Ep. 272 - Dave Parker, Author of Trajectory: Startup on Ideation to Product Market Fit

On this week's episode of Inside Outside Innovation, we sit down with Dave Parker, five-time founder, and author of the new book Trajectory: Startup. Dave and I talk about a range of topics for helping founders go from ideation to product market fit. And this conversation was part of our IO Live Series recorded during Startup Week Lincoln. Let's get started. 

Inside Outside Innovation is the podcast to help new innovators navigate what's next. I'm your host, Brian Ardinger, Founder of InsideOutside.io. Each week, we'll give you a front row seat to what it takes to learn, grow, and thrive in today's world of accelerating change and uncertainty. Join us as we explore, engage and experiment with the best and the brightest innovators, entrepreneurs, and pioneering businesses. It's time to get started.

Interview Transcript with Dave Parker, Five-time founder and Author of Trajectory Startup

Brian Ardinger: I wanted to thank our sponsors for this event. We are part of the Techstars Startup Week here in Lincoln. So, we wanted to give a shout out to them and Startup LNK for making this all possible.

Also Inside Outside is sponsored by the Ewing Marion Kauffman Foundation. As many of you may know about the Kauffman Foundation, they run 1 Million Cups and a variety of other things, but they're a private, non-partisan foundation based in Kansas City. They seek to build inclusive prosperity through entrepreneurship- led economic development. 

So, we're super excited to have them as partners with us here. And you can find out more about them at kaufman.org or follow them on Twitter at Kaufman FDN on Facebook or Twitter. So, thank you again to the sponsors. Thank you, Dave, for coming on, we had set this up when your book was coming out and I said Hey, I've got the perfect time to do this during startup week. When we might have some startup founders who may be having some questions. 

You and I met eight or nine years ago through Up Global. We were with Startup America. And you were based in Seattle. You also helped found Code Fellows and you're a five-time founder, so you've got a lot of experience in this particular space. Eight years ago, the startup ecosystem, and what it was like was a little bit different than is today. So, what has been the biggest trends or things that you've seen that it's changed over the course of the few years that we've known each other? 

Dave Parker: Well, let me go a little further back. I started my first company in 98 in Seattle. And believe it or not bill gates and Jeff Bezos weren't really giving back to the startup community at that time. Oh, wait, they haven't yet. I mean, Bill gives back to like global change the world stuff. Right. But the idea there was, wow there's a bunch of us doing this startup thing, but there's not really anybody to give much advice. 

So, we did a peer cohort. Which was my first thing. And after a while I was like, wow, we need to level up our city. All of us tend to think of the next city bigger than us as like, oh, we want to be more like, Seattle doesn't want to be like Vancouver, Canada. We want to be like San Francisco. Where Portland's like, well, we want to be more like Seattle.

Because I grew up in Portland and then moved here to go to college and never went back. First startup in 1988. Built a software distribution company called license online. The company went from zero to 32 million in sales in 4 years. Which was ridiculously fast. And we went from 3 employees to 150 and in four years. And then we sold the company in 2002.

So then in 98 to 2002, if you remember back there, there was a tech bubble in there and there was 9/ 11 in there. So, it was an interesting time. Wasn't a great time to sell a company now, too. But got it sold anyway. And that was my first startup. First of five. Three of them sold. Two of them failed. One in a rather epic crater fashion. Which is funny. Because it was after the first one, that actually worked. 

So, you know, people were like, I wouldn't do this again. And they're like working on the next one? I'm like obviously got a serial glutton for punishment. So, 16 exits total. So as a founder board member advisor. So, my day job is helping companies and founders sell their companies. Which allows me to my 20% time to work on community building and giving back.

Which kind of got me to Startup Weekend and Up Global. Up Global was the merger of Startup America and Startup Weekend. And we did about 1,265 events worldwide, my last full year there, before we sold to Techstars. Including launching Startup Week globally. And we launched it in 26 cities globally, the second year. I ran it in Seattle.

Andrew Hyde started it in Boulder. And we ran it in six cities, the first year. And 26 cities the second year. So, startup communities stuff is awesome. And I love it. It's, as you know, though, it doesn't pay, so you have to have a day job. You have to have a side hustle, so you can keep your community building job, right. Or vice versa.

