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Demystifying the conversations we're already here at RRE and with our portfolio companies. In each episode, your hosts, Will Porteous, Raju Rishi, and Jason Black will dive deeply into topics that are shaping the future, from satellite technology to digital health, to venture investing, and much more.
Raju: I just, I remember, like, in history, like, Lucent’s a great example of one that they kept, like, anonymous, but, like, I know, like, slogans have had problems in the past, right? Like, I don’t know if you guys know, like, KFC, “Finger Lickin’ Good,” it was like a really big thing. And then you translate it to Chinese and it’s like, eat your fingers off, right? And it’s like, all right, you know, like that we can’t use as a slogan. That’s a branding that needs to change.
Will: I’m Will Porteous.
Raju: And I’m Raju Rishi. Welcome to RRE POV, the show in which we record the conversations we’re already having among ourselves, our entrepreneurs, and industry leaders for you to listen in on.
Raju: Hello listeners. This is Raju Rishi, and I’m joined by my partner Will Porteous, and today we’re going to talk about things that startups decide upon early in their careers, or histories, that are difficult to change downstream. So, you broke it, you bought it. And we’ll just go into a bunch of them. And this is literally from, like… experience or conversations I’ve had with a handful of entrepreneurs over the past, like, 48 hours.
And I know Will, you know, you’ve been on a lot of boards and, you know, entrepreneurs, they—you know, CEOs, they make choices on certain matters and they basically say, “Hey, this is good,” and then they realize they’re barking up the wrong tree or they need to make a decision, a shift, and it’s hard to do.
Will: Well, and so often they believe that they can take the decision back somehow or that they can shift later on. And every step forward in one direction is taking you away from other paths you could be on, and many people realize that too late. So, this is a great suggestion for a topic, and I think we’re going to have a lot of fun with it.
Raju: Yeah, I think this one’s going to be fun. So, I’m going to throw out some items, you know, basically choices that entrepreneurs make. I’ll maybe establish it a little bit, and then we’ll kind of just talk a little bit about experiences that we’ve had and kind of what you’ve seen that works and what you didn’t see work. So, first one I’ll talk about is brand. You know, people kind of lock in on a brand, you know, the rough estimate is it’s a minimum of, like, $5000 to pick and create a brand.
And it can go, you know, sort of like $100,000 if you’re, like, a more established company and you’re using an agency. And then to establish the brand—and that’s just to create it, right? So, it’s $5000 to $100,000 just to create it. And then, you know, to establish it, it’s in the millions. And then to maintain it, it’s roughly 10% of your revenue, you know, on an annualized basis.
And so, you’re really kind of spending some effort. And a lot of entrepreneurs will sit there and they’ll pick a brand, and they’ll pick a name of a company, and it’ll lock and load, but it doesn’t always work out. And so, you know, I have a couple of examples of how and when this happens. I don’t know if you’ve got some in top of your mind.
Will: Well, I mean, there’s a couple that jump out that are really obvious. There’s choices about a brand that you might regret later, and there’s how much you spend on creating that brand and maybe sometimes getting ahead of yourself from a standpoint of where you’re spending your money. I’m sure you’ve got examples of both.
Raju: Yeah, I do. And the odd thing, Will, is that, you know, when an entrepreneurial team kind of first kicks off, you got a bunch of founders, you know, they think about fun names, you know?
Will: Sure.
Raju: Yeah, I did this. I had a company that I started, my third company, and it was called Rave Wireless. And we were selling at the universities and we loved the word ‘rave.’ And, you know, ultimately, the company shifted directions and became, like, a public safety company. And the rave word just, like, it was a tough one. You know, we made it work, but you know, Rave Wireless shifted. And we were an MDNO for universities that was building apps for students and colleges, and the word rave was kind of really fun and sexy.
And, you know, ultimately, when we migrated into the safety side of things, it costed us a lot of money. We had to rebrand from Rave Wireless to Rave Mobile Safety, and then, you know, ultimately—the name kind of stuck, but we didn’t kind of love it. But I have a few reasons that, you know, names do change and brands do change and it costs companies a lot of money. The first is, like, copyrights. And I think the reality is, a lot of entrepreneurs, they kind of think about a brand and they’re like, okay, let’s just use this, and they, you know, maybe do a cursory trademark check, but not really fully trademark check, and then they do something where they are looking for, you know, copyrights, you know, on certain nomenclature of what they have, and they think, like, “I’m only doing product X.” And so, one thing that changes is your product bleeds into a different sector. And then all of a sudden you are infringing on copyrights and trademarks for another company.
