This Week in Startups - Is Netflix over cancel culture? + Startup Checklist: Choosing a Business Model | E1304

Episode Date: October 14, 2021

First, Jason covers the blowback Netflix is facing from Dave Chappelle's new special "The Closer" and the masterful response from Co-CEO Ted Sarandos (2:09). Then, continuing our startup checklist series, Jason explains 10 items founders need to go through before choosing a business model (25:08).

Okay, we have an amazing show for you today. I'm going to cover 10 more points on our 100-point founder checklist, which you can find very easily at this week in startups.com slash checklist. In points 11 through 20, today, I'm going to cover choosing a business model, which is critically important. If you pick the right business model, venture capitalists and angel investors in seed funds will throw money at you. And if you hit the wrong one, they will run from the hills.

They'll tell you, how can I be helpful? but not a fit for our firm. So, it's an important episode. Listen to these points on the checklist and make sure you bring a pen in paper. Before we get to that, however, I want to cover the massive blowback that is building against Netflix because of Dave Chappelle's new special, The Closer. And I want to read to you the masterful response from co-CEO Ted Sarandos. I think corporations might be fed up with cancelculture at this point,

and they're just going to say to everybody, If you don't like it, don't work at this company. And if you don't like it, as a customer, you can change the channel. We really might be at a tipping point. Let's get into it. This week in startups is brought to you by Vanta Compliance and Security shouldn't be a deal breaker for startups to win new business. Vanta makes it easy for companies to get a SOC2 report fast.

Twist listeners can get $1,000 off for a limited time at vanta.com slash twist. Odo is a fully customizable and fully integrated suite of business apps that lets you build and scale your stack as you build and scale your business. Your first app is free forever and right now Odo is offering $1,000 of your first implementation pack at Odu.com slash twist. That's ODO.com slash twist. And LinkedIn Marketing. To redeem a $100 LinkedIn ad ad. credit and launch your first campaign, go to LinkedIn.com slash checklist. That's LinkedIn.com slash checklist. So everybody by now knows Dave Chappelle had a new special on Netflix called The Closer.

Some of you've seen it. Some of you haven't. I'll comment a little bit on it. But there is a bigger picture here. This piece, which was released on October 5th, has had a bit of a backer. backlash again from trans individuals who feel, and glad, the gay and lesbian alliance against defamation, people feel he is punching down, something he explicitly addresses in the closer, Dave Chappelle does. And this is created, I think more notably for this week in startups, not just this public debate over where's the line in comedy, but employees working at a firm, because this is a business show. The controversy is now leading. to a bit of an outcry inside of Netflix, which is super fascinating because Netflix is a content company. It is not a software company. It's not making headphones or iPhones. You know, this is a company that is in the content business.

Content is obviously rated. Content is not for everybody. And so it's quite notable that there are employees internally who are very upset by this. Some people apparently resigning. There were a number of people who were suspended inside the company who were trans, according to news sources, who I guess tried to go to a meeting that they weren't invited to or they were suspended and now they're reinstated. So it's creating a little bit of a civil war inside of Netflix, perhaps. We don't know exactly how many people inside of Netflix are truly offended or how many people are pro. Chappelle having the platform to do his art, or how many people who are indifferent, right? So there could be a range of experiences inside the company. There's going to be some kind of a walkout on October 20th, and Netflix is planning to host an internal event with trans activist. Alok Vedmanin. I hope I pronounced your name correctly. Alok. And so obviously, Netflix is creating a dialogue here. They're not, you know, sticking their head in the sand or, nor are they avoiding it. Over a thousand people have called or messaged the company to complain about the special in the first week of its release via a person familiar with those metrics to Bloomberg, which would be a very small number of people, I think, overall. I would think more parents would

have called to complain about Squid Games, which is ultra-violent and that all kids are watching and is sadistic and crazy. I mean, I enjoyed it. Don't get me wrong. I kind of hate watching Squid Game. I was like, why am I watching this? It's so dystopping and not making me feel good, but it was intriguing and I wanted to get to the end. So I don't exactly recommend Squid Game, but I love movies and film and I like the Korean horror, you know, dystopian, crazy psychological drama space. Just like I like the 50s and 60s version of that with Manchurian candidate and suddenly less summer. I just kind of like I find it interesting on a psychological basis, but I can't say I was exactly a fan of the ultraviolence in it. In the same way, if you saw a Clockwork Orange, there were aspects of Clockwork Orange,

you probably found intriguing, but also found it so hard to watch because of the ultraviolence. So here's the most interesting part of how Netflix is responding, co-CEO Ted Sarandos, who is kind of the content guy to Reed Hastings, who is the, you know, kind of the management tech product guy. He sent a memo to the entire company this week on Monday. You know, here's some quotes from the memo via variety. This is Ted Sarandos. We know that a number of you have been left angry, disappointed, and hurt by our decision. Put Dave Chappelle's last special on Netflix.

With the closer, we understand that the concern is not about offense to some content, but titles which could increase world harm. So he's really stating here, like we all know if you're working at a content company, some people are going to be offended, right? People are offended. That doesn't mean you don't make art in the world. That doesn't mean you don't make content. doesn't mean you don't do commerce.

So he's kind of giving the employees credit for, hey, I know that you're not complaining about this because it's offensive to some people, right? So he's actually giving them a lot of credit. So this is really, I think, well crafted by Ted. And then he says, you know, but what you're really concerned about is titles, which could increase real world harm. So real world harm, as in somebody saw something in a television show or a movie. And then they went into the world, inspired or triggered or triggered or

in some way that content increased real-world harm. So this is a big topic. It's been a topic for a long time. It's been a topic for video games. And we're even talking about it tangentially with young girls on Instagram who maybe they see, you know, a body type that is unattainable or very difficult to attain or very like couple of standard deviations over from the norm. And they try to aspire to that. And it leads, of course, to body dysmorphia and bulimia, anorexia and other eating. disorder. So here's what he says. The strongest evidence to support this is that violence on screens has grown hugely over the last 30 years, especially with first-party shooter games, and yet violent crime has fallen significantly in many countries. Adults can watch violence, assault and abuse, or enjoy shocking stand-up comedy without it causing them to harm others. So he makes in just really two long sentences, but well-crafted ones, I will say that, These are compound sentences that actually are easy to speak. That's a sign of a good writer is when you can do a compound sentence and you don't lose steam when you're reading it.