Brian Ardinger: Exactly. Yeah. I think we're nine years here at the Startup Week in Lincoln. We got grandfathered in when Techstars made it a global deal. But we found it very helpful to have these conversations, even if it's just once a year to get people connected and reengaged with why it's important to have a startup and why a startup ecosystem is so important in your own backyard.

So, you've got a great book out called Trajectory Startup. I would encourage you to take a look at this. There's a lot of books about startups out there. What made you say, I want to take a different take in this and give back to the community by writing a book about startups 

Dave Parker: Two big things about the book gap that I saw in the marketplace is one, I mean, you, you know, Brian, you've been around Startup Weekend. I'd see people coming out of Startup Weekend and they're like, woo. I met my co-founder, Charles. We're going to leave at eight and then go start our start up. And I'm like, yikes. Like, there are some things you can know before you leave your day job and your benefits and all those things, which allow you to really look at what do I want to know so I can de-risk this as the first semester, right. 

So, I got to do the market research and competitive analysis and look how big the market is and like, and how do I do that? The book's really focused on, the original title was Six Month Startup. And then I started delivering it in different formats and I'm like that doesn't work for the brand. So, it became Trajectory Series. 

But the program now is focused on a five-month program that takes you from ideation to revenue. And the idea there is, if you can't get to revenue in six months, it's probably not a great idea. There are exceptions to that rule. Like if you're a B2B or B2B enterprise and you need to build a really robust product, like that's an exception. Or biotech. Or you're doing B to C and you're competing with clubhouse and you're really about growth of users, right? You won't get to revenue in six months. 

But in general, you should be able to validate or invalidate your idea in six months was the goal. The second thing that came out of it, I kind of backed into was somebody came to me during my time at Startup Weekend. And they're like, hey, can I have your financial model?

I'm like, well, yes, you can have it. But yours is a business consumer marketplace and mine's a business- to- business subscription. And those are fundamentally different. I mean, we use the same lingo. And as you know, in startup land, we have our own language, which is knowing how to work the system for sure.

But the key there was how many templates would there be. So, I reached out to Crunchbase at the time and the CEO of Crunchbase and said, hey, can you give me a list of every seed funded company in the last 18 months globally. Ends up being twenty-six hundred and fifty-four companies. So hired a team. My son who was in college at the time was my project manager.

And we basically looked at all twenty-six hundred and fifty-four websites and where they didn't have a pricing model or a revenue model, that was obvious, I reached out to them and said, Hey CEO, I'm doing this research project on revenue models. How do you monetize? So, we ended up breaking down 2,600 companies into the logical revenue models and there were 14. And that was it.

So, I would say the most unique part of the content of the book is really the breakdown of the 14 revenue models that are successful in tech. And how you monetize them. So, the basic unit economics of what are the key metrics and KPIs of each of the 14 revenue models. Consequently, I became super geeky about pricing and revenue.

When somebody now gets to give a pitch and they're like, hey, we're doing a blah, blah, blah. I'm like, oh, you're a marketplace that monetizes this way. And people are like, how did you know that? And I'm like, it's actually not a secret. There's 14 just like pick from the list. Right. So, I think for first time founders, the question then becomes what you're building I hope is unique, but how you monetize it is almost never unique. 

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Brian Ardinger: That's an important point, because I think a lot of times we think about the features or the problem we're solving, but we don't necessarily think about the business model itself and you don't have a business without a business model. So, that's so critical to think even at the earliest stages. It may pivot. It may change based on what you find in the marketplace, but at least going in with here's our initial assumption of how we might make money. And the model that we need to... 

Dave Parker: And that, let me break down the business model in three parts for you, because I think one of the things that all of us look at and we're like, oh, it's in our business model. Kind of like this. It's a black box and it's a secret thing. And one of the things I discovered in the process was here are the components of the business model. 

So, think about it as a Venn diagram. The top circle is really creating value and how you create value is your product, your service, and your team. And those are the costs associated with creating a product or a service.

So, if you're in a service business, if you and I were lawyers, God forbid. We would bill out on an hourly basis. We'd have a pay rate and a bill rate, and that differential would create gross margins. It's a service business. In a product business it's a little harder to predict because we build the software once and we have thousands of users. So, it's not like, oh, every time we build it, we have to create a new and separate version, right. 

