Startup Q&A #5: Reinvestment, Marketing, Pricing SaaS, Prep for Entrepreneurship, Vetting an Idea

Hey everybody, Matthew Paulson here. Today we are going to talk about raising money from existing investors who should be in charge of your company's marketing, pricing for a SaaS business, what to do before starting your business, and how to validate a startup idea. Let's do this. This is officially episode five of the Startup Q and A show, the online video show that helps small business owners, startup founders and entrepreneurs grow their businesses faster and achieve financial freedom. Whether you're just getting started or if you have a hundred employees, Startup Q and A will give you actionable ideas and advice that you can implement in your own business. We are going to take a little bit of a break from the format today, and in lieu of doing a growth hack of the week, I wanted to provide just a little update on the show, what where we've been so far, and where we're growing. So this show launched in kind of December of 2016. It is now January. So this is the fifth episode and I would officially like to declare that this show is now out of beta. The production values are much more where I would like them to be. I got a real camera, a real microphone, good lighting, a nice background. I feel like the content is getting dialed in. We're finally now on all of the channels that we want to be. So you can now subscribe to this show on itunes, on Stitcher, on YouTube, on Facebook, through email, Google Play music. Just about anywhere that you would watch or subscribe to a video show or an audio podcast, you can now get this show. So I'm pretty happy that we're well on our way to the kind of be everywhere strategy of making this content available, really anywhere you would want to get it at. And if there's somewhere that the show isn't that you would like it to be, let me know and I will try to figure that out. So my personal commitment for this show is I plan to do one episode a week every Monday. It'll come out Monday morning around 10:00am Central Time on all of those platforms. And I commit to doing at least one episode a week, kind of through the end of 2017. So by the end of this kind of first season, there should be between 50 and 55 shows. And at that point we'll kind of reevaluate and say, is this show helping me accomplish kind of the goals that I have for it, which is just to build my personal brand, help people out, and promote some of my other projects? So that's kind of my plans for the show. We're going to keep doing it and hopefully it will turn into something that a lot of people find valuable. I also wanted to provide a quick little update on some of the projects that I'm focusing on in 2017. Other than this show, I'm working on another book called Online Business From Scratch. That book is kind of a step by step guide that kind of relies on the 10 years of experience that I have in building and growing online businesses and just teaches anybody how to identify a niche, how to build a brand, how to create great content, how to do marketing, how to do monetization through digital products and online advertising, and then how to scale up your business. So if that book is of interest to you, go to the domain fromscratchbook.com and we've got a launch planned in kind of mid February. I don't remember the exact date, but if you sign up there@fromscratchbook.com, you'll get updates for the book after that. I've got another little book coming out called Earn Extra Income. And that book pretty much shows different ways that you can earn money on the side in the next 30 days. So if you're broke and you need some extra cash, this book will kind of show you, here's what you can do right now to make some extra money. That will probably be coming out in April or May, and then I think after that I'll be taking a break from writing books for a little while. I've also recently taken on a role at an event called One Meowing Cups here. Locally, I'm now part of their organizing team. So what One Million Cups is it's a Wednesday morning networking event where somebody pitches their business for six minutes and then there's 20 minutes of Q and A. So I'm excited to be part of that group. If you are in Sioux Falls or in South Dakota, the Sioux Falls area, I encourage you to stop down. It's Wednesday mornings at 9am at Prairieberry East Bank. If you're not in Sioux Falls, which most of you probably aren't, they actually do these in about 100 cities across the country. So just go to onemowingcups.com and you can check it out there. Other than that, our angel and Fund Falls Angel Fund here in Sioux Falls, we're getting ready to make our first investment. Hopefully I'll be able to announce that in an upcoming show pretty soon. And other than that, MarketBeat Go Go photo contest, US GolfTV are all going reasonably well and I plan to continue to grow and build those businesses as well, so those are the updates. Let's dive into the questions. Every week we take five questions that are submitted through Facebook or through our website StartupQA Co and we try to answer them. So if you would like to have your question answered on the show, go to the domain startupqa Co or go on my Facebook page and just comment on one of the posts for these videos and I will try to answer your question on a future episode. Okay. The first question comes from Steve Brumwell and he asks, how do you approach current angel investors to invest more when your metrics have not hit the hockey stick yet and you need to buy more time as you know exactly the right route? So what Steve is asking is saying, hey, I raised some money from angel investors. It's going okay. It could be going better. I haven't quite hit the sustainability mark where my business can pay for itself and just keep on growing and growing and growing yet. I haven't hit that mark. I need more money to accomplish that. How do I do this? This can be a bit of a challenging conversation to have with your investors because what you're effectively saying is that the money you already gave me, I spent, it's no longer there. I haven't hit that sustainable traction yet and I really need some more money to make that happen so that I can build a self sustaining business. This is actually probably a harder conversation for you to have than for them to have because they recognize that 7 out of 10 businesses they invest in are going to fail. That's kind of the typical number for angel investors. So if they