Why your organization needs product principles

At Slack, every one of our processes and features has been designed with the primary goal of making Slack a workplace tool that feels human. We see ourselves as our users’ hosts, and we want them to feel comfortable and happy every time they’re in Slack. Our product isn’t just built for work — it’s built for people doing work, and everything we create is meant to forward our mission of making work life simpler, more pleasant and more productive.

Our job is to understand what people want, and then translate that value through thoughtfully designed, well-functioning products and features.

Against the backdrop of an unprecedented shift to remote work, we’ve seen an influx of people turning to Slack to make the transition to a digital-first workplace. Building thoughtful, intuitive products that add value, delight and human-centric experiences into peoples’ working lives has never been more important.

Product principles are essential guidelines that help teams evaluate work across functions.

To ensure we’re meeting our customers where they’re at, we created a set of guiding “product principles” that inform everything we build, and which serve as the foundation for our entire product decision-making process.

There’s business value in improving an organization’s processes, and we’ve been able to provide better experiences for our customers by enacting ever-evolving product principles and using them to evaluate our products and features. Any company can benefit from having product principles — it’s all about how you develop and deploy them across your organization.

First, what are product principles?

Product principles are essential guidelines that help teams evaluate work across functions, as well as up and down the decision-making chain, by ensuring all work ladders up to the organization’s ultimate goals. Better alignment, in turn, leads to better and faster product decisions.

Product principles should always evolve to keep up with the changing ways you work and what your customers need. At Slack, we currently have five principles that guide us:

  1. Don’t make me think.
  2. Be a great host.
  3. Prototype the path.
  4. Don’t reinvent the wheel.
  5. Make bigger, bolder bets.

By implementing these principles into all we build across teams — design, legal, marketing and more — they provide a shared framework for decision-making that keeps us aligned and therefore able to make better decisions, faster.

The idea of having principles themselves isn’t a new concept, but the creation process behind building and promoting these principles is often overlooked or underdeveloped.

Start with your product philosophy

Before building the principles themselves, it’s important to first establish your product philosophy, which will inform how your organization will ultimately view and abide by its principles.

At Slack, we embrace an approach we call “getting to the next hill.” While there is a long-term product strategy, we don’t spend a lot of time debating exactly where we’ll be in one or two years from now. Instead, we focus on more immediate, incremental moves to improve our customers’ working lives.

We’ve found that because Slack is used in so many different ways by so many different companies, it’s better to learn from how our customers use our features than from endlessly debating aspirational future ideas.

If you haven’t followed NFTs, here’s why you should start

NFTs (non-fungible tokens) — or scarce digital content represented as tokens — are driving a new wave of crypto adoption.

Thanks to the Ethereum blockchain, artists, gaming companies and content creators alike are utilizing token standards, which ascribe provenance to uniquely distinguishable assets. NFTs first made headlines in 2017 when Dapper Labs’ game CryptoKitties accounted for 95% of Ethereum network usage at its peak. While someone paying $170,000 for a digital cat seemed like an anomaly, what’s happening today blows that headline out of the water.

Platforms like Nifty Gateway, SuperRare, Foundation and Zora are quickly emerging as the leading players for creatives to monetize work in a digital world.

The estimated total value of crypto art has now passed $100 million according to cryptoart.io/data — just one vertical of a growing ecosystem of NFTs.

Collectible mania

Just as we’ve seen an alternative asset class form around physical collectibles like Pokémon cards, NFTs are starting to showcase what this universe of rare hallmark brands looks like online.

NBA Top Shot has seen close to $10 million in 24h volume according to CryptoSlam, with more than $100 million of “moments” being sold in less than one year of being live. The parent company behind NBA Top Shot, Dapper Labs, is said to be raising a $250 million round at a $2 billion valuation, as reported by The Block.

Niche collectibles like CryptoPunks — or 10,000 unique collectible characters with scarce traits and qualities — now have a base floor of roughly $18,000 a piece. Just recently, Punk 4156 sold for 650 ETH, equivalent to roughly $1.3 million at today’s prices.

Crypto art paradigms

Graphic designs and 3D designers are finding new platforms to showcase their work, with marketplaces like Nifty Gateway facilitating Supreme style drops for exclusive digital art.

Mad Dog Jones recently set a record for $3.9 million worth of art sold in one sale, topping the previous record held by beeple for his $3.5 million “Everydays 2020 Collection” drop. No wonder top art galleries like Christies are asking to team up.