So, that’s one example. The second example is when you think just domestically and you haven’t done the international trademark or copyright search. And you spent all this money and you realize, okay, now I’m ready to launch into another country, and I’ve got a problem. Because in a foreign country or in the UK, something like that, you know, somebody owns that and it’s near enough, and all of a sudden you got to think, do I want to have two different brands?
Will: Oh, yeah. Hard enough to maintain one and keep a consistent message about value proposition to your customers [laugh].
Raju: Yeah. So, you know, I find this to be an interesting topic. I think for entrepreneurs that are considering a name of a company and a branding for their business, I think it’s worth—if you’re confident that you’re going to become a venture-backed company, and you are going to ultimately scale this thing, you know, not just to the US but internationally, you ought to think about, sort of, having your legal firm do that quick check because it can save you a lot of money by doing that evaluation upfront as opposed to, like, waiting until you’re ready to go international or realizing that your business model has become a little bit more open-ended, and you run into the problem of having to spend $100,000 to create the brand, the millions to develop the brand and then 10% of your annualized revenue to maintain it.
Will: [laugh]. Well, there’s the legal trademark search dimension to it for sure. But also, I mean, back to you and your co-founders and the establishment of a great company to support people who love to go to raves, [laugh] like, you got to see through the conversation to the ultimate customer you’re going to be talking to and who that can be and what the brand connotation may be. And I don’t think it was bad in your case, but your customer base may change, who you’re talking to may ultimately change over time, and getting locked into a brand early on can be challenging. A lot of people come up with cool brands that don’t necessarily fit the message they want to send to their customer.
Raju: Yeah, and I guess it’s a big trade-off—I don’t know how you feel about this—how do you feel about brands that don’t depict exactly what you’re doing? So, in other words, you know, at Lucent, we created Lucent out of nothing and, you know, and we did [Aviya 00:08:04], which was basically a meaningless expression. And so, it’s hard to construe, like, if you get into a different business line, you know, it’s just Lucent, right, like, and—
Will: And I thought Aviya meant telephone in, like, six languages. It doesn’t?
Raju: No, I wish it did. I think it means water or something like that. But, you know, another great example is, like, AT&T. It used to be American Telephone and Telegraph, and it started getting to data services and they just, like, collapse everything into AT&T. So there’s, like, great examples where you get into adjacent territories.
And so, like, what are your thoughts on that, Will? Are you okay, like, betting on getting into a startup that the name really doesn’t mean anything, or do you prefer it to have clarity so that the customers they’re are going after know what it is and that they should buy the product or that it’s for them?
Will: Well, you give great examples. I mean, once upon a time, if you needed to communicate something, you could reach out to the American Telephone and Telegraph company to accomplish your communication goal. I mean, that’s maybe the most classic, simple example in the world. But the truth is that a brand is a signifier for whatever you want it to be, and I think in today’s technology world, you’re almost better off starting with something that people don’t know what it is unless you’re dealing with something that’s truly, truly abstract and hard for them to relate to, so that you can define what that brand stands for in the market as the essence of the company as opposed to something else. And, you know, I have a curious example of this in our portfolio, which is BlackSky, which is an optical imaging satellite company that has satellites in the sky, and you know, we do certain classified work for the government, which could be construed as a black project per se.
But the bulk of the work that they do is commercial and all available in an unclassified way. And so, an early commitment to that name has been something that we’ve, at times, found challenging. And when, by the way, it says nothing about satellites, it says nothing about space, it says nothing about imaging. It’s a cool word. So, I think you—these things are hard, and an abstraction is often, I think, better, or a familiar word that you can make into an abstraction.
Raju: I love that. And my coaching to those founders that are thinking about this is, yes, it’s great to have the product say exactly what you do, but you can do that with your product name, right? You don’t have to do that with your brand. Your brand can be something like, I don’t know, whatever, just make up a name, and then your product can say, you know, mobile application for whatever, right? Or it can kind of depict exactly what you’re doing.
And so, the overarching brand gives you that liberty to get into other product sectors, to get into different, sort of like, verticals. And yet you know that, like, your product itself can focus a little bit more specifically on exactly what you’re doing for a particular customer. And as you launch new products or different products, that can just be an appendage to the brand.
Will: Yeah, that’s a great framework for our listeners.
Raju: Yeah. I just, I remember, like, in history, like, Lucent’s a great example of one that they kept, like, anonymous, but, like, I know, like, slogans have had problems in the past, right? Like, I don’t know if you guys know, like, KFC, “Finger Lickin’ Good,” it was like a really big thing. And then you translate it to Chinese and it’s like, eat your fingers off, right? And it’s like, all right, you know, like that we can’t use as a slogan. That’s a branding that needs to change. And my favorite is the myth of Chevy Nova, right?
Will: Oh, gosh, yes.
