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This post is for SMB operators/acquirers who want to understand more about selecting the right HR software for their organization.  The goal is to share what we have learned from 10 years in HR software/SMB so you can save money and pick the right tool.

Some background on me: I interned at a traditional search fund back in 2009, run my own SMB that I bootstrapped, and have invested in dozens of SMBs via self-funded and traditional searches, as well as through three funds that invest in SMBs (mostly search, and some lower middle market PE).

I’ve also spent the last ten years in the HR Software industry, first starting a niche HR SaaS and now running a business that helps companies find and buy the right HR software (over 100k companies/mo use our research).

Get Free HR Software Advice

Before I get into the details around HR software, I highly recommend anyone reading to book a free call with one of our HR software experts.  They’ll ask you a bunch of questions to understand what solutions you should be looking at and then point you in the right direction afterward. 

This is a free consultation; we get paid by the vendor when you buy software (this cost isn’t passed along to buyers, in many cases we have special discounts with vendors we can give to buyers). 

We’ve been in this space for 10 years so have relationships with nearly every vendor under the sun. So, we have little preference over who you choose. What we really want is to do a great job so you tell your friends!

Click here to book an HR Software expert call.

Why buy an HRIS?

If you’re still reading, great.  Let me try to give you a 101 on what you need to know regarding HR Software so you can make the right choice for your business.

HR software spans many subcategories like payroll, recruiting, employee engagement, and performance management. An HRIS (Human Resources Information System) will have many of these in a single hub and typically include:

• Employee database
• Employee onboarding
• Leave & absence management
• Time tracking
• Recruiting & applicant tracking system
• Benefits administration
• Compensation management
• Employee self-service portal
• Payroll or payroll vendor integrations

So why buy one of these tools? The goal with most of them is to provide a single source of information from which everything about an employee’s lifecycle at the company can be managed. By using software, everyday processes can be streamlined and automated, freeing up HR’s time to pursue more strategic efforts instead of on time-consuming repetitive tasks.

For example, if the thousands of man-hours that are spent per year filing paperwork for payroll or keeping track of PTO can be automated 50%, that is a huge ROI to your business assuming you can re-deploy those resources towards more strategic efforts (workforce planning, employer branding, etc). 

The best in class solutions will also have tools that actually drive value beyond automation – better job applicant conversion rates, better onboarding, up to date employee satisfaction data, performance management/OKR tracking, etc.

PEO vs. HRIS for SMBs

Of course, when we talk about lessening HR’s burden (either on HR, or a COO/CFO/CEO), many companies consider the PEO route. A Professional Employment Organization is a company that you bring on to act as a co-employer. This means they’ll share some of the tasks and responsibilities towards the employee, such as staying compliant with local payroll regulations, processing taxes, managing benefits, and, generally, the more administrative tasks of the employee relationship. The client company, on the other hand, keeps handling the day-to-day work like project assignments, performance management, goal-setting, etc. 

To understand if you need a PEO or an HRIS, it’s best to ask yourself which tasks are better performed by an outside party and which ones you could keep in-house. Going the PEO route is something that many SMBs who lack an HR department prefer (typically up to 100 employees when it becomes more cost effective to have in house HR). When you engage the services of a PEO, it’s not so much about software as it is about services. There’s a lot more handholding, but you also forego a lot of control and oversight.

Through an HRIS, on the other hand, you retain control and visibility of everything related to those back office functions. Yet, you can still enjoy guidance and some handholding from professionals and experts who can walk you through how to perform most of these tasks on their tool. This is why all SaaS companies have an aptly named “customer success” team. The key difference is that instead of them performing the work each time, like with a PEO, they’ll teach you how to do it or how to “set it and forget it” when it comes to the automation of certain processes.

Interested in a PEO? Yes, our advisors can give you advice on that too.

HRIS Pricing

So, let’s say you decide to go through the HRIS route. Since you’ll be tackling many of these tasks in-house but with the help of software, does it mean it will be less expensive? That can certainly be true, but it’s best to take a closer look at how HR software is priced to get a better answer. 

Most HR tools are priced through the PEPM model, which stands for “per employee per month.” In essence, you pay a monthly fee for every employee that you add to the platform. Hence, the price varies according to your headcount. In addition to this, most companies will have a fixed monthly base price for using the platform and charge certain modules as optional add-ons. 

To provide you with an idea, most HRISs out there have a monthly base fee that can vary between $35 and $100, plus $5-30 per employee per month. So, let’s say a business has ten employees and decides to get an HRIS that starts at $35 per month plus $8 PEPM. Their total monthly fee, with no add-ons, would be $115. 

The SMB focused HRIS’s are usually in the $10-20 PEPM range, which will include a few modules in addition to the base package (most companies will want additional modules for aspects important to their business such as time tracking, recruiting, onboarding, etc).

You can find offerings in the $100 PEPM range, but unless you are a larger company looking to implement an enterprise solution like WorkDay (and even then…), you should be more in the mid to high teens range depending on your company’s needs.

Yes, we can give you free advice on how much your HRIS should cost 🙂 

HRIS Key Features for SMBs

Speaking of features, here’s a quick breakdown of some of the common HRIS features that we talked about before: 

• Leave management and time tracking: This allows employees to request time off and managers to approve or deny. The same module serves to keep track of absences and all types of time off. Some tools will also feature a time-tracking tool, which is useful when dealing with hourly workers or contractors.
• Recruiting and Applicant Tracking System: Streamlines the recruitment process by managing job posts, applications, candidate communication, and interview scheduling. It basically helps track the applicant through every stage of the hiring process.
• Onboarding: After hiring, this facilitates the process of welcoming and integrating the new employee into the organization. This module serves to guide them through all the necessary paperwork, training materials, and meeting scheduling that should happen on their first day— ensuring a smooth and consistent kickoff for each hire.
• Employee self-service: This is one of the must-have features, as it allows employees to access and manage their own HR-related information, which reduces the burden on HR staff.
• Benefits Administration: This module manages all employee benefits like health insurance, retirement plans, and any perks offered by the company. It should allow employees to make changes and view all the information about their coverage. 
• Payroll and compliance: Although very often purchased as a stand-alone platform, a payroll tool tends to be featured in most HR software, such as HRMS or HCM. This allows businesses to manage salaries, bonuses, and deductions from the same place where the employee info is already stored and tracked— especially useful for factoring in details like overtime, PTO, etc., all in a manner that helps you stay compliant with local laws and regulations. 

