How I Reverse Engineered A $100 Million Exit - Jason Lemkin

0:00If you want to reverse engineer things, you have to have a model with economies of scale that get you to three to four to four thousand dollars per employee or your model is not real. It is not scalable.

0:18What's going on, man? How are you? I'm so excited to be here and talk about all my first millions, talk about the millions I lost, a few learnings on scaling and whatever you want, Sam. It's great to be here. I love you for many reasons. One of them is like, you're so catchy and you're so good at summarizing important things but explain it in a very simple way in simple to understand ways. But before we get into that, I need to like talk about background because we have to do the OG software guys. You are the guy. So like if we talk to like the founders of HubSpot or I mean, like guys who run multi or tens of billions of dollars companies, they say, if you want to learn about software, Jason's the guy.

0:57But we have a bunch of like sometimes 20 year old kids listening to this. And I want to like give a little background. And so we don't, I don't want to spend too much time on this, but basically what I know about you is you started a few software companies, including EchoSign, which you sold for nine figures. I don't know the exact amount, but you've said nine figures. Then you've been investing in startups as a VC for like since 2013, which you said, I think you said you 10X your fund or something like that. Is that right? That is about right. And then what else did you do besides EchoSign before that?

1:28Before that, I had a startup where I made my first million. Between when the internet died for a while. I actually founded a startup making implantable batteries from nanomaterials, which I knew nothing about, which is interesting. And we sold it for 50 million after 12 and a half months. It is kind of an MFM story. And I learned a lot from it. What was that company called? It was called Nanogram Devices. And we did something that was thought to be impossible. And we got bought by our competitor. It was a classic buyout after 12 and a half months when we took away one of our largest customers.

2:00Did you raise funding? We did. And it was hard. I'm dating myself. This was one of the crummiest points. We raised$9 million in our seed round and sold 70 % of the company in our first round. And that was the deal. That was the deal. There was no choice. There was no negotiation. It was a different time. And that meant what you and the founder, you and your other partners, I don't know how many you had, had$15 million left over to share after the$50 million exit. I'd say it was more like about$10 million or maybe even$8 million to share. So it was enough. Interesting for the first million, it was just enough to not work for the man.

2:37I have worked harder. I worked even harder on the next startup, on Ecosign, which Adobe bought. So Ecosign, was that basically like what DocuSign is now? You guys just sold earlier? Yeah, a lot of learnings. Yeah, we actually, DocuSign believe, I mean, I'm really dating myself. DocuSign was basically a printer driver company when we started. We were the first web solution. I wrote it all myself in PowerPoint and crappy wireframes and we built it. And we got to a million dollars a month burning 4 million. So we got to 12 million ARR, growing 100 % with 110 % revenue retention and cashflow positive.

3:14And we sold it in 2011. And 2011 was a long time ago, in internet time and in real time. It was just before we understood the metrics around recurring revenue businesses. And so even my board, my investors, they weren't sure we had a good business. If I said to you today, Sam, I've got a business doing a million bucks a month, growing 100 % with 110 % revenue retention and profitable, you would say that's the ticket. That's the ticket. Now, DocuSign was bigger. We had about 36 % market share, but we were cashflow positive and growing 100%. So we only raised 4 million. And so when you sell your company to make your second millions, sometimes the second one is there's a certain logic in it.

3:59And the logic actually in its own way can be stressful, right? It can be stressful. That was a very complicated decision because it made sense on paper given that the team wanted to do it and part of the team wanted to do it and given how little we'd raised, right? But in my gut, I knew it was emotionally, I knew it was the wrong thing to do. Scott Galloway came out a while ago, and I didn't get to talk to him about this, but he had this awesome presentation. You and Scott are similar in that you have beautiful language. That's what I describe these types of people. They pick their words beautifully.

4:31Scott has this thing. So Scott sold L2. I don't know how much. I think 1 to 200 million. I forget the exact amount, but nice exit. And he was like, well, I wanted to have a nine-figure exit. And I wanted to do it in this data business because that's what I knew. And so I worked backwards and I sort of reverse engineer it. And he said something like he was like, I knew I needed to have an international presence. I knew I needed to charge at least $50 ,000 a year for a service. And then he lists all these things. And then he spent eight years, however long, building it. And I love that because I love reverse engineering.