Raju: Yeah. Like, ‘no va’ means no go, like, in Spanish. But the reality is that’s, like, a total myth because Nova, like, without like that hesitation between the words does mean star in Spanish. And I think it’s sold very, very well, actually, in Spanish markets, and people got it. But like, yeah, technically, if you say it slowly, you got a problem for a car.
So, all right, I’m going to move to the next topic. This one’s a little bit more easier for us to all understand and digest, and that’s, like, HR functions. And we’ll start with, like, the office. And I think these decisions are pretty important. I think the first thing I’ll start with is remote or in person.
And I’ve had a bunch of companies that have said, hey, you know, we’re kind of kicking the company off and we are going to decide to be remote because an office is expensive. And, you know, it’s just three or four people and we’ve kind of figured out the cadence of how to operate, but their long-term goal is to be in person. And what winds up happening is you scale the business, you know, faster than you think, you know, you’ve raised some money faster than you think and you haven’t established that office presence, and all of a sudden, you’re telling these employees that you’ve hired for the past, like, 6 to 12 months, “Hey, you got to be in person,” and it creates a big disruption in the company. I don’t know if you’ve seen that particular example play out in any of your portfolio companies.
Will: Oh, gosh, yeah. Yeah, and companies that have gone remote and have found it really hard to bring people back in-house. And companies that recognize the strength of the culture-building that happens when their team is together at least 70 or 80% of the time, and founders and leaders who crave that and they wish that they could pull back that decision or establish a kind of enough of an incentive system to get people kind of back in the door, for sure.
Raju: Yeah, I agree. And I think, you know, one coaching that I would give to entrepreneurs is that, just communicate when you create these policies. Like, if you say, “It’s okay to be remote because of Covid,” or you say, “It’s okay to be remote because there’s just five of us right now and we’re going to grow the team,” letting people know that our long-term expectation, like, in long-term being, like, within the next year, you know, we’re going to be in person so people’s headspace is correct, I think that is a mark of a good leader to say we’re doing this for a time period, but you know, don’t really kind of—like, we have the right to extend it for another year or whatever but, like, the expectation should be in office. So anyway, another example is your location of your office.
Will: [laugh]. Sure.
Raju: And so, two sort of nuances there, like, that are hard to take back. Like, near a subway or not near a subway. And, you know, the size of the office is really, really important because, like, it might be okay for, like, five, six people not to be near a subway when you open an office and they’re all managing, they’re all taking bicycles, but like, if you’re in New York City and you’re not near, like, a popular subway stop, you’re going to have trouble recruiting.
Will: Oh gosh, yeah.
Raju: Yeah. It’s just the nature of the beast. So, I think, you know, selecting the location sort of that remote or in person, selecting, you know, where that office is located in terms of the potential growth of the company, are important choices. You know, frankly, I think people are getting smarter about those kinds of things, but like, for those who are, like, sort of just making the cheapest decision on where to plant an office or how to do things in office or, you know, remote, it’s something to think about just in terms of a communication pathway. All right. What about policies? HR policies?
Will: Yeah, I mean, we could probably spend all day in this area. You know, I think they the particular nature of startups—and we’re going to talk about team members and roles in a minute—but the particular nature of startups is that they tend to be pretty flat organizations and they come together as teams of individuals working together, and they tend to be pretty flat organizations and information is shared pretty widely, including financial information, including ownership information, and that sort of thing. And in a certain point in time, that the group that’s included in that conversation narrows and a certain kind of set of communication norms, more corporate norms, take over and you need a certain set of policies that govern working hours and that govern roles and responsibilities and that govern the kind of information that is disclosed. And I’ve watched a lot of teams go through that and I’ve watched some employees kind of really chafe against that change within the organization.
And so, I think for good founders previewing that future change with their early team members is important. Part of being a great early team member is recognizing that the organization is going to change and your role may change. And you kind of have to know that you’ve signed up for an organization that will change in ways that may not be totally comfortable for you in the future.
Raju: Yeah, it’s a tricky one. Because you know, like, this is, like, hey, you know, it’s hard to take things back, you know, when you give them. And I think one of the things that I look at, there’s, like, three or four or five different areas of, like, corporate policy, like, family leave, vacation policy, severance that you give to people who are let go, you know, do you accelerate vesting, all that kind of stuff. I think, you know, when you first start the company and you sort of say, hey, look, you know, we’re going to give this much family leave out or this is the vacation policy, what a founder should do is just think about scaling that what happens if it’s not just one person that I’m giving this to, but a thousand. Or let’s be more reasonable, like, ten or twenty, right?
