone happy enough to keep paying for it. Especially when you aren't talking to them and problem-solving with people like you do in your services business. The product bar is much higher in most cases. - Not realizing that you are an unusual services business owner in your industry. If you succeeded enough in your services business, you are likely unusually sophisticated, change-oriented, and ambitious. If you make super-savvy, software that works for you, there may be few others like you. This happens a lot. - Selling and marketing your software is very different than selling services. It's a really hard leap for custom consulting entrepreneurs to market and sell "no touch" software products. It's an easier step for "productized" services entrepreneurs to sell software that comes with some standard services. - Underinvesting in the product business when you know you have a business there. All software startups take some support to get to self-sustainable levels. - Something built for your internal use always needs to be reworked to be used by other companies - new architecture, different features, higher quality. What else have you experienced in this services biz to software biz transition? #practicalfounders

A bootstrapped founder of a fast-growing £2 million ARR B2B SaaS company asked me what he should expect on their march to £10M in revenue. How will his role change? I told him that the founder/CEO role itself changes a lot in almost every company by the time you get to £10M in 3+1 ways. - With 5-10 employees, founder-CEOs do a lot of stuff: sales, accounting, sometimes coding, and more. - With 10-30 employees, you have teams with leaders and the founder-CEO does fewer things inside the factory. Delegation 1.0. - Somewhere between 30-100 employees, the CEO stops having day-to-day responsibility for execution tasks. You hire the leaders who hire the team members who do all the frontline work. Now the CEO is focused on the things for which only the CEO can be responsible and accountable for. Three things they can't delegate: - Company strategy - Hiring the top leaders - Having cash to run the business - plus 1 more thing. 1) The CEO is ultimately responsible and accountable for company strategy--The Chief Decider Officer. This doesn't mean the CEO goes off and decides everything by themselves. It means the CEO gets ALL THE HELP THEY CAN GET from leaders, team members, advisors, board members, consultants, books, and conferences. After all that, the CEO makes the final call on the most important strategic questions that guide the company. Someone, not a committee, has to make the calls and make sure they get done. 2) The CEO hires and fires the leaders who hire everyone else in your company. Some CEOs are involved in every hiring decision, but that becomes impractical. Hiring the top leaders takes 20-30% of the time of CEOs of growing companies. You can get help, but you can't delegate this. 3) The CEO makes sure there is enough cash to do what needs to be done. Fast growth eats cash fast, so this is a critical issue that kills a lot of companies. Bootstrappers sell and get cash before spending. How much profit, funding, growth, and investment? CEOs ultimately decide. At VC-funded companies, the CEO is the chief funding strategist, salesperson, closer, and investor relations manager. This can be up to 75% of the CEO's time when you raise new investment rounds. +4) The CEO is the ultimate Chief Believer Officer, as I call it. You can't delegate the unfailing belief that your crazy company will succeed when times are tough or confusing. The CEO ultimately has to sell the whole company and community on the big vision. You may have a few cofounders and a very capable leadership team, but one person needs to make the call on these decisions AND be the chief communicator to the larger team and community. It's the job of the CEO as you grow: Figure out the main thing and then keep the main thing the main thing. It's lonely at the top, but someone's gotta do it. What else do you see in this transition from founder to CEO? #practicalfounders