It actually becomes crystal clear. You shouldn't do a compound sentence, multiple fragments in one sentence, if it doesn't read elegantly and easily. And those are two sentences as a writer. I can tell you read very easily. And he makes his case really clearly here by not starting with comedy. He basically says, let's level. this discussion up. Let's talk about actual violence in, you know, on screens. And he actually describes in detail, adults can watch violence, assault, and abuse, right? He doesn't just say violence. He's,

he's saying assault and abuse. He's kind of unpacking the whole thing here and saying, or with the M-Dash, enjoy shocking stand-up comedy, M-Dash, you know, the two double-dash is like, he actually puts a little dash in there and drops in a little fragment of a sentence. This is something nobody reading it can argue with. That's the, that's the strategy here. as a writer when you make a statement like this is you want to get the person nodding, yes, right? So he's nodding. You're nodding as you read these sentences. Yes, I agree. Yes, I agree. Oh, that's very nice of you to under that you have framed this as real world harm, not offense, right? Or offensive. So here he goes to to dive deeper into stand-up comedy. And this is

just a master class. This, this memo is a master class in communications. Stand-up comedians often expose issues that are uncomfortable because the art by nature is highly provocative. As a leadership team, as a leadership team, so it's not just him, we do not believe that the closure is intended to incite hatred or violence against anyone, per our sensitive content guidelines. So what he's saying here, and again, he's made it very difficult to argue with him. The leadership team is very clear that Dave Chappelle, in the closer, did not create this content to incite hatred or violence against anyone. I think this is a pretty good argument.

And if you take this argument and you apply it to other places in the world, the fact is, tragically, you could have a mentally ill person who actually sees the closer and who actually commits an act of hatred or violence. It is possible. Sock two compliance is critically important. Why? If you don't have your sock too tight, you can't close major customer. We all know that, and it's really that simple.

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unlock bigger sales and give your employees time to work on more business critical assignments. Vanta's giving Twist listeners a $1,000 discount on their subscription at Vanta.com slash twist. That's V-A-N-T-A dot com slash twist to get 1,000 off. If you're counting, that's 10 hundies. Go get it right now, vanta.com slash twist. So then we get to the bigger question, which people don't want to bring up. This is the bigger question here. should we be allowed or should society condone art that is provocative if there is a chance

even a small chance that it could lead to somebody doing something directly because they watched it that is harmful to others should we as a society allow that and so here's how you can frame that. You know, there were people who read The Catcher in the Rye or were inspired by Jody Foster and went out and committed horrible assassinations, murders in the names of people who had nothing to do with those crazy people. We do not need to ban the Catcher on the Rye because some insane person was inspired by the book to then go attack somebody. This happens all the time. it could be correlation not causation. In other words, any trigger, it could have been the closer, it could have been Donald Trump,

it could have been, you know, another innocuous piece of media. A person who is mentally ill, and let's face it, we have, we do have a mental illness crisis in this country, could be inspired by the closer to do something. That doesn't mean that Dave Chappelle intended it. And I wonder if on the other side, if anybody actually believes in his heart, Dave Chappelle is trying to incite hatred or violence. Anybody actually believe that he's putting out his stand-up comedy to inspire hatred or violence against anybody else? It's clear that he is not. Clear he is not, right? I mean, he kind of makes that point in the closer when he describes his

friendship, no spoiler alert here, with somebody who is trans. So, a trans woman, in fact. And so it's a complicated issue, the nature of gender and sex and biological. sex and how people want to be referred to. Of course, it's a challenging issue for many people. I don't find it particularly challenging if you want to be called something different. I don't care. You have a name and you have a pronoun. I don't understand why this is so triggering to a large number of people.

I do understand on the issue of like some practical reasons of why this could be complicated. Like, how does the Olympics handle it? Like, I don't actually have an answer for that. I, you know, if somebody, I think they actually did a testosterone reading. And so the amount, I never thought that would be the solution. If you asked me in 100 years, like, would I come up with that solution that we're going to take people's hormone counts and then that would determine their gender for the Olympics? I mean, difficult, strange questions to have to answer.

And to the people who are coming up with the solutions, kudos. I don't think I could have come up with them. But the fact is that people can be inspired to commit violence based on content they've seen. I shouldn't use it's weird. I shouldn't use it's weird. we're supposed to say mentally ill. Okay, but mentally, severely mentally ill, aka crazy people. Like, if they're really on the edge of, you know, derangement, yeah, they could go do that. That doesn't mean that we shouldn't have art in the world. And you do have to understand. Yes, media inspires

behavior. That is clear. Nobody would debate media doesn't inspire behavior. The question is, does media inspire violent behavior? Does it inspire abuse and harm? And how is it exactly? correlated. There's no easy answer here because it's kind of both. Yes, it can inspire people to violence, but it doesn't do it on a one-to-one basis. It doesn't do it in a statistically large percentage of people. And so if it's going to happen on the margins, are we really going to have everybody in society not be able to experience art? Are we not going to be able to have somebody get murdered in a film and have that? I mean, it's basically the premise of many thrillers is somebody died and we have to figure out how they died. So it's really important to note

that Chappelle has said, you know, actually in this special himself, that he's not making fun of trans people. He's making fun of white people. He's very specific about who his target is, you know, that he specifically is targeting white people and racism in his. And he's kind of putting trans and people of color into a similar group that they're both experiencing racism or bias and violence and getting the short end of the stick here in society. And I think he's kind of clear about that as well. So I will open this aperture now to a bigger discussion, which I think is, are you getting the sense that corporations have had enough of cancel culture and virtue signaling?

I wonder if Ted Serandos would have come out this strong and said, hey, listen, he's essentially saying, if you don't like it, you should change the channel, which I remember when I was growing up. It's really interesting generationally how we see things differently. Gen X, when we were raised, we were raised that absolutely freedom of speech was such a critically important tenant of a democracy that you had to accept speech you did not agree with that was offensive and that part of the package of a free society was that some amount of free speech was going to be uncomfortable and, you know, If the Klu Klux Klan wanted to march down Main Street, the ACLU would back them up.

Not because they agreed with what they were saying, but they agreed with their right to say it. That's how our generation, Gen Z for the millennials and the Gen Z's, this is how Gen X was raised. Now, it's really interesting to watch. Millennials kind of shift a little bit over and then Gen Z shifting all the way over. And now you, I think, have the corporation saying, listen, there's got to be something more reasonable than canceling Dave Chappelle, whose body of work is unbelievable. He's the greatest comedian on the planet today, by far. Certainly, I think everybody would agree with that.

If you asked 100 comedians who the greatest comedian is right now, they would say Dave Chappelle. I mean, they might make a joke, but they'd say, me then, Dave Chappelle. And so are we canceling Dave Chappelle now? I mean, because he clearly does not intend harm here, but it is clearly offensive to people. So I get that as well. And it relates to what we saw with Brian Armstrong, I think, at Coinbase. He said, listen, we're a mission-based company. And I talked about this on episode 1295 and all in episode 49.

