March 24, 2022 • 35 mins
’If I don’t understand the cost of selling the product, how to price and how to monetize it, I’m kind of screwed. Right? And that’s why 70 to 90% of startups fail, they start with that first bucket, and they don’t look at the second bucket.’’ – Dave Parker.
Each week on the podcast, we are joined by inspiring business builders who openly discuss their entrepreneurial journey with us, sharing how they obtained their first customers and revealing what worked and what didn’t throughout the growing process. This week, listeners are in for a double treat as joining Conor on the show is tech guru and five-time founder, investor, coach, and author Dave Parker. Dave was formerly the VP of Programs at UP Global (Startup Weekend & Startup America) which Techstars purchased.
So much ground gets covered in this episode. We learn how to think about value, the importance of understanding your revenue model, and how to perfect your pricing. Dave has helped numerous founders across the globe achieve startup success and is a library of knowledge when it comes to launching a viable business. Not only does Dave offer golden advice for startups, but Dave also gives us the inside scoop of what it is like to reach the finishing line of exiting and selling a company. Key points throughout the discussion include:
- An introduction to Dave Parker.
- The first-time founder experience.
- Leveraging salesforce to grow your business.
- The reality of striking viral co-efficient.
- Finding the lifetime value of a product.
- What is a business model?
- The role of maths in business.
- Understanding revenue models and the importance of keeping your eyes on the numbers.
- Scaling for exit: an insight to selling a business and why you should always seek help when selling.
- The advantages of knowing your market and creating competition.
- Establishing product market-fit and traction.
- Dave’s advice for obtaining your first 10 customers.
Resources:
Book: Trajectory: Startup – Ideation to Product/Market Fit by Dave Parker.
https://www.dkparker.com/books/
Book: Mergers & Acquisitions – From A to Z by Andrew J. Sherman
https://www.amazon.co.uk/Mergers-Acquisitions-Andrew-J-Sherman/dp/0814413838
Connect with Dave Parker:
https://www.linkedin.com/in/daveparker/
https://twitter.com/daveparkersea
https://www.facebook.com/DKParkerLLC/
Connect with First 10 Podcast host Conor McCarthy:
https://www.first10podcast.com
https://twitter.com/TheFirst10Pod
https://www.linkedin.com/in/comccart/
Check out my podcast partners!
Buzzsprout:
https://www.buzzsprout.com/?referrer_id=1389931
Otter:
https://otter.ai/referrals/ETRNKY16
Calendly:
https://calendly.grsm.io/ilev18qxpn1e
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Dave Parker (00:01):
Those five factors are the equivalent of the magic
of compound interest. Right?
Because when you have it, youhave product market fit. If you
have one of them,congratulations, go get the
other four!
Conor McCarthy (00:19):
Hello, and welcome to season four of the
First 10 podcast. I'm your host,Conor McCarthy and I help people
start and grow their businesses.
I do that through jointventures, collaborations,
coaching, and online workshops.
In each episode of this podcast,I interview business builders
about the early days of startinga business, about how they found
their first 10 customers and gotoff the ground, so that you can
(00:40):
learn what works and whatdoesn't. Check out my website at
ConorMcCarthy.me for moredetails. My guest today is Dave
Parker. Dave is a techentrepreneur with no less than
five companies under his belt.
He's also an investor, anauthor, an advisory board member
for dozens of companies. He wasformerly the senior vice
president of programs at UpGlobal, that Startup Weekend and
(01:01):
Startup America, which waspurchased by TechStars. Dave
also works as a coach andconsultant for startup founders
internationally, as well as midmarket companies that are
staging for funding, growth,transition, and sale. So when it
comes to starting and growingbusinesses, and helping others
to do the same, Dave has seenand done it all. He really is a
trove of actionable and usefulknowledge for founders having
(01:23):
been there himself for the goodand the bad parts. In today's
episode, we cover a good fewtopics such as the importance of
understanding your revenue modeland as Dave discovered, there
aren't that many to choose from.
We talked about what it means tohave a viable business. We talk
about how to break down valueand this applies to any
business. We'll talk about howproduct market fit and traction,
(01:47):
just come down to simple maths.
We get into a little bit aboutpricing and how crucial it is to
get it just right, which oftenmeans charging more, we talk
about the experience of exitinga company that you've built. I
could have talked today forhours. He really is a great,
great guest. And I think there'slots of lots to be learned from
our chat. Please enjoy thisepisode with Dave Parker. First
of all, Dave, thank you very,very much for taking the time to
(02:12):
be with us here today.
Dave Parker (02:15):
Happy to join you.
This is awesome!
Conor McCarthy (02:16):
Do you want to give us a quick 60 second
overview about what you're doingright now?
Dave Parker (02:21):
Yeah. So today, I split my time between, well,
three things, I always say it'smy 50% time is supporting a fund
out of Atlanta, Georgia calledthe Fearless Funds. It was
started by two African Americanwomen and we we invest
exclusively in women of colorfounded startups. So in the US
today, it's about a $26 millionfund. And we're getting ready to
(02:41):
announce that we are going toraise a second fund, that should
be about $150 million. So I'm anoperating partner with that
fund. So I'm really helping inthat transition and investment
in the early stages, and thenhelping the operating role with
the founders into the boardroles and the transition there
where we really helped thatoperationally. So that's my 50%
time, my other 50% time is spenthelping founders actually exit.
(03:03):
So when you get to the, if thestarting lines awesome, I will
tell you guys, from a founderperspective, the finish line is
even better, because the wiretransfers come into your
personal accounts, not into yourbusiness account. So my partner
and I have a team of five peoplethat we do sell side merger and
acquisition for foundercontrolled companies. And the
nice thing about that work iswhen it's busy, it's super busy.
And when it's not busy, I havetime, so I get to do community
(03:24):
building stuff that support thebook and travel and like I just
came back from Saudi Arabia. Andin the last three, four years,
I've trained about 450 foundersin Middle East in North Africa,
which has been awesome, becausethat's what I love to do. But as
you know, Conor that doesn'tactually pay anything. So you
know, it's community buildingstuff is awesome, and what I
love but founders obviouslydon't have any money to spend on
(03:47):
on high end consulting work. Sothe answer is, we do that for
free or close to it.
Conor McCarthy (03:52):
Wow. You are, you're busy. You're busy in a
good way. This sounds like a lotof very fulfilling work. And I
suppose to be able to do allthis consulting and impart so
much wisdom to new founders, youyourself have had quite the
journey over your manyenterprises. Do you wanna take
us back to the first businessyou started what that was like?
Dave Parker (04:12):
Yeah, first of five, five time founder, sold
three and closed two. So firstone was as software licensing
company, the problem we weresolving was we were I worked for
my last job job, I worked for asystems integrator based in
Seattle, which is my home. AndMicrosoft would come to us every
month and I was in charge ofpartnerships and you know, out
(04:33):
selling systems integrationwork, about 350 person systems
integrator, and at the time forevery Microsoft product sold
every dollar Microsoft productsold, it took $3 to install it.
So pre-cloud days and all thosethings. And every month, my rep
from Microsoft came to me andsaid how much stuff are you guys
going to sell and like, we weare in the services business. We
don't sell product. And at onepoint I asked him the question
(04:55):
like well, how many people areout there like us that don't
sell software? He's like all ofthem. Like 35,000, systems
integrators who aren't in thebusiness of selling product, and
I'm like, Huh, that's a problemI could solve. Now not realizing
in retrospect, it's a shittyproblem to solve, because
there's no margin in it. Right?
So it's a question I always askfounders. I'm like, yes, it's a
problem to solve, do theeconomics make sense? So I grew
(05:16):
that company from zero to 32million in sales in four years
and about 155 people. We sold itin 2002. For those of your
listeners who don't rememberback to 2002 was post 911. Post
tech bubble. So we sold it, itwasn't a great exit like it was
it was an OK, exit. Right. So,and our big competitors were
(05:37):
Ingram and Tech Data who weredoing 13 and 15 billion
respectively, right. So we werea Microsoft contact was like,
you know, it's kind of, youknow, 32 million in sales day
was kind of mouse nuts. ForMicrosoft. I'm like, Yeah, but
don't forget mouse nuts areimportant to the mouse, just
saying, having been the mouse.
So that was the first one. Lotsof lessons learned lots of
(06:01):
scars, I still get twitchy onoccasion, right? When somebody
just talks about grossmerchandise value versus actual
margin, like that's thedelicious things that make me
you know, super twitchy.
Triggered.
Conor McCarthy (06:15):
Oh, my God, like, there's probably probably
a book or a movie just in thatalone. Is there any film? I'm
glad you survived the techbubble with something. Bubble
bursting. Was there anythingfrom the very first customers
you sold? Or that you got onboard that you remember? Is
there any any individual storiesfrom those?