Insider tips / Best + Worst Practices for buying HR Software

Here are some tips that we’ve learned over the years:

• Big brands: Many times, the incumbents in this space do not have the best offerings.  They are basically relying on their reputation and their distribution to grow.  It’s not to say they aren’t ever the best choice, but many times, the “up and coming” (5-15 yr old) companies have better offerings.
  
• Negotiations: Like all things in the SMB world, the price is always negotiable.  We have an extensive eBook on this you can save for when you do your negotiations with lots of tactics.
  
• Timing: Expect this process to take ~2 months for vendor selection and another ~2 months to implement, with another month buffer built in. Rushing the decision might prove very problematic, for example, if you realize there’s a key feature that you lack only after the tool has been implemented.
  
• Internal Buy-In: A huge percentage of the success of the new tool depends on its adoption by the relevant stakeholders. Hence, one of the worst mistakes we see software buyers make is that they pull the trigger on a particular tool without bringing those stakeholders into the discussion.
• Having a comprehensive must-have list: One of the benefits of having internal buy-in is developing a comprehensive understanding of all the use cases you expect from this new tool, every pain point it should solve, and why. This can be tied to the ROI that you expect from the tool and can also cover technical questions like the tools you absolutely need the new software to integrate with, for instance. It’s especially important and useful to create this list before you go into a demo with each shortlisted vendor.
  

Last advice

First off, congrats! You either bought a business, started it, or are growing (most likely), and so are starting to think about HR Software.

I’ve helped a few friends buy HR software post acquisition, and while it takes a lot of time, it pays dividends to have the right systems in place, at the right cost (I’m sure you’ll negotiate well!).

As a last plug, we really do love helping the SMB community out so please feel free to take advantage of our free advice, and best of luck!

Lately I’ve been having a lot of conversations around investment terms with searchers, as well as investors.

About 15 years ago, I interned at a search fund.  And, over the last few years, I’ve started to invest in the asset class going direct as well as through funds of search funds.

Investing in search funds is a great way to scratch my entrepreneurial itch, extremely rewarding when a searcher finds success, and can be economically rewarding too.

This post is my attempt to share thoughts on self funded search economics in an effort to contribute to the search fund community, get feedback on my thinking from a wider audience, and of course meet more people who are doing searches/investing and may want to collaborate (please feel free to reach out!).

You can watch a video of me explaining this model here, and download the excel here:

Enterprise Value

The standard finance equation is enterprise value = debt + stock – cash.  Enterprise value is how much the company itself is worth.  Many times people confuse it with how much the stock is worth and find the “minus cash” part of this really confusing.

So, you can rearrange this equation to make it stock = enterprise value – debt + cash.  Make more sense now?

Enterprise value is just how much you’re willing to pay for the company (future cash flows, intellectual property, etc), not the balance sheet (debt and cash).

Most investors and searchers think about the EBITDA multiple of a company on an enterprise value basis because they’ll be buying it on a cash free, debt free basis.  It becomes second nature to think about EBITDA multiples and know where a given business should fall given scale, industry, etc.

However, I believe this second nature way of thinking of things can be a massive disadvantage to investors given the way EV and multiples are talked about in our community currently.

Sources of capital, the typical way to calculate enterprise value for self funded searchers

If you’ve ever looked at or put together a teaser for a self funded search deal, you will notice that the deal value is equal to the sum of the sources of capital minus deal fees and cash to the balance sheet.

As a simple example, if there is $4 mm of debt to fund the deal, $1 mm of equity, and $200k of deal fees, the enterprise value = $4 mm + $1 mm – 200k = $4.8 mm.

We’ll use slightly more complex numbers in our example: If a searcher is taking a $3.2 mm SBA loan, $850k seller note, putting in $120k themselves, getting $350k of equity from the seller, a $500k earnout, and $1.2 mm of equity financing minus $350k to the balance sheet and $250k of deal fees, then the enterprise value will be $5.62 mm.

Our example company has $1.5 mm of EBITDA, so the EBITDA multiple is 3.7x.  This is a pretty attractive acquisition multiple for a business that meets traditional search criteria (recurring revenues, fragmented competition, high gross margins, low customer concentration, etc).

If you’re seeing a search fund deal for the first time, the headline of “we’re buying a decent company for 3.7x, and replacing a tired owner with a hungry operator” is pretty exciting!

However, if you’re an investor, there is some nuance to this enterprise value number and the true EBITDA multiple you are investing in.

The trick with self funded enterprise value

The security that most self funded search investors get in a deal is participating preferred stock with a paid in kind dividend.  This means when there’s an exit, you get your money back before any other equity holder, then get a certain percent of the business, and whatever dividend you’ve been owed in the interim accrues to your principle.

It’s a really favorable security for the investor, and one that is basically impossible to get in VC where straight preferred stock is much more common (no pun intended).

The key terms are what percent of common equity does this security convert into after the originally principal is paid back, and what is the dividend.

The share of common equity the investor group will get typically ranges from 10-50% of the total common stock. The dividend rate is usually 3-15%.  The average I’m seeing now is around 30% and 10% for common and dividends respectively.

The strange this about the enterprise value quoted to investors in a teaser/CIM is that it doesn’t change as the percent of common changes, even though this has large implications for how much the common equity is worth and the value investors receive.

For example, I may get a teaser where the sources of investment – cash to balance sheet – deal fees = $3.7 mm for a $1 mm EBITDA company, which would imply a 3.7X EBITDA multiple. Let’s say the searcher is offering investors 30% of the common and a 10% dividend.

Let’s now say that the searcher is having a tough time raising capital and changes their terms to 35% of common and a 12% dividend. Does the effective enterprise value change for investors? I would argue yes, but I would be surprised to see it changed in the CIM/teaser.