At the time, Coinbase was worth like $10 billion. Now it's worth like $50, $60 billion. He just said to everybody, if you want to talk about politics, if you want to talk about any of these charged issues, do it on your own time. Go find another company if you don't like it. Some people walked. He gave them like a super generous package when you're a company with unlimited resources

like they were, tons of cash in the bank. giving people an amazing severance package is just a way to make it for somebody who is unhappy to say no. Like imagine right now you are on a scale of one to ten, a six and how happy you are at your job. If I offer you two months of severance, how many people are saying yes? How have you six months of severance and it's a six for you? How many people are saying no to that deal? Like 100% of people who rate their experience at work, a five, six or seven, if they got a six month or a year package, they're out. And that's basically a new technique I've seen in companies that are dealing with these issues is just make the exit package so strong that people voluntarily opt out.

It's really kind of savvy, you know, for both parties because you create this exit package that results in signing a non-disclosure. We agree that as part of this payment of six-month salary plus vesting your options a year, whatever it was, that you're going to, you know, not trash the company on the way out, quite reasonable. and we won't trash you because it will be reciprocal. But what Brian Armstrong was saying, you know, I think was, listen, I just don't have the energy to deal with cancel culture. It's a distraction. And I think that's now what Netflix is saying to their employees. Listen, I understand it, some of these things are going to be offensive. And we don't believe they're causing harm.

But we respect if you believe that. And if you do believe that, you, as a customer, you can change the channel. You can cancel your subscription. So they're putting a line in the sand with the customers. We're not taking it down. if you don't like it, don't watch it. There's other things you can watch. Or you can cancel your subscription.

I think that's what Ted's saying here is like, listen, you're an adult. You signed up for this paid. We're not putting this on the open airwaves. This isn't like a, you know, FCC issue where, you know, it's on a public airwave. You're paying and opting into getting this. So if you don't want it, don't pay us. And he's saying to employees, if you don't want to be at a company that leans towards the free expression, uncomfortable,

speech, pushing boundaries in comedy, there's the door. You know, we'll hash it out with you, but if you're going to stay here, you know, there's always going to be something here that's going to be controversial. Feelings will be hurt. And Armstrong did a Twitter threat about the reaction. And so as evidence piles up that standing up to these issues or saying, hey, we're not going to cancel this person, we're drawing a line here, now I think is the trend we'll see. So there's always a pendulum in these discussions. And I think most people are getting a little tired of the cancel culture. They're getting a little tired of the virtue signaling. I think that's why I think Trump actually ran on that, right? Like, wasn't that part of Trump's positioning? Is like, you know,

we're going to be bad boys and say what we want and you can't cancel us and we're uncanceable. I think that's kind of the appeal of Joe Rogan to, you know, Spotify's not canceling him. So now you have Spotify, Coinbase and Netflix all saying, like, here's the line. We'll have a reasonable discussion about content, but there's a line here. We're not getting rid of Joe Rogan. We're not getting rid of Dave Chappelle and you're not going to come to work every day and create a distraction and talk about whatever the most charged issue in the world is. And we'll see what happens with Apple. I think Apple's going to be the real test cases. Apple going to say to their employees, like, enough. You know, we're just not going to comment on Israel versus Palestine. We're not going

to take a position on certain things. And we'll see. Spotify, you know, did concede previously by taking down the Alex Jones episode, if you remember. Alex Jones, of course, was, I think, thrown off of every platform for spreading disinformation and slandering people. And then he lost his lawsuit against the Sandy Hook parents. I mean, if you just think about there's an example of content that probably does create harm. And you could probably put a one-to-one to it, right? like Alex Jones is, you know, really spreading conspiracy there is. Somebody who spreads conspiracy varies over and over and over again.

I think there is a reasonable and attacks the parents of murdered children. Like, it's so dark that I could see Spotify saying, you know what? I can even see Joe Rogan saying, like, I don't have a problem with it. Like, I'll take my money and yeah, that episode's supercharged. We'll just leave it on another platform. Because there is something about platforming, and that's the larger issue. Are you giving people a platform to spread this? hate or to spread misinformation.

And again, it's a nuanced, that's a nuanced issue. When it comes to comedy, people are kind of, I think, coming to a decision that that's going to be a safe space for people to say things that are offensive or maybe push the boundaries. And I think comedians are going to stand the ground on this and obviously Netflix is as well. So I don't think it's the end to cancel culture. But I think something is changing in corporations where, They're just saying, we're going to have to put our foot down at some point.

Let's make this, the hill we're going to die on. So the hill that Netflix is going to die on is Chappelle. The hill that Coinbase is going to die on is politics at work. The hell that Spotify has chosen to die on or to fight their last battle is Joe Rogan. And so I'm interested in your thoughts on this. You can add mention me on Twitter. If you listen to Twist Often, you've heard me talk about Odoo Suite of Business apps a lot and they are sweet. Well, they're going to give you your first app free forever and a thousand

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Hey, everybody, we decided to make a hundred point checklist for founders who are starting companies. Now, the first 20 of them might be obvious if you've started a couple of companies and maybe as we get, you know, into 20 through 100, these might be things that you as a serial founder, somebody who's done it multiple times might get more value from. But this is our second installment of the startup checklist. In the first installment, we asked questions around your suitability to be a founder, right? Like the inherent qualities and skills you have. So we said, hey, listen, are you solving a problem that has personal relevance?

Can you yourself build a great product? Or question three, can you recruit elite talent to join your team? Four, do you understand your ideal customer profile and who your ideal customer is, who you're selling to? We asked how much personal runway do you have? How much are you willing to sacrifice or set another way? Are you resilient? Do you have a bias towards action?

And we unpacked why that's important. Do you need a boss? Do you need somebody to be monitoring your work? We asked that question in the first 10 questions in our checklist. Do you make excuses and do you wait for permission to do things? And can you build a startup flywheel? And do you even know what one of those are? So that was our first installment.

Today, we're going to cover business models for your startup. It's critically important for you to understand your business model because what we're doing here in Silicon Valley and in the venture capital space is we're giving you milestone-based funding. You hit a milestone, we give you money. You hit the next milestone, we give you more money. That's typically how this goes. And you have to build your credibility, and you have to build your performance over time to get more money to fuel your vision.

If you can't hit the milestones, you really are unlikely to clear market with venture capitalists. So it's one of the beautiful things and also one of the brutal things. In fact, it's brutal, if I were to pick a word. It's beautifully brutal. that you perform or you're out of the league. It's basically that simple. If you're in the NBA, there's a certain number of slots. You're in competition to be on your team and to make the 15 on your individual team. If you're free throw, shooting sucks. If you don't work hard in practice, you're just not going to get a seat, right, on the bench or even in the starting lineup.

Same thing with startup. So let's get into it right now. First question I want to ask you. So this is our 11th overall question in the startup checklist. So I'll refer to it as question number 11. And you can go to this week and startups.com slash checklist. And you'll see this whole checklist. We're going to put it into a Notion page,

our favorite wiki, and you'll be able to go down there and see my notes. And it's live right now. You can go check it out. And we're hoping that this becomes a living, breathing document. Maybe you remix it.

