This Company Does Profit Sharing With Over $25M In Annual Recurring Revenue

Why did you fail at raising? What happened there?

Yeah, well, I failed at raising 2 different times. One time we were at $8,000 in MRR and I went around to raise money from sort of like influencers in the, I don't know, say the blogging marketing space. And basically a bunch of people were like, this is interesting, but you don't have enough traction. Or like, who else has invested? And like, if you get other big names on to invest, then I'm in, you know, but no one really wanted to write that first check. And then actually it was, so we were at $8,000 in MRR, that was May 2015. And I tried again to raise in January of 2016, when I was at the SaaStr annual conference. We had then, we had grown, By then to $100,000 a month in revenue. So just like more than 10x growth in 6 or 7 months. And 2 things. One, like the biggest concern was that we were focused on bloggers and creators and people were like, the market's not big enough. If you want to go after small business, we'll do it. But there's actually one investor, his name is Tomasz Tunges, and he's a blogger himself. He's from Redpoint. And I still remember it. We went on this walk, you know, around a few blocks in San Francisco, and he got it immediately. He was like, oh man, not only is this market huge and do I think that you will never have to expand beyond it, but even if you do, you'll just add adjacent markets. Like, if you outgrow this, you just add adjacent markets. That's how it works. That is not at all a concern. But he was like, look, you're growing, you're $100K MRR, you're growing 20% month over month right now. Don't raise money. If you are going to raise money, I'm in, but otherwise don't raise money. And that combined with a conversation from Mike McDermott from FreshBooks, he said the same thing, and he was like, I know you have no cash in the bank, I know this is crazy stressful right now, and like, you know, your days of expenses in the bank keeps declining, but you can grow your way out of this problem, and stay bootstrapped, don't raise money. And so There was like 10 investor meetings. 8 said, no, I'm not going to invest. One said, hell yes, I'll invest, but don't take my money. And then one founder said like, nope, keep bootstrapping. And so that's what we did.

All right, everyone. Today we've got Nathan Barry. This is interview number 2. He's the CEO and co-founder of ConvertKit, which is email marketing software company for creators. But it actually does a lot more than that because Nathan's constantly been adding to it. And Nathan, still bootstrapped, correct?

Correct.

Cool. And just according to Baremetrics, because they build in public, $25 million in annual recurring revenue. Key customers, we got Pat Flynn, we got Tim Ferriss, we got my podcast co-host Neil Patel, Chris— I can't pronounce his last name, just call him Chris G— Gretchen Rubin, all these people. So anyway, Nathan, welcome back to the show. How have things been since we last spoke? I think it's been like a year and a half, 2 years.

Things have been good. We've just been continuing to build and ship products. So it's fun.

Cool. One of the first questions, this actually came from my team, is what's some ninja stuff people are doing right now to drive their email conversion rate up? Because I just saw you put something up with Dave Perell talking about like a 5% conversion rate. So what have you seen work really well?

Yeah. So I don't know that it's actually anything that's totally new. It's probably a lot of the things that have worked years ago, but you still just execute on them. Let's see, one example, and in that David Bell example that you're referencing from Twitter, what he's doing is a really targeted call to action. So if you're giving away something really specific tied into the content, content upgrades in that way work really well. Honestly, Once you do that, then it's just all about driving more traffic to the individual post. And so look for those posts that are performing and keep working on the search and traffic for that and everything. So it turns into more of a search optimization promotion play rather than a, like, I published the post and nobody came to it, and so I moved on and published the next post.

You know what's helpful with that? I think we all know content, or I guess not we all, I think we probably take it for granted, content upgrades, when you put something specific to the post, you can get up to like a 20, 30% conversion rate. But what is a very duh thing to me is like, oh yeah, you should probably promote that post because it converts really well. But people stop right there with the content upgrade. So just what's old is now new again. So I think people should think of that because that's something I don't think of often. Cool.

Yeah. The other thing that I see a lot of people doing is a content ladder in their in their paid advertising, where they have one article that maybe has a good content upgrade or something like that. And they're promoting, like driving paid traffic to that. And then for the people that engage with that, they're retargeting those people with a, hey, if you enjoyed this, like sign up for the list. 'Cause so many people are just like, I tried ads because people said that I should. And so I started driving paid traffic to my newsletter subscription form or whatever. It didn't work and I gave up. And it's like—

Yeah.

Well, you tried to go from 0 to 100 in the relationship. And so if instead you work up to it more gradually of like, oh, I've been seeing Eric's stuff over time, it's been popping up on my Twitter feed, on Facebook, I've been enjoying it. Then when it pops up with, hey, you should subscribe, you'll do a lot better.

And by the way, that works really well. I mean, I've been big on Twitter ads in the last kind of 365 days. You're basically retargeting people and they've seen your face already. So if I like ConvertKit, I like Nathan and Nathan's sharing more content, driving them to his list, it makes a lot of sense and it's cheap as well. So it just depends on who you're targeting.

