Hubspot today is a $23B juggernaut. But of course, it wasn’t always quite that big! In 2016, Hubspot was still a scrappy player that had only recently IPO’d, with a market cap around $1B. Co-founder and CTO Dharmesh Shah shared with us how they got there — and the top mistakes they made — just 3 quarters after their IPO. A SaaStr Classic!!
There are rules in starting an enterprise software company. You will fail if you: 1) try to build a suite of products out of the gate, 2) focus solely on SMBs, or 3) have an MBA. In this top-rated session Dharmesh Shah, cofounder and CTO of HubSpot, shares how he and his co-founders broke all of the “rules” and ended up creating an entirely new category of marketing software. Turns out a founding team of six MBAs creating a full suite of products sold solely to SMBs can become a multi-million dollar public company in nine years – and continue growing rapidly ($77.6 million in 2013 to $115.9 million in 2014.)
Of course, no success story is without its obstacles. In the candid style we all know and love, Dharmesh shares the bumps along the way on Hubspot’s journey from crappy product to a $125 million IPO.
Check out the video and full transcript below, and the podcast above! You can also view the slides here and below.
Jason Lemkin: Welcome back, guys. I’m just going to help on this session, but we have a treat. We have someone that…how many Twitter followers do you have?
Dharmesh Shah: 271,000. Not that I look obsessively or anything. I just happen to…
Jason: 271,000, and quite a few others on social media. We have someone that probably 98 percent of you know virtually or socially in some sense, Dharmesh Shah, founder and CTO of HubSpot. Let’s welcome him and thank him for coming, which is great.
Dharmesh: Thanks everyone.
Jason: I think we’re just going to learn a handful of lessons from nothing to IPO and beyond from a friend of all of ours. I’ll try and tease out anything interesting from the conversation that we don’t get to.
Dharmesh: Thanks for having me, Jason. This is awesome. My favorite audience other than my own conference of course, but my favorite audience ever. We’re going to mix it up a little bit. It feels a little bit like being on “Late Night.”
Essentially, I’m going to do my skit, then go sit down, and if I do well enough, and Jason invites me back, we’re going to do that. I’m going to run through this. I call this “Lessons from the Unlikely Story of HubSpot”, and I’ll explain in terms of why the story was unlikely.
I’m Dharmesh. That’s the hashtag, in case you have not figured that out, and you like the Twitter thing. For the video people, by the way, my slides are much better looking than I am. If you just want to drift that camera up there, that would probably be better.
I’m going to skip by my life story, and how I grew up as a small child in India, and how the dusty streets influenced my take on unit economics, and SaaS subscription models. We’re going to fast forward to HubSpot which is my claim to undeserved fame.
Most of you I’m assuming, at least, have never of HubSpot. Otherwise, we are not doing our jobs, being in the marketing space. HubSpot’s had a reasonably successful run. We had a notable funding round in October of 2014.
That’s the gratuitous ring of the bell photo that must be included because that’s just the way those things go, and this is the only other gratuitous slide in the deck. This is the revenue growth for HubSpot leading up to the IPO.
The thing that’s noteworthy here is the three quarters that we’ve been public since then. The top line growth has grown over 55 percent year on year for all three quarters since we’ve been out, so it’s been doing well.
We haven’t reported fourth quarter yet because the earnings call is tomorrow, so don’t try to read into my body language or anything. You’ll get me in trouble. You’ll find out tomorrow. Safe harbor, I may make forward-looking statements. The actual results may vary.
My goal here is, hopefully, to share something useful, or maybe a couple of things that are useful that will increase your odds of what I think of as like breakthrough success which is what HubSpot is trying to achieve. Things that we’ve learned along the way that we think have influenced our trajectory, and hopefully increased our odds of having breakthrough success someday as well.
A couple of quick notes of warning. One is, lots of folks that have been through the startup cycle, you have this extrapolation from a single data point problem, which is, “OK, we have this story. This is what we did. Wasn’t that awesome. You should follow it.”
