What Investors Want and How to Measure Success with Sandeep Shroff

Source: GeniusDen archive transcript checked against the recording. Administrative opening and closing material is omitted; the presentation wording is otherwise preserved with light readability edits.

Sandeep: Some definitional stuff. First of all is idea. It starts all with an idea. I know I have a solution. Most of the times you have a hammer, you're looking for a nail. Where do I hit it? You need to convert that to a product. Product means now you found the nails. Hammer you have, you found a bunch of nails, and God willing there are a bunch of nails out there. More people agree with you that the problem you're solving is real for us and we'll actually pay you money to solve that problem. Obviously, if you're a genius programmer or whatever, genius creator, you’ll create your product all alone and you’ll take over the market. Unfortunately that’s not going to happen. Now you need to have a startup.

A startup is a bunch of people equally passionate, hopefully more passionate than you, saying, “Okay we’ll all come together, we'll solve this problem for the world and we'll change the world forever.” Unfortunately startups run out of money and we’ve done a very, very deep scientific survey over the last twenty-five years. Results are unanimous: 100% of companies run out of money, guaranteed. You need to get out of the startup phase to keep alive. That’s when you become a company. A company has a few characteristics to it, they are all up there. You can actually sell this for money and make a profit at it. You can support and grow your customer base. Selling to one, ten, twenty, fifty people is not good enough.

You need all your customers telling other people, “Buy my service.” You need to be able to articulate your value proposition so that people come to you to buy your service, and hopefully your customers continue to consume more of whatever your product or service is. That’s how you are going to grow a company, and then all of these processes I don’t need to tell you, probably you’ve all experienced this at some point in your life. There are various aspects beyond the idea, beyond the product, beyond the people that come: the processes and customer service, sales, renewal, finance and accounting, all sorts of stuff comes here. This has to lead to the point where you're self-sustaining. As the machine starts, every dollar that comes in, something drops to the bottom line as profit; otherwise you are not going to last too long. That’s the life if you want to go to being a true company.

All of you—I'm assuming most of the population here are founders: hands up, founders, all of you, most of you. First or second employee, rest of you. Assuming you are the first employee or the founders, it is exactly one job you have. The founder job is the easiest. You are selling and selling always. At all points in time you are selling. Asleep you are selling, bathing you are selling, playing with your kids you are selling. Unfortunately that’s the job. If you are not that passionate then you are not a good founder. A few types of selling you have here. First of all if you are the only guy you need to find co-founders. Generally I’ll skip right to the end. To get funded, a one-person team very rarely gets funding. What funders want to see is a portfolio of talents.

One guy is the geek part of the team, one guy is the selling part of the team, here is the HR people manager part of the team, whatever. The two, three, four skill sets are very important to have in a group. Even if you, as a single human being, are the Steve Jobs and have all those skills—minus the people skills—you still can’t make it. There’s just not enough time in the day so you have to have co-founders. That’s the first selling. You have to be able to go tell another human being, “Sacrifice your wife, sacrifice your kids, come join me, live a life of austerity for a number of years and hope to God you are nearly great after that.” That’s a big sell job you are handing to somebody. Those are your co-founders. If you find them great, otherwise the going gets difficult. Once you have co-founders, you got some product; now you can hire employees. That’s another selling you have to do.

Selling at that point is a little different. Employees will get a salary, maybe some benefits, some less stock options, less of a lottery ticket than the co-founder, but still there is sacrifice involved by hiring employees who will do that service. Obviously investors in all of these—by the way, investors are the easiest selling to make, right? Any idea why investor selling is the easiest to make? Speaker 2: You lose your mom? Sandeep: What’s that? Speaker 2: You lose your mom? Sandeep: No it’s not your mom. You will lose your mom and dad in the bargain. Friends you lose very easily; I’m very anti–friends-and-family round kind of guy because they become a pain to handle. More on that later, but they become an absolute pain to handle. You’ll say, “No I’d rather give your money and cut you up than answer all your questions,” so don’t do that. Why are the investors the easiest bunch?

Speaker 3: You are selling them a dream, not an actual service. Sandeep: Selling a dream, actual service, okay. They are the only ones amongst these who are eager to give you the money. It is their job to give away the money. Co‑founders and employees—their job is not to take risk. Customer job: “I’m happy as it is; don’t show me anything new. I know you got a genius idea; keep it to yourself.” Investors are the easiest to sell because they are looking for the next lottery ticket and you are the ticket. Speaker 4: Horse. Sandeep: What’s that? Speaker 4: Horse. Sandeep: That’s right; they are betting on the horses and you are all the horses in the race. As crude as it sounds that’s their due. Nonetheless you have to sell. We all want a 10x sort of greater return on you knowing very well that ten of their portfolio companies are going to fail. They need one big home run.

Are you the home run or not? That's the sound of you saying, “I’m the home run, Mr. Investor.” Sounds easy; nonetheless you have to make it. Customers — that’s not the full stop. You are wanting something from them that they will never part with: that’s their money. You are selling to me, the customer: “Till I see 10x value, I will not give you a buck.” You got the coolest product this and that, ten bucks a month, fifteen bucks a month, whatever, $10,000 up front. “Till I see a massive improvement in my life in some way — whatever the improvement your product is bringing — I ain’t parting with my money.” That is a big sell you have to make. Having said that, the money that they give you is the cheapest money you will ever find. By cheapest I mean everything is a cost.

I’m a finance guy, but if you just look at it from a pure and simple cost-and-benefit economics point of view, everything comes with a cost. If you are married to your lovely wife or husband, it comes with a cost or compromise. He or she leaves his toothbrush in bed, not the bloody sink you put on the side; that irritation is the cost of having them as your life partner. Investment money comes with a cost: it takes away part of the company. Co-founders will come with a cost; they take away part of your company. Employees take away the money that you had dearly raised from the investors. Customer money — revenue — is the cheapest if you are selling your product. This is, hopefully, very free for you.

