Episode 538 | When to Sunset a Product, Enterprise Security Assessments, Lifetime Deals, and More Listener Questions

Rob: Welcome once again to The Startups For The Rest of Us, the podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing ambitious software startups. That’s a throwback intro. If you’ve been listening for more than a couple of years, you might remember that phrase from the prior intro.

Thanks for joining me today. I’m your host, Rob Walling. This is episode 538, where I welcome Einar Vollset back on the show. He’s my co-founder with TinySeed and we talk about listener questions today. We zip through (I think) maybe 6–7 questions, about when to sunset a product, filling out enterprise security assessments, acquiring a company where the previous owner had sold lifetime deals and not disclosed it.

Before we dive into that conversation, I wanted to let you know that our next MicroConf Remote is coming up at the end of March. You can head to microconfremote.com for info about that. We’re diving into early-stage marketing tactics. We’re going to have five sessions where each one is a case study with numbers looking at a specific early-stage SaaS marketing tactic.

If you’re at the place where you’re scratching and clawing for first users or first customers, I’d say, if you’re maybe a sub-10,000 MRR this MicroConf Remote is designed for you. Microconferemote.com to check it out and get your ticket. With that, let’s dive into listener questions with Einar Vollset.

Einar Vollset, welcome back on the show, sir.

Einar: Thanks for having me.

Rob: Absolutely. You may be hitting that Steve Martin on Saturday Night Live mark, where you perhaps are the most frequent guest.

Einar: I don’t know. I think I’ve been like three, maybe four, or maybe it’s more than that. I don’t remember now.

Rob: I think it is.

Einar: It could be.

Rob: Yeah, because you were on at least one of the startup news roundtables, then QA, and then we talked about company types, remember? LLCs versus C-Corp and all that.

Einar: Oh yeah, and then we did one on the PPP-type thing, didn’t we?

Rob: Yeah, I think so. There’s a lot. It’s good to have you back, but for folks who are less familiar with what you’ve been up to, your experience, you have a PhD in Computer Science, but I won’t hold that against you. You actually taught at Cornell for a couple of years, you were in Why You Did Startup, you were in YCombinator in the 2009 class. You have a lot of experience with enterprise sales, with cold outreach, cold outbound email. Live experience in M&A, specifically the sales side of SaaS. You founded a company called Discretion Capital, that is basically the  kind of the go-to that I refer people to if they’re like, hey, I run a SaaS app doing 7–8 figures. I’ve been approached by private equity or by a strategic, and they’ve made me an offer. There are people who do this for a living and you are one of those people with a lot of expertise in it. Obviously, there are other folks working there because you and I are focused and working hard on TinySeed.

Einar: Correct

Rob: We just closed Fund II.

Einar: Our first closed. Let’s call it the first closed. Come on, give me some more time to fill this sucker up.

Rob: I keep saying closed, and what I mean is first closed, so doing well with that. Then obviously batch three applications are in and we’re working through those. While we don’t have enough going on, I figured I’d pull you on the mic, and we’ll answer some listener questions today.

Einar: Why not?

Rob: All right. With that, let’s dive into our first question. It’s a voicemail from Phil at itscircletime.com.

Phil: Hey, this is Phil from itscircletime.com. We provide online classes for kids across the United States of America and Canada. We match them with high quality teachers that will help them socialize and continue their education. When we launched the company earlier this summer, we started with the preschool-targeted audience, bringing the Circle Time experience online, meeting up to 10 other kids of their similar age, 3–6.

Since then, we started a new course called Kinder Prep. It’s targeted towards 4–6 year olds who are entering kindergarten or are struggling and maybe they’re distance learning. This has blown up well beyond we could ever have hoped for, which is awesome. Now our run track for $450,000 a year and the run rate in only about four months of our history.

However, now our new service offering is dwarfing our original in revenue. I’m curious, when would you consider possibly sunsetting or winding down something? Even though it’s only making $8,000 of our monthly revenue, that’s about a third of what the other product makes, and the new one is growing leaps and bounds. Anyway, just want to pick your brain and see what you thought. Thank you.

Rob: Thanks for that question, Phil. Phil sent this voicemail in about a month ago. We are able to get to it already because voicemails always go to the top of the stack. If you’re going to send us questions, send it to questions@startupsfortherestofus.com. You want an answer quickly—at least within a month or so if that’s quickly—send in voicemails.

