Ventures Podcast with Will Little

Ventures Podcast with Will Little

Ideation to Product-Market Fit, choosing revenue models, and general advice for founders. This interview is a transcription from the Ventures Podcast with Will Little. Why do startups fail? How will you make money?

Will:            Hello everyone and welcome to ventures I’m excited about today’s episode with Dave Parker his new book “Trajectory”. Those who are on video here i have it – “Trajectory start-up ideation to product market fit” is full of gold for founders that are going through the process of building a start-up, forming a team selecting how they think about their revenue model and more. So he and I get to talk about his story – why he wrote the book? How his journey as an entrepreneur informed how he thinks about the world of business and start-ups?

And we talk about even the emotional ups and downs and how to seek advice and how to approach the venture capital industry? And more, so I’m excited to share this conversation with you if you are listening you can also watch by visiting wclittle.com and there you’ll see more extensive show notes to the things that we talk about today and it’ll be sure to link to a lot more of Dave’s resources and if you are watching you can also listen anywhere that you get your podcast you can just search for Ventures so with that please enjoy this conversation with Dave Parker.

[Music]

Will:            Alright Dave welcome to the show.

Dave:          Thanks Will, glad to be here, fine to catch up on all kinds of friends.

Will:            Yeah. Now I’ve really enjoyed working with you, getting to know you the last decade or so and I’m amped for this conversation. And to dive into the book that you have cranked out here recently, which many of colleagues and I are really amped to share with the founders that we work with and the material in there is fantastic, so well, well done. Would you mind just starting by telling us a little bit about your story, your journey thus far?

Dave:           Yeah, yeah, so 5 time founder sold 3 closed 2, one and a pretty epic failure. Like, you know, crater dome kind of sense, raised about $15 million exited about $85 million to all singles. No, no unicorns, no fairy dust, or pixie dust that should be. So again, I get different things to go with. So raised in a little town in southwestern Washington, my father was not an entrepreneur. My grandfather, however, was an entrepreneur. And he owned the first Ford garage in 1911 in Kansas, Washington. Which fun, you know, History Channel fact, they didn’t actually start the assembly line until 1913. So they sent parts of the Model T’s out to the field where they would reassemble them so he was an early – early you know, when new trends come out, right he was a new trend guy and he jumped onto the Ford Motor he sold it too early. But he started the first phone company in southwestern Washington. You see there’s little phone back there. In his next business and sold that too early too. So I’m consequently I’m, I think this next month will close my 14th transaction. So by contrast to him I the answer is I sell them all – if I can yeah.

Will:            Ha-ha, nice. And where did the entrepreneurial bug for you like when did you start? Was it super young? Or was it a little bit later, when did you realized the entrepreneurial bug was in you?

Dave:           Probably unemployable. That was probably early indication that I didn’t know how to read at the time. Early on, worked in the photography industry and was very entrepreneurial there with a little bit… if had a little bit different mentorship, I probably would have stayed to a professional photographer. I worked for United Press in high school and sat on the fourth floor of the Portland Trailblazers for two seasons and honestly didn’t know how good I had it. And for a little adult supervision, I probably would have excelled there.

Got to college at the University of Washington, remember the movie Caddy Shack? That’s how I got to college. I applied to one school, because I had one scholarship or went to go to school and then spent summers working back at the paper mill in the town I grew up in so which was a good driver to get you back to college. Like if you wanted motivation to get back? The answer was, yeah, go work in a lime kiln or, you know, do something crazy like that. It was a good motivator.

So first company was in 1998, though I was doing my own consulting sort of stuff off and on prior to that, but I kind of recognized early on that it’s like, I like my own ideas best and I can join a train in that’s rolling, but I probably only can join it for a little limited time.

Will:            Yeah. Right. So tell us about your journey with Startup Weekend?

Dave:           Oh, yeah. So Startup Weekend, for those of you who don’t know is an event that happens globally. It’s my first Startup Weekend experience was at Seattle University about 11 or 12 years ago. It could have been 13 years ago. And I took my son who was then 16. And we went in I was a coach and a judge. So you show up on the way the program works is Friday night, people come in about 125 people, people will stand up and pitch their ideas, and people will join their teams. And then they launch a demo or prototype. By Sunday evening in front of a group of judges, you give them feedback on the idea.

And we went in Saturday morning to kind of be a coach and walk around and talk to all the tables and people who broke into their teams. At that point, they were still super high energy, because they got a little sleep on Friday night, but would get even less sleep on Saturday night. And my son walked out of there for the first time and was like there were some really stupid ideas. And I’m like, well, that’s always the case. But think of startup weekend as kind of like a pickup basketball game for startup founders, right to give you a chance to validate your idea. In everybody context, we sold that company to TechStars in 2015. But the prior 12 months to that, we had done 1265 events worldwide in 120 countries and with 74,000 attendees.

So full credit to the team that I got to join in process was they had created a movement. I think the average age of the team when I joined was 27, maybe 28. So I singularly brought up the average there, that’s a good performance of care. And we scaled the events from about 500 to 1200, in the time that I was there, and we sold the company to TechStars. And then they made it part of their community program.

So Startup Weekend, startup next, which became startup boost today. And then Startup digest, which is the largest email newsletter in the world, for startup, curious folks. So, super happy where it landed, and they’re doing great programs today. Obviously, during COVID era, it’s weird, but they’re still doing great programs worldwide.

Will:            So for you personally, why startups? Like what is it about?

Dave:           I think it’s like choosing a puppy, right? I mean, sometimes well, that puppy chooses you and sometimes you choose the puppy, right? I feel like startups are similar, right! I don’t know that it was a deliberate thing.

Like my first my first startup I started in 1998. I was working for a large systems integrator. So I came to the telecom world, made the shift to IT staff in IT services. And, you know, I think I’m naturally curious, like, I’m even curious about stuff I’m not curious about. I’m a business model junkie; I’m always looking for how does that work together? Like, how’s that business model work?

So I was working for a large systems integrator in Seattle, our biggest customers, Microsoft, I ran sales for all the non Microsoft side. And every month my Microsoft represented come to me and say, hey, how much stuff you guys can sell in every month? We don’t sell software, we sell services.

And after the, I don’t know, fifth, sixth, 18th time he asked, right? I was like, wait a minute, am I the only one that doesn’t sell software? He’s like, no everybody doesn’t sell software. I’m like, why is that? You got to figure out licensing, it’s super hard. And it’s just not, you know, there’s no margins.