And so, is it okay for us to sit there and say, like, hey, you know, this person was really good for our company; we want to give, like, a six-month severance. And then you have to do a 10% RIF and you can’t afford to give a six-month severance to everyone. And so, I think the thing to really consider is, like, it’s okay to create these one off or, like, just think about it on the fly, but you know, at some point, you got to create a handbook, you got to create a policy. And even if you’re not disclosing it to everyone, like, what is your severance policy, like, how are you going to, like, talk to your executive management team and say, “What is that going to be,” or talk to your, you know, co-founders and say, “What do we want that to be?” And let’s not look at it right now because right now, we want to be good to, you know, these three or four people that kind of helped us out.
But what if we had a 10% RIF in the company, could we afford to do this? You know, can we afford to have this as a vacation policy long-term, even though, like, you know, people just kind of willy-nilly take time off? How do we scale, how do we professionalize the organization?
Will: I’m smiling because I had one of these this morning [laugh] with one of my CEOs who was reaching out because his head of engineering is so enthusiastic that he wants to exercise his options and buy his stock so he can lock in long-term capital gains treatment. And you love to see that in your early employees. The challenge is that this guy would need to borrow the money, and he wants to potentially borrow the money from the company. And this comes up a lot. You’ve seen it, I’ve seen it, and that’s not necessarily the best use of corporate cash. And so, we’re having a conversation right now more about policy than anything else because this company has 75 employees, and we can’t do that for five people, let alone, you know, the bulk of the company.
Raju: Yeah. And that’s a really interesting example, and I think it’s one where early on, you know, founders do X or maybe allow something like that because it’s like somebody who’s—but, you know, expectations are set; like, people find out. And the reality is, you know, you just don’t want to be in a legal situation if you’re kind of offering different people different levels of, you know, sort of access to, you know, loans or severance, you know, as they depart, unless it’s, you know, contractual. But, you know, I think you got to kind of think through that kind of thing. I think the one big thing that I struggle with in my companies is title inflation.
Will: Oh, yeah.
Raju: And, you know, you bring in somebody, you’re like, hey, I really want, like, a great salesperson, and you know, the person’s like, “I’m only going to take the job if I can be, like, Chief Revenue Officer.” Not even, like, VP of Sale. Like, Chief Revenue Officer and you just make the decision. Or you hire somebody at a particular stage in your business, and you know, now you’re a year later, and so you have a CRO and you need somebody… else, you know? You need somebody who’s, like, more capable, and how do you go through that conversation loop with this person who probably… can add incredible value to the organization, but isn’t really a CRO or a VP of Sales. I’m sure you deal with this all the time, Will.
Will: [laugh]. Well, I mean, we’ve both seen this phenomenon where early employees have titles that are much bigger than they’re capable of living up to. And for that person, it’s really hard as the organization develops around them, but maybe their career trajectory goes the other way. Actually one of the co-founders of my very first investment at RRE, Alex Moukas, the founder of Frictionless Commerce, Alex started as the company’s CEO, and over the next seven years, his career trajectory in the organization was downward, [laugh] while everyone else’s was upward. And Alex went from being CEO, to being president, to being head of business development, to being Head of Sales, to being an account rep, and a really, really good senior account rep, and he was an entrepreneur and he was great at entrepreneurial selling.
And the fact that he stayed with the organization, even as his career seemingly went downward, had an incredibly positive impact culturally throughout the organization, because everyone recognized that he always put the company first, that it was an incredibly meritocratic environment, and that as a founder, he just wanted to see the best people in every role. And he was loved and lauded, and he turned out to be a great sales rep, and actually found where he was supposed to be career-wise, through that journey.
Raju: That’s amazing. That’s such a beautiful story, actually. And I think founders do struggle with this, frankly because, you know, if you have one, you know, it’s manageable, right? Like you can kind of figure it out. But if you have, like, a handful, like, your founder-slash-CEO probably holds that title for some time, you know? You go through a couple rounds of financing, at least, you know, maybe three or four, before that person’s being moved around. But you have a CEO, a COO, and a CTO, and you’re just, like, 25 years old, you know, like, you ain’t going to hold those titles. And so, there’s got to be an expectation that, you know, we’re going to professionalize those roles as you earn the right to be able to bring in great talent.
But it’s also external people. And so, my coaching has always been to founders, like, when I am sitting on a board and they’re like, “Hey, I’m looking for, like, a VP of Sales,” my first inclination is, “Let’s call it a Head of Sales for the time being.” Because it’s a Head of Sales, right? They’re the Head of Sales at the moment. It’s not really, like, an officially—like, people aren’t, like, “I’m looking for a Head of Sales.”