With Bitcoin and Etherium reaching all-time high prices and investors looking for new places to allocate capital, the crypto art movement has given power back to the creatives.

Vibrant collector communities like FlamingoDAO are forming around these drops, while protocols like Zora are quickly starting to support NFTs of all different verticals.

Musicians like Mike Shinoda of Linkin Park and Fort Minor has released NFTs as a part of their strategy for his new single “Happy Endings” featuring popstar Iann Dior. EDM DJ and producer 3LAU is tokenizing his debut album “Ultraviolet” and Grammy-award winning musician RAC broke the SuperRare record for the highest NFT primary sale with his piece “Elephant Dreams.”

I even sold a blog post for 2 ETH (or roughly $4,000) using a crypto media publication called Mirror!

Why should I care?

NFTs have exposed a creative side of crypto that is not only fun to play, but digestible and accessible to new users. As bigger names host their first NFT drops, they bring a new wave of attention to their millions of followers noticing crypto for the first time.

This leaves people in a unique position to curate and discover this growing wave of scarce digital content. Showtime is aggregating NFTs to offer an Instagram-like experience, and the forthcoming music-specific NFT marketplace Catalog is creating a digital record store.

As Nifty Gateway drops continue to sell out in seconds thanks to credit card payments and free transactions, new collectors are finding ways to collect their favorite artists and brands — a trend that is likely to take better form over the coming years.

Areas of improvement

While the sales figures showcase a clear demand for NFTs, it’s not without hiccups.

More on NFT

The vast majority of NFT platforms today require users to be familiar with Ethereum wallets like MetaMask. This means collectors need to purchase ETH from an exchange like Coinbase and send it to a non-custodial address that consists of a long string of numbers and letters to get started.

Once they’re there, they need to pay upwards of $100 worth of fees to make a transaction and place a bid. The same goes for artists creating NFTs, causing community funds like MintFund to pop up and cover the operational costs of launching their first NFT.

Luckily, platforms like Audius are addressing these pain points head on. With 2 million monthly active users — the most of any Ethereum application today — Audius replaced MetaMask with an email and password login wallet called Hedgehog. By removing key management and transaction costs, users are able to access the wonderful world of crypto without significant start-up costs.

NFT bubble?

What’s happening in the NFT ecosystem today is nothing short of a paradigm shift for a maturing sector of cryptocurrencies. As avid collectors frame their digital art using companies like Infinite Objects, there’s no denying the vast majority of buyers are here to speculate. This increased demand signals interest, but is highly reminiscent of the 2017 ICO boom that caused the market to crash many years ago.

However, out of that multi-year bear market came a strong wave of foundational companies and products like Uniswap and Compound that are here to stay. It’s this writer’s bet that the same will happen with NFTs.

Until then, remember that digital content does have value, and crypto collectors are flocking to lay their namesake on the biggest collections of tomorrow.

Broaden your view of ‘best’ to make smarter, more inclusive investments

What can we learn from the best 40 venture capital investments of all time? Well, we learn to invest exclusively in men, preferably white or Asian.

We reviewed CB Insights’ global list of “40 of the Best VC Bets of all Time.” All of the 40 companies’ 92 founders were male.

  • Of the 43 U.S.-based founders, 35 were white American; four were white immigrant/first generation, from France, Ukraine, Russia and Iran; and four were Indian immigrant/first generation.
  • Of the 19 Western Europe/Israel-based founders, all were white.
  • Of the 30 Asia-based founders, all were natives of the country in which they built their businesses: 23 Chinese, three Japanese, two Korean and two Indian.

Of course, this dataset is incomplete. There are numerous examples of founders from underrepresented backgrounds who have generated extremely impressive returns. For example, Calendly’s Tope Awotona is Nigerian American; Sendgrid’s Isaac Saldana is Latinx; and Bumble’s Whitney Wolfe Herd is the second-youngest woman to take a company public.

That said, the pattern in the dataset is striking. So, why invest in anyone who’s not a white or Asian male? 

