Growing a startup isn’t for the faint of heart. But you knew that already. So does Nathan Beckord, CFA. The San Francisco–based CEO of Foundersuite built a software platform for raising capital that has been used by startups worldwide, including those participating in Y Combinator, Techstars and 500 Startups, but he does have a regret or two. Here, he talks about raising capital, prioritizing investor advice, and the costly initiative he wishes he could take back.
Connecticut Innovations: Great to talk with you, Nathan. You recently shared interesting content about five things that kill startups post-seed round (sourced from a SaaStr Podcast and Michael Seibel from Y Combinator). Number #1 is fake product-market fit. Why does this happen, and what can you do about it?
Nathan Beckord: Fake product-market fit happens when either (1) you have found some level of product/market fit, but it’s with a small segment of customers that does not represent the larger potential customer base, or (2) you are tracking the wrong metrics—and those metrics are false positives. For example, many startups find initial success selling to other founders and early adopters, but then struggle or fail when they try to cross the chasm and sell to mainstream users. Often the product needs are different, or there is more of a willingness to tolerate bugs and design quirks with the early adopters that doesn’t translate with more mainstream users.
To counteract it, first, take the time to pick honest KPIs—that is, metrics that really drive the true success of the business—and diligently avoid anything that could be considered a “vanity metric,” such as page views or press mentions. Metrics like average revenue per user (ARPU), customer engagement and retention are good places to start; for example, knowing, on average, how much customers are paying you and the percentage of customers who are repeat customers. Next, force revenue-generating employees such as salespeople to pay for themselves. This will drive them to pursue customers who are willing to pay market rate, not a “VC-subsidized” price. (Market rate is also a good signal that customers truly value your product.) Last but not least, consider raising less money until you’ve truly established product-market fit. Many bad habits arise when a startup is flush with too much capital, and discipline wanes. If you are capital-constrained, you will be forced to concentrate on serving customers who are willing to pay you, thus helping you navigate to true product-market fit.
CI: Having an investor as your boss was cited as the #2 startup killer. One of the fixes here (and elsewhere in the post) was having real KPIs and real metrics. You mentioned some earlier. Are there others you recommend founders track? How often should they communicate them to staff? To investors?
NB: So, the answer here is “it depends.” It depends on what type of business you are, what industry you are in, etc. Each business must find its “North Star” metric(s), which will vary by industry. For example, within subscription-based software startups, common metrics are LTV (lifetime value of a customer), CAC (cost to acquire a customer), churn (what percentage of customers cancel their subscription), as well as others like upsell rates, retention, engagement, etc. For a hardware business, key metrics will include things such as cost to build each unit, inventory and storage costs, etc. For online retail, you have factors like product return ratios. For all businesses, monthly revenue and growth rate are quite important metrics to track and report. The key is to focus on the three or four key things that truly drive the business, and obsessively track and try to optimize those metrics. As for reporting, I like to report to investors on a monthly or quarterly basis. For staff, it depends. I know some startups that have monitors in their offices and show such data in real time, constantly. This might be motivational, but for most businesses, a monthly or bimonthly report should be enough.
CI: You’ve said not all investor advice is good advice. So how do you tactfully ignore the bad stuff (or spot it in the first place)?
NB: It’s hard. Investors are typically very, very smart people (40 percent of all VCs went to Stanford or Harvard), and they are a highly opinionated group. I like to joke that if you ask a question of 10 VCs, you’ll get 12 different pieces of advice. I like to triangulate it by looking for patterns… if 4 out of 10 responses share a similar direction, that’s a signal I am more likely to tune into.
CI: Slow product development is cited as another top-five startup killer. You mentioned that investors want to see progress sooner rather than later. Do you have tips for compressing product development timelines that won’t compromise the product?
NB: Startups are by nature resource-constrained. I know this from experience. At Foundersuite, we have a small product engineering team, but a fairly large set of customers (2,000+) who are giving us advice on what they want and what to improve. We can’t do it all; we must pick just a few things to focus on. My methodology is the same as with investor advice: When you find patterns, meaning dozens or even hundreds of customers are all asking for the same thing, that is when [you should] tune in to it and let it drive product development. So, the short answer is: Solve the burning pain issues experienced by the largest number of your customers, and your product development timeline will move at the right pace.
CI: You built a phenomenally successful platform, Foundersuite, that has helped startups worldwide raise more than $3 billion. Inc., VentureBeat, and the Wall Street Journal have all written about your company. What made the platform so successful?
NB: Oh, that’s a loaded question. I appreciate the compliment, but it’s been a gradual evolution toward that state of being. We’ve been around five years now, and it’s been five years of grinding, day in and day out, making a half dozen or so small iterations and improvements each week. Thus, 5 years x 52 weeks x 6 improvements a week = 1,560 improvements—that’s what it takes! Also just being truly passionate about helping founders, and going the extra mile with our customers. All these things slowly accumulate and start to pay dividends over time, but I can say success didn’t come easy in the early days.
CI: Was there anything you would have done differently?
NB: We did go down a few false-positive development paths and built products for tangential markets that didn’t really pan out. This is extra-costly when you have a small development team. Pretty universally, that happened when I didn’t follow my own advice above and decided to build features that I thought sounded good, or that our investors thought would be useful, but that our customers were not clamoring for. We also hired a PR firm in the early days that cost a lot of money and generated little ROI. I’d love to have that money back.
CI: You help startups raise capital. What’s the #1 challenge entrepreneurs struggle with here, and what’s your advice?
NB: Many founders take a very chaotic, unfocused approach to raising capital. We recommend founders treat fundraising like a sales process, where you build a list of 200–300 investor prospects, you research and qualify this list, you map out your best path to getting an introduction, and then you run an efficient sales process and get heat and momentum going for your deal. If you treat it like this and really work your pipeline of investor prospects, you will greatly increase your chances of raising capital on your terms.
CI: Any other advice for our readers before we let you get back to running your company?
NB: Startups are exponentially harder than you think they will be, but also exponentially more fun…lower lows but higher highs. Know this going into it, and you’ll be better prepared to handle the startup roller coaster!