Rob Walling (@robwalling) spent years bootstrapping successful SaaS businesses, and today he's helping others do the same as the founder of TinySeed, the first accelerator for bootstrappers. In this episode, Rob and I discuss common misconceptions around fundraising, how to succeed as a founder from an investor's point of view, and why now is the best time to be an indie hacker.
What’s up everybody? This is Courtland from IndieHackers.com, and you are listening to the Indie Hackers podcast. On this show, I talk to the founders of profitable internet businesses and I try to get a sense of what it’s like to be in their shoes. How did they get to where they are today? How do they make decisions both at their companies and in their personal lives, and what, exactly, makes their businesses tick?
And the goal here, as always, is so that the rest of us can learn from their examples and go on to build our own profitable internet businesses. If you’ve been enjoying the Indie Hackers podcast and want an easy way to support the show, you should leave a review for us on iTunes. Probably the fastest way to do that if you’re on a Mac is just go to indiehackers.com/review, and that will open up iTunes for you.
Today, I’m talking to Rob Walling. Rob came on this show about a year ago to discuss his almost two-decades long journey building and selling profitable online businesses and culminating in the sale of Drip, his latest company, to the tune of many millions of dollars.
Rob is also the founder of MicroConf, the world’s largest conference for bootstrappers. More recently, he’s the founder of Tiny Seed, the only startup accelerator for bootstrappers. The way Tiny Seed works is Rob invests in a bunch of companies who all join together as a single cohort. Then over the course of a year, they work together to build their companies and grow them into something bigger.
I think it’s a cool model and Rob is particularly interesting in the talk to because as an investor, he gets to see what works and what doesn’t work across a wide array of companies, whereas most people I have on the podcast can only extrapolate from a sample size of one. They’re only one person and they can only tell you about their experiences. I hope that you enjoy the episode. I think there’s a lot to learn from the perspective of an investor.
(End of introduction.)
Last week you told me that you have over 700 audiobooks in your Audible account. What does that say about you, Rob? How many of those books have you actually listened to?
It’s a little embarrassing. It says that I'm a learn-aholic. What’s interesting is I bet there’s about 150 to 200 kids’ books and then my wife probably has 100, so I have a portion of that number. But if they’re in my account and I bought them, I have listened to them.
I keep them on a wish list and then when I am ready to add it into my list of three or four books, then I buy it. Here’s what I did discover, too, a little secret right off the bat, is you can return Audible books. I’ll get 10%, 25% in and I'm like, “This is not good.” And you go in and you exchange it. If you paid with a credit you get a credit back. If you paid cash, you get the cash back.
So I've been doing that ruthlessly now for about a year and half to two years. There are probably some in there from five years ago before I knew this that I got halfway through and bailed on, but I didn’t get the refund for. Audible has never had an issue because I have 700 books that I've kept. It says that I like to learn, man, and that’s a huge part of being a successful founder. There’s got to be a little bit of ambition. There’s got to be a little bit of willingness to take some risks, but I also think you need to learn stuff really fast.
That book returning tip is pretty good, because I start a lot of books and don’t finish them. I drop them. Sometimes they’re not even bad. They’re like, “Oh, I've gotten enough out of this book and I can tell it’s not going to say that much more,” and then I just drop it and move on to something else. But I haven’t yet figured out that you could return the book and get a refund. I'm going to start doing that.
And I only do that with books that I don’t - if I listen halfway and I'm like, “Man, I got some great stuff out of this but I'm not going to finish it,” I don’t return it because I feel the author should get the royalties cause I got some value out of it. But it’s only if I didn’t.
Patrick Carlson’s website has a link to this passage from a book by Umberto Eco. He’s this Italian philosopher and novelist. He had a couple of apartments with huge libraries, and people would walk in and always ask him, “Have you read all these books?” which is the same question I asked you about your audiobook library.
He liked to troll people and talk about how he hadn’t read any of them, otherwise why would he keep them there. But I think what’s cool about it is he had this idea that essentially your library can also serve as a reminder for all the stuff that you don't know. I thought that was inspiring. I heard that and I immediately bought a bunch of books that all my friends had recommended.
I've got maybe a hundred sitting on my shelf, but I've read less than half of them. It’s very humbling because every book I look I think, “Oh, that’s a book my buddy Dave recommended,” and I know there’s a bunch of stuff that Dave knows that I don't know because he read that book and I haven’t, which is great. But is also hasn’t motivated me to read any more than I already have. I'm still a book or two a month. It’s good for humility but not necessarily for motivation to read more.
Right. You know, I've got to be honest. We’re obviously in quarantine right now. The thing I miss most about it is going to bookstores. I don’t actually buy that many physical books, but for the exact same reason you just said. I love being around books because I love the knowledge and the idea that there’s all this knowledge out there.
I have since I was a kid. When I was 10 years old, we’d go to the mall and I’d go into Walden Books, they’re totally out of business now, or B. Dalton booksellers, and my mom could leave me for two or three hours. While that sounds irresponsible in today’s parenting environment, I would just sit and read and read and then I’d have a big stack and be like, “How many can we buy?” I totally get it.
Books are the ultimate ambient decoration to have around.
Is there any book you’ve read in the last year or two that you can’t stop thinking about, you can’t shut up about, you're telling everybody about some idea that you learned from that book?
You know, there’s a book that impacted me a lot. I've referred it to a few people. It was referred to me by Steven Kellet who’s a MicroConf attendee. It’s called Why We Sleep. It’s the science of sleep.
It talks about how sleeping in a room that is not really dark, relatively cold and really quiet, even though you don’t notice it in your physiology, it’s not ideal from an evolutionary perspective and that there’s basically an epidemic of people who don’t get enough sleep. Teenagers, all the angst that comes with that, scientists are starting to think it’s that, wow, when you’re 15 and going through puberty you need 10, 12 hours of sleep a night, whereas high school students get much less than that.
I often say pricing is the biggest lever in a SaaS business, or really in most businesses. Sleep, I think, is perhaps one of the biggest levers in our lives, sleep and exercise, probably. So Why We Sleep, super fascinating.
One of the books I have on my shelf as well. Completely agree. I'm one of these, I’ll go without sleep and be like, “I feel perfectly fine,” but then there are certain things where I can tell, “Oh, this lack of sleep is affecting me.”