The conventional answer is that diversity pays. Research from BCG, Harvard Business Review, First Round Capital, the Kauffman Foundation and Illuminate Ventures shows that investors in diverse teams get better returns:

  • Paul Graham, cofounder of Y Combinator (2015): “Many suspect that venture capital firms are biased against female founders. This would be easy to detect: among their portfolio companies, do startups with female founders outperform those without? A couple months ago, one VC firm (almost certainly unintentionally) published a study showing bias of this type. First Round Capital found that among its portfolio companies, startups with female founders outperformed those without by 63%.”
  • Kauffman Fellows Report (2020): “Diverse Founding Teams generate higher median realized multiples (RMs) on Acquisitions and IPOs. Diverse Founding Teams returned 3.3x, while White Founding Teams returned 2.5x. The results are even more pronounced when looking at the perceived ethnicity of the executive team. Diverse Executive Teams returned 3.3x, while White Executive Teams only returned 2.0x. As mentioned above, we report realized multiples (RMs) only for successful startups that were acquired or went through the IPO process.”
  • BCG (June 2018): “Startups founded and cofounded by women actually performed better over time, generating 10% more in cumulative revenue over a five-year period: $730,000 compared with $662,000.”
  • BCG (January 2018): “Companies that reported above-average diversity on their management teams also reported innovation revenue that was 19 percentage points higher than that of companies with below-average leadership diversity — 45% of total revenue versus just 26%.”
  • Peterson Institute for International Economics (2016): “The correlation between women at the C-suite level and firm profitability is demonstrated repeatedly, and the magnitude of the estimated effects is not small. For example, a profitable firm at which 30 percent of leaders are women could expect to add more than 1 percentage point to its net margin compared with an otherwise similar firm with no female leaders. By way of comparison, the typical profitable firm in our sample had a net profit margin of 6.4 percent, so a 1 percentage point increase represents a 15 percent boost to profitability.”

How do we reconcile these two sets of data? Research going back a decade shows that diverse teams, companies and founders pay, so why are all of the VC home runs from white men, or Asian men in Asia, plus a few Asian men in the U.S.?

First Round did not include their investment in Uber in their analysis we reference above on the grounds that it was an outlier. Of course, one could rebut that by saying traditional VC is all about investing in outliers.

  • Seth Levine analyzed data from Correlation Ventures (21,000 financings from 2004-2013) and writes that “a full 65% of financings fail to return 1x capital. And perhaps more interestingly, only 4% produce a return of 10x or more, and only 10% produce a return of 5x or more.” In Levine’s extrapolated model, he found that in a “hypothetical $100M fund with 20 investments, the total number of financings producing a return above 5x was 0.8 – producing almost $100M of proceeds. My theoretical fund actually didn’t find their purple unicorn, they found 4/5ths of that company. If they had missed it, they would have failed to return capital after fees.”
  • Benedict Evans observes that the best investors don’t seem to be better at avoiding startups that fail. “For funds with an overall return of 3-5x, which is what VC funds aim for, the overall return was 4.6x but the return of the deals that did better than 10x was actually 26.7x. For >5x funds, it was 64.3x. The best VC funds don’t just have more failures and more big wins —  they have bigger big wins.”

The first problem with the outlier model of investing in VC is that it results in, on average, poor returns and is a risker proposition compared to alternative models. The Kauffman Foundation analyzed their own investments in venture capital (100 funds) over a 20-year period and found “only 20 of the hundred venture funds generated returns that beat a public-market equivalent by more than 3% annually,” while 62 “failed to exceed returns available from the public markets, after fees and carry were paid.”

The outlier model of investing in VC also typically results in a bias toward investing in homogeneous teams. We suggest that the extremely homogeneous profiles of the big wealth creators above reflect the fact that these are people who took the biggest risks: financial, reputational and career risk. The people who can afford to take the biggest risks are also the people with the most privilege; they’re not as concerned about providing for food, shelter and healthcare as economically stressed people are. According to the Kauffman Foundation, a study of “549 company founders of successful businesses in high-growth industries, including aerospace, defense, computing, electronics and healthcare” showed that “more than 90 percent of the entrepreneurs came from middle-class or upper-lower-class backgrounds and were well-educated: 95.1 percent of those surveyed had earned bachelor’s degrees, and 47 percent had more advanced degrees.” But when you analyze the next tier down of VC success, the companies that don’t make Top 40 lists but land on Top 500 lists, you see a lot more diversity.

In VC, 100x investment opportunities only come along once every few years. If you bet your VC fund on opportunities like that, you’re relying on luck. Hope is not a strategy. There are many 3x-20x return opportunities, and if you’re incredibly lucky (or Chris Sacca), you might get one 100x in your career.

We prefer to invest based on statistics, not luck. That’s why Versatile VC provides companies with the option of an “alternative-VC” model, using a non-traditional term sheet designed to better align incentives between investors and founders. We also proactively seek to invest in diverse teams. Given the choice of running a fund with one 100x investment, or a fund with two 10x investments, we’ll take the latter. The former implies that we came perilously close to missing our one home run, and therefore we’re not doing such a great job investing.