Dave Parker (06:36):
Yeah, I think there was a couple big takeaways,
right? So we were we worked withsystems integrators. So one of
the things we did was we wentout to all the Microsoft events,
and we recruiting systemintegrators from from those
events. And one of the things welearned early on Conor was that,
you know, Microsoft had allthese field sales reps that were
all doing the same thing. My repwas doing the region. And I
(06:57):
don't know if you could do thistoday from an IP hack
perspective. But we, webasically took all of our sales
numbers and broke them down bythe Microsoft regions. And then
we looked at all of Microsoft'sIP addresses. And anytime
somebody from Microsoft came toour site, we would redirect them
to an internal sales page thatshowed sales by region. Wow. And
(07:17):
you know, San Francisco is thelowest performing region for
Microsoft product sales, becauseit's the home of Open Source.
And we took them from in thethere's nine regions in the US.
And for eight regions. We tookthem from like next to last a
second. And so we really viewedour customer as the input
because we were marketplace,right? So you have two sides of
a marketplace, sellers andbuyers. In our case, Microsoft
(07:39):
was a customer. Yes, we're thesystems integrators. So what we
did was we'd leverage ourSalesforce by getting the
Microsoft salespeople to go outand say, Well, you guys need to
use Dave's company, becausepeople would come back and say,
How did you go from next to lasta second. And they're like, Oh,
we use we use Dave's companylicense online. Right. So we
basically leveraged our salesforce to make it easy for them
(08:00):
to repeat our message. Now was adeliberate, I think we tried
really make it deliberate. Inretrospect, it's a little I'm
sure there's a littlerevisionist history there by the
one, which that's, you know,founder latitude, right.
Conor McCarthy (08:12):
At the time, it's very different at the time,
from your testing everything inthat press. Yeah, exactly. So.
Okay, so you finished up withthat? And did you have the idea
for the next business in mind?
Does it spring out of the firstone? Or was it a total clean
break?
Dave Parker (08:25):
It was a total clean break, we actually did a
hardware company. So one of ourinvestors was out of Japan, they
actually approached me and said,Hey, we have this product,
classic engineering dilemma ofengineers built a product
without an understanding of whothe ideal customer was, or what
the market was, would you helpus take it to market and the
time I'm thinking, sure, like,they'd been a great investor. So
(08:48):
six months into the project, I'mlike, we should just shut it
down and return all the money tothe investors, right? Because
the product was not a productthat would actually it didn't
solve a problem, right? So sonow, when I talk to founders,
I'm like, Listen, if you have alack of clarity here, pivot
around the problem, don't pivotaround the product, right?
Because, you know, they hadthis, it was basically a device
(09:08):
that was a thumbprint reader,with an embedded processor and
storage, right? And the answerwas, well, what problem can it
solve? And after six months, I'mlike, the answer is, there isn't
one. So you really have to startwith the problem that with a
product and I think founders,you know, from personal
experience, right? We fall inlove with our product. And we're
(09:28):
like, all we have to do is justtell people, and people will
rush to us, and find us, andwe'll go viral, even though
we're b2b. And no b2b companyever fucking goes viral. But we
will be the first. And I alwaystell people when I do seminars,
that listen if you're if liketwo companies have gotten close
to viral coefficients, andthat's, by the way, it's just
math. Right? So viralcoefficient is a key factor of
(09:51):
greater than two. You can youcan Google it. LinkedIn for a
very short period of time whenthey made their app that it
allows you to upload all of yourcontacts for LinkedIn. For about
six months, they spike intogreater than two on viral
coefficient. Slack has amazingnetwork effects, right? So
people invite other people andpeople outside of your origin.
But that's a network effect. Andmaybe they got viral coefficient
(10:14):
a little bit, but not much. Sowhen people are like, and then
we're going to get on TechCrunchand go viral I'm always like,
yeah, no. So sorry to burst yourbubble, but you're a b2b. And
there's, if you are the firstone, like I will probably write
your first cheque as an earlyinvestor, but it ain't gonna
happen and not my cheque. I'llstill write cheques, but it's
(10:34):
not I'm not going to be b2b,viral.
Conor McCarthy (10:37):
It's a brave move to get into hardware. From
what I've heard hardware ishard. It's another level of
difficulty.
Dave Parker (10:42):
Yeah, no, because it was hardware and software.
And so yeah, did that start aconsulting firm, we grew to
about 85 consultants, so one todo a services business. The next
one was a company that we builtsoftware for the small and
medium business segment. And itsolved the problem, but the
catch 22 on that one, kinda wasthe whole If you can't sell it
(11:09):
for reasonable economics, andscale a sales team, so you can't
create a product that no one'sever seen before and market it
because nobody's searching forGoogle search for those
keywords. So you have to sellit. So now your cost of sale
breaks down into what's mylifetime value. But I have to
calculate it 12 months, becauseI can't build that like a three
year lifetime value on a productthat's never been sold before.
(11:30):
So so your unit economics onthat one are are a challenge for
sure. So we ended up sellingthat one, which was really just
finding a home for it, right?
Because they what we found wasthe customer small neat
businesses liked the product,but they wouldn't pay what we
had to pay in order to hire asales team to go do it. And then
the last one, we had a superambitious plan to kind of do an
indeed.com in China and helpWestern companies find talent in
(11:53):
in the emerging market,especially bilingual talent. So
generally in the West, right?
People on LinkedIn are generallytelling the truth and
occasionally lie.
I will tell you in China, it'snot the case. So people, so if
Starbucks is hiring for countrymanager, or branch managers and
(12:16):
like that, they may get 5-50people who apply. But in China,
you'll get 5000 people who applyand you have to screen them out.
Meet with them. It's an onlineoffline combination. So we
started that company in June of2008. And you probably remember,
October 2008, nobody was hiring.
So it's kind of like walking outof your house going to get a
coffee and like going like, Oh,I forgot my phone and you go
(12:39):
back in and the House has nofurniture. No fixtures like it's
just stripped bare. So in inOctober of 2008, we're like,
yeah, no, we're just going toclose this down. So that was a
that was a fail. So. So yeah, afew sales, a couple closes, you
know, the math overall, I thinkwhen I look back on it, the
thing that I over index on nowis how do you make money at it?
(13:00):
Right? Because if there's, ifyou if you break down the
business model into its threecomponents, right? So there's a,
if you ever look at Wikipediaabout what's a business model,
you'll see there's three partsto it, there's creating value,
which is your product orservice, right? So if you're
building, if you and I arebuilding a software product,
it's engineering and design andsupport and all those costs that
are associated with hiring thoseengineers to build the product.
(13:21):
If it's a service business, andwe're a law firm, God forbid,
right? It's the people we haveto hire to do the work, right.
So I have that's my constantdeliver, whether it's a product
or service. So all those costsare, the costs are what they
are, if you're building anenterprise product is going to
take you longer, if you'rebuilding an app on the App
Store, it's going to be shorter,then my next cost is my cost of
(13:42):
sale. So my cost to deliver soit's, it's creating value,
delivering value. And the lastpiece is capturing. So in
delivering value, I havepricing, revenue model,
marketing, and sales, those aremy four, those are my all of the
things that represent myvariables in my constant sales.
Pricing is one of yourvariables. It's not a cost, but
if you price wrong, it's hugelydetrimental. Right? And then
(14:05):
what you have leftover and forcapturing value, right, in the
last, the last bucket is topline revenue and gross margin
and net profit. Right? But youdon't control those, you control
the two cost buckets. Right. Andthe pricing is so you know, in
the top one if if I'm like, Oh,the products too expensive. Can
I do it with less engineeringhours? Can I do it with cheaper
(14:26):
engineering hours? Can I do itnow? You know, with AWS? The
answer is I don't need serversnow anymore. I can I can do on
demand. That's awesome. That'sfunctionally lower the cost of
building a product. But if Idon't understand the cost of
selling the product, how toprice and how to monetize it,
I'm kind of screwed. Right? Andthat's why 70 to 90% of startups
fail is they start with thatfirst bucket, and they don't
(14:48):
look at the second bucket. SoI'm a big fan now of like, let's
pencil out the back of thenapkin math on your model. Like
what do you think the customersliked? Tanzania's gonna be well,
we're gonna do a free for life.
No, you're not. Because you'renot HubSpot. And you're not a
billion dollar company already.
What we're gonna do we're gonnapress the dollar. No, no, you're
(15:09):
not. Because you don't you don'thave any money you're not gonna
make. And yeah, but if we justshow it to them, it'll, it'll
increase value over time. Let meshow you how the math works.