5:02And what I tell a lot of people, I'm like, they want to create this amazing stuff. And I'm like, yeah, that's cool. And sometimes that works. But you can actually kind of reverse engineer a bunch of stuff to figure out what's the rules of the game that I need to play. And then you optimize for the rules. and I wanted to have you on to basically like reverse engineer what it takes to get like either 100 million in revenue or even 100 million in outcome because I actually think those rules are actually the same. I was like, Jason, I want to talk about this like reverse engineering thing and you like banged out this like five or eight point thing.

5:30You said that a lot of startups right now because they raise money in a zero interest environment, it's like 100 grand in revenue per employee and you said no, the new minimum needs to be 300 to 400 ,000. Is that right? It is. If you're trying to reverse engineer whether your business model makes sense, like this is one thing to reverse engineer. Certain business models have economies of scale and some don't. And if you want to go really big, you want a business with economies of scale. And if you step back in the old days of software, the old Adobe's, Microsoft's, Intuit's made a million dollars in revenue per employee.

6:05A million dollars. Okay. You'd have a bunch of engineers. They'd go off in their offices. Everyone used to have a private office to code. You'd spend two years building a piece of software, a small team. You'd put it on a DVD-ROM or CD-ROM. That costs$0.50. And then you'd package it up. That costs$0.50 for a dollar. And then someone would sell it for you between$50 and$400. This was a really good business. There were 90 % margins. And the classic Adobe, Microsoft, into it,$0.50 of every dollar went straight to cash flow. $0.50. We don't see this anymore in companies to go public. It was so profitable.

6:40So that was$1 million. And then things just deserve or whatever you want to call it. It got crazy. And we reached a low in 2021 of 100 ,000 in revenue per employee for all these unicorns, 100 ,000. So we got, we only were 10 % as efficient as we used to be. Now the pendulum swung back. So we were historically, we're at a million per employee. The low point was 100 ,000 per employee. When employees in the Bay Area probably cost you$250 ,000 fully burdened with insurance benefits, this and that. So you're losing 150 ,000 per employee. Now, every public company, at least, public SaaS software company is at$300 ,000 to$400 ,000.

7:16HubSpot's at$310 ,000, which we talked about. Cloudflare's at$400 ,000. That's where you have to be. But when? When do you have to be there? So one way to think of it, if you're lucky enough or unlucky enough, depending on how you look at it, to raise capital, angel money, venture capital, whatever, it bridges the gap. It bridges the gap to get you to$300 ,000 to$400 ,000 per employee. but you're going to have to get there. And if your product isn't profitable enough, if your gross margins are too low, if it doesn't make sense, make some changes, right? You have to have a model. If you want to reverse engineer things, you have to have a model with economies of scale that gets you to three to$400 ,000 per employee, or your model is not real.

7:55It is not scalable. And then you have another point here. You say going multi-product and you say it's a huge issue of how, when, and where to figure out when to go to multi-product. But did you say at like 10 million or in revenue, you want to go, what did you say for going multi-product? By the time you get to 10 ,000 customers, you better have a second product that, and this is the non-obvious thing, that can be bigger than the first. This one took me a while to figure out to be bigger than the first. For HubSpot, CRM in two years will be bigger than marketing automation at HubSpot for years was a marketing company.

8:33In two years, CRM, its sales product will be bigger than its marketing product. It has to be. And you want to be there by 10 ,000 customers. This is the same for econ businesses too. They sell a handful of SKUs and then they reach some type of critical mass and then like, all right, we need to create more stuff. So we made deodorant. Now we need to make toothpaste or shampoo or something like that. But the second one has to be bigger. This is the mistake founders make. if the second what's easiest sam is to add a product extension okay we sell shampoo and e-commerce okay let's sell shampoo and conditioner that's the easiest thing because our customers already know us if they bought shampoo they'll buy shampoo and conditioner but the problem is if you if you if the second product isn't bigger than the first and the first one's still growing you never catch up it's never enough right if you're selling 150 million of shampoo and you're growing 20 % a year, you're adding 10 million a year, right?

