Lost and Founder: A Painfully Honest Field Guide to the Startup World

by Rand Fishkin

Raising prices for your product every year or two and grandfathering in existing customers is a great way to increase loyalty and grow your profit margins. (We did this several times over the next few years; it worked like a charm.)

By 2017, my company, Moz, was a $45 million/year venture-backed B2B software provider, creating products for professionals who help their clients or teams with search engine optimization (SEO). In layman’s terms, we make software for marketers. They use our tools to help websites rank well in Google’s search engine, and as Google became one of the world’s richest, most influential companies, our software rose to high demand.

We employ very expensive, talented, highly-in-demand engineers, product designers, marketers, and customer service folks. The average Moz salary is more than $100,000/year, and with benefits and taxes, a new employee costs us about $145,000/year. More than 70 percent of our costs come from the salaries and expenses of people on the team.

In 2014, after a particularly brutal period, I stepped aside as CEO and took a role as an individual contributor. As of this writing, I’m chairman of Moz’s board of directors and an adviser to several of our product and marketing teams. I speak at more than thirty conferences a year and spend about 25 percent of my days on the road, helping folks around the world gain a better understanding of how search engines and web-marketing channels work. I still walk to the office from the apartment I share with my wife, Geraldine, run tests that Google wishes I wouldn’t, try to be a force for transparency both internally and externally at Moz, and do my best not to beat myself up for the mistakes of the past.

The most meaningful benefit transparency brings might be its forcing function for deliberately ethical, rational behavior.

Transparency can’t just be a tactic, though. It has to be a core value that’s consistently followed. If you openly share some things, but hide others, credibility will suffer. Your team will always wonder what you’re not sharing. Your customers, your investors, the press—whomever you interact with—will be trained to mistrust you.

How is it that thirteen years later, we’re a 155-employee, $45-million-dollar-a-year software business?

Many businesses get stuck in this cycle—not wanting to scale because it creates more work and less profit margin in the short run, thus limiting their upside in the long run.

Why is it that so few consulting businesses successfully launch a product?

There are two traits fundamental to an effective product-focused business. The first is reach (i.e., the ability to influence a large audience). The second is scalability (i.e., an aptitude for growing revenue far more quickly than costs).

Traditionally, consulting businesses have little of either. Consultants don’t need wide brand awareness or a large audience. They require only a small group of highly targeted individuals and organizations to be aware of their existence and services. Word of mouth is often enough to fill the pipeline for consulting businesses. In a product-based business, though, a much broader audience is typically required, and there’s vastly greater need for brand awareness and market penetration. Word of mouth alone can power an exclusive list of enterprise-only product companies, but even then, the competitive landscape dictates a degree of coverage and scaled-up marketing that’s almost never found in the consulting world.

In a consultancy, hours and projects are what customers pay for rather than the goods or access (physical or virtual) that power a product-based firm.

the dollars earned from a recurring revenue model are vastly more valuable than dollars earned from services, thanks to scalability and margin.

gross margins on software product businesses are often higher than 75–80 percent, while the margins on a consultancy are more likely in the 25–40 percent range.

Every dollar you make from services will net you (on average) one to two times the amount in an acquisition or valuation scenario. This formula for a product-driven business, like our software subscription, is often in the three-to-eight-times range.

Silvio can probably anticipate a sale of $10 million to $25 million for his similarly sized business. The modifiers will generally be his company’s EBITDA (earnings before interest, taxes, depreciation, and amortization), his net margins (profitability), and some elements of relative demand, bidders, and industry.

services-based businesses still have many great strengths that deserve consideration: Little to no startup capital is required; you can build these companies from home, with nothing but your own time, energy, and effort. You can entirely control the scale, expenses, and profitability of your business with far greater precision by taking on more or fewer clients, raising or lowering prices, and doing the work yourself versus hiring or outsourcing. If and when you choose, you can take time away from the business with far less harm to its long-term potential. No new clients for a month and no deliverables committed means a month with family or on vacation. You will almost never need to give up ownership or shares in the company, which has tax benefits (using an S corporation or LLC, which most consultancies do, means neither profits nor salaries get taxed twice) and leaves you in full control. This isn’t to say that a software/products business cannot do this, just that it’s much less likely, especially if you want/need to raise capital.

In general, hiring costs are much lower in consultancies (because most types of consultants tend to have lower salaries, on average, than software/product engineers, designers, and marketers), people retention is less challenging, and the benefits/perks are not expected to compete with those of Google, Facebook, and others of their ilk.

Most surprisingly: services firms are often a superior financial...