Right and my favorite and youknow, Conor, because she had
like, people are like, here's myspreadsheet, we're gonna go from
zero to a billion dollars. AndI'm like, okay, so let's say you
did, just for novelty. You wouldhave grown faster than any Inc
(15:33):
500 company over the last 15years, because the average Inc
500 company, so this for thoseof your listeners who don't
follow Inc, magazine, in the USattracts the fastest growing 500
companies across the US, but thebasis is a million dollars. So
you can't start with $1. Right.
So it's a basis of a million,and then it's over a three to
(15:53):
five year span, how faster theygrow. If you if you wanted to be
consistently in the top 10 listover the last 15 years, the
answer is 42.4 million. So 1million to 42.4, you would be in
the top 10 of the Inc 500 Listconsistently. So what happens is
an investor is when you come andshow me your numbers that you're
(16:14):
going to go from zero to 300million in five years, and then
you leave the room we always go,they're cute. So now I try to
tell founders that in a niceway. They're like, Yeah, but
Dave, you haven't looked at thespreadsheet? I'm like, actually,
I know how spreadsheets work.
But I'm just going to tell you,you would be in the math that
would. So you know, companieslike Groupon, Conor got up to
(16:35):
like 300 million, I would arguethe gap on that is not actually
true. Right? They were bookingthe $50 charge that they were
charging for this, you know, forthe cafe or whatever, that
wasn't actually their revenue,that was gross merchandise
value. So yes, it kind of, butfor a startup, all that matters
(16:59):
is how much cash you have in thebank, right? GMV just doesn't
matter. So when I we have acouple companies in our
portfolio that track GMV. AndI'm like, Listen, you can put
GMV under realized revenue. Sothe bottom when I see the
revenue line at 11 Point font or12 point, you can put GMV at the
seven or six point fontunderneath it, because it just
(17:19):
doesn't matter. Like it is ait's such a vanity metric that
founders get wrapped into thatit's a problem is problematic
for sure.
Conor McCarthy (17:26):
Hmm. There's a great saying that there's more
fiction written in spreadsheetsthan in books.
Dave Parker (17:33):
Amen to that!
Conor McCarthy (17:34):
Yeah, you see, you've seen an awful lot more of
it than I have. But I, I havebeen that person as well, who
has kinda gone you know what,this could be a hockey stick
business, straight out of myhead.
Dave Parker (17:44):
So what I love about what I get to do, is I go
into a room of 100 founders,wherever in the world I happen
to be, and I always lead withthe same sameness like me, this
is my tribe, right? I mean, allof us, all of us are slightly
delusional. All of us know that70 to 90% of the people are
going to fail. All just lookaround and say I feel sorry for
the rest of y'all. Yeah, cuz I'mgoing to succeed. Right? It's
(18:05):
yeah, right. But everybody feelsthat way. And every idea is
delusional. But like, rightbefore it works, right?
Conor McCarthy (18:11):
So that's the paradox. That's true. Yeah,
yeah. Yeah,
Dave Parker (18:15):
It's like the tribe there is there is 5% of people
who are just completelydelusional. But. So that's just
the math.
Conor McCarthy (18:26):
I hope you're enjoying this episode, and that
there's some actionable andinsightful advice that you can
take out to your business,helping you identify and create
those first 10 customers is whatI do. So if you like what you
hear on this podcast, and wantmore information, including a
bunch of free resources on howto find your first 10 customers
and grow your business, checkout First10podcast.com, that's
(18:48):
10 one, zero, or find me onTwitter @thefirst10pod. Now, you
probably hear what I'm about tosay on every podcast you listen
to, and it makes a really bigdifference to the show. If you
find this podcast in any wayuseful or enjoyable, I'd be so
grateful if you left me a reviewon iTunes, it really does make a
big difference in terms of otherpeople discovering the podcast.
(19:10):
Also, if you leave a review, youwill get to see your name and
the review in lights. What I'lldo is I'll design your words and
post them online, tagging youand your project along with it.
I know it's a pretty sweet deal.
Okay, let's get on with theshow. You touched up there with
the revenue models. I mean, youyou wrote a book that I will
obviously include in theshownotes that everyone should
(19:31):
read. I mean, revenue models isyour thing. But it's it sounds
like when I talk about revenuemodels to people who aren't
ready for it, it's kind of like,oh, wait, I have to I have to go
to college to understand this.
Dave Parker (19:45):
Yeah, the good news is is you don't, so to your
point so. So this started as aninnocent enough question and has
turned into this weird likeDave's quest, which is kind of
frightening when you think aboutit, because I'm super geeky
about unit economics and revenuemodels. So Somebody came to me
when I was at Startup Weekend.
So in addition to doing the fivestartups, I had a chance to run
Startup Weekend programsglobally, and was the CEO of the
(20:06):
company before we sold atTechStars. And my last full year
there, we did 12 165 eventsworldwide, in 120 countries and
74,000 attendees. It wasamazing. Like, I got to join a
movement in progress. And theteam started the movement, Marc
Nager and the team were, youknow, all these, I think the
average age was 27 when I gotthere, so I single handedly
(20:28):
brought up the average age. Andwe went from 500 events a year
to 1200 65 in two years. Andbecause that's what I love to do
is like operationally, how doyou scale these things and
create efficiencies that youcan? You know, I'm just geeky.
So somebody came to me early andsaid, Hey, can I have a copy of
your financial model? And I'mlike, well, yeah, I'm kind of a
community guy. So I'm totallyfine with that. But yours is a
(20:50):
marketplace. That's b2c, andmine's a b2b, subscription
business. And it got me thinkinglike, well, how many templates
would you need to have in orderto like, just say, here's a
template, right? So innocentlyenough, I went to CrunchBase CEO
at the time before they have theAPI. And I'm like, like, can you
give me a list of every seedfunded company in the last 18
months, ends up being 20 654companies. And because it took
(21:14):
me so long to write the book,because I kept being interim CEO
and selling the company. Icreated a five year longitudinal
study. So we ended up trackingthese companies going to their
websites, looking at theirrevenue models, pricing. And if
they didn't have one, I'd reachout to him and say, Hey, I'm
doing research on blah, blah,blah, revenue models come to
find out. There's 14. That's it.
(21:39):
So there's, technically that oneis combination. So you can have
like a, you know, marketplaceplus a subscription. Okay, so
yeah, you can, there'svariations of that one, too.
But, you know, you've gotservices revenue, you've got
commerce, you've got lead gen,you've got subscription, and
you've got metered services,like Twilio. The irony of it,
(22:00):
which I found out afterwards isI put the list into the book.
And it has a list of the 14 withexamples like Spotify and
Salesforce for subscription. Anda friend of mine, who's in the
FinTech world is like, Have youever looked at what the multiple
is on each of the revenuemodels? And I'm like? That's a
great question. So we pulled alist of 220, tech, publicly
(22:22):
traded tech companies, so youknow, Salesforce to DocuSign, to
snowflake, and said, Let's lookat the price to sales ratio on
each of those. And sure enough,they stack, the stack rank out
really, really interestingly. Solike, a services business, if
you and I do a consultingbusiness for a million dollars,
(22:42):
it's if we were to sell it, wewould sell it for roughly a
million dollars. And usually weget paid in an earn out over
three years, because they'rereally just giving us our cash
in advance that we're gonna paythem back. So that's the other
side of my world, right sellingcompany. But if you and I did a
million dollar subscriptionbusiness, it would likely sell
between a $12 million. Becausethe logical of market buyer has
(23:03):
the value that they see in thepublic market is eight to 12,
technically, before the lasttech sell off in the end of the
year, and Russia invadingUkraine, hopefully not. Right.
DocuSign is example traded 32times trailing 12. Now there is
one model, that's better,actually. And that model is
(23:25):
metered services. So if youthink Twilio, Splunk, UI path,
Okta, all of those companies arein the API economy, and they
charge a subscription, thinkAWS, but if you pulled AWS out
of Amazon, so Amazon has a totaltrades of 4.42 times trailing
12, which is still an impressivenumber. If you did the cloud
(23:47):
only and pulled AWS out, itwould probably trade 35 times
trailing 12. So as a founder,you can't always dictate to your
customers how they will buy,right? So you can't be like, Oh,
I'm going to dictate, you'regoing to be a metered service.
Because Dave said it has thehighest valuation, maybe you
can, maybe you can't, right. Butthe point of this is, is that if
(24:08):
you can choose, there was adramatic impact on the exit
valuation of the company basedon things like if I have
recurring revenue, it'spredictable and forecastable,
the company's more valuable thantransactional revenue that may
or may not happen this year.
Right. So if you have a choice,pick a good one.
Conor McCarthy (24:29):
Exactly. Yeah.
Think deeply about your choices.
Dave Parker (24:35):
Go grab a pint.
Think deeply.