“While we all want to have invested in those exciting home-runs/unicorns, most investors are seeking the data points to construct reliable portfolios,” Shelly Porges, co-founder and managing partner of Beyond the Billion, observed. “That’s not about aiming for the bleachers but leveraging experience to reliably deliver on the singles and doubles it takes to get to home base. A number of the institutional investors we’ve spoken to have gone so far as to say that they can no longer meet their targets without alternatives, including venture investments. “

Lastly, the data above reflects companies that typically took a decade to build. As the culture changes, we anticipate that the 2030 “Top 40” wealth creators list will include many more people with diverse backgrounds. Just in 2018, 15 unicorns were born with at least one woman founder; in 2019, 21 startups founded or co-founded by a woman became unicorns. Why?

  • “All else being equal, a larger pool of female-founded companies to select from for VC investing should increase the odds of a higher number of female-founded VC home runs,” said Michael Chow, research director for the National Venture Capital Association and Venture Forward. According to PitchBook, investments in women-led companies grew approximately 54 percent from 2015 to 2019, from 459 to 709. In the first three quarters of 2020, there have been 468 fundings of women-led companies; this figure beats 2015, 2016 and nearly 2017 total annual fundings. ProjectDiane highlights that from 2018 to 2020, the number of Black women who have raised $1 million in venture funding nearly tripled, and the number of Latinx women doubled. Their average two-year fail rate is also 13 percentage points lower than the overall average.
  • “Millennials value a diverse workforce,” Chow added, according to Gallup and Deloitte Millennial surveys. “In the battle for talent, diverse founders may have the edge in attracting the best and brightest, and talent is what is required for going from zero to one.”
  • The rise in popularity of alternative VC models, which are disproportionately attractive to women and underrepresented founders. We are in the very early days of this wave; according to research by Bootstrapp, 32 U.S. firms have launched an inaugural Revenue-Based Finance fund. Clearbanc notes on their site they have “invested in thousands of companies using data science to identify high-growth funding opportunities. This data-driven approach takes the bias out of decision making. Clearbanc has funded 8x more female founders than traditional VCs and has invested in 43 states in the U.S. in 2019.”
  • More VCs are working proactively to market to underrepresented founders. Implicit biases are robust and pervasive; it takes a proactive and intentional approach to shift the current status quo of funding,” Dreamers & Doers Founder Gesche Haas said. Holly Jacobus, an investment partner at Joyance Partners and Social Starts, noted that “we’re proud to boast a portfolio featuring ~30% female founders in core roles —  well above the industry average —  without specific targeting of any sort. However, there is still work to be done. That’s why we lean heavily on our software and CEOs to find the best tech and teams in the best segments, and we are always actively working on improving the process with new systems that remove bias from the dealflow and diligence process.”

Thanks to Janet Bannister, managing partner, Real Ventures, and Erika Cramer, co-managing member, How Women Invest, for thoughtful comments. David Teten is a past Advisor to Real Ventures.

In freemium marketing, product analytics are the difference between conversion and confusion

The freemium marketing approach has become commonplace among B2C and B2B software providers alike. Considering that most see fewer than 5% of free users move to paid plans, even a slight improvement in conversion can translate to significant revenue gains. The (multi) million-dollar question is, how do they do it?

The answer lies in product analytics, which offer teams the ability to ask and answer any number of questions about the customer journey on an ad-hoc basis. Combined with a commitment to testing, measurement and iteration, this puts data in the driver’s seat and helps teams make better decisions about what’s in the free tier and what’s behind the paywall. Successful enterprises make this evaluation an ongoing exercise.

Often, the truth of product analytics is that actionable insights come from just a fraction of the data and it can take time to understand what’s happening.

Sweat the small stuff

A freemium business model is simply a set of interconnected funnels. From leads all the way through to engagement, conversion and retention, understanding each step and making even small optimizations at any stage will have down-funnel implications. Start by using product analytics to understand the nuances of what’s working and what isn’t, and then double down on the former.

For example, identify specific personas that perform well and perform poorly. While your overall conversion average may be 5%, there can be segments converting at 10% or 1%. Understanding the difference can shine a light on where to focus. That’s where the right analytics can lead to significant results. But if you don’t understand what, why and how to improve, you’re left with guesswork. And that’s not a modern way of operating.