put money in your company, they probably put money in a lot of companies like yours and say, well, this is just going to be one of those updates that was only so so or not going so well. They get these types of updates all the time. It's not going to be a big shock to them that your company hasn't achieved the type of traction you want to get. So I get these emails pretty regularly. I've done 20, 30 deals on AngelList and the founders send out updates saying, hey, this didn't work out, or hey, we're trying to keep the company alive, but we're really struggling here. These are high risk, high reward investments. So your angel investors won't be shocked to find out that you need more money and that you haven't hit the traction you would like yet. So really kind of the first step to raise more money from your existing investors to first kind of identify what your capital needs are how much money do you need to hit that mark of place of sustainability where you can run the business without taking a lot more money on, unless it's for strategic reasons. So it's do you need 100,000? Do you need half a million? Do you need a million? I would start with that number in mind before talking to your investors. Then next, it's really a matter of going back to your existing investors, have coffee with each one of them and say, show the progress that you've made so far, highlight all the good stuff you can tell them what the challenges are and then tell them what your plan to reach sustainability is and then what your business could look like if you are able to accomplish everything you want to accomplish with that next round of money. Obviously, any people that gave you money for your business, they believed in your company enough to give you money the first time. They probably still believe in your business as long as you didn't really screw it up and disappoint them in some way. So if they still believe in your business, there's a pretty good chance they might come back for round two. If they are financially able to do that, they also might make an investment in your company as kind of a defensive play of their existing money. If an angel investor knows that, hey, if I put more money in this business, it'll probably work. If I don't put more money in this business, it's probably going to go bankrupt. Sometimes people just give more money so that the business can stay alive and kind of protect their first investment. They do do that. If your business isn't doing very well, they might ask for more favorable terms than they got the last round. This is referred to as a down round where the terms are less good for you as the company than they would be before. And that's not always the worst thing in the world, depending on fundraising environment. But be aware that can happen if you haven't really gotten traction yet. And then if your existing investors aren't willing to put more money in the company, you should really ask yourself why. And then you can go approach other investors. Sometimes your existing investors will have kind of a first right of refusal. So kind of be aware of that and any paperwork that you have in place for them and know what their rights and abilities are when talking to other investors. But hopefully if you convince one group of investors to put money in, you can convince another group of investors to put money in if the first group declines to reinvest. Alright, next question. Thaddeusge asks, In a small or medium sized organization, does it need to have its own marketing department or can you assign marketing duties and roles among the staff and have them responsible for it? Obviously anything is possible, but can it be done to the same standard without hiring a professional to operate that and that alone, Brand marketing, social media, etc. So I think there's a lot of different ways that you can skin the cat that's marketing, especially in a small business. You can spread that work out amongst your team, you can have a dedicated marketing person or you can do an, you hire an agency to do some things for you. However, I think it's important to have one person that is kind of the point person, the person that's effectively your chief marketing officer, the person in charge of marketing. They don't have to do all of the work themselves, but marketing really has to kind of fall under their umbrella and they need to be directing all the different pieces of marketing in your business. So in a startup you're going to be wearing a lot of different hats. So one of the startup founders should be the chief marketing officer person or that role initially, along with all the other hats that they wear. So probably you're not going to have one dedicated marketing person when you're first getting started. It'll be one of the founders roles and then they will have to work with contractors and other people to help create all the marketing material and the campaigns that you want to attract customers to your business. I think when marketing gets distributed among a lot of different people, I think you can come across with some inconsistent messaging and branding. If you've got five different people coming up with different messages for your business, your content and your material, anything you produce for marketing will just look very inconsistent and kind of, it will be very hit or miss. You might do a couple things well, but miss out on some other things. So really I think it's important to have one person in charge of marketing, whether or not they execute all of it. I do think there is a bigger question here that's probably more relevant to startups and, and small businesses and that's should you hire a marketing agency to do campaigns for you to do all your advertising, to do your logo, your website, your brand, should you hire that out or should you try to hire somebody on your team to do that for you? And I think marketing agencies, digital agencies, they can do some really good work on some types of things. If you need a logo, if you need a website, if you need some brochures, anything that's kind of marketing material, that type of stuff, you're perfectly okay to outsource. That to an agency. What people tend to get in trouble with is when they outsource advertising campaigns and paid marketing spend to digital agencies. Typically, an agency will be more than happy to set up those campaigns, but they typically don't take responsibility for the results. So you might give them, say, $10,000 to create a campaign. They'll