MITEF: Building a scalable business

Because you can never be too busy, last night after work I went to the MIT Enterprise Forum (I also went to a show at the Crocodile later in the evening) and listened to a talk on Building a Scalable Business. It was given by Mark Mader of Smartsheet and Tim Porter of Madrona (one of Redfin’s VCs.)

After you go enough of these talks the content really is very similar but its good to hear the same themes over and over again. Its also good because sometimes you lose your focus of some of those key themes. For instance while I talk to a lot of Redfin users I don’t talk to a Redfin user every day. We also haven’t done much testing of first time users or people who have dropped off, both ideas that Mark touched on several times.

Here are my notes from the talk…

They started with a Smartsheet overview. They have about 25,000 customers and have spoken to about 200 of them.

Tim spoke about why Madrona invested:

  • They had a good team already in place, had a product, and had a market.
  • They liked the self service, automated, and UGC aspects of the business
  • Felt the business is capital efficient; they feel the team doesn’t need to grow much beyond the 11 people they have now
  • They had a solid v1 product
  • Madrona thinks of their investments as 4-8 year commitments
  • Traffic is going up but they’re working on conversion and upsell
  • How you scale efficiently changes over time. Your 500 customer costs a different amount to acquire than your 50,000 or 5 millionth
  • They feel like they have enough features and now are working on usability.
  • They use Google Analytics to measure marketing costs. However there are a finite number of people who search on specific keywords and so you only have so much headroom in each segment. You should understand how much headroom you have and have a strategy for when you max it out.

Mark on why they took VC investment:

  • Access to money wasn’t the important thing, but rather building brand trust by attaching to a VC because customers do a lot of research and likely wouldn’t trust an online service business that didn’t have any history.
  • The VC’s network opens doors. Their example: they were able to be introduced to a design firm for branding that they otherwise wouldn’t have been able to talk to.
  • Raised $1.6 million in angel ($400k, $450k and a bridge) before their VC round
  • Wanted product, paying customers, before raising their money
  • 9-10 month courtship that really accelerated once they showed adoption of the service
  • Founded June 05. Did a year on angel. Marketing director did consulting on the side to bring in revenue unrelated to their core business.
  • Spent $15-20k on building an IP portfolio

Keys to effectively scaling your business:

  • Talk to customers over the phone, not over email to understand their needs
  • They’re doing account profiles not testimonials since enterprise customers can’t give testimonials
  • You need to understand the customer you didn’t get though he didn’t elaborate on how they do this
  • What Tim is looking for: What’s the user scenario, what’s the pain point and why will people pay for it?
  • The process of building the product, acquiring users, monetizing and repeating can be serial or parallel or a blend. Mark said he talked to Andy from Judy’s Book who said he though they paralleled too much.
  • Nose for the money: 100% focused on how we’ll make money on this. Very customer driven. Who will pay? How much? Always have it in your sights
  • Mark: Fail early. Be flexible.
  • Mark: Do landing page multi-variate testing
  • Tim: Use data for prioritization. Have a short list of what you’re focusing on.

Keep burn rate low:

  • Pay sub market rates in exchange for equity. Check point on this every 6 months to a year because employees perspectives will change.
  • Paying $14 square foot now. It’s $32 square foot in Bellevue.
  • Hinting at multi-variate testing spends
  • Little stuff ads up. Using Windows Mobile instead of Blackberry because it’s cheaper.
  • Using open source and free serivces like Google Analytics.
  • Using hosted software like Quicken Online
  • They’re using Exchange but thinking of switching to Gmail because they tinker with their server 3 days a quarter which costs them time.
  • They don’t think of costs in terms of headcount but in how many leads it could generate
  • Outsource but buy from top shelf providers. Two they use are Rackspace and Amazon Web Services (storage and computing power)


  • People talk so put in place structure on options pool so there is some amount of transparency when they do.
  • Make clear to people that salaries might not change when VC money comes in
  • They have 5 full time developers
  • Outsourced QA ‘tasks’ overseas
  • Employees are a fixed cost be very careful on hiring
  • Less is more
  • They look for passion for business bit first skill sets second
  • Do not settle on people. Wait for the best

Product development

  • Find people who have done it before
  • Developers should have passion for the whole product and not just the nuts and bolts
  • Sometimes you have to say no to new features.
  • Focus on what will convert the not yet captured client
  • They do experience testing with people off the street who haven’t used the product
  • Think about personnel issues when choosing a platform. How hard/easy will it be to hire developers for a particular platform?

Distribution strategy:

  • They’re pursuing a single revenue stream (subscriptions)
  • The purchase process has got to be frictionless
  • You’re either a paying customer or not a customer, even though it’s initially free. Don’t let the users know they’re going to hit barriers in three months that will cause them to either drop off or start paying.
  • How do you position yourself in the customers line of questioning? Be specific vs generic
  • Started with paid then moved to organic web marketing
  • Don’t focus too much on the homepage since users come in via landing pages. Optimize the landing pages.
  • Do permission free partnering with no investment. Reminds me of how Zillow has an easy to use API that anyone can run with.

Interesting questions at the end:

  • They have a horizontal tool that they’re able to position vertically. No one goes looking for task management online but they go online looking to solve and track HR tasks for insistence. This why they have a big database of templates.
  • Looking for repeatable successes/sales you should avoid one offs to meet one quarters financial goals. He had an example of being approached by two big companies to provide their software in a box so it could be hosted in the customers data center. This would have been lucrative but distracting.
  • Salesforce helped paved the way for hosted software and ease security concerns with customers
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