This isn’t a knock on searchers or the search fund community. It’s just kind of how things are done, and I think this is mostly because it’s really hard to think about how the enterprise value has changed in this scenario.

However, the natural way of using EBITDA multiples to think about value for a business that is so common in PE/SMB can be extremely misleading for investors here. You may be thinking 3.7X for this type of business is a great deal! But, what if the security you’re buying gets 5% of the common?

If you’re in our world, you may counter this point by saying most searchers will also supply a projected IRR for investors in their CIM. However, IRR is extremely sensitive to growth rate, margin expansion, and terminal value. While the attractiveness of the security will be reflected, it can be greatly overshadowed by lofty expectations.

To get more clarity and have a slightly different mental model on the effective price investors are paying for this business, let’s go back to basics. Enterprise value should be debt + preferred stock + common stock – cash.

We know the values of each of these numbers, except the common. So, the main question here becomes: how much is the common equity worth?

Calculating value of common equity for self funded search funds

Equity value for most search fund deals = preferred equity from investors + the common equity set aside for the searcher and sometimes also advisors, board, seller.

We know that the preferred equity is investing a certain amount for a certain amount of common equity.  The rub is that they are also getting a preference that they can take out before any common equity gets proceeds, and they are getting a dividend.

So, the exercise of valuing the common equity comes down to valuing the preference and dividend.

In my mind, there are three approaches:

• The discount rate method where you take the cash flows you’ll get in the future from the pref/dividends and discount them back at the discount rate of your choice.  I am using 30% in my model which I believe accurately compensates investors for the risks they are taking in a small, highly leveraged investment run by an unproven operator.  If you believe in efficient markets, this number also fits as it mirrors the historical equity returns as reported by the Stanford report, with a slight discount given this asset class has clearly generated excess returns relative to other assets on a risk adjusted basis, hence interest in these opportunities from an expanding universe of investors.
• The second method is to calculate how much money you’d get from your preference and dividends, taking into account that per the Stanford study around 75% of search funds will be able to pay these sums, and then discount these cash flows back at a rate more in line with public equities (7% in my model).  This yields a much higher value to the preference/dividend combo, and therefore lowers the implied value of the common equity.
• The last method is to just say nope, there is no value to the preference and dividend.  I need them and require them as an investor, but they are a deal breaker for me if they aren’t there, and therefore they don’t exist in my math.  This of course makes no logical sense (you need them, but they also have no value?), but I’ve left it in as I think many investors probably actually think this way and it creates a nice upper bound on the enterprise value. Side note, as with obstinate sellers, jerk investors are usually best avoided.

In our example, you can see a breakdown of the preference value, dividend value, and therefore common value and enterprise value for this deal.

In each case, the effective EBITDA multiple moves from 3.7x to something much higher (see the last 3 lines).

There are some simplifying assumptions in the model (no accruing dividend, all paid in last year), and some weird stuff that can happen (if you make the hold time long and the dividend greater than the 7% equity discount rate, the value of the dividend can get really big).

These flaws aside, I think this creates a nice framework to think through what the common is actually worth at close, and therefore what enterprise value investors will be paying in actuality.

It’s worth noting that the whole point of this is to benchmark the value you’re getting relative to market transactions in order to understand where you want to deploy your capital.

This creates a method to translate cash flow or EBITDA multiples of other opportunities on an apples to apples basis (if only there were a magical way to translate the risk associated with each as well!).

Another note, we could calculate the value of the common to be what this asset would trade at market today in a well run auction process minus any obligations (debt, preference, seller financing). However, I think that understates the option value inherent in this equity, a value that is only realized when a new manager takes over with more energy and know how.

There is a finance nerd rational for this. If you plot the value of equity in a leveraged company on a chart, it mirrors the payout of a call option. In both cases, the value of the security increases at a certain inflection point: when the value of equity rises above the strike price in an option, and when the enterprise value of a company rises above the debt level in a levered company.

The common equity of a highly levered company can therefore be valued by a similar methodology as the call option: Black Scholes. If you remember back to finance class, increasing volatility will increase the value of an option.

In the search fund case, we’ve (hopefully) increased the (upside) volatility and therefore create more value than simply selling the company today.

A few more thoughts on investor economics

There are a few other ways to think about the economics you get as an investor to best understand if this is the deal for you.

First, you may want to think about how much your investment will be worth day 1.  The key lever in this model is what discount this company is being bought for relative to fair market value. For example, the searcher may have proprietary sourced a great company and is buying it for 25% below what it would trade at in a brokered auction.

This is very much a “margin of safety” philosophy on things. Same with the calculation on how much you’ll receive in year 5 (after QSBS hits) assuming no growth in the business.

The only problem with each of these calculations is that they never play out in practice. Most companies don’t just stay the same, you’re either in a rising tide or you’re in trouble. And, you’re almost never going to sell in year 1, and definitely not for a slight premium to what it was bought for.

However, if your investment is worth 30% higher day one, and you can make a 20% IRR assuming nothing too crazy happens either way in the business, that’s not a bad place to start. Add in a strong searcher, decent market, some luck, and you’re off to the races.

Thoughts on searcher economics

A lot of this post has considered things from the investor perspective as my main quandary was related to how to create an EBITDA multiple that made sense for investors.

However, the point of this post is not to say searchers are misrepresenting or being unrealistic with their terms. In fact, I think it’s quite logical that self funded searchers capture the massive economic value that they do.

There are many reasons why self funded searchers deserve the lion share of the common equity.

First, they are providing a nice service of giving investors a positive expected value home to park their money with much lower correlation to the market than other asset classes ($1 mm EBITDA companies don’t see lots of multiple contraction/expansion throughout cycles).

Most money managers that fit that criteria are taking a 2/20, of course they also usually have a track record. So, I’ve used a 10% carry in my model, but stuck to 2% annual management fee.

The searcher spent a lot of time, and probably money, finding this company. That’s a lot of value, especially if it’s a below market price. They should be able to capture a lot of the value in finding a below market deal.

