#36 - Dave Parker of DKParker.com
[#36] - How to think about value with Dave Parker
‘’If I don’t understand the cost of selling the product, how to price and how to monetize it, I’m kind of screwed. Right? And that’s why 70 to 90% of startups fail, they start with that first bucket, and they don’t look at the second bucket.’’ – Dave Parker.
Each week on the podcast, we are joined by inspiring business builders who openly discuss their entrepreneurial journey with us, sharing how they obtained their first customers and revealing what worked and what didn’t throughout the growing process. This week, listeners are in for a double treat as joining Conor on the show is tech guru and five-time founder, investor, coach and author Dave Parker. Dave was formerly the VP of Programs at UP Global (Startup Weekend & Startup America) which Techstars purchased.
So much ground gets covered in this episode. We learn how to think about value, the importance of understanding your revenue model and how to perfect your pricing. Dave has helped numerous founders across the globe achieve startup success and is a library of knowledge when it comes to launching a viable business. Not only does Dave offer golden advice for startups, but Dave also gives us the inside scoop of what it is like to reach the finishing line of exiting and selling a company. Key points throughout the discussion include:
An introduction to Dave Parker.
The first-time founder experience.
Leveraging salesforce to grow your business.
The reality of striking viral co-efficient.
Finding the lifetime value of a product.
What is a business model?
The role of maths in business.
Understanding revenue models and the importance of keeping your eyes on the numbers.
Scaling for exit: an insight to selling a business and why you should always seek help when selling.
The advantages of knowing your market and creating competition.
Establishing product market-fit and traction.
Dave’s advice for obtaining your first 10 customers.
Resources:
Book: Trajectory: Startup – Ideation to Product/Market Fit by Dave Parker.
https://www.dkparker.com/books/
Book: Mergers & Acquisitions – From A to Z by Andrew J. Sherman
https://www.amazon.co.uk/Mergers-Acquisitions-Andrew-J-Sherman/dp/0814413838
Connect with Dave Parker:
https://www.linkedin.com/in/daveparker/
https://twitter.com/daveparkersea
https://www.facebook.com/DKParkerLLC/
Connect with First 10 Podcast host Conor McCarthy:
https://www.first10podcast.com
https://twitter.com/TheFirst10Pod
https://www.linkedin.com/in/comccart/
Check out my podcast partners!
Buzzsprout:
https://www.buzzsprout.com/?referrer_id=1389931
Otter:
https://otter.ai/referrals/ETRNKY16
Calendly:
https://calendly.grsm.io/ilev18qxpn1e
Produced in partnership with podlad.com
SUMMARY KEYWORDS
Founders, Revenue model, People, Company, Sell, Business, Customers, Revenue, Sales, Product, Microsoft, Dave, Systems integrators, Pricing, Services, Product market fit, Year, Subscription, Investor, Conor.
SPEAKERS
Dave Parker, Conor McCarthy
Dave Parker 00:01
Those five factors are the equivalent of the magic of compound interest. Right? Because when you have it, you have product market fit. If you have one of them, congratulations, go get the other four!
Conor McCarthy 00:19
Hello, and welcome to season four of the First 10 podcast. I'm your host, Conor McCarthy and I help people start and grow their businesses. I do that through joint ventures, collaborations, coaching, and online workshops. In each episode of this podcast, I interview business builders about the early days of starting a business, about how they found their first 10 customers and got off the ground, so that you can learn what works and what doesn't. Check out my website at ConorMcCarthy.me for more details. My guest today is Dave Parker. Dave is a tech entrepreneur with no less than five companies under his belt. He's also an investor, an author, an advisory board member for dozens of companies. He was formerly the senior vice president of programs at Up Global, that Startup Weekend and Startup America, which was purchased by TechStars. Dave also works as a coach and consultant for startup founders internationally, as well as mid market companies that are staging for funding, growth, transition, and sale. So when it comes to starting and growing businesses, and helping others to do the same, Dave has seen and done it all. He really is a trove of actionable and useful knowledge for founders having been there himself for the good and the bad parts. In today's episode, we cover a good few topics such as the importance of understanding your revenue model and as Dave discovered, there aren't that many to choose from. We talked about what it means to have a viable business. We talk about how to break down value and this applies to any business. We'll talk about how product market fit and traction, just come down to simple maths. We get into a little bit about pricing and how crucial it is to get it just right, which often means charging more, we talk about the experience of exiting a company that you've built. I could have talked today for hours. He really is a great, great guest. And I think there's lots of lots to be learned from our chat. Please enjoy this episode with Dave Parker. First of all, Dave, thank you very, very much for taking the time to be with us here today.
