Building a startup from its very foundation and scaling it to the first major milestone is exhilarating, but ramping is even more validating showing there’s significantly increased value to what you’re doing. This is the greatest difference in feeling between the periods of $0 to $1M Annual Recurring Revenue (ARR) and $1M to $2M ARR.
Exhilaration versus validation.
After the warm reception to my column about scaling from $0 to $1M ARR, I felt it would only be right to share a further five lessons, this time on the world of $1M to $2M ARR.
It’s been over a year since I co-founded Sales Kiwi, a virtual sales staffing company, and I’ve learned a great deal from each stage of its growth. Startups can often stagnate on the road to lofty goals, and Sales Kiwi was no exception. Growth is never a linear path, and here I will share five of my top lessons to help you beat back lulls in your growth.
Every startup inevitably pushes promotions to increase their conversions and revenue. One of the earliest examples of a company offering a promotion was Coca-Cola, which in the late 1800s gave away coupons for a free glass of Coke. Other companies, including JCPenney and Sears, popularized “clearance” and “sales” items in the retail sector.
Unfortunately, some promotions can hurt more than help. I experienced this firsthand with Sales Kiwi when we became more aggressive with discounting monthly prices and offering lower set-up fees. While we saw huge upticks in conversion rates from leads to closed deals, we started to see the harmful effects of promotions weeks further down the line. The types of clients who would sign with a heavy promotion were closely correlated with their retention rates. It makes sense: clients paying full price understand the value of your offering versus those that are looking to just get their feet wet with a heavy upfront discount.
Be careful with heavy discounting and measure the retention rates of your client segments based on the prices that they have paid. You might be surprised to see that offering heavy promotions ends up causing more of a headache in the long run.
I have often been described as a kid in a candy store when it comes to acquiring new tools to leverage, help automate work and build our team. When we started to scale beyond our first $1M in ARR, it opened the budget for shiny new tools, such as fancy Slack apps to monitor sales team performance or dashboarding business intelligence tools. When I’d find a tool I thought would be useful, I’d typically do some of the initial scoping and implementation, then leave it for the team to take on. This was a fundamentally incorrect way of thinking about how things would work long-term.
When onboarding any new tool, it’s important to answer the following questions:
Instead of onboarding new tools, consider methods to introduce a leaner version of what the new tool would accomplish with your current tech stack. I would rather possess 60% of a tool’s capability within our current tech stack, along with it not being as pretty, than have the burden of managing a new tool. Equally important is being realistic on the bandwidth of those on your team when adding new tools to their management and upkeep. This was my biggest error in expecting that tools would continue to be optimized, but it is challenging as a startup when there are already a multitude of other things going on. In addition, there were many tools that I would test which would only be helpful for a quarter and thus not worth the upfront investment in setting it up. It’s best to be realistic about these factors when testing and purchasing new tools.
On our road from the foundation to our first $1M ARR, we had already pivoted dozens of times; from $1M to $2M in ARR we pivoted another dozen times. So, why should you pivot if you’ve already reached a huge milestone? Shouldn’t you simply keep doubling down?
If you can maintain your scaling efforts and have amazing metrics with customer acquisition cost (CAC) and retention, pivoting may no longer be necessary. However, if you’re facing issues with scaling efficiently, there’s absolutely nothing wrong with pivoting. Even behemoth companies such as Meta are pivoting. Their latest transition from a social networking company to a metaverse company is the perfect example of this.
If you’re seeing the following metrics within your startup, it’s time to pivot:
We realized that it would be a slow climb to our next revenue milestones because of retention issues with the offerings we still had available from our first days. Instead of trying the treacherous climb, we began to introduce new services, played with our messaging and even began taking sales calls again! This helped us hone in on what mattered most to our customers and allowed us to hypothesize once more on what the next big change could be. It can be very hard to cast aside big bets that you have already made for new ones, but it’s one of the most important things any founder can do in this early period.
It’s also important to keep in mind that there are various types of pivots, with the following three as the major levers that we used:
You can have the most amazing product, but simply aren’t promoting it the correct way with your messaging and value proposition emphasis. At times, I see startups that are artificially handicapping a great product due to how they convey their message.
The most obvious pivot to make is within product or service and adjusting or introducing new offerings. It’s also the toughest as it requires a rewiring of a great many foundational elements, such as marketing collateral and team focus.
In contrast to the most obvious pivot, I don’t think many startups realize that team composition is a lever to pivot as well. The structures that worked well from day one often won’t work when looking to scale. We realized the importance of Client Success Managers (CSMs) with our clients and rolled out a brand-new team, as the existing teams had no additional bandwidth to handle client requests. This is just one example of the many ways you can pivot an existing team’s structure.
The clients that you acquire early on are mostly small fish when compared to those that you aspire to close later, specifically for B2B startups. With a B2C consumer product, the consumers being acquired don’t change much in terms of household income and reputation.
If you’re building in the B2B space, this one is important if you want to close bigger clients as you scale. Branding may be an afterthought initially because of larger items to tackle but quickly becomes something of utmost importance.
As more bandwidth became available thanks to a wonderful new marketing manager on our team, we started to clean up all our skeleton-built projects, such as our website and email lifecycle campaigns. We moved away from LeadPages and built a custom-website on WordPress, emails got huge facelifts that lined up with our overall branding, we started to post more consistently themed content across all our social channels, and more. Instead of letting this pile up, start to think about how you can build a consistent brand across all properties and chip away as resources become available. This way you’ll be ready earlier to take on the big clients who expect a white glove experience and premium brand.
This one is my favorite as your team is everything and they become even more important once you shift from your co-founding team at the outset to scaling beyond $1M ARR. When I hire anyone at my companies, I look for the following three attributes:
I would rather have someone who possesses these three traits with less practical or educational experience versus someone who has a similar pedigree but lacks such a strong ‘EQ’. This means that not every hire we have brought on has had deep expertise in their role, which has made my title at times that of a “Chief Puzzle Builder.” I made it sound fancier than it is, but it’s really just ensuring that everyone on the team is in the best place to succeed. We’ve had some hires that have come into the sales team, but are eventually transferred to a different department, such as recruitment.
With more than 30 full-time employees, it is more challenging to rearrange the puzzle than when we had five to 10 employees. Instead of impacting a single stakeholder, you can now impact multiple members of those on the team with every decision. You need to constantly be asking the following questions as you scale your team:
We’ve made some significant adjustments towards identifying when someone’s skills can be leveraged in another role, such as specializing their job functions. In one important example we changed the role of a senior leader in our operations organization who had a vast scope, to focusing solely on the pairing and onboarding process for our clients. This allowed said leader to focus laser like on a critical aspect of operations and thrive on improving metrics, rather than be spread too thin.
There’s also the flip side which are those team members who unfortunately can’t scale at the same pace as your startup. I’ve had a few on my various teams who were great individual contributors (ICs) but didn’t work well cross functionally as we scaled, which became more important over time with the initiatives we were working on.
Always question the organizational chart and know that one of the biggest responsibilities as a founder is to put the puzzle together as correctly as possible.
Although there are dozens of other lessons I’ve learned while scaling, these are the most prominent ones that stick out as items I wish I had known sooner. If you take one piece away from this column, it’s that you should be at peace knowing that there’s never a perfect startup in terms of offerings or team. It’s perfectly acceptable to constantly evaluate and make changes.
How does a founder implement a growth framework to scale to their first million dollars in revenue?