First enterprise customers – revenue or user engagement? need to optimize for engagement first, revenue comes after

Since we are seed investors in enterprise technology, I am often asked this question. The answer on the surface seems quite obvious — generate as much revenue as you can to prove that customers find value and are willing to pay. My answer is the less obvious one — focus first on user engagement and the revenue and bookings will follow.

Wait, isn’t user engagement more of a consumer metric? It is, but it is equally as important to focus on this metric in the enterprise. No matter what business you are in, you need to ensure that your ultimate customer (the end user) is happy and absolutely loves using your product. I have seen countless situations where a startup extracts initial dollars top-down from an enterprise but ultimately cannot get traction because the end users don’t love the product. Without love of product there is no user engagement, and without user engagement, there is no long-term customer.

This is especially important in the age of SaaS as switching costs are quite low for substitute solutions. This is also the reason why next to VP of Sales, I would argue a VP of Customer Happiness/Success is a crucial hire. One is for generating new revenue and the other is for expanding existing customers and reducing churn. It is also why a number of companies have been created to help understand and monitor user engagement in the enterprise to proactively determine issues before they happen (totango, gainsight, and preact — full disclosure, my fund is an investor)

What is user engagement in the enterprise? When understanding initial customer traction, we like to understand how a product/solution can/will become a daily habit for the user. It is pretty clear that the more an end user interacts with the product the more important it becomes and ultimately the more value it provides. Another important metric to optimize for would be expansion of users within an existing account. In other words, how do you sell into one user and create viral loops (sharing dashboards, etc) and expand the active user base for the product. Once again, this sounds like a consumer metric but quite an important one —the more people that use it the more it becomes part of the ingrained workflow creating more value.

The challenge sometimes is that many enterprise tech companies are designed to work in the background, invisibly to automate tasks or aggregate data to reduce noise. If your tech is seamlessly analyzing data in the background, you need to find ways to show the user how awesome your product is by either sending alerts or creating some other eye candy to remind the user that your product is working and important. I have seen a few of our portfolio companies implement some simple changes regarding this and see their usage increase significantly.

So to recap, revenue matters but the path starts with optimizing for the end user in the enterprise and focusing on engagement. Once you create happy end users who love your product, the revenue will follow.

Revenues kill the dream counterintuitive - short term revenue can sometimes come at cost to long term opportunity...

I was on the phone yesterday with the CEO of one of our portfolio companies, and we were talking about goals for the next few months and in particular, what the company needed to get a Series A done.

Her answer was quite simply “make the product delightful.” She continued: “I want to iterate to continue to make the product faster, better, and easier to use. I want to get the user to the “a ha” moment even faster.”

And with that I knew that she got it. The company paid user base is already growing rapidly but rather than focus on a couple of features that can boost MRR in the near term, she would rather focus on the longer term.

This reminds me of a quote from Yossi Vardi, founding investor in ICQ (creators of IM and sold to AOL).

“Revenues kill the dream.”

It may sound counter-intuitive but what Yossi is really saying is don’t sacrifice long term opportunity for short term revenue…

Camping out and closing deals

I am sure you can see a common thread in many of my recent posts – Sales, Sales, Sales!  I don’t care how great your product is because without an ability to articulate the value proposition succinctly, tell the world about it in a capital efficient manner, and sell the damn thing, you are SOL (yes, shit out of luck!).

So what does camping out have to do with selling? Let me explain.  In sales I am sure you have heard about all of the various models to prospect, push leads through a funnel, and get to closing.  One underestimated method is the “camp out sale.”  What is it and how do you do it?  Well quite simply, when things begin to stall you basically pick up the phone or send an email and tell the prospect you will be in town the next day or week and would love to come by.  You then “camp out” and don’t leave until you get an answer, presumably yes.  I have to warn you that you need to employ this method selectively and have the right criteria (relationship with sales prospect, size of deal, timing, etc) in place because if done the wrong way you can waste a ton of money and time trying to close deals.  Email, phone calls, and video chats are great, but sometimes you just need to be there to move a process forward.  I have seen this done right many a time and can’t tell you how effective just showing up can be.

To that end, I was on the phone with an entrepreneur yesterday who was trying to get their round closed.  The investor wanted to set up a call to meet the other co-founder before making a decision.  Like any great entrepreneur would do, he simply said I will be there tomorrow and proceeded to book a flight for first thing the next morning.  I will let you know how this story ends but I can assume that an entrepreneur who shows that kind of hustle and willingness to walk through walls to make their company a success will surely leave a great impression regardless!

Cutco Knives and startups everyone in a startup needs to learn how to sell

When I worked for Cutco Knives one summer in college selling the world’s finest cutlery, my dream was to sell the Homemaker +8 at every meeting.  It was the Rolls Royce of knife sets and in every sales call I had, I always tried to flog the deluxe set.  Of course, more often than not, I left with selling a spatula spreader or much smaller set.  Many a memory was brought back yesterday as my wife and I went through a sales pitch for Cutco knives from an enterprising college student.  His pitch was great…and entertaining…and the same from 20+ years ago – cut the penny with the scissors, cut some rope, lay out the catalog, and even the close.  Would you like the Homemaker +8 or the Homemaker +4?