There’s a misconception that volume of data equals value of data. Let’s say you want to jump-start your funnel by buying pay-per-click traffic. You see a high volume of activity, with numbers going up at the beginning of your funnel and a sales team busy with calls. However, you come to learn the increased traffic, which looked so promising at the outset, results in very few users converting to paid plans.

Now, this is a story as old as PPC, but in the small percentage that do convert, there’s a lot to learn about where to focus your efforts — which product features keep users hooked and which ones go unused. Often, the truth of product analytics is that actionable insights come from just a fraction of the data and it can take time to understand what’s happening. Getting users on board the free plan is just the first step in conversion. The testing and iteration continue from there.

The dropped and the languished

Within the free tier, users may languish — satisfied with whatever features they can access. If your funnel is full of languishing users, you’ve at least solved the adoption problem, so why are they stuck? Without a testing and tracking approach, you’ll struggle to understand your users and how they respond, by segment, to changes.

Dear Sophie: Which immigration options are the fastest?

Here’s another edition of “Dear Sophie,” the advice column that answers immigration-related questions about working at technology companies.

“Your questions are vital to the spread of knowledge that allows people all over the world to rise above borders and pursue their dreams,” says Sophie Alcorn, a Silicon Valley immigration attorney. “Whether you’re in people ops, a founder or seeking a job in Silicon Valley, I would love to answer your questions in my next column.”

Extra Crunch members receive access to weekly “Dear Sophie” columns; use promo code ALCORN to purchase a one- or two-year subscription for 50% off.


Dear Sophie:

Help! Our startup needs to hire 50 engineers in artificial intelligence and related fields ASAP. Which visa and green card options are the quickest to get for top immigrant engineers?

 And will Biden’s new immigration bill help us?

— Mesmerized in Menlo Park

Dear Mesmerized,

I’m getting this question quite frequently now as more and more startups with recent funding rounds are looking to quickly expand. In the latest episode of my podcast, I discuss some of the quickest visa categories for startups to consider when they need to add talent quickly.

As always, I suggest consulting with an experienced immigration lawyer who can help you quickly strategize and implement an efficient and cost-effective hiring and immigration plan. An immigration lawyer will also be up to date on any immigration policy changes and plans in the event that the Biden administration’s U.S. Citizenship Act of 2021 passes. It was introduced in the House and Senate this month.

That proposed legislation would enable more international talent to come to the U.S. for jobs and clear employment-based visa backlogs, among other things. Given the legislation’s substantial benefits offered to employers, I encourage your startup — and other companies — to let congressional representatives know you support it.

A composite image of immigration law attorney Sophie Alcorn in front of a background with a TechCrunch logo.

Image Credits: Joanna Buniak / Sophie Alcorn (opens in a new window)

Given that most U.S. embassies and consulates remain at limited capacity for routine visa and green card processing due to the pandemic, it is generally quicker to hire American and international workers who are already in the U.S. Although U.S. Citizenship and Immigration Services (USCIS) is experiencing substantial delays in processing cases due to the coronavirus, as well as an increase in applications, Premium Processing is currently available for most employment-based petitions. We are still able to support many folks with U.S. visa appointment scheduling at consulates abroad using various national interest strategies.

With all of that in mind, here are the visa categories that offer the quickest way to hire international talent.

H-1B transfers

Hiring individuals by transferring their H-1B to your startup can be completed in a couple of months with premium processing. Premium processing is an optional service that for a fee guarantees USCIS will process the petition within 15 calendar days.

What’s more, H-1B transferees can start working for your startup even before USCIS has issued a receipt notice or made a decision in the case. You just need to make sure that USCIS received the petition, which is why I always recommend sending all packages to USCIS with tracking.

Premium processing can help to get a digital receipt as the paper receipts are often backlogged. I stopped suggesting this route during the Trump administration, but am feeling more comfortable providing it as an option under the Biden administration. The H-1B is the only type of visa that allows somebody to start working upon the filing of a transfer application.

4 essential truths about venture investing

After making pre-seed investments for seven years, I have observed how different the pre-seed stage is from Series A and later-stage investing.

Today, I want to highlight four ideas that are true across different stages of investing.

Venture outcomes are driven by a power law

Power law is an immutable law of the universe. Examples include the distribution of population in cities, price of artwork, and unfortunately, wealth distribution. This law is also known as the Pareto principle, and colloquially known as the 80%-20% rule.

The average manager faces a very real possibility of making no money at all because of how steep the power law curve is.

