Brian Halligan and Dharmesh Shah – entrepreneurs in residence at the Massachusetts Institute of Technology (MIT) in Boston – know a thing or two about launching a new business.
They’ve transformed their own firm, HubSpot Inc., from a two-person outfit (when it launched three years ago) to a 110-employee company that has already raised $33 million in financing.
The Boston-based firm that sells marketing software to small and mid-sized businesses grew 300 per cent year-over-year – from 2006 – 2009.
Halligan and Shah must have been doing something right!
In a recent Webinar titled: Money, marketing and management Halligan and Shah offer a range of strategies startups can use to build their business, get financing, and get a lot of free marketing.
Here are five key techniques they recommend — all of which have been used very successfully by Hubspot itself.
1. Follow the customer, not the competition
Typically, many new businesses spend a lot of time studying competitor offerings and try to improve upon them.
A better approach, say Halligan and Shah, is to discover what potential customers really need, and create an offering to satisfy that.
They cite the example of the Apple’s launch of the iPod. “Before Apple came up with the iPod there were other mp3 players on the market, but they were complex,” Halligan noted.
He said Apple studied customer needs and took a different approach. “Instead of creating an mp3 player with even more features, the company decided made a simple player that was toned-down and integrated.”
The masses didn’t want yet another feature-rich product, Halligan said, but one that was user-friendly. “Apple did the same thing when they created the iPhone. They watched what RIM and other smartphone manufacturers were doing, but didn’t follow them.”
2. Write a blog, not a business plan
Turns out HubSpot never did have a final business plan.
“We tried to do it, but it turned out to be a time hog,” Halligan reminisced. “Every time we had a meeting with someone, we’d have to get back to the office to update the business plan. It was just more time put into sharing the document to get it right, than building the business.”
So eventually Halligan and Shah decided they could do without a business plan, but instead put together three core documents.
- A PowerPoint deck that was 12 slides long – but had lots of extra backup slides that could be shown to stakeholders to give them an idea of the business
- An Executive Summary – containing key facts — the target market, its size, what was unique about the firm’s offering etc.
- A three-year P&L document i.e. what do revenues look like in the next three years, what do expenses look like, how much capital will be needed?
Halligan admits the last document was steeped in speculation, as the founders had no idea of how much revenue would come in, in the early days of HubSpot.
“We were able to do all of these three things without a business plan and I would recommend this to you as well.”
Shah noted there may be cases when someone starting a new business has this irresistible urge to write a business plan. “That’s okay, as long as you understand that not a single individual on the planet, including your friends and spouse – will ever read that plan.”
He said entrepreneurs who spend endless hours and cycles putting together a business plan that no one ever reads, also tend to be less flexible in modifying that plan when market changes require that this be done.
A new firm would be far better served by creating a powerful blog, Halligan said. “By putting a blog out there you get valuable feedback. In some cases, it’s going to be competitors who read your blog, but the idea is to get feedback from the market.”
The second big benefit from blogs, he said, is that very early in the game, you’re able to build a community around whatever issue it is you are solving.
He said Hubspot did this before it wrote a single line of code.
“We created a blog – blog.hubspot.com. And many early ideas we got from the community were great. You can see in those early posts how we were thinking through the model, soliciting feedback from the marketplace, and pushing our ideas back to the community.”
Startups, says Halligan, should be building their community even before they go out there to sell something. “That’s because people in your community are the first ones you’re going to target when trying to drive marketing and sales.”
Shah noted that many entrepreneurs are reluctant to share their idea in a blog, and get community feedback for fear that a competitor will steal the idea.
But most entrepreneurs, he said, hugely over-estimate the actual risk of putting their idea out to the public.
“The truth is this ‘stealth mode’ just doesn’t make sense,” he said.
“It’s very unlikely someone’s going to wake up in the middle of the night, look at your blog idea and say: wow, that’s such a fantastic idea, I’m going to go and do exactly that.”
On the other hand, the upside to putting your ideas out there is very high, Shah pointed out.
“You can start attracting potential investors, attracting employees, management team members – something you would find very tough to do if you couldn’t tell anyone what your idea is.”
3. One, two – what’s a startup to do?
How many founders should a startup have?
One founder isn’t a great idea unless the person is exceptionally energetic, versatile and can handle strategic decisions as well as the day-to-day running of the business.
It’s not something Halligan advocates. “I can’t imagine running HubSpot by myself. All the decisions sit on your shoulders.”
He said there’s another issue with having a single founder, and it has to do with finding funds for the business. “When you meet an angel investor or venture capitalist, what goes on in their mind is: you couldn’t convince one other poor slob, you have to convince me as the second person on the face of the earth that this a good idea.”
So it’s good to convince at least one other person that your idea is worth jumping into.
But going beyond two founders carries several disadvantages. Halligan listed some of these.