Cost of goods sold and software stuff is very low; even if you have a hardware product, your profit margin should be high enough that if a customer buys something from you for ten bucks, it costs you nearly a buck. The cheapest money on the planet is called revenue. Question so far, anything not clear? All right. What are the essentials, attitudinally speaking? What do I need in me that I should know that I'll be successful? Again, there is a whole laundry list of it. I put what I think is the most important and I’ll go in details. You found all those nails — customers that you want to hammer who will give you money for the hammer — you need to be in touch with them at all points in time. I suggest, for example, to do that: do not hire any sales guys; do not hire a VP of sales.

For as long as you can, you as the founder should be talking to the customers because that will tell you what the pain points are. I can tell you from personal experience: I did the selling for the first one year of my company, and the product was massively changing with every call. Missed that part of it. Their pain is this: the sales guy shows up, our sales go down, and the sales guy says the product sucks or the customer doesn’t. “That’s not right; my feedback from a year back was different and you are telling me different.” I go on the call as the founder, as the guy who conceived of the product; I hear completely different stuff the customers say. Why? I understand the product side; I knew this product, we made [unclear]. I know what he means when he says something.

The salesman just hears the pitch and says, “He says I have no time.” He has all the time; it’s just that your pitch sucks so badly that he doesn’t have the time for you because you didn’t enunciate your value prop clearly enough. I suggest you be in touch with your customer: be the salesman, be the guy on the phone. If you want to hire a guy to do the cold calling, be my guest, but when the pitch comes, when the demo comes, it’s you who’s giving it because the feedback you will hear is very different. The conversation you will have with the customer is very different than a salesman will have, right? A salesman's focus is completely on whether he is closing the deal or not — am I making commission or not? If not, okay, move on. But what you are listening for is feedback. In the early days, more than the revenue, it is the feedback that’s valuable to you.

Being in touch with the customers is, in my view, super, super important if you want to have success with them. Work with a budget. Sounds as simple as it is. Know how much money you have, know how much you are going to spend on a monthly basis, have a preconceived idea, “Okay I’m going to make an experiment of five thousand dollars. If you hire this guy and he’s going to call fifty people and we'll get five customers out of that." Have a limited, what I call, sandbox of everything. We are going to have seven engineers, four engineers take them this long to make the project, et cetera, et cetera. The idea is to set guide posts for yourself financially speaking and every month look at it versus the actual and say, “Did I go wrong? Have I exceeded my boundary anywhere?” If you are screwing up you want to know early, right. That’s [unclear]. Tons of means to screw up a company.

Budget is the biggest helper of you in not screwing up, but what we’ve seen is most founders, entrepreneurs, they are passionate about product, technology, selling. Nobody is passionate about spreadsheets, nobody is passionate about reconciling a bank, nobody is passionate about wiring money to a vendor. It’s just a chore and you will always put it to the last, give it second grade, third grade, and then, “I’ll do it after I’m done with everything,” and you are blurry eyed you are doing something that you don’t really want to do. Budget is how a monthly close, quarterly close, whatever you think is a periodic check with yourself. Honest objective check with yourself, "Am I on track?" That’s extremely important because, as I said from my earlier research, 100% of companies that run out of money will die. You don’t want to be one of those. Hire people smarter than yourself.

Cliché, very easy to say, extremely difficult to do. If somebody is smarter than yourself why would they come work for you, right. Refer to slide number two: you are always selling. They are smarter than yourself on something but what is that part that you are bringing that says, “Aha I want to work with you.” You have to be able to have, if you are the smartest person in the company I guarantee you if you are not Einstein your company will not do anything. For that matter even if you are Einstein you will not do anything or if you are the smartest guy that means you are the fountain of all decision of the company. You will choke the company to death because you will not have enough time in the day to spread that wisdom even if you are Einstein. You need to be able to have people smarter than yourself. You say, “No John sales yours. Sally HR is yours.

Talent acquisition is yours,” and then it’s out of your mind. Why? Sally is finding the other smart people, John is finding the right sales guys. You want to be able to delegate. That's where you need people smarter than yourself. Very, very big thing that most people are afraid to do not in the part of country where I come from, affectionately called Silicon Valley. Failure is one of those medals of honor. I have burned through fifty million of investor capital. What have you got to show for it? Nothing. Some companies shut down. You know what? We’ll probably give you another ten million bucks for that. This guy must have learned a lesson. I have two MBAs myself personally. One from UC Berkeley cost me $58,000. Done in two and a half years, evenings. My second MBA was my second start-up: $30 million. That’s my $30 million MBA; it took me five years to get nothing to show for it.

Bunch of IT, funny, just yesterday my son, who is turning out to be more hands-on geek than I am, he even recommended, “Dad I want to make a computer.” I said, “Okay.” Four days ago we bought a bunch of stuff on Amazon, we missed the Amazon Prime sale but we got a bunch of stuff. We have motherboard, this, this, that. I have a computer disassembled flat on the floor and he’s learning how to put it together. At home we have no desktop but he’s making the super high-powered desktop and he’s trying to get an idea of physically how and he said, “Dad, the box at the corner of the garage what is that?” “Don’t touch it.” “What’s that?” I said, “That’s the $30 million machine. It’s all the source code from my company. The last server that I kept to myself and all the source code.

A hundred and twenty-eight man years of $30 million.” “Can I open it just to see how this is going to be?” I said, “Be careful. Don’t screw it up.” “I don’t even want the computer to switch on and off.” All jokes aside: failure. Back to the failure part. Don’t be shy to admit your failure. A founder's job, a CEO's job, an entrepreneur's job is an extremely lonely job. Not too many people you can go to for advice, not too many people you can confide in, but “If I told my co-founder I’m having jitters on this I’ll look weak. If I tell my employees I’m not sure this is going to work they will leave.” Everywhere there is the other side, and you will never talk. Being objective and knowing when you are failing is super important for you to succeed. It’s okay to admit. You’ve failed, so my deal with this is I will admit all failure to myself at 2 a.m. Why?