So last thing on that, Twitter threads also work ridiculously well. And the biggest thing is people think like, oh, a Twitter thread, I can take my article and just like chop it up into 25 little tweets and that'll do well. It won't. What does well is if you treat each tweet as a standalone thing where it could stand by itself and deliver value. It has media with it, whether it's just a simple image or something else. But to give you an idea, I wrote a blog post called The Billion Dollar Blog that did well, but when I wrote a Twitter thread, and I spent probably an hour, hour and a half writing the Twitter thread after I'd written the blog post, making sure that each thing had a hook, that it flowed into the next one nicely, that it had good media all the way through, that drove thousands of Twitter followers and then a lot of A lot of newsletter subscribers from it.

How do you think about when it's the right time to add new stuff? Because you can add features all day, right? So, and I know for you, you're a very focused person. So how do you stay deliberate about that?

Yeah, I mean, we have our teams adding features and building out new functionality all the time. That's been a big shift, is probably over the last 18 months we've doubled the size of our engineering team with that in mind. So most of our new hires have been product and engineering to drive that sort of growth. Nearly everything that we build is just inside of the same plan that you're paying for. So we don't drive expansion revenue, for the most part, through like, buy these add-ons. We drive it through helping the creator be more successful, get more email subscribers, and then they naturally go up based on usage. So if I were starting a SaaS company today, having usage-based pricing, our success is tied to our customer's success, would be non-negotiable. When I look at platforms that are really struggling to get people to upgrade from one plan to the next, it's like, I just wouldn't get into that business model. Whereas in email, even when you go from 5,000 subscribers to 10,000 subscribers, you pay us more and— You know, you're pretty happy about it because your business doubled in size. Yeah, so years ago when I was looking to raise money, which I'm really glad now that I failed at raising money, you know, most venture capitalists I've talked to would say like, oh, bloggers or creators, like that's way too small of a market. And you know, what's been interesting is since we've been serving this creator market for so long, the market has expanded like crazy. And now you just see so many things. You know, like Google Ventures reached out the other day, and we have no interest in raising capital, but we still get, you know, all of these emails. And they were just like, oh, we're so excited, like, we're trying to invest as much as we can in the creator industry, 'cause we see it taking off. And so really what's happening is not that we need to go from creators and expand to something else, it's that we picked this small market, and it's just, The market's growing faster than we can even keep up with.

Talk to me about— we didn't talk about incentives and profit sharing last time, and so you've kind of changed your mindset a little bit. First, it was profit sharing for bootstrap startups, and then originally you were against equity. So, A, okay, let's break this out. Let's talk about incentives and profit sharing. How do you think about that now for bootstrap startups? Let's go with that first.

Yeah, so what I think about now, For incentives, I like to think about compensation in 4 quadrants. So if you, if you imagine our, you know, our horizontal axis is short-term compensation versus long-term compensation, and then our vertical is guaranteed versus performance-based, right? So then we end up with this grid. And short-term guaranteed is salary. Long-term guaranteed is 401 retirement match, that kind of thing. And like, we're not there yet, but one of my dreams is just keep bumping that up to where it's a ridiculous number and our team is, you know, like getting into 10%, 20%, 30% like retirement matches, I think would be super cool. So then if you get into short-term performance-based, that's profit sharing, and then long-term performance-based is equity. And I think people can over-index on one of those buckets of their like, you know, short-term guaranteed, and there's like, we just do salary, or like, and salary and Christmas bonuses or something like that, right? And it's like, look, you're missing out on letting people be a part of this performance-based compensation, or they'll do profit sharing, or like what's really common is just doing equity. And so it's like, look, I've got short-term guaranteed, And then I've got very long-term performance-based, and that can be good, but you're missing out on other quadrants there. So I started, I went through various things early in ConvertKit. I was like, it's just me. So it doesn't matter. I don't have to think about this. Then when I brought on some early key employees, I did equity. And then I started to think, okay, I'm actually never going to sell this company. I want to build for the long time. So equity doesn't make sense. And so then I was like profit sharing instead. So there's like 3 or 4 very early people who had equity and then nobody else does. And we did profit sharing for a long time. And then I was like, wait a second, I'm saying that equity doesn't have value, but I'm currently spending over $1 million to buy back equity from, you know, an early team member who left. So it obviously has value on a secondary market or any of that. Like, It doesn't have to mean that we sell the whole company. And then kind of the last thing is just seeing the level of value in the company that we're creating. I think it was at the point where I realized like, oh, this company's worth over $50 million, that I realized, wait, I'm going to have more wealth from this than I will ever need. know what to do with or need or anything like that. And so I want to have the team being involved in that. And so a little over 2 years ago, we started doing stock options for the team in a more traditional sense, carved out an equity pool. And in that time, we've got individual team members now who have equity that's worth over half a million dollars as we've 5x'd the value of the company. And so I like to look at it in that really balanced view, and I look at it from the perspective of, I'm going to build something wildly valuable and I want everyone to participate in that value, and I want them to participate in the short term as well.

Nathan, this has been great. I think we've got to do like a third one so we can go deeper on more company culture stuff.

Let's do it.

What's the best way for people to find you online?

Yeah, so I blog at nathanbarry.com. I'm active on Twitter. I've got a new podcast. If you go to Subscribe to the newsletter, you'll get all of those things. And then ConvertKit is just at convertkit.com.

Cool, love it. Nathan, thanks so much for doing this.