Conor McCarthy (24:38):
This is this is a question. I don't often get to
ask my guests. But because this,this podcast is all about how
things start. But when thingsare ending, either in a sale or
an acquisition or whatever itis, what's something that people
might not know about what it'slike to sell a company?
Dave Parker (24:53):
Oh, yeah, for sure.
Great. That's actually a greatquestion. So the first time I
did it, I think I have a book upon my shelf called Mergers in
action. positions from A to Z.
Because as I started theprocess, I'm like, holy crap,
like, what do I? What do I evenneed to know? Because it's like
going into every, like zero to 1million in revenue is hard. One
to 10 is hard. 10 to 100 ishard. Right, they're all
(25:15):
different kinds of hearts withdifferent kinds of people. And
we often think about technicaldebt, but we don't always think
about people dead. Right? So inthe early days, we hire the best
we can find, and we hope, right,and at some point, we have this
organizational debt we need toaddress as well. So you're
bringing some of that into thesale process. So logic, in most
(25:36):
cases, is going to be astrategic buyer, right? Because
you're not going to get, you'renot going to get a great exit
based on EBIT ducks most of usdon't have even though we just
have revenue and growth, so I'mgonna get a multiple on
revenues. So the question is, ifI look at my public company,
comps, and likely market buyers,not aspirational, not the ones,
I'm like, oh, Google's gonna buyme and of course they're not,
right? You're doing 2 million inrevenue, congratulations. And I
(25:58):
don't trivialize the 2 millionin revenue, but Salesforce is
not going to buy you if you'reunder $50 million in revenue, it
just cost them too much money todo a deal. Unless you have
something completely unique thatyour three PhD co founders and
your the only ones in the world,which happens, right? Just not
very often. Um, so yeah, so Ithink about forecast stability
and predictability of revenue.
Right? And how, how good are weat that mark sales and marketing
(26:19):
machine, don't miss yournumbers. Oh, my God, this is the
most painful one, because we'llstart with somebody and they're
like, we're gonna hit 2 millionin revenue by the end of the
year. And we go out and put thepitch together. And and you
know, that it's the same asfundraising, right? If there's a
sense of urgency that thecompany's value is going to go
up. If I don't put in money now,right, then I'm gonna come back
(26:41):
and see you in 30 or 60 days,and the price is gonna go up
because you've got momentum,right? And then if you come in
at 1.8, after saying you'regonna do two, the answer is the
air leaving the balloon, right?
It's just really hard. And so,you know, hitting your numbers
is, you know, don't don't takeyour eye off the ball, for sure.
(27:04):
And I think that, you know,knowing who your logical market
buyers are, creating competitionis really important, right. So
sometimes people will be like,I'm getting inbound requests.
Those are junior associates ofprivate equity firms who get
tasked with their first year jobis to go call a ton of startups
and say, Hey, you should meetwith my partner. Now, none of
(27:25):
the associates have theinvestment decision of any, most
of them are looking for positiveEBIT companies, right. So
they're not really they'rereally just wasting your time.
And I know, it's a greatcompliment. It's flattering. And
I know the first time ithappened to me, I was like, Oh,
I'm validated. Right? And thenyou meet with him. And you're
like, no, like, it's the samething I think is true for
(27:46):
venture right. Sometimes VCsjust pat you on the head, like,
let me know when you havetraction, but they didn't tell
you what traction is. Right. AndI think that one, the one thing
I'd say for your earlier stageand later stage companies, both
Conor on the topic is whenpeople talk about product market
fit and traction. It's math.
Right? So let's take all themystery out of it. Right?
(28:07):
Product Market Fit and tractionis math, here's the five
components, at least fivecomponents you need to look at
that are the leading indicatorsversus the trailing indicators
of Product Market Fit traffic atthe top of the site, right? Or
App Store, if you're doing anapp, number of downloads, number
of leads number of people whofill out a form and said, Hey,
give me a demo. So I now havetraffic, I now have leads of the
(28:30):
demos and leads that I gotwhat's my conversion rate to
paid? So there's my my thirdfactor, right, my fourth factor
then becomes my time to close ifmy time to close is improving,
if I'm going from 90 days to 60days, things are moving the
right way. The last one is myannual contract value or average
(28:50):
contract value, is that averagecontract value going up versus
going down?
This, those five factors are theequivalent of the magic of
compound interest. Right?
Because when you have it, youhave product market fit. Yeah,
if you have one of them,congratulations, go get the
other four. Right. But you haveto get those four things are the
(29:11):
five things put together to haveproduct market fit. And I think
for a lot of us as founders,we're like we have one yes. You
know, like, that's awesome,right? But go get the other
four. Right. So well, but I butI'd have to charge for my
product. Yeah, that's thepricing component, right? Go do
pricing over the monetization,how we're going to charge for
(29:33):
it. Now we're gonna do issubscription. Great. Awesome.
Right. But you're not. You'renot inventing a new revenue
model. Right? There's none ofthis is the good news is is a
checklist, right? So whileyou're building product and
inventing your innovations, youcan go back to this checklist
and say, Okay, I'm going to pickthis primary revenue model, the
secondary revenue model, butbreak down the components,
right. So I have revenue model,how I monetize I have pricing
(29:57):
which is a variable that's in mycontrol within a range, right? I
can't overcharge for that I'mgoing to charge within a range.
But I want you to be at the highend of the range, because it's
always easy to bring price down.
It's frickin impossible to bringprice up. Right? So I'm going to
set a first year price of, hey,here's my price, but I'll give
you a 30% discount for the firstyear. But I'm setting an
(30:19):
expectation price is going to goup, right? Most vendors set the
price too low. And then they getstuck with well, it's hard to
raise my customer pricing. Yes.
So revenue model, pricing,marketing is the next big
bucket, how what, how am I goingto acquire customers. And the
last piece is promotions. Sokeep in mind, those are four
distinctly different things. Soif I'm giving you a 30%
(30:41):
discount, so this goes back tomy financial model example that
I'm geeky about, right? If I'mgiving you a 30% discount,
that's going to show up indiscounts on the spreadsheet. If
I'm doing $1,000 A month inmarketing spend, that's going to
come up as a marketing expense.
So a lot of times founders whodon't have that experience, and
first time founders,particularly will mudge all
(31:04):
those things together, right,I've got my marketing, my
pricing, my promotions, and myrevenue model are all one thing.
And I'm like, they're fourdistinctly different things. And
you have to manage themdifferently and track them
differently. Or you can't decidewhat levers you're going to pull
and push in order to getcustomers faster. Right. So
that's, that becomes a limitingfactor about it. When you have
(31:26):
those things in place, you havemomentum and product market fit.
So when it comes to like, Hey,Dave, what's the company worth?
We end up doing evaluationpartially based on revenue
model, partially based onmomentum and growth, like you
have to be about 50% annualgrowth in profitability
combined, right used to becalled a rule of 14, it's become
the rule of 50 over the lastcouple years. And then do you
have enough revenue? Like ifyou're doing 800,000 in revenue?
(31:48):
The answer is people are buyingpotential and they're requiring
the team, you're not going toget a good Exit Multiple on
that. Right. So, so yeah, lotsof things to consider in there
when you get to time to thefirst sale. And I would say get
help, right? Because the lastthing you want to do is be like,
you know, when when you're whenyou're buying a car dealership,
they're like, let me talk to mysales manager. You need somebody
(32:10):
to at least a board member whocan help and provide
perspective. And sometimes we'reso anxious as founders just to
land the deal that we end uptaking the first deal, and then
it ends up not being a greatexit. Right. So for the
founders, which is a bummer.
Conor McCarthy (32:26):
Yeah. Oh, boy, I love that idea of those levers
to pull though, that there are,just paying more attention to
those four things will get you,will have you thinking the right
way?
Dave Parker (32:37):
Yes, at least you can break it down to something
that's now manageable. Right?
Otherwise, it's otherwise it'sjust a cluster.
Conor McCarthy (32:43):
Yeah. I know you have to go in a moment. So I
always wrap up by asking peoplewhat their advice is, for anyone
who's out there looking fortheir first 10 customers. Yeah,
Dave Parker (32:55):
I think the, boy, you know, I'm gonna give you
probably different than the onethat you would normally get is
going to be all about pricing.
Like, I'm gonna look foropportunities to to raise
pricing, right, which makes usas founders so fearful, because
we're like, I know what the MVPis, and I know all the features
it doesn't have, and I know,your products gonna change over
time, it's going to mature. Sosometimes in the pricing,
(33:15):
seminar I do for founders, I wastalking about my, I could send
you a picture of my son, right?
He was super cute. He's five,you know, it's awesome. Except
today, he's 29. He plays leadguitar in a metal band. He's
tatted up and has gauges in hisears. Now, they're both true,
but one of them is accurate. Sofor the founder dilemma, I would
say work on how do you price up,if you if you're giving a
(33:38):
Customer Price, and they're notpushing back? It's too low.