But the cost of building that product, whether it's the six engineers in six months or three years, depending on what it is, is a cost associated with creating value. The value created is the product or the service. There's a cost associated with creating a value. 

Circle Number Two is the cost of delivering value. And that is your pricing. Because that's a variable, right. That I can adjust. It's my revenue model. How I monetize. It's my marketing and my sales. I fixed the cost to build. I have now fixed the cost to sell. And there's lots of variables in there. There's lots of marketing things you can test. There are a few sales models, not a lot. Marketing is the most creative, and obviously it can be the most expensive in some ways too. 

And then what you have leftovers, the third bubble which is your top line revenue and your gross margin and hopefully net profit. Those are outcomes. You don't get to control those. You get to control your cost to build it, and you get to control your cost to sell it and the price. But when you think about it, that way, you're like, oh, there's only so many variables I get to be in control of. And since those are the ones that you control of, then I'm a strong advocate of like, know what the levers are you can pull. 

I talk to a lot of founders and some of the research was interesting. It basically showed that most founding teams don't change their price at all in the first three years. Which is when you think about it kind of crazy. But us as founders, were like, oh, I know all the product detriments and you know, it was kind of like, I would liken it to, if you said, hey, show me a picture of your son, Brandon, I'd be like, oh, I can show you a three-year-old picture of Brandon.

He's a super cute kid. He's 28 today. Plays lead guitar in a metal band. Tatted up and you know, with sleeves and gages in his ears. It would be true, but I just want it to be accurate. Right. And I think that as founders, one of the challenges we have is how do I continue to reprice my product as a product feature set goes.

So, one of the things I always recommend to founders is having a pricing council, you do once a quarter. Not that you're going to change price every quarter, but you are, you should really think about it. 

Brian Ardinger: Well, and you can also do tests around it as well. I remember a story, Eric Ries was talking about. He was working in a corporate environment, but they were saying like, this is the price. And he said, well, have you ever tested it? Do you know if you can go higher? And they said, no, no, because you know we know our customers and blah, blah. And he said, well, why don't we just run a test? And let's, you know, throw out a different price and see what happens. So, they ran the test. And it worked. 

And they said, well, why don't we do it again? Let's bump up the price again. And they ran a test and it worked again. And they realized like all these years they were leaving all this money on the table, so to speak. Because they had never even tested it. They never test to see if they could extract more value out. 

Dave Parker: There was a company in Seattle and I'm blanking on the name, that I was trying to see if they pull up real quick. So, they were doing a competitor for PowerPoint. It would look at contextually what the content was, and it would make the image suggestions for you. 

When they launched the product, the product is all the same price, and they came back at one point, and they just doubled it. And they had zero churn. Right. Which makes you think like, oh my God, how long ago could we have done that? Like nobody left. Everybody's like, yeah, makes sense. Like it would have paid more for it all along.

Brian Ardinger: So, what are the most common questions that you get from founders at the earliest stages? What are most founders struggling with when they come to you? 

Dave Parker: When we think about the go to market strategy is definitely a question. So, I'm a product person or I'm an engineer and I'm new to like go to market. There's still a little bit of that theory of like, well, if I get on Tech Crunch, I'll just go viral. And the answer is, no, it doesn't work that way. Right. I mean, it would be awesome if it did. And we see some examples of companies going viral and there's a misattribution Brian of like, well, I'm going to go to market like Clubhouse.

I'm like you're B2B and only B to C companies get a chance to go viral. Like B2B companies get good word of mouth maybe but going viral is math. Right. There's probably three big things in startups that are mysteries, but when you peel them back, they're actually not a mystery. It's just math. Going viral means it's called a K factor.

So, if you have a K Factor of greater than two, I'll give you this base formula. Every customer I buy, I generate two additional paid customers. So, if you think about WhatsApp right or clubhouse, the answer is I'm in a business model there that actually doesn't require a business model. So, I call it new media.

And what you're trying to do is grow your customer base so fast that at some point you'll monetize it through advertising. Not a surprise. Facebook, WhatsApp, et cetera. At some point you'll monetize it through advertising. So Clubhouse, you're starting to see some of those things, Tik TOK with pre roll. And people apply that revenue model or lack of revenue model to like a B2B business and B2B companies don't go viral.