Dave Parker 02:15
Happy to join you. This is awesome!
Conor McCarthy 02:16
Do you want to give us a quick 60 second overview about what you're doing right now?
Dave Parker 02:21
Yeah. So today, I split my time between, well, three things, I always say it's my 50% time is supporting a fund out of Atlanta, Georgia called the Fearless Funds. It was started by two African American women and we we invest exclusively in women of color founded startups. So in the US today, it's about a $26 million fund. And we're getting ready to announce that we are going to raise a second fund, that should be about $150 million. So I'm an operating partner with that fund. So I'm really helping in that transition and investment in the early stages, and then helping the operating role with the founders into the board roles and the transition there where we really helped that operationally. So that's my 50% time, my other 50% time is spent helping founders actually exit. So when you get to the, if the starting lines awesome, I will tell you guys, from a founder perspective, the finish line is even better, because the wire transfers come into your personal accounts, not into your business account. So my partner and I have a team of five people that we do sell side merger and acquisition for founder controlled companies. And the nice thing about that work is when it's busy, it's super busy. And when it's not busy, I have time, so I get to do community building stuff that support the book and travel and like I just came back from Saudi Arabia. And in the last three, four years, I've trained about 450 founders in Middle East in North Africa, which has been awesome, because that's what I love to do. But as you know, Conor that doesn't actually pay anything. So you know, it's community building stuff is awesome, and what I love but founders obviously don't have any money to spend on on high end consulting work. So the answer is, we do that for free or close to it.
Conor McCarthy 03:52
Wow. You are, you're busy. You're busy in a good way. This sounds like a lot of very fulfilling work. And I suppose to be able to do all this consulting and impart so much wisdom to new founders, you yourself have had quite the journey over your many enterprises. Do you wanna take us back to the first business you started what that was like?
Dave Parker 04:12
Yeah, first of five, five time founder, sold three and closed two. So first one was as software licensing company, the problem we were solving was we were I worked for my last job job, I worked for a systems integrator based in Seattle, which is my home. And Microsoft would come to us every month and I was in charge of partnerships and you know, out selling systems integration work, about 350 person systems integrator, and at the time for every Microsoft product sold every dollar Microsoft product sold, it took $3 to install it. So pre-cloud days and all those things. And every month, my rep from Microsoft came to me and said how much stuff are you guys going to sell and like, we we are in the services business. We don't sell product. And at one point I asked him the question like well, how many people are out there like us that don't sell software? He's like all of them. Like 35,000, systems integrators who aren't in the business of selling product, and I'm like, Huh, that's a problem I could solve. Now not realizing in retrospect, it's a shitty problem to solve, because there's no margin in it. Right? So it's a question I always ask founders. I'm like, yes, it's a problem to solve, do the economics make sense? So I grew that company from zero to 32 million in sales in four years and about 155 people. We sold it in 2002. For those of your listeners who don't remember back to 2002 was post 911. Post tech bubble. So we sold it, it wasn't a great exit like it was it was an OK, exit. Right. So, and our big competitors were Ingram and Tech Data who were doing 13 and 15 billion respectively, right. So we were a Microsoft contact was like, you know, it's kind of, you know, 32 million in sales day was kind of mouse nuts. For Microsoft. I'm like, Yeah, but don't forget mouse nuts are important to the mouse, just saying, having been the mouse. So that was the first one. Lots of lessons learned lots of scars, I still get twitchy on occasion, right? When somebody just talks about gross merchandise value versus actual margin, like that's the delicious things that make me you know, super twitchy. Triggered.