So we built the company from licensed online was my first company, we built a configuration tool that allowed systems integrators to configure what the right software licenses were for their customers, and then we would do the transaction through to the small and medium business. So the systems integrator could take the sale, and get credit for the sale of Microsoft, make a little bit of margin, but most importantly, keep account control and not lose their account to somebody else.

So that company went from zero to 32 million in sales in four years, and 150 people, I have scars on my back have healed, but I still get a little twitchy at times, because we – in that phase of growth, you’re like, it’s just, it’s ridiculous. And when you get past the first round of people that you know, and you get into the next round of people you don’t know like it’s a kind of a crazy way to grow a business. We sold that company in 2002. If you remember back for your listeners this it wasn’t, it wasn’t a great time to sell a company. So tech – bubble, post 911, so we got the company sold, but it wasn’t a great exit and learned a ton. Would I say that was a success? No I think it was kind of a failure.

Like we were returned some capital to investors, but we didn’t give them a great return by any means. So brutal timing, lessons learned, but I got a company sold. So people will often say, well, wasn’t a failure. I’m like no, actually, it was because I didn’t return all the capital back to the shareholders.

So from that standpoint, you know, investors are big boys and girls, they understand that when they invest in a startup, sometimes you get returned, sometimes you don’t. But for me, the only people that ever say, well, Dave, it wasn’t really a failure. You learn something from it. Those are the people who’ve never actually done this. It’s been my observation. Maybe it’s not true, but for those of us who’ve done it and succeeded and failed, the answer is no, there’s definitely successes and there’s definitely failures.

So that was the first company. It was really around the problem like, aha, I saw friction, I saw a problem, knowing what I know now, will around the data that we’ve done in the book, I’d be like, but will I start that company again. Oh, hell no. Because you were in a business with margins were really tough, right? A friend of mine who’s become a mentor is a guy named Dave Berkus. So he wrote 20 years ago, what was called the Berkus method for how do you value pre revenue Startup Company, just 20 years later, is still the standard of how you value them.

And Dave had a quote that said, where there’s mystery, there’s margin. Like there’s, you know, where there’s complexity, you can you can find margin in that mystery. In the case of like Microsoft licensing, there was no mystery, like there was wholesale pricing and a rebate percentage.

So we were going up against, you know, our next biggest competitor was 1,000,000,002, those were the guys we sold to. And then we had a 13 billion and a $15 billion competitor, and Microsoft was our number one product. So it was kind of like dancing in rotation with gorillas, you’re not through till they are, and a kind of a rough business to be in, in retrospect, I’d be like, you do know, there’s very little margin in this business and not a lot of room for errors. So I would definitely not start that business again, knowing what I know now.

Will:             So I have a million questions around your book. And for those that are watching, I have the book here with me and really, really enjoyed so many different parts of it. And I actually, remember when you and I were in Chicago, let’s say was six, seven years ago, we were sitting down with a founder. And you gave them the business model spiel you gave you said, Well, if we’re going to start a marketplace, it’s going to be this, here’s the dynamic, here’s the roadmap you, you really helped me and others think about the reality that, hey, we’ve been playing this tech startup thing for decades now, there have been blazing trails, there have been trails that have been blazed ahead of us. And we may, you know, we may want to be a little mini historians here and learn from people and learn how all these things happen. And so I really admired the way that you have, you know, some people say that they’re data driven. You, my friend, espouse this. Even in the sort of the virtual green room before this conversation. You showed me a bunch of spreadsheets and data about multiples for exits, and all these different business models. So I love that, admire that. But let’s maybe just start with the like, why write the book? Why this book?

Dave:           Yeah, so two things from a wide perspective, one is coming out startup weekend, we’d see people, you know, Monday morning, Sunday night, they’re like, really, really joking. I’m like, Whoa, please stop. Like before you do that. There are some things you can know about your idea. Right. And so I will say there’s been at least three unicorns I know that come out of startup weekend, right.

And one that people might know in the US is called rover. So Rover actually was a company that Greg Glassman, who was one of our board members. And one of the venture capitalists in Seattle, went to a startup weekend, and it was like, we’re gonna do Airbnb for pets. That was the idea right? And it was valued at over a billion dollars a day, you know, some folks there as well. But there were two other companies that were billion dollar companies that came out of one was out of Brazil, and one was out of Spain. And what’s interesting about it was, you know, this, this whole thing of like, the founder failure rate is so incredibly high well, and it’s 70 to 90%, depending on what source you believe.

Will:            Right

Dave:           And the first question was, as well, how do I help founders not – there’s 1000 things that can scare you while you do a startup, right? This is Indiana Jones in the Temple of Doom, right? Every time you turn around, there’s something that can kill you. I can’t keep you from doing that. But there are things that can help you do. So that was one of the motivators was like if it’s 70 to 90%, can we bring that failure rate down based on data? And based on what you can know?

And the second thing was, is that when you’re doing a startup time matters so much, right? So if I can help you do something in 6 months, instead of 12 or 24 months, you can always earn money back, right? I mean, you and I both made money and lost money in enterprises, I can always make the money back, but I can never make the time back. So if I can help you compress the time, then Mission accomplished.

So number one was decreased the failure rate in even a small way, which made me super happy, and then compress the time it takes you to learn. So going back to your kind of previous point is one of the things is demystifying this concept of oh, it’s in my business model.

And honestly, as a VC, I’ve been in venture capitalist a couple of times – it’s never stuck. You know, and because I’m always transparent with the founders versus like, I think your valuation is high right? Because there’s information asymmetry in venture separate topic.

Yes. So the question then came up, well, it’s in my business model. So in the book, I break down an event of what is actually In the business model, so think about this, like doing a soufflé, right, you have to have all the ingredients, you have to follow the recipe, you have to bake at the right amount of time. And if you slam the door around, it’s gonna fall. And there’s a bunch of places within your startup that is super precarious.

So the business model has three components in the battle. Number one is how you create value. So creating value is your product, your service, your market, and your team. Think about this is all of the costs associated with building your product. So that goes into creating value, you can have a product, you can have a service, you could have a combination of the two, how many engineers does it take me to build it? What’s that text platform? How am I going to build it up? How am I going to support it? Who’s going to host it? All of those costs are costs associated with building the product? So that’s just one circle of event.

