This week I had a conversation with an early-stage founder who’s building software for micro SMBs. After being at it for several years, he’s finally hit product–market fit. He’s doing over $1m in annual recurring revenue, is cash-flow break even, and wants to raise from VC firms to accelerate growth.

As we chatted, he told me that he’s made it to several final meetings with VC firms where he presents to the entire partnership. They love the product, but they don’t understand how the go-to-market will work for micro SMBs or how big the market opportunity is. So, they pass.

This conversation reminded me of a post I wrote a few months ago (see here). There’s no tried-and-true playbook for selling to micro SMBs like there is for enterprise SaaS, so lots of people avoid it. They don’t understand how big the market is or how to find potential customers.

To me, it’s an obvious white space that people—even some VC firms—are overlooking. And to this founder, the opportunity is crystal clear. He’s dumbfounded that forward-thinking investors don’t get it.

Micro SMBs is an overlooked and great market to go after. The entrepreneurs who get it now will end up building massive businesses with diversified and loyal customer bases. By the time others realize how big this opportunity is, these early entrepreneurs will have a first-mover advantage that will be hard to compete with.

I’m rooting for this founder. He finally found one firm whose people get it. They’ve agreed to be the lead and write a large check in his fundraising round. He’s on his way!

This week, I met with an Atlanta founder who bootstrapped his 18-month-old company to over $100 million in annual recurring revenue in under 12 months, and it’s profitable. He mentioned that Lovable is the only company he’s aware of, as of today, to have reached $100 million faster than his company. They did it in eight or so months and raised venture capital.

Having a front-row seat for this founder’s journey over the last year has opened my eyes to what was once unimaginable: reaching $100 million in revenue in a year or two. Seeing how he’s been able to scale his company rapidly has expanded my thinking around what’s possible. It’s one thing to read about $100 million-in-a-year growth stories (there are more and more every week). But it’s another thing to know someone who’s doing it and hear about the ups and downs of their journey. The latter makes it real and feel obtainable.

Rapid growth on this scale isn’t a smooth ride. It’s a nonstop fire drill with stuff breaking and a chase to try to get ahead of the growth. How many of these hyper-growth companies will endure? Time will tell, but my gut tells me that founders like the one I talk to this week are smart and will find a way to not only take their companies to $1 billion in annual revenue but be around for the long haul.

I’m working with a founder on his pitch deck, and his market-size slide was one we agreed needed work. Lots of founders use a top-down approach to sizing their market. For example, they estimate the market to be $10 billion and assume they’ll capture, say, 20% of it, resulting in a total market share of $2 billion. Coming up with this is easy, but it’s not the best approach. It doesn’t add much value to the entrepreneur who did the exercise, and investors won’t put much weight on it either.

The better approach is one that’s bottom-up. I’ve written about this before (see here), and I won’t rehash everything in that post. But for entrepreneurs looking for an example of how to do a bottom-up sizing of their market, I like this blog post from Bling Capital. It’s detailed and includes a link to a market-sizing template that’s very helpful. (Note: Its site has been updated, so I’m linking to the post on Internet Archive.)

This week, I had the opportunity to catch up with an entrepreneur who has an idea-stage company. He and his cofounders have built an MVP and are now looking to raise money from investors and acquire customers. When a seasoned entrepreneur and I chatted with him, both of us zeroed in on a material issue: he couldn’t quickly and concisely articulate the problem his product solves.

We brought this to his attention, and he agreed that he and his other cofounders need to get specific about the problem. When I talked to him a few days later, they’d spent significant time debating the point. He presented the new problem statement to me. It was better, but still not clear. They’re back working on it again.

A business exists to solve a problem for customers. If the solution is good, it creates value for customers by resolving their problem and the customers pay the business for the value it created. It’s that simple.

If a business isn’t clear on what problem it’s solving, customers won’t be clear on how the business can help them. They’re less likely to buy.

My point is that clarifying the problem is a crucial step. The problem is the entire reason the business exists. It’s the foundation of the business. Without clarity about the problem, the business is built on a weak foundation and everything about building the company becomes significantly harder (it was never going to be easy).

If you can’t articulate the problem you’re solving in a way anyone can understand—in one sentence—ask yourself, What problem am I really solving?

This week, a founder wanted feedback on her sales pitch deck, so I sat in on her pitch. The company has hundreds of thousands in revenue from enterprise clients and product–market fit. The pitch deck was visually impressive, and the value proposition made sense. But I noticed a glaring problem with her pitch: her messaging wasn’t clear. Specifically, when I asked questions, it became apparent that the problem she’s solving is slightly different than what’s in her sales pitch. So the pitch isn’t as effective as it could be.

You might be thinking that your messaging and your sales pitch are the same, but they’re not. Your messaging is a clear articulation of what problem you solve, how you solve it, and why your audience should care. It quickly explains why your company exists and how it adds value. Having a clear message is important because it becomes the basis of lots of critical fundamentals of the company: the recruiting pitch, the investor pitch, the sales pitch, etc. Without clarity, everything built on top of the messaging is less effective, which is what this founder is experiencing.

