Is the Net Promoter Score for you?

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Many of the startups I mentor are so early stage they don’t even have customers – but for those who do and those who will, consider the Net Promoter Score (NPS). It seems the bigger the company the popular NPS is: Best Buy, Delta, American Express, Intuit, United Health, IBM  …

The title of The Wall Street Journal article by  Khadeeja Safdar and Inti Pacheco The Dubious Management Fad Sweeping Corporate America is misleading, as are many headlines in our click-bait culture. The sub-title is somewhat more accurate: NPS—or net promoter score—is a measure of customer satisfaction that has developed a cultlike following among CEOs. It also may be misleading. The authors actually do a good job of presenting  both the pros and cons of NPS, but balance doesn’t generate clicks.

The beauty of NPS to me is its simplicity. It consists of a single question for customers:

On a scale of 0 to 10, how likely are you to recommend the company’s product or service to a friend? The survey usually includes a follow-up question asking customers to explain their ratings.

NPS is based on the premise that every company’s customers can be divided into three groups. People who answer 9 or 10 are “promoters,” or loyal enthusiasts who keep buying. Those who give a score of 0 to 6 are “detractors,” or unhappy customers. Those who answer 7 or 8 are considered “passives,” satisfied but easily wooed by competitors.

However, recent surveys show no correlation between NPS with revenue nor predict customer behavior better than any other survey-based metric.  Several unquoted companies maintain that NPS does in fact correlate with revenue growth. Though the fact that these NPS users decline to be quoted speaks for itself.

There are two technical reasons why NPS might not always correlate with profit or other measures of corporate success. One is that the score is derived by subtracting the percentage of customers who are detractors from those who are promoters, which increases the unreliability of the survey by conflating two variables, each of which has an error rate. Secondly, research has been criticized as focusing on too small a sample The latter may well be a red light for startups whose customer numbers are a rounding error for the large companies mentioned in the WSJ article.

One criticism of NPS seems valid to me: that organizations tend to concentrate far too much on their NPS score and not enough on applying insights from the survey to improve their customers’ experience.

So what’s a founder to do? First I would not bother with NPS until your customers hit four figures. Given the low response rate to surveys in general you need a large customer set to ensure that you get enough responses to be valid. Secondly, you need to install other measures of customer satisfaction so you are not wholly dependent on NPS. For ecommerce retailers such measures may include rate of returned merchandise and number of complaints handled by customer service. For subscription services, churn is probably the most important metric. You can start by reading the post Identifying What to Watch: 14 Key Performance Indicators That Matter and instantiating some of these metrics. You can then develop a scorecard that includes NPS but also other measures. This scorecard needs to be filled out regularly – perhaps monthly for early stage companies and quarterly for latter stage ventures. Founders need to resist the impulse to tinker with NPS or your metrics, as it is important to have baseline data and be able to measure projected versus actuals over time.

 

Some refreshingly different tips on presentations

 

presentationI’ve read several books on presentations and innumerable articles. I even have an entire category on this blog about pitching. But the article on Business Insider by Troy Wolverton, This Silicon Valley founder is an expert in designing presentations, has some excellent advice I’ve not seen before from Mitch Grasso, founder and CEO of Beautiful.AI.

Grasso is a former software designer and serial entrepreneur who has raised millions of dollars in venture funding. Two of his startups, including Beautiful.AI, have focused on presentation software.

Here’s his list of what to include in a pitch deck:

Founder-market fit. Outlining how your team is the team that is best suited to solve this problem or pursue this opportunity is paramount. Aside from the West Coast bias in favor of Stanford, most investors could care less about your academic degrees. What they want to know about the team is what experience and skills they bring to bear on the problem they are solving. I almost never seen pitch decks do this; founders tend to list all their academic degrees and maybe jobs they have held at hot startups.

Product differentiation. Ok, you’ve heard this one before. But Grasso lists it number two for a good reason. There is a sea of products and services out there. What makes your product not only different but why it is better than anything else on the market?

Why now? Founders tend to totally overlook the issue of timing. But timing is critical: too early and you won’t have the necessary infrastructure to support your product; too late and the competition will have staked out the market. Founders need to explain why their product couldn’t have been successful previously.

Grasso sums up with this advice:

All this stuff about traction and go-to-market and business plans, that becomes important as you move further along, but in the earlier stage, it’s more about that vision. Its about convincing rather than showing the data.

But here’s what separates Grasso’s pitch advice from everyone else’s: he outlines what to leave out:

Potential acquirers. Doing this signals to investors that the entrepreneur isn’t committed to the company long term.