When I'm coding, for example and I find myself just wanting to take a bunch of shortcuts and get things done as quickly as possible and not write the right code. And I'm like, “Oh, it’s because I'm tired.” Or if I'm playing poker or something and not thinking about every hand, I can tell a subtle difference between how I'm playing if I’m caught up on sleep or not.
I think all the tips in that book are great. Any founder who wants to operate at the peak level should probably be getting a lot more sleep, doing a lot more exercise than they think even though it seems probably on its face more immediately productive to stay up an extra hour and answer those emails, etc.
Yeah, for most of my adult life, I don't know when I discovered this. This is within the last 10 years I discovered the same thing, my sensitivity to sleep and how it impacts me.
And for me, it’s not just productivity, it’s my outlook. My opinions on matters would change. I’d wake up and I’d almost feel depressed or very pessimistic to the point of, I'm running Drip and I would get up. We’re doing some figures in ARR and I’d be like, “This business isn’t going to work. There are too many competitors and we’re going to get crushed.”
I would have this feeling of impending doom. I wouldn’t tell anyone, but I would feel this crushing weight all day. And then I would get a good night’s sleep and wake up and be like, “What was I thinking?” It literally would change my psychology.
I started tying it to sleep. It was three things for me. It was sleep, lack of exercise and drinking alcohol the night before, which degrades your sleep quality. So as I tweaked those things, it’s very rare that I have a day like that now.
It’s funny. You hear all this basic advice that we’ve probably been hearing since we were kids, “sleep and exercise.” For startups it’s the same thing. “Talk to your customers. You can even charge more.”
It’s one thing to hear that stuff and be like, “Okay, I get it, I get it, I get it,” but it’s another thing to do it. There’s a long list of things that I get and I'm tired of hearing but that I don’t do. A lot of it is the fundamentals.
If you're playing basketball, you’re on a sports team, the coach is just like, “Do the fundamentals. That’ll get you 90% of the way there,” and most people just don’t do the fundamentals. They’re focused on all these fancy tricks and extra stuff and they’re not really doing the basics.
Right. “I’m going to buy the next book and implement the next productivity thing and the next growth hack, and the next body hack cause I'm going to take this –
What’s the newest thing.
– protein that I pour in my coffee with this” blah, blah, blah, but are you doing the basics? Cause you know what, the basics are boring. The basics tend to be hard work or at least require discipline.
I think this is a perfect analogy for starting a startup or just living life and being healthy. We want to read about the next growth hack. But it’s about - we know it. What is it, Courtland? It’s “Talk to your customers.” It’s “Find the pain.” It’s all of it, and it is interesting.
So you're trying to do something that I don't know if there is a list of basics out there. I don't know if it’s something that’s been done before. You're trying to take the Y Combinator accelerator model and apply it to bootstrappers. You talked about this a bit on the podcast a year ago when you first launched Tiny Seed. Remind us all about the concept and how it works.
Tiny Seed is the first startup accelerator designed for bootstrappers. We’ve really focused on SaaS, so I tend to say now it’s the first startup accelerator designed for SaaS bootstrappers.
In essence, we saw – I say we. It’s Einar Vollset is my co-founder, and I. And just through my podcast and the conference MicroConf and all the stuff I do online and conversations with founders.
I've done advising. I've done a little bit of angel investing on my own. I did about 12 or 13 angel investments privately. I have a lot of conversations and then I have exposure to quite a few founders and companies and all that.
I kept seeing this bifurcation where it was like, “All right. You can raise venture capital which most of us don’t want to do because it comes with a bunch of strings attached. Not always, it’s getting better. But I don’t want to move to Silicon Valley. I don’t want to work 90-hour weeks, etc., etc., all the tropes there.
And then there were folks that were self-funding or bootstrapping, which is what I've done. But it’s hard. It’s hard. I mean, you know this, that bootstrapping a company is hard. So I remember at an early stage at Drip I was like, “Man, if I had a couple hundred thousand dollars, my life would be” - not in my personal account but in the business account - “my life would be noticeably different.”
I started seeing customers do this. Customer.io raised a couple hundred grand back in 2012. Then Jordan Gal of CartHook raised money. I invested in them. They’re not raising it to go on a venture track. They’re raising it to, in essence get to profitability, to reach escape velocity, to get product market fit, to start marketing and then to become profitable at some point.
They can raise venture later if they want or they can sell the company, or they can just take dividends out. It’s this whole different model. I started to see a lot of founders interested in that, started talking about it, thinking about who’s doing this, where’s the money coming from.
Eventually I was over diversified with startups. I had too much money in angel investments. So people were asking, “Who’s investing like this and where can I find investors that aren’t trying to shoot for unicorns?” They aren’t only funding the Ubers and the Instacarts, but they’ll fund a SaaS idea that can do $5 million a year.
So that was the original idea. I got together with Einar and we raised just under four and a half million dollars as a fund. But we didn’t want to just write checks. My whole adult life, since I started blogging in 2005, has been trying to educate but trying to help founders. If I'm a year ahead of you I feel like I can offer some advice at least on what you're doing.
So it’s a yearlong remote accelerator. We decided to do a yearlong because SaaS takes a long time. We felt like the 90-day dash to a demo day is helpful, but we think there’s more value in a longer program.
Then we wanted to do a batch because of the network. The motivation of working together with other founders is huge. It’s remote because where else could you pull together that many bootstrappers because we are so distributed? We are in hundreds of cities across the world. So that’s the long and short of it. We just launched this second batch.
I saw. It’s a lot of great companies. I am a mentor in Tiny Seed, and you’ve got an all-star list of mentors as well, Hiten Shah, Jason and DHH from Basecamp, Rand Fishkin, Patty O’Leven (ph), your wife, Sherri Walling and Laura Roeder, April Dunford. It’s like a Who’s Who of Indie Hackers podcast guests helping all these startups.
Let’s talk about this cohort model which I think is fascinating. I went through Y Combinator in 2011. The way any accelerator works is everybody joins at the same time. The latest batch at Tiny Seed, all these companies join at the same time and they go through this process of building their companies while talking to other people.