As Niki started her software business, she raised two rounds of financing, $500,000 from angel investors in exchange for 30 percent of the company’s equity, and later, a Series A round from a venture investor of $8 million in exchange for an additional 40 percent of equity. These modest investments and the 15 percent of shares in the company she put in the employee option pool and distributed to team members meant that, upon sale, she owned 15 percent of the company she started. That’s slightly higher than the median startup founder, who owns only about 11 percent of his or her company’s shares at exit.

If we presume each got the median valuation for their sale, Niki made 15 percent of $40 million ($6 million) and Silvio made 100 percent of $15 million. Despite the massively higher valuations of software revenue, Niki made $9 million less than Silvio.

In 2012, Scott Shane of Small Business Trends analyzed US Census Bureau data and found that services firms have some of the best survival rates among small-business types: 47.6 percent make it past year 5 of operation. Contrast that with the less than 25 percent of tech startups that do. You are, statistically, almost twice as likely to “make it” as a services business than as a technology product firm. But,

When I talk to founders who’ve attempted this shift, three big things are almost always holding back a successful transition. Comfort with the existing model, and the reliance on services income to survive. The undistracted time needed to build a great product. The difficulty of finding enough of the right customers for that product. It’s rare that your services clients are the perfect match for your product (because fundamentally, they need services, not a product; that’s why they’re your customers!). This is why you can’t simply transition services clients to product customers, despite the seeming appeal and overlap. If

If you can reset your passion from “I want to do *this* work” to “I want to see something I create change the world in *this* way,” your expectations will align with reality, and the cognitive dissonance and frustration of being torn away from the work you love can fade.

She reorganized the company into functional business units, with a smaller number of shared services departments,

from an average customer lifetime value of a couple hundred dollars to more than $2,000,

“What good development practices did your last company have that you don’t see in play here?”

Recruit technical leadership with a teaching orientation. The best way to ensure that your CTO is going to make you a better CEO is to hire a CTO who likes to teach. Make it clear that you’re looking for someone to drive change and educate you and the team. Beware CTOs who try to “shield” you from the details. Being able to explain complex things simply is a job requirement.

List functional areas of the business (ignore how you’re actually subdividing the teams/people) and record which teams or roles have high turnover versus strong retention, which have an easy time recruiting versus a tough slog getting qualified applicants. These recruiting and retention numbers have strong correlation with strengths and weaknesses.

Venture capital changed Moz. It changed me. It made me a better, more focused, more ambitious entrepreneur. I learned more in my first two years as CEO of a VC-backed startup than I did in the seven prior years at a struggling family-run business with my mom. The money we raised at Moz and the help of the partners who joined our board were remarkable gifts. I couldn’t have come this far in my professional career or written this book without them. But when asked if I’d raise money again in any of my hypothetical future business endeavors, my answer has changed over the last few years, from “Yes, definitely” to “Oof . . . I really hope not.”

National Venture Capital Association data showed that the average time from funding to exit (via an acquisition or an IPO) increased dramatically from 3.1 years in 2001 to 6.8 years by 2014. Those figures count all exits, including many that did not generate a positive return for investors or founders. When EquityZen limited its analysis to only those startups that had an IPO (and thus, almost definitely generated returns for at least its investors and probably most founders, too), it found that from founding to public offering takes an average of eleven years.

Say you visited Moz for the very first time via a Google search for a phrase like “SEO tools,” then immediately signed up for a free trial of our software. Chances are good you’d be a Moz customer for less than four months versus the overall global average of about nine months. But if you visited Moz twelve times or more in a three-month span before signing up for that free trial, chances are you’d stick around for fourteen-plus months as a paying subscriber.

Turns out, our best, most loyal customers tend to be those who’ve spent considerable time on our website, participating in our community, consuming our educational resources, and testing out our free tools. Thus, it’s actually in Moz’s interest not to promote our products or conversions too heavily or too fast, especially to new visitors. The classic funnel optimization promoted by many marketers has this peculiar idea that we must race to turn as many visitors as we can into paid customers and that any missed opportunity represents a flaw in our marketing process. Our metrics show just the opposite. If we want to have the best long-term impact on customer growth and retention, we need patience. We need to wait for our audience to be ready and engaged with us before we nudge them toward our subscription.

our business actually prospers most from long-term, low-churn, high-engagement customers—the kind we get from deep investments not just in a visitor’s conversion path, but in their professional and educational journey.

Pro Tip: If you have any type of subscription or recurring revenue, make sure you measure LTV (Lifetime Value—the total revenue customers spend during their relationship with your firm) by referral source(s) and by the number of visits prior to conversion.