So the next circle of event is how do I deliver the product? And delivering the product has a number of components as well? How do I monetize it? How do I market it? How do I sell it? How do I price it? Those pieces are the four components of how I deliver value? That’s how a customer engages with me to buy the product. Now I know some of the audience because we do and I know them all right, it’s like I just built a great product, people will find me? And the answer is no. Or at least they will not find you at scale right? So you have a cost associated with building the product, and you have costs associated with selling the product. So that’s circle number two.

The last circle is how do I capture value, and that is my gross revenue, top line sales and my net profit. And it’s an outcome that you can’t change based on the previous two pieces of event. If your price goes up to build it, your margins are gonna go down. If your price goes up to sell it, your margins are gonna go down. So if you look at it from that perspective, you are like I’m in control of these variables cost to build, and I’m control of cost to sell, but the market impacts both of them.

So that then gets you to a further breakdown of like in the cost of delivery like what how do I monetize this? How do I sell it? And we break down a lot of the, what and the how in the book, but I really push people to say you need to know your why first, and then that can help you with the what and the how. But I’m not going to give you the pontification reasons of why you should build a startup is it to change the world? Is it to make a billion dollars like you, you got to decide that yourself, right. But I can help you with the mechanics of what and how.

Will:             So what’s your standard answer? I know you talk about this from various different angles in the book, but for those listening in who have maybe just bought the book or diving in. What is your answer to the question? What is a good idea?

Dave:           Oh, yeah, it’s a great one. So in the first time we ran this, as I read this is a program about four times before I finished the book. That was actually my MVP. Yeah, right. So we were coming out of Startup Weekend. And I’m like all these people there. And I’m like; you should come to this thing – we called 6 months startup because we had a weekend event and a week event. And I’m like 6 months sounds good. Totally misbranded in retrospect different – different topics

But one of the people in the very first sessions came up to me afterwards. And they’re like, Oh, this was awesome. I’m super inspired. And I want to be a founder, but I don’t have an idea. And I was like, got me thinking like, how did you get in here? Because you know this is a – all about, how do you take your idea and grow it. In an unusual manner for me, I said, let me come back and be thoughtful about that answer instead of being stupid. So I actually took it away. And we actually wrote a chapter about it, or I wrote a chapter about it in the book about pure 11 frameworks for what makes good ideas. They’re not designed to be all of the frameworks. But the concept areas like Rich Barton’s Power to the People thesis, that’s his investment thesis. So Rich, for those who don’t know, started Expedia within Microsoft, and then spun it out was the first company to spin out and go public from within Microsoft. And then Rich went on to start Zillow, obviously took public as well, and then became chair and then recently a couple years ago, became CEO again.

So his thesis was how do you take an opaque data set and make it transparent to the users, and his takeaway from it was power to people. So one of things I’ve outlined in the book is 11 frameworks for that. So another good example is what I call the waterline example. Like when you think about every problem in your market that exists, there are problems that fit above the waterline and problems that are below the waterline. And what I mean by that is, there may be small problems above the waterline, but you can actually make money there. We look at some of the big problems you’re like, that’s below the waterline, but how do you change that, right? And the answer is, you invest in the above the waterline ones first, and then you figure out how to pull the waterline down as you go.

But like you and I have been in the education market, as well as like, how do you transform education in America around retraining into 10s of 1000s or hundreds of 1000s of people? And the answer is, wow, that’s a big problem. Where do you start? Right and you have to start above the waterline to make work.

So in the book, if you have six ideas, or you have one idea, the thing I encourage you to start off with was, here’s the topic on ideation, here’s how you do customer development and go find out if the customer actually cares. And then have the process for tracking. So one quick side note on that Will, you know, I mentioned my grandfather before we were talking. So in 1911, you had the Ford garage. And, you know, people often will say, well, Dave Henry Ford said, If I asked my customers what they wanted, they tell me a faster horse. And I would remind people that that was true in 1910. And today, we have this thing called the inter-web.

So people have alternatives, and they have choices, but you need to go out and how you ask those questions definitely matters. And I’ve outlined a very step by step process that kind of recognizes kind of best practices from Steve Blank and Eric Reese. But it’s really designed for earlier in the process, like lean startup is an amazing book. And Eric’s thesis is when you have 1000 unique users every month, this is what you do right? For me, the folks listening don’t have 1000 unique users in a year or three years, they have nobody. So the question is what do I do first? And that’s what I’ve tried to answer in the book.

Will:             Yeah. So I’ve noticed, you know, working with startups last 15 years or so that there’s a characteristic of a founder that would say that they have a product vision, and they’re just going to carve out a market, whether people like it or not, they always point to Steve Jobs and the iPhone, you know, and they’re like, this is what the people want. And then there’s the people who read Eric’s material, and think I just need to measure everything. And based on data, I’m gonna move my product feature and product roadmap on x, y, z. And as you know, by my backgrounds in science, you know, I spent better part of a decade in the bio engineering lab. So I take data and statistics very seriously, because it was a matter of graduating or not graduating for me. So, it still sort of triggering for me. All things, statistics and data, especially when it’s not done well, so I’m a little bit of a pet peeve of mine, when people do statistics haphazardly, so I’m always cautious when I work with founders of are they actually just optimizing for a local maxima, right? Are they collecting data based on a relatively low number of data points, and making decisions about their products that are actually leading them in a direction where there’s a much larger market and much larger opportunity over here, but they miss it. So how do you advise and how do you think about the dance between product vision and pivoting based on data?

Dave:           Yeah, it’s interesting. I’ve done a bunch of stuff in the emerging markets and mean, and I’m starting to do some stuff in Sub Saharan Africa. And one of the consistent trends Will is that people will think about, like, I remember doing a startup weekend in Moldova, right? And people think about their total addressable market as Moldova. And I’m like, well, what, what do you mean Moldova? Like how about, you know the rest of Central Europe? And how about all of Europe? And how about the globe? And I think founders can think about the markets they’re in, which is super interesting. In the US, we have a big market. But if you’re in a niche market like Egypt, the answer is they’re going to think about Egypt and the GCC.