Some of the other written questions we’re answering here are from October of last year. I’m sorry. It’s been a little bit of a backup, Phil gave a little more context in writing and he basically broke it down, like we had this offering, it grew to $8000 or $9000 a month, then we added a second offering and that far outpaced it, and it’s three times the revenue. Pretty close one, it’s 75% of the revenue is the new course.

He said the original service is only doing $8000 or $9000. It’s a lot more complex, it has three membership plans versus the new direction with a single plan. His question in the end, he says, “I guess my core question is what factors would you look at when trying to determine when or if it is a good time to sunset a product or service? I’m in between a rock and a hard place with this issue and I’d love to hear your advice.” So many thoughts. What do you think, sir?

Einar: I’m a great believer in focus through degrees. It depends a little on how much time is being taken up and efforts being taken by the original product. But from what we’re hearing, this is something that’s three times as large in a much shorter time. Anything that detracts from that growth I would be wary, even if a bunch of time has been sunk into the prior product.

Rob: I’m up in the same boat. He said that the new product that is taken off is also three times the price of the previous one. That instantly makes me think, could you triple the price of the first one and have similar numbers? My inclination is usually entrepreneurs want to do too many things. We have shiny object syndrome and, as you’re saying, focus is (I think) a core value that we both share in that respect.

I would wrestle with the idea that either the new one just has better product/market fit and you go all in on that. I just cannot imagine having something that is making three times the money and it’s three times the price, meaning you have far fewer customers. Or I guess you have the same amount of customers doing three times the revenue. I cannot imagine not sunsetting the original one or at least tweaking the original one, like I said, by tripling the price for new people. Or messing around with it to see, can I get the same profitability or the same level of effort out of this?

He also said there were three membership plans. This is more complicated with the old one, so do away with those and go to a single plan. Maybe you ran for other people for now who are already in it and just try it with new folks, or maybe you don’t. That’s the hard part about this. There’s a lot of details to it and my gut feeling is you’re going to sunset the previous one, unless you can figure out tweaks to make it as profitable and as easy to run. If not, there’s no reason to spend equal time on two parts of your business if one business is making three times the money.

Einar: I agree. Once you found something that’s growing three times as fast, I don’t know if it’s still going three times as fast, but certainly at least that, by the looks of things, you would be silly to divert your focus onto something that isn’t doing as well. That’s my view.

Rob: I think you brought up the sunk cost fallacy, which is a good thing to think about. A lot of us get attached to our first idea or we get attached to something that’s working. It’s hard to think about all the hours we put into it. You don’t want to do that in this case. Thanks for the question Phil. Hope that was helpful.

Our next question is from Matthew. The subject line is Split Personality Marketing. He says, “Hi Rob. While listening to TinySeed Tales Season Two, I was listening to Brian and Scottie talk about their move up market with Gather.” I’ll cut in here, Gather, TinySeed, batch one company and they have SaaS for interior designers. Back to the email. He says, “I got to wondering if it’s possible to target a whole new audience as you grow by spinning out a ‘new’ product or even a ‘new’ company that’s just a white label version of the original product, probably with different default settings, different features enabled, and different marketing/support channels.

In some ways it would be a bit like turning the enterprise plan into the enterprise product. I’m guessing it could be dangerous to split your focus, but if you know anyone who’s tried it and succeeded, or tried and failed, I’d be fascinated to hear their take. Intuitively, it sounds like a terrible but seductive idea trying to have it all, but I can’t help feeling empathy for the smaller fish, Brian and Scottie mentioned who are still arriving at the Gather site, but being turned off or turned away by their move up market.” What do you think, sir?

Einar: I’m not sure about this one, I have to admit. My gut feeling is, why isn’t there room in the existing brand to have a wide range of price? We’re talking about price differences. Presumably, that’s what’s going on here. I’m a little unsure exactly what he means by white labeling and making a new company or a new plan. Presumably it’s a price and positioning thing, and presumably mainly a price thing. My question then is, why isn’t there room in the existing brand to have a very wide range of prices?

I think a lot of people are almost anchored to their own price in a weird way, like people say, oh, I have a $19 a month, a $49 a month plan, and a $99 a month plan. But we have some bigger customers or if you position slightly differently, maybe we can charge $1000 a month or $2000 a month. That’s probably true. It’s probably more often true that not if you’re selling to the enterprises.