Right? And we have to you haveto go, you have to create enough
margin to have a business,right. And if the customer is
not willing to pay for the valueyou've created, you have a
problem. And I would rather youknow, I think for me the biggest
challenges we end up with zombiestartups in the portfolio and
(34:00):
friends and you guys, you knowto like in venture in the
venture world top quartileproduces returns, the top decile
gets monster returns, whichmeans the bottom 75%, the bottom
25 or quarter of that totalportfolio dies relatively
quickly, which means the middle50% dies slowly. I would rather
you go kill it and start a newidea. And I would wait you
(34:21):
another cheque as a founder,than be a zombie startup for
seven years. Right?
Conor McCarthy (34:31):
What a waste of talent and energy. And
opportunity. What's what'samazing about this conversation
is you have experienced bothends of the spectrum. And you
did a great job of kind ofcommunicating some of the really
important factors at both endsand a bunch of stuff in between.
So thank you very, very much forthat. Thank you for your time
today.
Dave Parker (34:49):
Happy to do it again sometime. Let me know how
I can be helpful. Thanks, bestto your audience.
Conor McCarthy (34:53):
Thanks.
Those five factors are the equivalent of the magic
of compound interest. Right?
Because when you have it, youhave product market fit. If you
have one of them,congratulations, go get the
other four!
Conor McCarthy (00:19):
Hello, and welcome to season four of the
First 10 podcast. I'm your host,Conor McCarthy and I help people
start and grow their businesses.
I do that through jointventures, collaborations,
coaching, and online workshops.
In each episode of this podcast,I interview business builders
about the early days of startinga business, about how they found
their first 10 customers and gotoff the ground, so that you can
(00:40):
learn what works and whatdoesn't. Check out my website at
ConorMcCarthy.me for moredetails. My guest today is Dave
Parker. Dave is a techentrepreneur with no less than
five companies under his belt.
He's also an investor, anauthor, an advisory board member
for dozens of companies. He wasformerly the senior vice
president of programs at UpGlobal, that Startup Weekend and
(01:01):
Startup America, which waspurchased by TechStars. Dave
also works as a coach andconsultant for startup founders
internationally, as well as midmarket companies that are
staging for funding, growth,transition, and sale. So when it
comes to starting and growingbusinesses, and helping others
to do the same, Dave has seenand done it all. He really is a
trove of actionable and usefulknowledge for founders having
(01:23):
been there himself for the goodand the bad parts. In today's
episode, we cover a good fewtopics such as the importance of
understanding your revenue modeland as Dave discovered, there
aren't that many to choose from.
We talked about what it means tohave a viable business. We talk
about how to break down valueand this applies to any
business. We'll talk about howproduct market fit and traction,
(01:47):
just come down to simple maths.
We get into a little bit aboutpricing and how crucial it is to
get it just right, which oftenmeans charging more, we talk
about the experience of exitinga company that you've built. I
could have talked today forhours. He really is a great,
great guest. And I think there'slots of lots to be learned from
our chat. Please enjoy thisepisode with Dave Parker. First
of all, Dave, thank you very,very much for taking the time to
(02:12):
be with us here today.
Dave Parker (02:15):
Happy to join you.
This is awesome!
Conor McCarthy (02:16):
Do you want to give us a quick 60 second
overview about what you're doingright now?
Dave Parker (02:21):
Yeah. So today, I split my time between, well,
three things, I always say it'smy 50% time is supporting a fund
out of Atlanta, Georgia calledthe Fearless Funds. It was
started by two African Americanwomen and we we invest
exclusively in women of colorfounded startups. So in the US
today, it's about a $26 millionfund. And we're getting ready to
(02:41):
announce that we are going toraise a second fund, that should
be about $150 million. So I'm anoperating partner with that
fund. So I'm really helping inthat transition and investment
in the early stages, and thenhelping the operating role with
the founders into the boardroles and the transition there
where we really helped thatoperationally. So that's my 50%
time, my other 50% time is spenthelping founders actually exit.
(03:03):
So when you get to the, if thestarting lines awesome, I will
tell you guys, from a founderperspective, the finish line is
even better, because the wiretransfers come into your
personal accounts, not into yourbusiness account. So my partner
and I have a team of five peoplethat we do sell side merger and
acquisition for foundercontrolled companies. And the
nice thing about that work iswhen it's busy, it's super busy.
And when it's not busy, I havetime, so I get to do community
(03:24):
building stuff that support thebook and travel and like I just
came back from Saudi Arabia. Andin the last three, four years,
I've trained about 450 foundersin Middle East in North Africa,
which has been awesome, becausethat's what I love to do. But as
you know, Conor that doesn'tactually pay anything. So you
know, it's community buildingstuff is awesome, and what I
love but founders obviouslydon't have any money to spend on
(03:47):
on high end consulting work. Sothe answer is, we do that for
free or close to it.
Conor McCarthy (03:52):
Wow. You are, you're busy. You're busy in a
good way. This sounds like a lotof very fulfilling work. And I
suppose to be able to do allthis consulting and impart so
much wisdom to new founders, youyourself have had quite the
journey over your manyenterprises. Do you wanna take
us back to the first businessyou started what that was like?
Dave Parker (04:12):
Yeah, first of five, five time founder, sold
three and closed two. So firstone was as software licensing
company, the problem we weresolving was we were I worked for
my last job job, I worked for asystems integrator based in
Seattle, which is my home. AndMicrosoft would come to us every
month and I was in charge ofpartnerships and you know, out
(04:33):
selling systems integrationwork, about 350 person systems
integrator, and at the time forevery Microsoft product sold
every dollar Microsoft productsold, it took $3 to install it.
So pre-cloud days and all thosethings. And every month, my rep
from Microsoft came to me andsaid how much stuff are you guys
going to sell and like, we weare in the services business. We
don't sell product. And at onepoint I asked him the question
(04:55):
like well, how many people areout there like us that don't
sell software? He's like all ofthem. Like 35,000, systems
integrators who aren't in thebusiness of selling product, and
I'm like, Huh, that's a problemI could solve. Now not realizing
in retrospect, it's a shittyproblem to solve, because
there's no margin in it. Right?
So it's a question I always askfounders. I'm like, yes, it's a
problem to solve, do theeconomics make sense? So I grew
(05:16):
that company from zero to 32million in sales in four years
and about 155 people. We sold itin 2002. For those of your
listeners who don't rememberback to 2002 was post 911. Post
tech bubble. So we sold it, itwasn't a great exit like it was
it was an OK, exit. Right. So,and our big competitors were
(05:37):
Ingram and Tech Data who weredoing 13 and 15 billion
respectively, right. So we werea Microsoft contact was like,
you know, it's kind of, youknow, 32 million in sales day
was kind of mouse nuts. ForMicrosoft. I'm like, Yeah, but
don't forget mouse nuts areimportant to the mouse, just
saying, having been the mouse.
So that was the first one. Lotsof lessons learned lots of
(06:01):
scars, I still get twitchy onoccasion, right? When somebody
just talks about grossmerchandise value versus actual
margin, like that's thedelicious things that make me
you know, super twitchy.
Triggered.
Conor McCarthy (06:15):
Oh, my God, like, there's probably probably
a book or a movie just in thatalone. Is there any film? I'm
glad you survived the techbubble with something. Bubble
bursting. Was there anythingfrom the very first customers
you sold? Or that you got onboard that you remember? Is
there any any individual storiesfrom those?
Dave Parker (06:36):
Yeah, I think there was a couple big takeaways,
right? So we were we worked withsystems integrators. So one of
the things we did was we wentout to all the Microsoft events,
and we recruiting systemintegrators from from those
events. And one of the things welearned early on Conor was that,
you know, Microsoft had allthese field sales reps that were
all doing the same thing. My repwas doing the region. And I
(06:57):
don't know if you could do thistoday from an IP hack
perspective. But we, webasically took all of our sales
numbers and broke them down bythe Microsoft regions. And then
we looked at all of Microsoft'sIP addresses. And anytime
somebody from Microsoft came toour site, we would redirect them
to an internal sales page thatshowed sales by region. Wow. And
(07:17):
you know, San Francisco is thelowest performing region for
Microsoft product sales, becauseit's the home of Open Source.
And we took them from in thethere's nine regions in the US.