Venture capital is no exception and the outcomes of every venture portfolio will likely follow a power law distribution. There are two significant things to think about here:

One: Because most startups fail, the distribution is going to have a lot of zeros (or near zeros) in the long tail. The zeros are going to be followed by singles and doubles.

Two: The biggest winners, when they happen, tend to be huge. Unicorns were hard to come by when Aileen Lee penned her now-famous article in 2013. Today, unicorns are no longer as rare and top-tier firms are constructing their portfolio with the goal of funding a decacorn — a company valued at $10 billion or higher.

There is nothing mysterious about the power law dynamic in venture. Just like the rich get richer, the biggest companies get bigger.

A startup that reaches $10 million in revenue is much more likely to double, double again and then cruise by $100 million in revenue versus a startup at the $1 million mark now trying to get to $10 million.

At scale, everything is different — the resources, the possibilities and access to capital. Of course, even companies that reach very substantial scale may run into obstacles and eventually underperform. But that is not the point.

The point is that the ones that do end up winning and driving all the returns keep doubling and continue getting bigger and bigger.

Hence, the outcomes of the venture portfolio fit a power law curve.

The best managers in the business are distinguished by a few more at the very top of the curve.

The average manager faces a very real possibility of making no money at all because of how steep the power law curve is.

Your fund size is your strategy

There is a piece of feedback that fund of fund managers frequently give to GPs: Your fund size is your strategy.

What they are essentially saying is that a fund’s portfolio construction will depend on how much capital is under management, and vice versa. Why is that?

Let’s take two extreme examples — a manager of a $10 million fund and a manager of a $1 billion fund. Let’s assume that both managers want to lead rounds. If the first one decided to be a Series A fund, it would be extremely concentrated. It may be able to lead 1-2 rounds, but that’s it. Given the power law nature of outcomes, it would be extremely unlikely for this manager to generate a good return.

How to overcome the challenges of switching to usage-based pricing

The usage-based pricing model almost feels like a cheat code — it enables SaaS companies to more efficiently acquire new customers, grow with those customers as they’re successful and keep those customers on the platform.

Compared to their peers, companies with usage-based pricing trade at a 50% revenue multiple premium and see 10pp better net dollar retention rates.

But the shift from pure subscription to usage-based pricing is nearly as complex as going from on-premise to SaaS. It opens up the addressable market by lowering the purchase barrier, which then necessitates finding new ways to scalably acquire users. It more closely aligns payment with a customer’s consumption, thereby impacting cash flow and revenue recognition. And it creates less revenue predictability, which can generate pushback from procurement and legal.

SaaS companies exploring a usage-based model need to plan for both go-to-market and operational challenges spanning from pricing to sales compensation to billing.

Selecting the right usage metric

There are numerous potential usage metrics that SaaS companies could use in their pricing. Datadog charges based on hosts, HubSpot uses marketing contacts, Zapier prices by tasks and Snowflake has compute resources. Picking the wrong usage metric could have disastrous consequences for long-term growth.

The best usage metric meets five key criteria: value-based, flexible, scalable, predictable and feasible.

  • Value-based: It should align with how customers derive value from the product and how they see success. For example, Stripe charges a 2.9% transaction fee and so directly grows as customers grow their business.
  • Flexible: Customers should be able to choose and pay for their exact scope of usage, starting small and scaling as they mature.
  • Scalable: It should grow steadily over time for the average customer once they’ve adopted the product. There’s a reason why cell phone providers now charge based on GB of data rather than talk minutes — data volumes keep going up.
  • Predictable: Customers should be able to reasonably predict their usage so they have budget predictability. (Some assistance may be required during the sales process.)
  • Feasible: It should be possible to monitor, administer and police usage. The metric needs to track with the cost of delivering the service so that customers don’t become unprofitable.

Navigating enterprise legal and procurement teams

Enterprise customers often crave price predictability for annual budgetary purposes. It can be tough for traditional legal and procurement teams to wrap their heads around a purchase with an unspecified cost. SaaS vendors must get creative with different usage-based pricing structures to give enterprise customers greater peace of mind.

tips for navigating legal and procurement teams

Image Credits: Kyle Poyar

Customer engagement software Twilio offers deeper discounts when a customer commits to usage for an extended period. AWS takes this a step further by allowing a customer to commit in advance, but still pay for their usage as it happens. Data analytics company Snowflake lets customers roll over their unused usage credits as long as their next year’s commitment is at least as large as the prior one.