Conor McCarthy 06:15
Oh, my God, like, there's probably probably a book or a movie just in that alone. Is there any film? I'm glad you survived the tech bubble with something. Bubble bursting. Was there anything from the very first customers you sold? Or that you got on board that you remember? Is there any any individual stories from those?
Dave Parker 06:36
Yeah, I think there was a couple big takeaways, right? So we were we worked with systems integrators. So one of the things we did was we went out to all the Microsoft events, and we recruiting system integrators from from those events. And one of the things we learned early on Conor was that, you know, Microsoft had all these field sales reps that were all doing the same thing. My rep was doing the region. And I don't know if you could do this today from an IP hack perspective. But we, we basically took all of our sales numbers and broke them down by the Microsoft regions. And then we looked at all of Microsoft's IP addresses. And anytime somebody from Microsoft came to our site, we would redirect them to an internal sales page that showed sales by region. Wow. And you know, San Francisco is the lowest performing region for Microsoft product sales, because it's the home of Open Source. And we took them from in the there's nine regions in the US. And for eight regions. We took them from like next to last a second. And so we really viewed our customer as the input because we were marketplace, right? So you have two sides of a marketplace, sellers and buyers. In our case, Microsoft was a customer. Yes, we're the systems integrators. So what we did was we'd leverage our Salesforce by getting the Microsoft salespeople to go out and say, Well, you guys need to use Dave's company, because people would come back and say, How did you go from next to last a second. And they're like, Oh, we use we use Dave's company license online. Right. So we basically leveraged our sales force to make it easy for them to repeat our message. Now was a deliberate, I think we tried really make it deliberate. In retrospect, it's a little I'm sure there's a little revisionist history there by the one, which that's, you know, founder latitude, right.
Conor McCarthy 08:12
At the time, it's very different at the time, from your testing everything in that press. Yeah, exactly. So. Okay, so you finished up with that? And did you have the idea for the next business in mind? Does it spring out of the first one? Or was it a total clean break?
Dave Parker 08:25
It was a total clean break, we actually did a hardware company. So one of our investors was out of Japan, they actually approached me and said, Hey, we have this product, classic engineering dilemma of engineers built a product without an understanding of who the ideal customer was, or what the market was, would you help us take it to market and the time I'm thinking, sure, like, they'd been a great investor. So six months into the project, I'm like, we should just shut it down and return all the money to the investors, right? Because the product was not a product that would actually it didn't solve a problem, right? So so now, when I talk to founders, I'm like, Listen, if you have a lack of clarity here, pivot around the problem, don't pivot around the product, right? Because, you know, they had this, it was basically a device that was a thumbprint reader, with an embedded processor and storage, right? And the answer was, well, what problem can it solve? And after six months, I'm like, the answer is, there isn't one. So you really have to start with the problem that with a product and I think founders, you know, from personal experience, right? We fall in love with our product. And we're like, all we have to do is just tell people, and people will rush to us, and find us, and we'll go viral, even though we're b2b. And no b2b company ever fucking goes viral. But we will be the first. And I always tell people when I do seminars, that listen if you're if like two companies have gotten close to viral coefficients, and that's, by the way, it's just math. Right? So viral coefficient is a key factor of greater than two. You can you can Google it. LinkedIn for a very short period of time when they made their app that it allows you to upload all of your contacts for LinkedIn. For about six months, they spike into greater than two on viral coefficient. Slack has amazing network effects, right? So people invite other people and people outside of your origin. But that's a network effect. And maybe they got viral coefficient a little bit, but not much. So when people are like, and then we're going to get on TechCrunch and go viral I'm always like, yeah, no. So sorry to burst your bubble, but you're a b2b. And there's, if you are the first one, like I will probably write your first cheque as an early investor, but it ain't gonna happen and not my cheque. I'll still write cheques, but it's not I'm not going to be b2b, viral.
Conor McCarthy 10:37
It's a brave move to get into hardware. From what I've heard hardware is hard. It's another level of difficulty.