9:27And you launch shampoo and conditioner and it does a million its first year. It's great, but it will never get there. The second one has to be bigger than the first. And this is, it's too, we all default to the easy second product and you actually have to do the harder one. That's interesting. So at The Hustle, so we had, I don't remember, a million and a half subscribers. I think we were doing a million a month in revenue And like a media company is basically you build an audience and then you launch multiple businesses to that audience. So whether it's advertising, conferences, software, whatever, that's kind of typically how media companies are weird.

10:03It's usually a collection of small businesses and or different businesses. And I think we were at a million a month. I forget. I think about that. And I wanted to create a subscription service called Trends. And it was like, we like, and dude, I fucked it up so bad because I charged$300 a year, which is so stupid. It should have been$30 ,000 a year. It should have been way more expensive. I think in the first month we did, I don't remember exactly, but in the first month we did almost a million in sales. And then it was a pain in the ass. But by the end, I think when we sold, I think we were at 5...

10:39Maybe 10 months later, we were at 5 million a year in sales with it. But it only had like 4 or 5 people running it, which so is profitable. But the mistake I made was the thing of not making it bigger than the first thing. And I so intimately know that mistake. And it's really hard because I'm like, well, this is like a clear extension. Just do this, then this. But it just... Because it's also like a psychological thing of like, why pay attention to this thing? just put money back into the main thing. This is an advantage to hiring a VP of sales, for example. Founders underprice their products, usually.

11:12They underprice them. Because we know what's more important, is it more important to get the product off the ground and get 100 customers than to optimize pricing? As founders, we're always going medium or long, right? So we almost always leave money on the table so that we can make people happy and get them going. Dude, I've underpriced everything I've done, I've underpriced. Yeah. And so have I, and so have 80 % of founders, not all, but it's a, I hate this term, but it's a feature, not a bug because as painful as it is, you can fix pricing later, at least for new customers. It's harder to fix it for grandfathered customers, right?

11:47But for new customers, then just double it to 600 and 1200 and 1800. Like it is, it's hard. I think it's like rooted in like imposter syndrome of like, I don't know if this is good enough. And, but then you talk to, if you talk to a good salesperson, you're like, dude, like I I could just put a zero behind that. I'll sell it. You know what I mean? If you talk to a good salesperson, can get it done. A good one will not rip people off, but a good one will get the full value for your product. In a way, as a founder, you almost never can. You almost never can, right? That's why a lot of the classic SaaS content is about hiring a VP of sales because that's why in the first quarter, the first 90 days, you should see a lift from a good VP of sales, at least because they can run this playbook with the same leads, the same customers, the same dynamics for trends or something else.

12:32Someone with the confidence to ask 30 ,000 for trends, knowing it's cheap compared to Gartner or Forrester or whatever, they'll take that off your plate. If they're good and you'll see a 30 to 100 % revenue lift from someone that's great, right? Someone that's mediocre will rip your customers off and never understand your product and misspell trends and never read it and not know what it is. A mediocre one will actually see a revenue decline from founder-led sales, but a good one will solve that piece, right? So I think the other thing, you just didn't give it enough time either. I sold the company at 4.5 years.

13:05Yeah. But that was like, I was okay. I don't regret that at all because I wanted to get some financial freedom and I was broke. I think I paid myself the first 2 years, my salary was$20 ,000. The third year, maybe$100 ,000. And then the fourth year, I think I paid myself a few$100 ,000. But I was like, I was fucking poor. And so I was impatient. and what you talk about all the time. The worst thing is a tired CEO. And I was tired of being poor, basically. And that was a huge mistake, by the way. Pay yourself way more if you can, is what I've learned. As soon as you can afford it, pay yourself market, is the learning.

13:45Yes. As soon as you can afford it. And you had this other thing on here. You talked about you want 30 % of your revenue to be outside of North America. That's very intimidating. That's probably the most intimidating thing here is going global, at least in my opinion. I think it's a very intimidating thing. Obviously, some businesses, this doesn't really work, right? If you're highly regulated, it can take a long time, for example, right? If you're very specific. But at scale, at scale, the average public software leader gets about a third of their revenue outside of the US. HubSpot's now a majority.