But I will come back a little bit with back to the data set. If I look at the unicorn list, from CB insights , the 400 unicorns over the last three years, almost all of them have something in common that doesn’t leave with product first, that leads with total addressable market first, and what I would call a nascent market. So most of the big players have gone after a category that didn’t exist as a billion dollar market when they started, they may be a multi-billion dollar market today, but when they started, it wasn’t a multi-billion dollar market.

So a very consistent trend there is that that market matters more than product. So and what I mean by that is that a great team and crappy market is going to produce bad results, right? So my analogy is a wave. But if you want to go to the north coast of Hawaii and ride a big wave, the answer is the product needs to be right, this report, and the timing needs to be right or you wait a long time. Now if you want to go the south coast of Hawaii, and right away, it may be three feet, right? So there’s nothing super exciting about that when investors will look at it and say like, so my point is a great team with a great product in a super tiny wave are going to get really marginal results. They’ll get crushed from an investor perspective, because there’s no outcome.

And if they’re truly you know, the self proclaimed visionaries you find on LinkedIn, then it could be three years before the product is actually ready. And this I’ll tell you, that’s super expensive, because you’re trying to train the market and you’re like, you don’t have enough money to train the market.

So I think market comes first is my observation. I used to say team comes first I’ve kept the blog up to just institutionalize it not have revisionist history. Today, I’m definitely under the opinion that you market comes first. And timing and market together make a huge difference. So, I’m glad you have a product vision, that’s awesome. It should be informed by data, which is customer reviews. And hopefully you do have a really transformative product at the end. But keep in mind, think of this as I have launch and I have scale.

A lot of founders live their life as if they’re in scale today. But I’m really just trying to get them from launch and survive this, you know, the terror part down here before you hit the hockey stick, and compress the time it takes to get to the hockey stick. Because that time is gonna exist. And if you don’t have a budget, you’ll just die. Which is why the math is the way it is. So keep the product vision, but also look at my reality, what can I ship in the timeframe I have, with the engineering channel that I have, with the budget I have and you’ll keep iterating on that as you go and get to the hockey stick is the goal. But keep in mind, you have to survive long enough to get to the hockey stick. Yeah. There were founders kind of, I think, especially first time founders a little bit naive. You’re like, Oh; I didn’t have enough personal runways? Should I go raise money? And it’s like, well, if you don’t have any traction, you’re not going to raise money these days.

Will:             Yeah. I really liked the analogy of pick the side of the island that you’re going to surf in, right? Do your homework on your market? Pick a market. Yeah, no, that’s good. And I think even to extend that the surfing analogy even more or less, so you find the side of the island you’re going to surf and you build a product, you got your surfboard, you’re riding this wave, and maybe the how to pivot your product is almost like which way you go, like for those who have surf, you know, if you go this way, sometimes the wave is amazing, and you have a nice long run. And if you go this way, it’ll collapse on you or the wave falls apart or something. So how do you advice founders, when they’re on that wave? The wave is going, how do they know whether to turn right or left? Like how do you actually use data to inform your product roadmap and to and to inform your growth roadmap?

Dave:           Yeah, I’ll switch analogies with you a little bit. Because I think it’s all about training. Yeah. As you start to do customer development interviews, one of the things they outlined in the book is a process to capture that customer data and capture email addresses and capture who said that they would buy it if you had this feature. Now, if you only do five customer interviews, you can remember all of them. Well, technically, you can’t, but you feel like you. But when you get 50 or 100 customer interviews, you definitely can’t remember all of them.

And let’s face it, if you and I had a product ideas day, and we had a list of 300 people who were interested in this particular product, man, our time to ship a product that that group had consensus on would be so fast, right? Most founders don’t have that list of 300. So you’re going to start this month, I’m going to start doing interviews. And  the last question I’m going to ask is, I’m asking, Hey, well, can I put you on my monthly email update for our progress? Almost everybody will say yes. And the ones who say no, frankly, were never interested in the first place, and you don’t want them there.

But in a year, you’re going to have 300 people on that list. Hopefully, you know, at least 200 people on that list, right? Who when you send out a monthly update and say, here’s what we shipped this month, here’s what we’re going to ship next month, and here’s where I can use your help. Now that email should take you about 20 minutes to craft. That’s it. And you should send it out regularly on the – you know, first or fourth or whatever day of the month.

Now, most people aren’t going to respond to you. But the people who do respond to you are going to become your super fans right? And they’re going to be like, oh, that feature is awesome. Like, if you added this, I would buy it. But again, if you don’t track the data, it won’t matter right? You’ll be like; I’m convinced that everybody wants a black car. Right the black. So and that’s really not what you’re building, what you’re building is for early adopters, people who be fans, and again, you’re building, I have an ICP ideal customer profile at launch, It’s different than my ICP at scale. But I have to sell it to those customers.

And in the book, I outline the concept of launch addressable market, right versus I got this abstraction, which is pretty academic called Tam and Sam and Sum and I try to connect that to your first 10 – 101 customers, as your launch addressable market is like at the first hand, you and I, as co-founders are going to go sell them our self. At 100, we’re probably not gonna have a salesperson, and 1000 we’re definitely gonna have a sales team. But until you and I can sell the first 10 the answer is we don’t know. And that’s really about how do I connect that abstract concept continuum? With my go to market strategy you have kind of 10 – 100 – 1000.

Will:             Alright, so let’s say a founder has a small team. They have identified the market, they’ve assembled the product, and they have a reasonable go to market strategy. How do they best engage the investor community right? At this point, maybe they’re just done their own sweat equity. Maybe a little bit of friends and family money or something, but at what point do they start having conversations with the investor community? And how should they even think about the industry in general?

Dave:           Yeah, so great question. So one of the things that I’ve found, and it’s what I call stage appropriate capital in the book, right, there are what you’ll find from meeting with, you can get meetings with VCs, right? Because they take meetings for a living, that’s what they do. And they’ll say nice things about you. Oh, that’s awesome. Let me know when you have traction, and let’s talk again.

Now, will they define what traction is? And the answer is no. And so you felt good about that meeting until I’m going to tell you right now, it actually wasn’t a good meeting, they were blowing you off and patting you on the head, right? So stage appropriate capitals, super important, like how much money do you need? And for what deliverables becomes your first question, we need $250,000 to finish this prototype into a scalable version can launch an AWS. Awesome!