I get my best ideas when I am half asleep. I’m not joking — I sleep with a pen and paper next to me and in the morning, every day, there are scribbles on it which I have difficulty reading, but somehow I figure it out. I solve my problems when I’m half asleep. When I have admitted my failure at 2 a.m., I’m going to get up at six. I have a solution for it, or I have a way to present it to other people. I screwed up yesterday, but this is how I want to improve. Go to your investors, go to your co-founders, go to your employees, tell them, “Okay guys, this is not working, but this is what we are going to do.” Every failure has to come with a success plan after that. Part of admitting failure is, “Okay, this path is not working, this is a rat hole we are going down, it’s not going anywhere, stop it, back up, take a different path.” Nobody else is going to tell you that, honestly. Right.

One of the value props we bring — we have about a hundred-plus clients, many of them young startups — I tell them the first thing in my first meeting. I say, “What you get from me is the hard truth. Not, ‘Interesting, get back to me when you have more traction; let’s talk in six months.’” None of that bullshit. Come to me and I’ll tell you that stinks. [unclear] Tell me the value actually and if I don’t see this, I’ll say it’s not going anywhere because you want to do it. The big word is pivot — the only way you make proper progress is by meandering and finding what the right way is. Till you admit failure, till you say this part is not going anywhere, you will never pivot away. Right. Every child is beautiful; no mom says, “My child is ugly.” But fortunately these are not human things — it’s the company: you kill the idea and move on.

“Yeah, that child was ugly — yeah, need a new one.” Move on. Don’t get too emotional about it, don’t get too sentimental about it, and you have to be controlled about it. I’m not joking, you have to be ruthless about it. Right. In fact, we got funding from a company called Charles River Ventures. At that time we got funding in 2005, 2007, and 2008 from them. At that time they had been funding companies for forty years, now close to fifty years. I’m like, “You’ve been funding companies for forty years,” but this is the discussion I’m going to have with my investor on the board when the death of my company was certain. We were trying to make a Bloomberg wannabe; we were selling to Wall Street. Then 2008 happens and Lehman Brothers closes up. Lehman Brothers was my first client. My first $10,000 says “Lehman Brothers” on it.

I still have the image on my computer here — a very proudly taken high-res 7-megabyte picture of $10,000 from Lehman Brothers — and that’s the end of my story. I’m like, “Okay, you are going down the tubes and you have to find another way out of it.” You tell me, Mr. Investor, you are a super-smart, good guy; you’ve been investing in literally many hundreds of companies for forty years — what succeeds? What’s your analysis of success? He said, “It’s good you ask because recently we did an analysis of all our portfolio companies for forty years.” He said there was one common thing in all the successes. Any guesses? What is that one common thing in all the companies that succeeded for them? Yes, anybody? Speaker 5: The team. Sandeep: The team. Speaker 6: A great wife. Sandeep: A great wife telling them that they are wrong. Speaker 7: Flexibility. Sandeep: Flexibility.

All of them—he says, all the companies that succeeded did something else than what we funded them for. We funded X; finally they found success in Y. There are great stories coming out of Silicon Valley. For example, you know the company Slack, use all the product, right. I don’t know if you guys know the story of this guy. I forget the guy’s name, but he is the founder of Flickr. Same guy—he founded Flickr before. He started on making a video game. His passion is video games. He makes video games and they had to share artwork; they made a lot of artwork for the video game and shared the artwork amongst different artists. One of the geeks on the team made this facility where all the artists can share screen. “I made character X, here it is; you make character Y, you make the background, we merge them all together.” This is how the video game art is coming together.

The video game never saw the light of day, but the photo-sharing thing was Flickr. They started off making a video game and out came a photo-sharing app which they sold for a few hundred million dollars to Yahoo. The husband and wife came—now they divorced. Then he said, “Okay, I’m back to my passion of making video games. I have enough money; I’m going to make another video game.” He starts making the second video game and they say, “You know this email traffic is killing us. You send me email; I get lost. I told you that last week—you did send email and send me three times. Please attend to all these emails that I’ve sent you because there's just too much.” One engineer made what is now Slack. He says, “We should have a common board. We’ll all post our notes on it and you can read whenever you want it.” You have topic X, topic Y, topic Z.

There goes the second video game down the tube; out came Slack. One of the unicorns now with a billion-dollar-plus valuation. The joke ongoing in that company is actually, besides Slack, what the next video game he's going to make is. Everybody knows it’s not a video game. Point is, people today—don’t be shy; it’s okay; that’s how you’re going to succeed. Question so far? None? Anyway, essentials for success. All that is attitudinally required at the floor of the company, but how do you get the money? Very, very simple thing. Not much on the slide. The biggest thing that gets you the money, which I didn’t put up there, is your reputation. The one thing the investors are investing in. You ask any investor, they say they invest in the team, but everybody knows you’re going to pivot away from the idea.

The first idea most likely is not going to work, so what they are investing in is you: your flexibility, your willingness to move. I talk to countless investors; there’s the team’s ability to hire—are you smart enough to hire people smarter than yourself? Do you have a large enough network to attract good people to come work for you? All of that goes into the mix and those are the bigger factors. What do I put on my deck? What do I go tell? You need to have an operational plan and, of course, a financial plan. What will the nitty-gritty of this company’s growth be? Okay, we aren’t attacking multiple techs, but I’m going to solve problem Y in market X. Why multiple techs? By the way, then I can do Y plus one, Y plus two, Y plus three in the same market and then the same solution can apply to market A, B, and C.