Top down market analyses. Painting a picture of a very large market then promoting the idea that the startup just needs a tiny fraction of that market is one of my pet peeves! If you want to demonstrate to investors you are a rank amateur take this route. Otherwise you need to present a bottoms-up analysis: how will your sales and marketing efforts acquire the early adopters? Then later adopters? etc. You should be able to defend your customer acquisition cost projections, as well as your lifetime customer revenue projections.

The five-year business plan. This is a holdover from the last century – I did my share of them. I call this Excel fiction – and it won’t make the best seller list. Even three years is a stretch, but stretch you must.

Here’s Mr. Grasso’s bottomline: “At the end of the day, the pitch is about you, and if you can’t convince somebody of your idea without a pitch deck, then you probably don’t know your idea well enough.”

Does every startup need VC capital?

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Virtually every startup I mentor at MIT seems to believe that they need to raise outside capital immediately. While there are few notable exceptions, it seems like the entrepreneurial culture puts a premium on raising venture capital – it’s sort of the startup seal of approval. But Peter Strack argues against the tide in his Forbes article Why You Shouldn’t Always Raise Money For A New Business. Here are his arguments annotated by my comments:

You Can Keep 100% Of Your Company

As a notable VC once reminded me, “They only make 100% of the company, so act accordingly.” But there’s a more important factor than how much equity you have upon a liquidity event, that factor is control. Once you take a VC investment you will be giving up a board seat to that investor. Since first rounds are often syndicated, there may be two or more VCs looking for board seats as well. Generally you can get two insiders on your Board, the founder and another member of senior management, to balance the two VCs, but you aren’t going to have the freedom and independence you had as a new founder. Keep in mind that you may be working with these investors for years, so make sure the individual partner and their fund are going to contribute more than money – contacts, advice, feedback, and support when times are tough.

Bigger Is Not Necessarily Better

While tech startups often need engineers to build their product and these engineers typically will want a salary, which can increase the pressure on the founder to raise money. But keep in mind Mr. Strack’s admonition: Premature scaling can cause technology startups to fail. And 46% of professional, scientific and technical services companies close within the first five years.

You Learn So Much From Doing It Yourself

I consider learning to be job one for any founder. No matter what your academic credentials, not matter what hot startups you’ve worked at, being the CEO of a startup is very hard. The longer you can stay in control and learn the ins and outs of running your company the more you will learn, and the more valuable the company will be. Of course, there is a point of diminishing returns where you will need to bring on partners and staff but premature hiring is almost as dangerous as premature scaling, actually it’s a subset of that problem.

So what does Mr. Strack advise in lieu of taking on investor capital?

• Hustle – hard work is just the ante. To create value in your enterprise you need to be productive. That means being absolutely ruthless on how you spend your time, your most valuable asset as a founder. Focus on productivity not activity.

• Be smart with the funds you have – I was taught by the VCs to stretch the dollar. For example, rather than hiring full time staff who require not only salaries, but benefits and stock options as well, use consultants and contractors to work on a project basis.

And let me add one other point: look for leverage. As Archimedes said, “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” Examples of leverage include hiring interns instead of consultants and contractors, finding a law firm that will defer your fees until your first round of investment, and sub-letting office space from another tech company that may have a surplus and be willing to offer you a cut rate.

There is nothing wrong with raising capital, but be strategic about it. The best time to raise capital is when you don’t need it. Believe me, investors can smell desperation a mile away and they will take advantage of it. And keep in mind it can take six months or more between starting to raise capital and the check clearing the bank. So start understanding the VC climate in your region. Get to know some VCs informally. But just because you are studying something doesn’t mean you are committed to it. The Boy Scouts’ motto applies to raising capital: Be prepared.

Incomplete article on why Massachusetts can’t birth tech IPOs

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Scott Kirsner of The Boston Globe has a business section front page article entitled Where are all the Massachusetts tech IPOs, sub-titled When it comes to going public, the sector remains in the long shadow of California. 

This is scarcely news to anyone who has been or is in the entrepreneurial economy in Massachusetts. Silicon Valley has lead Massachusetts in every dimension of tech startups since the downfall of the Route 128 computer companies like DEC, Prime, Wang, Data General, and Apollo.  I assume what prompted Scott to write the article is the current flock of IPOs and soon-to-be-IPOs from Silicon Valley, including Uber, Lyft, Zoom, Pinterest, and Slack.

Unfortunately the article, while accurate, is incomplete. It principally blames founders for several sins:

  • Thinking too small – building million dollar companies that get acquired versus billion dollar companies that go public
  • Inadequate PR – not creating the kind of buzz that attracts big investors and star employees
  • Poor culture of mentorship – “We have a poor culture of mentorship relative to the Valley and now New York,” says Michael Greeley, an investor at Flare Capital Partners in Boston.