Maybe you take some of the questions I'm asking here. Link back to it, give it credit, and take one of my points and debate it. Maybe you write a full blog post out of it. Maybe you, You do a clubhouse or tour spaces or call-in, you know, room about some questions on this checklist, or you adapt it otherwise for yourself and build upon it.

So founders know what the important questions are to ask themselves. So question 11, pick a business model that easily aligns with your product or service and customers. So what do we mean by this? There are many business models in the world. In venture businesses, there are a few that scale and get the returns. capitalists and their limited partners, the people who they're investing money from, on behalf of, like. And so if you look at all the great companies in Silicon Valley, in the technology space,

they basically knew how they were going to make money from day one. Now, sometimes they waited till day 500 to turn on that business model, i.e., an advertising startup like Google might spend a year or two just perfecting the search engine. Instagram might spend a year or two just perfecting their image-based social network. And then when they hit some level of scale, they turn on advertising. And that's one of the business models, advertising. Advertising, advertising business models are great, but they are not the only one. There are subscriptions, right?

You can subscribe to a product or service, be it com.com for meditation as a consumer, or be it slack or notion for your enterprise. So the business model needs to match the type of product or service you're offering, and it needs to match and be effortless for your customers. Now, if you're providing a free service that people are unwilling to pay for, let's say social media is not something people are willing to pay for because there's so many choices of free products out there. Well, you know, getting them to pay for it might be hard.

Previously, people thought that getting people to pay for content as consumers would be hard because, oh, Netflix is only $12 and look at how much you get from that. Why would anybody pay for a subset of that mid-a-tenths? or a subset of that dance videos or a subset of that exercise videos, you get the idea. Well, if they're really world-class and better than what's out there, then people will pay for it. And we've seen that through a lot of the investments we've made. FitBod and Com, come to mind, Steezy, and other ones.

So imagine if you pick the wrong business model, right? Let's say you're Uber. And instead of charging people, a percentage of the ride, you said, you know, it's $25 a month to be part of the Uber network. and then we take no percentage of your rides, right? The rides are just between you and the driver. It's a membership club. Well, people did try that, actually.

There were people who had concepts around that where people would either donate, like sidecar, or maybe there would be a monthly fee to be part of this marketplace. But that would have added a ton of friction. What people wanted was just obscureify or just abstract what I'm paying to Uber for the service and just make it easy. I don't want to pay a monthly fee. Of course, if you look at a company like Costco,

you know, Costco exists because they have a very compelling concept. You buy in bulk. Other services don't have buy in bulk. They sell you things as you want them. You know, you can buy one croissant or 10, but you're not forced to buy 24 like you are at Costco. So different business models will work, but you want to make sure that the business model is elegant

and simple. Elegantly simple is what we're looking for here. We give you a meditation app, you pay us. We give you software, you pay us. We're a marketplace. If you get a customer, we take a percentage of it. It's really simple, right? So let's look at number 12 on our checklist is focus.

You need to focus on a single business model. So ask yourself in this question, are you focused on a single business model? That would be how I would frame this question. Are you focused on a single business now? Now, why is that important? Well, it's very hard to build a product and to find customers for it. And then it's hard to get them to pay, right? But then to have multiple different revenue streams when you're starting out

means you're taking your team and cutting it in half. So we typically see this when somebody says, I'm going to build an advertising-based business. They don't hit critical mass. Then they try to turn on their sales team. Their sales team is selling, the advertiser say, oh, it's not enough. You don't have enough reach.

So why would I buy an ad buy? I want to spend $25K. The most you can take for me is $2,000. I'm going to go just spend my money on Reddit or Twitter or Facebook or Google, right? So getting bogged down in multiple revenue streams, in that example, the advertising people might say, okay, now we're going to charge a subscription. So now you have people trying to sell a subscription while another half of the company is trying to sell advertising. One side of the company is trying to restrict.

access to your content in order to get people to pay for it. And the other side is trying to sell. And we saw this at the New York Times, right? They were an advertising-based business. They were trying to get more and more people to the site. It wasn't working. They were losing the battle at the Washington Post, the New York Times, and every other newspaper to Facebook and Google, which had much wider reach and much more data on each individual user. So what did they do? Washington Post and New York Times. They didn't throw away their advertising business. They still have a vibrant advertising business, but they said, you know what? the number one business is going to be subscription.

Let's make that the majority of revenue. And they just turned around those giant aircraft carriers and, you know, got them to face in another direction and go in a different direction, which was subscriptions. Really hard to do. Really hard to do. Listen, right now, LinkedIn is going to give you a hundred dollar credit towards your first ad campaign. That's a hundy for you to get new customers to run some ads. Just go to LinkedIn.com slash checklist. LinkedIn.com slash checklist and get a $100 credit right now.

Now, let's look at your startup. Let's pretend you're about to launch a campaign. It tested well. Your entire team is happy. The creative's great. It's going according to plan, but you have this thought in the back of your head, and you should have this thought for a reason.

How do I ensure the people I want to target will be in the mindset to receive my message? Well, the answer is LinkedIn. Why? Because when you market on LinkedIn, your message reaches people who are ready to do business. LinkedIn equals business, business, LinkedIn. We all know that's the case.

If you're there, you're doing business, right? And that means your advertising campaign will work as hard as it can as soon as you launch it. Because there are over 62 million business decision makers on LinkedIn right now, waiting for you. That's why over 78% of B2B marketers rate LinkedIn as the most effective social media platform at helping their organization achieve specific goals.

So do business where business is done. Get a Hyundai, a $100 ad credit at this very new domain name. LinkedIn.com slash checklist. LinkedIn.com slash checklist. One word, terms and conditions apply because they're giving you a Hyundai. Imagine Netflix saying, you know, we're going to now give up 100 million plus people paying us 12 bucks a month. We're going to throw that model away and throw away that $10 billion or whatever they make. back of the envelope and we're going to throw that away.

And now we're going to go do something different. We're going to make it ad base. We're going to start selling ads. And everybody who is a user would be super confused, right? So don't create confusion inside of your own company, especially in the early days. Just keep it simple. Uber's a marketplace. They take a percentage of every ride.

Airbnb is a marketplace. They take a percentage of every transaction. Same thing with Etsy. Same thing with Patreon. Very simple. Com, it's just subscriptions. It's consumer subscription, right? Slack.

It's a subscription. Spotify, it's a subscription. And then some people like 8Sleep just sell you a bed, right? And then you're seeing some people who sell hardware saying, you know what? We'll sell the hardware and we want a subscription business. And when you look at those businesses, hardware plus subscription, they're really selling a subscription business and the hardware is part of the puzzle. So I would even consider those subscription businesses that just have an upfront cost for the hardware.

So Spotify doesn't charge you for headphones or, your iPhone or your computer, but those are kind of required. You just happen to have them. Well, with Peloton as the perfect example, they really want subscribers. If they make a couple of hundred bucks every time they sell a treadmill or a bike, fine, but that's really not their business. Their business is getting to a large subscription base. So don't get it super confused. Sometimes it can seem like there's two or three business models, but those would be adjacencies. And for you, I really want to see you keep it super simple. And to have the business model that people really want because the quality of your revenue is super important.