That’s your operational business plan and each of these segments comes with this financial theme. Attacking a new market means $5 million or whatever—new geography, new market, I don’t care. New sector, new geography, whatever it is. If you talk to Uber they’ll say, “Yeah, it’s $12.5 million per city attack,” that’s how they think. It takes us twelve and a half million bucks or whatever the number is, I’m just pulling it out of the hat, to go to a new city. Why do we need a $1 billion? We are going to go to twenty new cities in the next twelve months and it’s about $50 million per city. Right. Similarly you will have that in your financial plan just to show that you thought through it. Nobody gives a damn about anything beyond twelve months.

Everybody knows life changes and then you will pivot, but you need to show that you thought through it, you have some idea and if I come across these problems, basically you’ll solve all the known problems out there. Of course new ones will crop up and you’ll move away, but show me the fact that you can think. Anticipate investor queries and also have the answers ready. The idea is, think through the problem like me. The ideal presentation is where the guy stops thinking. Why? Every time I have come to a question or I’m going to come to a question, you’ve already answered it if you spice that. That’s the beauty of a pitch deck. If you can do that, you’ve mastered the art. It takes a lot of iterations. I remember I made a pitch to a guy called Doug Leone at Sequoia Capital—the big daddy of Silicon Valley VC. When you get a meeting with Doug it’s difficult.

Funnily, we knew people through people; it was a team thing—one of my co-founders was a known guy, blah blah blah, we got a meeting with Doug. He says, “Give me a radical approach.” I said three sentences. He said, “I’m the third guy you’re pitching to, right?” I said, “Yeah,” and I’m like, “How the hell did he know that he’s the third guy I’m pitching to?” Just the smoothness of my saying, or the finesse in my words, told him how many times I had been pitching that. You try that on yourself: make a pitch to your significant other, make a pitch to some friend—you will see yourself become smoother and better with everyone. Write it down and shrink it, write down, shrink it, write down and shrink it. The fewer words you say, the better it is. It takes a lot of iterations to get there. As simple as it sounds, anticipate queries and have them answered. You need to talk to some investors.

If you have never talked to investors, you don’t know what the questions are. Therefore, you need some seasoned advisers or other friendly co-investors, mentors, advisers who have done this before. That’s the invaluable part of the advice. Yeah, don’t say that—you only get screwed there. But my biggest advice is: always take two people minimum to a meeting. Absolute minimum: two people go to a meeting even if you’re meeting one guy. Why? One guy is busy making the pitch; he’s focused on, are my words right, am I looking right, am I fidgeting—I’m focusing on so many things. How do I control my body, control my pitch? I forgot to see the guy. I’m so focused inside that I have no idea he’s sitting here, and I’m not even focused on the fact that he might pick up a phone. If your guy has picked up a phone and started answering email, you’ve lost.

So many times I see founders will not even see that they’ve lost the guy. Is he looking at his watch? Is the 45-minute meeting ending in 45 minutes? Silicon Valley — they are all meeting forty-five minutes. Every VC’s calendar for the next forty-five minutes is always blank. Every freaking assistant in the Valley knows not to book the next forty-five minutes. Why? “I really love this guy, let the meeting flow.” They will never kill the meeting because they have another one to go to, but if they don’t like you — if a forty-five-minute meeting ends in forty-five minutes — it’s bad news. That means you didn’t excite him enough for him to flow over into something else. These are the finer points that you need to know, understand, and what I call the psychological factors behind the meeting. Assuming you have funders, you have ongoing. I mixed the two slides of how to get and keep investors.

Always give them honest updates on the company. What are you doing? What did you do right? What did you do wrong? Et cetera. These things are very important; I’ll come to that in the next slide. But it’s extremely important for you also to take a step back, smell the roses, look at your own charts: “You promised this in the last board meeting, did you make it or not?” Most of the time we are not honest with ourselves, right? Let’s admit it: you try to pick the data that suit your thesis and drop the others. We do all this nonsense of keeping ourselves happy. Nobody wants to feel miserable, but you have to be honest, because they will see through it in a second. I have had investors — one of my board members said, “Don’t give me charts, give me spreadsheets,” very weird guy.

I would give him a spreadsheet full — like the whole PowerPoint thing would be full of numbers, all eighteen months, all glory of twenty-five lines — he’d go, “That one looks off.” You make one freaking mistake in the first ten seconds, he’ll point a finger at you. These guys are smart. They handle entrepreneurs like you three times a day. They attend four board meetings in a week. They are pros. They have better background than you. Don’t try to fudge it, don’t try to fool. Honesty is the best policy, to yourself and to your investors. Again, admitting failure is part of it. Don’t be shy of that; admit your failure upfront. I always start my board meeting, “Here’s the bad news.” Get it out of the way because you want to end the meeting on a positive note — everybody remembers the end of the meeting; nobody remembers the beginning of the meeting. “We screwed up here, here and here.

These are the corrective actions, and this is already put into play.” Show them that you are self-aware enough: you will find your own mistakes, you will take the corrective action, and put it into play. Questions? None. My favorite slide — took me the longest time to make. Speaker 8: You didn’t show me the money. Does this show me the money slide? Sandeep: “Show me the money” is right after this, but the point is whether you want to keep investors or get investors. I need some chart like this. Everything is missing on this chart. There’s just one hockey stick, you see, and I’ll walk you through why it’s missing and what’s the purpose of this. I have no idea what the X axis is. Is this over a six-month time frame or is it a six-year time frame? I have no idea of the Y axis — what’s the magnitude, is this a logarithmic scale or a linear scale? I don’t know.

What is the metric you’re showing? I have no idea. These are all relevant to your business — what makes sense. Is it number of users, revenue, number of page views, number of ads served, whatever. You pick the metrics that are useful for your business. Point of this chart is, you’re most likely, all of you, in the beginning of your company. All of this is a complete figment of your imagination. I made this chart in exactly ten seconds. It’s nothing but previous numbers multiplied by two. So mathematically behind me you can see the segments that are changing slowly; it’s not that smooth, but that’s what I could do on the flight. The point I’m making is, have this chart ready for the investors — you’re sure to sell your dream — but have these charts, at least four of them.

