29: Startup Lessons From Gail Goodman
Speaker 1: Today on Seeking Wisdom, we're going to dig in the crates a little bit.
David Cancel: Digging into crates, way back.
Speaker 1: Yeah, we're digging in the crates.
David Cancel: Let's go. What we got for them?
Speaker 1: You're not going to hear from either of us today. Well, actually, you're going to hear from you.
David Cancel: Six years ago.
Speaker 1: Six years ago. We happened to be talking about something today and you came across this interview. You interviewed Constant Contact's Gail Goodman, who is a SaaS OG.
David Cancel: The original SaaS OG. I interviewed her back in 2010, public company CEO, took it from nothing to something. Just a terrific interview and I enjoyed my time with her.
Speaker 1: This was a different perspective for you. This was your first CEO. This was Performable CEO, DC, right?
David Cancel: Yeah. This is back in the day. Performable CEO, DC. This is me getting some wisdom from an OG, Gail Goodman.
Speaker 1: Awesome. Enjoy.
Scott: With no more ado, I want to turn things over to David Cancel, the founder of Performable for his conversation with Gail Goodman, the CEO of Constant Contact.
David Cancel: Thanks, Scott. Good morning, everyone. How many people here have never used Constant Contact? Oh, there are some. For the few of you who don't know Constant Contact and I've used constant contact myself, I want to introduce Gail Goodman who's the CEO of Constant Contact and being a first time CEO myself, this is a joy to interview Gail. There's a lot of information that I want to extract out of her and I hope that it's entertaining for the rest of you. Gail, can you tell us a little bit about yourself and constant contact?
Gail Goodman: Sure. Constant Contact got started just over a decade ago, I guess 12 years now. Founded in Randy Parker's attic. Randy Parker was an MIT grad. Great idea, let's help small businesses. Got to put yourself all the way back. It's now,'96,'97, the internet is really hard to use. It's going to be hot, but to build a webpage is hard. Let's make it really easy for small businesses to stay in touch with their customers using great looking email, which sounds immensely simple now, but was incredibly complicated then. Let's make it really affordable for them. We didn't really know what that meant, but I think the first VC pitches basically said$ 20 a month. The real question was, could you build a business where you could make money at$ 20 a month and could we make it easy enough that small businesses could use it? Tons of challenges between then and now where today we have 375,000 customers paying us what turned out to be an average of$ 37 a month once we get the pricing structure, right and some cross sell and upsell opportunities. We'll do 170 plus million in revenue this year at$ 37 a month. I guess the answer is yes, you can build a business to scale, but that's hindsight that tells us that. There were many, many, many years of that still being the outstanding question. Any of you doing software as a service, they talk about the slow ramp of death. Well, that slow ramp is even slower and more painful at$ 30 a month. A thousand customers was fun, but could only pay one of us and so on. Lots of stories around how we survived that long, slow ramp of death at a low dollar recurring revenue model and how great it is to be past that and in the scaling point.
David Cancel: It sounds so obvious now, but having lived through that time targeting small business owners, making it cheap and raising venture capital sounds like craziness.
Gail Goodman: It was craziness.
David Cancel: Absolutely crazy and so amazing that Randy and yourself had that vision to build that business and that you could do it.
Gail Goodman: Yeah. Thank you.
David Cancel: How did you come to Constant Contact? How did you find Randy?
Gail Goodman: I had come out of Open Market, which was an early e- commerce player. I definitely want to do something internet, internet commerce, psyched up about that. Open Market was spawning CEOs right and left. I think there were 10 of us who left Open Market. I think there's at least one more of us in the audience. There he is. If they could do it, I could do it. I was sort of sure, not sure. I'd never been a CEO before, kind of wanted to give it a try. It was the Wild West days of the internet. This is before the first bubble burst. It's'98, early'99 and I just was inspired to maybe try it. I was simultaneously hedging my bets and interviewing for VP marketing jobs. Those of you who know Chris Heidelberger at Channel Wave, I really credit him with a lot of this because I went to interview for the VP of marketing job at Channel Wave. He said," What are you doing here? You could do my job better than me. Stop interviewing for VPs, go start something." It really was the final kick in the butt I needed to really say," All right, I got to go find myself a startup." Then I started pitching VCs that they should put this person who'd never run anything in front of their business. I had some reasonable organizational scale experience. I'd been a general manager of a$ 40 million... I probably had more experience than most startups CEOs have in terms of running a large scale organizations and delivering results there. Finally, I met a VC who the day before, had been pitched by Randy. He did a little matchmaking and the rest, as they say, is history.