It’s a myth that unicorns, just because they were successful, that everything they did was smart, and everything they say since having become a unicorn is right and true, and applicable to all people. It’s just simply not true. Unicorns don’t crap out universally applicable advice.
All that aside, going back to when HubSpot first started, I met this guy, Brian Halligan, who’s the founder and CEO of HubSpot. We met in grad school at MIT, and there was one problem with Brian. The problem is that he was in business school, working towards an MBA.
Now some of you may be like, “Well, why is that a problem?” It’s like, “Lots of people get MBAs,” and it’s because the conventional wisdom in the startup world was, and still is…I’ll explain by way of this formula.
Let’s assume the probability of success for a SaaS company is roughly one percent, and that formula is true, given some definition of success, right? Work with me here. It’s OK. That probability is impacted, sometimes negatively and sometimes exponentially, by certain things.
One of those things, supposedly, is the number of MBAs on the early team, so the math going through my head is like, “OK, well, we’re just getting started, and here we’ve got this MBA that’s joining, and the two person co-founding team. I said, “Holy crap. We’ve just dropped our odds by 50 percent.”
Dharmesh: Then it occurred to me a few minute after that thought, that actually I was in business school, too…
Dharmesh: …thereby taking the odds down another 50 percent, and so if that weren’t enough, we have the founder CEO, the founder CTO, and me, MBA. Hire the VP of Marketing, MBA, the VP of Sales, MBA, the VP of Customer, MBA, the VP of Engineering, MBA, and now, the odds of any semblance of survival, let alone success, are vanishingly small at this point.
And by the way, they’re all MIT, as it turns out, a weird little coincidence there. All with the network, and it’s like, “OK, what could possibly go wrong,” right? We’ve got a bunch of MBAs trying to build a SaaS business here.
The reason I put this out there, no knock on MBAs, obviously I have one, is that I think one of the mistakes we make in SaaS sometimes is because SaaS has the word software in it, and software is tech, we automatically assume that everything is all about the product, product, product, product, product, product.
Find a great product, like, “Designer, get the product right,” and the thing we’ve learned is that, yes, a great product is essential, but there are so many other things that contribute, because it’s a large, very complex machine in the SaaS business, and everything impacts it, so it’s not just about getting the product team right. It’s about getting analytical people across the entire organization.
The other thing that dropped our odds of success was the fact that we were focused on small business, on the SMB market, and everyone we talked to, literally everyone. I’m paraphrasing…
Dharmesh: …said, “This is a very bad idea. Do not…,” and the reason is no one hardly ever has succeeded in building a big business in SMB. It’s impossible, because here’s the deal.
You’re trying to acquire customers, and it’s expensive to reach SMBs, because…I don’t know why. It just is, and then when you get them, they churn at a higher rate, and so it’s like the math just doesn’t work. You can’t make the economics work, but that’s exactly what we did.
We did raise capital along the way. My guess is that our early investors humored us, and said, “Yeah, they say SMB now, but they’re not stupid. They’re going to figure out that enterprise is the actual way to go, and it’ll be OK.” That was, I think, they thought in their head.
They underestimated our stupidity, as it turns out. We’re now nine and a half years in, and we are still unequivocally SMB, working out OK so far, by the way. It’s been fine.
Another piece of very, very good startup advice that I’ve given myself a hundred times is the “Do one thing exceptionally well.” Narrow in, narrow the focus, and do that one thing better than anybody else, and that increases your odds of success.
We did the exact opposite of that. We were like, “We are going to build all the things, all of the things a marketer needs in the modern world, we are going to do all of those things.” One would question this. You would ask yourself, “Self, why are we doing this crazy thing of building out? We’re going to do search tools, a content management system, and social media, all of it, on the top of the funnel.”
Our motivation was very simple, which is when we talked to customers, which I encourage you to do. That’s a good idea, talk to customers and potential customers. The thing they kept coming back with was their problem was not a dearth of tools. It’s not like…these were great tools by great companies.