How about the Essentials +5 or the Essentials.  As I sat in on the sales call, what I remember most about selling knives was that it was a tough and lonely job and my friends teased me the whole summer about being little more than a “door-to-door” salesman flogging kitchen utensils.  Looking back on that experience, I recognize that I learned so many valuable skills about selling and more importantly about myself in terms of constantly being rejected but still having the optimism and fight to move on to the next opportunity.  I am sure by now you are thinking, what does selling knives have to do with startups?I strongly believe that every entrepreneur should take a sales job at one point in their life, even for a summer.  Whether you are a tech guy or product guy or executive, you have to remember that you are always selling – not just to the external world like customers and VCs and partners but also internally as well, drumming up support, getting the team to buy into your ideas, and much more.  I believe there is sometimes a stigma for being a sales person but in reality no business can ever succeed without someone selling your product or service.

Selling Cutco Knives was great because I went through sales training which at the time seemed incredibly cheesy, became enamored with trying to win salesperson of the week and month, and learned how to use referral based lead generation to create sales appointments.  I learned about creating a great script to use on the initial sales call (great understanding for understanding the life of an inside sales rep), how to use a presumptive close (can we meet this Wednesday at 3 or 5), how to properly make a sales call, how to read my potential customer, and ultimately how to manage my own personal sales pipeline and funnel.  From that experience I went on to start my own window washing business and develop a deep appreciation for sales reps and how hard their job really is.  And I find myself selling every single day in my life as a venture capitalist – selling to potential investors, selling my value add to startups, selling to portfolio company CEOs on why they might try another way to accomplish a certain goal, and selling my own partner on why we should or shouldn’t do a certain deal.  If you are wondering what happened at the end of our sales call, my wife and I ended up buying the lovely Homemaker +8 and gave our rep a boatload of referrals.

Put your users first! focus on an amazing customer experience before all else

As a VC who invests in seed and first rounds, I love revenue just as much as the next guy.  However, the focus on revenue should play second fiddle to a user/customer first experience.  Over the years, how many times have we seen companies grow from next to nothing in user base and somehow forget why they got there in the first place?  Yes, the answer is because they made an insanely great product or service that catered to their users.  Over time they then figured out how to generate revenue without destroying the delicate balance of putting the user first but generating revenue for the business.  In an article in the NY Times yesterday, there is a great quote from the MySpace founder, Chris DeWolfe:

“The paradox in business, especially at a public company, is, ‘When do you focus on growth, and when do you focus on money?’ ” said Mr. DeWolfe. “We focused on money and Facebook focused on growing the user base and user experience.”

This a question that we constantly struggled with at years ago and now have found to have struck the right balance.  I remember some of the management and board meetings where we would all intensely debate whether to add an extra advertisement or not on a certain page and how that would impact the user experience vs the revenue line.  While this sounds like minutiae and too much detail, I would argue that if you don’t have this debate internally that you may be tilted too far in one direction.  In the end user experience won, the page views continued to grow, and consequently revenue improved significantly.  Over my 15 years of investing, it is pretty clear to me that the users are in control, keep them happy, and they will come back for more!

Don’t build an empire overnight – lessons from FreshDirect and Webvan better to start small first and then expand

The other day I received a direct mail piece from FreshDirect, the online delivery service based out of New York.  What struck me is that the service has been around for years in NYC, and it is now getting out to some of the suburbs in New Jersey.  In fact, after having done a little research, FreshDirect was started in 2002 and now 8 years later is delivering in New Jersey.  This is in stark contrast to WebVan which was the first online grocer.  What brought WebVan down is the fact that it tried to build an empire overnight.  And yes we should all know from our history books that empire building leads to empire destruction eventually.

It is pretty evident that FreshDirect took its time to understand how to enter a market, serve it well, and make it profitable.  In other words, FreshDirect spent its time to build a repeatable sales and market entry model before moving on to other locations.  In addition, its expansion is still local based-close to its distribution point in Long Island City, NY.  You don’t see the company going out to San Francisco – rather, it is slowly expanding outside of its first core market, NYC.

As an entrepreneur, you should take the same approach before expanding too quickly.  Whether you are hiring a sales force for the first time or expanding territory for your product or service, make sure you have a repeatable sales model before conquering the world.  More often than not, I meet entrepreneurs who raise too much money too fast and expand way too quickly before having a product that is fully baked and ready for primetime and before the company knows who it is selling to, how it is selling to them, and what the core value proposition is.  Get everything right in your first market like FreshDirect and you will build a great company and avoid monumental disasters like Webvan.