14:21The majority of HubSpot's customers, small businesses, are outside of North America, the majority. And so let's step back in terms of reverse engineering, right? There's a couple of things. If you don't lean into them, you're going to have less revenue than you otherwise would. International and partners are two of them. If you try to only sell direct is an issue too. And so how do you do this? How do you learn how to sell in France, right? In Germany and Milan and London? It's not as complicated as it sounds. what you do is build your business, build your brand, right? Find a niche where you're one of the top two or three folks.

14:58You don't have to beat HubSpot everywhere, but find a little segment where you're better, your little area and watch who wants to buy you. And if you're in software, what will happen is Australia, New Zealand, UK, some parts of France and others are very used to buying from US companies. They will find you if you are the best vendor. They will find you. You don't actually have to find them. Now, traditional industries won't find you, right? It's going to be tech focused folks. It's going to be early adopters. It's going to be cool kids, but they will find you. And as soon as you cross 5 % of your revenue in an area, then invest in it, just invest in it.

15:36As soon as you see a cluster in England or New Zealand or somewhere you didn't expect Chile or Brazil, like support it. And then the cheat code, this sounds obvious. Okay. The one one is just support it, like make your product open. The one that takes work is also localize your product earlier. And most of your engineers don't want to do this. They don't want to localize the product into Spanish and Portuguese. Turn it into 30 languages. Not super complicated engineering tasks, but 95 % of engineers just don't want to do it for a variety of reasons. So, you know, you can get going in the English-ish countries and even in Europe, right?

16:13but you're not going to penetrate certain areas if you don't actually localize your product. But that's the second cheat code. The first one is just be welcome to it. You don't have to go hunt customers in Japan if you have zero. You don't have time as founders. Going to Japan is the worst place ever to go because the culture is so different. And there's been so many failures of Japanese companies wanting to come to America and America to Japanese because the culture is wildly different. Because I actually looked at... One of the ways that I researched cool company ideas is I like to look at Japanese publicly traded companies.

16:46There's this one called Usabase. Have you heard of Usabase? So Usabase is a media company in Japan. They own three products. One of them was sort of like CB Insights, and it was doing 30 or 50 million in revenue. The second one was a news app called NewsPix. That was doing another 30 million. And then I think they had one more thing. And I remember going and trying to download their app, and it was all in Japanese and I couldn't really figure it out. But I eventually translated it and I was like, I'm going to make this app in America and I'm going to do it at the hustle. And so I built out this whole thing and I was going to launch it and everything.

17:21And the culture of what they were trying to do, it required users to leave feedback and opinions on news, which is not so common here. And I remember like, fuck, why is this Japanese idea not working? And then I realized I was just like reading Wikipedia or whatever. And there's this whole term to describe the failure of American companies trying to break into Japan because the culture is so different. And it scared me like hell to do anything involving Asian cultures because our cultures are so different. I'm like, I can never crack that. Whereas Germany, France, it's mostly similar. But yeah, the whole Japanese thing freaks me out.

18:00I'll give you two examples. But Salesforce had 10 % of their revenue in Japan in the early days. 10%. Now, you can Google it. You can see what Mark Benioff said. They didn't plan it. They got dragged into Japan. Some of it was through partnerships and others. But my point is that wasn't on their day zero plan. Okay. But it took off there. I was just talking with Howard Lerman, who has got a new company called Rome, but he founded Yext and took it up to a billion. And they were huge in Japan. And we were talking about how he's going to do Japan the next time. But they got dragged into Japan for small businesses.

18:33They got dragged in. So my point is don't show up to Japan with no traction. asking for a tour in the city. But if somehow in your first 100 customers, first 500, you've got five in Japan, don't dismiss them. Don't be snarky like some folks are. Don't say it doesn't matter. In fact, say, oh my God, we've got five customers for Japan in our products, not even in Japanese. We've got something good here. Let's take a pause and let's figure out what the heck is going on like Salesforce did and get 10 % of our revenue from Japan. That's how you do it. Is there a sweet spot for how much you charge? I think with a lot of people starting out, like what I did, like, well, my business was a two prong in that we had users and then we had advertisers or advertisers for spending six figures a year.

