How I Reverse Engineered A $100 Million Exit - Jason Lemkin

Jason Lemkin’s first million (00:00:00)

• To reverse engineer a successful business, it must have economies of scale that generate $300,000 to $400,000 per employee.
• Jason Lemkin is known for his expertise in software and has been investing in startups as a VC since 2013.
• He achieved his first million from selling a startup called Nanogram Devices, which developed implantable batteries from nanomaterials.
• Nanogram Devices was sold to a competitor after 12 and a half months for $50 million.
• The company raised $9 million in seed funding but gave up 70% of the company in the first round.
• After Nanogram Devices, Lemkin founded EchoSign, which was acquired by Adobe and became a pioneer in web-based document signing solutions.
• EchoSign reached $1 million in monthly revenue while burning $4 million.
• It achieved 12 million ARR, grew 100% year-over-year, had 110% revenue retention, and was cash flow positive.
• Despite these strong metrics, the company was sold in 2011 before the full understanding of recurring revenue business models.
• EchoSign had a 36% market share and was growing rapidly with minimal funding.

Reverse engineering a 9-figure exit (00:04:19)

• Jason Lemkin discusses reverse engineering a successful business exit.
• Scott sold L2 for a significant amount and wanted to achieve a nine-figure exit in the data business.
• He worked backward, identifying key factors such as international presence and charging at least $50,000 annually for services.
• Lemkin emphasizes the importance of reverse engineering to understand the rules of the game and optimize for success.

Rule 1: New minimum is $400K per employee (00:05:32)

• Lemkin introduces the concept of reverse engineering a business model.
• The new minimum revenue per employee should be $300K to $400K to ensure scalability and long-term success.
• In the past, software companies like Adobe and Microsoft achieved $1 million in revenue per employee.
• Due to various factors, the revenue per employee dropped to $100K in 2021, resulting in inefficiencies.
• The pendulum has swung back, and public SAS software companies now aim for $300K to $400K per employee.
• Companies must reach this level of efficiency to be sustainable and successful in the long run.
• Venture capital and angel money can bridge the gap to reach $400K per employee, but the business model must ultimately be profitable and scalable.

Rule 2: Go multi-product (00:07:58)

• By the time a company reaches 10,000 customers, it should have a second product that has the potential to be bigger than the first.
• The second product should not be a mere extension of the first but rather something significantly larger.
• Founders often make the mistake of creating product extensions that are too similar to the original product, which limits growth potential.
• The second product should be more ambitious and have the potential to surpass the first product in terms of revenue and impact.

Rule 3: Your second product must be bigger than your first product (00:09:40)

• The speaker shares an example from their own experience of launching a subscription service called Trends.
• Despite initial success, the pricing was set too low at $300 per year, which limited its potential revenue.
• Within 10 months, the subscription service reached $5 million in annual sales with a small team of four or five people.
• The speaker acknowledges the mistake of not making the second product bigger than the first and emphasizes the psychological challenge of prioritizing a new venture over the main business.

Cheat code: Double your prices (00:11:05)

• Founders often underprice their products, prioritizing customer acquisition over revenue optimization.
• Underpricing can be corrected later for new customers, but it's harder for existing customers.
• Hiring a VP of sales can help increase revenue by optimizing pricing and leveraging sales expertise.
• A good VP of sales can identify the true value of the product and negotiate higher prices without compromising customer satisfaction.
• Founders should pay themselves market rate as soon as possible to avoid burnout and financial strain.

Rule 4: 30% of your revenue is international (00:13:48)

• Aim for 30% of revenue to come from outside North America.
• International expansion can be intimidating, but it's crucial for growth.
• Building a strong brand and finding a niche where you excel will attract international customers.
• Tech-focused early adopters will find you if you're the best vendor.
• Invest in areas where you see a cluster of customers (5% of revenue).
• Build your brand and establish yourself in a niche where you're among the top 2-3 players.
• International customers, especially in tech-focused industries, will find you if you're the best vendor.
• Once you reach 5% revenue in a specific region, invest in supporting that market.