I ask at every fundraising point; I say, “As soon as you’re done fundraising give me the deck of the next funding.” You just raised your million‑dollar seed that is going to last you thirteen months; on month number eight you will go out to raise the next round of five million dollars. On month number eight tell me four metrics for which the fundraiser chart will look like this. Print them out. Stick them to the wall in front of you, preferably large charts; stick them on a common wall where all employees and other people in the company will see. Have the guts to, every month, draw up a red dot where reality is — as reality is going. Be brutally honest, objective with yourself; let the charts speak: am I tracking to what I said I will track to, or am I just smoking? This chart should tell you that.

I’m a geek, software guy — life is easier as a software guy: you can program everything, anything. Instrument, for the geek in you, instrument the heck out of your code; track every click, track every page, track whatever you can track — ten, twenty, thirty, I don’t care how many. They don’t take up space. This is free business. [unclear] the damn thing. Why? I don’t know which one of those thirty will make me look like this.

Each one of those thirty is predictive of my future success, but I want to be here and say, “We did very well in Lehman Brothers, but we screwed up in Merrill Lynch.” Now I’ll go back in my data, look at the thirty points for Lehman Brothers, look at all the thirty points for Merrill Lynch, and ask, “What was predictive of the failure at Merrill Lynch and what was predictive of success at Lehman Brothers?” We need more users and we need the user to come back every day. Customer admits, “My users don’t log in to the system every day — I’m doomed for failure.” Why? Because it’s not habit‑forming; people forget after the first two, three, four times, like gym members. If you don’t go every day you forget it, and at the next renewal time you will cancel. Have the data points so that you can study the pattern of whatever success or failure was.

And in software it’s all very easy; I understand in hardware you can’t put out that many iterations of the product, but instrument the heck out of the software if you can. This automatically tells a story. If you put the right X axis and Y axis and convince the people that, “Hey, if we have page views I’m guaranteed to have revenue. If I have users, I will monetize them,” whether it’s one cent a day, two cents a day, online gaming, mobile gaming — I don’t know — but first let me get to ten, twenty, thirty, forty million users. In online gaming, and in any software‑as‑a‑service business these days, every successful company has tens or hundreds of millions of users; you can never know. Sixty million users? Three or four percent of them pay and the company is massively profitable. Even if you get four million people to pay you ten bucks a month, that’s forty million bucks a month.

It’s hard to lose money at that rate if you’re a software company. If you’ve done things right at forty million, you should be very, very profitable, unless you take the money and dump it down — “Okay now I’m going to make my software in a hundred other languages and I want to be not only text but I want to do video, voice” — whatever, and you can complicate it further the way you want and lose money the way you want. But at forty million bucks a month, very difficult to lose money. One of the simpler charts is this one; I call this the $13 million chart. I cut off the other one, which is a $25 million. This is a company I came into — we were out of money, we couldn’t make payroll; we were twenty people at that time. His investor called me. The investor was the investor in my company.

He said, “The company is crumbling, they don’t know how much they have; every time at payroll time the CEO’s credit card comes up.” He was literally paying company salary out of his own pocket. He started making charts and all that. Somewhere here in this thing — this month had not happened yet. This was a dead month. So this is basically: blue is current revenue, green is the upgrade figure, light green is the very small bar, dark green is the brand‑new revenue, and the downgrades in this we have to control. Which was very good for the company, but we were not getting enough of a bump. As soon as he started getting these bumps, thirty million bucks came in about fourteen months after that; which was December last year we did another twenty‑five for this company. This was the sole chart that did the trick.

There were a few others, but this was the real chart for a software‑as‑a‑service company. What we’re showing is close to zero and it seems to be getting his green bumps very successfully, month after month after month. That’s it, done. As I said, a few other things, but the point of it is, the day he started keeping his chart, he just completely focused the sales force on, “Is that green there this month or not?” On the twenty-fifth of every month I draw this chart and show it to everybody. This is what it's looking like. We have five days to go; are you going to get anything green on top or not? There were very visceral reactions because it is physically there in front of you; as you look, there’s a spreadsheet. It’s the data I downloaded from your system; I didn’t cook this up. There is no arguing the objectivity of data.

That is why I say you keep this stuck up there, draw dots on it, real numbers. What can those numbers be? You can make all those charts on the financial side. As I said, I mostly work with software companies, enterprise software types like this. I may be wrong about other types of businesses, but the bottom line is revenue in any SaaS business; bookings and billings are very important. As I said, revenue is the cheapest source of money. If you can bill people in advance for one year, God bless you; you’ve got your life made. If I can bill everybody for the full one year of service in advance, I’ve got a lot of cash coming, but it’s very difficult to get to that point.

You need to get to, let’s say, half a million a month, which means if you are signing up thirty, forty, fifty thousand dollar MRR deals every month, that means you’re getting a half a million dollars, six hundred thousand dollars cash every month from your customers for free. This is a promise of future service, right? There is one year of subscription in advance; I hope you will be alive in a year and you will keep giving me service. If you notice, I am sure you guys use a lot of SaaS services yourselves, whether it’s Dropbox or Box or Evernote or Slack, GitHub, I don’t know, but everybody has a five bucks a month, ten bucks a month service, and if you pay in advance—LinkedIn is twenty-five dollars a month, but if you pay in advance it’s two hundred twenty dollars a year and they’re giving you twenty, thirty percent off.