The issue the SMBs had was, “Well, I’m a 20-person consulting company. I don’t know how to take WordPress and hook it up to Google Analytics, and then this. I just can’t do that.” That’s why we did it. We wanted to solve the problem customers actually had, despite the fact that it was actually crazy, and contrary to our own advice, to ourselves, for many years.
One of the byproducts of this all-in-one strategy is the product tends to suck. It’s because you have very few engineers trying to build out this nine-inch wide, two inches deep thing, and HubSpot’s product, in the early years, sucked, because that was it. On a scale of 1 to 10, I’d give it a 7, if you round up from 6.3. It got better. It got much better over time.
One of the early decisions we made, which was, I think, very fundamental to HubSpot, was that when Brian and I started the business, our thesis in our head was, “OK, we’re building a SaaS company. I’ve built commercial software products before. Let’s stipulate that if we happen to have stumbled into a real market, we will be able to build the software.”
“If we end up going down, and crashing and burning in flames, and this doesn’t work, it will be not because we couldn’t build the application.” We weren’t inventing new video codecs, driverless cars, or anything like that. It was this relatively simple business SaaS app. It was big, but it wasn’t particularly hard.
So we said, “OK, well, if this doesn’t work, which we need to figure out really soon if it’s not going to work, it’ll be because there’s no market. That will be the primary cause of failure, and we’d rather know that now.”
In the early years, we oriented around that thesis, which is, “We need to mitigate market risk and not product risk. We’ll assume we’ll build a product if a market’s there,” and the only way we knew to test the market is like, “Oh, well market means transactions occur. A transaction is when someone pays someone else money.” We’re from the East Coast. We’re old fashioned that way, right?
“OK, how do we actually establish the fact that people are willing to pay money?” Ask them to pay you money. That’s the best possible way to test it, so the product, even in sucky form, and, I’ll say generously, late alpha, we started asking people to pay.
One of the challenges with that, one of the requisites, in order to start charging money, is you have to come up with a price. It’s one of those little details. You have to know what it is you’re charging. At the time we had to make the pricing decision, we didn’t have the six MBAs yet. It was just me and Brian and a house plant, trying to decide.
“OK, both of us are going to start selling this thing,” and I’m going to give you the answer here. The answer is three minutes. I’m going to tell you the entirety of the conversation pretty much, paraphrased.
“Brian, we’re going to go start selling this thing.” “Yep, we’re going to start selling this thing.”
“We need a price.” “Yep, we need a price.”
“What do you think we should charge?” “I don’t know. What do you think we should charge?”
“What do you think about $250?” “Done.”
That was the extent of our rigorous analysis on pricing, and the price we came up with was $250 a month. The astute amongst you will recognize that is not a starting at $250 a month. It was $250 a month.
You could have been a Fortune 500 company, which we got some of those in the early days, and we made it physically impossible for you to pay us a penny more than $250 a month.
We rationalized it. We’re like, “This is actually good, because we’re getting this data, and we’re going to charge monthly.” We didn’t do any annual contracts. It worked, because it’s so simple. We could sell this. It’s 250 a month, month to month. If you hate it, you can quit. That’s why the month to month model…We had that for years, by the way.
Because one of the things we were looking for is, once again, we were looking for evidence or data. Number one, can we sell this thing at any price? 250 seemed like a reasonable number. Ended up being low, but reasonable number. After we sell them, will they stay, despite the product sucking? That’s what we were trying to establish, hence the month to month.
Then we can see are people canceling or not? The funny thing is the same thing that I think worked for us in the early years almost killed us, because this price stayed that way for some of our early years. For you folks, it’s like, “That’s obvious. You guys are idiots. How could you do that?” We were idiots. We did that.
Over time, we changed it. We did the basic, pro, and enterprise. We went, “No, we’ll go from 250 to 500 dollars a month. Awesome. Pro version. Double the revenue. Awesome.” But not a penny more than 500. We were slow.