There are venture scale business models and then there are other business models that are not venture scale. What's an example of that? Well, subscriptions are the ultimate SaaS subscriptions, consumer subscriptions. This is the ultimate business model because every month you start with essentially, you know, plus or minus 10. 10% of the subscribers you had last month. That's why Spotify and Netflix and Slack and Salesforce are such great businesses, because they have an idea of what they're going to make every month. And that means they have predictability and that means investors can buy into the story.

Now, if every month, you know, Netflix had to convince you like the iTunes store does to buy a series, you know, you got to buy Squid Game. You're like, yeah, I'm going to buy Squid Game. Why? like some Korean dystopian violent game show. Why would I buy that, right? But you might actually consume it because it's all you can eat on Netflix. And we'll get into Netflix and how they pivoted their business model twice in this actual checklist.

So you get the idea of why investors really like certain business models over others. And if you want to be on the venture track and you insist on going with a non-scalable non-venture model, don't be surprised. When everybody looks at your revenue and says, I'm going to take a pass. or I'll wait and see. So let's go through each one. Do you understand why investors love SaaS software as a service? We should pause here. This is my 13th point here.

Do you really understand why they love this? And I hinted at it. But basically, when you have reoccurring revenue, every new payment cycle, every month, every year is essentially building on what came before it. You don't have to fight to keep your, to resell your customers on your service. A restaurant, every time you go to a restaurant, they're auditioning for you. If you have a bad experience, maybe you stop going to that restaurant, right? Your steak comes out raw, the food is cold, the service is terrible.

You've had this happen. You went to a restaurant three or four times. The fifth or six time, it was bad twice in a row. You stopped going. This happens to all of us. And this is a terrible business model because you basically can lose your customers overnight. With a reoccurring revenue, the opposite happens. You might have land and expand.

You get 10 people inside the company use Notion, and it's a hundred person company, and the marketing and sales department is using it, and then all of a sudden, the content department wants to do it, some executives want to do it, the tech team wants to use it, and all of a sudden you go from 10 to 20 to 50, and then somebody just buys a license for the whole company, and it becomes a standard inside the company. So land and expand is a big part of why people love SaaS. So reoccurring revenue is one reason. Landon expands another, and bottom up sales is.

one of the great, great innovations that my friend David Sacks pioneered, which was when people used Yammer, which was a precursor to Slack, anybody could start using it and they could use it for free, basically. And if they used it in their department, eventually some VP or director or even the CEO would be like, what's this Slack thing? What's this Yammer thing? What's this notion thing that three or four different groups are using? Okay, I want to have that centralized. I want to have control over. I want to make sure the data is backed up, it's secure, and that's when you start paying for it. And that gives your sales team at your SaaS company the ability to just look at usage and say, when this group at IBM gets to their 10th person in Notion, let's send them an email and see if they

want to use the VIP product or if they know about this extra feature. And that's why bottom up SaaS and this cross-pollinization that occurs just organically is super, super important. Slack, Notion, Superhuman, Salesforce, HubSpot, Twilio, you know, many of these are subscription-based, and they do really well because of it. Actually, Twilio is not subscription-based.

So if you look at Slack, Notion, Salesforce, HubSpot, a lot of these services really land and expand nicely. And they're not consumption-based, like a Twilio, right? Twilio, they charge you based on how much you're consuming. It might look like SaaS, but it might

be a SaaS consumption hybrid. So a lot of the Amazon Web Services, Twilios, a lot of those are done based on consumption. Maybe they have a minimum amount each month to keep your account running, which would lend it to look like SaaS, but it's really consumption-based. And those business models can work too

if it's highly scalable. Okay, number 14, let's go over why investors are crazy about the FinTech model. So FinTech combines, in a lot of cases, some qualities of SaaS and then transaction-based revenue. Transaction-based revenue is a beautiful thing because if people use your product or service more, you just keep making more money. As opposed to SaaS where 10 people are using Slack, Slack's going to make, if you have only

10 people in your company, the most they can make is 10 people's, you know, $15 a month usage. Now, if those 10 people are using Slack a thousand times a day and they're posting 10,000 messages a day, they don't pay extra for, you know, the 10,000 message or the 5,000. It's just flat rate, right? You pay per seat. So there's a cap on how much they can spend with you, as opposed to something like Stripe or Spotify or Plaid or, you know, Robin Hood. The more you use these services, the more money they make. So they're really incented to make it super easy for you and super cheap on a per transaction basis, so you get addicted to them,

and you keep using them more. They grow alongside you. They grow with you. That's why Stripe will make it really easy. Or Spotify, if you look at these services, Stripe and Shopify make it really easy for anybody to use their services and pay a small amount of money for doing so.

Is it better or worse than SaaS? Well, I think if you hit scale, consumption base is better, right? consumption based can just be extraordinary because there's no cap on what you make and you're making money alongside the people using your service. What's another example? The app store, right? Some people would argue it's a marketplace, but they basically take 30% of everything you sell. So the more you sell, the more they make on their commission. And so marketplaces and fintech both share that the more you get people to consume, the more you get them to transact, the more

money you make and you might have left a lot of money if you just charged a monthly fee. And then people are not growing alongside you. So you would have to keep upping the price of your SaaS software, as opposed to just saying, hey, listen, if you use it, you all will charge you and you don't have to worry about it. So it takes a lot of cognitive cycles out of the customer if they say, only pay for what you use. You only pay for what you use is a really great selling point, right? and if you look at Shopify, they had about a 3070 split between SaaS and transaction-based revenue. Their standard plan, I think, Shopify, Shopify had a 30-70 split between SaaS and transaction-based revenue. So in Q2 of 2021, Shopify had 334 million in subscriptions.

They get that every month. It's nice and predictable. It grows slightly when they get more subscribers. And they had $785 million in transaction-based revenue. revenue, which they call merchant solutions revenue, fancy way of saying a piece of the action. And so what we'll see over time is if the Shopify sellers keep selling more, the percentage that they make from SaaS versus these transactions could become more and more based on the transaction. They just get all that free money on top of it. So let's move on and talk about understanding this

is point 15 on your checklist. Do you understand why consumer subscriptions are coveted by investors, but not as much as SaaS. I'll explain this. So getting consumers to pay for something is great, because most people think consumers are cheap, they won't pay for something. This is actually false. It's been proven false,

but it is something that I think people default to because we've had this content wants to be free and consumers don't want to take out their credit cards for so long. But a lot has changed since then. As the offering of content became weaker and weaker and lower quality, the people who were making high quality content couldn't make money from advertising. And they decided, you know what, I'm going to put this behind a paywall. And I'm going to ask people to pay for quality.