Why are they giving you that much off for paying one year in advance, why? Any ideas why? Speaker 11: Cash flow kills companies. Sandeep: Cash flow kills companies. Revenue is the cheapest source of money. I’d rather collect revenue upfront than I don’t have to go to my dear investors and raise another five million bucks and if I have to collect five million it’s like this. Next time my revenue is half a million a month just for the record. I’m going to get six million from these guys assuming no churn, no upgrade, no new customer just simple math. Half a million — click, click. At the end of the year I will have collected six million from these guys, six million, sorry. To grow, hire more engineers, I need salary to be paid today. If I have to give them $1 million off and collect all the five million today, I’d do it in a heartbeat.

No investors, no debt, no nothing — just promise of future services. Services is largely run for free. Amazon.com, AWS, Rackspace, whatever your cloud, you’re just paying not that much in actual cost of goods. Money is near free. Anyway, so what I mean is how much of my expense is variable versus fixed? The less fixed expense you can keep, the better it is. If you can scale the company that’s better. Try to go for the least fixed cost because the more fixed cost, as much as people think employees are variable cost, not true. Employees are fixed cost. Just think through an employee’s life cycle. You want to hire me as this hot engineer. It will take three months to find me. You’ll pay some headhunter what? 25, 30% of my salary to find me. It will take six months to onboard me, to figure out all your software. Am I variable cost?

Are you going to fire me month number seven or eight when things go bad? You already have $150 thousand invested in me, you’re not going to fire me. Then in the ninth month or the tenth month the business picks up, you’re out on the road again trying to find me again? No way — all employees are fixed costs. Be careful about what fixed costs you take on. The other thing which I can tell you from personal experience: bigger ships are difficult to steer. If you are the Titanic and the iceberg is within three miles of you, they use a different word in Silicon Valley. Joe asked me not to use it here. You cannot steer the ship fast enough to avoid that. If it was a small ship you will turn. Ship being number of people. I raised thirty million bucks for my company, grew the company in less than two years to three hundred people, from 2006 to end of 2007.

Then I got a cancellation from Lehman Brothers. I had no idea why they cancelled. December 2007, my second renewal from Lehman Brothers. There were three users inside of Lehman. All of them vanished. Emails bounced and I very reluctantly went to the procurement guy, who I hate because he just squeezed me and squeezed me. Those guys said, "We don't need your license, cancel it." What happened? They were running a $1.5 billion hedge fund inside of Lehman proprietary money. Lehman decided to shut that fund down. Of course eight months later we find out what the hell was going on in Lehman; they were pulling all the money into [unclear] security issue, blah blah. They didn’t know that we were the canary in the mine. I knew I was a canary, but I didn’t know I was in a mine, but I knew I was dead.

I didn’t know that the mine went to all the hedge funds, to all the mutual funds, to all Wall Street — boom! Eight months, my customer base vanished, absolutely vanished. I am a big ship of three hundred people and sailing at a million dollars negative a month. I was the Titanic and I saw the iceberg eight months away, couldn’t do jack about it. The only good part that we’d done: I’m obsessive about data, so we had instrumented the heck out of our code. I knew every click of every user in our system. I could recreate your session instantly, when you came, what did you do, blah, blah. The only thing we figured out we updated was the twenty-five hundred companies, I believe, every quarter. We were like a public company database, like Yahoo Finance but much more specialized and deeper. When you have the 2,500 companies, people look at 60–70 companies every quarter.

The other database doesn’t even get looked at. I was tracking everything. I now know that of these 300 people, I’d only need 30 percent of them because only this database needs to be kept up. From quarter to quarter only 10% of the database changes and only adjacent companies come through. It is not like people access this then this then this; no, people access the same few companies repeatedly. I knew how the user changes over a quarter. I was selling to the tech crowd: all the people in mall retail companies, all the people in energy companies, oil and gas. Very difficult organizations; very hard to implement. Firing 300 people is not an easy job. We were sixty-six people in the last year of the company. Over the year and a half that the company was going down, I fired 240 people. People are fixed costs; very difficult to get rid of them. It is very painful; it’s emotional.

All of these guys you made a promise to, you feel morally bound to them: “Hey, I’m a salesman, remember? I asked you to give your [unclear] job, come to me, promise of bigger options, blah, blah, blah; now I’m telling you, you don’t have a job.” When I shut my company down the last day in May 2010, India operations shut down April 2010. There were five co-founders, and four of us made a pact. I said, until we find a job for all the sixty-six guys, each one of them, we will not move. Four months later we found each one of them a job; then we said, okay, look for our job. Very hard decision because we expended our blood and sweat finding each one of these guys. What I’m saying is, don’t make the mistake of taking people as variable costs; they are fixed costs. Be very careful about what's fixed. Keep as many costs as you can variable so that you can change them on the fly.

Obviously, cash flow—where is the cash-flow break-even point? One piece of deep analysis is something very simple. Most people can’t do that: what’s your profitability per customer? That requires knowing that number extremely well; can you break it down by customer? What is your average cost of delivering the service? You’re delivering a video, sure. Or you’re making a tax return per person, sure. Do you know how much infrastructure gets used in making one tax return? Can you split that across the number of customers? Have those things in mind, because when the going gets tough, which it inevitably will, know that a company’s success graph is not a straight line. Even if you look at the Facebooks or Microsofts of the world, a company that looks dead can come back. Read closely any company story; there are enough death points that they encountered.

At that point, when you have to do this, you ought to know what to leave behind. If you have no idea where your costs are and all that, sorry to say it, but you're screwed. There is no takeoff after that. For all this stuff you need to charge yourself with the possibility you’ll get it wrong the first time—always, guaranteed. Then some crisis will prove to you that it’s wrong. Hey, I thought of this, but now all the customers are gone and I still have this cost. You should have gone to zero; obviously it is a fixed cost in the system. Oh, we bought these AWS reserved instances—$60,000, $5,000—now none of them can be used. We don’t got any [unclear] in the face, very interesting [unclear], but nonetheless it hurts you. What I’m saying is, make these charts even if they are wrong in the beginning; let yourself find out if you are wrong. If you don’t even make the charts...