Most people don’t know that when a practical SaaS company raises money from a growth equity investor or private equity investor, those dollars mostly go to the founders. It’s not risky rocket fuel for the business like the VC funding game. It’s mostly money off the table—a partial exit prize—for the savvy founders who created fuel-efficient businesses with steady growth. This practical world of growing and funding unsexy B2B SaaS companies is where most of the action is in the software business right now. It’s also where founders are winning more overall. These founders created valuable companies, and they kept their option to sell all or part of the business when it made sense to them. Growth equity investors play a huge role in helping successful SaaS founders take money off the table and keep growing their practical software businesses. In this week’s podcast, I discussed the world of growth equity investment with Philip Dur, a 20-year investor veteran and managing partner of PeakSpan Capital. PeakSpan Capital is a growth equity investment firm that works with bootstrapped SaaS founders who are scaling up to become sizable market leaders. Phil has been funding capital-efficient software founders for over 20 years and has served on 40 boards with those companies. Phil explains that the growth equity approach is almost the opposite of the VC investment game. For starters, Phil works with founders who want to keep growing their business but still retain the option to sell all or part of it at practical points along the way. Founders can’t do that when they take on big VC funding. In the venture world, it’s go big or go home, but it’s the opposite with growth equity partners. As Phil describes it: “I recommend every founder do some honest reflection and ask yourself, what is really the first exit value where I might want to transact and sell all or a part of my business? “If you raised or want to raise outside capital, make sure that your investment partners are making interesting returns at that outcome so you can make it happen if there's a great place for you to pursue liquidity. “Alignment and optionality are two unsung heroes that are hugely beneficial to bootstrapped and capital-efficient founders. Growth equity aligns with that. "You have the option to raise outside capital or not and the ability to sell all or part of your business at the right time. Alignment with your founders and any practical investment partners is required to be able to do that. "I think every time you raise, you should take secondary and take a little bit off the table." VCs and VC-funded founders don’t try to keep their optionality. That’s just one way that growth equity is different than venture funding. Phil describes more ways that growth equity can be practical and useful on the Practical Founders Podcast this week. Listen to this podcast here. https://lnkd.in/giawRYuS #practicalfounders

Beware of universal business recommendations on LinkedIn. Very few business rules always work for every business at all times. For everything else, it depends. The best advice for you today always depends on questions like these: - What kind of business do you have? At what stage? - Who are you, and what are you really good at right now? - What are you trying to accomplish with your business? - Who is your specific target customer? - What exactly do your customers want? - How can your product be uniquely amazing to them? - What is the competition or alternative for that customer? - What is likely to change (and not change) in your business in the next year? - What resources do you have to make things happen? That's not an infinite list. Answering just a few of those questions will increase your odds that a perspective or recommendation can be very useful to you. Beware of advice that doesn't start with asking these "it depends" questions. This advice can come from books, founder peers, experienced advisors, investors, or friends. We sort these ideas based on the question, "Will this work very well for me right now?" The more "it depends" questions someone asks or starts with, the better the advice is. This is the reason that specialists (like me) who do just one thing for just one group always get more traction with their audiences. They have already narrowed down their focus on most of those "it depends" questions, so their advice fits better out of the gate. Can you see that? The game of growing a company or doing almost anything is not completely random, with no structure. There's always a deeper structure to the game that is not obvious from the outside at first. It is a complicated puzzle with pieces that move in consistent ways most of the time. This deeper structure under the day-to-day startup craziness is where founders can find the most leverage to drive their business. Founders should be asking a question like this: "What's the best decision I can make that has the best odds of long-term success in this area?" They should be looking for the best answer that's relevant to their "it depends" questions. "What's the best decision for me, in my business, at this time, in this industry, with my customers, with my vision of success..." Successful founders with growing businesses are often surprised that the game changes as their companies grow. What worked last year might not work next year. That's another "it depends" that keeps changing. - Should I raise funding from outside investors? - What should I do to grow faster in one of my businesses? - Should I raise prices? - Should I post more on LinkedIn? - Where should I invest next year? I don't know. It depends. But there is a best answer for you, only if you do the work and engage the right resources to figure it out at a deeper “it depends” level. #practicalfounders