Today, this tactic of including influencers in the creation of content (often called “roundups”) is a staple of the content marketing practice. I’d even say it’s massively overdone at this point. But a hundred new, creative opportunities await.

Transparency—We believe in sharing what we know, learn, and do with everyone who’s interested. We reject secrecy, obscurity, and opacity in all its forms and strive instead to make the worlds of marketing, of SEO, of software startups, and of Moz itself open and accessible to all.

Instead, you need a hiring process that considers core values and broad culture fit. Don’t arrogantly presume you can transform a person who isn’t predisposed to believe in or share your core values into someone who is. Build that screening into your interview process, your onboarding process, and the way in which contributions are judged. Use it to inform how raises, recognition, and promotions are given. That’s the only way you’ll prove to your team that values are on par with work output.

Real values have costs. They’re difficult to embody. A lot of people (but hopefully not the ones you recruit) will disagree with them. People internally and externally should, at least some of the time, view them as a barrier to making a financially beneficial decision.

Real values are truths you hold to be more important than making money. They will come into conflict, and you’ll have to make that hard decision and show everyone on your team why you’re choosing that path, not just once, but over and over in order to instill the idea that values mean something at your organization. Because, usually, they don’t. People who’ve been in the professional world for even a few years get pretty jaded about “company values.” That means you have to go above and beyond to prove that you take them seriously.

When you force people to figure out a secret, unwritten code for behavior, you are guaranteed to drive away a fair portion of otherwise talented contributors. Worse still, all the benefits you could achieve from recruiting and hiring with explicit values are forfeit. If you can’t be bothered to identify, amplify, and reward your beliefs, there’s no way for your recruiting process to seek out those shared beliefs in new employees.

Retention—It’s far more difficult to retain team members who fundamentally disagree with how things should be done and why, even if they agree on what work to do. And constantly rebuilding a team through hiring is both exhausting and inefficient—people do their best work a year or two into working together with the same group. They learn one another’s intricacies and idiosyncrasies, anticipate needs, establish efficient communication and process patterns, and know what works and doesn’t for their teammates. According to Namely’s analysis of more than twenty thousand startups in the United States, average employee tenure is only 10.8 months. 10.8 months! If you can improve yours, you’ll have a powerful competitive advantage.

Motivation—The difference between working with people you like, trust, and agree with versus working with those whose tactics, style, and ethics you question is immense. The former promotes the assumption of good intent (among the most critical elements for team bonding, productivity, and quality of output). The latter fosters political environments where work quality suffers.

Cohesion—It is massively easier to ask a team to commit to a road map, a project, or a process (even when they disagree) if core values and culture already bind you together. When those elements are lacking, so, too, is the basic structure for what makes a compelling argument or what elements should be p...

shared culture combined with diversity should be exactly the combination you’re seeking in a team. Diversity, culture, and values might sound like a complex, tough combination. I agree it’s challenging to build a team with these attributes, especially if your own background lacks exposure to diverse people and/or those who share your values.

Diversity is immensely desirable because it improves perspective, empathy, and creativity. A diverse group brings unique life experiences and, as a result, a unique ability to contribute that non-diverse groups can’t match. It’s often hard to know when you’re benefiting from diversity (or when you’re being hurt by lack of it) because the input given by people is seldom directly attributable to their background,

Research from McKinsey showed that more gender-diverse companies outperform their less gender diverse peers by 15 percent while more racially diverse teams outperform their peers by 35 percent. PE Hub, Venture Capital Journal, and Women VC published a joint report analyzing the returns of investment funds with gender-diverse versus mostly male and all-male investor teams and found the more balanced teams had returns 3.78 times higher than their less-balanced peers. When First Round Capital analyzed the performance of the hundreds of investments in its own portfolio, it found that teams with at least one woman founder performed 63 percent better than all-male founding teams.

You want a team that has significant overlap in its answers to questions like: What traits and behaviors should be rewarded and recognized in our employees? Which ones should be discouraged? What criteria should be applied to people we hire, those we promote, and those we let go? What makes someone a good person versus a bad person? How should hard-to-resolve conflicts be handled at our organization? What’s your preferred form of communication and why? What enables you to deliver your best work? What stops you from it?

Pro Tip: We use and love Textio (https://textio.com/) to analyze our job postings, about page, and other recruiting-focused content to make sure we’re using inclusive, unbiased language. It’s worth checking out and has a number of free and low-cost options.

Of the 90,545 folks who’d said they were interested in our new product, only 2.3 percent actually paid for at least a month of the service. Worse still, those customers tended to quit the subscription far earlier than customers of our prior product. It was almost a year of additional work before the new product was performing as well for our customers or our bottom line as our previous one.