So assuming you’ve figured out the market size, the market size is interesting. Keep in mind, the early days you’re raising about, this is an awesomely big market. And we have a kick ass team, and we built a great product. Great, you have no data to show the investors, they just have to believe in you and have to believe in the market. But as you start to go out and talk to investors, you’re going to do a similar process with the investor updates. Now, originally, the first 6 months, investor update, and customer updates can be the same. But after about 6 months, if you’re really making progress, we’re going to separate those investor updates into two things. And the updates can be slightly different, right? This is what we build. This is what we learned. So it’s what I thought, what I learned and what I’m doing about it. So we thought this, we learn that, and this is how we’re approaching it.

So my last full year working for a venture capital fund in the northwest, I looked at 167 deals, and then we invested in two. Now, I looked at super, super early deals. So I stayed in past the fund formation, they were raising fund two ended up not raising as much as they thought and they weren’t gonna open a Seattle office, I’m like, you guys don’t need me to do that you can do it on your own. Right, so the challenge there is, I have to begin to build relationships with investors before I have something to actually get them to invest in. So I’m gonna build a profile list, and I walk you through in the book a very step by step, this is an enterprise sales process, I’m going to build a list of people who have interest in this space based on their crunch-base profile, their angel-list profile, etc. And I started to build out a list and make and do outreach to those folks, and give them an update on what we’re doing.

So keep in mind of the 167 deals I saw that last year, 90% of their plans were built on that I can’t do anything in this slide deck without getting a million dollars from you and somebody else, or somebody else in combination which is super painful. Because I’m like, Well, what are you gonna do next when we don’t fund you like tomorrow? And they’re like, well, we’ll have to rebuild our plan and like, go rebuild your plan.

So 10% of the companies were like, Listen, Dave, this is where we’re at, this is what we’re doing. With or without you, we’re going to go do this. I’m like, Oh, I want to watch that. Yeah, now with you and with that million dollars, we’re gonna take this thing in q4 next year, and we’re gonna move it to q1 next year and take this thing in q2 next year, we’re gonna move into q4 this year, we’re going to take everything we’re going to do without you, and accelerate the pattern. I really want to watch that one.

Will:              Yes, go founders. Listen to that, that Oh, my gosh, Dave’s advice, right there.

Dave:           Its painful…Now the two deals we invested in, amazingly enough, we watched them, we saw their monthly updates. And they happen to be the ones that said, Hey, you know, we told you, we were gonna do this, we’re actually 120% of plan. And I’m like, really, we should definitely talk. So what changed in that, and these are, again, two deals that we lead, not just deals we invested in, right.

So if you have a plan with or without investment, then you exceed the plan with or without investment. You don’t have to worry about investors will reach out to you. Right, and one thing’s for sure about finding a lead investor, which is super critical, and I talked about in the book, is you have to be able to – lead investors will pull your deal along. Like you don’t have to call me and say, Hey, Dave, you still want to meet? Like, if I’m going to be your lead, I’m going to pull the deal, right? You don’t have to push the deal right.

So the first off is you need to be in the top 10%. And the top 10% says this is the plan with or without you. And this is how we’re gonna be scrappy and get it done. Yeah. And then if you actually continue to do it, you know, that’s, that’s where investors get super interested versus you don’t have to sell me on it at that point, because I’ve been following you for a while and those monthly updates are actually doing the heavy lifting for you, which is super important because you got to, you know, as a founder you have your top 10 list is huge. And you’re under resourced and understaffed and, you know, you’re under everything, right? And you’re being a generalist because you can’t hire to do everything you need to get done,  so having something to help you do the work for you by doing some heavy lifting is super important.

Will:           So how do you think about no code right? There’s the landing page, no code at all, the number of ways to validate your idea in a market that you want to play in and a team you want to play with, seems to have been exponentially increasing the last 5-10 years. How do you think about the whole validation game and no code movement?

Dave:          It’s super exciting. Like this is like, I think this is probably aside from AWS, you know, like, when I did my first startup, we raised millions and millions of dollars to have, you know, a cage and Exodus and a backup location in our building with redundant servers and physical hardware. And like, AWS has done so much to bring the cost of doing a startup down. And I think any newer folks like, you know, bubble, and others are just doing amazing things to make that low code, no code thing work. So quick side note that, in the time, if you’re still looking for a technical cofounder, and you’ve been looking for technical cofounder for a year 18 months, I would tell you, you should be more productive with your time and learn no code or learn to code.

Now to be clear, I am not a fast coder. But if you said, Hey, Dave, you have an idea. Can we hack something together over the weekend? The answer is absolutely. Like I wouldn’t hack something together and go test it out. I’m kind of an extreme man, like I would even do landing pages and spend $1,000 on Instagram ads to validate an idea before I spent $1 building anything, right? I would send people all the way through the checkout process and then throw them a 404 error and tell them I’m out of inventory. I wouldn’t capture their credit card information just to be clear. But short of that I would send them all the way through the process.

And founder sometimes you’re like petite, you will disappoint people, I’m like, well, it’s an MVP, you’re going to disappoint people anyway right. So I mean, the definition of an MVP, like, you know, Reid Hoffman’s comment was, if you’re not embarrassed by it, you waited too long to ship it. So you know, I tend towards that predisposition anyway. So when I look at the low code, no code solutions, its super exciting, you can get a clickable demo super fast. Is there a learning curve for you as a founder? Of course, you need to spend $10,000 on a prototype? No.

So, you know, between things like low code or no code, and I haven’t found a great market on Fiverr for that yet, but that markets coming up for sure right. But like, you know, I will look at my task list at the beginning of every week well, and be like, this is something that can pay somebody on Fiverr 25 bucks to go do it right, right. And I don’t even like, don’t -Don’t step on dollars to find dimes. Like if you can find somebody on Fiverr or Upwork to build a prototype where you’re no code, you still have to build stuff to write a spec. So one of the things I outlined in the book is a very step by step four step process for like, what are your requirements? What are your specifications, stuff that you know, where like, what’s your tech stack, like? Like your MVP, you gonna throw it away. So does have to be on the ultimate right tech stack? Will be nice if it was, but if it’s not, it’s okay.

So those solutions are going to open up a whole new area and drive the cost of doing a startup down just like AWS did, which is super exciting. I wish I would have thought of it, I have to be honest and slightly jealous.