I mean, it’s VP of Sales, it’s CRO, and that’s when you get more corporate nomenclature that people recognize, and that Head of Sales kind of, you know, that title gets subsumed by a VP of Sales, which gets subsumed by a CRO. Somebody says, “I need a, you know, like, a CRO,” I say, “Go get a VP of Sales,” right, because then you can always have the opportunity of putting somebody on top without creating a lot of title degradation. But I think just as important as that, like, hey, let’s think about what that title is, like, the start with Head of Sales, then go VP of Sales, then go CRO, I think the conversation with the individual is really important.
Will: Yeah.
Raju: And I think when you hire people, I think you got to say to them, “Look, you are going to be our VP of Sales right now. You know, if we scale and we do more verticals than just finance, which you’re really good at, you know, and we start doing healthcare, and we start doing, you know, sort of manufacturing and whatever, I’m going to need a VP of Sales that can actually, you know, talk the language across that.” Or, “You’re great for this product, but like, when we grow products”—or, like, I think setting expectations with folks that said, “I don’t know. You might be able to do it, but there’s a chance you won’t and I don’t want to lose you. So, are we going in with our eyes open?”
And sometimes that’s hard to have a conversation around with people because they’re like, wait a minute, am I the VP of Sales or not? But oftentimes if people are there for the mission, as well as, you know, the title, they kind of understand. And they do realize their own limitations, to some degree.
Will: I think that’s a crucial idea, Raju, that commitment to the mission as opposed to the role is a really big deal, and that’s the hallmark of great employees in startups is that just incredible desire to be a part of it, to make a contribution in whatever role they can be most valued. And that’s a hard thing when you’re early in your career and you’re trying to find your footing and you’re trying to establish your professional credibility, and yet having someone come in because the company is succeeding and maybe even having that someone come in over you. And if you’re lucky, that person who comes in is someone that you can learn from and that you can develop under and someone who drives more success for the organization over time. Those are the best stories and that’s how you want it to work.
Raju: Yeah. So, I’m going to sum up that section, which is, like, hey, you know, when you’re looking at your HR function office, think about, like, hey, I got five people. What if I wanted to recruit? Are we near a subway? I got five people remote, but do I want to be in the office or out of the o—like, is remote long-term okay for the company? And just be communicative about that.
And then when you’re thinking about your policies, like, what’s your family leave, what’s your vacation, what’s your severance policy, if you have to let people go? Does that scale over time? And then for your organization, do you have to give people the VP or the C-level titles early on or can you avoid that, number one, and number two, just communicating honestly with the person you’re bringing in—if you can do it because I know sometimes it’s difficult—that, hey, you are a great fit right now, but we might get into other verticals, we might scale internationally, we might X, Y, Z, and maybe you have the headroom to do that, but maybe we’re going to need somebody who has more experience doing that over time. And I think if you can get that right balance and mission-driven culture, I think it’s really, really good.
Will: Yep. I would end with the stress on, if you and your co-founders are collectively committed to that mission and to those values that Raju just described, that putting the company first throughout, and if you’re willing to live that as founders, the impact on the rest of your team can be profoundly good. But you’ve got to make that commitment up front.
Raju: Yeah. Okay. Moving on to the next section, right? These are basically decisions that you make that are either hard to change or impossible to change or really impactful down the road. Let’s talk about pricing.
Will: [laugh]. Yes.
Raju: Which… I love this.
Will: So, when I was in business school, I took Entrepreneurial Finance with Bill Sahlman at Harvard, one of the great teachers of all time and mentor to many, many people—
Raju: Legend.
Will: And Bill had a really simple rubric for pricing, which he called the flinch test. And the flinch test is basically you look the customer in the eye and you say, “Our product is $500,000 per seat”—and you wait to see them flinch, then you say—“Per month.” [laugh].
Raju: [laugh].
Will: And if they still haven’t flinched, you say, “Before maintenance costs,” [pause]“And integration.” [laugh].
Raju: [laugh]. That is hilarious, dude.
Will: And he had a great point, which is, like, particularly when we’re talking about software and technology products, like, perceived value and value delivered by products relative to pricing is really amorphous and super amorphous in the early days. And so, you’ve got to kind of—you can’t—it’s very, very hard to raise prices in the future, so you’ve got to set yourself up for success in the pricing conversation.
Raju: Yes, I agree. I think this is tricky. I think it’s tricky because I think you got to think through your business model. Like, if you want to like—like, I love that analogy. I used to do it in Lucent days. I used to go into these meetings that my salesperson had set up and I would be, like—I knew, like, pricing was like—they knew a range, but they didn’t know the total pricing and they were still kind of getting comfortable with, like, what the product’s capability is.
And we’re toward the sort of like last third of the conversation. I would walk in and say, “Is this a $10 million room? I just—
Will: [laugh]. I love that.