I think that’s the secret to why Y Combinator is so successful and why a lot of the companies are so successful. It’s an X factor that companies going through YC have that companies who are on their own don’t have, a bunch of peers who are working alongside them. What is your take on the cohort model and how is it working for Tiny Seed?
It was something. Einar went through YC back in 2009 and he knew the value. It’s the same. You knew the value. Then for me, having started a couple different online communities and then MicroConf, and seeing the value of getting people together and realizing that there’s so much more value in the hallway track, the conversations in the hallway versus watching a speaker speak. It was a no-brainer from the start.
In our very first crappy hack to get our landing hack for Tiny Seed that I put up overnight, we had some basic tenets. It was a little bit manifesto-ish. “This is what we believe. We believe you should be remote. We believe we should not shoot after unicorns, and we believe in the batch model, the cohort model.
The support between batch members the willingness to help, the shared expertise of, “Hey, two batch members are amazing in enterprise sales, and three of these folks really know SEO well,” it’s amazing.
Even to be able to - friendly competition against one another of like, “Hey, they’re doing pretty well. We’re not in the same vertical. Maybe we can borrow a trick. What’s working for you right now?” as well as the network. Everyone has their own network and we’re able to tap into that. I have no desire to not do that. I've seen there is a fund that did batch models and then they didn’t, and then went back to doing batch models because of how value they saw in it.
Yeah, there’s so much motivation in having other people working on their things at the same time as you. I talk to a lot of founders who have trouble with motivation.
They wake up every day. They’re living in some city where there aren’t that many other Indie Hackers. They don’t have a lot of friends who are doing this and it’s just that. Maybe they’re not getting a lot of sleep. So they wake up and they have this existential crisis, like “Oh, man. Is my company going to work? Is this stupid?” etc.
But when you have other people motivating you and doing the same thing, you have some of this friendly competition, you have some of this support. It sounds like a little airy fairy, “Everyone work together,” but the reality is we’re such social creatures.
We’re so programmed inherently to care about what other people think, to care about status, to care about not letting down our colleagues, to care about impressing people, and all these emotional levers that pull us along. I think it’s incredibly powerful just to have a ton of people you’re working with.
Yeah, and people who genuinely care about your success, because you're like a college class or a sorority or fraternity where you have a deep connection to one another, especially we do three in-person retreats during the year just to get everybody together cause in-person does trump Zoom and video chat. Man, those bonds start to go deep. Friendships form that aren’t just talking about work. Pretty special.
So let’s talk about how this works. I had Tyler Tringas on the podcast last year. He runs Earnest Capital which has a similar goal, funding for bootstrappers. He said, “You can’t just take the YC model and copy it over to bootstrappers.”
What he meant by that was, you can’t just copy and paste. You have to adapt it to account for the differences between bootstrappers who you’re investing in and what makes them different than the high growth startup trajectory that YC companies take. There’s a huge question mark, obviously, around whether or not this model can work. So Tiny Seed, as a year in, is it working?
I would say yeah. The companies are growing. The feedback we’re getting is overwhelmingly positive in terms of people saying, “Man, I almost didn’t realize the value of being in a batch.” The quality of the companies we get, who applies is high. There’s obviously a lot of demand on the companies’ side.
Between the first two application periods we got I believe it’s almost 1600 applicants, batch 1 and 2 combined. Yeah, it’s a lot. The quality of them, meaning the traction or just the experience level is high.
We are obviously tweaking things as we go along. The first batch, the whole year was going to be the same where it’s like, “Oh, we’ll do mentor calls. We’ll definitely interact a lot with batch members and we will do a lot of mastermind calls where the batch is talking to each other.”
But we realized there was some education that was needed early on and then there was less of that needed as you went along. So we were tweaking things to where the curriculum or the week-to-week, how it looks is different in batch 2. But at this point it’s tweaks. It’s things that we are just kind of mixing it up.
How does your funding model work as an investor? I want to talk about the business of being an investor. For example, how do you get paid as the partner of Tiny Seed?
It’s so funny. Every time you say, “as an investor,” I'm like, “Wait, who?”
“Who are you talking about?”
I still identify as a founder. I'm not just saying that. I've been doing this work without writing checks in companies for 15 years, because it’s something I enjoy so much, being around ambitious people, trying to do interesting things and create companies.
Again, I was doing it not writing checks, and that’s why I started a conference, and that’s why I've been blogging and podcasting about this topic, because it’s so interesting to me. So while I am an investor, there’s no - I write checks into companies.
I don’t identify as that. I look at the money, to be able to write a check through founder is an excuse to be able to help them over an extended period of time and justify that. I have to justify it to myself. I can’t do that for free.
It really is a side effect of all the other stuff, all the mentorship and the teaching and the helping and the trying to do it. That was a preamble, but you were saying how do we get paid. Do you mean me personally?
Yeah, you personally, because I think there are VC firms. There are private equity firms. There are hedge funds. From what I understand, there’s this two plus twenty model that’s very common.
Does that work with Tiny Seed? Is that what you’re using?
I think it’s an interesting model for people to learn about because a lot of people don’t know. So how does it work at Tiny Seed?
It’s based on a two and twenty model, but I’ll give you an example. We raised our first fund. Normally, a venture capital firm would raise a fund and then they deploy over it I think it’s three to five years, and then it plays out over another five or x amount of years.
We deployed our entire fund in two years, and we run an accelerator program. So we have a fulltime program manager. We have in-person retreats. We have way more expenses. If we were just writing checks, we would have almost no expenses. I’d take a stipend. It is not buckets of money coming out to me.
The 2%, typically the two and twenty model is, if you raise a fund, you take 2% of the fund value per year as management fees. So imagine if you raise a million-dollar fund, then 2% for 10 years, you’re going to kick out 20 grand a year for 10 years, total of $200,000.
And then the 20% is called carry, and it is after the fund is paid back, so after a million would be paid back in that case, then the fund gets 20% of the profit, of any gains that you make. Two and twenty. We have to front load that 2. We can’t do 2% a year.
Again, our fund was for $150,000.00 and 2% would have been $90 grand. That would not be enough to keep the lights on, given that we’re running this. We meet multiple times a week with founders for 52 weeks. So it’s not something that we can ride and (inaudible).