Will:             So let’s talk about three types of debt in a startup that maybe founders don’t think about very much; operations debt, technical debt, and growth debt. Obviously, technical debt, is when you just go off and run and you’re building lots of lots of things, you’re not writing enough tests, or you have lots of spaghetti code everywhere, because you’re just trying to get the idea validated, which I’m a fan of like, I’m very comfortable racking up debt in these three areas. But how do you advise founders with regard to the we’re going to go we’re going to ship we’re going to get data from customers versus like cleaning up the house and paying off debt in those three areas? Or how do you even think about it from a framework perspective?

Dave:           Yeah, well, I think it has major milestones, right. So as you look to do… think about this way, at some point, you’re gonna ask the question, hey, I think we need to increase our option pool, right to take on more people, those should be times you look at the same thing for those operational forms of debt right. Because we’re gonna go out and raise institutional running with a venture capitalist. How much capital do you need? And you’re like, well, actually, I need more than I think, because I have, you know, we don’t have good processes in place that will scale operation. But right, we have code that we’re supporting three or four different ICPs.

So I remember TA McCann launched a company called just the he sold a blackberry way back. But at one point, they had to drop their initial ICP or ideal customer profile, the product had shifted over time, and that ICP was no longer a customer they were supporting. So though hard decision there was like, I don’t want to turn them off. Because we know all of them by name, they were a first 10 of the 10 of the 100. And they had to just make a decision to like, send him notifications, and let him know that we’re shutting those features off, because it couldn’t continue to support it. Right, the support cost alone was, you know, a single person versus working on the new code that allowed them to scale.

So I would kind of look at those things as like, here’s, every time I’m looking at the next tranche of funding, I’m gonna look at those things and say, Well, let me be realistic about what’s here, because at some point, you’re gonna make a decision, I have to answer this technical debt decision or build this new feature. But if I build this new feature, it can crash, right? And your head of engineering is like, Dave it’s gonna crash and you’re not technical. And you’re like, I think it will be fine right? But when you’re head of engineering says, it’s going to crash, like our server loads are off the hook, or we’re going to show this picture of net supporting the whale on the right. You need to be ready for that as well.

And we’ll look at it in each of the milestones for fundraising right? When you bring on a CFO, right, I will tell you, I’m really good at details today. That is not my native state. But I had to learn that because I couldn’t hire it right? So like, do I hire a technical person or COO? Well, that’s simple, right? Do I have a revenue person or an overhead person? That’s Simple, right?

So in the early days, you’re always making those decisions. So if you’re not good at finance, that’s okay. You can get good at it. If you’re not good at no code, that’s okay. You can get good at it. Yeah, right. But you really have to prioritize your time and early days of a startup, you’re defined by what you say no to, as much as what you say yes to.

Will:             Very, very important. Yeah. So there are many, many hearts and nuggets in the book, but one of the key hearts is around the business models – and for founders as they’re formulating their idea; they’re identifying the side of the island to surf in. What was it about the business models and getting data around business models and helping founders think about multiples around business models and the well worn paths around business models that was so intriguing to you? Like why? Because you’re definitely the guy that I referred to, and refer people to when it comes to thinking through these different business models. Why? Like, what was it that was attractive to you?

Dave:           Well, someone ask this kind of an innocent question, actually, which is super funny. So a founder came to me in Seattle and said, Hey, can I have a copy of your financial model? And I was like, I’m a community guy. So I’m like, yeah, I’ll give you a copy. You’ll break it, and you want me to fix it. And I’m like, that causes problems. And then I was like, in the side, mine’s a b2b subscription business. And yours is a b2c marketplace business. And like, those are just, they share common language, but they’re just different right?

So that led me down to what I thought was an innocent path at the time, I went back to the CEO of Crunch Base, he didn’t have an API. And I reached out and said, hey, can he make a list of like every seed funded company for the last 18 months? Thinking, it’s a good place to start. So ends up being 2654 companies. So my son at the time was in college. So we hired an offshore team. And we went back and looked at their product and pricing pages on every company. And we basically broke down what revenue model are there, – so there’s 14. So because it took me so long to do it, that turned into a six year longitudinal study of those 2654 companies. Again, not my original intent – This feels like, you know, Frodo and Sam, with the edge of the Friar going, why are we leaving the shyer? You’re like, the shyer? Why are we leaving?

So it was never my intention to like, create the definitive business model guide, or revenue model guide. But what we learned in the process was we tracked these companies over five plus years. Anytime the team came up with another, I would reach out to the CEO and say, Hey, I’m doing a research project on blah, I’m trying to figure out what your revenue model is, what is it? And so some of the surprises, one from the data perspective was, the number of seed rounds has exploded from, you know, usually we do a seed round or pre seed round, a seed round and a round three round. Seed rounds went from seed 1 to seed 10. Seed rounds became much more milestone driven than they were historically, which means it was taking people longer to hit particular milestones was the observation.

The second thing is we looked at all the companies who failed. And then we went back to the Wayback Machine, which is the Internet Archive for the folks who don’t know. So you go back to waybackmachine.org. And you can look at their last cached pages, and 80 to 85% of the companies that failed, well, had no call to action, no price, and no really clear value proposition was kind of the three things they all had in common.

Now, they had things like Call us for price, which I will remind people from a go to market perspective is, if you’re my boss, and you tasked me to go find a product that solves a problem, and I find four companies, three of them have price and one of them doesn’t, I’m not actually calling you for price. It just makes me look dumb to my boss right. So there was no clear call to action, so that the AHA there was around pricing. So I ended up writing a chapter around pricing and how do you engineer pricing? And do AB testing on pricing? What’s the engineering approach for non engineering very, very systems thinking right? Which is weird -I know for my arts friends.

So that ended up being a chapter we wrote on, you know, it’s better to have a price out there and be wrong, right? Even if you have to set a higher price and discount the first year than it is to have no price. But because when you launch your price, you’re going to be wrong anyway right? It’s like doing a financial model, you’re gonna be wrong, orders of magnitude wrong is really the thing we’re looking for. So the 14 revenue models became the outcome of that. Give people context, if you remember back to Group on.

So Group on, it was a new revenue model at the beginning, revenue models are not defensible. If you remember the 1000s of Group on knockoffs, right? Because I think you were in Chicago at the time right, right. And there was like Group on knockoffs everywhere. So Group on ended up becoming a combination model of commerce in Legion, with a way to monetize by the models, and combinations are actually one of the models that surprised us as well, because in venture land, you’ll hear people say, we think you should be a pure subscription based business or a pure SAS company, which is super weird because SAS is a delivery mechanic. And subscription is a monetization mechanic.