take 20% of that as their ad spend, so they'll take $2,000 for their fee. They run the campaign, and whether it worked or not is kind of on you, the entrepreneur. They won't take responsibility for it. They won't do any kind of commission thing. Or they only make money if you get made. If you make money. They just won't never do that because the incentives are different. Their incentives are to get money from you, and your incentives are to get money from your customer. You know, it's typically kind of hard to find an agency that is going to work, you know, and really care about your performance and work with you without charging you a ton of money to make campaigns that actually work. You know, I really believe that startups, small businesses, entrepreneurs, you really have to own your marketing strategy. You can get people to help with the design and the content, but the strategies that are actually going to get your customers in the door, I think you need to own that internally and make that one of the core competencies of your business. You can't hand that off to somebody else and think that it's going to go well, because usually it doesn't. You have to own it, you have to develop the strategy, you have to test it, you have to prove out whether or not it works. That has to happen in house and it just can't be outsourced. Well, next question, Kevin Gilbertson asks, how do you figure out pricing for a SaaS business? So this is a question I ran into several years back when starting up MarketBeat. I wanted to create a subscription offering. I had no idea what to price it at. So I saw, I did some research. There were financial products priced as little as $5 per month, and there were some that were $100 per month. There were some that were $200 flat fees, some that were up to five grand flat fee. And it was just, it was a challenge to figure out what to price this thing at. And what I ended up doing. There are kind of two strategies to price a SaaS product. One, you can kind of do an evaluation of the existing market and do kind of a competitive market analysis. What other SaaS products are there in my space? What are their different tiers, what are they charging at each of those different tiers? What kind of pricing or what kind of features and benefits are available at each of those tiers. And then you can kind of see, okay, where does my product or service fit in in terms of kind of the feature set and the price point, you know, where in this spectrum of companies do I fall? And then you can kind of price yourself either at the high end of that, if you're going to have a really quality thing with a lot of features and benefits that creates a ton of value, or if you're going to be more of a commodity thing that targets lower end people, you can target, do a lower price point and hopefully make it up on a volume. So my friend Kevin here who's asking this question, he runs a business called tinyurl and if I were Kevin and I was in his shoes, I would be looking at services like Bitly and any other link shorteners that offer analytics or statistics and even Google Analytics check out services like that. And what's the pricing for these things? What kind of services do they offer then where do I fit into that and what could the pricing look like there? The other way to price a SaaS business is to do what's called value based pricing. And what value based pricing is setting a price for your product based on the value that it creates in your customer's business. So let's say you have a SaaS marketing tool and that you know, if a customer of a certain type uses it, they'll make $10,000 a year from it. So if you can charge them $1,000 per year and they get 10 times the value that you charge them, this should be a no brainer for them. It can be kind of difficult to determine, you know, how much value am I actually creating for my customers? And the way that you're going to figure that out is going to vary a lot depending on what your SaaS app or service kind of business does, does. And it's going to be very specific to each business idea. For Kevin, for TinyURL, if he launched some kind of subscription service where you had analytics and stats, you would need to say, okay, what is the value to knowing how many people clicked on a link, where they came from, all that stuff and then divide that number by 10 or so and then you could come up with pricing that way. The other thing I'd like to note about SaaS pricing is that you should never really just have one price. You should have a good, a better, a best pricing that have more features and benefits and fewer limitations as you go up in price. So typically you'll have an opening kind of basic tier that most everybody will sign up for. And then you'll have another pricing tier that's kind of five times that price and then another one that's like three to five times that price as well. So you might have a $10 a month price point, a $50 a month price point, and then like a $200 price point per month for enterprise users. So it's not uncommon for that, you know, $20 a month, $50 a month, $200 a month. Those tiers are pretty common. And then you kind of target each tier to a specific type of user. So an individual for the low end, a small business for the medium, than enterprise for the high end tier. Alright, the next question comes from John Small. John asks, what should I do before trying to start my own business? Should I go back to school? Should I get some training? Should I save some money? Should I do some research? Should I do some kind of trial of my business? What should I do to get started? Or what should I do before I get started? So first let me kind of talk about the things that some people do that you probably shouldn't do first. If the goal is to start a business, you probably shouldn't go back to college and get a degree. You don't need to wait two to four years to start a business. That's just unnecessary. You can learn what you need to learn in a lot less time and for a lot less money. Also a professional training program, you probably don't need to do that. The only time you would do one of these types of things would be is if you're going to be a doctor, a lawyer, or something else that requires specific certification or degree to actually do it. Obviously you can't be like an unlicensed chiropractor. So if that's the type of business you want to start, then you do need to go back to school for that. But in most cases you really don't need to go back