19:18But I had to acquire fucking 4 million subscribers in order to like make it work. And it was really hard. Acquisition. Yeah. And so is there like a price point where you're like, you want your average customer to be paying$50 ,000 a year? I think that pricing is over discussed. And I'll tell you why. We have all now bought 200, at least most businesses have bought over 200 SaaS apps. It's 200 pieces of business software. And we all kind of know what stuff should cost. We know what Notion should cost. We know what HubSpot should cost. We're on Riverside. I don't know what Riverside is. What do you guys pay?

19:54$300 a month? Okay. Let's say you pay$300, bucks, 400 bucks a month. Now, if someone else has a better version of Riverside and they want 50 ,000, you're going to like a month, you're going to kind of balk, right? But what if someone had something that was better than Riverside, it was$30 a month, it would seem too cheap, right? It would seem too cheap. So my point is, there are organic price points. And what you want to do is anchor around them, go figure out the couple of products out there that are most similar to yours, and charge the exact same way. And either charge the same pricing, or if you're nervous, charge a smidge lower, 10 % lower, 20 % lower.

20:32If you charge too much lower, you're telling the market you're not as valuable as Riverside, right? Or you're not as valuable as HubSpot. And you can actually, customers will bounce off you if you're too cheap. If you're too cheap, they will get confused. So anchor around the comps. If you're truly 10 times more valuable than Riverside, okay? And Riverside's very good. We're using it to record the session. If you're times more valuable, maybe charge twice as much because you're telling the market we're 10 times more valuable than the leader, right? We're 10 times more valuable. But whatever you do, founders that say there's no one like us, there's no comp, try harder, try harder.

21:08It doesn't have to be the same as you, just it feels the same. It feels a similar amount of value, a similar type of utilization. Do I use it eight hours a day? Do I use it once a month? Do I use it as an API? Is it metered? Is it per seat? Just there's hundreds of apps like you. And if you price similar to similar value apps, you remove friction. You remove friction from the sales process. And that's what you want to do until you're really big. And this is why we also underpriced as founders, because you want to remove friction. We want every deal to close in the early days, don't we? We want every deal to close.

21:45And so your job as a founder, if you want to scale, if you want to reverse engineer things, your job, because no one else in your company will do this, your job is every day to relentlessly remove friction from your customer acquisition process, remove friction. And people add it at scale. The classic one is contact me. You go to a website, you're all excited to buy on your own. And I got to talk to a rep. Yeah, there's a couple of reasons. One reason is they've gotten to hundreds of millions in revenue and they actually want to add friction to the sales process. But you don't want to do that until you're at tens of millions of revenue.

22:19You want to every day come into work. And if you can't do anything else on your company, remove friction. How can I make sign up easier? How can I add single sign on? How can I make it easier to check out from my e-commerce thing? How can I make the bundle easier? How can I make support better? Remove friction. Having support that happens automatically in seconds rather than waiting five minutes on the dumb bubble, that removes friction, doesn't it? Whatever it takes, remove friction. The last point you have is the most challenging. It's getting to net revenue retention of 100%. Yes. And I don't know how you would describe yourself.

22:55I think of you as you're a CEO founder type, but I think that you have an edge on sales and operations. The churn part, I think, and this is maybe naive, I think that's mostly product. Maybe it relates to who you sell to and how you position it, but it's like product. And it's the hardest part. is like figuring out how do I make something that integrates in someone's workflow? Or how do I make something that's so essential to someone's life that they... Not only do they not want to get rid of it, they're going to tell their co-workers and their co-workers are also going to have to start using it.

23:28It's so freaking hard. And I think it's part art, part science. But you said that you have to have 100 % net revenue retention. The good news is that a lot of the big boys sucked at first. I think Brian Halligan, I think he told me that they were churning out something like, at one point, like 5 % to 10 % or maybe even more per month. And he was like, it was horrible. And it took us four or five years to figure it out. But what do you have to say about churn and retention? How do you make it good? If you want to reverse engineer things to your point, you need to really honestly have a path at a product level so that you can eventually get to that 100%, right?