And for eight regions. We tookthem from like next to last a
second. And so we really viewedour customer as the input
because we were marketplace,right? So you have two sides of
a marketplace, sellers andbuyers. In our case, Microsoft
(07:39):
was a customer. Yes, we're thesystems integrators. So what we
did was we'd leverage ourSalesforce by getting the
Microsoft salespeople to go outand say, Well, you guys need to
use Dave's company, becausepeople would come back and say,
How did you go from next to lasta second. And they're like, Oh,
we use we use Dave's companylicense online. Right. So we
basically leveraged our salesforce to make it easy for them
(08:00):
to repeat our message. Now was adeliberate, I think we tried
really make it deliberate. Inretrospect, it's a little I'm
sure there's a littlerevisionist history there by the
one, which that's, you know,founder latitude, right.
Conor McCarthy (08:12):
At the time, it's very different at the time,
from your testing everything inthat press. Yeah, exactly. So.
Okay, so you finished up withthat? And did you have the idea
for the next business in mind?
Does it spring out of the firstone? Or was it a total clean
break?
Dave Parker (08:25):
It was a total clean break, we actually did a
hardware company. So one of ourinvestors was out of Japan, they
actually approached me and said,Hey, we have this product,
classic engineering dilemma ofengineers built a product
without an understanding of whothe ideal customer was, or what
the market was, would you helpus take it to market and the
time I'm thinking, sure, like,they'd been a great investor. So
(08:48):
six months into the project, I'mlike, we should just shut it
down and return all the money tothe investors, right? Because
the product was not a productthat would actually it didn't
solve a problem, right? So sonow, when I talk to founders,
I'm like, Listen, if you have alack of clarity here, pivot
around the problem, don't pivotaround the product, right?
Because, you know, they hadthis, it was basically a device
(09:08):
that was a thumbprint reader,with an embedded processor and
storage, right? And the answerwas, well, what problem can it
solve? And after six months, I'mlike, the answer is, there isn't
one. So you really have to startwith the problem that with a
product and I think founders,you know, from personal
experience, right? We fall inlove with our product. And we're
(09:28):
like, all we have to do is justtell people, and people will
rush to us, and find us, andwe'll go viral, even though
we're b2b. And no b2b companyever fucking goes viral. But we
will be the first. And I alwaystell people when I do seminars,
that listen if you're if liketwo companies have gotten close
to viral coefficients, andthat's, by the way, it's just
math. Right? So viralcoefficient is a key factor of
(09:51):
greater than two. You can youcan Google it. LinkedIn for a
very short period of time whenthey made their app that it
allows you to upload all of yourcontacts for LinkedIn. For about
six months, they spike intogreater than two on viral
coefficient. Slack has amazingnetwork effects, right? So
people invite other people andpeople outside of your origin.
But that's a network effect. Andmaybe they got viral coefficient
(10:14):
a little bit, but not much. Sowhen people are like, and then
we're going to get on TechCrunchand go viral I'm always like,
yeah, no. So sorry to burst yourbubble, but you're a b2b. And
there's, if you are the firstone, like I will probably write
your first cheque as an earlyinvestor, but it ain't gonna
happen and not my cheque. I'llstill write cheques, but it's
(10:34):
not I'm not going to be b2b,viral.
Conor McCarthy (10:37):
It's a brave move to get into hardware. From
what I've heard hardware ishard. It's another level of
difficulty.
Dave Parker (10:42):
Yeah, no, because it was hardware and software.
And so yeah, did that start aconsulting firm, we grew to
about 85 consultants, so one todo a services business. The next
one was a company that we builtsoftware for the small and
medium business segment. And itsolved the problem, but the
catch 22 on that one, kinda wasthe whole If you can't sell it
(11:09):
for reasonable economics, andscale a sales team, so you can't
create a product that no one'sever seen before and market it
because nobody's searching forGoogle search for those
keywords. So you have to sellit. So now your cost of sale
breaks down into what's mylifetime value. But I have to
calculate it 12 months, becauseI can't build that like a three
year lifetime value on a productthat's never been sold before.
(11:30):
So so your unit economics onthat one are are a challenge for
sure. So we ended up sellingthat one, which was really just
finding a home for it, right?
Because they what we found wasthe customer small neat
businesses liked the product,but they wouldn't pay what we
had to pay in order to hire asales team to go do it. And then
the last one, we had a superambitious plan to kind of do an
indeed.com in China and helpWestern companies find talent in
(11:53):
in the emerging market,especially bilingual talent. So
generally in the West, right?
People on LinkedIn are generallytelling the truth and
occasionally lie.
I will tell you in China, it'snot the case. So people, so if
Starbucks is hiring for countrymanager, or branch managers and
(12:16):
like that, they may get 5-50people who apply. But in China,
you'll get 5000 people who applyand you have to screen them out.
Meet with them. It's an onlineoffline combination. So we
started that company in June of2008. And you probably remember,
October 2008, nobody was hiring.
So it's kind of like walking outof your house going to get a
coffee and like going like, Oh,I forgot my phone and you go
(12:39):
back in and the House has nofurniture. No fixtures like it's
just stripped bare. So in inOctober of 2008, we're like,
yeah, no, we're just going toclose this down. So that was a
that was a fail. So. So yeah, afew sales, a couple closes, you
know, the math overall, I thinkwhen I look back on it, the
thing that I over index on nowis how do you make money at it?
(13:00):
Right? Because if there's, ifyou if you break down the
business model into its threecomponents, right? So there's a,
if you ever look at Wikipediaabout what's a business model,
you'll see there's three partsto it, there's creating value,
which is your product orservice, right? So if you're
building, if you and I arebuilding a software product,
it's engineering and design andsupport and all those costs that
are associated with hiring thoseengineers to build the product.
(13:21):
If it's a service business, andwe're a law firm, God forbid,
right? It's the people we haveto hire to do the work, right.
So I have that's my constantdeliver, whether it's a product
or service. So all those costsare, the costs are what they
are, if you're building anenterprise product is going to
take you longer, if you'rebuilding an app on the App
Store, it's going to be shorter,then my next cost is my cost of
(13:42):
sale. So my cost to deliver soit's, it's creating value,
delivering value. And the lastpiece is capturing. So in
delivering value, I havepricing, revenue model,
marketing, and sales, those aremy four, those are my all of the
things that represent myvariables in my constant sales.
Pricing is one of yourvariables. It's not a cost, but
if you price wrong, it's hugelydetrimental. Right? And then
(14:05):
what you have leftover and forcapturing value, right, in the
last, the last bucket is topline revenue and gross margin
and net profit. Right? But youdon't control those, you control
the two cost buckets. Right. Andthe pricing is so you know, in
the top one if if I'm like, Oh,the products too expensive. Can
I do it with less engineeringhours? Can I do it with cheaper
(14:26):
engineering hours? Can I do itnow? You know, with AWS? The
answer is I don't need serversnow anymore. I can I can do on
demand. That's awesome. That'sfunctionally lower the cost of
building a product. But if Idon't understand the cost of
selling the product, how toprice and how to monetize it,
I'm kind of screwed. Right? Andthat's why 70 to 90% of startups
fail is they start with thatfirst bucket, and they don't
(14:48):
look at the second bucket. SoI'm a big fan now of like, let's
pencil out the back of thenapkin math on your model. Like
what do you think the customersliked? Tanzania's gonna be well,
we're gonna do a free for life.
No, you're not. Because you'renot HubSpot. And you're not a
billion dollar company already.
What we're gonna do we're gonnapress the dollar. No, no, you're
(15:09):
not. Because you don't you don'thave any money you're not gonna
make. And yeah, but if we justshow it to them, it'll, it'll
increase value over time. Let meshow you how the math works.
Right and my favorite and youknow, Conor, because she had
like, people are like, here's myspreadsheet, we're gonna go from
zero to a billion dollars. AndI'm like, okay, so let's say you
did, just for novelty. You wouldhave grown faster than any Inc
(15:33):
500 company over the last 15years, because the average Inc
500 company, so this for thoseof your listeners who don't
follow Inc, magazine, in the USattracts the fastest growing 500
companies across the US, but thebasis is a million dollars. So
you can't start with $1. Right.
So it's a basis of a million,and then it's over a three to
(15:53):
five year span, how faster theygrow. If you if you wanted to be
consistently in the top 10 listover the last 15 years, the
answer is 42.4 million. So 1million to 42.4, you would be in
the top 10 of the Inc 500 Listconsistently. So what happens is
an investor is when you come andshow me your numbers that you're
(16:14):
going to go from zero to 300million in five years, and then
you leave the room we always go,they're cute. So now I try to
tell founders that in a niceway. They're like, Yeah, but
Dave, you haven't looked at thespreadsheet? I'm like, actually,
I know how spreadsheets work.