The thing we were selling, we were selling this thing called inbound marketing. This is not a HubSpot sales pitch, so I’m not going to tell you about inbound marketing. What I am going to tell you is that what we were selling is this new approach to marketing. It was a philosophical, transformative change.
Which brings me to sales and marketing. There are two kinds of things in the world. One are simple things that people understand. If you have a tool that’s an existing category, other people already have it, some of the potential customers already use something else, you can put a website up and a credit card form up.
It’s like, “I have this tool. It does this thing in this category. You might be using another tool. Ours is better. Try it out for 30 days, and if you like it, pay.” You can get customers without ever having carbon-based life forms interact with each other. You can actually do that. That’s possible.
As it turns out, on the other end of the spectrum, when what you are selling is almost a religion change. “Oh, by the way, everything you thought you knew about marketing is wrong, and you need to change it and do it the other way,” which is what we were pitching. That is what would be called a transformative sale.
As it turns out, no number of brilliant blog articles from me or my co-founder were going to be enough to put up on the Web and someone says, “Oh yeah, these guys are right. Inbound marketing, that’s the way to go. Here’s my money.” That doesn’t happen, because we’re asking for this massive change in their mindset, so that required people.
We built out a marketing and inbound sales machine over the years. I’m going to take a deep breath. Are you doing OK here, Jason?
Jason: I’m very entertained, so keep going. Much appreciated.
Dharmesh: By the way, if you were wondering why I talk so fast, it’s not because there’s a beer waiting over there as soon as I make it back there. It’s because I talk this fast. This is me. Skip by this.
This one’s subtle but on the list of things. When we started HubSpot, we had this inbound marketing thing. We called it inbound marketing, but there was no category that we neatly fit into. It could have been marketing automation, but this wasn’t marketing automation.
We made this weird, very impactful decision. We didn’t know how impactful it was going to be at the time that we made it. It’s like, “We’re going to create an entirely new category, and we’re going to create a movement. This is going to be a thing. This should be a thing.”
Now, years later, millions of dollars later, we wrote a book, have a blog that gets two million visits, had an event that had 14,000 people last year. It’s this big thing. We have all this push behind this new category called inbound marketing.
Now, the question I get asked all the time, and even if you don’t ask me, I’m going to tell you anyway, should I create my own category? Should I do what HubSpot did? The answer is it worked out for us pretty well. Even to this day, at HubSpot, we still have the debate internally, was that a good thing to do?
The odds of actually pulling it off were relatively low. It’s like, “Couldn’t we have found something else?” I’m on the side of we did a good thing, but there are good counterexamples as to why you might not want to do it. It’s super expensive, and it doesn’t always work, so it’s easy to do.
The first filter you should ask yourself before you go off and do something like create your own category is you have to force yourself to say, “If we were to pick an existing category, what’s the closest one, and how bad is it? How different are we from the things that already exist?”
I’m going to give you two secret weapons. I’m going to actually probably just talk about one of them, in the interest of time, in terms of good things that we did that worked. One of the things we launched is this free tool called Website Grader. I hacked it myself in the first sixth months of HubSpot.
What it is is you put your website in, like acmewidgets.com, and it would go do this analysis and give you a score from 0 to 100 on how good you were at marketing based on evidence from your website. Was the SEO right? Did you get the tags right? How much traffic were you getting? What’s your social media presence?
It gave you a relative score, a percentile score, that says, “Oh, you get an 87. That means you are better than 87 percent of the other websites we’ve graded.”
Now, what was interesting about that is that, basically, this was freemium without the downside. One of the challenges you have with freemium is, I’m going to take my solution, which is X. I’m going to carve out a small portion of it and give it away for free. That’s the classic freemium model. Then, I’m going to sell the premium version.
One of the big challenges with freemium is you have to decide what that small piece is. There are issues around do people devalue the big thing because some portion of it’s available for free, or do you get bucketed into something else?