The searcher may be taking a below market salary, and needs to get comped like any CEO, with stock options. In my example model I have $1 mm of stock vesting over the hold period, as well as extra comp for taking a below market salary.

Searchers are also usually putting their financial standing at risk by taking a personal guarantee on the bank/SBA loan. This is really tough to put a number on, as is the last line in my framework where searchers are dinged for lack of experience. Like any good model, you need a few lines that you can fudge to make the math work 🙂

What you do think?

I’m shocked that I wrote all this. I was going to type a few paragraphs and a quick excel. However, putting this to paper has been a great exercise for me to sharpen my thinking.

Now I’d like you to help me further. Where do you think this should be changed in this framework? How do you think about things from the investor and/or searcher side?

Feel free to shoot me a note if you have thoughts (even just to tell me I’m being way too academic with this, which I actually agree with).

Lastly, a post like this is really a trap I’m putting on the internet to catch any like minded people in so that we can figure out ways to collaborate now or in the future. So, at the very least, connect with me on LinkedIn 🙂

For better or worse, I’m a numbers person. I regularly think about new decisions in terms of ROI – how much will I put in, and what will I get out of it.

For example, I want to start a new business where I’ll buy employee shares in fast growing companies. One of the first things I did was open excel to figure out a conservative and upside scenario for how much I’d spend on costs buying/selling, and potential returns given my strategy.

I’ve done this with newsletter subscribers, content strategies, sales lists, etc. It all comes down to numbers, right?

No, it’s not all about numbers!

A few years ago I had the pleasure of getting to know Chris Savage at Wistia. He’s a smart guy who’s built a pretty impressive business. And, I think he lives in spreadsheets a lot less than me.

I was in the early days of starting a business then, and was investing my time into blogging, while seeing very little results. No traffic spikes, no leads, no ROI.

Chris told me that when they first started blogging at Wistia, they experienced something similar. But, he knew things were working when he went to conferences because (smart/important/industry leading) people would recognize him and say “hey – I read your blog, it’s really good.”

The data didn’t say his blogging strategy was worth it yet. However, he had conviction because of the positive feedback he was getting from the right people. It would just take time to show up in the numbers.

He was right! Wistia has over 500,000 customers, and very enviable domain stats for the SEO nerds out there:

This reminds me a lot of a podcast I’d listened to a while back with Jason Fried of Basecamp who is also famous for building a large, profitable, bootstrapped SaaS business over the course of >10 years.

He said that he doesn’t look at the numbers for his business often. They use data all the time, but they are not obsessed with today’s revenues, or last week’s signups. Focusing on the metrics a PE/VC board member may have as top of mind can drive you a bit nuts.

Instead, his philosophy is that doing good work over a long period of time and looking for signals of success, even if it’s not hard numbers, to corroborate your focus leads to achieving whatever numbers based goal you may have perseverated over.

Seeing something similar

I’m glad I’ve listened to people like this. As I said, I’m a numbers guy, and I want to also be a disciplined person who kills what isn’t working quickly. Like any strength, it’s also a weakness.

The point here is that figuring out “what’s working” is an art in the early days of a venture. It’s part numbers, and part really smart people actually caring about what you’re doing as evidenced by remembering a blog and recognizing you at a conference. Or, other non-data based signals.

I’ve seen experienced something similar, although at a much smaller scale, with my Whiteboard Wednesday videos, and have also started to see similar signs as a double down on the SSR newsletter.

I hope this is useful advice for all the numbers people out there: look for signals outside of your spreadsheet, especially when in the early days of a venture doing things that don’t scale.

Thus far I’ve founded two bootstrapped B2B startups, and led sales on both.  One is off to the races, profitable, and growing.  We even hired a general manager so that I can free myself up to work on other projects.  The other is slightly more nascent, and just barely at ramen profitability.

It’s really hard to get started with founder led selling.  I’m a (slight) introvert, and had basically no sales experience before starting my first business.  While I have a business mind, and an MBA in addition to my programming skills, it was still very challenging for me to get started.

I used to view sales as this dark art that I could never master.  I’m not “salesy.”  I’m much more of a steak than sizzle person.  I’m too honest.  I don’t look, talk or act like the various stereotypes of a sales person.  And so, I thought it was basically unattainable for me to be successful with sales for the first year of my first business.

I’m proud to say that through a lot of struggle and learning, I’ve actually become a decent sales person.  For whatever I lacked in initial extroversion and unblended confidence, I make up for in understanding of strategy and product.  I’m even fairly confident I could hit quota for any post product/market fit b2b SaaS startup out there.

What I’ve learned about b2b founder sales

It’s been nearly five years now since I started the first business.  As a result, I get introduced to other founders every month or two who are starting to sell their products and want advice.  Coming out of these conversations, I find myself repeating the same themes.

So, in no particular order, here’s my advice when starting to do B2B sales at your startup:

• Find a sales mentor who’s done pre-product/market fit selling before.  It’s essential that someone has done the selling at the earliest stages of a company’s lifecycle.  Even someone who led sales at a Series A company won’t have the proper mindset or experience to help you through this.  Ideally, it’s another founder who’s been through it, and actually done the selling vs the strategy behind sales.  Another bonus is if they’ve sold to the exact customer persona you’re trying to reach.
• Network with account executives who sell into a similar persona.  Ask them to walk you through their entire sales process, from initial outreach to demo.  Give them your sales pitch, and listen to their feedback.  You’ll get good practice demo’ing, and some advice.  However, you should realize that most sales reps selling a post product/market fit product will have very little understanding of why someone buys their product, that’s really up to you to figure out.
• Record your first 50 demos and listen to them each within 24 hours of the pitch.  You will start to make small adjustments in messaging, in how long you answer questions, etc.  Be your own coach and try to look objectively at your pitch.
• Ask for demos for software you are thinking about buying.  Think about what the sales reps do well, and what they don’t do well.  Mainly do this because you will realize 90% of sales reps are pretty mediocre. They don’t show up on time.  They ramble. They don’t do any research.  They are too aggressive.  You can be 10x better than they are as a sales person, even if you’ve never sold before.  And, you’ll have to be to get started without a brand, and a product that is probably half complete.
• Ask sales people you admire what books and blogs they read.  My recommendations: FirstRound Review’s articles, this book on founding sales, and the Challenger Sale are good places to start.  There is also a hilarious instagram account you will start empathizing with.
• Spend as much time in person with your prospects as possible.  That means demos, as well as conferences, dinners, coffee, whatever you can.  This will allow you to build trust, and learn a lot faster about your customer than doing calls or even video calls. Working out of one of their offices side by side is a great way to hear how they talk, what they care about, etc. This is great for product development, and even better for sales.
• Sales calls will probably become the most important way you will get feedback on your product in the next 6-18 months.  Keep track of the themes you hear, and start to think about how you can build those into your offering / start charging for them. Record the closed/lost reasons for no-sale in a structured way so you can see what % fell out of the funnel due to pricing, competitors, etc.
• Sales can be a grind.  I used to get nervous before calls, and found that creating a routine pre-demo really helped – jumping jacks, review the script, and believe that the product I’m offering will help the person on the other end of the phone.  You also need to let go of any ego or expectations of being treated like a human being.  Most people view sales people as a nuisance.  You will get let down a lot by your prospects every single day, but that makes the wins so much sweeter.  Plus, it’s a thing that happens to everyone, not just you.
• It’s going to take you a few months to make your first sales (assuming your product is >$1k/yr).  Don’t get discouraged.  Don’t think “we need to change the pitch/outreach/etc.”  If you’ve been thoughtful about your process from the get-go, just keep building your pipeline.
• Celebrate the wins.  I’m so bad at this and have some sort of Catholic guilt about it.  When someone says “yes” – celebrate.  When someone signs the contract – celebrate.  When someone goes live – celebrate.  High five your co-founder.  Get a beer after work.   Tell your significant other.  Enjoy the moment and pat yourself on your back.

There are a million nuances to sales.  My first business was straight B2B SaaS where we were selling HR a product to help with their recruiting.  Getting headspace was tough.  Getting budget was tough.  Getting them to think about their job in a new way was tough.

In my new business, I’m selling to marketing.  It’s a completely different buyer that has more budget and is more likely to experiment with new products.  I also have an advantage in that I’m putting reviews of their software online, which means they care a lot more than if I was selling them a tool they can ignore.  This allows me to cut through the noise more effectively.  Of course, it comes with many other challenges, and some I haven’t even run into yet.

I hope you enjoy your journey to becoming an A+ sales person, which is a very attainable goal for any founder.  My journey has helped me build win new business, think deeper about product, and kickstarted my personal branding efforts. 

Good luck, and feel free to connect if I can be helpful in your journey!

One thing I’ve noticed is that the vast majority of really good advice is usually really simple.  Maybe that’s a function of the amount of time third parties are willing to spend on your problems, but I think it’s more that the majority of life’s trials can be helped with simple truths.

Warren Buffett has a lot of good quotes to this effect.  The summary is that Berkshire Hathaway doesn’t employ complex algorithms to determine good businesses.  They are just logical, and use a few axioms you could learn in an afternoon that help them pick winners.

If it’s so simple, why aren’t there more billionaires?  My theory on this is that life gets in the way, usually in the form of stimulus that depletes our ability to think rationally.

For example, maybe you put your life savings into WeWork stock because the CEO was a really good salesperson and you had extreme fear of missing out after your classmate from college made a mint investing in Facebook pre-IPO.  So, you ignored the unit economics and went all in.

There’s a similar dynamic here to when poker players are “on tilt” after luck has struck them down too many times in a row, or a lack of sleep has left them barely conscious.  They are likely to ignore the right moves, and go after outsized risks.

Whatever the case may be, it’s just hard to remember the 30-40 things that are/should be important to us.  Also, this list can grow over time, especially if you’re disciplined about it.

Recently I wrote myself an email campaign – a daily email that hits my inbox during a time when I’m probably commuting, and gives me a piece of advice I’d like to internalize but find hard to remember.

The advice may be to take a minute to think concretely about something I’m grateful for.  It may be a reminder to do something nice for someone I’m close to, or a stranger.  It could also be a quote from Warren Buffet 🙂

I’ve actually found these emails are pretty effective at keeping me focused just a tiny bit more on what I think is important, but again very easy to lose track of in the course of life.

I’m curious if anyone has figured out other ways to keep the best life advice you’ve gotten top of mind?  I’ve also been thinking about the best way for me to organize these nuggets (and stay motivated to organize them…it’s easy to highlight a book, especially on a kindle, but a lot harder to actually take those and put them in one repository!).

 

I’m hiring again and so I wanted to share some advice for anyone diligent enough to find this blog.  As time passes, and this post moves further down into the archives, I’ll be even more impressed if someone can subtly show they’ve done their digging before we meet.

So, here’s my advice when applying to jobs / interviewing (with me), that I think will also hold true across most companies / hiring managers.

• Show you care about this job.  Connect with me on LinkedIn when you apply, or find my email online and shoot me a note on what interests you about the job.  3-5 thoughtful sentences is sufficient, no need to write a book.  You’ll be in the top 5% of applicants right off the bat!
• Make me think.  I’m a curious person who loves to learn.  If you can tell me something that you’ve learned that I probably don’t know, and share it in a logical way, you’ve won me over.  Think about what you have an insider’s take on and try to weave it into the conversation.
• This is a pro tip I kind of wish wasn’t true, but flattery will get you everywhere in life.  Interviews are no different.  Show you’ve done your research, tell the interviewer they’ve got an interesting background and why.  Ask for advice.  Tell them you read their blog and found XYZ interesting.
• Be yourself.  Interviews are like doctor appointments to some extent.  Be honest and open so that both sides can assess fit.  Don’t take a job that’s a bad fit.
• Don’t let nerves hold you back.  I’m going to be a hypocrite here as I definitely allow anxiety to dictate my abilities sometimes.  That said, please don’t be nervous, I’m usually a pretty nice person and promise not to be too tough 🙂
• The most important thing is to bring 1-2 ideas that are relevant to the business that we aren’t doing yet.  What would you do, why do you think it’s a good idea, how do we lean test this, what does success/failure look like?

