Friday, October 24, 2014

Lesson #189: How to Price Your Software Technology

Oftentimes, tech startups are so focused on building their technology, that once it is built, they have no idea how to price it.  This lesson will provide some high-level guidance on how to do that.


The first thing you need to do, is quantify how much investment went into to building the technology in the first place.  How many developers were working on the project, at what hourly rate, etc. And, since you are most typically competing with a "buy vs. build" decision for your prospective clients, it is OK to use market prices for the costs of your tech team (e.g., $150 per hour, even if you are investing sweat equity and it really didn't cost you that much in cash out of pocket).  So, for an example, let's say you had a team of four developers working full time (40 hours per week) for three months.  Your cost would be $312,000 (13 weeks x 40 hours per week x 4 people x $150 per hour).


Just like a venture investor shoots for 10x ROI on their investments, businesses need to shoot for a reasonable ROI on their investments.  And, since we are talking about technology that may have a limited useful life before it becomes obsolete, you need to have a reasonable timeframe that you want that ROI to be realized.  My rule of thumb, where you can, is to shoot for a 10x ROI on your technology investment within a three year period of time.  Continuing our example, that means you need to recover $3,120,000 in revenues in the coming three years, or around $1MM per year, on average.


Next, you need to reasonably estimate how many sales of the technology you will have during the three year ROI period.  You need to take into consideration: (i) how big of a market are you serving; (ii) how many potential buyers are there; and (iii)  how much sales and marketing investment are you making to drive leads and close sales.  In our example, let's say you have one salesperson calling on prospective clients and one salesperson can close one transaction a month.  In order to close $1MM in sales a year, the salesperson would need to be selling the software license at around $80,000 per sale.


The above assumed there were 36 prospective clients that would be closed in a three year period.   And, with a 20% conversion rate in B2B sales, that means your sales person needs to have identified 180 prospective customers.  When you sized the market above, how many potential customers did you reasonably think you were out there?  If not at least 900 customers (assuming most business have a hard time growing beyond 20% market share), then your sales assumptions may be too aggressive, and you may need to adjust your projections (e.g., shoot for fewer customers at a higher average price--maybe 18 transactions in three years at $160,000 price).


So, let's say the $80,000 price held up based on your market analysis.  But, how does it compare to your competitors? Where are they priced?  If you are materially more expensive for a similar product, then you need to lower your price to get competitive (hence, lowering your ROI expectations at the same time).  Or, are you materially cheaper than your competitors?  If so, now you can afford to actually raise your prices (and grow your ROI expectations beyond 10x, which is a really terrific situation to be in).  But, if the ROI starts to dip below 5x, you really need to question doing the project in the first place, given all the risks you will be taking in launching this new product.  So, make sure you do your revenue projections before you start building one line of code.


Lastly, you need to ask yourself two questions, as it relates to your prospective clients:  (1) is the price affordably within their budgets (e.g., enterprise clients can easily afford a $80,000 software licence, but SMB's would not); and (2) how much would it take for them to build the software themselves, in a buy vs. build decision.  In this example, they are getting a $3MM technology investment for $80,000 (that feels like a steal for them, and could argue raising your prices).   If you were trying to sell $80,000 software that would only cost them $160,000 to build themselves, then they would start to think about the merits of doing it themselves to "own it".  I like to pitch "we are only 10% of the cost of building this yourself", which suggests we could raise our prices to $300,000 in this example, and still be a big value to clients.

Anyway, pricing is more of an art than a science.  Play with it, test it out on a few clients and adjust accordingly based on how fast or slow they are to act on your offer.  Hope this helps point you in the right direction.

For future posts, please follow me on Twitter at:  @georgedeeb.

Wednesday, October 22, 2014

The Top 5 Traits Needed for a Startup Management Team

I previously wrote about the key success factors for startups, and the importance of having a solid business plan and model.  I would argue  it is even more important you have a solid management team to execute that plan. Below are the top five things to look for when identifying candidates to fill out your management team.