But I'm just going to tell you,you would be in the math that
would. So you know, companieslike Groupon, Conor got up to
(16:35):
like 300 million, I would arguethe gap on that is not actually
true. Right? They were bookingthe $50 charge that they were
charging for this, you know, forthe cafe or whatever, that
wasn't actually their revenue,that was gross merchandise
value. So yes, it kind of, butfor a startup, all that matters
(16:59):
is how much cash you have in thebank, right? GMV just doesn't
matter. So when I we have acouple companies in our
portfolio that track GMV. AndI'm like, Listen, you can put
GMV under realized revenue. Sothe bottom when I see the
revenue line at 11 Point font or12 point, you can put GMV at the
seven or six point fontunderneath it, because it just
(17:19):
doesn't matter. Like it is ait's such a vanity metric that
founders get wrapped into thatit's a problem is problematic
for sure.
Conor McCarthy (17:26):
Hmm. There's a great saying that there's more
fiction written in spreadsheetsthan in books.
Dave Parker (17:33):
Amen to that!
Conor McCarthy (17:34):
Yeah, you see, you've seen an awful lot more of
it than I have. But I, I havebeen that person as well, who
has kinda gone you know what,this could be a hockey stick
business, straight out of myhead.
Dave Parker (17:44):
So what I love about what I get to do, is I go
into a room of 100 founders,wherever in the world I happen
to be, and I always lead withthe same sameness like me, this
is my tribe, right? I mean, allof us, all of us are slightly
delusional. All of us know that70 to 90% of the people are
going to fail. All just lookaround and say I feel sorry for
the rest of y'all. Yeah, cuz I'mgoing to succeed. Right? It's
(18:05):
yeah, right. But everybody feelsthat way. And every idea is
delusional. But like, rightbefore it works, right?
Conor McCarthy (18:11):
So that's the paradox. That's true. Yeah,
yeah. Yeah,
Dave Parker (18:15):
It's like the tribe there is there is 5% of people
who are just completelydelusional. But. So that's just
the math.
Conor McCarthy (18:26):
I hope you're enjoying this episode, and that
there's some actionable andinsightful advice that you can
take out to your business,helping you identify and create
those first 10 customers is whatI do. So if you like what you
hear on this podcast, and wantmore information, including a
bunch of free resources on howto find your first 10 customers
and grow your business, checkout First10podcast.com, that's
(18:48):
10 one, zero, or find me onTwitter @thefirst10pod. Now, you
probably hear what I'm about tosay on every podcast you listen
to, and it makes a really bigdifference to the show. If you
find this podcast in any wayuseful or enjoyable, I'd be so
grateful if you left me a reviewon iTunes, it really does make a
big difference in terms of otherpeople discovering the podcast.
(19:10):
Also, if you leave a review, youwill get to see your name and
the review in lights. What I'lldo is I'll design your words and
post them online, tagging youand your project along with it.
I know it's a pretty sweet deal.
Okay, let's get on with theshow. You touched up there with
the revenue models. I mean, youyou wrote a book that I will
obviously include in theshownotes that everyone should
(19:31):
read. I mean, revenue models isyour thing. But it's it sounds
like when I talk about revenuemodels to people who aren't
ready for it, it's kind of like,oh, wait, I have to I have to go
to college to understand this.
Dave Parker (19:45):
Yeah, the good news is is you don't, so to your
point so. So this started as aninnocent enough question and has
turned into this weird likeDave's quest, which is kind of
frightening when you think aboutit, because I'm super geeky
about unit economics and revenuemodels. So Somebody came to me
when I was at Startup Weekend.
So in addition to doing the fivestartups, I had a chance to run
Startup Weekend programsglobally, and was the CEO of the
(20:06):
company before we sold atTechStars. And my last full year
there, we did 12 165 eventsworldwide, in 120 countries and
74,000 attendees. It wasamazing. Like, I got to join a
movement in progress. And theteam started the movement, Marc
Nager and the team were, youknow, all these, I think the
average age was 27 when I gotthere, so I single handedly
(20:28):
brought up the average age. Andwe went from 500 events a year
to 1200 65 in two years. Andbecause that's what I love to do
is like operationally, how doyou scale these things and
create efficiencies that youcan? You know, I'm just geeky.
So somebody came to me early andsaid, Hey, can I have a copy of
your financial model? And I'mlike, well, yeah, I'm kind of a
community guy. So I'm totallyfine with that. But yours is a
(20:50):
marketplace. That's b2c, andmine's a b2b, subscription
business. And it got me thinkinglike, well, how many templates
would you need to have in orderto like, just say, here's a
template, right? So innocentlyenough, I went to CrunchBase CEO
at the time before they have theAPI. And I'm like, like, can you
give me a list of every seedfunded company in the last 18
months, ends up being 20 654companies. And because it took
(21:14):
me so long to write the book,because I kept being interim CEO
and selling the company. Icreated a five year longitudinal
study. So we ended up trackingthese companies going to their
websites, looking at theirrevenue models, pricing. And if
they didn't have one, I'd reachout to him and say, Hey, I'm
doing research on blah, blah,blah, revenue models come to
find out. There's 14. That's it.
(21:39):
So there's, technically that oneis combination. So you can have
like a, you know, marketplaceplus a subscription. Okay, so
yeah, you can, there'svariations of that one, too.
But, you know, you've gotservices revenue, you've got
commerce, you've got lead gen,you've got subscription, and
you've got metered services,like Twilio. The irony of it,
(22:00):
which I found out afterwards isI put the list into the book.
And it has a list of the 14 withexamples like Spotify and
Salesforce for subscription. Anda friend of mine, who's in the
FinTech world is like, Have youever looked at what the multiple
is on each of the revenuemodels? And I'm like? That's a
great question. So we pulled alist of 220, tech, publicly
(22:22):
traded tech companies, so youknow, Salesforce to DocuSign, to
snowflake, and said, Let's lookat the price to sales ratio on
each of those. And sure enough,they stack, the stack rank out
really, really interestingly. Solike, a services business, if
you and I do a consultingbusiness for a million dollars,
(22:42):
it's if we were to sell it, wewould sell it for roughly a
million dollars. And usually weget paid in an earn out over
three years, because they'rereally just giving us our cash
in advance that we're gonna paythem back. So that's the other
side of my world, right sellingcompany. But if you and I did a
million dollar subscriptionbusiness, it would likely sell
between a $12 million. Becausethe logical of market buyer has
(23:03):
the value that they see in thepublic market is eight to 12,
technically, before the lasttech sell off in the end of the
year, and Russia invadingUkraine, hopefully not. Right.
DocuSign is example traded 32times trailing 12. Now there is
one model, that's better,actually. And that model is
(23:25):
metered services. So if youthink Twilio, Splunk, UI path,
Okta, all of those companies arein the API economy, and they
charge a subscription, thinkAWS, but if you pulled AWS out
of Amazon, so Amazon has a totaltrades of 4.42 times trailing
12, which is still an impressivenumber. If you did the cloud
(23:47):
only and pulled AWS out, itwould probably trade 35 times
trailing 12. So as a founder,you can't always dictate to your
customers how they will buy,right? So you can't be like, Oh,
I'm going to dictate, you'regoing to be a metered service.
Because Dave said it has thehighest valuation, maybe you
can, maybe you can't, right. Butthe point of this is, is that if
(24:08):
you can choose, there was adramatic impact on the exit
valuation of the company basedon things like if I have
recurring revenue, it'spredictable and forecastable,
the company's more valuable thantransactional revenue that may
or may not happen this year.
Right. So if you have a choice,pick a good one.
Conor McCarthy (24:29):
Exactly. Yeah.
Think deeply about your choices.
Dave Parker (24:35):
Go grab a pint.
Think deeply.
Conor McCarthy (24:38):
This is this is a question. I don't often get to
ask my guests. But because this,this podcast is all about how
things start. But when thingsare ending, either in a sale or
an acquisition or whatever itis, what's something that people
might not know about what it'slike to sell a company?
Dave Parker (24:53):
Oh, yeah, for sure.
Great. That's actually a greatquestion. So the first time I
did it, I think I have a book upon my shelf called Mergers in
action. positions from A to Z.
Because as I started theprocess, I'm like, holy crap,
like, what do I? What do I evenneed to know? Because it's like
going into every, like zero to 1million in revenue is hard. One
to 10 is hard. 10 to 100 ishard. Right, they're all
(25:15):
different kinds of hearts withdifferent kinds of people. And
we often think about technicaldebt, but we don't always think
about people dead. Right? So inthe early days, we hire the best
we can find, and we hope, right,and at some point, we have this
organizational debt we need toaddress as well. So you're
bringing some of that into thesale process. So logic, in most
(25:36):
cases, is going to be astrategic buyer, right? Because
you're not going to get, you'renot going to get a great exit
based on EBIT ducks most of usdon't have even though we just
have revenue and growth, so I'mgonna get a multiple on
revenues. So the question is, ifI look at my public company,
comps, and likely market buyers,not aspirational, not the ones,
I'm like, oh, Google's gonna buyme and of course they're not,
right? You're doing 2 million inrevenue, congratulations. And I
(25:58):
don't trivialize the 2 millionin revenue, but Salesforce is
not going to buy you if you'reunder $50 million in revenue, it
just cost them too much money todo a deal. Unless you have
something completely unique thatyour three PhD co founders and
your the only ones in the world,which happens, right? Just not
very often. Um, so yeah, so Ithink about forecast stability
and predictability of revenue.