Dave Parker 10:42
Yeah, no, because it was hardware and software. And so yeah, did that start a consulting firm, we grew to about 85 consultants, so one to do a services business. The next one was a company that we built software for the small and medium business segment. And it solved the problem, but the catch 22 on that one, kinda was the whole If you can't sell it for reasonable economics, and scale a sales team, so you can't create a product that no one's ever seen before and market it because nobody's searching for Google search for those keywords. So you have to sell it. So now your cost of sale breaks down into what's my lifetime value. But I have to calculate it 12 months, because I can't build that like a three year lifetime value on a product that's never been sold before. So so your unit economics on that one are are a challenge for sure. So we ended up selling that one, which was really just finding a home for it, right? Because they what we found was the customer small neat businesses liked the product, but they wouldn't pay what we had to pay in order to hire a sales team to go do it. And then the last one, we had a super ambitious plan to kind of do an indeed.com in China and help Western companies find talent in in the emerging market, especially bilingual talent. So generally in the West, right? People on LinkedIn are generally telling the truth and occasionally lie. I will tell you in China, it's not the case. So people, so if Starbucks is hiring for country manager, or branch managers and like that, they may get 5-50 people who apply. But in China, you'll get 5000 people who apply and you have to screen them out. Meet with them. It's an online offline combination. So we started that company in June of 2008. And you probably remember, October 2008, nobody was hiring. So it's kind of like walking out of your house going to get a coffee and like going like, Oh, I forgot my phone and you go back in and the House has no furniture. No fixtures like it's just stripped bare. So in in October of 2008, we're like, yeah, no, we're just going to close this down. So that was a that was a fail. So. So yeah, a few sales, a couple closes, you know, the math overall, I think when I look back on it, the thing that I over index on now is how do you make money at it? Right? Because if there's, if you if you break down the business model into its three components, right? So there's a, if you ever look at Wikipedia about what's a business model, you'll see there's three parts to it, there's creating value, which is your product or service, right? So if you're building, if you and I are building a software product, it's engineering and design and support and all those costs that are associated with hiring those engineers to build the product. If it's a service business, and we're a law firm, God forbid, right? It's the people we have to hire to do the work, right. So I have that's my constant deliver, whether it's a product or service. So all those costs are, the costs are what they are, if you're building an enterprise product is going to take you longer, if you're building an app on the App Store, it's going to be shorter, then my next cost is my cost of sale. So my cost to deliver so it's, it's creating value, delivering value. And the last piece is capturing. So in delivering value, I have pricing, revenue model, marketing, and sales, those are my four, those are my all of the things that represent my variables in my constant sales. Pricing is one of your variables. It's not a cost, but if you price wrong, it's hugely detrimental. Right? And then what you have leftover and for capturing value, right, in the last, the last bucket is top line revenue and gross margin and net profit. Right? But you don't control those, you control the two cost buckets. Right. And the pricing is so you know, in the top one if if I'm like, Oh, the products too expensive. Can I do it with less engineering hours? Can I do it with cheaper engineering hours? Can I do it now? You know, with AWS? The answer is I don't need servers now anymore. I can I can do on demand. That's awesome. That's functionally lower the cost of building a product. But if I don't understand the cost of selling the product, how to price and how to monetize it, I'm kind of screwed. Right? And that's why 70 to 90% of startups fail is they start with that first bucket, and they don't look at the second bucket. So I'm a big fan now of like, let's pencil out the back of the napkin math on your model. Like what do you think the customers liked? Tanzania's gonna be well, we're gonna do a free for life. No, you're not. Because you're not HubSpot. And you're not a billion dollar company already. What we're gonna do we're gonna press the dollar. No, no, you're not. Because you don't you