to school or do any kind of professional training. You don't need a general business degree to run a business. I have a computer science degree, an information systems degree, and a Christian leadership degree. I've never taken a real business class in my life and somehow that hasn't stopped me. I've been able to learn what I need to learn through books and podcasts and just research and dealing with competent professionals. Really, the types of things that you need to learn how to do to run a business. You can almost learn that better outside of school than you can in school. You should also avoid spending too much time just reading general startup content, reading books, listening to podcasts, going to conferences. It's very easy to consume just a ton of content while you're thinking about starting a business. And what can happen is that you make the mistake that you're actually doing something and when really you're just consuming business entertainment content. So be careful on how much learning you do before you dive in. Any learning that you should do should be very specific to the task that you're focused on right now. So if I'm trying to figure out a marketing strategy with Facebook, I should be learning about Facebook marketing. I shouldn't be learning about Twitter Marketing or YouTube Marketing or accounting or any of the other things that go along with running a business. Only learn about the things that you're focusing on right now. And just don't spend that extra time on other things in lieu of actually working on your business. So don't get the degree, you probably don't need it. Don't do a lot of general content consumption, only consume content on the immediate things that you are working on. What you should do, on the other hand, is first get your personal finances in a pretty healthy kind of spot. Pay off as much debt as you can, get three to six months of savings in the bank, do all the Dave Ramsey kind of things that you would want to do to get yourself in a good financial position anyway with the startup, cash flow can often be up and down or it could just be non existent for the first few months. So really you want to put yourself in a good place to kind of weather the storm and just be in a place where you can live without income for a few months if your business doesn't take off right away. Dave Ramsey has a class, it's called Financial Peace University. I used to teach it. If you don't know anything about money, that's a good place to start. You know, they're teaching you how to get out of debt, how to build savings, how to buy a house, how to do retirement accounts, how to do insurance. So that's kind of a good beginner course. If you have never really looked into personal finances and don't know much about it. The second thing I would do is try to validate your startup idea. So this is kind of a process of, you know, identifying, you know, what is the idea, what is the solution then? Is this solution going to actually work and this actually Leads us into the next question directly, which comes from Troy Clongerbow and he asks, how do you vet a startup idea that is purely in its infancy? So there's kind of a five step process that I like to use to vet kind of a startup or a business idea to see if it is actually going to work. So step one is to kind of look what solutions are already out there and see if somebody else has tried to solve the problem that you propose to solve and say, what is the solution? Is it any good? Can I do a better solution than this existing solution? And can I build something that's maybe five times better than what's out there right now? If you're just going to be a me too business that copies somebody else, usually that doesn't work out. So if there are existing players in your space, you have to identify what your key differentiators are that are going to make you different and better from any existing solutions that are out there. The second step is to identify your customers. So get a good idea of who your product or service is for. How old are they? What gender are they? Are they married? What are their interests? Do they own or rent? What part of the country do they live in? Do they have kids? Try to describe your customer as best as possible possible so that you can have a good idea of the types of people that you want to sell to. The third thing is to identify the size of your target market. So if you owned 100% of the space that you plan on entering, how much revenue would you have per year? So if you had a total monopoly, people spent say a million dollars a year on cell phone cases. If I owned 100% of that market, I would own, you know, a million dollars a year in revenue. So if your kind of maximum size of your market is in that five to $10 million per year kind of range, that's the size of your market. That's okay if you're not going to raise money, but if you are going to raise money from investors, they are going to want to see you have the capacity to grow to more than $10 million a year in annual revenue and ideally even more than $100 million a year. Because they're looking for that home run. They want you to knock it out of the park and that if you grow really big, that you have the capacity to generate a lot of money from the markets that they are. You might own the yarn needle market or some market that's pretty small, which would be a great little lifestyle business. But for an investor that's just not going to be big enough for them to care about. So if you do plan on raising money, you're going to have to think about how big is the space and is it going to be big enough to attract the interest of investors? So step three is to talk to potential customers. So go find people that are in your target demographic and psychographic and talk to them and kind of present the problem the way that you see it and the solution that you have, and then ask them how they're currently solving the problem that you're trying to solve and what they'd be willing to pay to solve that problem. Just try to talk to about 10 people that kind of meet your demographic and psychographic criteria, that are people that are in your space that have your problem, that may have tried to solve it themselves or could benefit from any kind of solution you offer. Get feedback from them. Ask a lot of questions. Don't spend a ton of time pitching, say, what would an ideal solution be? How much would you be willing to pay? Just questions like that. You really learned a lot by talk.