David Cancel: And you found that you could you jelled with Randy right away or was that a process?
Gail Goodman: Well, we definitely took a lot of time getting to know each other. I'd say we took about two months. At that stage, they had gotten some angel money that was a bridge round into the A. That angel came from the co- founders of Markham, John Campbell and Paul Margolis. John Campbell was helping Randy find a CEO. I do recall they did 30 background interviews on me, so they were clearly nervous about getting to know me. I felt like saying they actually found my high school boyfriends. It was crazy. I was getting calls from people disconnected three degrees. Somebody's calling about you what's that about? They clearly did their homework on me. I did the same serious homework on them, but the biggest thing I needed to know was that I could have passion for the product. The best thing I did was even before I took the job, I went to a trade show with these guys. I was like," I'll just stand in the back of the booth. I won't say anything." 30 seconds later, I'm in the front pitching and that was when I knew. I had passion for the product and what we did, and loved talking to our prospective customers. I think it was partly seeing that passion that helped them know that I was the right person for the job.
David Cancel: Randy was ready for this transition to give up?
Gail Goodman: Yes and no. It was a learning curve together, yep.
David Cancel: What do you think the hardest struggles were making that transition to first time CEO, once you got over the matchmaking?
Gail Goodman: The thing that was, I think the toughest for me was that I was immediately sucked into fundraising and that was totally foreign country for me. I had never raised money. I had never worried about cash. I'd always been in larger organizations and suddenly it was all about how much cash we had and what we could do. I was spending a ton of time out of the business, on the road pitching my brains out. Then you combine that with just a ton of things I needed to do that were urgent, but not strategic. How are we going to pay people? What should our benefits be? What rent? Where are we going to be? It seemed like every day was filled with tons of tasks that had nothing to do with figuring out the business model. I think that was the biggest pain point at the beginning was like, when do I get to work on the business? When do I get to work on the business, and how do I keep the team focused and working on the right things when I'm not there so much? That became easier as we got bigger and more mature, but this was six people in a basement.
David Cancel: You brought up one of the hardest things I think a CEO has to do, which is say no to new product ideas, and features, and markets and partners. How did you approach that? How did you learn to say no?
Gail Goodman: Well, we very quickly, I think figured out that there were just a couple of things we needed to know. The biggest one was, can you make money at$ 30 a month? Just really tough question. We sort of parsed that question down to can we attract customers at a reasonable cost of acquisition and can we convert them and keep them? We got very focused on those two pieces, building channel and the conversion retention formula. I think we got those things right. What it turned out was we had few enough resources that it was like these two months, we work on channel, these two months, we work on conversion and retention. We were never big enough to do both. It would seem like when we were working on product conversion, retention things, there'd be these channel partner product needs that would build up until they were urgent and ready to go through the roof. Then we'd go there and then it'd be like two months and we hadn't added anything to the product, and we'd go back. We're swinging back and forth between there. I guess the priorities were always urgent enough that when the board then said," Maybe we should go up market." It was like," Are you crazy? We got to figure stuff out where we are first." A lot of that was about knowing what, at least at the... I think a tough tension. You pick a market based on some research and some gut instinct, and then you got to give it enough time to figure out whether it works, but not be so inflexible that you don't move if you're learning things about it that don't work. How do you know when you've given it enough time? The hunting for the model versus focus and one of the things I hear a lot now is fail fast. Try things and fail fast. Well, that's great, but you can get to a lot of false negatives, too, because if you try them with not enough scale or not the right product, did you fail because you didn't do it right, or did you fail because it's the wrong thing to do? Knowing when you've got the right thing there. I'll give you one really crisp example. Everything was a free trial. Great. It's the internet, everything's free. Not surprisingly, trial to pay conversion was a big internal metric for us. What percent of our trialers could we get to pa. Not surprisingly, the economic model swung pretty big on that. I'll share what the original launch number was just so you can understand the order of magnitude, the challenge we had ahead of ourselves. We don't share our current number. We consider quite proprietary, but our first version of the product was 4%. Model did not work at 4%, but the one spreadsheet showed us the model would work at 20. The question was, could we get to 20? I will tell