And what happened? You're seeing many podcasts, which were advertiser unfriendly, like let's say, Brett Easton Ellis, or Red Scare. These two podcasts do extremely well on Patreon. They get consumers to pay them for a podcast. In fact, in the Red Scare, I think they do one free, one paid. So you would have to be pretty committed. I mean, you could get, I think, 25 for free a year, and then you pay for the other 25. Pretty amazing to think that content providers have learned over time that they don't need

everybody to pay for something. They just need a small number of people. We're seeing it in newsletters. We see it in podcasting. And before that, we saw it in movies, TV shows, and music. And people thought, well, that's where it's going to end. Because think about it. Spotify is giving you this giant catalog.

Every song on the planet. It's amazing. $8, $10 a month, whatever it is. Netflix, oh my God, what an incredible corpus of content for 10 or 15 bucks a month. Same thing with Disney. Those are no-brainers, right? You watch but one movie and it's cheaper and it pays for itself than going to the movies, right? In fact, if you have a family of five, if you were to go, if you were to watch two movies on your Netflix or Disney, that would be the equivalent of going to see two movies in a major city with popcorn parking.

And the tickets, you know, maybe only difference would be if you went to a matinee. So what we found is there's a long telecontent people will pay for. We have music investments, musician, and tone base. We've seen fitness with FitBod or calm with meditation, as I mentioned a couple times, Steasy with dance. And people will pay five or ten bucks a month for this content. No problem. Will everybody pay for it?

No. But do you need everybody to pay for it? No. And so people will sample it. And that's where the problem comes in. When people look at consumer-based subscriptions, they immediately try to compare them to SaaS. In SaaS, you have businesses where you can have 10 or 100 or 1,000 people. You have land and expand.

Do you have land and expand in consumer? Not really. You might have some virality if you and I want to both compete in Stravia or in FitBod or, you know, in one of these Fitbit has a premium now. If you want to compete with your friends, yeah, maybe you'd, Both need to have paid subscriptions, but you don't have the same network effect or land in a expand dynamic that you would have in SaaS where, you know, five people are using Slack and 50 people are not. Those 50 people are going to feel left out and eventually make their way over your Slack. So you don't have land and expand. You don't have bottoms up and the prices tend to be much smaller.

But what you do have is a larger group of people. What is the market for Slack? Well, it's business folks, and that's basically it. If you look at something like Calm or Steasy or a music app like Spotify, yeah, I mean, it's hundreds of millions of people could potentially, billions of people could potentially want that, right? So you trade off a larger audience for a more deep pocketed audience who are willing to pay a lot of money and have a group of people using a product. And so that's why Com and FitBod would have more churn as well,

because you have individuals looking at it saying, yeah, I'll try meditation, but maybe it doesn't vibe with them and it's not for them. Or somebody tries FitBod or they try, you know, Disney Plus. And then their kids graduate and they're like, yeah, we don't want to watch the Marvel movies and Disney and Pixar movies over and over. We're going to cancel it and we'll get HBO Max because we're all adults now. And we prefer that. So you do have a little more in the consumer subscription phase churn,

but it's still a solid business model that is predictable. and, you know, in the early days of Com, they used to sell it for a one-off price of 10 bucks. And that was a major, major jump in consumption. When they moved to five bucks a month instead of $10 for life, they actually saw more paying customers. So that's a very interesting concept there. Human psychology is, I'll try a subscription because that means I can cancel. Whereas if I buy something, I can't cancel, right? I can't get a refund.

I can't cancel. I mean, maybe you could get a refund. Maybe they offer refunds. but just psychologically, you've probably had that experience. Oh, it's a subscription? Great, I can cancel. So I'll try the Wall Street Journal or economist, and then I'll just cancel if I don't like it, right? People do that all the time.

So the churn numbers look terrible when compared to SaaS for consumer subscriptions, but it's still really great. Let's go to point 16 on the checklist. Do you understand why marketplaces are so coveted by investors? Well, the reason is they're really hard to start, right? You've got to get supply. You've got to get demand. You've got to get drivers.

You've got to get passengers. You've got to get restaurants, you've got to get people who want to order food in at home. You've got to find people who make beautiful bespoke, you know, sarongs and outfits and ashtrays on Etsy. And then you've got to get people who want beautiful sarongs and outfits and Halloween costumes and lightsabers, bespoke lightsabers. You know, it's hard to get these things cranking. But if you do get a marketplace going, it's very hard to stop that dynamic. It's very hard to stop the momentum of a marketplace. Look at Craigslist, still cranking, still throwing off hundreds of millions of dollars a year in revenue.

Maybe even they're up to a billion now. And maybe many people listening here haven't used Craigslist in a long time. But that marketplace works. It's effective. People use it for real estate. They use it for jobs, et cetera. And it just keeps cranking. So that is why investors are over the moon about it.

and connecting buyers and sellers provides a lot of value. Just think about it for a second. You're a plumber. I need a plumber. There's a pipe burst. There's a really hair-on-fire moment for those people who need the plumbing services and plumbers. They need customers. And that's why Thumbtack and other Yelps and Google locals of the world have really built significant businesses.

and although they take a while to get going, when they do get going, they're unstoppable. What could unwind Airbnb at this moment? Who is going to beat the liquidity of Uber and Lyft and DoorDash Postmates at this point? Very hard to get these started. And it's very hard to displace them when they are at scale. And that absolute lock-in that occurs is what makes these businesses when they do hit escape velocity become giant. and that's what VCs are looking for. Let's be honest.

And that is where sometimes there is a conflict between what you want as a startup founder and what VCs want. There can be a little bit of friction there. You might be very happy with a $100 million valued business because you and your co-founder's own 50% of it and $50 million is a lot of money. On the other side, the investors who invested, you know, at a $30 million valuation and bought 20% of your business for or 25% of your business, they're kind of bummed that it only got to $100 million

because they only doubled to triple their money. and they really need to see hit 30 or 300 or 3,000 times their money. That's what they're really in it for. They're in it for hitting an Airbnb or an Uber or a Google or a Facebook. So marketplaces are very appealing to them. And for you as a founder, you should really think about the marketplace and the SaaS model and which one you want to build because the SaaS will get off to the race is quicker. You can get a couple of people to buy it really quickly in the first couple of months of the product being out.

whereas a marketplace, you might just be struggling city by city to get some liquidity. Liquidity means when a buyer and seller are in the marketplace, they get connected quickly. So one of them takes years to ramp up, and the other one takes weeks after you launch it to ramp up. So, you know, but eventually marketplaces are so self-sustaining and really money printing machines when they hit scale. And that's why people like them. And it's really hard for a competitive to displace somebody. They would have to spend a lot of money, which we saw. You know, when you see somebody try to come in and compete against Craigslist, who's

going to be able to do that? The only person who really has been able to do that is Facebook's classified system, which they've been working on for years. Maybe Facebook classifieds is a decade old. And I think although it's dented eBay and Craigslist's businesses, I think those businesses are still doing well. So let's see if you can ask yourself this question. At a most basic level, why do investors love these four business models?