don't have any money you're not gonna make. And yeah, but if we just show it to them, it'll, it'll increase value over time. Let me show you how the math works. Right and my favorite and you know, Conor, because she had like, people are like, here's my spreadsheet, we're gonna go from zero to a billion dollars. And I'm like, okay, so let's say you did, just for novelty. You would have grown faster than any Inc 500 company over the last 15 years, because the average Inc 500 company, so this for those of your listeners who don't follow Inc, magazine, in the US attracts the fastest growing 500 companies across the US, but the basis is a million dollars. So you can't start with $1. Right. So it's a basis of a million, and then it's over a three to five year span, how faster they grow. If you if you wanted to be consistently in the top 10 list over the last 15 years, the answer is 42.4 million. So 1 million to 42.4, you would be in the top 10 of the Inc 500 List consistently. So what happens is an investor is when you come and show me your numbers that you're going to go from zero to 300 million in five years, and then you leave the room we always go, they're cute. So now I try to tell founders that in a nice way. They're like, Yeah, but Dave, you haven't looked at the spreadsheet? I'm like, actually, I know how spreadsheets work. But I'm just going to tell you, you would be in the math that would. So you know, companies like Groupon, Conor got up to like 300 million, I would argue the gap on that is not actually true. Right? They were booking the $50 charge that they were charging for this, you know, for the cafe or whatever, that wasn't actually their revenue, that was gross merchandise value. So yes, it kind of, but for a startup, all that matters is how much cash you have in the bank, right? GMV just doesn't matter. So when I we have a couple companies in our portfolio that track GMV. And I'm like, Listen, you can put GMV under realized revenue. So the bottom when I see the revenue line at 11 Point font or 12 point, you can put GMV at the seven or six point font underneath it, because it just doesn't matter. Like it is a it's such a vanity metric that founders get wrapped into that it's a problem is problematic for sure.
Conor McCarthy 17:26
Hmm. There's a great saying that there's more fiction written in spreadsheets than in books.
Dave Parker 17:33
Amen to that!
Conor McCarthy 17:34
Yeah, you see, you've seen an awful lot more of it than I have. But I, I have been that person as well, who has kinda gone you know what, this could be a hockey stick business, straight out of my head.
Dave Parker 17:44
So what I love about what I get to do, is I go into a room of 100 founders, wherever in the world I happen to be, and I always lead with the same sameness like me, this is my tribe, right? I mean, all of us, all of us are slightly delusional. All of us know that 70 to 90% of the people are going to fail. All just look around and say I feel sorry for the rest of y'all. Yeah, cuz I'm going to succeed. Right? It's yeah, right. But everybody feels that way. And every idea is delusional. But like, right before it works, right?
Conor McCarthy 18:11
So that's the paradox. That's true. Yeah, yeah. Yeah,
Dave Parker 18:15
It's like the tribe there is there is 5% of people who are just completely delusional. But. So that's just the math.
Conor McCarthy 18:26
I hope you're enjoying this episode, and that there's some actionable and insightful advice that you can take out to your business, helping you identify and create those first 10 customers is what I do. So if you like what you hear on this podcast, and want more information, including a bunch of free resources on how to find your first 10 customers and grow your business, check out First10podcast.com, that's 10 one, zero, or find me on Twitter @thefirst10pod. Now, you probably hear what I'm about to say on every podcast you listen to, and it makes a really big difference to the show. If you find this podcast in any way useful or enjoyable, I'd be so grateful if you left me a review on iTunes, it really does make a big difference in terms of other people discovering the podcast. Also, if you leave a review, you will get to see your name and the review in lights. What I'll do is I'll design your words and post them online, tagging you and your project along with it. I know it's a pretty sweet deal. Okay, let's get on with the show. You touched up there with the revenue models. I mean, you you wrote a book that I will obviously include in the shownotes that everyone should read. I mean, revenue models is your thing. But it's it sounds like when I talk about revenue models to people who aren't ready for it, it's kind of like, oh, wait, I have to I have to go to college to understand this.