There's been two examples of things that went close, right? So Slack super close to viral. Interestingly enough, Slack before their pivot was a gaming platform. The game sucked but the communication platform was great. So that's one example of a B2B company kind of going viral, but it's really just group invitations.

And the second one was LinkedIn for a very short period of time, about nine months, early, early on. And they built a tool that allows you to upload your entire contact database. And for that nine-month window, they went viral for every paid customer, they got more than two. So that's what viral means. The second one is traction or product market fit.

And one of the things you'll hear from investors all the time. And I work as a venture capitalist now for a fund out of Atlanta. People are like, well, when you get traction, come see us again. Which is really the VC patting you on the head and saying, you're really cute. Like, let me know how it goes. And most first-time founders are walk away from those and go like, oh, that was an awesome meeting.

And I'm like, actually, no, it wasn't, you're going to get ghosted. This is just like, they just swipe left or right. Or I don't know, I don't use dating apps. So whichever way they swipe, they swipe. Wrong way. Traction and product market fit is just math as well. Right. So, when people are like, oh, it's a mystery. Like we'll know it when we see it. I'm like a VC saying it's like porn, like that's crazy. Right. 

But product market fit is really not a mystery, it's math. So, when I think about the method Product Market Fit, there are early indicators of Product Market fit and there's trailing indicators. And the trailing indicators are easy. Churn. Surveys of, hey, if you didn't get use our product, what would it be like and how much disappointed would you be? And lack of customer retention through either contracts going down in value versus contracts going up in value. Those are lagging indicators. 

The early indicators are really things around like, is the traffic at the top of your site going up, right? Are the number of people downloading your app? Is that going up? Is the time to close going down? Is the conversion from demo to customer going up? And is my average contract value going up? When I put those five factors together. Right? So, closing ratios are improving. Traffic is improving. Demos are improving. Time to close is going down. And average contract value is going up.

It's like the miracle of compound interest. If you don't have any of those indicators moving the right way, maybe you have product market fit, but it's too early to tell. If you do have those indicators coming together, then the answer is right, good on you, man. This is, this is exciting. And as an investor, that's where I get excited about writing the check. Because I'm like... 

Brian Ardinger: Because you know your money is going towards the fueling of that growth versus building something or guessing. 

Dave Parker: It's the early shift between risk capital and growth capital. And typically, what I see in the early stages are people like, well, we're not spending any money, we're just doing organic growth. And that's okay. But the big question is, okay, how do you scale it with paid growth so that organic growth can go fast. Oh, I'm just doing it through my network today. So I think about it as 10, 100, 1000 customer rule, right?

The first 10 customers as the founder, you're going to go hand-to-hand combat. Go get them yourself. The first hundred, you probably can't do that. You're going to need to hire a salesperson or two. And you need to get good at making them, your value proposition clear. You need to get good at getting your pricing, right.

But that's when you start to scale and as the first investor for you as the founder, that's good news, right? Because it's starting to scale past what I would call the Binary Risk Stage. Right? It's a zero or one it's going to succeed. Right. And angels will invest in you because we like you, right? I'm like, oh, writes you a check for $10,000 and you know, maybe be a board advisor, right, as an angel. 

When I'm ready to check for the fund, our average check is $650,000. I'm looking for like numbers and math. Right. And I can help the founders see it. But typically, what happens in venture is if a VC sees the math before you do, they're going to get a really good deal because they're going to put a check in and go like, Ooh, we saw the math before the founder did. 

And I'm not good at that. So, when I talk with founders, I'm like, here's the math you should be looking for. And one of the funds I used to work for, it was like, why are you telling them that? And I'm like, because I think better trained founders is always a good thing. So, if you're geeky about math and numbers and unit economics, you'll love the book.

If you're new to that. And don't know, you're like Dave, you're speaking a foreign language and I recognize it is English. You'll learn the lingo with the book as well. 

Brian Ardinger: Well, I do think that's vitally important. Especially as you go out and want to go that more venture capital type of route, because these are the things you have to be able to talk to and understand and know, like you said, the levers and that, that you have to pull to make that work. 