What we did is to say, “Instead of giving a part of the solution away, why don’t we create a tool that surfaces the problem that they have? That increases the likelihood that they’ll buy the full solution.” It has worked brilliantly for us.
I don’t know that it’s universally applicable, but a bunch of you should think about that. Is there some adjacent tool that you can build that helps your customers recognize that they need you or something along those lines?
I’m not going to talk about this, because it’s secret weapon number two. I’m going to talk about retention. We’ll talk about retention. I’m going to skip to this one, which is actually the key one. We all know retention is important. I’m going to tell you the mistake we made and I think most SaaS companies make.
This generation of SaaS companies is way better than we were. You guys are much more thoughtful around the metrics that you track and knowing that churn and retention is important. Here’s the mistake. The mistake is you assume, by looking at your cancellations, “People are not canceling. That means they must be happy with the product.”
It does not mean that they are happy with the product. It just means for any number of reasons, one of which could be they’re happy with the product, but it could be they’re too lazy to cancel. They didn’t even know they were paying you, essentially, which happens, by the way, shockingly. Any number of things.
What you have to do, what we did at HubSpot, I’ll give you the very short version of it. In the first three-odd years, we built in the first year this thing called the Customer Happiness Index. It was a model that we developed internally that looked at all the data available to us, product usage, which sales rep sold it, what day of the week they bought on, which customer service…
Everything we could possibly have about the customer all in one database, and we did regression analysis. The idea behind the Customer Happiness Index was for it to be a predictive model that says knowing everything we know, how likely is this customer to still be a customer next month.
We tweaked the model, as you would expect, being a bunch of MIT folks. We made the model relatively accurate, so we could know. It’s like, “OK, Mr. Smith.” We had a team that does this now. “Mr. Smith, I know you don’t know this, but you’re going to cancel in 4.2 months. Is there anything we can do to help you? By the way, it’s all included in the product price, anyway? Why don’t you use this and this? Can I help you with that?” One of the most brilliant things that we did.
The idea here is don’t wait until after they cancel to analyze the data. A lot of the data you need, you already have. Cancellation is a post facto indicator of unhappiness. Try to catch it earlier so you can do something about it.
Jason: How do you find that pre churn? I don’t want to interrupt, but that’s profound. You’re really talking about pre churn. One way is an NPS and surveys. Any insights on how you really get to this data?
Dharmesh: We do NPS surveys. We haven’t had massive amounts of success in terms of finding correlations between NPS in the short run. It’s like people will say something, but then the next month they’ll cancel. It’s like, “Wait a second.”
Jason: That’s the problem with NPS.
Dharmesh: What we like is we like behavioral data. We don’t ask people what they think. We watch what they do. They may say they’re happy, but you haven’t logged into the product in three weeks. You can’t be happy, happy. That’s a problem.
Or you think you’re happy, but you have a sales rep that was notorious for having a higher churn rate than average. There’s something not quite right. We had all these factors that went in.
The early part of the Customer Happiness Index, the model was very complicated, because we threw every piece of data we could find and get our hands readily on. Behavioral data, demographic data, all of it in one standard database.
Over time, the thing we discovered is it really came down to four things that were the actual predictors of whether they would cancel or not. Now, we’ve reduced it down to those are the things. We’ll rerun it probably every year or so.
Jason: You can find at your scale, because this is what I think is hard, is unhappy engaged customers. It’s “easy,” and we have all the vendors here, where you can track lack of usage. That’s work. The really hard ones to find are the prisoners. I hate your product, but it’s core to my business, so you don’t see it in usage.
Then, bam, they move to a competitor in one day. Have you been able to find that?
Dharmesh: We tweaked some of that out. We have, as you all should have, the customer success teams. They’re onboarding, and their job is to make the customer successful and help them use the features of the product. One of the thing that does, though, it sometimes distorts the data.
When they’re using something, are they using it because they intrinsically saw some benefit or because we banged on their head until they started doing the thing, like writing a blog article?