I still think the easier solution is just lean into an enterprise plan and have it be a call us–type situation, where maybe you thought about the things that make it an enterprise plan, whether that’s single sign-on, or custom contracts, or whatever it is that makes it a whole different price point for enterprises.

That would probably be my main question. If it’s the same product, it’s just a different branding and the different price, then why not build that into the existing product? Unless it’s specifically positioned as the cheaper alternative in the market, which then you have a problem. But then, you have other problems, in my view.

Rob: I think he’s talking about, remember when Brian had first started TinySeed, their lowest priced plan was between $29 or $39, I forget. By the time they were 6–8 months in, I believe those prices were like $200–$250 now. That’s what he’s talking about. They did at the enterprise but they just left out the bottom of the market.

Einar: But I think in some cases like that, there just isn’t a bottom of the market. Particularly for B2B SaaS stuff, if you’re meeting somebody particularly with something like what Scottie and Brian have, this is a software used full time. A lot of the time you’re using the software if you’re in this industry. Who are the people who are spending that much time in on some software, and it’s critical to their business, but they’re not willing to spend $200 a month? Does that really exist or are these sort of wannabe businesses almost? I would buy it if it was $39 a month. Would you really though? Would you use it? I don’t know.

Rob: To Matthew’s question of forking off this higher price plan and making it its own entity, I think that is an absolutely catastrophic idea. I hate it. I hate it with the heat of a thousand burning suns. The one thing that we have as entrepreneurs is our time and our focus. I guess that’s two things, but that’s the most important thing.

Can you imagine? Okay, I’m going to go register another domain name, because it’s not the code, it’s not the product. That’s the problem. My guess is Matthew is a product person or an engineer. We think, oh, if we have this code, why can’t we just have two of them. You need two sales teams or two sales people, you need two support email inboxes, you need two people supporting it, you need a domain name.

Now, how do I get drive traffic? Well, SEO. SEO is hard enough on one site. Now, we’re going to split our focus? We’re going to create content, on and on and on. It’s all the things you don’t think about. Sure, copying the code and flipping a few bits to the defaults are different. That’s fine, that’s done, but it’s everything that’s not the product, that is like you’re running two companies now. Frankly, you’ll grow twice as fast, if not faster if you just focus on one of them. This is like trying to make a decision and avoid loss. So many decisions involve some type of loss.

Einar: It’s a trade off.  I think it’s one of those things. To me it sounds like if I were to guess, I think he’s just sort of scared of having a higher price plan or having an enterprise call us–type plan and ask for 20 times as much for the enterprise plan. That’s what it smells like to me. Then it’s like, okay, I’m going to make this whole different brand and it’s the high-end brand. Unless you’re a Toyota and Lexus, I don’t think it is a good idea.

Rob: That’s the thing I’ve been talking about a lot on the podcast lately. There’s low-touch funnels or no-touch funnels. People come, they sign up, they self serve. Usually it’s $50 or below-ish. Those are great little businesses. Frankly, if you have a super high volume, it can be a great medium-sized business. You can get into the definitely six figures and often low seven figures.

Then there’s the high-touch businesses which are going to be more enterprise-y. And then there are dual funnels where you have a low-touch funnel and a high-touch funnel. Imagine we are recording right now on software called Squadcast. You can imagine Squadcast has people recording fly fishing, very almost hobbyists, not almost, but they are hobbyists who are paying whatever their lowest price plan is on Squadcast, $9 a month to record the podcast.

You can imagine a Squadcast gets approached by a large podcast network and they should be paying or are willing to pay thousands of dollars a month. That is an amazing, amazing funnel to have both of those.

We have other TinySeed companies who are in that position. You heard Craig Hewitt talking about it on his podcast, obviously the lowest price, Castos. Once again, we are hosting on Castos. The lowest price plan there is (I believe) maybe $19 a month. But then, they also have this private podcasting. They’re catering to these enterprises and (I think) people with big personal brands, Those are much larger deals.

If you have the dual funneling and you can make that work, that to me is the golden ticket of SaaS. Again, you can totally make it with low-touch, you can totally make it with high-touch. We see companies succeeding with only one, but the idea of having both but splitting them into two separate products to me gives me some heart palpitations here thinking about it.