I want the most perfect chart otherwise I will not make one; you’ll never have a chart. Guaranteed you’ll never have a chart. There was a Spanish mathematician, Spinoza—he was Spanish or Portuguese, whatever. He said [unclear], “I’m a little [unclear], not mad [unclear].” All mathematicians of the world, from Newton to others, were very spiritual guys. Many mathematicians have written books on philosophy. When you read the philosophical books and the [unclear], it is very beautiful. One thing which still sticks in my mind is a line he wrote: even if you figure out your moral framework is wrong, stick with it till you find the right one, because living without a moral framework is very difficult. If you don't have that framework, you'll be floundering and bound to make a mistake. The point I'm trying to make is your charts are wrong—no problem, stick with them.

Let time tell you they are wrong, but have a chart. Have a discipline of making a chart; have the discipline of following some numbers, otherwise you will have no idea when you learn. Then you find out you're wrong—hopefully sooner rather than later, great. Same thing about this e-matrix: are you guys familiar with this—letter mumbo jumbo, alphabet soup? Number of users and customers—that's very clear and very simple, right? We want to show activity and engagement—are they coming back? Are they active? Some services are very active; some are weakly active. We found a very interesting pattern: most people come on Monday and there is no usage for seven days; Monday again there is usage, and you're like, "Oh, something's wrong." It turns out some geek in the company had put a one-week cookie. If you logged into the service once, it never asked you to log in for seven days.

Another geek had instrumented the code only to track logins. Two guys not talking to each other, doing that—no idea. We thought we were screwed because people were not coming. In five weeks we saw this. I'm looking at the CFO; I'm sitting there. This is a product meeting. I get very intrusive with my companies. I said, "Your data is wrong." "No, our data is right." This guy is a wizard. I said, "Obviously this is such a massive pattern, it can't be..." And our service is what? The login service. We are a login service—people log in every day, what are you talking about? People don't log in. Then this guy said, "I put a cookie which expires in seven days; therefore people don't touch our service for seven days." "Why did you put that thing?" He wanted to save the pings to the database because it was killing his servers.

"Dude, just to make your improvement better, you've lost all the logging for six days? You have no idea what people do for six days?" What a dumb idea is that. I'm saying these charts help you find idiosyncrasies—that one part of the company has done something the other does not know about. Just analyze the usage. Churn rate is very important. How many people am I losing? It's extremely important in any subscription-based business because it takes a lot of money to get the guy in. The second is CAC—customer acquisition cost. To acquire that is a big science. It's not easy to find out what your customer acquisition cost is; we can talk offline about it because that's a lecture in itself. Since your CAC is very high, in a subscription business you will take six to eight months to recover your customer acquisition cost.

If your subscription is ten bucks, your customer acquisition cost should be no more than $60 to $80. If your subscription is $250, then you can spend $2,000 or $3,000—I don't care. These are some standard industry ratios we can talk about. The point I'm saying is watch churn rate very closely because that is a big indicator of the stickiness of your service and the profitability of your venture. LTV is nothing but 1 divided by churn rate—the lifetime of a customer. How much time before my customer dies? Am I a user for four months, five months, forty months, fifty months? That's how long I'll live. If my churn rate is 2% a month, which means out of a hundred users I lose two people every month, my average user is gone in fifty months. Use linear math—don't get too complicated, don't go geometric on me.

Linear math: 2% lost every month means my average guy is gone in fifty months; therefore, if I'm a $5-a-month service, the average guy gives me $250 in his life before he vanishes. That LTV relationship is super important. Speaker 12: What’s LTV? Sandeep: LTV is lifetime value. How much money will I have given you before I drop your service? That LTV doesn’t take hindsight to figure that out. If your CAC is greater than your LTV, you’re dead. It takes you $10 to acquire a customer today. Remember CAC always happens today because you rolled out your marketing money, sales money, commission money. You’ve given out $10 and a customer walks in, you welcome them and over the next twenty months he can give me $8, right? It’s like selling a buck for $0.80 and say I’ll make double volume. You’ll never make volume. In fact, volume will kill you.

I don’t know if it’s the same story about this cookie lady in Chicago or New Jersey — I forget — Groupon killed her. You’ve heard of the story, guys? You know what happened to her? Anybody? Speaker 13: Too many orders and discounts. Sandeep: Too many orders and discounts. She didn’t know her break-even. She sold a cookie 50% off of whatever price. If it was $2 she sold it for $1. She didn’t know that a cookie costs $1.50 to make. She had no idea. Suddenly ten thousand people show up for cookies and she is giving them away for a buck and a total cost of production of about $1.50. She sold at a negative gross margin and had to shut down. She had to put a notice, “no more Groupons,” and went out of business.

It’s very important to know your CAC, customer acquisition cost, and the lifetime value, because if CAC is running ahead of LTV you’ll never make any money—guaranteed; it’s just mathematically impossible. This again goes back to churn rate. What are the net customer additions that you’re looking for? These things are kind of related. Net customer additions—that is where your sales and marketing dollars are going to acquire that new customer. See, new customers are what your acquisition costs are paying for; ongoing customers cost you nothing to acquire. All the acquisition cost is going to acquire this net new business. That’s what you need to keep your eye on. Obviously, organic and viral growth is supremely important. Why? Anybody? It’s free. It costs you zero.

Your customer should be able to tell other people, “Hey, try this service.” Why will companies put out offers like, “If you refer us another customer, we’ll give you one month free”? Very standard. That one month is the cost of acquisition because they’ve given you a month free because you referred someone, et cetera. That’s the cheapest way to acquire customers. It’s a very, very high-probability customer. If I go to the website, I don’t know how I’m going to do this but [unclear], “You, slack man, what’s your email [unclear]? Sign up for Slack.” Word of mouth and organic growth are super important. They’re the heart and soul of any business. You don’t want to lose your current customers. That’s your free money. Don’t let go. Keep an eye on those blue bars.