Dave Parker 19:45
Yeah, the good news is is you don't, so to your point so. So this started as an innocent enough question and has turned into this weird like Dave's quest, which is kind of frightening when you think about it, because I'm super geeky about unit economics and revenue models. So Somebody came to me when I was at Startup Weekend. So in addition to doing the five startups, I had a chance to run Startup Weekend programs globally, and was the CEO of the company before we sold at TechStars. And my last full year there, we did 12 165 events worldwide, in 120 countries and 74,000 attendees. It was amazing. Like, I got to join a movement in progress. And the team started the movement, Marc Nager and the team were, you know, all these, I think the average age was 27 when I got there, so I single handedly brought up the average age. And we went from 500 events a year to 1200 65 in two years. And because that's what I love to do is like operationally, how do you scale these things and create efficiencies that you can? You know, I'm just geeky. So somebody came to me early and said, Hey, can I have a copy of your financial model? And I'm like, well, yeah, I'm kind of a community guy. So I'm totally fine with that. But yours is a marketplace. That's b2c, and mine's a b2b, subscription business. And it got me thinking like, well, how many templates would you need to have in order to like, just say, here's a template, right? So innocently enough, I went to CrunchBase CEO at the time before they have the API. And I'm like, like, can you give me a list of every seed funded company in the last 18 months, ends up being 20 654 companies. And because it took me so long to write the book, because I kept being interim CEO and selling the company. I created a five year longitudinal study. So we ended up tracking these companies going to their websites, looking at their revenue models, pricing. And if they didn't have one, I'd reach out to him and say, Hey, I'm doing research on blah, blah, blah, revenue models come to find out. There's 14. That's it. So there's, technically that one is combination. So you can have like a, you know, marketplace plus a subscription. Okay, so yeah, you can, there's variations of that one, too. But, you know, you've got services revenue, you've got commerce, you've got lead gen, you've got subscription, and you've got metered services, like Twilio. The irony of it, which I found out afterwards is I put the list into the book. And it has a list of the 14 with examples like Spotify and Salesforce for subscription. And a friend of mine, who's in the FinTech world is like, Have you ever looked at what the multiple is on each of the revenue models? And I'm like? That's a great question. So we pulled a list of 220, tech, publicly traded tech companies, so you know, Salesforce to DocuSign, to snowflake, and said, Let's look at the price to sales ratio on each of those. And sure enough, they stack, the stack rank out really, really interestingly. So like, a services business, if you and I do a consulting business for a million dollars, it's if we were to sell it, we would sell it for roughly a million dollars. And usually we get paid in an earn out over three years, because they're really just giving us our cash in advance that we're gonna pay them back. So that's the other side of my world, right selling company. But if you and I did a million dollar subscription business, it would likely sell between a $12 million. Because the logical of market buyer has the value that they see in the public market is eight to 12, technically, before the last tech sell off in the end of the year, and Russia invading Ukraine, hopefully not. Right. DocuSign is example traded 32 times trailing 12. Now there is one model, that's better, actually. And that model is metered services. So if you think Twilio, Splunk, UI path, Okta, all of those companies are in the API economy, and they charge a subscription, think AWS, but if you pulled AWS out of Amazon, so Amazon has a total trades of 4.42 times trailing 12, which is still an impressive number. If you did the cloud only and pulled AWS out, it would probably trade 35 times trailing 12. So as a founder, you can't always dictate to your customers how they will buy, right? So you can't be like, Oh, I'm going to dictate, you're going to be a metered service. Because Dave said it has the highest valuation, maybe you can, maybe you can't, right. But the point of this is, is that if you can choose, there was a dramatic impact on the exit valuation of the company based on things like if I have recurring revenue, it's predictable and forecastable, the company's more valuable than transactional revenue that may or may not happen this year. Right. So if you have a choice, pick a good one.
Conor McCarthy 24:29
Exactly. Yeah. Think deeply about your choices.
Dave Parker 24:35
Go grab a pint. Think deeply.
Conor McCarthy 24:38
This is this is a question. I don't often get to ask my guests. But because this, this podcast is all about how things start. But when things are ending, either in a sale or an acquisition or whatever it is, what's something that people might not know about what it's like to sell a company?