Einar: Shopify has the same thing. They have their low-cost, self-serve, start dropshipping thing, and it’s easy. Then they have Shopify Plus or Pro, or whatever it’s called, where it’s $2000–$3000 a month to get a Shopify Pro account. The fact of the matter is, I think a lot of the Shopify Pro—I think it’s called Plus—customers started out on the lower stuff and then they graduate. They grow to trust the brand and then they step off to the Pro Plan or whatever.

If you were to separate it and it’s like, Shopify is only the low-end stuff, then you might actually put off some of the larger shops, where all the medium-sized shops were like, well, let’s not go Shopify because they don’t have a top-level plan or the enterprise version that we might eventually need. So yeah, I agree. I don’t think it’s a good idea.

Rob: Yeah, and I think for Matthew, part of his question was he almost felt bad for the individual interior designers who are hitting their site and being shell-shocked, the price raised, the $200–$250 price point. Like you said earlier, if they’re serious and they’re in this software all the time, it’s that important then they should be willing to do it. Maybe if they really do want to pay $40 a month for something, then you just refer them out to your cheaper competitor who is staying down market0 That’s the other option.

We used to refer to Drip. Some people come to us, they say, oh well, I only have a 1500-person list and we’re a non-profit. Oftentimes it was like, well we can either give you a discount or go to MailChimp. They’re free. It’s free up to 2000. We were not in it to make $50 a month from everybody that came through. Sometimes they were just better options. I hope that was helpful Matthew.

Our next question comes from Olivier and he has a success story plus questions. This one’s actually funny. He said, “Hey Rob. I just wanted to thank you for taking a long shot in episode 515 at the 28th minute mark when answering a listener question. The question was from Martin and it was about where to look to find a co-founder for his startup activity messenger. You said he might want to look at his first couple of clients, and here I am one of his early clients who is now officially co-founder of Activity Messenger.” Rob Walling, founder matchmaker. Am I right?

Einar: Nice.

Rob: That’s super cool. I love to hear stuff like that. He says, “I’ve been running a kids sports business for the last 10 years with another partner that has been mostly running by itself for the last 2 years.” As a reminder to listeners, Activity Messenger is aimed at kids sports businesses. It’s a product built for people like him. He was using it as a customer and now he is involved as a co-founder. He said, “I have two questions for you. The first is any tips on how I can use it to my advantage of the fact that I am a client as well as a co-founder in marketing sales or during on-boarding calls?” What do you think about that, Einar?

Einar: I would lean into that. I’ll be like, yeah, all these boffin software guys. They don’t truly understand the industry like I do because I’ve been there and done that. Certainly, I think that makes sense. And the content stuff, all that stuff, I would certainly lean into that. People like to see, oh, people like me are using this stuff. In general, that’s why you have customer testimonials and things that say, oh, companies like ours use this. But if you have a co-founder or someone in the business who’s been in the industry, sort of can speak the lingo, and be that side of things, I do think that’s helpful.

Rob: Yeah, I think that’s hit the nail on the head with. I was in this situation with my sports business. This is how it served my needs. I mean you can do that as examples and you have credibility. The other thing that I used to do because I don’t like sales, I don’t like sales calls, but I’ve done them when I need to, especially in the early days of Drip. I did some for HitTail too. Especially in the early days of Drip, I would get on the call and I’d say, hey, I’m a co-founder. I’m not a salesperson. I’m actually a developer-turned-software entrepreneur. I’m not gonna do the sales thing to you. I’m going to talk to you about the product, ask me questions.

It instantly disarms people, whether it’s right or wrong. There’s a stigma with salespeople of, they’re gonna try to talk me into blah-blah-blah, but I was like, look, I weigh in every day on what features should be built and I’m a user of that. We built this to solve our own problems with this other SaaS app. There was instantly some credibility and a bit of (I believe) I got the benefit of the doubt on a lot of those calls because I was not only a client but a co-founder as well.

Einar: Yeah, and I think you should lean into that. That’s probably a good case for that industry as well.

Rob: His second question, I’m not sure if how much I have to say about this one but he said, “I’ve had extensive success in marketing and sales in the sports and leisure industry, selling an in-person service in the B2C world. Any tips on how to translate those skills into SaaS in the B2B world?” I have some fleeting thoughts but no major connections for me moving from one to the other.