So we frontload some of that and we effectively run it at breakeven, which is what most venture funds do. Most venture funds don’t make any money unless they carry that profit, unless they make a profit, and that’s the return to investors.
I know a lot of people in SF where it’s become trendy for some of these higher-growth tech startups’ founders to raise a fund after their company exits. There are all sorts of smaller funds, but because of that model a lot of people raise huge funds because they’re going to get that 2% management fee. They’ll try to raise $100 million whenever they can, and that means they can justify paying themselves $2 million a year.
Unlike Tiny Seed, they don’t necessarily have a lot of expenses so that just goes in their pockets for being an investor. I think in a lot of ways it misaligns their incentives. Because yes, they Californian make more money from the 20% carry if they actually make good investments, but they're still rich just from the fees so they don’t have to have good returns for their investors.
I would agree with you there. It would feel weird to me to take personal money out of the management fee. To me, that’s not what it’s for. It’s for running the business. I don't know, I am new to this though. I wrote my first angel check maybe 10 years ago, but really this type of stuff, I'm about two years in. I've seen some weird stuff like that that doesn’t make a ton of sense.
What would you say, given your new perspective, that your average bootstrapper doesn’t understand about fundraising? What are some common misconceptions?
I think some bootstrappers can have the black and white mindset of all funding is bad. There are, of course, these horror stories of raising venture capital and having strings attached and having, “Oh, I can’t sell my company because that move is blocked. I was fired from my own company cause the board fired me.”
There are all these things, and liquidity preferences. “If I sell, they get paid back 2x before I get any.” Those things do happen and have happened. I think it’s less so these days. But then there’s this whole other thread of, to say all funding is bad, it’s like Tiny Seed is, I just wouldn’t call it venture capital. It’s much more growth capital for early-stage SaaS companies.
And you have to know, who are your investors, because all investors are not alike. I you go to Sandhill Road in the Bay area, there are venture capitalists and they want billion-dollar companies or ten billion-dollar companies, whereas Tiny Seed is me and Einar, and we have a different view on it.
We believe a seven-figure, eight-figure SaaS company is a huge win for the founders, life-changing amounts of money can come out of that and if we can help more founders get there, that’s the goal. And again, we have to justify it. I can’t personally do it for free, and so the model that we’ve set up, I think people wouldn’t have dreamed of it 10 years ago.
If you went to a venture capitalists and said, “Can you make money investing in companies that won’t be unicorns?” most of them will tell you no, because the common wisdom in the VC space is you make money on your Airbnb’s and your Ubers and you lose money on most of the other ones. But the way we’ve modeled it out, it doesn’t appear to be the case.
Explain your model to me. How do you make it so this model works? Does it have to be the case that everyone you invest in succeeds? How do you turn a profit if you’re not expecting these companies to become billion-dollar unicorns?
Yeah, there are two things, really. One is fewer companies will fail. When you go for a base hit, meaning say seven or eight-figure SaaS app, so many more make it there than implode.
Because when you pour an inordinate amount of money, let’s say you put ten, twenty, thirty million into a company and you say, “All right. Become a billion-dollar company,” instantly your work shoots through the roof that you’re going to fail, because you hire 50, 100 people. There’s way more chaos. You’re moving way faster. It just makes it more likely that you're going to fail. I’ve seen it many times.
Yeah. I think living in San Francisco you probably see it all the time where you’re like, “Hey, that company would have been a great five or ten-million-dollar business, but they raised funding and then they trucked the company. They destroyed it.
Again, I'm not saying all VC does that, but I'm saying it increases the likelihood. A big chunk of venture capital, if you raise ten, twenty, thirty million, it really increases your likelihood of failing or being a unicorn, a billion-dollar company. They want it to be binary because that’s just the way it is.
Whereas we say, “You know what, what if 40, 50, 60% of the companies could be successful and be these nice base hits, and none of them become unicorns?” And then the other thing is, as opposed to Y Combinator, they’re able to give slightly higher valuations than we are, because they will have the Dropboxes and the Airbnbs. Those are the two factors that allow us to exist.
I have probably five or six conversations a year with founders where they’re either excited that they just raised a ton of money from VCs and they’re going down that very polarized path of unicorn or bust. They’re confident they’re going to become a unicorn. And then next year I follow up and they’re like, “I should have bootstrapped.”
The company could be doing well. It could be making money and growing, but if it’s not growing at this ridiculously crazy rate, with those investors you're the walking dead. You can’t raise another round. No one wants to touch you, but you also owe your investors a bunch of money and you feel like crap even if your company’s doing well.
There are so many more companies that can be successful, seven and eight-figure businesses, than there are can be billion-dollar companies, and yet they’ve been neglected by people who can give them a little bit of funding to help them get along with few strings. So that’s been the goal.
Let’s talk about how you start one of those companies, because I know we’re making it seem a little easy here. “It’s a base hit. It’s way easier.” It’s still hard.
I think there are a lot of things that you’ve learned as an investor and as a very storied founder who’s spent a lot of time starting successful companies. First of all, do you think your perspective as an investor has changed how you think about starting one of these base hit companies?
I do because even though I've for 10, 15 years been immersed in the space and thinking about it and talking to founders, I'm now getting more and more deep, deep dive data points.
I have 30, I believe, across Tiny Seed, and then the angel investments I did before Tiny Seed. I have 36 companies I've invested in. For most of them if they’re in Tiny Seed I'm talking to them every week and if angel investments I typically get monthly updates.
I'm seeing financials. I'm seeing how they operate. I’m seeing how different founders approach things, a broader insight, I think, than I’ve had in the past. So it has made me definitely see patterns in companies.
As an example, this is a little bit from personal experience but also from looking across companies, I don’t plan to start a SaaS again, but if I did, I would start from the assumption of I want one where expansion revenue is built in and net negative churn is possible. I don't think I’d build a business without that, because it’s just such an immense growth lever.
Explain that to people who don’t know what expense revenue is or net negative churn, because I agree it’s immense but it’s not an obvious thing if you’re a first-time founder that this is a thing you can even think about or plan ahead for.