Dave Parker 24:53
Oh, yeah, for sure. Great. That's actually a great question. So the first time I did it, I think I have a book up on my shelf called Mergers in action. positions from A to Z. Because as I started the process, I'm like, holy crap, like, what do I? What do I even need to know? Because it's like going into every, like zero to 1 million in revenue is hard. One to 10 is hard. 10 to 100 is hard. Right, they're all different kinds of hearts with different kinds of people. And we often think about technical debt, but we don't always think about people dead. Right? So in the early days, we hire the best we can find, and we hope, right, and at some point, we have this organizational debt we need to address as well. So you're bringing some of that into the sale process. So logic, in most cases, is going to be a strategic buyer, right? Because you're not going to get, you're not going to get a great exit based on EBIT ducks most of us don't have even though we just have revenue and growth, so I'm gonna get a multiple on revenues. So the question is, if I look at my public company, comps, and likely market buyers, not aspirational, not the ones, I'm like, oh, Google's gonna buy me and of course they're not, right? You're doing 2 million in revenue, congratulations. And I don't trivialize the 2 million in revenue, but Salesforce is not going to buy you if you're under $50 million in revenue, it just cost them too much money to do a deal. Unless you have something completely unique that your three PhD co founders and your the only ones in the world, which happens, right? Just not very often. Um, so yeah, so I think about forecast stability and predictability of revenue. Right? And how, how good are we at that mark sales and marketing machine, don't miss your numbers. Oh, my God, this is the most painful one, because we'll start with somebody and they're like, we're gonna hit 2 million in revenue by the end of the year. And we go out and put the pitch together. And and you know, that it's the same as fundraising, right? If there's a sense of urgency that the company's value is going to go up. If I don't put in money now, right, then I'm gonna come back and see you in 30 or 60 days, and the price is gonna go up because you've got momentum, right? And then if you come in at 1.8, after saying you're gonna do two, the answer is the air leaving the balloon, right? It's just really hard. And so, you know, hitting your numbers is, you know, don't don't take your eye off the ball, for sure. And I think that, you know, knowing who your logical market buyers are, creating competition is really important, right. So sometimes people will be like, I'm getting inbound requests. Those are junior associates of private equity firms who get tasked with their first year job is to go call a ton of startups and say, Hey, you should meet with my partner. Now, none of the associates have the investment decision of any, most of them are looking for positive EBIT companies, right. So they're not really they're really just wasting your time. And I know, it's a great compliment. It's flattering. And I know the first time it happened to me, I was like, Oh, I'm validated. Right? And then you meet with him. And you're like, no, like, it's the same thing I think is true for venture right. Sometimes VCs just pat you on the head, like, let me know when you have traction, but they didn't tell you what traction is. Right. And I think that one, the one thing I'd say for your earlier stage and later stage companies, both Conor on the topic is when people talk about product market fit and traction. It's math. Right? So let's take all the mystery out of it. Right? Product Market Fit and traction is math, here's the five components, at least five components you need to look at that are the leading indicators versus the trailing indicators of Product Market Fit traffic at the top of the site, right? Or App Store, if you're doing an app, number of downloads, number of leads number of people who fill out a form and said, Hey, give me a demo. So I now have traffic, I now have leads of the demos and leads that I got what's my conversion rate to paid? So there's my my third factor, right, my fourth factor then becomes my time to close if my time to close is improving, if I'm going from 90 days to 60 days, things are moving the right way. The last one is my annual contract value or average contract value, is that average contract value going up versus going down? This, those five factors are the equivalent of the magic of compound interest. Right? Because when you have it, you have product market fit. Yeah, if you have one of them, congratulations, go get the other four. Right. But you have to get those four things are the five things put together to have product market fit. And I think for a lot of us as founders, we're like we have one yes. You know, like, that's awesome, right? But go get the other four. Right. So well, but I but I'd have to charge for my product. Yeah, that's the pricing component, right? Go do pricing over the monetization, how we're going to charge for it. Now we're gonna do is subscription. Great. Awesome. Right. But you're not. You're not inventing a new revenue model. Right? There's none of this is the good news is is a checklist, right? So while you're building product and inventing your innovations, you can go back to this checklist and say, Okay, I'm going to pick this primary revenue model, the secondary revenue model, but break down the components, right. So