So there’s a bunch of SAS products out there that are free. Right, so they’re not actually it’s not a pure play SAS is really a stupid thing for venture capitalists say but don’t argue with them right. And say, Dave said, I can argue with you about SAS. Don’t do that. That’s not what I said.

So yeah, subscription models, you have needed services. And we’ll go through all 14, you can look it up, I’ll make sure I give you the extra link to the excerpt for the book. So all 14 revenue models are broken down there, right? And then the thing we also went through is what were the conversion metrics and heuristics that mattered for each of the 14 models?

So, for example, on subscription, I have number of people who registered or sign up for a trial convert to paid, what’s the average revenue per user, and what’s the churn? So you may find that you have your own unique KPI for your business. Maybe like I’ve had this argument with a bunch of VCs, because we think that every company has its unique KPI like maybe, but while you wait to find that perfect KPI, here are the five that I would track, they are super prescriptive, like, so go find your unicorn, but start here, start with these.

So for each revenue model I’ve broken down. And then the point of that exercise is really to go to the founders and say, I hope what you’re building is unique. How you monetize it, is basically never getting, right. So there’s been one new model, two technically, coins and tokens were a new model that emerged during my data. Ultimately, there’s no drivers to that, it was a financing model with the SEC found to be illegal, right? So park that one for that.

Group on converted to combination. And then we had this new one called metered service, which started with subscription. And if you remember your old cell phone bill, that was a metered service, right, every texting you did you got charged extra fund. But in B2C, it’s a negative customer experience. In B2B, it’s actually positive customer experience, right? via Twilio number, my usage goes up, it means my customers usage goes up, which means I’m gonna get paid more. Yep. So AWS, Twilio is a great example. Azure is a good example. And by the way, what’s interesting is the multiples on exits are dramatically different on each of the revenue models.

Yeah, so give you a couple examples. So you and I decide to do a consulting company, we do a million dollars a year, it’s us and our team who’s delivering the consulting, and we decide, we’re tired of doing this, we want to move somewhere else. And go to Florida, or Austin often with all the other startup people, and we’re gonna sell our company. And so that million dollars subscription business, I’m sorry, a million dollar consulting business is gonna sell for roughly a million dollars, right? And will typically paid in what’s called an urn out, which means the company is going to use our cash flow for the next three years to pay it, there’s going to pay us in advance and then use the cash flow to pay themselves back. That’s not a bad exit, right. But it is a services business, which means it intrinsically doesn’t scale or is not adventure scale business.

So let’s compare that to a million dollar subscription business. So a million dollar subscription, business is going to sell between seven and $12 million and I would argue from a founder perspective, it takes almost the same amount of time to build a million dollar services business as it does to build a million dollar subscription business. I got to dig into some of that data to but to give you the range of differences, services is at the low end is one to one. Things like marketplaces, so think Ali Baba, eBay or Uber, are in the four to six range; niche ecommerce businesses think Lulu lemon to Wayfair. And this is all based on the public comp data is three to 8x.

Will:              And this is this is all top line, this is evident isn’t there obviously?

Dave:           You know…because startups are so tough to do on so if you can’t answer you do a multiple of you have to do multiple revenue. And in most cases, the companies that are going to be acquisitive, are big public companies who are buying revenue. So the reason I bring that up is, as a founder, if you can think about I’m going to choose between a subscription business or transaction fee business. The difference is, you know, a factor of two, right – a transaction fee business might be 4x on revenue, where subscription business is going to be eight to 12x on revenue. So I bring it up, not that you over index as a founder on your exit multiple and how to optimize for exit, not the point. It’s also not the point of how you value your company in the early days, right? Dave said, I’m doing this I should be worth 12 times.

The point is, is that as you’re building the business, there are some things you should think about that are out on the horizon, like, who am I going to sell this to? How am I going to exit it, right? And some people build a great lifestyle business, and they love it. And they employ friends and family and they live in a great community. And like, that’s all awesome. But at some point, most businesses get sold right? And you should at least know going into it. A friend of mine pre-read the book. He’s in the financial services industry. And he called me after we read it and said, I’m really pissed. I’m like, what do you mean? He’s like, he just reminded me that after all the work I put into the business, I’m gonna sell it for one times revenues. I’m like, well, I didn’t make the data out. But I’m just reporting the data right. And he sold the company about six months later, and he just he still just shakes his head. He’s like, yeah, you know, so it’s something you need to think about, but not optimize for.

So as you look at the book, just know that there’s a compounding effect, like it’s super risky to launch new company and new product. And your first milestone is product market fit. Which, by the way, I think is math, not like how do we feel right? So at least pre-product market fit is math. So you should think about it from the terms of which, you know, if I’m gonna have an outcome, which direction should I go. And if you can choose your revenue model, which many people can, then I would encourage you to choose the high end of them if you can, but you’re not gonna build a new revenue model at the same time. So the other change we saw in the dataset was licensing, which is where I started my first company, right? Software licensing has actually been in significant decline as companies migrated to new subscription. And I remember 15-20 years ago, when Microsoft was like, hand wringing about can we migrate from what’s the impact on revenue going to be if we migrate from licensing to recurring revenue? And now the answer is, why would we ever do anything else? Like you can order your Lacroix subscription on Amazon on a subscription these days?

Will:             Right. So last question, and we need to do a project, I’m sure there gonna be a bunch of questions. So I’d love to have you on again. Last question for now, something you mentioned earlier, which was asymmetry in VC conversations, the asymmetry of data, they know, things that you as a founder don’t, there are a lot of things wrong with venture capital. This is partially why we started proto was because there was a lot more value add we thought we could bring to the early stage founders, in terms of operational health connections, etc, etc. But for you and your experience, with the way that you think about the VC industry, and the way that you think about how founders should approach it, where the value add where the value transfer is, can you speak a little bit more to what you were talking about there with regard to the asymmetries that exists?