Yes, and I didn’t plan for it. So I started a company called Drip which was an email service provider and later it became marketing automation. We had expansion revenue and we hit net negative churn. We did it by accident, but once I saw it, I was like, “This is incredible.”
Expansion revenue is basically where let’s say you're a SaaS company and you have 3 or 4 pricing tiers or maybe you have 50 pricing tiers but you have a metric, a value metric it’s called, which in email service providers it’s the number of subscribers. In CRM it’s the number of seats, number of salespeople you’re paying for.
And that number organically over time, it ticks up. It goes up for the majority of your customers and your revenue expands even when you can literally not add any new customers and enough customers are expanding.
So you think about email subscribers. Most lists, if people are working on them, their goal is to build them. The more subscribers you get, the more you wind up paying Mailchimp or edWeb or Drip. So that’s the expansion piece.
Net negative churn is where your churn, not counting new customers, but where your existing customer base is growing and it’s expanding your revenue base. If you literally added zero new customers, your revenue would increase month-to-month. In many of these businesses, like a Zoom or a Slack where it’s seat based or a sales course where it’s seat based, or Mailchimp which I believe bootstrapped to $700 million dollars in ARR. They did that in 2019. Expansion revenue is a substantial portion of that.
I like to think of, if recurring pricing, like if SaaS is the golden ticket of building and selling software, I think net negative churn expansion revenue is the golden ticket of SaaS. It’s the pinnacle. It’s the thing you aspire to do. It’s not possible in every space. Every app can’t do it. Every vertical can’t do it, but there are some ways to engineer it.
I think it’s one of those things. When you're a first-time founder you’re very focused on acquisition. You don’t have any customers. You don’t have any users, so you think the only lever that you can pull is, “How do I get more users in the door?”
Maybe in the very beginning that’s true. You don’t have anyone. There is no expansion revenue to be gained. But as you go on and you get customers, that becomes huge. Because it’s easier to sell to people that have already given you their credit card. They’re already paying you.
They already know you and trust you and like you, and if you don’t unlock additional revenue from them, you're spending all your time trying to get new people who don’t know you, who you have to persuade. It’s way harder. It feels like an endless grind. What are some of these businesses and industries where it’s easier to get expansion revenue, and how can a brand-new founder who’s trying to come up with an idea think about this in advance?
There are three ways to structure pricing. One is based on a value metric which is subscribers or seats, like I said. Second is to do feature gating, to gate off features. It’s not based on usage of your product at all, it’s based on which features do you need, and you have to pay more for these types of features.
And then the third one is to do both. You’ll see there is value metric and feature gating going on at the same time. So feature gating doesn’t tend to be expansion. It’s based on the value metric, as that number goes up.
So A, I would focus on that. And then B, it’s to think in any space, “Will this number go up over time? Will it go up enough?” It’s hard. You just have to guess. One way is to look around and be like, “Wow. All the CRMs I know charge per seat. I'm guessing that’s a pretty good way to do it.”
So if I have something that I can charge per seat, and of course the rule of thumb is, if user A and user B log into your app, they’re in the same company and they see something different, then you should charge per seat, and if they see the same thing, then you shouldn’t.
Seats is a great value metric, assuming that these teams grow over time or that your app will infiltrate the company more over time. Cause sometimes they only need three seats and then it’s permanent. You have to think through it. They’re not going to expand.
Subscribers, of course, is another one, and all these contacts in ESPs and those kinds of things. That’s probably a good way to do it, because they do it. But I had an app that was an SEO keyword tool. It was a SaaS app. You connected it to your Google analytics. It sucked in keywords and then it recommended keywords that you should attack based on your actual incoming traffic. There was an algorithm it used.
I was like, “Expansion revenue” because it’s based on number of keywords processed or number of visits per month or something like that. But you know what? A lot of websites weren’t growing. Especially the people that were coming to me, they weren’t busting through the tiers to the next thing.
I thought it might, but it wasn’t as successful as I thought it would be. The other thing to keep in mind is that typically it is your larger customers. Your larger customers got there by growing fast and they’re the ones that are going to continue to grow faster in general.
We were talking last week, and you also mentioned another lever besides expansion revenue, but more broadly pricing. You said it’s perhaps the biggest lever that you have as a founder, and also onboarding being quite powerful. Why is pricing the biggest lever that founders have?
It’s something that, A, most of us get it wrong. It’s easy to get wrong cause pricing is hard. But raising your prices is something that you can literally do in 10 minutes by going to your website and going into Stripe or whatever, whereas so many other levers, it’s like, “Let’s build this big integration, two months of work.” It’s such a fascinating thing.
In addition, typically you find that the more you can increase prices, A, your growth, now everyone’s paying that. It compounds and it can increase growth. It also changes your customer type.
If you’re charging $25.00 a month or $250.00 a month, you’ll have a different customer base, assuming you can figure out a way to charge $250. They will tend to be less price sensitive. These are generalizations, but they will tend to churn less, and you will tend to then start attracting even larger customers.
The best businesses that I see from the inside are the ones that do have a low price plans with wide funnels, wide reach in a big market, like electronic signatures or podcasting or something, where it’s a lot of people doing it.
But that’s not their thing. That’s not where they most of their money. They make most of their money from enterprises that come in and you have a $10.00 plan. You have this great brand because you thousands of customers doing that. But it’s when they approach you and they say, “We want to have 20,000 a month signed.” “All right. That’s five grand a month.”
You’ll see it over and over. You can look at publicly traded SaaS companies. You can look at Wufoo.com. They sold several years ago. One of the quotes in the press release, one of the founders was like, “Yeah, 80, maybe 90% of our revenue came from 10% of our customers. The lower-priced plans are feeders up into the enterprise but they’re just a way for you to have a brand that feeds up into the higher price.
I'm not saying every business needs to be that way because there are other models that work, but the ones that I see growing fast are thinking about it that way. That’s pricing engineering. It’s thinking about, how can I balance these things?
I think it also goes back to that obsession that new founders have with bringing new customers in the door and thinking about how much money you make. It’s the price you charge times the number of customers.
If you’re solely focused on just growing the number of customers, you’re leaving out the entire other half of this equation, which is you could make twice as much money by changing a number on your website. That is way easier than finding twice as many customers.