Handling overages

Nobody wants to see a shock expense when they’ve unknowingly exceeded their usage limit. It’s important to design thoughtful overage policies that give customers the feeling of control over how much they’re spending.

How to overcome the challenges of switching to usage-based pricing

The usage-based pricing model almost feels like a cheat code — it enables SaaS companies to more efficiently acquire new customers, grow with those customers as they’re successful and keep those customers on the platform.

Compared to their peers, companies with usage-based pricing trade at a 50% revenue multiple premium and see 10pp better net dollar retention rates.

But the shift from pure subscription to usage-based pricing is nearly as complex as going from on-premise to SaaS. It opens up the addressable market by lowering the purchase barrier, which then necessitates finding new ways to scalably acquire users. It more closely aligns payment with a customer’s consumption, thereby impacting cash flow and revenue recognition. And it creates less revenue predictability, which can generate pushback from procurement and legal.

SaaS companies exploring a usage-based model need to plan for both go-to-market and operational challenges spanning from pricing to sales compensation to billing.

Selecting the right usage metric

There are numerous potential usage metrics that SaaS companies could use in their pricing. Datadog charges based on hosts, HubSpot uses marketing contacts, Zapier prices by tasks and Snowflake has compute resources. Picking the wrong usage metric could have disastrous consequences for long-term growth.

The best usage metric meets five key criteria: value-based, flexible, scalable, predictable and feasible.

  • Value-based: It should align with how customers derive value from the product and how they see success. For example, Stripe charges a 2.9% transaction fee and so directly grows as customers grow their business.
  • Flexible: Customers should be able to choose and pay for their exact scope of usage, starting small and scaling as they mature.
  • Scalable: It should grow steadily over time for the average customer once they’ve adopted the product. There’s a reason why cell phone providers now charge based on GB of data rather than talk minutes — data volumes keep going up.
  • Predictable: Customers should be able to reasonably predict their usage so they have budget predictability. (Some assistance may be required during the sales process.)
  • Feasible: It should be possible to monitor, administer and police usage. The metric needs to track with the cost of delivering the service so that customers don’t become unprofitable.

Navigating enterprise legal and procurement teams

Enterprise customers often crave price predictability for annual budgetary purposes. It can be tough for traditional legal and procurement teams to wrap their heads around a purchase with an unspecified cost. SaaS vendors must get creative with different usage-based pricing structures to give enterprise customers greater peace of mind.

tips for navigating legal and procurement teams

Image Credits: Kyle Poyar

Customer engagement software Twilio offers deeper discounts when a customer commits to usage for an extended period. AWS takes this a step further by allowing a customer to commit in advance, but still pay for their usage as it happens. Data analytics company Snowflake lets customers roll over their unused usage credits as long as their next year’s commitment is at least as large as the prior one.

Handling overages

Nobody wants to see a shock expense when they’ve unknowingly exceeded their usage limit. It’s important to design thoughtful overage policies that give customers the feeling of control over how much they’re spending.

RIBS: The messaging framework for every company and product

Over more than two decades of advising founders, I’ve heard all kinds of stories — good, bad and everything in between. While everyone is different, I’ve noticed that the very best stories have something in common: They pass the RIBS test. I’ve talked a lot about this over the years, and it’s stood the test of time and trends.

The test is designed to tell you if your story is memorable (will it “stick to your ribs?”) so you can turn it into a compelling message. It looks something like this:

  • Relevant
  • Inevitable
  • Believable
  • Simple

Relevant

Before you can come up with a good story, you need to think about the audience. Who are you trying to reach? Are you solving a problem they care about? What matters to them about that problem? Why does your solution deserve attention?

The test is designed to tell you if your story is memorable (will it “stick to your ribs?”) so you can turn it into a compelling message.

Marc Benioff could have launched Salesforce by describing it as an online way for companies to manage relationships with their customers. It’s true and it would have been interesting, at least to some people. But instead, Marc went bigger: He ran a campaign that described Salesforce as the “end of software.”

At the time, software was everywhere and it was creating all kinds of problems: It was massively expensive, time consuming and prone to failure. By taking on those issues, Marc made the company instantly more relevant to a bigger market and audience. The conversation went from a discussion of feature checklists, contacts and leads, to how an entire industry would change. Marc looked like a visionary — and Salesforce seemed revolutionary.