This is a meta question here in our 10 questions. Why do they love these? Why do they love SaaS? Why do they love transactions? And why do they love consumer subscriptions and marketplaces, right? These are the four models that they really can get behind. And sometimes the transactional based model has a little SaaS in it. Sometimes marketplaces will have subscriptions.

Sometimes people will blend these things, right? But generally speaking, let's look at them as four distinct ones. SAS transactions, consumer subscriptions, and marketplaces. Well, they all scale. What does it mean to scale? It means you can get to, you could have 100, 1,000, 10,000, or 10 million people participating in these business models as elegantly and simply as 100, right? What's the difference between a thousand? people using Slack or 10,000? Do you think that actually makes any difference on their servers?

Probably not, right? And if you had a marketplace where Uber was providing cars and rides in 100 markets or 1,000 markets, is it really that different? Is the code base really that different? Yeah, there are things you have to adapt for each marketplace. There might be local regulations, but the marketplaces tend to get off the ground quicker and quicker and quicker and quicker. For example, in the early days of Uber, which I got to see, it was crazy that, you know, you would get off a plane and there was a five-year period where you could flip a coin. Las Vegas? Okay, no Uber. I got to go back to getting in the cab line or, you know, call the casino and see if they'll pick me up. Then you would get off in Sydney and to be like, or Tokyo and,

oh yeah, Uber's here. Great. I can just take out my app. And you saw it just scale the planet so so effortlessly. There was work behind the scenes, yes, but these things tend to scale amazingly. Marketplaces, like we talked about, you know, if there's a hundred places to stay in Paris or a thousand, you know, Airbnb's

got an office, they've got customer support, they've got their licenses. It doesn't matter if there's 100, 1,000, 10,000, or 100,000 people renting rooms in, you know, New York City or Paris. The system can handle it. So, that's what you're looking for. It's really true scale.

A lot of other businesses don't have the ability to scale this way. If you're just selling a piece of hardware, it tends to be a race to the bottom. If you're selling services, that has challenges as well. We'll get into that. And if you look at the outliers I've had in my portfolio, Com, consumer subscriptions, Uber, Marketplace, Superhuman, SaaS, Thumbtack, Marketplace, Grin, SaaS, lead IQ, SaaS, FitBod, Consumer SaaS. We've just seen this over and over and over again in our own

portfolio and you'll see it across other people's. Checklist point number 18, which business models do most venture capitalists stay away from? What are they not like? I'm not going to say these are cursed, but if you have one of these, you're going to be not only fighting upstream, you know, like swimming upstream, you've heard this, they're swimming upstream and then they're sometimes trying to swim up a waterfall. A waterfall is waterheading down by gravity, going a stream or, a river is the same thing. It's gravity, having water go down. But it's qualitatively two different

things, isn't it? Like, swimming upstream is hard. You ever been in a river and try to swim upstream? It's not easy. Try to swim up the waterfall. Impossible, right? And so where do we see our portfolio company struggle? Where do we struggle when we try to convince downstream investors, you know, because we're at early stage, try to get involved with the company? Direct to consumer. Selling direct to consumer is really hard. Consumer package goods. It's really hard. Does that mean it doesn't work out? No, we've had incredible success. Smarty pants, a vitamin company we were investors in, did phenomenal for us. We had a great experience with eight sleep. That's done phenomenal. Ruby loves done phenomenal. It can happen. But more often than not, venture capitals will look at the startups in front of

them and say, okay, I got a SaaS company. Oh, I got a marketplace. Great. Oh, consumer subscription, oh, a fintech doing transactions. Great. I'm going to invest in these three, those four. And then they have the D to C stuff and Dollar Shave Club, where they see a services business or one that feels like it's consulting in services but has a tiny amount of SaaS. And they're just like, you know what? I could pass on this and I will pass on it. And that is where, you know, companies have a problem. We look at D to C and if a D2C company is going to break out, There are a couple of differentiators they need to have. Number one, it's got to be an elite product.

It has to really be something unique in the world. Eight Sleep is the first smart bed, being able to set the temperature for your side and your partner's side and get all that sleep data. It's never existed before. It's completely different than other mattress out there. Warby Parker and Dollar Shave Club were exceptional products at incredibly valuable prices,

and they were very early in the D2C space, away luggage seemed to fit into that same pattern. exceptional product at an exceptional price. So that, you know, either very advanced or exceptional in some way and at a great price. And, you know, you look at the second reason of why I think these D to C companies break out is they have some really, really elite acquisition strategy. So they've mastered TikTok, they understand Instagram in Dollar Shave Club faces. They had mastered making really amazing viral videos.

And so if they have this really amazing way to get it done with DTC, you know, in terms of growth, maybe you'll see a venture capital's look at it and say, wow, this product is truly unique and the marketing and acquisition strategy is truly unique. I'll make a bet. But in 2021 and into 2022, I can tell you it's a really challenged business model. Hardware. You know, I say this all the time. Hardware is hard.

It's historically very low margin. and it is much more expensive than making a software company, because if you're making hardware, you still have to make software. So you're basically doing two startups, hardware and software. And it tends to be a race to the bottom where some companies in China will take your product, put it in the same factory it's being made at night, knock it off and make a webcam or like a drop cam or Ness cam for $30 instead of $300. And the margin's gone and it doesn't work.

What does work is HASS, hardware as a service. We've got two incredible companies in that space, density, which does people counting. They have a hardware component, but you're basically paying for a SaaS subscription and the hardware is included. And then CafeX, which started doing, you know, they would run their own cafes. And they do. They run one at SF, but increasingly they're working with partners to do the execution of finding a location and maintaining the robotic cafes.

And CafeX is looking more like density. Hardware as a service, software as a service. Give us $2,500 a month. buy the machine for 250K,k, and now you've got your own robotic cafe, and you can make all the margin at it. Advertising, some VCs will invest in advertising, but it takes a long time, and you have to hit critical mass. Google, Facebook, Amazon, Yelp, Twitter, Snapchat, all have vibrant advertising businesses. In some cases, it's the core of their business in Amazon's. It's something they add it on, but it's hard. It's a very Web 2.0 model, and right now the

duopoly of Google and Facebook have it pretty locked down. They are the majority of growth in the space. So that's a hard space. Be careful if you choose to pursue it. Also, if you're in the advertising business as opposed to the subscription business, when the market collapses, what's the first thing that company stops spending on? Business travel. Okay, what's the second thing? Advertising, marketing. They just look for things to cut. And they typically cut advertising where they think it's the least effective, which might be TV and outdoor. And then eventually they get to online and then they get rid of branding based advertising. They go just to performance-based advertising, which really is Google, right, paying per click or Facebook paying per click and really,