you, we are significantly past 20 now. There were clearly some product things to fix and... then it was all sorts of other questions. One of my lessons learned is talk to a lot of other people. Get a CEO peer group of some sort. One of the groups I had was... She ended up with two, but one was an informal breakfast club of other people building small business internet apps. It was Rick Foch from Intranet, Sam Zales from BuyerZone, Steve Sydness from BizLand, Don Bulens from Trellix and me. Five Boston companies all building small business apps in the 2000, 2001 world. Rick was doing something crazy. He was actually calling free trialers and welcoming them on board and helping them get started. It doubled his trial to pay conversion. We decided to try it. The reason this is a great example is three months in, I would have told you it was failing miserably. Six months in, we said to heck with the control group, let's have him call everybody because it was working so well. Another lesson, everything has to have a control group. Everything has to have a control group so you know did the product just get better or is the call actually making a difference? Literally, there was a point where we had so few trials and they were improving conversion so much. It was like, the heck with the control group, have him call everybody, but that was something where you had to let it last long enough. You know why? Because three months is not enough to figure out a sales model. We started with people, so it wasn't going to be a false positive because it was just the wrong person. You got to design the experiment with enough richness that you know that you learned what you learned. Then when they needed to learn the product, and the customer base and how to sell. Not surprisingly, they were sales guys. Guess what they did when they first came? They sold. The secret was here was actually not selling to our customer base. Small businesses hate to be sold to and they really didn't need to be sold, they needed to be taught how to use email marketing in their business. When they stopped selling and started understanding barriers to adoption, and smoothing the path and helping them understand what kind of content to write and what kind of frequency, when they became coaches instead of salespeople, the model clicked. Not surprisingly, it took a couple iterations to figure that out. I think the big challenge for you is you're hunting for the model. How do you put enough tests in the water and do that with enough confidence that you're getting the right answers? By the way, there were plenty of tests that didn't work at all. How do you know when to pull the plug on them? Have they run long enough? The other thing is we were always hunting for the silver bullet. There had to be a silver bullet that was either going to drive lots of people to the website and start the top of the funnel or drive conversion in the bottom of the funnel. The answer is there is no silver bullet, it's a million incremental improvements to the business model. We had lots of ahas, but we never found the goddamn silver bullet. Just wasn't out there.
David Cancel: That's funny. All of these lessons that you have now sound obvious 10 years later.
Gail Goodman: Yeah, of course.
David Cancel: How did you buy yourself enough leeway early on with your investors to experiment and not grow prematurely?
Gail Goodman: Well, to be honest, we were probably always at the hairy edge of running out of money and not getting the next round. I wrote two shutdown plans for the business because we weren't getting enough traction fast enough. This was the horrible post bubble, dark days. Every venture guy we had, had to make choices in their portfolio. Which of my investments do I continue to fund and which do I cut off? We were always on the bubble. I think the only thing that kept us alive is that every chart we had was going up into the right. New customers per month, up into the right. Conversion, up into the right. Retention, up into the right. You could see small business is a big market. That was never the debate. 29 million small businesses. The spreadsheet was always beautiful. If we can improve conversion 2% and get retention up 10%, the thing just kept hockey sticking. We had five different versions of the hockey stick. The inflection point just kept getting a little later. You could believe the business model and all the metrics are moving. It was always about give us enough time to get to the inflection point. I would say there wasn't any magic there, it was going out and working every VC partnership team, not just the VC on the board, but the whole damn partnership. I spent a ridiculous amount of time raising money. Worth it now, frustrating in the time period, very frustrating in the time period.
David Cancel: That's an interesting thing that most people don't know about working a partnership, it's just no matter who your partner is, they're part of a partnership and they have to convince a room full of other people who want to say no to do this deal. That's an important lesson.
Gail Goodman: It is a very important lesson. Just because your guy says he's got the partnership covered, don't believe him. Make sure that you're at least once a year in front of the whole partnership, giving them an update on the business, preferably after your best quarter of the year. Not when you need money.
David Cancel: Were the internal metrics that you were tracking what convinced you to keep going with this model and not panic?