Einar: No. Marketing and sales. I guess maybe marketing is more similar than sales. I’ve never done B2C sales. I’m not really familiar with it, but the way that I think about B2B stuff—particularly high-end B2B sales—is that it tends to be almost like an outsource consultant. That’s what you are. Your stance should almost be like, we have this solution. If you use this solution then you’ll be better off. I’m the one who understands enough about the problems you’re facing to be a trusted advisor and choosing what software to go with. I don’t know if that translates from the B2C world […] to sports and leisure, I’m afraid.

Rob: And he wraps up his email. He says, “I’m also a father of two young kids and I love how your podcast is geared towards people who don’t have 80 hours a week for their startup. I really appreciate the episode you mentioned recently about raising entrepreneurial kids on the ZenFounder podcast. It’s one of the most popular episodes. I’d love more of those. Thanks for taking the time.”

Yeah and congrats, sir. It’s super cool to hear the success story of you guys pairing up. I would love to hear updates. You can email them in or send them as voicemails whenever good things happen and let us know your progress. I’m sure people like to follow that story.

Our next one is a good one. I think you might have feelings on this one. What’s funny is these all come in via email and I actually responded to him via email because I was so worked up about this. I’ll let you answer and then I get to tell you what I emailed. It’s from Dan and he says, “Hey Rob. We recently acquired a SaaS that’s making about $4500 a month,” so $4500 MRR. “We’ve since discovered that there is a significant number of lifetime users in the app. The previous owner sold them a lifetime plan for a one-off fee 2–3 years before the business changed hands. Now we’re wondering what to do with these users. Can we offer them a deal and ask them to pay something on a recurring basis or do we just eat the cost. I wonder what you would do. Grateful for your advice and everything you do.” What do you think?

Einar: Yeah.

Rob: My first two sentences in my response to him is that the seller screwed you. This is a […] move to not disclose. And depending on what contracts you signed, this could be seen as a breach of contract or fraud for not disclosing.

Einar: Lifetime is funny. You do the M&A stuff then there’s this concept of working capital and how you account for things. Do you do cash accounting, do you do accrual accounting, all of these stuff. Then, not as extreme in case of this, if you’re selling on January 1st (say) and on December 30th the year before, you hold a big annual sale and you sell $1 million worth of software, if you then sell the business on January 1st or 2nd, then the buyer, very sensibly would argue that okay, you have to leave the vast majority of the cash for the sale that you just did in the business because we are the one who have to service this. We have to provide the service that’s being used.

This is the kind of thing that at least $4500 MRR is not, probably, I don’t know. This depends how the deal was done, but usually, these kinds of things are in place. But for a bigger deal, like $2–$5 million ARR, $10 million ARR, certainly these are things that would be taken against reps and warranties, like how clawback closes to say if you found this out afterwards, you could go after the seller and say, hey, you didn’t disclose that 20% of your customers aren’t paying us and we were supposed to service them for life. That’s a pretty big piece of information to leave out in the sales process for sure.

Rob: Yeah. As I said, I’m pretty bummed about it. I actually asked him for some clarifications and I said how many are there, do you get support requests from them. And he basically said, “We do get customer support requests from them. We’re paying for an agent to answer from everyone and those are included.” I was asking what the actual costs or is this negligible. He basically said, “We have 197 active subscribers in Stripe who are paying customers, then we have 122 lifetime customers paid a one-time fee.” It’s hard to tell how many of these are active on a regular basis, but like I said in my previous point it looks like quite a few are active judging by the volume of customer support requests.

I feel the same way. The seller screwed you. I said, “I don’t know your purchase price, but depending on how you feel about this, it might be worth freaking out to the seller and basically saying, you owe us some money back, like you breached the contract.” Basically talk to a lawyer. If you paid $30,000 for this, then it’s probably not worth any of that, but if you paid $150,000, $200,000 for this then it starts to become a thing where getting a lawyer to write a letter is an issue.

Einar: It depends how you did it. A lot of the time, these templatized deals for the smaller stuff, there is some stuff in there that’s, like did they make reps and warranties in the asset sale or whatever that they now have breached? It could be that there are certain things in there that says, yeah, we disclosed all XYZ. There could be some remedies there. Purely tactically going forward, the question is yeah, I agree. I think the seller at least was a little coy about the truth.

Rob: Disingenuous? Yeah.

Einar: But I think going forward, it’s like, okay, what would I do with those customers. It’s not the customers fault. They paid for a lifetime thing. Should they be punished because the company has changed hands? My gut feelings says no.

Rob: Me too.