Serious SaaS startup founders are starting to see how pursuing big VC funding too early will decrease their odds of success. Like buying a lottery ticket for a bigger Powerball prize, the odds go down the more money you raise early in your venture. This is not what the startup tech advisors, service providers, and tech media have been and are still telling us. But the world has changed for SaaS founders in the last ten years. The old recommendation that "the best founders raise VC funding, it's just what you do" keeps going despite the reality and facts. The longer you can go without raising any outside funding or big VC funding, the better your odds of success are as a SaaS founder. Here's why: 1️. Time and Effort Founders in the US can spend up to 50% of their time for 12-18 months learning the funding game, building their network, and trying to raise money. In many cases, for B2B SaaS, they could have generated that much revenue with the same amount of time and effort. And $1M in revenue is worth much more to founders than $1M in funding. Revenue funds your business too, but it keeps on recurring. Funders are looking for startups with efficient revenue growth anyway, so just do that first. 2. Slow is Fast Inviting VCs turns your business into a pro game with serious obligations, important terms, and additional pressures. I've played that game and I dealt with the pressure of working six days a week for 20+ years. But you don't have to push your business that fast and bet it all in the modern B2B SaaS game, in most cases. You can work much smarter by taking a slower approach to achieve better founder-equity-value results without VC funding. I know practical SaaS founders with businesses that are growing by over 50% and are very profitable--and the founders don't work all day. 3️. Better Risk-Adjusted Odds When you raise $5 million and value your company at $25 million, you're agreeing to aim for a half-billion to a billion-dollar exit, which is not realistic for 90%+ of software businesses. It sounds counterintuitive, but it's true. It's hard to get up and running as a bootstrapper at first, but once you do, it's a much better game for founders, customers, and employees. I call them Practical Founders. It's the hidden majority of software companies in the world. They have much better odds of winning this crazy game in the end and doing it their way as they go. VC funding isn't bad or wrong. There is still a place for rocket-ride startups to take it, go for it, and bet it all to go big. But big funding is still overprescribed by funders and misunderstood by most new software founders. PS. This video is a clip from a podcast I did with Finn Thormeier last month. Here is the full episode of the @Founder-Led Marketing Show. - Youtube: https://lnkd.in/gjzRDJ6d  - Spotify: https://lnkd.in/gnCcUztS #practicalfounders

I hear the same thing over and over from practical SaaS founders I interviewed on my podcast who successfully sold their companies: - "We were profitable and growing and weren’t trying to sell our company. - We kept telling prospective buyers No, but one of them made an offer we couldn’t refuse, and we finally said Yes. - It worked out great, and it was a good home for our business." The best exits for practical founders often happen when they aren’t worried about an exit and don’t design their business for it. Like Joe McMenemon, co-founder of ChapterSpot, who shared his story this week on my podcast. ChapterSpot is the leading enterprise member management platform for national associations with local chapters, including college fraternity and sorority organizations in the U.S. Each local chapter recruits members, charges dues, and runs its programs. But the national organization manages the software systems, unique workflows, and payment management for its chapters. ChapterSpot took 15 years to grow from a useful tool for individual chapters to the core system for national associations with millions of members. They were bootstrapped and profitable the whole way before BillHighway acquired ChapterSpot in a strategic sale earlier this year. Joe and his cofounder Brendan didn’t have to sell and weren’t thinking about a big exit. They were focused on their customers and employees and creating a great business. As Joe described it on the podcast: “Honestly, we weren't really thinking about selling our company. Our mindset was just to make the right calls for the business long-term. We had grown much bigger, and we continued to win market share. “We had always been approached by different parties to acquire our business. Our standard line was that we’re making really good money and we don't want to sell. Life is great for us now. We get to pick who we want to work with and we have full autonomy of our schedule. “For us to think about selling, it really had to be a big win for our families. We always said it's about our families, team members, and customers. “They threw around some initial numbers to buy our company that were very interesting. After we talked about it with our families, we were willing to jump in and go through the process. But we could say No at any time.” The difference between a good exit to a financial acquirer and a great exit to a strategic partner is often the ability you to say No Thanks and keep building your business. That’s optionality on steroids. It’s an important superpower for practical founders building valuable software companies without big funding. Listen to Joe’s amazing story here on the Practical Founders Podcast: https://lnkd.in/ddXMEDQA #practicalfounders

