Hi, I’m Kwin, co-founder of Daily.co and two previous startups. This post is part of my series about startups and tech. I’m always happy to be helpful to startup founders and people trying to break into tech, if I can be. Feel free to schedule a Daily.co video call with me, here.
It’s January, so if you’re a startup founder you probably are working with your team on finalizing your plan for this year.
Numerically speaking, most tech startups are “seed stage”— you’ve raised some money, but are still figuring out important pieces of your product, market, and business model (and you haven’t yet scaled up beyond a dozen or so people).
My experience is that annual planning as a seed stage founder is actually harder than annual planning later on. As your company grows, the metrics that you use to run your business come into much sharper focus. Also, you have experienced executives working with you. Those executives bring with them their own planning experience.
Here’s what I try to do in an annual plan at a seed-stage company:
- clearly outline our top-level goal for the year,
- create a budget that makes sense,
- and meet with each person on the team about their role and goals.
The Importance of a Top-Level Company Goal
As an early-stage startup founder, it’s often useful to start with Steve Blank’s definition of what a startup is, then work forward from there: a startup is an organization formed to search for a repeatable and scalable business model.
To succeed, you have to figure out a repeatable and scalable business model before you run out of money.
So it naturally follows that your Top-Level Company Goal should primarily be about how you make progress towards finding your business model, as quickly as possible. :-)
Why do I keep saying “top-level company goal,” like that’s an obvious thing you want to have?
Well, the more goals you have, the less it’s possible to focus on any one of them. If you have more than three priorities, then you don’t have any, as the saying goes. Aligning your entire team around the search for a scalable business model is so important that it’s worth being very, very clear about how you’re attacking the problem.
Most successful startups focus in the early days on one of three things: getting to cash-flow break even, finding product market fit, or achieving the metrics required for a Series A.
Getting To Cash-Flow Break Even
Getting to cash-flow break even is a huge milestone in a startup’s life. It’s also not something that gets talked about nearly as much as flashier milestones like raising a big venture round or partnering with a Fortune 500 company.
But all of the most experienced entrepreneurs I know think a lot about how to manage cash so as to maximize flexibility, opportunity, and margin for error. Mark Pincus, for example, famously ran Zynga as a completely revenue-obsessed business in the early days.
If you have as much cash coming in the door each month as you have going out the door, then you have a lot of control over when and how you raise money. Many, many potentially great startups have failed because they ran short on runway and couldn’t raise money with their backs against the wall.
Paul Graham viscerally captures the advantages of being cash-flow break even in a wonderful phrase: being cash-flow break even means your company is default alive. (If you’re not cash-flow break even, you are “default dead”).
In the absence of a very good reason for having a different top-level goal, your top-level goal should be getting to cash-flow break even.
Finding Product/Market Fit
Everybody talks about product/market fit. But most of us are farther away from achieving product/market fit than we think we are. :-)
I had a conversation a couple of days ago with a founder friend who showed me her new product features and said, “We finally have an MVP. Last year, one of our advisors told me we hadn’t really gotten to Minimum Viable Product, yet, and I was offended. But now I know exactly what she meant.”
I knew exactly what my friend meant! It’s way too easy to see all the potential of what your company is doing and gloss over how far you are from actually achieving must-have levels of product stickiness for a large group of potential customers. As a founder, you have to be optimistic and passionate about what you are doing. But you also have to be a gimlet-eyed realist about the challenges.
Michael Seibel’s blog post, The Real Product Market Fit, is my favorite summary of this critical dynamic that we all struggle with. Go read it; I’ll be here when you get back.
Having said all that, finding product/market fit is an excellent early stage goal. If your top-level company goal is product-market fit, then your job as a founder is to be relentlessly focused on the dynamics of growth: user numbers, funnel data, conversions, retention. Figure out which metrics fit your business, align your company around those metrics, and make sure you have good data feeding your decision making.
Achieving “Series A” Metrics
If you’ve raised a seed round from professional tech investors, and have a board of directors, achieving “Series A metrics” is the top-level goal your board will probably want to talk most about.
Raising a Series A funding round is definitely the next big public milestone for a seed-stage startup. It’s a great thing to aim for. The problem is that being “Series-A ready” is a slippery category.
Right now, conventional wisdom is that a SaaS startup will be able to raise a Series A round when it hits $2M in annual recurring revenue and is growing that revenue at least 15% each month. But that conventional wisdom might change between now and the time you get to that benchmark. And the conventional wisdom is much squishier on a number of metrics that are almost as important as top-line revenue and revenue growth: customer acquisition cost, churn, and gross margin, for example.
Aiming your SaaS company at $2M in ARR is a great goal. But spending all your runway to get there, and then having to raise money under time pressure because you aren’t cash-flow break even … maybe not so much. The story might not end well.
If you are a founder who accepted money from venture investors, you absolutely should be committed to getting to a Series A. But your plan for getting there needs to have some flexibility and margin for error built in. One measure of a great board of directors is whether they know how to have this conversation with you: “Hey, we want to see you raise a Series A this year — here’s what we think you need to do to get there.”
Walking the Walk
Our company is a seed-stage startup. How does all of this translate to Daily.co’s 2018 plan? (Feel free to skip this section if the general stuff, above, is more useful than the miniature case study, below.)
At our company, we’re focused on getting to product/market fit in 2018. We use the rigorous Seibel/Andreessen definition: by the end of the year we want to be growing almost faster than we can keep up with.
Right now we have a product we believe in, enthusiastic customers, revenue, and consistent growth, but we haven’t yet hit the explosive growth inflection point that justifies having raised a seed round.
We do think we know how to get to explosive growth. Video calling is a huge, every-day activity for hundreds of millions of people. We have the only one-click, in-browser video calling application that lets 50 people join a meeting, has free telephone dial-in for every meeting, and gives you super-easy team management features.
But we’re missing a couple of key features that customers tell us they need. (Number one on our development priorities list is meeting recording. We’re also working on Android, iOS, Edge, and Safari support.)
Even more critically, we’re fine-tuning how we communicate about Daily.co and how we encourage viral adoption. We often hear from people, “oh, yeah, I had a Daily call and it was great, but I haven’t gone back and signed up for my own account.” That’s a miss on our part, and it’s something we can fix.
Getting to cash-flow break even isn’t our top-level goal, for two reasons. First, we have money in the bank and strong support from our investors, so we have the confidence to focus on user growth rather than revenue, right now. Second, even though we’re a professional software tool, the dynamics of our market are more like consumer software than like enterprise software. The best way for us to get to cash-flow break even is via a freemium model. If we have a lot of happy, every-day users, some of those users will choose to pay for our conference room hardware and for extra software features!
I hope that if you’re working on your 2018 plan, the above has been helpful. Feel free to read part 2 and part 3, if you’re so inclined. And let me know in the comments what I missed or what I got wrong!