Gail Goodman: It was a combination of that and the sheer rabid enthusiasm of our customers. One of the other ahas was small businesses are immensely referring in nature if they love something. The biggest thing that started our model really cranking was our small businesses started telling their friends. Thank you. They started writing us," You saved my business," reviews. At the beginning, most of our customers were online merchants who were trying to do internet marketing in the early dark days. It turns out, your most likely prospect is the guy who already bought from you and if you just start marketing to people who already like your products, you actually get a lot of revenue. We started getting emails. I remember one, by the way, reading these to the whole company, was a woman trying to run a craft business. She basically said,"It was my dream to leave my corporate job and do my art for a business. I've been trying to do it. I was about to give up and go back to the dark cold corporate world." She wrote a really nice note. It was like," Death was about to happen and I found Constant Contact. Within two months, I get a call from the credit card company because they thought there was fraud going on, the volume in my website had gone up so much. I will never have to go back to corporate. Thank you, Constant Contact." Okay, I'll meet 10 more VCs. I'm making such a difference. The energy of the customer summer was a really important part of what kept me going and the whole team. One of the things that I think we did really well was bring that energy into the company, whether it was through reading letters, whether it was to actually bringing the small businesses in. We very early on said," We got to remember who our customer is because they're not us." That was part of the reason was because they're not us. They are not technical. They are not spending their time in email marketing. If we forget who they are, we won't design to the right point. Very early on, we started company meetings every week and every week, we told a customer story so that everybody in the company remembered who our customer was and why we were doing what we were doing, which really wasn't about the VCs. It wasn't about us and our personal wealth creation opportunity. It was really about helping this customer base.
David Cancel: How did you go about picking pricing in your early day? How did you test pricing? Just a dart?
Gail Goodman: Pricing is hard. We looked at what else the small business was buying that might be a reasonable price point that they would evaluate us against, which at the time was their website. We didn't feel like we could charge much more than they were paying for website hosting. We wanted it to be a variable model with usage. Interestingly enough, the natural instinct would have been by email sent. We were very big on talking to our customers, talking about focus groups, not professional focus groups, us with five customers. People say," I can't afford to do market research." Get out and talk to customers. You can do it. It doesn't take many before you know the answer. We heard a bunch of things. It needs to be predictable. It needs to be understandable. We knew it needed to not create a disincentive to usage. That retention was about usage. We needed people to use the product and charging people based on emails sent meant they would hesitate over the send button. Is this worth spending the money on? We wanted them using the product, so we went based on the mailing list size. They knew how big their list was. They didn't know, by the way, how many mails they were going to send them off. They'd never done it before. That actually ended up originally being a huge competitive differentiation. Now, the entire industry prices the way we price, but we were the first guys to go to list- based versus numbers of emails sent. It was just a good instinct.
David Cancel: Once you discovered pricing, I think the next big hurdle is modeling out your lifetime value for a customer. How long did that take and how did you go about that?
Gail Goodman: The actual lifetime revenue of a customer was very straightforward. It was revenue per month life. If you know your attrition, one over the attrition rate is your life. It's a mathematic formula. We kind of knew the revenue value. It was always about, so what's the cost of acquisition? We knew we could get better at that. We knew everything got better at scale. Sales and marketing gets better at scale, conversion gets better at scale so we had an idea of what it was. Then we basically said at scale, we think we can get at least a 50% improvement and now the world looks okay. That was a leap of faith. We've actually done much better than a 50% improvement, but at the time, it was just what are you going to sell to the VCs? Wildass guess on what we could do for efficiency at the front of the funnel. We've done better than that at scale.
David Cancel: One of the tensions that I feel every day and most other CEOs that I talk to is preventing your company from... You always want to optimize for your own problems and really you need to be focused on solving customer problems, but something like optimizing pricing, or lifetime value or your cost is your problem, it's not your customer's problem. How did you keep your team going?
Gail Goodman: I think we were a little lucky in that there was a lot of overlap. Trial to pay conversion was our big metric and that meant making it easier to use our product. That was a win for us and a win for the customer, which was very helpful. We didn't have that tension in that particular one. I think the place we felt that the most was the board wanted us to go up market. We sold a couple of customers at$1, 000 a month and they were like," Wow, that really jumped the revenue model. We should do more of them." Truthfully, they were serendipity. They were people who had larger lists who were okay with a lower- end product and were willing to buy in our model and all of that. I think if we'd gone that direction, it would have been a different business. It might've been good, but it would have been a different business. The second thing is they wanted us to get multiproduct really fast, right. There was always a worry that email marketing wasn't big enough to be a standalone category. Most frequent question I got at VCs, why isn't this just a feature of somebody else's product? Why is this a inaudible? You've heard that before?