The other question I want to talk about is early-stage solo founders. One of the biggest things they've got to figure out is how to build that team and the culture and things along those lines. What kind of advice or insights have you seen at the early stage of how do I build that team create it.

Dave Parker: I'm going to give you a little contrarian advice. It frustrates me at times when people pontificate around stuff that they don't actually know. So you'll hear VCs often say culture matters is the most important thing. What they mean by that is personality. When you have a two-person founding team or a three person founding team, you don't actually have culture.

Like there are few repeat entrepreneurs or people come from organizational development, or maybe you're in the services business. And you're like, we're going to build our company on a services culture, and that we really understand. 

If you're building a product, your first milestone is product market fit. Because if you get the culture wrong, you can fix it. But if you don't get product market fit, your culture doesn't matter. You don't have a company. Right? Right. So, the first milestone is product market fit. So, in VC you say, oh, culture really matters. What they're really talking about in a three-person startup is do they like you from a personality standpoint or are you an ass?

Right? So, cause if the answer is, I don't think you'll listen to feedback, I'm probably not going to write a check. If I'm like the average investment for me as an angel is probably eight years to exit. So, if I don't like you, I'm probably not going to write a check. Right. So, there's, the things I'm looking for there from a personality profile type tends to be, then there's totally from views, right?

There's the Introvert view, right? Bill gates did okay. Jeff Bezos, I don't think it was really an extrovert. But people will over-index on charisma or salesmanship when the answer is maybe, right. So ultimately, I kind of look at it first and say, is this the right founder? Is it Founder Market Fit? Are they the right people to solve this problem or not?

So, I remember with Mitsui when I was there at one point. I was with a big fund out of Silicon Valley for three years. We got invited to invest in this deal, that was like spin the bottle where 70% of the attendees were girls and 30% were boys. And it was like late teenagers, early twenties. I'm like, we can't invest in this. This is just creepy. 

We're a bunch of old guys by comparison. It's just weird. Like, wait, this is the wrong investor fit for us. So, I'm looking at the founders and going, are they the right founders for this market and for this product first off. 

Brian Ardinger: And I think that's an important point for the founders to understand is like not every angel or not every fund is the right fit for you. And it's not necessarily, they don't like you or don't think it's great or whatever, sometimes it's an industry that they don't invest it. 

Dave Parker: For sure, like the fund that I'm supporting out of Atlanta, is called the Fearless Fund. So Fearless Fund is two African American women were the founders of the fund. They launched the fund with a $5 million exploratory fund. For all the wrong reasons. It blew up, right George Floyd, et cetera. And they're going to close on $30 million. We invest exclusively in black and brown women. 

And when they recruited me on it, I was like, oh, hell yeah, this is like, so on-mission right. Because 3.1% of all venture capital over the last 20 years is went to white dudes named Dave. Now I just want to pinpoint Jims are worse than the Daves. They got 3.4%. 2.8% went to all women. 0.8% went to people of color. Like if I could spend the next chapter of my life helping to level that playing field, I'm in. Like, it's kind of a no brainer. But if you came to us and said, hey, I'm a black and brown woman, but I'm based in London.

We would be like, sorry, I can't do it. It doesn't matter how good your ideas because we have what's called an LP Agreement. An LPA. The LPA says we invest in these things, US-based companies, black and brown women founders. And if you're not in that mix, it doesn't matter how good your idea is. 

And people tend to take it personally. They're like, I can't believe you told me. No, my idea is brilliant. And I'm like, you're not in our thesis. Right. And if you're not in our thesis, we can't invest in it. So, know that that's pretty common for a lot of venture capital funds. Some VCs are opportunistic by definition and the answer is they can invest in a very broad category and angels can invest in the stuff that they love. Right. I like you as a founder. And I think it's a cool idea. I give it a shot. 

Brian Ardinger: Yeah. At Nelnet where I do some investing, obviously on our venture capital side, we are a lot more opportunistic or we'll take different bets based on community or other things, rather than things that are always in our sweet spots, so to speak. So corporate venture is a lot different as well. So, it pays to understand who has the money. Why do they want to invest for sure? What are they looking for? 