Yeah, and this is something we focused early on with the Tiny Seed batches. I was on a call today with batch 2, and I said, “Raise your hand if you think you're underpriced or that your value metric is off or that something’s off with your pricing.”
I believe it was 90% of the batch. We’re a week in, so that’s going to be the first thing we focus on. First thing we iron out is going to be pricing, because everything else flows from that. Because if you're selling for $50 a month and you don’t have a ton of expansion revenue, it’s not $50 per seat, you can’t afford to do enterprise sales.
It changes your customer. It changes your marketing. You can’t afford to do typically cold email outreach if you’re charging $50.00 a month You probably can’t afford Google AdWords. If you’re charging $500 a month, it changes the ways you can market. Changes the way you can sell. Everything else flows from that.
I've been thinking for a couple months saying, “Pricing is perhaps your biggest lever,” and now I can’t think of a better lever, a bigger lever than that. It’s only three ways to make more money in the business. The first is to raise your prices. The second is to find more customers which you’ve referred to, which is typically the default everyone thinks of. And then the third is to sell more addons and such to your existing customers.
But typically, figuring out how to build a more valuable product, how to position it in a way that it seems more valuable, because if you position yourself against cheap competitors, everyone’s going to compare your prices to them.
If you can figure out a way to position and play with the people who are charging $500 a month and that’s the baseline, it’s incredibly powerful. We did this with Drip. We were an ESP. People compared us to MailChimp and AWeber.
And one day it hit me, we’re a marketing automation platform. A lot of people haven’t heard that term. They’re just expensive, complicated pieces of software. They start at about $400, $500 a month and went up to thousands a month.
And so suddenly our $49.00 a month price point was not compared to MailChimp. It was compared to Infusionsoft, Marketo, and Pardot, and that was something I stumbled on early. Position and onboarding are other levers in addition to pricing.
I was talking to Baird Hall, who has company called Waave, and another company called Zubtitle. He had the same positioning thing where his Zubtitle company was doing this transcription for your podcast videos and would add text.
He couldn’t charge that much for it because everybody was comparing him to rev.com. It was only a dollar a sentence or something. It’s so cheap. Then he changed his positioning so people started comparing him to more like video editing software and then suddenly he could charge ten times more.
I'm interested in this process you’re going through with educating founders going through Tiny Seed about pricing, because it’s something we talk about so often on this show, and yet when I go to Indie Hackers meetups or I'm on the forum and I'm talking to people, it doesn’t get through.
I think a lot of founders have this idea that what you need to is start off charging $5.00 a month and then eventually after you build enough features and you're well established enough, then eventually you can raise your prices to $50 or $500, but you can’t start there.
What’s your take on that, Rob? Do you think founders should start by picking an idea that they can charge more, or do you think they need to work their way up from a tiny amount and eventually start charging more?
You can do either, of course. There are examples in both that could work. I would lean towards the stairstep approach which is to build a smaller product in a less competitive niche that probably is lower priced and that will plateau to learn the ropes, and then take that money, whether you sell that or whether you take the cash off of it to do your next thing.
That would be more the latter where you start off with a feature, get live quick. Five-dollar customers are going to be a pain in the butt, but I don't think that that’s a terrible way to go, especially if it really is your first time and you don’t know the ropes.
However, I know that if you want to build a substantial business, let’s say high six figures, have a bigger business, the one with the $5.00 start, you’re going to be wandering for a long, long time.
I’ve started and grown a bunch of companies. The last one I did before Tiny Seed was Drip. I wrote down, “I want to build a product where the lowest price point is X.” Originally X was $99 and by the time we launched it was $49, but the idea was I didn’t want to play that game anymore, cause I had had cheaper SaaS apps before and they came with baggage. They came with the burden and they were harder to grow in my experience.
Aspirational pricing is what I call this, where I aspire to be able to charge $49.00 a month. So we started building stuff. I had an idea and we showed it to customers, and they were like, “Eh, not really.”
Some people started using it and they said, “This isn’t worth $49.,00 a month.” So what I didn’t do was lower the price. Some people were saying, “You know, I’d be willing to pay $19.00 a month for this.”
I didn’t say, “Okay, cool. I'm going to lower the price to $19.” What I said was, “What would we need to build for this to be worth $49.00?” Obviously, we had dozens and dozens of conversations. It wasn’t clear cut.
There’s a bunch of gut feel and it wasn’t like all the customers told me the same thing. My cofounder and I had to whittle away and figure out what to build next. It took us a while to get there. But it’s a process you have to go through. This was the hardest. This stage, when you’re trying to figure out pricing and your product/market fit, I would say is one of the most difficult of starting a startup.
There’s almost this bright dividing line that I see when talking to Indie Hackers, where on one side you have a lot of the founders who, for example, in Tiny Seed, they have a business and they’re making it work.
They’re talking about all sorts of SaaS metrics to optimize and hiring. It’s more advanced tips and worries that founders have. They’re already making money and they’re trying to make more money and grow their companies and be more impactful.
But on the other side, and this is the vast majority of people, they’re really struggling just to come up with an idea that makes any sense at all, to get any customers in the door. A lot of people are stuck at making a hundred or two hundred dollars a month. They’re working for months just to try to get it to $300.00 a month.
Obviously, the answer to this will differ from person to person, but what do you think are some of the biggest differences with the new people on either side of this line. How can people cross that line and try to figure out how to make a business that’s working?
Oh man. Yeah, there’s a lot. There’s a lot there. I think of success and being able to achieve it as these three first principles, these three factors, and it’s hard work, it’s luck, and it’s skill.
Different success stories have varying degrees of those. You’ll hear a story about a founder who gets incredibly lucky and hits the right place at the right time in their skill set. Steve Wozniak’s an example of this. '
He happened to be in this hobby that turned out these personal computers, and he happened to have done hard work for years to learn how to build these circuits. He had built that skill through the hard work.
But Apple wouldn’t be Apple if they hadn’t hit that timing just right. Similar with Bill Gates and Windows, with MS-DOS at the time. With IBM there was more luck, and there’s Zuckerberg. I think a lot of these deca-billion dollar companies, there has to be some luck factor, even if that luck is timing.