Einar: It depends. Is there something you can do to not keep upgrading those people? If you’re adding features, then just don’t add it to these guys’ plans. Eventually, some of those people will be like, hey, I want this feature. In which case you’re like, great, now you need to upgrade out of your lifetime plan or whatever. That’s probably the approach I would take.

Rob: Yeah. One other piece of advice I gave him was, “In your shoes, I would try to assess the actual damage so if you have a last login date in the database, you look through the 122 customers to see how many have actually logged in.” My guess is it’s not as many as you think because churn. It’s just simple churn. Even when you’re paying for things, often people stop using it. If you only have 5% of those people churned per month and somewhere sold 4 years ago. That’s 2017, over three years.

There’s a strong possibility that maybe it’s only 30 people. Thirty of these lifetime, 50 of these lifetime are still using it. I wrote this whole email and then I said, “My gut is that this is not worth pursuing, and if the company made a lifetime deal…”

Einar: Not from the legal side, yeah.

Rob: Like you said, get the existing customers to pay more. I think your time is better spent marketing and sales rather than looking backwards. This is a one-time thing, it’s a big shock, but if you start adding 10–20 new customers a month, which maybe you should, 10, 20, 30 a month, then this will become inconsequential. Again, not knowing every detail and there’s a principle to it. This is where that emotional side comes in. The principle is holy […] in my pants off right now.

Einar: I’d be pissed will be my principle.

Rob: But is it worth the time, effort, and the energy to go back into it. That’s where I would try to determine how many are actually using it. All right, hopefully that was helpful, Dan. Super bummed for you man. Don’t sell lifetime deals if you’re in SaaS. AppSumo is probably the one exception I would say and if you’re going to sell, then you disclose when you exit. That hey, we do have these users and you can give reports of this is how much they used on whatever basis. And also know that if you do an AppSumo deal or you sell lifetime deals, there’ll be some type of ding against you. You may have to give something back to the seller as you’re going through. Hope that was helpful.

Next question is about something that we hear about quite a bit. It’s how to do enterprise security assessments. It’s from Philippe. He says, “Hey Rob. First of all, thank you for the amazing show. I’m a new listener but already in love with your show and consider it the best podcast for running a business. I’ve discovered so far and I’ve tried a lot. I have a specific question on enterprise security assessments.

I run a SaaS app. We’re a small startup, started as a hobby, we’re now 6 people, $25,000 MRR, we’re averaging 7% month over month growth for the past 2 years. Every now and again, we get some individual users from big enterprises and they usually send us a big information security self assessment questionnaire with 150 questions or more that if we passed, it gets us on their internal list of approved vendors.

Unfortunately, most of these questions are clearly targeted for bigger companies that have a lot more resources and we need to answer it negatively as we just don’t have the time or human resources to have all these complicated procedures and policies they ask for.

So far we’ve had mixed success in answering these assessments. Sometimes, we have passed but sometimes we have not, basically failed or have been rejected. One time, we actually got a simplified list of requirements to work against. But every single time, this was a ton of work for us, which is not justified by the single or few licenses that the individual and these companies need.”

That is the key statement, that entire thing out there. I’m going to let you answer this one first. But let me finish it. “On the other hand, we always feel we need to do it as this is our step in and once we’re in, we can expand much more easily. Though even that is not always true, as it turns out different departments in the same company have different procedures and so on.

My question is do you have experience with this, is there a way around it for small businesses like ours. We’re thinking of preparing our own document that answers the main questions we find relevant and offering that to them instead, but we’re not sure if that would work. Any thoughts are helpful.” You get the first crack at this one.

Einar: We see it all the time.

Rob: Yup.

Einar: A super, super common thing. I think you’re right. The key thing is here, yeah, this is inevitable if you’re going to sell to large enterprises. Inevitable. In some cases, it’s because they have their own internal policies that they might be doing certain things that they’re promising to the public markets that they have to be able to do in terms of compliance, following some legal requirements on the national or supranational level. There’s a bunch of reasons why these guys will never say like, oh, you’re a small company. That’s totally fine, don’t worry about it. I think that’s the start of this.

The second piece is how do you get around it? Certainly, once you have seen a bunch of these, there’s an option to have your own answers to most of the questions most of the time–type of thing and hope that that works. But honestly, what we’re seeing with TinySeed is most of the time is that they need some sort of a certification.