Rule 5: Localize your product (00:15:43)

• Make your product open and support it.
• Localize your product early, even if it's not a super complicated engineering task.
• Most engineers don't want to localize the product into multiple languages.
• Don't dismiss customers from non-English speaking countries.
• If you have customers from non-English speaking countries, take a pause and figure out what's going on.
• Salesforce got 10% of their revenue from Japan in the early days, even though it wasn't part of their initial plan.
• Yext, a company that Howard Lurman founded, also became successful in Japan.

Cheat code: Remove friction (00:19:05)

• Organic price points exist for products.
• Anchor your pricing around similar products.
• Charge the same or slightly lower than competitors.
• If you're truly more valuable, charge accordingly.
• Founders should try harder to find comparable products.
• Price similarly to similar value apps to remove friction.
• Underpricing as a founder removes friction and helps close deals.
• Removing friction is a founder's job.
• Common friction points include requiring contact with a sales rep, complex sign-up processes, and poor support.
• Remove friction wherever possible to increase sales.

Rule 6: 100% net revenue retention (00:22:42)

• Churn is a major obstacle in achieving a net revenue retention of 100%.
• Product integration into users' workflows and providing essential value can effectively reduce churn.
• HubSpot successfully improved revenue retention by moving upmarket, offering multiple products, and enhancing value at the same price point.
• Businesses with high churn rates (over 3% monthly) struggle to replace lost customers and face limitations in revenue growth beyond double-digit millions.
• The newsletter business model involves organic growth to 100,000 subscribers, followed by paid marketing to reach millions, and eventually relying on brand recognition for subscriber retention.
• Newsletters face high churn rates, losing approximately 30% of subscribers monthly.
• To overcome churn and achieve scale, businesses require double-digit monthly growth.
• Understanding the specific business model and churn rate is essential in determining the necessary growth rate.

Business models that won’t get you there (00:29:01)

• The speaker's conference business generated $3 million in revenue over several years, while their software company reached $30 million in revenue in a single year.
• Despite the challenges of organizing large-scale events, the speaker found success by building a community around content and hosting meetups that attracted thousands of attendees.
• The conference business became profitable after surpassing $15 million in revenue and was eventually sold for a multiple of its earnings.
• British companies often acquire trade shows that have been around for 40 years and generate a steady income, as they can be worth 20 times their annual revenue.
• Jason Lemkin's friend, Ryan Dice, sold his company, Traffic Summit, to Hive.

100M conferences (00:33:38)

• Health, founded by the individuals who sold ShopTalk and Money2020, organizes trade shows that operate as three-day marketplaces, connecting buyers and sellers and facilitating transactions.
• The company generates revenue by charging attendees a fee for access or a premium for setting up meetings with potential clients.
• Despite their tech backgrounds, the founders chose to focus on trade shows due to their ability to scale quickly and generate significant revenue.
• In the tech industry, only the top-performing companies have significant value, while others struggle to survive.
• Raising venture capital may not be the best option for entrepreneurs aiming to build wealth within a five to ten-year period.
• Bootstrapping and raising a small amount of capital can be more suitable for entrepreneurs aiming to achieve their first few million dollars and gain financial independence.

Rule 7: Don’t raise double digit millions (00:39:35)

• Raising a few million dollars can lead to dilution but doesn't significantly impact optionality.
• Raising between half a million and two million dollars can be used to hire talent and accelerate investment.
• Raising over $10 million commits the company to a billion-dollar exit, and anything less is seen as a disappointment.
• Raising double-digit millions comes with high expectations and pressure, as investors view venture capital as free money.
• Founders today don't feel the same sense of responsibility towards investors' money as they used to.
• Jason Lemkin, a business person known for reverse engineering a $100 million exit, shared his experience on Twitter (@Jason LK) and LinkedIn.