Inevitable

Why I felt fine about not disclosing my pregnancy to investors

I closed two major rounds of funding for my geothermal energy startup, Dandelion Energy, while pregnant. I did not disclose either pregnancy to my investors during the fundraising process either time. I felt fine doing this, and I believe other founders should feel free to keep their pregnancies private as well if they’d prefer to.

No one would think twice about a male founder who declined to share the details of his health or family status with investors during an initial fundraising meeting. On the contrary, it would be an unusual move for him to do so.

For some context, my co-founder and I spun our startup, Dandelion Energy, out of Alphabet’s X in April 2017 and raised our first small round of outside funding that summer. Our goal was to set up a commercial pilot and start selling and installing heat pumps to demonstrate that our product worked and show that there was demand for affordable geothermal before we raised a larger round. We had to prove that our business was viable.

No one would think twice about a male founder who declined to share the details of his health or family status with investors during an initial fundraising meeting.

That same summer, in 2017, I became pregnant.

Round one

As summer turned to fall, I had to figure out how to approach being pregnant while raising Dandelion’s second round of funding. I was lucky to be able to choose whether to tell people I was pregnant because it turned out I didn’t end up looking visibly pregnant until about seven months in, and even then I could dress to make it nonobvious. Without knowing anyone who’d gone through a similar experience, I had to decide how I would handle my status as a pregnant person when speaking with investors.

At first, it worried me that I would be hiding something if I didn’t disclose my pregnancy. But I really didn’t want to. I was a first-time entrepreneur with no real track record. Oh yeah, and I was a woman. And almost all of the investors were men who typically funded men.

Especially early on in a startup’s life, these investors are judging the founder as much as the business. Making an impression is key, and “pregnant” didn’t strike me as accretive in any way to my ability to deliver the type of impression that would lead to investment in my business (I hope this changes over time, but I am being honest about how things seemed to me).

And then there was this: Even if I had decided to tell investors I was expecting, how could I broach the topic in a way that wouldn’t threaten to derail the entire tenor of the meeting? I was meeting most of these people for the first time and had a limited amount of time to spend explaining payback periods and vapor compression refrigeration cycles. It seemed like the best-case scenario was if disclosing pregnancy made the meeting no worse than it would otherwise have been. In no world could I imagine it would be a net positive.

Given all of this, I made the decision to not talk about it. It worked out for me. As soon as I started showing, around seven months in, everyone left their offices for the holidays, and so I was never forced to address what was becoming visibly obvious.

But of course there was a downside to my approach. I would have to tell them eventually, and I’d pushed it off so long that by the time I finally got around to it we basically had to have a conversation like this:

Me: “Some happy news to share: I’m pregnant!”

Investors: “Congratulations! We are so thrilled for you! When’s the due date?”

Me: “Ahhh … Next month.”

Happily, all of them were extremely supportive and gracious when I told them. Their uncomplicated and positive acceptance of the news even made me wonder if all my internal wrangling about whether to tell investors had been unnecessary. I gave birth to my daughter literally one day after the money was wired.

Round two

Time passed and it became clear we were ready to raise our next round of funding. Also, I become pregnant again. This time, most of the fundraising happened in the early stages of my pregnancy. Early enough that I hadn’t even really told my friends, so it was obvious to me I wouldn’t be telling investors I was just meeting. After having gone through it once before, it was an easier decision the second time around.

Looking back

Reflecting on my experience, I do think it helped that I got to know my investors throughout the fundraising process, so by the time I told them I was pregnant, they already knew me and I had already established my credibility as an entrepreneur. Being pregnant was just something going on in my life; it didn’t define who I was to them. That is one advantage of introducing it later: It did not define me because they knew so much else about me by that point.

In many ways, I am a stereotypical founder: I have a CS degree from Stanford, I worked as a PM at Google, I have an engineering background. I have many advantages. Yet, more present in my mind during fundraising were the parts of my identity that seemed atypical, and the primary aspect here was my being a woman.

Because there is so much conversation about how women receive so much less investment, I was worried that being a woman would be a disadvantage, and there’s nothing like being pregnant to highlight in the strongest possible way that you’re a woman.

I now feel lucky to know other founders who have raised money while visibly pregnant, and so I’ve seen firsthand that it’s possible. But it is not something that a pregnant founder should feel obligated to disclose. I hope that it becomes common for women to start businesses and raise capital for those businesses in every stage of their lives, including when they’re pregnant.

Because as soon as the pregnant woman and the guy with the hoodie both seem equally probable as startup founders, it will suddenly matter much less whether to talk about your pregnancy.