Here are the things I’m trying to hire for (more or less in this order):

• Personality – Are you someone who’s enjoyable to be around, with high ethical standards and a “get to” perspective?
• Growth mindset – Can you learn fast and get over failure?  Do you want to get better and seek out feedback?
• Work ethic – Are you willing to do the hard (and very unglamorous) work required to succeed?
• Rational – Do you think logically through problems in a balanced way?  Can you reason, and be reasoned with?  Are you a rambler or a clear thinker?
• Zest – Are you excited about the things that you do in life?

Tactics you should use:

• Write a thoughtful cover letter.  Don’t send a form cover letter, what is the point?  Just write 3-5 sentences about why you want to work at my company / with me.
• Make sure your resume is close to perfect.  Not typos, consistent formatting, etc (get an investment banking analyst or corporate lawyer to look at it).  Please include your GPA if you graduated in the last 10 years.
• For a video call – use your computer (not phone), dress biz casual or formal (shave if you’re a guy, don’t wear a t-shirt or hoodie!), make sure you’re in a quiet place with decent lighting, try to find a room without tons of mess behind you.  Make eye contact.
• Write a thank you note after we chat within 24 hours.  2-5 sentences on stuff that stood out to you, and why you’d want to move forward with this opportunity.  In a startup you have to hustle the extra bit to succeed – most people write “Thanks for the time!” and usually get the response “You too, we’re moving forward with another candidate, sorry.”
• If I give you a project to do, please push back if it’s going to take more than 60 mins unless we are paying you for it.  I don’t want to create an arduous interview process and sometimes need some feedback.
• Don’t feel like you have to ask questions at the end of the interview if you don’t have any that you care about.
• Ask for feedback if you want it.  I’ll usually tell you what’s on my mind (good and bad – please don’t ask if you don’t actually want to hear anything bad…also bad feedback doesn’t mean you’re out of the process, I’m just offering it so you can get better).
• Being on time is 1 minute away from being late.  1 minute late is almost always a deal breaker.
• Show that you’ve done your research on our company, myself, the industry, etc.

Ironically, I think anyone who finds this post probably doesn’t need 90% of this advice.  However, if it makes one high aptitude person more prepared for an interview so we can better assess one another – I’m glad I wrote it 🙂

A few weeks ago I asked Fidelity to send my brokerage history dating back to when I opened the account in 1998.  Last week I got a big package in the mail and so thought it’d be a great time to go through my investing track record!

When I got into the market

When I was in 5th grade, I really wanted to open a brokerage account.  It was the beginning of the dot com bubble, and everyone seemed to be talking about the stock market.  It seemed like a good way to make money.

I’d heard stories of how my Dad took his paper route money when he was a kid and started trading stocks.  But, he was a bit reticent to let my brother (a year younger) and I open accounts given the market was so hot, and that we had a good chance of starting out investing at the peak of a cycle.

Luckily, my Mom thought it was a good idea and eventually took us to Fidelity one afternoon to open accounts.

By this time, I was 12 and in 6th grade.  But, not too young to start saving (in fact we’d opened savings accounts when I was in first grade – the idea that for every $100 I scrapped together I could get $5/yr for free was too good to pass up – this was when interest rates weren’t 0%).

My Performance

The first year was rough.  I bought one stock, MXE, a Mexican Holding company (like Berkshire Hathaway, but cheaper, and maybe the Mexican market was being overlooked, was the vague investment thesis).  It went down 17% that year (I eventually made a modest profit off it).  Most of my ideas in the early days were from reading Worth magazine to see which stocks they were pumping at the time, and then pick the one I liked the most.

The next three years were pretty amazing though.  I traded in and out of a few tech stocks.  I was in cash for the blow up in 2000.  And, I was finally was able to afford a share of BRK.B (Berkshire Hathaway’s “b class”).  These all lead me to beating the market by 125% over 1999-2001.  Finally, I had that freshman year nest egg I always dreamed of :).

I won’t bore you with every trade (there were many over the decades, but not that many each year).  In summary, here’s a chart of my annual returns over the last ~20 years:

Over the next decade or so, I made some good calls and bad ones.  Overall, I tend to beat the market in down turns, and lag it when things are going great.

Here’s a chart of my annual returns relative to the S&P 500:

I’m proud to say that my public equities have outperformed the S&P 500 by about 3% per year on average.  Of course, a lot of this is luck.  I had some rational behind every trade I made, but does a freshman in high school really know what they are doing?

It’s interesting to note that my annual returns are starting to converge closely with the S&P 500 over time:

Scorecard

The S&P has returned a 6.5% IRR since 1998 – 2017 (when my data ends for now), vs my 9.5% average annual return.

Overall for every dollar put into the S&P in 1998, you’d expect to have $3.29.  For every $1 I invested, I have $5.59, which is about 41% more.

Data notes

I’m understating my returns a bit here.  My transaction costs were around $20/trade when I started, which was a meaningful amount of money relative to my overall portfolio.  So, my returns are probably a bit higher each year, especially in those early years (>1% of my portfolio went to fees in 1999 alone).

I got the S&P return data here for reference.

I almost calculated a sharpe ratio, but realistically I’d need to do a lot more data analysis on my portfolio and I don’t have all the info I need.  However, I’d like to think my standard deviation relative to the S&P is lower given I’ve always had a decent amount of money in cash.