Dave Parker: One of the chapters, I break down what the investor profiles are and why they invest. So, if you think about this as an enterprise sales process, if you, as a founder are out raising money, the question is, is like what stage appropriate capital. Right? So as a corporate VC, you're probably not investing in early risk stage capital. But you're investing in markets you want to keep an eye on usually. Because you're like, oh, that's a super interesting development. Let's put some money over there and see how that works and we'll follow on with it. 

Brian Ardinger: So, Andrew has a question in the chat. He says, I work with very early-stage VC funding, pre prototype presales. I've noticed this new trend where companies are being trained in their pitch to propose who they might be acquired by in the coming years. Do you feel this as a legitimate trend and if not, how we advise founders to prepare for acquisition? 

Dave Parker: So, I've done 16 exits. So, I definitely have an opinion on this one. I would say the first thing you need to focus on is like focus on building a great product and a great company. Right? And then your acquisition thing becomes a lot easier to discuss. Like I will say my general default is I like products and companies that have logical upmarket buyers.

Right. So there's like, oh, it makes sense that they've and people like, oh, Google's going to buy me. I'm like, actually you can, there's a Wikipedia page. Every acquisition that Google has ever made. And in most cases I will tell you, they're not going to buy you. Now, I know aspirational, you want them to buy you and that's super cool. 

But there's a big difference between oh, Microsoft will buy us or it's like, actually, no. Right. So, we're selling a company right now. They're doing about $10 million runway and run rate and revenue. And at one point I was talking with the CEO and he's like, Salesforce will buy us. I'm like, no Salesforce, isn't going to buy you. You have to be way over 10 million in revenue to have Salesforce actually be interested.

So, they bought Slack for, you know, something incredible in the billions of dollars. But they have to do an acquisition that moves the needle in the billions, not in the oh, it's 10 or 20 million. Right. It doesn't mean you're a bad company, it just means you have limited buyer set. So, from a founder perspective, I think if they're asking you the question there may or may not be the right investor because we don't typically look to flip deals.

I know I'm going to be in the deal 7 to 10 years. But I do like where there's a logical upmarket buyer who has a track record of doing acquisitions. So, I would say it's a bit of a Catch 22. By contrast, I will tell you I've been on the board of the company for 17 almost 18 years. That we're the largest player in our space. 

Which means the company today is a great, you know, kicks off great dividends. We do really well with it, but there's no easy exit for it because we're the biggest player in that kind of niche market. Which gets you back to the market sizing and why you want to go after a market, that's a much bigger market than a niche market for sure. 

Brian Ardinger: Andrew says. Thanks. Great insight. Thank you for that. Question around what are some of the trends that you're seeing and what are you excited about when it comes to startups?

Dave Parker: I think one of the ones that I'm aspirationally looking for, and I can't get myself to get off the bench and go do myself, is I think there's going to be a shift in the social platforms, not just solely based on the fact that watching Facebook stab themselves has been awkward. But the idea of platforms that empower the creatives and creators is super interesting to me.

Like when I look at Sub Stack and things like that, it's like the revenue models are still flipped. Where it's too much of the money, goes to the platform and not enough money goes to the creator. So, I think there's probably a really interesting opportunity that says, hey, how do you flip that model, where the creators make most of the money and the platforms making less.

You know, obviously Facebook's the extreme version of that. But Tik TOK is a good example of, hey, somebody gets on to try to monetize something and finds that they made quite a bit. I think we'll see more platforms develop that empower the creatives. Creative class. I think that's super exciting. 

Brian Ardinger: That's interesting too. The whole no-code low-code movement has really changed over the last five years where again five or six years ago, you, at some point had to have a development team or a, or a developer on your team to start building product. And nowadays I tell most founders, there's probably enough out there with low-code no-code tools that you can at least get your MVP some early insight without having to have that developer co-founder on board. 

Dave Parker: Yeah, I think that's super exciting as well. It's one of the categories we're following. And I think low-code no-code is the equivalent of what AWS was to buying servers. So, I've raised $12 million and exited $85 million. In my first startup, we had to buy servers and racks and build them ourselves and put them in a, an Exodus Data Center.

And people were like Exodus, what was that? It was one of the biggest epic fails of all time. And when AWS came along and they didn't have to, I could just turn up a virtual server. I didn't have to order something from Dell. It fundamentally changed the cost of doing a startup. Low-code no-code I think will be the same. And my cost of actually doing it.