“In the early stages, by the time you raise enough venture capital if you have four founders, your slice of the pie is very small. You get diluted down with each round of capital, which is painful.”
Also, with multiple co-founders, the company often ends up making lowest-common denominator, regression to the mean-type decisions.
“You don’t take big risks, which as a startup you may need to do. You sometimes have to do very radical things to succeed at a startup – which you can’t do with four founders. So you’re almost destined to fail.”
The ideal situation is for the founders to have complementary strengths, he said, noting that this was the case with Shah and himself.
“Dharmesh and I complement each other. I come from a heavy sales and marketing background, while he comes from a heavy technology vision background. And we overlap in the middle. We’re both interested in software, Web 2.0, marketing and strategy. This is how, I think, it should be with co-founders.”
Likewise, when hiring members of the team there’s often doubt about whether one should go in for a specialist or a generalist, he said.
“This happened with us,” Halligan recalled. “In the early days, when looking for someone to head our sales organization, we asked ourselves – should we hire a pure salesperson, who has grown up through the ranks or someone who can do sales, as well other things.”
Eventually, he said, the firm hired Mark Roberge to manage sales. “He had never run a sales organization before. We know him through Sloan (at MIT). He was a very convincing entrepreneurial kind of guy. We hired him as our first sales person, and today he’s VP of Sales at HubSpot with about 40- 45 people on his team. He scaled up very well.”
He said the firm had similar success on the services side by hiring a generalist. “We hired Jonah Lopen as our first service person straight out of MIT´s Sloan School of Management. Today, he manages around 30 – 40 of our consultants and support people.”
The problem with hiring specialists in the very early stages is it’s very difficult to know exactly what you need, Shah said.
“If you take on a specialist you may be paying for experience that you don’t really need a year down the road. So as you’re still figuring out your market, generalists tend to be better choices. Later on, you can hire specialists as the model gets more refined.”
4. The world’s not flat, make sure your company is
The conventional command-and-control type organizational structure where authority flows down from the CEO, to the VPs, directors, managers – with the employees right at the bottom of the pyramid doesn’t really work that well in the Internet era, Halligan said.
Modern companies should look different on the inside, he said. “They should be very flat, very transparent, everybody should be empowered on all the edges of the organization.”
What kinds of structures can a startup put in place to have this happen. Halligan has a tip or two.
“At HubSpot we don’t have an open door policy – we have a no door policy. So while Dharmesh and I sit in the engineering group, we move around in the organization. Neither of us has an office, we don’t have a door that you can close. You can walk into a conference room if you have a private meeting or phone call to make.”
He said everyone just sits out in the open and every three months at HubSpot desks are rotated around. “It let’s people collaborate much more and get to know all their colleagues and the execs. And there’s no “holier than thou” attitude built up inside the organization.”
HubSpot also uses a scrum methodology, used by software developers – particularly in the Open Source world – to self-organize teams, and empower them to make decisions.
“We implemented that across our whole company. For instance, in our marketing organization our vice-president of marketing doesn’t unilaterally decide everything. We have two marketing scrum teams. Every month they get together, look through a project backlog and pick the most important projects and assign them to one another and hold one another accountable for the results. It’s very decentralized and empowering.”
5. Let your community do your marketing
Surveys show outbound marketing – telesales, direct mail and email campaigns, radio or TV ads – are getting increasingly ineffective.
“The fact is people are getting tired of being marketed to, and they’re getting better and better at blocking it out,” Halligan said. “So today when marketers cold call, people just have caller ID and block you out like crazy. The same is true with e-mail marketing. Back in the 90s open rates were very good. But now they are plummeting. The impact of newspaper ads is decreasing, because many people don’t read the newspapers – they use RSS to subscribe to edgier blogs in their industry.”
He said rather than spend a ton of money, time and energy on channels that don’t deliver, new entrepreneurs should focus on building their online community.
“As a start up you want to take advantage of social media sites – such as Facebook, Twitter, YouTube, Foursquare — to pull people in, and stop interrupting them with cold calls and e-mail marketing.”
The first thing to do is create a remarkable blog. “If you’ve got great content on your blog that will spread like wildfire, attract links and turn you into a hub.”
In the quest to build community, he said, Twitter is also an extraordinarily powerful tool.
He cited the example of online shoe retailer Zappos.com, whose founder Tony Hsieh today has 1.5 million Twitter followers.
“If you want to start another store online to compete with Zappos – it’s going to be difficult to beat that 1.5 million following. Tony also has millions of other Web sites linking into his Web site. It’s going to take a long time for you to achieve that.”
Today, with many startups their early success hinges on how quickly they’re able to build a vibrant online community that they can tap into when they start marketing their product.
Halligan cited the example of Hubspot which currently has 120,000 members in its online community, and is the fourth- largest LinkedIn group.