Dave:           Yeah, I’ll give you two concrete examples. So you’re a founder going out to raise money. In the early days, you raise money from friends and family, which can make Thanksgivings super awkward. But you have information asymmetry in your favor. You like the product, you’re super jazzed about the market, your team’s doing awesome. You’re shipping product, and your uncle grandfather cousin who gave you money because they believe in you. Right and you give them terms that sometimes aren’t the greatest terms. So you gave them a safe note or convertible debt with a cap that the cap was at 10. And then when I come along and see that as an investor, I’m like, you need to fix that right? That cap should have been at 3, right, right. You’re like, well, but they said yes to it. I’m like, but so here’s where information asymmetry and pricing asymmetry really matter. When you’re selling your stock to somebody who doesn’t know anything about private company stocks, and venture capital and startups, unintentionally, you’re taking advantage of those people because they should get the best deal they are taking the most risk.

When you come to me it’s amazing. I know the deals. I’ve seen the deals; I’ve passed on in the deals I missed. And I know what the pricing and terms were of those deals. Now granted, it is a super small data set right? But it’s a bigger data set than you as a founder. So when you come to me and say, Hey, Dave, we want to do a million dollars with 10 million cap, I’m gonna be like, your price is off. Right and my analogy is being on the pitch on the soccer field or football field for my friends that aren’t in the US. You can be on the pitch, which is on between the outer bounds and between the goalposts right, as long as you’re on the pitch, you are okay. If you’re up in the stands, investors will nod and smile. And as soon as you leave, they will chuckle that it’s so cute right?

And then some people are like way the hell out in the street. They’re not even in the stadium. Their numbers are so weird, right? We’re going to sell 10% of the company for $2 million. And what we’re pre revenue? And the answer is, No, you’re not. So it’s a really is based on that information asymmetry. And at one point, I was thinking about starting a company that did that. And I realized, well, it’s just like, it’s a super nice $4 million business that would be great for founders. But it’s super hard to scale. Yeah. And I’m like, it takes as much time to build one of those businesses as it takes to build $100 million business. So sadly, I’d sideline out because I would love it if the data was available for founders to say, Here’s six months of revenue data, here’s my revenue model, how do I benchmark to my peers? Like that would be super interesting. And we started to build a prototype and realized it was just too hard to get the data in an automated fashion. That’s forward looking data, not trailing 12 data like I can get your QuickBooks data. But it’s hard to get your HubSpot data looking forward, but that’s where information asymmetry exists and just notice there and going into it, probably why I’m not in VC anymore, right? Because I was always having a conversation with founder like, here’s how you should think about it right? And my partners were like, no, no, we should get extra points in negotiation. And I’m like, No, I don’t think so. Like this is how do you level the playing field and make your portfolio company CEO smarter? Because it will serve them better long term

Will:             Yeah, that is one of the things that bugs me, there are many things that bugged me about the VC industry. But that is one of them in that they are pumping out all the material, because they have the budgets to crank out the media and growth to take all those meetings that you mentioned earlier, right, where they pat the founder on the head and say, Oh, that was cute. And I desperately want to talk to the founders as you do before they go into that meeting. So they can at least get into the pitch, they can get in the ball park, have the education to be able to speak the language because it really is a whole language in and of itself. Like I’m sure those listening in, that aren’t familiar with VC and startups, maybe we’ve been talking a lot of inside baseball. But this language of startups is important to en-culturate yourself in first before you go out. And a good way to do that is to read Dave’s book, because there is a wealth of information in here.

So Dave, I really, really appreciate your time, where’s the best place for people to go buy this book and follow you and learn more about you?

Dave:           You bet, Amazon has it, it’s easy to get there. If you want to go to dkparker.com you’ll see all of the online choices for you, if you want to support the independent bookstore. Audible version will come out at the end of May. So for those of my friends who say when I think about this, I hear your voice in my head, sorry, you’re actually now going to actually hear my voice in your head. So that’ll be out at the end of May, early June. If you listen to me on to Expedia, they can finish the book in about four hours and 20 minutes. So I’m not sure you want to listen to me on to speed but 1.8.

Will:             So any final words like what are the next things in your horizon? The next questions for you or things that you want to you want to say to folks?

Dave:           Yeah, we’re working on a couple things to that. How do we make entrepreneurship more accessible to people who traditionally been disenfranchised by some bipoc founders and women, I think this COVID has disproportionately pushed women out of the workforce and entrepreneurship. So I’m super excited about some of the stuff we’re doing there.

The big takeaway I leave your listeners with is – so I have my calendar at the bottom of my signature, right and on my emails. But I in the in the application or in the tool, I use the book on my calendar, one of the questions I’ve started asking is, tell me who you’re mentoring that doesn’t look like you. It’s good, because if you’re not, I’m kind of swamped right now and a little busy. But if you’re actually paying it forward and giving first which was something TechStars institutionalized, but we were great at from Startup Weekend perspective. Like if you were mentoring people who don’t look like you, like I am super happy to support you. If you’re like I’m super busy day running my startup, then the answer is okay, I need you to be a little more community minded because there’s already somebody who’s one chapter behind you that you can help, right? If you’re good in product, and they’re great at marketing, like this is a great relationship.

So, as a startup, you don’t live in isolation. And I would encourage you not to because the amount of depression in startups is super high. Because as entrepreneurs are a little bit weird that way anyway. But mentor somebody who doesn’t look like you like those are my table stakes, right? When somebody says, Hey, can I get in your calendar? My question is, so tell me, somebody you’re mentoring who doesn’t look like you? If the answer is yes, then I’m happy to me, if the answer is no, then go do that first, and pay it forward and mentor that.

Will              It’s good. Well, Dave, really appreciate and love your book, excited to tell more people about it. And really appreciate your time.

Dave:           Yeah, thanks for time. I appreciate it. Thanks, everybody.

[Music]

Will:             All right. A couple quick things before you go. Number one, I have a general newsletter, where I write about technology and startups, health science and teaching people to code. And I write about a variety of different subjects that we talk about on this show. So if you go to wclittle.com, there, you’ll be able to subscribe and you’ll also be able to subscribe to particular topics. If you’re just interested in one or a few of them, you’ll be notified right when I publish new content in those areas.

Number two, my partners and I proto ventures have a portfolio company called startup rocket. If you go to startuprocket.com there you’ll be able to receive coaching guides and customize an operations framework for you and your team and your advisors to be on the same page in terms of what is the appropriate next step for you and your entrepreneurial journey.

And finally, if you wouldn’t mind leaving a review anywhere that you have listened to this podcast or watch this podcast would be super helpful to help those who might be interested in consuming this content as well. Thank you.

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