Read the rest of this post in Forbes, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.

Thursday, October 16, 2014

Lesson #188: When Picking a Startup to Join, Focus on the Company (Not the Role)

Startups are really risky.  And, if you are looking to join one, know going in you have a 9 in 10 chance that company won’t be in business within a couple years from now, and you’ll have to be looking for a new job again.  Venture capitalists can get around these odds, by investing in ten companies, hoping one hits it big, with a portfolio driven mindset.  Unfortunately, you as an employee, only get one “bite at the apple” at a time, since you cannot concurrently work for ten companies. 

That means, if you are looking to join a startup, (i) make sure you interview at least 10 companies, before picking one to join (yes, I said YOU interview them—you are not picking a job, you are making an investment bet); (ii) make sure you  pick one that has solid fundamentals in place for success (be sure to read Red Rocket's Definitive Checklist for Startup Success, to learn what that means);  and (iii) you can’t think about it with a specific role in mind—with an early stage company about to take off, sometimes you just need to jump on board anyway you can, buckle up, and enjoy the ride.

This is an entirely different mindset than most people have when looking for a job.  We have been programmed to look for job postings of companies hiring, apply for those specific roles and hope you get a call.  That process, in general, is broken, even for big companies, with too many applicants, and not enough returned phone calls from your applications.  And, with thousands of startups hiring, placing job postings, you have no idea which ones of those have a fighting chance for success.

What I am suggesting is to think like a venture capitalist when looking for a startup to join.  A VC may look at 1,000 business plans a year and only invest in 10 of them.  And, they don’t want to invest in strangers; they prefer to invest in successful people they know or were credibly referred to them (so work your networks).  And, let’s face facts, it is often a herd mentality, they want to find the “hot” companies.  And, often times, that means following the money.  If other respected investors have cut a check into that company, assume they have done a lot of due diligence, and that company must be on to something interesting.  And, if a startup has successfully raised professional capital, they are one step further along in their development curve, to lower the odds of going out of business, and increase your odds your career move will have longevity.

So, with this all said, once you have found that company to “invest” your time in, make sure you get a meaningful equity stake to make it worth the risk and effort, and jump on board in whatever opening they may have at that time.  And, even if they don’t have an opening, creatively figure out how to create a role for yourself.  In early stage companies, there is often a wide range of work to do, and “jacks of all trades” can come in handy, especially if you are willing to put in some “sweat equity” (work without cash salary) for some period of time. 

I am not saying, you as a technologist should try to fit into a finance role, as those skillsets are too far apart.  But, what I am saying is, you as a proven marketer, may be able to fit into a marketing, sales, business development or general management role.  So, be flexible in your thinking, as it is more important to find the right company, than the right role at these early stages.  Happy hunting!

For future posts, please follow me on Twitter at: @georgedeeb.

Saturday, October 11, 2014

How to Structure Your Board of Directors or Advisory Board

Properly structuring your board of directors or advisory board could be one of the most important pieces of determining the success for any venture.  These are the people you are going to be relying on for strategic direction, or voting on all key decisions.  So, it is important you understand their role, and correctly set them up.

Read the rest of this post in Forbes, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.

Thursday, October 9, 2014

[AUDIO] @georgedeeb Discusses Keys to Entrepreneurial Success With @entrepreneurjim at @school4startups Radio

This week, Red Rocket's George Deeb had the pleasure of being interviewed by Jim Beach at School For Startups Radio, a great resource for entrepreneurs, serving over 110,000 listeners.  Hear George talk about his entrepreneurial learnings from his CEO roles at iExplore, Media Recall and Red Rocket, and get juicy tips for entrepreneurial success, based on collective case studies he has seen from the over 500 companies Red Rocket has consulted or mentored over the years.

You can hear the interview by clicking the play button at this link.

For future posts, please follow Red Rocket on Twitter at: @RedRocketVC.