I think there’s something to be said for founders working on their messaging independently, before beginning to use it in other collateral. Many founders start working on their messaging when they begin building a pitch for investors or customers. But I think messaging is so critical that founders should get clarity on it far in advance of building a pitch. They should clarify their messaging to gain clarity in their minds. If a founder has clarity on the messaging, they’re more confident, which permeates everything else they do. It makes many other facets of company building easier (not easy). For example, it’s easier to close deals with customers, recruit the right talent, and raise growth capital from investors.

This week I chatted with a founder about his fundraise and his longer-term goal. He told me his goal is to build and sell his company. I thought, his company will be built to sell. I asked him a few clarifying questions and learned that his true goal is to have a large enough cash position that he can pursue his other passions and ideas.

Selling a company isn’t a guarantee. A lot of external factors determine if (1) a transaction is possible and (2) if it’s financially feasible to sell the company.

Since 1981, we’ve been in an environment heavy in acquisitions, and it’s all some founders know. However, I’d argue that this is largely a function of interest rates on 10-year U.S. Treasuries, which dropped from almost 16% to 0.5% in 2020 and have since risen to about 4.25% today. Said differently, interest rates were falling, or historically low, for roughly 40 years, which contributed to more borrowing, which led to more acquisitions. People borrowed money, and some of them bought companies with it.

I can’t predict what rates will do going forward, but 40 more years of declining rates seems highly unlikely.

That having been said, I believe that building a company that’s self-sustaining and that generates positive cash flow is a more effective strategy. If customers love the product and it’s generating cash flow, the owner has several options. He can keep the company and reinvest the profits inside or outside the company. If the environment is right for acquisitions, the company likely is more attractive and can command a premium from a buyer because the owner doesn’t “need” to sell.

When you build a company focused on creating sustainable value for customers and cash flow for the long term, your decision process is a lot different. You’re more likely to build something that can withstand whatever external factors the world throws at it. If you build something to sell, you can do everything “right” but still fail to sell simply because outside factors, such as interest rates, create poor market conditions and timing.

This week, I listened to an entrepreneur share how he took out a loan to buy out his cofounder about a year ago. The good news is that the founder now owns 100% of the company and all its upside. The bad news is that revenue has declined slightly, the company is breakeven (no profit), and the monthly debt payments are affecting the founder’s decision-making. He’s now worried about what will happen if the business can no longer generate enough cash to service the debt payments.

I don’t have enough context to say whether debt was right for that founder, but I think about taking on debt in a business using a simple framework. Here are the steps:

• Do I have a clear plan to invest the proceeds, and can that investment generate a return? If not, I won’t take on the debt. For example, I’m not comfortable taking on debt for consumption, but I’ll take on debt to invest in a project that will allow the business to generate more revenue and cash flow.
• If I use the proceeds to invest in something that generates a return, will the percentage return be higher than the interest rate on the debt? If not, I won’t take on the debt. For example, the loan has a 10% interest rate, but the project I’m planning will likely generate a 5% return. That’s not something I’d take on debt for because the return isn’t sufficient to service the debt payments.  
• Can the current business cash flows support the debt payments? If not, I’d think harder about taking on debt and be less inclined to do so if my conviction about my plan to invest the proceeds isn’t strong.

Debt is a form of leverage and a tool. It provides you with more financial resources than you typically would have from customer revenue alone. Like any tool, it’s not good or bad. How you apply the tool makes all the difference.

Last month I shared my love for the micro SMB market and my observation that many start-ups overlook it (see here). This week, I listened to a founder who’s targeting this market give an update on his progress. The TL;DR is that it’s starting to work. He’s beginning to land paying customers and see his monthly recurring revenue increase month over month. But it’s tough and taking longer than he expected.

A few of my takeaways from this founder’s experience so far:

• Go-to-market (GTM) – Finding and converting micro SMBs into paying customers is difficult. They’re scattered all over the place and busy operating. You likely can’t find them on tried-and-true places like LinkedIn. Instead, you have to think of them as consumers and market to them that way (I think of them as prosumers). Finding them in the places they’re already hanging out (e.g., Facebook groups or Reddit forums) is a good first step. Figuring out how to add value where they are builds trust and increases the chances that you’ll get them into your sales funnel.
• Wannabes – Targeting aspirational micro SMB entrepreneurs isn’t a great strategy. Even if your GTM is good and you find them, they still may not buy what you’re selling because the problem you’re solving isn’t real to them (yet). Target micro SMBs who are already generating revenue and trying to grow. They’ll instantly understand the value of the solution you’re providing. They’ve tasted some success, and they’re hungry for more. Position yourself as the person trying to help them build their empire.
• Start narrow – Building on the GTM point above, starting with a narrowly defined problem and a narrow persona for an ideal target micro SMB is likely a good approach. It’s much easier to measure the effectiveness of your marketing efforts and iterate on them when you’re focused narrowly. Going wide is akin to trying to boil the ocean (and the micro SMB market is HUGE).
• Moat – Because finding micro SMBs is challenging, many players tend to avoid this market and go after SMBs (mid-market businesses) or enterprises instead. Therefore, if you can figure it out, you’ll have a big competitive advantage. You’re less likely to have competitors because what you’ve done seems impossible to others. Less competition means you can capture a larger share of the market before having to worry about competitive pressures that erode margins.
• Partnerships – If your GTM is working well, other companies will likely want to partner with you or pay you to tap into your micro SMB customer base because they can’t figure out how to replicate what you’ve done. This creates all kinds of opportunities and leverage in relationship conversations. If done strategically, it could get your cost to acquire a customer to zero or even turn into a profit center.
• Runway – Finding your strategy to locate and acquire micro SMBs isn’t like executing a proven playbook, such as enterprise SaaS sales. It’s about creating something from scratch that may not have been done before. Lots of testing and iteration are required. Because there isn’t a predictable formula or strategy, you have no idea how long it will take. Maximizing your runway is critical so you’ll have enough time to experiment and, quite frankly, catch a lucky break.
• Small tickets – Selling to micro SMBs means the average amount you get from a customer is likely to be low. So, you need lots of customers to build a meaningful amount of revenue. That takes time, so you need to give yourself plenty of it. But once it starts rolling at a steady pace, it can snowball quickly.
• Payments – Offering a product that makes it easier for micro SMBs to accept payments from their customers puts you in the revenue path. Once they rely on your product or service to generate their revenue, they’re less likely to leave.
• Workflows – Micro SMBs usually have zero processes and are often one- or two-person companies. If your product offers processes where none exist or automates tedious manual processes, that’s huge to these micro companies because you can help them generate more revenue without needing to add headcount.

I’m excited for this entrepreneur. I think he’s on to something big. If he can crack the GTM for micro SMBs, I think he’ll build a shockingly big business fast.

Last year, I read a book by Felix Dennis. The title—How to Get Rich—isn’t my favorite, but it grabs people’s attention. The book is about succeeding as an entrepreneur, which leads to wealth—it’s not just about how to get rich. Dennis shares numerous lessons he learned the hard way as he built several companies, including Maxim magazine.

The book is a good read and contains lots of useful lessons for entrepreneurs. To see my takeaways, read my blog post series here.

One takeaway that stuck with me is about persistence and stubbornness. I regularly ask myself if I’m being persistent or stubborn when things aren’t going as I’d hoped. Here’s how Dennis describes the difference between the two:

Persistence is having the conviction that you’re right about something and that your point will be confirmed in the future (hopefully shortly). You simply keep going until you’re proven right. This is what entrepreneurs are known for. Simple enough, right? Well, how does persistence differ from stubbornness? Stubbornness is a form of persistence. You persist at something because you think you’ll be proven right. Stubbornness comes in when data or other evidence points to your likely not being right. Said differently, stubbornness is persisting even though signs are pointing to your being wrong.

Persistent people keep going, but they pay attention to red flags. If they’ve made a mistake, they change their plans. They persist, but in a different way—one that’s more likely to be successful. Stubborn people keep going and never course correct when they should.  

I think of persistent people as rational, clear thinkers. They’re grounded in reality and have the mental flexibility to acknowledge when they’ve made a mistake or bad decision. They acknowledge their error, regroup, and refocus their energies on the right activities so they can still achieve their goal.

I was stubborn once. I ignored signs that I was going hard in the wrong direction, and I regretted it. I vowed to do my best to avoid those kinds of mistakes going forward. Since reading Dennis’s book, I regularly ask myself if I’m being persistent or stubborn. I look for signs or data points that signal that I might be right. If I can’t come up with any, I know I’m likely being stubborn and need to course correct and put my energy into different actions that still align with my goal.

Last year, I wrote a post (see here) in which I defined wisdom:

Wisdom is the ability to apply knowledge in a manner that aligns with the outcome you desire. Wisdom means changed behavior and improved decision-making—knowing what to do and when to do it. Wisdom is acquired from experience (yours or someone else’s).

Wisdom is the entrepreneur’s friend because it allows them to hit their goals (e.g., grow their company) faster. Acquiring wisdom from the experiences of other credible entrepreneurs is best because doing so saves a significant amount of time.

How entrepreneurs acquire wisdom from others is something I’ve given a lot of thought to—after all, I’m reading biographies to do just that. Entrepreneurs pay lots of money to be in communities with people going through similar experiences so they can learn from them (EO, YPO, Vistage, Hampton, etc.).

I’ve been thinking about the difference between first-generation and second- or multi-generation entrepreneurs and how the acquisition of wisdom impacts their respective velocities, which is more important than their speed (learn why here).

I’m going to learn more about this, but I hypothesize that second-generation entrepreneurs have a material advantage starting out because they’ve acquired significant wisdom through osmosis from being around and talking to family members who are entrepreneurs. They learn from an early age what works and doesn’t work, and why, from experiences of family. So, when they start their own companies, they have a better idea of what to do and when to do it. Does that mean a second-generation entrepreneur is more likely to be successful? I don’t know. Does it mean a first-generation entrepreneur competing against a second-generation entrepreneur needs greater learning velocity? Likely so.

I’m curious about this and excited to learn more. I’m going to talk to a few entrepreneur friends who grew up in entrepreneurial families to get a feel for whether my thesis is directionally accurate.