I have revenue model, how I monetize I have pricing which is a variable that's in my control within a range, right? I can't overcharge for that I'm going to charge within a range. But I want you to be at the high end of the range, because it's always easy to bring price down. It's frickin impossible to bring price up. Right? So I'm going to set a first year price of, hey, here's my price, but I'll give you a 30% discount for the first year. But I'm setting an expectation price is going to go up, right? Most vendors set the price too low. And then they get stuck with well, it's hard to raise my customer pricing. Yes. So revenue model, pricing, marketing is the next big bucket, how what, how am I going to acquire customers. And the last piece is promotions. So keep in mind, those are four distinctly different things. So if I'm giving you a 30% discount, so this goes back to my financial model example that I'm geeky about, right? If I'm giving you a 30% discount, that's going to show up in discounts on the spreadsheet. If I'm doing $1,000 A month in marketing spend, that's going to come up as a marketing expense. So a lot of times founders who don't have that experience, and first time founders, particularly will mudge all those things together, right, I've got my marketing, my pricing, my promotions, and my revenue model are all one thing. And I'm like, they're four distinctly different things. And you have to manage them differently and track them differently. Or you can't decide what levers you're going to pull and push in order to get customers faster. Right. So that's, that becomes a limiting factor about it. When you have those things in place, you have momentum and product market fit. So when it comes to like, Hey, Dave, what's the company worth? We end up doing evaluation partially based on revenue model, partially based on momentum and growth, like you have to be about 50% annual growth in profitability combined, right used to be called a rule of 14, it's become the rule of 50 over the last couple years. And then do you have enough revenue? Like if you're doing 800,000 in revenue? The answer is people are buying potential and they're requiring the team, you're not going to get a good Exit Multiple on that. Right. So, so yeah, lots of things to consider in there when you get to time to the first sale. And I would say get help, right? Because the last thing you want to do is be like, you know, when when you're when you're buying a car dealership, they're like, let me talk to my sales manager. You need somebody to at least a board member who can help and provide perspective. And sometimes we're so anxious as founders just to land the deal that we end up taking the first deal, and then it ends up not being a great exit. Right. So for the founders, which is a bummer.
Conor McCarthy 32:26
Yeah. Oh, boy, I love that idea of those levers to pull though, that there are, just paying more attention to those four things will get you, will have you thinking the right way?
Dave Parker 32:37
Yes, at least you can break it down to something that's now manageable. Right? Otherwise, it's otherwise it's just a cluster.
Conor McCarthy 32:43
Yeah. I know you have to go in a moment. So I always wrap up by asking people what their advice is, for anyone who's out there looking for their first 10 customers. Yeah,
Dave Parker 32:55
I think the, boy, you know, I'm gonna give you probably different than the one that you would normally get is going to be all about pricing. Like, I'm gonna look for opportunities to to raise pricing, right, which makes us as founders so fearful, because we're like, I know what the MVP is, and I know all the features it doesn't have, and I know, your products gonna change over time, it's going to mature. So sometimes in the pricing, seminar I do for founders, I was talking about my, I could send you a picture of my son, right? He was super cute. He's five, you know, it's awesome. Except today, he's 29. He plays lead guitar in a metal band. He's tatted up and has gauges in his ears. Now, they're both true, but one of them is accurate. So for the founder dilemma, I would say work on how do you price up, if you if you're giving a Customer Price, and they're not pushing back? It's too low. Right? And we have to you have to go, you have to create enough margin to have a business, right. And if the customer is not willing to pay for the value you've created, you have a problem. And I would rather you know, I think for me the biggest challenges we end up with zombie startups in the portfolio and friends and you guys, you know to like in venture in the venture world top quartile produces returns, the top decile gets monster returns, which means the bottom 75%, the bottom 25 or quarter of that total portfolio dies relatively quickly, which means the middle 50% dies slowly. I would rather you go kill it and start a new idea. And I would wait you another cheque as a founder, than be a zombie startup for seven years. Right?
Conor McCarthy 34:31
What a waste of talent and energy. And opportunity. What's what's amazing about this conversation is you have experienced both ends of the spectrum. And you did a great job of kind of communicating some of the really important factors at both ends and a bunch of stuff in between. So thank you very, very much for that. Thank you for your time today.
Dave Parker 34:49
Happy to do it again sometime. Let me know how I can be helpful. Thanks, best to your audience.
Conor McCarthy 34:53
Thanks.