But he manages to mainly give a pass to both investors and the Commonwealth of Massachusetts. Having been in the “innovation economy” for 39 years, I can tell you there is a very strong investor culture here that is in one word conservative.  The first generation of VCs came out of companies that were consistently profitable. In fact, back in the day of DEC and Data General, the rule was you could not go public until you had four consecutive quarters of profitability. Tell that to the investors in Uber, Lyft et al! These VCs also hated consumer plays. They told me there was no way they could perform their due diligence on B2C companies. With enterprise companies they could call all their CIO friends in large companies and get a reading on the viability of new products from these potential customers. They had no idea who to call to get a reading on a consumer startup like Uber. So they passed. I can’t count the number of times I was told by founders from California that the startups I couldn’t get funded here in Boston would easily have raised capital in Silicon Valley.

And Scott leaves out one of the major governmental problems with the startup economy in Massachusetts: non-compete agreements. In California non-competes are illegal. Period. You can leave your company on a Friday and form a startup on a Monday to compete with your former employer. And many entrepreneurial-minded employees do just that. It’s a fact of life in the Valley. But it’s more than that. The constant spawning of new companies creates the winners that go public and in turn spawn more startups. Not here. The large legacy companies and their lobbyists have kept the legislature from ending indentured servitude in the tech sector. Until the legislature wakes up and does away with non-competes, Massachusetts is doomed to fall further and further behind the Valley.

But founders also share part of the blame that isn’t mentioned in the Globe article. The best and brightest leave Boston for Silicon Valley. The canonical example being Mark Zuckerberg, who founded Facebook in his dorm room at Harvard, but as soon as he got traction he headed for the Valley. Perhaps far more importantly, but lesser known, is that Paul Graham, the founder of Y-Combinator, perhaps the most important early stage investor of the past ten years if judged by the sheer number of investments it has made, started Y-Combinator in Boston. For a while he maintained both an East Coast and West Coast presence, before shutting down his office here and putting all his focus on Silicon Valley.

The tech sector in Massachusetts has been second fiddle to Silicon Valley since startups moved from 128 into Cambridge and Boston. But it has fallen farther and farther behind to the point that Massachusetts is no longer even number two, it’s behind New York, and if we aren’t careful, we will fall behind Texas next.

And there is plenty of blame to go around: entrepreneurs, investors, state government all play a part in squandering the tremendous entrepreneurial engines of MIT and Harvard. Until the culture changes amongst all three groups my advice to the founders I mentor is, sadly, “Go west, young man.”

 

Lessons learned by Adobe in selling software by subscription

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Adobe is one of the most venerable software companies extant. They had their start in life courtesy of Steve Jobs, who invested in Adobe.  Adobe created the Postscript driver that made Apple’s Laserwriter a breakthrough success, as the Apple/Adobe alliance launched the desktop publishing industry last century (along with Aldus’ Pagemaker).  And as a venerable software company Adobe mov from system software (Postscript) to consumer and professional software entailed shipping their software on disks, packaged in boxes and sold in computer stores.

For those of you, like me, interested in technology history, the VentureBeat article by , Adobe’s path from $200 million to $5 billion in recurring revenue presents the lessons learned as Adobe transformed itself from selling boxes to selling subscriptions – software as a service.

You can’t get close enough to your customer

When Adobe went from shipping software in shrink-wrapped packages to distribution through the cloud they went from customer-blind to seeing the full customer experience, namely their usage.

Adobe SVP of go-to-market and sales Rob Giglio said. “We’re taking signals from customers in real time.” Now, the product is part of the marketing — perhaps even the biggest part.

You can’t have enough data

Adobe now uses predictive modeling  based on usage data  to deliver the right tutorial at the right time. From usage data Adobe can tell which customers are having usability or learning issues, and which ones are at risk of churning.

You can’t stand still

Adobe has gone from yearly updates of their software to continuous improvement –  every day is launch day. “You can make the product better, easier, faster, and more bug-free. Accumulating enough incremental value over time means you not only keep existing customers, but add new ones.”

Test, test, and test again

Adobe runs about 200 tests on Adobe.com each week and wants to up that by an order of magnitude to about 2,000 tests each week.

Automate, automate, automate

There’s no way you can run 2,000 tests every week manually. You can’t interact with millions of customers in totally manual fashion either. So the answer has been automating these tests.

What’s been the business impact of moving from shrink-wrapped boxes to a subscription licensing model? Adobe has gone from $200 million a year in recurring revenue to over $5 billion! And their stock is up 300% in five years. So while some people say cash is king and other say content is king, I say the business model – how you make money – is king. At least that has proven true in Adobe’s case.

How to raise your first round of capital

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If you are looking for great information about startups in an easily digested format, e.g. slides, I highly recommend Slideshare.net.