What I learned

• Starting to invest/save early has a few major advantages including compounding, as well as working towards your 10,000 hours to “master” money management.
• You can start with a very small amount of money, my first savings account had <$100, and as long as you have >$1,000, you can start investing in the market.
• It’s important to take a long term view on your savings/investing.  I’ve never withdrawn money from my Fidelity account.  This is money I don’t need, and won’t need unless something very terrible happens.
• Don’t freak out during downturns, and don’t think you’re a genius when you make a lot of money.  A lot of this is luck, which hopefully evens out over time.
• You have to pay up for really great companies – I sold Amazon 5 years ago because it was very “expensive” on a P/E basis.  This is really hard for someone like me who’s naturally frugal.
• Analyzing your investing style and decisions can give you some insights into your personality/strengths/weaknesses – I’m less aggressive than I should be, cheaper than I should be, and tend to focus on ‘contrarian’ opportunities more than average.
• Almost no one can consistently beat the market – this is why the  majority of my money is now in low cost ETFs, with a few exceptions.  Of course, if you are extremely shrewd and level headed and can dedicate >10 hrs/day to it, there is a lot of alpha out there.
• You can’t regret bad decisions and missed opportunities, just learn from them.
• Allowing your child to start investing with a small amount of money is a good idea, as long as they are very interested in it, and prudent.  They’ll lose money at some point, which is a good thing.  And, over time, they’ll learn a lot while saving along the way.

More to come

I’ve had the opportunity to do some investing in private tech companies, and so would like to update my overall annual investing IRR with these returns in a future post.  Overall I’d estimate I’ve gotten around a 7x return on these investments over the past 8 years.  It should be very interesting data to add!

Every 6-10 weeks someone asks me how I studied for the GMAT and any advice I have.  Well, here’s my story!

Unfortunately, in college I was friends with a bunch of over achievers who thought it’d be a good idea to take the GMAT during senior year after they’d secured full time jobs.  So, due to peer pressure and insecurity, I too signed up to take the test.

I took the ManhattanGMAT class which was ~7 weeks long.  Each week consisted of 2 hours in a classroom, and 2 hours or so of homework.  I’d say I did around 1/2 of the recommended homework each week.  After taking the prep course, I immediately signed up for a date to take the actual exam which was about 2 weeks out.  The date was during my finals week at NYU, but I wanted to take it before I headed out for a post-graduation trip to Asia with friends (the same ones who’d peer pressured me into taking this exam!!).

Before the prep course, I took a practice test and scored ~610 (my memory is slightly hazy, but it was in that ballpark).  My goal was to get to a 700 by the time I took the test, and I was around a 680 by the time I finished the prep course.

The number one piece of advice for anyone taking this test is to create and use flashcards to internalize the information you need to answer the most difficult questions.  This was a strategy I stole directly from my Dad who used it to become a doctor (much harder than getting into bschool – so it seemed battle tested).

With that in mind, I went through the 7-8 books that the test prep course had provided, and made a flashcard for any piece of info that I thought would help me answer questions.  I made them for the types of triangles, grammar rules, and for the toughest types of questions (two trains going towards each other, the ones that require factorials, etc).

I had 200-300 flashcards, and would look at them when I had 5 mins on the subway, or while waiting for a friend.  When I’d correctly answered a given card in three consecutive cycles (I put the card on the bottom of the deck after I’d tried to answer it), I discarded it.

The week before the test, I studied for 3-4 hours/day (mostly the flashcards plus some practice problems).  The day before, I didn’t do anything but workout, eat some good food, and watch a movie.  It’s important to rest your brain and de-stress!  Now, I’d probably also do an extra long mediation session but I wasn’t into that back then.

I don’t remember exactly the slope of the curve, but there was a huge increase in my scores in the week before the test.  I started off maybe at the 700 mark for a practice test, and then got a 720, and a 750 before my studying ended (don’t take too many practice tests.  They are good to gauge where you’re at, but take a lot of time and aren’t very instructive in helping you improve).  I’m pretty confident if I’d pushed the test back another week I could have continued to improve…but the commonly accepted rule says increasing your score above a 700 doesn’t help too much in getting you into school.  Btw, I share these numbers only so you can see my progress from the original 610 to when I took the exam and what I did to get there – not to brag!!!

The day of the test of course I was a bit nervous.  The worst part of the GMAT is that they ask you “do you want to accept this score” after you take the test.  Basically, you can say “no” – and it’s like it never happened.  But, if you “accept the score” it goes on your record.  My advice: just accept the score unless you had a monumental meltdown for some reason.  Because of the way the test works, you get harder questions if you answer questions correctly.  So, if you’re getting hard questions, even if you can’t answer them, you’re doing well!

In the end, I scored a 740.  I remember not being completely happy with the score when I got it, and the person working the front desk who’d given me the score basically said “I don’t get it – if I got that score, I’d be jumping up and down!”

My advice is to not put that much pressure on yourself.  And, if you score above the range you need to get into your dream school, go celebrate!  Luckily, I came to my senses about 10 mins after leaving the test center and couldn’t wipe the smile off my face for a few days.

Good luck, don’t stress, and look forward to two of the best years of your life 🙂

This past summer a good friend of mine bought me a copy of “The Book of Joy.”  In the last year I’d been getting into meditation/spirituality, and his wife had loved it.

While the book isn’t very long, it did take me a long time to read it for the simple reason that there is SO MUCH wisdom sprinkled throughout.   For those that don’t know, this book is basically a summary of a week of conversation between the Dalai Lama and Desmond Tutu.  It outlines many of their core philosophies.

There are a ton of great tidbits in this book for anyone with an open mind, and I highly suggest you go buy it if you’re at all curious.

I knew it’d be a worthwhile exercise for my own self to codify some (I can’t stress ‘some’ enough – this book is full of interesting and useful wisdom) of the key lessons that I took away, and thought “why not write them up on that blog I never post to!”