That’s your repeat business, and if you can have an account manager focused on existing customers, track the hell out of their usage; know if they are overusing your service. For example, using my company as an example—this happens every day. Fortunately, I sold a product to a very large mutual fund and I leave them unnamed because they didn’t stop [unclear]. We signed a contract that they had only two seats. You have fifty people in the [unclear] testing your service. I said, okay, test it up. We are selling financial data, and if you know the mutual fund setup there are a bunch of guys who do tech, a bunch who do energy, retail, industrials—different people do different sectors. Two guys in tech [unclear], and six months later I’m like, “Hey, they are looking at GE, they are looking at Exxon, they are looking at McDonald’s.

Tech guys don’t look at that.” Next thing I know, their logins are coming from ten different, distinct machines. They cleared their sessions. You can read the fingerprint of the user. This guy goes out to cash flow, this guy seems to go out to balance sheet. What the hell is that? I just hand that list to the head of research. Then you go over the uses from the last six months; I can send it up to a year when the renewal time. You quietly up the two to ten users, [unclear] right back and pay me then use from day one. I didn’t ask for it, I just sent him a username. Thank you very much John. Your customers have been great. He knew he was in violation of the contract. I’m going after that repeat business and I know where that repeat business is coming from: the cheapest revenue. I have an account manager focused on current customers.

If you license five seats in a company and only two guys use it, guess what? At renewal time they will renew only two, not the five. Have your account manager proactively call the other three guys. “Hey dude, what’s going on? Can we do something? What did we do wrong? Why are you not using?” Supremely important to do that. Next, this part—repeat customer—goes back to what I said way in the beginning. Have a way to service your customers. That is customer service, account management, proactive calling out, et cetera, et cetera. If you are hi‑tech enough, have email alerts. If a user doesn’t log in for a month or six months, send mail: “Hey, not seen you in a long time. What’s going on? Can we help?” et cetera. Whatever your plan is to harness that customer and revenue base, do that. Questions? No? That’s it. That’s the end of my show.

Speaker 14: You talked a lot about memberships and paying every month generating revenue and how that's vital and important to business and membership, and they are very successful. Is there any statistics on being that sort of ...? Sandeep: Stickiness? Speaker 15: Can you repeat the question? Sandeep: The question is, I talked of membership-based services being successful because you’ve charged the money upfront or whatever. There’s the membership and people are paying or they come to you every day, but he’s saying, like Uber service, which has no membership. He asked why it's successful. There are a couple of things in that. Uber is more a network marketplace issue. It is like the eBay of the world. Where there are drivers there are riders and where there are riders there are drivers. What Uber is doing is a membership-less thing, but if I’m a new driver, do I sign up?

I’m in Philadelphia; Lyft or Sidecar doesn’t even have a presence in Philadelphia. Uber does, so I will only download the Uber app because they’ve spent so much marketing money and they’ve signed up drivers and they tell all riders, "Come, hey you Philly people, come ride with Uber because we are 150 drivers in your neighborhood." Of course I download, I am Philly, 123 Main Street, and I see ten drivers around me. That’s a marketplace issue; it’s not a membership issue. Those businesses, by the way, are extremely difficult to start because they take a lot of marketing money. He just met somebody before this meeting; he’s trying to start a marketplace — we were talking about the same thing. eBay doesn’t exist in Japan, why? Because Yahoo! Auctions got to Japan before eBay.

That had to do with Masayoshi Son — he bought Yahoo Japan and the Japanese guy put money and established Yahoo in Japan. Why did all the buyers and sellers start selling and buying on Yahoo Auctions in Japan? eBay couldn't do this. I can’t do this. Same thing with Alibaba in China. They are the dominant marketplace. Uber is the same — Uber is not a membership service; it’s a marketplace of drivers and riders and they have tons of marketing money, we know that, and they just raised about $1.2–$1.3 billion. They are, in the history of mankind, the company which has raised the most money. They could even go across $10 billion. $10 billion is private money. This used to be talked of as the industrialist ten billion. Here is one company that’s raised $10 billion plus. Other questions? Yeah, you.

Sandeep: The question was that I talked of Yahoo Japan conquering the auctions in Yahoo and eBay not doing there. If you are a startup and you want to start a marketplace company, how do you start to dominate your industry, right? It’s a good question. I will tell you I don’t have a single good answer for it. It takes a lot of gumption; it takes a lot of product differentiation. Hope to God that you have some angle on some new company, new market meaning. Companies do things differently. I’ll tell you one of my clients. He started a marketplace and he started a marketplace of GeniusDen-like people. I put that as separate — it’s not a GeniusDen, it’s a virtual GeniusDen. It’s a marketplace of desks or rental space or that kind of stuff. While doing that, he realized he can’t dominate it; very difficult. He’s now become a marketplace of [unclear].

That thing with different angle on your question on the pivot thing. He makes marketplace software. You want to make a marketplace of photographs, you want to make a marketplace of candles, you want to make a marketplace of cats and dogs? You can white-label his software for all your customers, whatever you call your suppliers, whatever you call your goods. Marketplace app in two days. Coming back to your question, it's very difficult. There is no silver bullet; it is market by market. Is your market geographically dominant? Is it vertically dominant, like only the techies come here for a [unclear] demo, whatever. This marketplace is for only women forty-plus. You look at Pinterest. It was a very heavily female-dominated marketplace. Women were posting, women were looking. Of course they have expanded from that.

The characteristics of the marketplace will determine what you are successful with. I don't have an answer to that; I don't have a silver-bullet answer. You look lost. All right, thanks for coming. If we can help in any way, whatever else you need, we'll help.