Should a healthy early-stage SaaS company care about profits when strategic or PE buyers value revenue size and growth rates so much more? SaaS companies are mostly valued on their revenues and growth rates and not so much on profit percentages. But profits play a huge role in helping practical SaaS founders get higher valuations when they sell their companies. Here's why: All SaaS founders start to get interest from potential acquirers when their companies hit about $3M ARR. It starts with lowball financial acquirers and relationship builders. - If you are profitable, you can ignore all these inquiries and keep growing at the pace that makes sense for you. No distractions, no desperation. - If you are not profitable, the clock is ticking to raise money or sell before you run out of cash. That's 50% of CEO time talking to investors or acquirers who know you need cash and are fishing for desperate (or tired) founders here. - Cash-profitable and breakeven SaaS businesses can keep growing. At the same multiple of revenue a SaaS business is worth TWICE as much in three years at a steady 25% growth rate. Keep growing. - Bigger software companies garner higher multiples since there is less risk in a $20M ARR software business than a $3M ARR biz. Keep growing, but only if you aren't desperate to raise cash or sell right now. - When a strategic buyer comes knocking, you can have a polite conversation and entertain any offer to buy your company. And then you can tell them "No thank you" and keep on growing. It usually takes two or three escalated offers over the course of a year or two for a strategic buyer to realize that you don't NEED to sell, but you might WANT to sell if there is a truly premium offer. Your valuation range is determined by your current revenue size, growth rate, and potential for predictable growth. Say 3X-7X your revenues, which is typical for a growing $5M-$10M ARR B2B SaaS company right now. Your valuation WITHIN THAT RANGE is determined by your ability NOT to take the first offer and wait out all the potential buyers until they give you an offer you can't refuse. Earning some cash profit allows SaaS founders to politely wait out interested buyers and keep growing steadily, making their company more valuable. Or wait it out and sell when markets get hot again. You might even take some money off the table now as profit distributions, so you aren't started for the cash that potential buyers wave in front of you. You can't negotiate much when you are burning cash and can't raise more funding. Buyers smell desperation and will take advantage of it. Profits give founders the optionality and power to win their game on their terms. I have heard this from 50+ SaaS founders I interviewed on the Practical Founders Podcast and from countless other practical founders I know. #practicalfounders

Perseverance usually comes at the top of the list of entrepreneurial success traits. But there’s a twist that isn’t so obvious that makes perseverance work. Persistence doesn’t help if you keep doing the wrong things that don’t work. You need perseverance AND the ability to change and correct your course. To persist long enough to find what needs to change in your business and your thinking. To prove something wrong and do something about it. Jeromy Wilson is the founder and CEO of Niche Academy, a profitable and growing software company with 21 employees and 1,700 business customers. Niche Academy is 10 years old and doing great, but the first few years were brutally hard. There were few customers, little revenue, and meager paychecks. Jeromy and his cofounder almost gave up several times. They cut their paychecks again and ignored their spouses, who hated this crazy business that wasn’t working. But they changed a few things and started to gain traction. Then they started to pay themselves a living wage and hire some employees. They kept going and kept changing by learning what their customers really wanted. As Jeromy describes it on the Practical Founders Podcast this week, it wasn’t just persistence and grit: “You could work yourself to death on the wrong problem and not get anywhere. Stick with it and keep learning, What will really make this something that will help these potential customers of mine? “If you listen to your customers and you're willing to change— to pivot and to find your way into what will actually make a difference in their lives—you're going to be successful. Don't give up, but do it in a smart way. You can't keep going after the wrong thing and expect something magical to happen just because you're working hard. “You've got to listen and be willing to make those changes and do those things that will bless your customers' lives so much that they'll want to be with you forever. “Don't give up, but do change. Do listen, do learn.” A major part of abnormal success is doing the things that normal people won’t do. Like finding a way to keep going in your crazy startup when it’s really hard. When normal people would give up. Perseverance is hard, but pivoting and making big changes is often harder for founders. Be careful what you choose to be stubborn about. Listen to Jeromy’s practical founder journey here https://lnkd.in/gST-fFrK #practicalfounders