Raju: —“Want to make sure that the people in this room can authorize a $10 million purchase. And if not, like, if we need to bring other people in, I’m totally fine with it. I just want to make sure that we don’t have to come back because we spent a lot of time and effort bringing, you know, the entire organization to, like, the Netherlands or something like that.” And so, like, yes, I love Sahlman’s story even better. Like, if—I over a good $10 million per year—[laugh], you know?
Will: But your approach is great because the concept of a $10 million room, it sets the stage for the fact that we’re going to do some major business today, and surely all of you people who are gathered here are people who can do major business and you’re not wasting my time. And it puts people back on their heels in a way, you know, if you’re showing up and you were the head of international for Lucent, if you’re showing up, it’s because you’re expecting that a deal is going to get done that day.
Raju: Yeah, exactly. And I said it in a really nice way. I was like, “I don’t mean any offense by this to anyone. I just want to make sure that we have the right people in the room that can sign off something like that. And if we need to wait, you know, happy to wait. Like, I made the trip.” It’s a long trip to get to Singapore or whatever.
So anyway, I think pricing is tricky. My recommendation to entrepreneurs is, number one, think through your business model. Make sure that you’re not creating a pricing that you can’t live with because every additional sale you make, you are more and more out of business. And so, that’s really the balancing act. Like, you know, is this going to cover the cost?
Because some people don’t really understand the totality of the business’s cost when they’re [unintelligible 00:31:48], like, yeah, and I mean, like, you know, if it’s a hardware product, I’d make it for X and I sell Y, but like, you got marketing costs, you got, you know, all of this inventory cost, all these other kinds of things. So, think through your business model and think through the trends that are happening in the world. Like, for instance, right, now, SaaS pricing is a problem. And we’re living a world with we have AI, and there are different incremental costs for each activity. So, if I’m doing generative and I’m doing generative text, the GPU utilization is not that aggressive. But if I ask it to create me an image, it’s a little bit more. If I ask it to create me a video, it’s a lot more.
And so, we’re moving to token-based models, which is, like, hey, a video might cost a thousand tokens and an image might cost ten and text one. And so, like, what are people buying? They’re not buying SaaS, right? They’re not buying a subscription that I can do all of that with. I’m buying a bucket.
And I think the bucket—it actually makes me really smile, Will, because I think about, like, the cell phone days and data utilizations.
Will: Oh, yeah [laugh].
Raju: And we used to sell buckets, right? Oh, you want—
Will: Yeah, it’s a data plan.
Raju: Yeah, you want a data plan? You get, like, six gig or you got this, like, 100-minute plan, and if you exceed it, there’s overages, right? And if you go under, like, well, you kind of like, that’s breakage and that’s how we make money a little bit. We don’t want to tell people that until AT&T or Cingular created this rollover minute, which kind of pissed me off when I was in wireless days. I was like, “Shit, where’s all my breakage going?”
But anyway, like, forget the rollover for the time period, but like, this bucket model. And I think, like, if you’re in today’s world and you’re, like, “Let’s just do SaaS,” and you’re an AI company and you haven’t thought about this tokenization model, which most people have, but you better think about that because a query is not a query is not a query. And there’s different, you know, sort of demands and costs on your business, so how do you create a pricing plan that, kind of like, lives with your business long-term?
Will: Well, and that’s just an enormous challenge in this environment as the world moves to AI-driven architectures, right? So, if you had a SaaS-based business model when you launched your company, guess what? There’s a token-based competitor who will come in and undercut you on that initial deal today and get that customer up and running for a fraction of the initial outlay that you’re going to charge them with your old SaaS-based model. So, there’s a lot in this—
Raju: Or the inverse. Or the inverse.
Will: Or the inverse. Sure.
Raju: You go out of business because you have a SaaS-based model, but your costs to generate queries are, like, gross-margin negative, you know? So, one of the other tips I give entrepreneurs is, like, in this world of turmoil, everybody—you know, like, the world’s been trained, oh you know, “How long was the contract?” “I got a three-year deal.” And I’m like, you know what? Three-year deals are not good right now.
Will: Yeah, that’s true.
Raju: Sign the one-year deal. I’m serious. Like, I’ve been coaching a lot of my entrepreneurs in AI space, like, your price might need to go up. And if that customer gets a three-year deal, that’s a win for them and a loss for the business.
Will: No, this is a really powerful point. You know, they’ll value the lock-in, but the reality is that your capabilities as a company are going to change immensely during that period. And that early customer will have gotten a three-year discount, essentially.
Raju: That’s right. And so, I’m like—and it’s been the inverse. Like I used to be, like, with SaaS deals, like, three-year deals. Yeah, baby, three-year—ten-year deal. That’s, like, phenomenal. But like, you know, that’s great when you’re SaaS-based, and you know, you got it, like, a provision built in to automatically increase up to 6% annually.