A lot of the time, particularly if you’re pricing right and selling the right sized plan to these businesses—which is the key thing—then it’s probably worth doing something like SLC2 Certification or something like that. If you’re certified for these kinds of things—the SLC2 is probably the ones we see most often—then in some cases, they’re like, oh, that’s okay, we don’t need this questionnaire then if you’ve checked the box.

A lot of the time, on the enterprise side it’s like are they ISO so-and-so certified or SLC2 certified? If not, answer this giant list of questions. In many cases, it’s easier just to get certified beneath that cost because—this I think is the key thing you are leading to—if you’re going to jump through the hoops of answering 150 questions and things, why would you even offer to sell an individual plan or something?

For most of these people, they don’t care. If they’re having you jump through the hoops of doing this kind of security assessment, then price is immaterial to them for all intents and purposes. If you’re at the end of that, sell them something that’s $29 or $79 a month, then you’re probably leaving probably a couple of thousand dollars a month on the table for no reason whatsoever.

Rob: Yeah. That was going to be my kicker is, if you’re going to do this, minimum annual contract value $25,000.

Einar: I think so.

Rob: That just becomes what it is. Maybe it’s not that hard, but maybe it’s $18,000 or $20,000 or something. It has to be worth your time. The offer of we’ll do this and we’ll buy a few licenses and then you’ll be in the company. Nope. Sorry, can’t do it. Can’t beat it. We don’t do RFPs and leave without a minimum contract value of X amount. Again, somewhere between $20,000 and $40,000 is probably where I would put that.

You’re right. The SLC2 is like the silver bullet for this. The struggle is, isn’t it $30,000 up front? I believe it’s very expensive.

Einar: Yeah. What he is saying in terms of the size of his business and the growth that he has, I think it’d  be worth it for him. I think it’s a pricing thing. I’m guessing you haven’t got your enterprise, Philippe. You don’t have your enterprise pricing right, that’s why you’re concerned about this. You’re either selling the wrong kind of plan or you don’t have an enterprise plan that captures all the value that you’re providing to these businesses. Once you solve that, you’ll be like, oh okay, yeah, we’ll do SLC2.

That could be the only difference. You literally could be like, maybe the large enterprise, the Fortune 500 or whatever are perfectly able to get by within the constraints of your mid-price plan or whatever, but if they need this security assessment, or they need single-sign-on, or they need some other custom contracts red lining your terms of service or something, that’s what kicks them in on the enterprise plan and now it’s 20 times more expensive.

That sounds insane, particularly most developer-type entrepreneurs, but it really isn’t. They’re used to it. They’re just like, oh yeah, sure. We just need this, and it doesn’t matter to us whether it costs $49 a month or $500 a month. It’s immaterial, but it’s obviously not immaterial to you.

Rob: Like you said, it doesn’t make sense from a distant pure logic perspective, but that doesn’t matter. That’s how it is. We see this over and over. This is some of the most common advice that we give and some of the most common mistakes we see with new companies. In MicroConf and people who write in here, and then in the TinySeed batches, the pricing is too low especially on the enterprise.

A couple other suggestions, Philippe, is episode 463 of this very show. I sat down with David Heller of Reimbi and we spent the whole episode, Troubleshooting Enterprise Sales. That’s the name of that episode. Part of that was this question of the security handouts. We had similar conversation, but it was basically build your own handout to be like, hey, this answers most of yours. He developed a lot of templates or templated answers, shortcut things that he could use to fill in because the questions are common but they’re not all identical. You can’t have a whole doc that answers them all but you can probably get 80% of the way there with just putting a bunch of stuff in Word docs and then pulling from there.

As Einar said, the real way around it is to get this SLC2. It’s just expensive and then you have annual maintenance, and it’s overhead of all the stuff. You have a million of these documents and procedures and such. If you’re not there yet, then yeah, you just got to struggle through and make it worth your while in the meantime. Thanks for the question, Philippe.

I think we have time for one more today. It’s from Alan. He says, “Hello. First of all, I really love the podcast and everything you do. Keep it up. I’m a full-time employee at a software company. I’m in a senior role and I’ve been here for over five years. I’ve come up with a SaaS product idea after finding a problem in my company’s engineering process. I’ve started creating a product to mitigate this problem. It solves a niche problem in general software development. So it isn’t related to my company’s product. It’s not competitive with them.