Now, I still have to learn how to do that. But from a founder perspective, I can learn how to do that in months and not years. And then not have to build the development team. So, using Bubble or Air Table, for sure. Monday, I would say is the expensive version of Bubble or Air Table by comparison, from a founder perspective.

Brian Ardinger: What I like about it is it allows for greater customer discovery and experimentation around your product earlier to get that feedback, to see if you're on the right stage and figure out what features you do need to build or scale or optimize. 

Dave Parker: Yeah. Yeah, that one's great. I think in a revenue model side, one of the things we're seeing is in the marketplace components. As we're seeing marketplace shift from transaction fees only to subscription fees, plus transaction fees. I would tell you watching revenue models over the last seven years, ish, total, there's been a few changes in them. One, if you remember Groupon, there's thousands of competitors to it because at a fundamental level, I would say revenue models aren't, they're not defensive. 

Revenue models, so think of they're very public domain. So even Google and pay-per-click copied that model from Yahoo. Lost the lawsuit against them. Yahoo had bought a company from Idea Lab who'd had actually patented the pay-per-click model. Yahoo ended up being a great holding company for Alibaba and Google stock, right at the end of the day.

Revenue models are defensible, but if you look at all the copycats of Groupon, you see, most of those went away. Groupon is still alive in a public company, but they traded 0.49 times trailing 12 revenue. So, if you take the market cap of the company divided by sales, I would say that it's 50 cents on the dollar. Right. So as far as what they trade at. 

Now, compare that to a subscription business. Well, maybe the next step up would be you and I do a consulting business for a million dollars. That company is worth roughly a million dollars. It's worth one times revenues. So, because if you remember Groupon booked the top line sales of what they sold you for that certificate, but they really only made the margin on the, you know, the 10 or 15% on the margin of it.

So, if you and I had a consulting company for a million dollars, it'd be worth roughly a million dollars. If we did a million-dollar subscription company, it would be worth somewhere between 12 and $15 million. And one of the new models that really came out in the last five years was the idea of a metered service company.

So Twilio is a great example, AWS, if it was pulled out of Amazon is a pay as you go model. It is predominantly is B2B, but those companies traded really 35 times, right? So, if you think about, okay, if I'm going to do a startup, which revenue model should I use, I would tell you to think about again, if you're going to go back to Andrew's question about the exit multiple, I would be interested in less than who's going to buy it. More interested in the revenue model and the multiple of sales. So, I'd be like go for a metered service company for sure, or subscription at very least. 

Brian Ardinger: I wanted to ask around the topic of founders. It's obviously a very lonely, difficult journey at the very early stage. Do you have any advice for early-stage founders to how to get better connected and deal with the mental challenges of building a company?

Dave Parker: Yeah. Great question. It was probably my most read blog post ever is I wrote about my personal battle with depression. And then I hit publish and I thought, what the hell? What did I do? What was I thinking? And I got more positive comments on it than I could have imagined. Brad Feld, who used to be on my board, as you know. Brad sent me a note with one word, and it just said brave. 

I think that the challenge there from a founder perspective is, you know, you're always trying to be positive. You're trying to, I was trying to be upbeat. If it's motivate the team or motivate investors. And so consequently leads to a lot of isolation.

And I think that's one of the things that, like, one of the things we're doing here in Seattle is we run a cohort program for founders. We don't take any equity. There's no cash. They don't pay for it. And it's really about us up leveling the community of founders 25 to 30 founders twice a year, which is our math.

And we're really helping them navigate the ecosystem, here in Seattle in six months instead of 18 months, which improve their odds of success. But also connecting them with other founders. Because other people are asking the same questions you're asking. They're not competitive. They're going through the same challenges.

And by putting them in community, it serves one of those two purposes. One is we want to help them navigate the ecosystem, but we also want to help them connect with other founders like them at the same stage, which we think has two benefits. One is personal connection and not being in isolation for sure.

And second is really helping them think about reinvesting in the community over time. So, if you think about classically, it was the PayPal mafia and then reinvested in each other. So, Reed Hoffman and Elon Musk and Peter Thiel, et cetera. And then it's now become the Uber mafia, right? All the people that were at Uber that are now launching other companies that are reinvesting in each other. We've never had that in Seattle. And most cities don't. It's one of the biggest gaps. 