You can’t control luck, but I do think you can influence luck by working hard. There are only one or two - probably one I can think of. It’s a friend of mine who I won’t name. But he says, “I got lucky and I didn’t work that hard.”
Usually, the story is when you hear Mark Zuckerberg and Bill Gates, or when you hear Hiten Shah and Jason Cohen and Rand Fishkin and those types of folks, they all worked hard, especially in the early days.
DHH and Jason Fried, I know they don’t work full work weeks now, I think 30 to 40 hours a week, but in the early days my guess is they worked hard. By hard, I don’t mean long hours. I mean focus, effectiveness, you’re driving, working on the right things and you’re working and putting in the time.
I have tended in my professional life, especially since I've been running my own companies, it’s rare I work more than 40 hours a week. But in the early days I had no money to speak of. I didn’t have many skills, so I put in hours. I would work a day job.
When I say no money, I mean I could afford my house payment and stuff, but I didn’t have a bunch of extra money. When I heard people say, “friends and family round,” I was always like, “What friends? We have no money. No one has any money.” My dad’s an electrician. They had money to put food on the table and that’s it.
So yeah, I would go to work all day and then I’d come home. I’d eat dinner and then I would work for five to six hours. I would check out books from the library. I taught myself to program. I eventually started building apps, and I built those skills over time.
There are a bunch of factors. We could go down rabbit holes, like “What about money?” I would say, “Well maybe you’re lucky to be born with money or maybe you need to work hard to earn money and build skills that are valuable.”
Those are the three base factors I see, is that most founders I know who are successful are not afraid of the hard work. They have built skills up over time, and eventually they stumble into a little bit of luck or they make their luck over the course of a decade of putting in the time and building the skills.
I was talking to David Hsu who runs a company called Retool a few weeks ago. Hopefully I can get him on the podcast. His story is the thing I go to when I think about luck as a founder.
He and his cofounder bootstrapped something close to a million dollars in revenue. Then they did almost the opposite fundraising thing that you’ve been talking about. They bootstrapped there and then they raised a bunch of money. Now they’re going for broke, almost like Jason Cohen is doing.
But when I talk about how he found his idea, and when he talks about it, he basically says they lucked into it. They picked something that they thought was cool that they were really passionate about. It turns out that this thing they’re building, Retool, which is one these internal programing tools for companies, has a huge TAM, a huge market where there are tons of customers who will pay a ton of money for this.
It turns out to be a good business. But he didn’t sit down and plan all of that out. He lucked into it. There are many other founders who are probably equally talented, equally smart who read as many books, who worked just as hard but that luck component, their passion doesn’t happen to be correlated with something that can turn into a big business.
I think a lot of what you want to do as a founder is obviously try to erase as much luck as possible and replace that with skills. What’s cool about you as an investor is, I talk to a lot of founders who choose an idea and don’t consider TAM.
But as an investor that’s one of the first things you look at. You probably have a whole checklist of like, “Can this business work? Is it going to be the right size? Can it grow fast enough? What’s the competitive landscape look like?” that lot of founders aren’t asking.
Walk us through some of the things you look at in any particular company and that you think maybe more founders should look at so they can look at their companies through the same lens an investor might look.
That’s interesting. You know, I don’t spend a lot of time looking at TAM because if you’re going to build that billion or $10 billion company you absolutely have to say this is a massive, massive market. Because if it’s not, it’s not worth it.
But if I'm going to say, “Well, let’s build a five, ten, twenty million dollar company, I need to do a little check and be like, “Do I think there are that many people that are willing to pay this price to get there?”
And that’s about it. There’s not a ton, because there are just so many more opportunities. That is the beauty of this. It’s that we can literally have thousands and thousands of companies that can get to $10 or $20 million.
The way that I think about it, yes, we do have a long evaluation criteria, a bunch of questions. How much traction do they have? What is the team like? What is their experience? Why are they the right people? It’s kind of boring, so I’ll put it into the fortune cookie version that I think of. It’s three P’s. It’s people, product/market fit, and price sensitivity.
So the people who are the founders, do I feel like they love what they’re doing? Do I feel like they have the ambition? Do I feel like they’re shipping? Are they smart founders? There’s effectiveness. There are all kinds of things.
Product/market fit is obviously do they build something that people want and are willing to pay for? Because building something people want is amazing, but sometimes you can do that and then people aren’t willing to pay for it.
So it’s hitting product/market fit and then that step after, which I've been calling escape velocity. Product/market fit is where, all right, we’ve built something people want. You still need to find marketing channels and sales channels that work. And once you start to do that, even if you find one, that’s when revenue really kicks. That’s product/market fit.
And then price sensitivity, I could just say pricing but per our earlier conversation or our earlier question, price is such a massive lever that if you can only charge $14.00 for this product and you’ll probably only ever be able to charge $14.00 for this product, or if your average revenue per user is $14.00 and I talk to a founder and I say, “Hey, how are you thinking about expanding that?”
And the founder is like, “I've never thought about that.” That’s a bit of a yellow flag. Not a red flag, obviously, but you should be thinking about that. That’s an important thing.
Again, low RPU is not bad if there’s an angle, if there’s a way to either raise that over time or to bring in enterprise customers. That’s the real way you're going to get into the seven and eight figure companies.
I know at Tiny Seed, people applying to join the batches are a little bit more mature. They’re not necessarily in the “I don’t have an idea” phase, but a ton of Indie Hackers are in the “I don’t have an idea” phase.
If there’s this checklist of things they should be aiming for, ideally high average revenue per user or ideally something that could have good expansion revenue, obviously they need to find product/market fit, is there anything that an Indie Hacker can do in that situation to try to come up with an idea that does meet some of these criteria?
The reason I ask is because it’s hard enough for people to come up with an idea that makes any sense at all. People are sitting around like, “I have no idea what to build. None of the problems that I have seem like they’d be good businesses to solve.” It’s even harder to not only come up with an idea from scratch or come up with an idea that checks off all these boxes. How would you approach doing something like that?
Coming up with ideas is not only really hard, but I question it as an exercise all together. Ideas often become a solution without a problem. I’ve started from the problem every time, at least when I've done it well.
When I've done it poorly, I start with my own ideas. “Oh, man, there’s this new technology.” I was a software developer for years. “New technology, how can I turn that into a product?” That’s not the way to go about it.