Why do venture investors tell SaaS founders they invest for 10x to 100x returns when a VC fund would do great with a 3-5x lifetime return? It's simple. It's the massive churn problem in their portfolio. A SaaS startup would stall or go out of business if they lost 60-70% of their customers--and those customers never paid them in the first place. But that's how it works for the big venture funds we all hear about. Between 50% and 70% of a venture firm's investments will not pay back anything to the investors. These aren't amateur and generous local angel investors we're talking about. This is how it works in professional VC world, with all that money, all the smart people, all the screening interviews, the few special funding decisions, all the lawyers, all the board meetings, and all that work they put in over years and years. The 50% "failure rate" for institutional venture investors isn't a problem to be fixed, it's how this game works. They make the best bets they can to win with the few companies that will get unicorn-blockbuster big. Big tech VCs don't win when all their founders win. Venture investors win when they invest in 50 companies and 2 or 3 of those get really, really big. That's it. That's their Power Law game and their portfolio approach. So at least half of their investments are "churn": they don't pay back anything. And when investors don't make any return, founders don't make any return either. Zilch-o. If your early-stage VC fund goal is a 5x cash-on-cash (called DPI) return to your fund's investors, and most of your investments don't return anything, you need a few of those to return big. 10x at least and 100x if you are lucky. As a venture investor, your 50x winners make up for so many 0x losing bets. This is how they get to 5x overall return goal in about 10 years. An S&P 500 mutual fund has returned about 2x in the last seven years, so the additional risk of venture investing requires a much higher return. Founders should be clear about a few things when taking VC investment: - It's an all-or-nothing bet, most of the time. Go big or go home. - VCs win even when most of their investments don't, but it's a binary win-or-lose for each founder. - If you aren't looking like at least a 5x winner to your investor, you're one of the losers in their portfolio. - When you take big VC funding, you inherit the business model of your investors. - If you're not growing very fast (at least 100% for 5-7 years), you can't possibly get the big returns. It's totally possible for serious SaaS founders to win with VC funding. It's just far more rare than founders imagine. VCs know this. This game is not clear and visible to most new startup founders--and to most advisors, mentors, and angel investors who help startup founders who recommend it. The first rule of the game is to know what game you are playing. Investors know their game. Is that really the game that you want to play? #practicalfounders

Here are the biggest milestones for practical SaaS startups on the way to $5 million in ARR when they get started and grow without big VC funding: - Finding an idea that inspires you to start a company. - Validating that customers have a problem they will pay you to solve with software. - Building your first crappy product and crappy website. - Getting paid by a customer for your first crappy product with founder-led sales. - Getting 5-10 early customers who show you where your product needs to be less crappy. - Fixing your product, website, sales process, and marketing enough so it looks like you know what you are doing. - Getting to $100K ARR and hiring some help to get things done. - Getting interest from investors and learning they would never invest. - Getting to $300K ARR with a couple of employees who you pay more than you pay yourself. - Realizing the limit to growth is the founder's time, not cash. - Realizing that half of the product features, sales messages, employees, and customers you sold to...didn't work. - Starting to say no to things that don't work and speeding up smaller experiments of things you think should work. - Getting to $1M ARR with some happy customers, founder-led sales, a few loyal employees, a sharper message, and execution tactics that work. - Founders taking a livable salary and making a tiny cash profit in the business. - Having productive internal conversations about narrowing in on your ICP, company culture, scalable customer acquisition, and pricing. Focus! - Founder realizing being a CEO of a team of 20 employees is a completely different role and mindset than that of the do-it-all founder. - Starting to get customers that were referred by other happy customers. - Starting to get interest from investors now that it looks like you have a proven product and an actual company. Telling them no or ignoring them. - Founders realizing how much they don't know about everything. And that they need to spend time on their health to do this for another 5 years. - Getting one or two salespeople who can sell without the founder's help. - Getting most customers up and running to high value in a predictable way. - Finding your primary customer acquisition muscle that can be flexed to create efficient growth next year. - People in your industry or market treating you like you know what you are doing. - Realizing not every employee can report to the founders and you need a few leaders who can manage too. - Fixing the deeper things you ignored at first but now clearly block your path to $5M ARR. - Founder getting help (books, mentors, coaches) to learn how to be a CEO. - Realizing that a few of those loyal, scrappy employees who joined your crazy startup aren't doing so well when you have 30 employees. - Realizing the work on product, company, culture, company reputation, systems, and processes will never be done. That's a start. What did I miss? Where are you now? #practicalfounders