But like, in an AI world and your capabilities are expanding, if somebody gets locked in at a certain price point and then all of a sudden you’re adding video to the mix or some kind of a holography or, you know, audio clips or whatever, and your costs go up, you know, you’re upside down on that customer. And so, it may be better to, you know, stick with shorter-term, one-year pricing or even start with token-based pricing and then, you know, people can understand, like, everybody’s got to make money, right? Like, you love our product, but you want the company to be in business. And just while we’re talking about pricing, the same thing is true for vendor contracts. Like, you know, if you get a 20% discount for a long-term vendor contract as a startup, that isn’t necessarily good for a three-year contract because you’re on the hook for three years, but your business model might change.
You might, you know, want a different player in the marketplace, so you got to think through how you deal with that kind of thing. So, I got a funny story around this, around pricing. Just one. Like, I read about this recently. I don’t know if you—do remember JC Penney?
Will: Of course.
Raju: Okay, still go there?
Will: Oh yeah.
Raju: Yeah, I used to go there.
Will: Oh yeah, well—yeah, I used to. And the JC Penney catalog, you know, we’ve talked about the Sears catalog on a prior blog post, but the JC Penney catalog came to my house. I was a JC Penney customer.
Raju: Yeah, yeah. That was the thing, huh? I wasn’t a catalog guy. I don’t know why I wasn’t a catalog guy because I was, like, around well before the internet was created and I do love the Restoration Hardware catalog. I love that. I kind of go through it, but like, gives me ideas on how to shape my room.
JC Penney CEO came in and said, “It costs us too much to do couponing and we’re going to say, everyday pricing, everyday low pricing, and we’re going to get rid of coupons.” And I think it was a year. The franchise was almost bankrupt. They fired the CEO and it was a catastrophic decision because people love coupons.
Will: Yeah.
Raju: They pay more with the coupon than if you had everyday low pricing.
Will: The coupon gets them in the store, first of all. Yeah.
Raju: Exactly.
Will: It guarantees that they’re going to spend money. And once you’ve got them spending money, you’re most of the way to making them a profitable customer.
Raju: You’re exactly right. You’re exactly right. And so, this was, like, a pricing change that the CEO made and said, like, this is, like, everybody—like, guaranteed low pricing. It works for certain businesses. Like, Tesla did really great by saying, there’s no negotiating the price. The cars were what the cars were, you know? You can buy it online or you can go to a showroom, and there’s no negotiation, and so people kind of liked that.
But the JCPenney shopper is not that shopper. They like bargains. And so, thinking through that is super important. Okay, so we talked about brand. We talked about HR, like, office, policies, people, equity grants. We talked about pricing and finance.
The last is product. You know, sort of like decisions that you make that you kind of can’t go backwards around for product. And you know, I can kick it off, like, very easily. Like hardware, that one’s tough.
Will: [laugh]. Yeah.
Raju: This is why, like, I mean, I got to be honest, like, the number of software investments in startup land versus hardware investments are, like, an order of magnitude—2x, like, 10x, 100x. 100x. 100x. It’s probably, like, two orders of magnitude different in terms of software companies versus hardware companies because you can’t ship a product that’s broken or you know, the form factor people don’t gel with because the recall, you know, in hardware-land is very different than a recall in software-land.
Will: [laugh]. Yeah.
Raju: And so, you know, I think that, you know, if you’re a hardware entrepreneur and I have advice for both hardware and software entrepreneurs, you know, just to the extent that you have locked in on a form factor, but then functionality can be over there upgraded or updated through the internet, like, that is really vital and important in hardware-land. And for software, like, I really think if you’re an entrepreneur, modular design, plug-in architectures, API-first, dynamic loading and managing, all of those sort of architectural choices that you make are super important because you don’t want to have all tech debt that you have to sort of rip out and replace.
Will: Well, I think that in our careers as investors, we’ve both been in the room more than once—I’d say at least half a dozen times—where the CEO and the head of engineering walked in and said, “Yep, we have to rewrite the whole stack.” [laugh].
Raju: Yes, yes, we have.
Will: And so, those early design choices and architectural choices matter tremendously, and you’ve got to get those things right. And today, I think where modular design allows us to do a better job of getting those things right in the software world. You don’t have a choice in the hardware world because whatever you build, you build at scale and you’re going to have to live with it or you’re going to spend a lot of capital doing a turn of inventory on something that isn’t quite right.
Raju: Yeah. And you, my friend, are, like, a wizard because you have a handful of satellite companies, and it isn’t just, like, you can’t recall a satellite, you know what I mean? It’s like—
Will: [laugh]. You got to make it work.