I’d love to use this product in my current company, but they help me manage the technical issues and to help validate and grow the idea. Should I have any concerns with what I’m doing? Can my company claim my idea as its own? What should I do now to protect myself? Any other things I should consider? Does it make sense to validate a new side hustle idea out of a company while working full-time at said company? Thanks for everything. Who knows, maybe I’ll be in TinySeed batch three.”

This was sent last October. The application process is over, but maybe batch four. Applications are open for that in July. Thanks for the question Alan. Einar, aside from looking at your employment agreement as the number one piece of advice because it’s in writing.

Einar: Number one piece of advice, yeah. Reading this, it’s like, yeah it’s finding a problem in my company’s engineering process. Immediately, that to me is a big red flag, okay. Started creating a product, solves a niche problem. It’s not related to my company’s product. Okay, well yeah, but there’s all these things around, did you do them in their time? Did you use their laptop when you were working on this?

I think it does depend on where you actually are, both which state in the US or which country and depending on how the laws are there. I would be concerned about this. Like he says, it’s not related to my company product, but he did come up with it because of a problem that he found at work.

You almost need a letter from the employer saying that hey, yeah, we’re fine with this. We don’t want to claim the IP. I can imagine if he did come to us and applied, we would be concerned with the IP that […] I think with the existing company, being this is our IP. He doesn’t have a right to spend it out. What do you think?

Rob: I would certainly look at the employment agreement. I think building something to solve a problem at your current company without having pretty explicit permission—by that I mean something at writing—is not a good recipe. Just building something on the side to solve other problems outside of your company, that’s different because it’s so much more clean cut, you can look at your IP, everyone in your employment agreement, and you can go to HR, the CEO, or your boss, whatever the structure is, and basically you disclose. That’s what you do.

You say, I’m working on a site project. It’s not competitive. This is the name of it. They have a form that you fill out and you say, I’m working on an XYZ project and I want to retain ownership. I’m not using company hardware and I’m not doing it during work hours. Some companies now have a policy that I’ve heard—I don’t know how enforceable it is in which states—that anything you build even in your off hours, on your own stuff they own—not to me, that’s […], but whatever; that’s over reaching—if it’s legally enforceable, then that’s a tough position that you find yourself in.

Definitely look at what you’ve signed and then consider your options. Once Drip and Leadpages merged, I knew two people who started side projects. Neither of them reported to me, but they went to HR and basically got explicit permission because they didn’t want the IP issue. They didn’t want there to ever be a question if they wanted to raise funds or sell or whatever. You need to have clean IP.

The thing that concerns me is the build it and manage the technical issues at my own company. It’s really gray and I don’t like gray when it comes to law. I don’t like gray areas when it comes to IP.

Einar: It’s like, well, it’s the utility tool that you built and used at work, do you think your work would value it? That’s what I would think.

Rob: Yeah. Thanks for the question Alan. I hope that was helpful.

If you have a question for the show, email questions@startupsfortherestofus.com. Best if you attach an audio file; it’ll go straight to the top of the stack. Otherwise at this point, it looks like we have about 12 or 14 questions in the backlog and I will get to those, again, as soon as possible.

Einar Vollset, you are on Twitter, @einarvollset and of course, people can go to tinyseed.com/thesis if they want to look at the amazing document you put together about TinySeed’s investment thesis. It’s pretty impressive, honestly. If you haven’t read this, even if you’re not going to invest in TinySeeds, it’s pretty cool. Just the idea of you did data analysis because you’re a data nerd.

Einar: Thank you.

Rob: I say that with all the love. But just look at how things pan out and just that trying to take a more of an indexing approach into early-stage SaaS is really the way to go. That’s what allowed us and a big reason to raise this second fund that’s going so well. I’m excited about it.

Einar: Me too.

Rob: Thanks for coming on the show today.

Einar: Thanks for having me.

Rob: Thanks again to Einar for joining me on the show. If you like these shows, I would really appreciate a five-star review and wherever you listen to your podcast, whether that’s Spotify, Apple Podcast, Google Podcast. Is that what it’s called these days? Google Music? Who knows. Just click for a start button and try to hit the five. Really appreciate it. I believe we’re approaching a thousand worldwide podcast ratings.

You don’t even have to do a full review with the sentences, verbage, and compliments and things like that. If you hit the five star and you submit that, I appreciate it. I’ve been trying to move towards that 1000 rating mark.

Thanks for joining me this week. And I will be in your earbuds again next Tuesday morning.