you know, paying for conversion. So service-based businesses where you are charging for somebody's time, very hard to make it scale. You will once in a while see a marketplace hybrid of this where you can hire developers, et cetera. But service-based businesses are so easy to start. You have 10 developers, you and nine of your friends are developers and product managers. You leave Facebook, you start a dev shop, you have a great sales executive, find somebody to pay a million bucks to build an app. You build the app for a million bucks. You know, it takes you six months to do it. Now you have to find another person. And it's great. Everybody gets a really high salary. They get billed out at high hourly rates, but it sucks for the investors. Okay. And our 19th point in our

checklist, this week in startups.com slash checklist. How soon do you need to identify a business model after starting your company. This is a critical question. Well, I would argue that you should know it from the start. Now, you could debate, oh, you know, we have the opportunity to be advertising or subscription and we're going to get there, but I'll be honest. Almost every company I've had great success with, outlier success. They knew the business model. It was obvious to everybody. So if you don't have your business model from the beginning, it tends to be a bit of a tell, but not always. If we look at Netflix, they started, obviously, with mailing physical DVDs for a monthly fee. So it was subscriptions, but it was real world. Then they did a streaming platform and they did deals with

other people, but it was still subscription. So the products they were making, they had to license, and then finally they started saying, hey, we're going to do original content. So here, did the business model actually change? Nope, was always subscription. But they did have to change how they made that content and how they delivered it. So there were changes here, but this is a good example of despite there being major pivots inside of Netflix, they didn't actually change your business model. Consumers paid them a fee per month. It's always been a consumer subscription model. It continues to be one. But what radically changed was how they built their content. So again, most companies have their business model lined up from the beginning, even if it seems

like they're pivoting wildly and changing things. What you will see often is a pivot from, I wanted to build a large business in the advertising space. I couldn't get there. So now I'm taking my social network and I'm going to adapt it and make it a social network for enterprise. I mean, the amount of roadkill up and down the 280 on the way to Sandhill Road of social networks and consumer products that didn't work and then pivoted to enterprise and then die to slow painful death on the side of the road, getting to 250K or 500K and getting three customers is huge. Why is it huge? Well, because if you couldn't get consumers to consume this for free, are you really going to be able to get businesses to pay? That's what you have

to ask yourself. Or even being more brutal or beautifully brutal, brutal, brutal. If you want me to be brutalful here. It might be you've proven that your team is not good enough to make a free product. What makes you think that that team can now make an enterprise level product that will clear market with enterprises? So almost universally, the business model should be fully baked. If it's not, if your business model is you're going to sell data or you have 20 different ideas, it's a huge red flag to investors. They may not tell you it's a red flag, but they're thinking it. And I'm always going to be honest with you about that. Okay, the 20th item on our checklist and the last one for today is just pricing, how much should you charge? And here, there's many different pricing models.

If you charge too little, people might not think the product is worth buying. In a SaaS product, you ever have that experience with a charging of $5 per person? You're like, I'm getting $500 in value. This seems too cheap. And then if you charge too little, you might be leaving so much money on the table. So one of the first things we do is we say to people, hey, listen, if you doubled your price, would any of your customers leave the product? And they say, no, well, why don't we double the price? Then you'd have more money. You'd be break even right now. Like, let's say you're having a hard time clearing market with investors for your subscription product. You're charging $3 a month. Literally, true story, somebody's charging $3 a month for a consumer product

and $20 a year. I said, why don't we charge $20 a month instead of $20 a year and then get people a discount to $150. And, you know, you make that change. And if you lose 10 or 20% of your users, you still might be making five times as much money, right? If you lose 25%, but you've increased your price, 5x, you're going to still be in pretty good shape. In other words, you went from $3 a month to $50 to $20. You've increased your price by 7x and you lost 20% of your users.

Okay, you're still going to be an amazing shape. And now you're profitable. And people see a chart of revenue going way up and they throw more money at you. And if you charge too little and can't cover your expenses and you run out of money, well, that's not doing anybody any good. And then your customers are going to say, why don't you charge me more? I miss your company and I want you to invest in the product. Charge me more.

And if you charge too much, yeah, maybe people won't give your product a shot. That's why you can always give people a discount or a month for free. So you can solve that price. Some people might get sticker shock. I had the CEO of Sourcegraph, Quinn Slack, on the program. And man, he was opaque about pricing. And I kept drilling him and drilling him. It's really worth going to just that part of the podcast, episode 1285.

We'll click on that in the notes here at this week and startups.com slash checklist. If you look at that, he said, you know, if you've got a thousand developers and I'm charging you $1,500 a month a year per developer, you may not want to pay me $1.5 million a year. You might think you can build it yourself. So we like to do a trial. we like to show you how much more effective your developers are. Your developers cost $125,000 on average. We're making them 10% more effective. 10% of $125,000 is $12,500.

We're charging you $1,500. Therefore, you're getting the other $11,000 in gain. You can have a really great conversation like that. Most people will do, you know, a couple of tiers here. You've seen it before. Low, medium, high, you know, premium, cheap, and then just right in the middle. Goldilocks pricing, not too hot, not too cold, just right.

It tends to work. And you can also experiment with pricing. But generally, you want to keep raising your prices and charging a fair price for it and letting people not have to think about it. That's why yearly charging of customers is great. If you pay $99 per year for some service and you use it two or three times, you might feel like you got your money's worth. If you're paying $10 a month, you have 12 moments of dissonance.

We have to make a decision, am I using this enough? That's why yearly pricing is just so special for consumer products. You do have to understand your competitors, right? So generally speaking in the SaaS space, people are not canceling SaaS based on price. If you've got the product up and running and it's costing, you know, a company five or $10,000 a year, that extra $5,000 is probably not going to get you to displace somebody. if there are cheaper versions of Slack available, cheaper versions of Salesforce available,

but once you've got the product in your company, kind of hard to displace, right? Everybody knows how to do it. It's up and running. You've got other priorities. Saving $5,000 might not be a big deal for your company because you just sell one more advertiser or get one more customer yourself and you make $50,000.

You don't need to sweat it. So competing on price sometimes is a sucker's game and you may not want to do that. And you really need to understand who your ideal customer is. When you understand your ideal customer, you're going to understand how they feel about your product, if you're doing service with them, if you're looking at their engagement data, and you see they're using your product constantly, raising the price is pretty easy. Creating new products and services are pretty easy. If they're not using your product, you've got a problem. So, you know, if you see one company's using Notion and they're creating 10 pages a day and doing 100 edits a day and another company's creating 10 pages a month and doing 100 edits per month, these are two different.

levels of customers. One might not be your ideal customer and the other one is you really should be focusing on the ideal customer, not trying to get people who don't need your product to use it. That's why it's so important to know who your ideal customer is and just basically fire everybody else. Okay, I think this has been super helpful. We can go deeper and deeper into these, but I'll stop there and make sure you go to this week in startups.com slash checklist to see the full checklist and we'll see you all next time. Bye-bye.