So there are two things I would say, especially for first time, again coming back to stair stepping. How can I find a really small product to build, just to learn copywriting and marketing and customer support and get the experience and the skill and the confidence and build my tool belt out?
I would tend to lean towards these ecosystems, almost these app stores, because the marketing isn’t as hard. The distribution is built in. So Shopify app store, Photoshop add-ons, there are a bunch of others. I personally wouldn’t go into mobile apps because they’re so crowded, but any of these ecosystems.
There’s Salesforce add-on. Any of these ecosystems where, there are a bunch of them now because a bunch of companies have built platforms. The beauty is if you can get in there and you can rank for something, the distribution’s built in.
You won’t have learned all the chops of marketing, but you will at least now have a resource, meaning you have money coming in, and you’ll have learned these other skills and built confidence in yourself.
But even from there, “Okay, Rob. You’re saying go build a Shopify app,” which may or may not be a great idea. “Well there are already a bunch of Shopify apps, so how do I come up with an idea there?”
That’s where I try to find, where are there disgruntled people? Where are there people complaining about something, because people who have pain complain. Wow, that rhymed. I just came up with that. I'm going to start saying that. People who have pain complain.
And for some, that may be forums. That may be private Slack groups. That may be Facebook groups. That may be the - I don't know. There are places you can go to find this out. Maybe it’s in-person conversations where you hear someone complaining.
Wouldn’t it be amazing if you were going to try to build a Shopify app, if you could go to LinkedIn, find an ex-Shopify email customer support rep, ping them and say, “Hey, I’d love to have a conversation with you. I can pay you money for it.”
Just have a conversation, like “What were some of the biggest things that people complained about that Shopify didn’t do?” Or “What were the plugins that were popular but didn’t do stuff?” Just try to get inside and especially, again, it’s if they’re not there anymore because otherwise that would be inside information.
That’s just something I came up with off the top of my head, but it’s being creative about not looking at the same data everyone else, is, and trying to find pain points and sources that you can suddenly whittle your way in, even in competitive spaces.
We launched an ESP in 2013 for crying out loud. There were hundreds of others, and yet we figured out that there was pain, that there was pain with some of the ESPs and people wanted more from it. That was the problem that we solved.
I love this approach cause it all flows from what you said earlier, which is problem first. Don’t think of a solution but think of a problem. If you bought into that, which is one of those fundamentals, like “Get enough sleep. Get enough exercise. Don’t start with the solution, start with the problem,” that a lot of people pay lip service to but don’t do, but once you’re doing it, it looks like what you're saying.
Talk to people. Ask for pain points. Before you have any sort of idea for what it is you’re going to build. You should be doing this hunting. I also like the idea of building on a marketplace. Probably the vast majority of Indie Hackers who are first getting started know zero about sales or marketing or distribution.
If you can make that part easier for yourself, which is what you’re advising, and yeah, you’re not going to learn everything there is to learn your first time at bat but you’re much more likely to succeed cause you can focus on all the other hard parts.
How do you build a product? How do you do customer support? How do you come up with a good solution for a problem? Then next time around maybe you can make the distribution challenge a little bit harder, maybe not build on the marketplace and stairstep your way to building on the advantages and things you learned earlier, rather than making it super hard for yourself out of the gate and having to learn everything.
Yeah. I think of it like a toolbelt, like maybe Batman’s utility belt, where, when you start you may only have one thing there and it’s what you do for a living. So if you're a developer, you have code, or if you're a designer you have design chops or if you’re in sales and you have sales chops, how do you start building that out to get SEO, PPC, other types of marketing, copywriting, customer support? You just build those out one at a time.
I would not have been able to start Drip 15 years ago when I started picking up my entrepreneurial career. Frankly 20 years ago is when I launched the first apps, but the first five years was exactly what you’re talking about. It was me coming up with ideas, spending a bunch of time building them and all of them failed.
But then slowly you learn one and then two and then three and then four. You don’t have to learn them all at once. I couldn’t have learned them all at once and I wouldn’t have had success with Drip 15 years because I didn’t have that utility belt and I didn’t have the confidence I could do it, either.
Well listen, Rob. We’ve learned a ton, and it’s cool to see some of the insights that you’ve had by working with such a wide array of companies instead of just starting your own companies one at a time.
Is there any parting advice you would like to leave these fledging Indie Hackers with, especially with the times we’re going through right now? A lot of people are surprisingly starting more companies than ever.
What I've noticed is people aren’t as worried about being out of work as you might think. A lot of them are just starting companies and not looking for jobs. What’s your advice for people in that situation?
I think we’re in the best time in history for Indie Hackers and software founders. Thirty years ago, this was shareware. It was such a different game. So relish the fact that we live in this time in history and have the skills as likely developers or designers to do this, where the rest of my family worked or works in construction their whole life. And that’s fine. I did it for several years. But they don’t have the skills that we do. They haven’t developed them to get out of it to have this freedom that we’re all seeking.
And the second thing I’d say is, there’s this great quote from I believe it’s Thomas Jefferson. “The harder I work, the luckier I get.” Put in the work. Again, I'm not saying long hours, but I'm saying focus and put in the work and build that toolbelt. Hopefully you’ll build your own luck.
Rob Walling, thanks for coming on the show.
Can you let listeners know where to go to find out more about what you’re up to with Tiny Seed and MicroConf and your various podcasts that you have going on now?
I’ll only plug one podcast. I have three different ones. If you like podcasts and you’re not listening to Startups for the Rest of Us, we’re about to hit our 500th episode.
I've been upping the game over the past six or eight months. I do some interviews, but we do a lot of Q & A. It’s all about this stuff. This is where all these frameworks come in. It’s from talking about this all the time.
And then of course tinyseed.com if you’re interested. We’re going to open applications in the fall so if you want to get on the mailing list, you can head there. Also, if you’re interested in investing in early-stage B to B SaaS companies, we are doing an open raise in essence, so tinyseed.com/invest if that is something on your radar. And then microconf.com is the last one. That’s our community for essentially self-funded and independently funded startups around the world.
All right. Thanks so much, Rob.
Thanks for having me, man.
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