So that's our secondary benefit is we think if we have them in community and at five years, but when we launched this as a program, which through the Washington Technology Industry Association. And I went back to the CEO. I'm like, this is a ten-year plan. Right. I'm like you can't judge it at three years or four years. And we're coming into our fourth year right now. And I'd say it's worked out better than we thought. But as I told him, I'm like, you don't get actually judge on it for 10 years. 

We've had some exits; we've had a bunch of fundraising. Our teams do it a lot faster than other teams. So, it's become a program. People are like, I want to get in. So, we just actually, Brian took it and put it into an document for a national scale-up grant for the Department of Commerce, with the State of Washington. So, we actually have those documents set up now. If somebody wanted to take it to Nebraska and say, Hey, we want to replicate all of this programming.

We've opened source all the programming, we've open sourced, the narrative doc and the fundraising docs. So, somebody could turn around and say like, okay, we're going to go launch this program here as a, as a copycat with, with pride. Like we want you to knock it off. 

Brian Ardinger: Well, that's interesting. That may be an interesting model to explore now with COVID and the whole virtual remote angle of it. Or even in communities like Lincoln, where again, just by the pure numbers, we're not going to have thousands of founders. So how do you scale that? 

Dave Parker: For sure. And we're basically taking a program we were running in Seattle now and run it in Kent, Washington and Yakima. And Vancouver, Washington, and Tacoma. And we're trying to provide it from an access perspective. Like we want to make sure that we provide people with access that didn't have access to that before.

But also, with a path to funding, because if you give people access to programming, but no, they can't ship an MVP at the end because they don't have any money. That's still a problem. So, we're trying to address that problem next. But the grant was a $750,000 grant over three years. Which means we'll kind of be able to take the show on the road and obviously virtual too. I think the nice thing about if there's a positive outcome of the whole COVID thing is place matters a lot less than it used to.

Like the good news is I don't have to get on a plane to come be on stage with you. I'd like to be. That'd be kind of fun, because we could go have a beer afterwards and have dinner. But that that'll happen too. But I think from an efficiency standpoint, I've been doing programs for the Middle East, like six or seven cities in the middle east over the last two years. And I fly out Thursday night to Abu Dhabi for four days. And I'm like, it's kind of a fast turn for Abu Dhabi. Could do it just virtually. And be fine.

More Information

Brian Ardinger: I wanted to thank you again for coming on. Here's Dave's book Trajectory Startup. Pick it up at any place you buy books. I'm going to put it in a call to action. He also is giving away some free stuff on his website. So let me share that right now. You can download his free resource guide on 14 successful Tech Revenue Models to check that. 

And then I also, again, I want to thank all our sponsors for bringing this today. And I encourage folks to also sign up for Inside Outside.io. Our newsletter and our podcast, where we bring these types of things whenever we can. So that's the link to that. Thanks for coming out. Thanks for all the audience for being here. Thanks for the great questions and looking forward to doing this again, at some point. And maybe having you come and see us in real life. So, I appreciate your time. And thank you again, Dave. If people want to find out more about yourself or your book, what's the best way to do that?

Dave Parker: Yeah, they can find all the information is on my blog, DKparker.com. If you don't want to buy the book, you just have to figure out how to navigate all the blog posts in order. But that should be, you know, there's only 180 blog posts there. So DKparker.com, you can find the book and more information. The 14 revenue models.

You can also find me on social media. I'm at Dave Parker CA for Seattle, when you find, you know, LinkedIn, Twitter. I'm not on Facebook anymore. I just finally had to just say, no. I'm still on Instagram because I want to see what my kids are doing. But Daisy, my dog has more followers on Instagram than I do at this point. But so yeah, you can find me on social media, and you can find me on DK parker.com. 

Brian Ardinger: Excellent. Well, thank you again, Dave. We're looking forward to having future conversations. And go out and have fun everyone at Startup Week Lincoln, and we'll see you around the neighborhood. Thanks very much for coming out.

That's it for another episode of Inside Outside Innovation. If you want to learn more about our team, our content, our services, check out InsideOutside.io or follow us on Twitter @theIOpodcast or @Ardinger. Until next time, go out and innovate.

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