Raju: —like, it’s in the freaking sky, you know? It’s up there. It’s, like, in orbit. Like, and yet your companies do a great job of creating modular design around it.
Will: And actually, what’s kind of amazing and one of the big lessons that I learned when I first started investing in the sector is that our teams could do a tremendous amount to rebuild and build new capabilities and upload them to the spacecraft over-the-air as it were, just in the way you were describing. And some of the greatest engineers I’ve ever seen were rebuilding whole software stacks and uploading them to their early spacecraft at some of our satellite companies. But the truth is, you know, whatever you put out there in the market from a hardware standpoint, you’ve got to be able to work with over a long period of time. Asking a customer to return something or throw something away or a product recall is just as devastating as you can imagine and frankly, deeply damaging to the credibility of your company with investors. So, getting these things right early matters.
Raju: Yeah. Suffice to say, you got a couple of investors here that when we work with our companies, we really help you think through those handful of choices that you can make early on in your life and make sure that you’re not, sort of like, pigeonholing yourself or getting trapped somewhere and lots of stories.
And I’m going to move to the Gatling gun sections. It’ll be very brief. I only got two questions and then we can wrap this one up. So, the first question is, like, in your mind, you know, companies have these burn-the-boats moments where they bet on something and, you know, the companies are going to succeed or fail. So, the first question is, just, like, a company that you’ve seen make a really bad decision on something that kind of cost them, like, burn the boats down, but you know, maybe you should have probably not burned them [laugh]. Maybe left a couple, like, onshore with a paddle, you know? Maybe just, like, a, like, a life vest at least, you know, [laugh]? Anything come to mind on companies that are—
Will: I mean, I think there are these strategic moments in the history of every company where you kind of have to put it all out there for the success of the long-term enterprise. My favorite one isn’t drawn from the startup world. It’s actually Boeing in the late-’60s, when they made the decision to bet on the 747. And the 747 was a bet-the-company decision for Boeing. They were one of many undistinguished aircraft companies.
We don’t think about all the people who used to make commercial aircraft. But Boeing bet the entire company on the 747 and long hall transatlantic travel. And it was like they were deeply in debt, it was an all-in great American engineering triumph. But they still had other planes. They could have persisted [laugh] in the rest of the airplane business.
Raju: Yeah, yeah, yeah. My question was what the worst one. You answered the second question, which is the good decisions, like, good burn-the-boat down.
Will: Okay.
Raju: So—
Will: Yeah, that was a good one. What was the worst one?
Raju: Yeah.
Will: I mean, it’s the doubling down on things that you want to believe are true, but that are not, in fact, true. And I have a startup that did that over and over again in the mobile device space where there just wasn’t enough customer demand. And—
Raju: That’s so funny. The one I was going to mention is also in the mobile device space. It was a company called Quibi. They were making mobile-only streaming service and they firmly locked down that the streaming service was for mobile-only, designed for mobile and it just burned up. Because people love content, but they don’t necessarily want a mobile-only content, you know, in a streaming service. And best burned down the boat’s decision—you already mentioned one, which is Boeing—
Will: Yeah.
Raju: —I have a couple, but do you have any others that you want to throw out there or—
Will: No, you go ahead.
Raju: Okay.
Will: I may have others.
Raju: So one, Netflix, just going to streaming.
Will: Oh, God, yeah.
Raju: Going from DVDs. A DVD rental company.
Will: Arguably the greatest burn-down-the-boat story in history.
Raju: Yeah. I think that one’s great. And I know of a couple of others. Did you know that Wrigley went from a soap company to a chewing gum company?
Will: [laugh]. I did not know that. Oh, that’s great.
Raju: That’s a burn-down-the-boats moment, man. Like, chewing gum. PayPal shifting from Palm Pilots and doing money transfer on Palm Pilots to email. Like that was a big burn-down-the-boats moment for the company, actually. And then Apple’s iPhone, you know, is just, like, a huge one where, like, it just transitioned their entire business.
But I love Boeing. I didn’t realize they bet the farm on that 747.
Will: They totally did, yeah.
Raju: Really interesting. Really interesting. Okay, well, I’m going to let you wrap this one up, Will. I mean, it was great talking to you about this topic because it is an interesting one, for sure.
Will: Well, listeners, thanks for joining us for today’s episode. You know, as Raju said at the outset, if you broke it, you bought it, and that means you’ve got to get things right early on in the life of your company. And hopefully today gave you a few examples of areas where we’ve seen people go wrong. Thank you as always for listening to RRE POV, and we’ll be back to you with another episode soon.
Thank you for listening to RRE POV. You can keep up with the latest on the podcast at @RRE on X or rre.com, and on Apple Podcasts, Spotify, Google Podcasts, or wherever fine podcasts are distributed. We’ll see you next time.