One major change in VCs in the past decade or so, which I believe was spearheaded by Brad Feld of The Foundry Group and Fred Wilson of Union Square Ventures, has been a sincere attempt to educate entrepreneurs. While I’ve known both of them I never asked them about their motivation, but I can take a good guess. Top flight VC firms see literally hundreds of pitches a year, year in, year out. Yet a partner like Brad or Fred may make only one or two investments per year. So it is in their interest to teach entrepreneurs not only how what VCs want to see in a pitch, but how to conduct themselves in a VC meeting, as it is much more efficient to deal with educated founders rather than having to teach everyone, one at a time.

I’ve already written about and recommended Brad’s book, Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist. Now I’m going to recommend a great slide presentation by Jeff Bussgang of Flybridge Ventures entitled Mastering the VC Game: How to Raise Your First Round of Capital. It’s a 19 slide primer that takes the founder from first pitch to due diligence. While its six years old I don’t think anything has really changed in the VC game regarding how to raise your first round of capital. Of course Jeff being a VC he doesn’t spend any time educating founders about the alternatives to VC funding, such as corporate VC, angel groups, angels, super angels or grants like SBIR. After you’ve gone through Jeff’s presentation check out my blog post VC funding and its alternatives to help decide what type of investor is the best fit for your venture.

I have to admit I have not yet read Jeff’s book, Mastering the VC Game, but based on his blue chip reputation and the quality of his slide presentations (you can search SlideShare for others), I’d venture to say it’s well worth reading.

If you still have questions and the time to search for answers there are a number of posts on this blog that fill in the many gaps in knowledge of raising capital that I’ve seen from mentoring dozens of founders in the past decade.

How to ask better questions

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I first learned the power of questions when I was hired into a software engineering company as one of the first, and few, non-engineers.  Most of what was discussed was over my head. I had three options: pretend I understood, remain silent in the hope I “didn’t get called on,” or ask a question. It quickly became apparent that I would learn nothing from options one or two and if I was to swim rather than sink I had to learn and learn fast. I soon determined that there was great power in being the most ignorant person in the world just so long as I asked smart questions. These questions often clarified the discussion and even surfaced hidden assumptions. Thus questions became my most powerful tool as they helped me learn and helped focus discussions.

After being exposed to the Socratic Method I learned that asking the right question of the right person at the right time was extremely powerful. I also learned that making statements can make people defensive, whereas if you phrased the statement as a question it made people think.

The Wall Street Journal article The Secret to Asking Better Questions by Hal Gregersen, sub-titled Most bosses think they have all the answers. But the best bosses know what to ask to encourage fresh thinking. Here are six ways to build that skill drew my attention. Here are the six ways to ask better questions, annotated from my own experience.

1. Understand what kinds of questions spark creative thinking. There are five ways a question can break down barriers to creative thinking: It reframes the problem. It intrigues the imagination. It invites others’ thinking. It opens up space for different answers. And it’s nonaggressive—not posed to embarrass, humiliate or assert power over the other party. What I’ve found is that the newspaper reporters six questions can often be the right ones to spark creative thinking: who? what? where? when? why? and how? Of these the question I ask the most is why? as it will reveal intentions and goals.

2. Create the habit of asking questions.

I find the sample questions in the article far too generic. The more specific the question the more specific the answer. Generic questions like “What more can we do to delight the customer at the point of purchase?” are far from penetrating. Better to ask, “what are we doing now at the point of purchase to better engage customers? Then a series of follow up questions: “What are our competitors doing?” “What do our POP programs cost us?” “Should we be evaluating these programs on a strict ROI basis or are the more long term strategic initiatives?” “How do POP programs relate to customer satisfaction at the point of consumption?” “How are we measuring customer satisfaction and when do we take these measurements?”

3. Fuel that habit by making yourself generate new questions.

Better yet lead your team into a question generating mode by setting an example for them and positively reinforcing the asking of questions. Keep in mind, “There are no dumb questions, only dumb answers.” Staff need to feel safe in questioning senior managements thinking and assumptions, otherwise they will suppress their questioning.

4. Respond with the power of the pause.

Silence is a very powerful tool. It can slow down a rush to judgement as well as stimulate more discussion. By the way, this is a technique interrogators use, as people naturally dislike silence and may talk when they should have held their piece!

5. Brainstorm for questions.

This can be an effective technique when a team is stuck. Rather than trying to brainstorm answers brainstorm questions. That may enable you to zero in on the real problem.

6. Reward your questioners.

If there’s one constant theme here, it’s the idea that bosses should reconceive what their primary job is. They aren’t there to come up with today’s best answers, or even just to get their teams to come up with them. Their job is to build their organization’s capacity for constant innovation.

So whether you are a mentor, a manager, or an individual contributor, learning to ask more and better questions will help you and your team improve.

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