David Cancel: Everyone has.
Gail Goodman: How is this a standalone business? By the way, it's still a question I get. Now I get it from wall street instead of VCs, but it's still a question I get. This get multiproduct, get multiproduct, but it was really clear organizationally that we weren't ready for that for years. That was one I just fought off by saying," Here are the five other priorities that make that not the right thing to do now," and luckily had the board relationships to pull that off.
David Cancel: Very luckily, so good job. I have a million more questions, but I want to open it up to the rest of the audience. There are mics on either end, if anyone has any questions for Gail. If not, I'll keep asking them, but...
Speaker 5: Good morning.
Gail Goodman: Hi.
Speaker 5: Congratulations on your business.
Gail Goodman: Thank you.
Speaker 5: I really applaud your customer- centric viewpoint of the way you built the business. Now that you have achieved some scale and you're not in an attic or a basement anymore, how do you bring the voice of the customer into your business today?
Gail Goodman: Great question. Believe it or not, we are now at 675 employees and we just gave up weekly company meetings two months ago. Now they're every other week and we still tell a customer story. We also ask every employee to spend at least an hour every six months sitting on the phones, listening to our customer, but now we have much more organized voice of the customer processes as well. We're all agile scrum. Our product owners are rapid usability fanatics and we just have a regular process. We have people in to do usability testing every other week and products line up to go through that. No product gets to market without being hands on in our customers. We make sure we stay fresh there, but we also listen to our customers through a monthly customer sat survey, where there's a free form text box that they can fill in, and we read that. Then we have organized internal processes where anyone can make a suggestion for how to improve the product. It's like wecare @ constantcontact. com. They send emails to that. The employee base sends in over a thousand emails a month with ideas for how to improve our product. We read them all and organize those. Then this year we actually put a full employee incentive plan in place that rewards all of us for our customer sat. We put our money where our mouth is, literally everybody's going to get paid on how happy our customers are from their point of view. We spend a lot of time making sure we don't lose that because I think that actually is our cultural long- term competitive advantage, which is subtle from the outside, but not from the inside. Yep?
Speaker 6: You said you were trying to stick to doing one thing and doing it well, but was social media and email actually dropping off with people communicating in new ways, how do you address the social media revolution and how are you weighing the different options of how to move beyond if you are crosstalk?
Gail Goodman: The fight to stay in email marketing was five years ago when we were 10 million in revenue and they were trying to get us multiproduct. We are now multiproduct, so we have four major products today, email marketing, event marketing. Helping you do online registration and payment for events, online survey, and now social media marketing. Just a month ago or so, we bought a small business out of California, Nutshell Mail, which is our first entry into social media marketing. We believe social media is something small businesses can effectively use to grow their business. I don't think it's actually a replacement for email marketing. Interestingly enough, the most aggressive social media marketers are using more email rather than less. I think there's a little bit of a misconception that one replaces the other. They do totally different things, but we think social media can really help small businesses grow their business by really getting them to take their passionate customers, get them talking in the social media space so that they get enhanced reach, reviews and rankings that support their business as they go to find new customers. Definitely building a set of tools to help them do that.
David Cancel: I think we have time for one more.
Speaker 7: How much money did you raise before your experiences with the types of investors that you had and could you have done it on less?
Gail Goodman: Well, hindsight being 20/ 20, of course I could have done it on less, but if I just hadn't gone in all the wrong directions along the way.
David Cancel: And if you didn't start the company in 2000.
Gail Goodman: We raised money in a very slow and painful way. We kept doing these little$ 5 million down rounds because that was the most painful, possible way to do it. I like to say until we got to some scale, it was 21 million that we raised, but then we did what was like a mezzanine round, an incremental 15, but that was with Greylock and post- money over a hundred million. I'd say it took 21 to build the business, then we raised another 15, really to help us restructure the board to go public because we had a bunch of smaller, early stage VCs on the board who had a different set of opinions about the right exit strategy for the business and we needed to get alignment. Definitely had a wide... I don't have time to tell all the stories, but a wide range of VCs, not all of whom knew how to swing for the fences once it was obvious that the fences were possible. It forced me to do that final round to restructure the board so we could think big.
David Cancel: All right. We need to have another conversation about that last bit there, restructuring the board. Interesting. Thanks, everyone, for coming out. Thank you, Gail, for taking the time.
Gail Goodman: Thank you.
David Cancel: Appreciate it.