So, here are a few of the lessons I took away:

• “The purpose of life is to find happiness” – The Dalai Lama says this in the opening part of the week, and I completely agree.  Of course, finding and pursuing happiness are quite different and will lead to divergent outcomes.  As is mentioned later in the book, happiness is a byproduct of generosity, compassion, self love, and a host of other worthy pursuits.  Pursuing it directly usually ends in distraction and a focus on things like fast cars or big boats.
• Compassion = Happiness – Do you ever have one of those days where you strike up a genuine conversation with a stranger, or get to help out someone in need?  As the book says “If you develop a strong sense of concern for the well-being of others, this will make you happy in the morning, even before coffee.”  This is very true, and you can lean test it by smiling and saying hello to each person you meet with today – I guarantee you’ll notice the change in yourself.  Of course, you can supercharge your effort through generosity.
• A grateful mind breeds happiness – Having a bad day?  Think of something you’re truly grateful for and focus on it.  Maybe it’s as trivial as how warm your coffee is, or maybe it’s something as important as your health.  Focusing on things we’re grateful for is transformative, and a worthwhile daily practice.
• We’re all people – This is very related to the compassion point, but I wanted to write down a key consideration made throughout the book around the negative side of personal interactions.  Ever have a boss that is horrible, or have a run in with a bully?  Realistically, these people are critical because they see the world as critical, or aggressive because they are fragile.  Forgiveness and empathy, even to people who “don’t deserve it” leads to happiness.  Side note: I’ll admit it, I can hold grudges…but letting them go feels so much better than ruminating (with the exception of when I’m trying to beat a 3 mile time and need some extra adrenaline for that final push).
• Stress and hardship are just a part of life – According to the book, stress is actually key to our development in utero (disclaimer:  I’m no doctor).  We can all agree that it’d be crazy not to recognize the amazing role that hardship and failure play in the evolution of us as individuals.  So, try to see the bright side of your next challenge, and realize that every human on earth has to go through something similar in their lives (easier said that done!).  Apparently, the first noble truth of Buddhism is that life is full of suffering.  If you need some extra inspiration here, I highly recommend Viktor Frankel’s Man’s Search for Meaning.
• It ain’t all fluff  – A lot of the above sounds like something a non analytical thinker would believe in, or what you may simply learn at Kindergarten (and what’s wrong with that???).  However, nothing could be further from the truth.  Following the teachings laid out in this book will actually make you happier, allow you to think clearer, and live a more “productive” life.  Beyond my own experience,  you can see that these teachings align with how humans came to be through the evolution of our species.  For example, building meaningful relationships with others is a sure fire way to be happy, which makes sense as that’s how we used to (and still do) get stuff done in society.  In fact, the book is sprinkled with actual scientific studies that detail things like lowered hypertension in people who gave away money…just in case you’re a skeptic and need some data along with the wise words 🙂

One fun thought experiment is to think about the various things future generations will know as truth that we can’t see right now.  For example, we now look back at history and think “how could they not know smoking was bad for them?” or “how could anyone not see the CDO market was a house of cards that posed a major systemic risk to the economy?”  Meditation is a great way to think more clearly about the question of what we just aren’t understanding now…and, perhaps its future adoption will be another answer to this thought experiment.

For the majority of my life, I’ve been mediocre at best when it comes to marketing myself.  This is true in the business and personal realms.  In fact, there was a time when I took pride in being mostly steak with very little sizzle.

However, I’ve slowly realized that building a personal brand has massive benefits in helping accomplish your goals.  I know people who are pretty much average in their talents who’ve been able to accomplish a lot simply because they were truly great at marketing themselves.

What is personal branding

Just to be clear, personal branding is any attempt to dress up your own accomplishments.  This can take the form of a highly manicured LinkedIn Profile, a personal blog (ahem), smart-sounding language you use to describe stuff, etc.

Why I hated personal branding

The reason I took pride in my lack of sizzle is because at my core, I think that  ideas, talents, etc should be evaluated in an objective and analytical manner that rewards that which is truly great.

I hate it when entrepreneurs spend days honing their pitch before raising capital.  Shouldn’t VCs simply be judging their business’s merits based on a frank conversation that answers the key questions in the most honest, and intellectually honest way?

There are a few million other examples: dating, sales, introducing yourself to a stranger.  These interactions can all be changed and framed in drastically different ways through the way someone “brands” themselves.

The reality – it matters

I mentioned a few people I know who’ve done well because of their personal branding.  Ok, so I won’t mention any names here, but there are smart people I know who’ve made >$10 million MOSTLY on the backs of their personal branding efforts, and average people who’ve made $>1 million.  Those are pretty conservative numbers.

Think about the person in your office who does a phenomenal job of making sure the boss knows when they did a good job, introduces themselves to the CEO to get on their radar, and gets promoted faster as a result.  Now, think about an entrepreneur who turns a personal mystique into a million dollar contract, despite their product.  Yup, this stuff matters A LOT.

What’s more – it takes a VERY long time for most people to figure out if the emperor is wearing any clothes or not.  Marketing of products is so ubiquitous for a reason, this is how companies effectively hack our brains into buying products.  The same can be done at a personal level.

The moral question

Ok, so who cares if your colleague gets promoted 6 months before they should?  We live in a capitalist society where you should get yours, within the realm of the law, right?

Sure, but where is the line?  At the extreme, “false advertising” here means that someone is a con artist who defrauds people of money.  One step below is the person (probably entrepreneur) who grossly over inflates their past accomplishments, relationships, etc to get economic benefit.  I’ve run into this a lot as I’ve started my own business, both watching others and from people overselling themselves in order to get equity in our company, or cash.  Fun times.

We all need to do our own diligence on the characters that we run into in life, but I’d also like to think that we are all good actors in the world that have empathy for others.

At the risk of getting very long winded, I believe that the personal branders out there need to make sure the image and narrative they’re putting forth are in line with reality, and not aspirational – or down right false!

It’s actually not all that bad!

Before you call me a hypocrite for having a personal blog ( I don’t even have a favicon, c’mon), professional LinkedIn headshot, etc…please let me state that my perspective has changed drastically since I started my career.

Beyond the most basic of “branding” (you should probably wear deodorant, brush your teeth, etc), it just plain makes sense to market oneself.  Realistically, we all use appearance, reputation, etc to evaluate people and figure out if we want to do business with them, or be their friend.  With that in mind, you should take the basic steps to put your best foot forward.

The important key is to remain authentic, and self aware.  A week back, I heard someone in my network talking about how they modeled their personal brand off of the “heel” character type in pro wrestling.  I actually admired that.  They aren’t pretending this is their true self (even if they are kind of pretending this is their true self).  And, they’d done this in a very intentional way in order to differentiate themselves in a market full of nice people.

From a personal standpoint, you’d be kind of crazy not to put in at least the baseline efforts.  Just please don’t exaggerate because then it makes the whole personal branding this feel really icky.