Right? And how, how good are weat that mark sales and marketing
(26:19):
machine, don't miss yournumbers. Oh, my God, this is the
most painful one, because we'llstart with somebody and they're
like, we're gonna hit 2 millionin revenue by the end of the
year. And we go out and put thepitch together. And and you
know, that it's the same asfundraising, right? If there's a
sense of urgency that thecompany's value is going to go
up. If I don't put in money now,right, then I'm gonna come back
(26:41):
and see you in 30 or 60 days,and the price is gonna go up
because you've got momentum,right? And then if you come in
at 1.8, after saying you'regonna do two, the answer is the
air leaving the balloon, right?
It's just really hard. And so,you know, hitting your numbers
is, you know, don't don't takeyour eye off the ball, for sure.
(27:04):
And I think that, you know,knowing who your logical market
buyers are, creating competitionis really important, right. So
sometimes people will be like,I'm getting inbound requests.
Those are junior associates ofprivate equity firms who get
tasked with their first year jobis to go call a ton of startups
and say, Hey, you should meetwith my partner. Now, none of
(27:25):
the associates have theinvestment decision of any, most
of them are looking for positiveEBIT companies, right. So
they're not really they'rereally just wasting your time.
And I know, it's a greatcompliment. It's flattering. And
I know the first time ithappened to me, I was like, Oh,
I'm validated. Right? And thenyou meet with him. And you're
like, no, like, it's the samething I think is true for
(27:46):
venture right. Sometimes VCsjust pat you on the head, like,
let me know when you havetraction, but they didn't tell
you what traction is. Right. AndI think that one, the one thing
I'd say for your earlier stageand later stage companies, both
Conor on the topic is whenpeople talk about product market
fit and traction. It's math.
Right? So let's take all themystery out of it. Right?
(28:07):
Product Market Fit and tractionis math, here's the five
components, at least fivecomponents you need to look at
that are the leading indicatorsversus the trailing indicators
of Product Market Fit traffic atthe top of the site, right? Or
App Store, if you're doing anapp, number of downloads, number
of leads number of people whofill out a form and said, Hey,
give me a demo. So I now havetraffic, I now have leads of the
(28:30):
demos and leads that I gotwhat's my conversion rate to
paid? So there's my my thirdfactor, right, my fourth factor
then becomes my time to close ifmy time to close is improving,
if I'm going from 90 days to 60days, things are moving the
right way. The last one is myannual contract value or average
(28:50):
contract value, is that averagecontract value going up versus
going down?
This, those five factors are theequivalent of the magic of
compound interest. Right?
Because when you have it, youhave product market fit. Yeah,
if you have one of them,congratulations, go get the
other four. Right. But you haveto get those four things are the
(29:11):
five things put together to haveproduct market fit. And I think
for a lot of us as founders,we're like we have one yes. You
know, like, that's awesome,right? But go get the other
four. Right. So well, but I butI'd have to charge for my
product. Yeah, that's thepricing component, right? Go do
pricing over the monetization,how we're going to charge for
(29:33):
it. Now we're gonna do issubscription. Great. Awesome.
Right. But you're not. You'renot inventing a new revenue
model. Right? There's none ofthis is the good news is is a
checklist, right? So whileyou're building product and
inventing your innovations, youcan go back to this checklist
and say, Okay, I'm going to pickthis primary revenue model, the
secondary revenue model, butbreak down the components,
right. So I have revenue model,how I monetize I have pricing
(29:57):
which is a variable that's in mycontrol within a range, right? I
can't overcharge for that I'mgoing to charge within a range.
But I want you to be at the highend of the range, because it's
always easy to bring price down.
It's frickin impossible to bringprice up. Right? So I'm going to
set a first year price of, hey,here's my price, but I'll give
you a 30% discount for the firstyear. But I'm setting an
(30:19):
expectation price is going to goup, right? Most vendors set the
price too low. And then they getstuck with well, it's hard to
raise my customer pricing. Yes.
So revenue model, pricing,marketing is the next big
bucket, how what, how am I goingto acquire customers. And the
last piece is promotions. Sokeep in mind, those are four
distinctly different things. Soif I'm giving you a 30%
(30:41):
discount, so this goes back tomy financial model example that
I'm geeky about, right? If I'mgiving you a 30% discount,
that's going to show up indiscounts on the spreadsheet. If
I'm doing $1,000 A month inmarketing spend, that's going to
come up as a marketing expense.
So a lot of times founders whodon't have that experience, and
first time founders,particularly will mudge all
(31:04):
those things together, right,I've got my marketing, my
pricing, my promotions, and myrevenue model are all one thing.
And I'm like, they're fourdistinctly different things. And
you have to manage themdifferently and track them
differently. Or you can't decidewhat levers you're going to pull
and push in order to getcustomers faster. Right. So
that's, that becomes a limitingfactor about it. When you have
(31:26):
those things in place, you havemomentum and product market fit.
So when it comes to like, Hey,Dave, what's the company worth?
We end up doing evaluationpartially based on revenue
model, partially based onmomentum and growth, like you
have to be about 50% annualgrowth in profitability
combined, right used to becalled a rule of 14, it's become
the rule of 50 over the lastcouple years. And then do you
have enough revenue? Like ifyou're doing 800,000 in revenue?
(31:48):
The answer is people are buyingpotential and they're requiring
the team, you're not going toget a good Exit Multiple on
that. Right. So, so yeah, lotsof things to consider in there
when you get to time to thefirst sale. And I would say get
help, right? Because the lastthing you want to do is be like,
you know, when when you're whenyou're buying a car dealership,
they're like, let me talk to mysales manager. You need somebody
(32:10):
to at least a board member whocan help and provide
perspective. And sometimes we'reso anxious as founders just to
land the deal that we end uptaking the first deal, and then
it ends up not being a greatexit. Right. So for the
founders, which is a bummer.
Conor McCarthy (32:26):
Yeah. Oh, boy, I love that idea of those levers
to pull though, that there are,just paying more attention to
those four things will get you,will have you thinking the right
way?
Dave Parker (32:37):
Yes, at least you can break it down to something
that's now manageable. Right?
Otherwise, it's otherwise it'sjust a cluster.
Conor McCarthy (32:43):
Yeah. I know you have to go in a moment. So I
always wrap up by asking peoplewhat their advice is, for anyone
who's out there looking fortheir first 10 customers. Yeah,
Dave Parker (32:55):
I think the, boy, you know, I'm gonna give you
probably different than the onethat you would normally get is
going to be all about pricing.
Like, I'm gonna look foropportunities to to raise
pricing, right, which makes usas founders so fearful, because
we're like, I know what the MVPis, and I know all the features
it doesn't have, and I know,your products gonna change over
time, it's going to mature. Sosometimes in the pricing,
(33:15):
seminar I do for founders, I wastalking about my, I could send
you a picture of my son, right?
He was super cute. He's five,you know, it's awesome. Except
today, he's 29. He plays leadguitar in a metal band. He's
tatted up and has gauges in hisears. Now, they're both true,
but one of them is accurate. Sofor the founder dilemma, I would
say work on how do you price up,if you if you're giving a
(33:38):
Customer Price, and they're notpushing back? It's too low.
Right? And we have to you haveto go, you have to create enough
margin to have a business,right. And if the customer is
not willing to pay for the valueyou've created, you have a
problem. And I would rather youknow, I think for me the biggest
challenges we end up with zombiestartups in the portfolio and
(34:00):
friends and you guys, you knowto like in venture in the
venture world top quartileproduces returns, the top decile
gets monster returns, whichmeans the bottom 75%, the bottom
25 or quarter of that totalportfolio dies relatively
quickly, which means the middle50% dies slowly. I would rather
you go kill it and start a newidea. And I would wait you
(34:21):
another cheque as a founder,than be a zombie startup for
seven years. Right?
Conor McCarthy (34:31):
What a waste of talent and energy. And
opportunity. What's what'samazing about this conversation
is you have experienced bothends of the spectrum. And you
did a great job of kind ofcommunicating some of the really
important factors at both endsand a bunch of stuff in between.
So thank you very, very much forthat. Thank you for your time
today.
Dave Parker (34:49):
Happy to do it again sometime. Let me know how
I can be helpful. Thanks, bestto your audience.
Conor McCarthy (34:53):
Thanks.
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