You have to somehow separate the data that’s pure, to some degree, versus the thing that was not forced but that we tainted the data as a result of our own intrusion, with good intent no doubt. This is great conversation for beers afterwards for those that are curious about it.
Jason: Keep going. It’s good.
Dharmesh: Three slides left now. Short.
Jason: Take your time.
Dharmesh: I’m going to posit three theories. Theory number one is that it’s possible, possible, that not all MBAs are going to pre doom your start up to failure. Crazy thought, but it could be true.
You have to have a philosophy. Maybe not on the product or the market, on culture, on distribution. Something has to be different, and you have to have a point of view that you can pitch outside of just features. Even benefits, that’s not enough. It’s like, “This is what’s wrong with the world. This is how we see the future.” Here’s what we’re doing about it.
It’s really, really hard to break through the noise just selling technology, essentially, as much as, being an engineering guy, I would love for that to be the case. I would love to say, “Oh, I wrote this software, and I put two servers on AWS, and put a credit card form up, and the money just kept flowing in.” It just doesn’t turn out that way, much to my chagrin.
The last one, this is a feel good, my expectation is that over a hundred of you will build the hundred million dollar ARR SaaS businesses right now. You guys are getting so much smarter than we were. You will skip a bunch of the mistakes that we made. It’s a good time, present market conditions notwithstanding.
Thanks for your time. I’ll be around.
Jason: Thanks for adding a little serious levity to the day. It was a lot of fun.
Dharmesh: Thank you.
Jason: It’s good. I don’t want to break it up with my typical intense questions.
Dharmesh: Ask me intense questions.
Jason: But I do have some. I wrote this piece in “Tech Crunch” in the 12 months Box was in its quiet period. Same Box will get to a billion in revenue before we know it. People made fun of it. As Box crossed 150, and 200, and 300, is there any chance they won’t get to a billion? Of course, right?
Dharmesh: They’re going to get there.
Jason: They’ll make it there. I know you can’t talk about forward-looking statements, but I want to tease it out a bit. HubSpot will unquestionably get to a billion in revenue. The question is how long will it take? We don’t have to talk about the quarter, but it would be difficult for HubSpot, given an infinite amount of time at whatever we’re doing, 200 and something mil, I should know the rough number, it’s going to get there.
Talking some of the things you teased about. Not selling to SMBs, simplistic medium, low-end pricing. What are the learnings going to a billion, and why the heck can HubSpot even do a billion dollars? You talked about a hundred, but that’s a lot of people. What have you learned in these contra obvious things that will scale to a billion?
Dharmesh: One is, and this was the obvious one that investors know and we, as a start up community know, but I don’t know that we know it, which is a lot is defined by the market you’re going after.
If we’re going after some vertical trying to sell a $250 a month product that only had 8,000 possible companies to sell into, there’s no way the TAM was large enough and the addressable market’s big enough to do that. That’s one thing.
The other one, I think it comes down to what we at HubSpot call machine building. The way we think about the machine is that we have this machine. This was the LTV/CAC kind of thing. We put a dollar into this machine that we built, and X number of dollars comes out over Y period of time. It’s the classic LTV/CAC thing.
The thing we work on, it’s like, “Everything we do has to do one of two things. Either has to shorten the length of time that it’s going to take us to get the LTV, whatever it’s going to be. Increase the overall return.”
When we were starting in our formative years, that number was, like, 2.5 or 3, the LTV to CAC. It’s like, “OK, we’re going to keep driving that up.” What do we do? It’s like, “We could work on acquisition costs,” which we did. That was not the issue, and that is usually not the issue for most SaaS companies at this stage.
The issue usually is maybe your CAC is 20 percent higher, but the upside on LTV is where the real leverage is. The question we ask ourselves is here’s how much money we make on a per customer basis right now. Here’s how long they stay. How do we make both of those numbers go up? We back-solve.
We have a number in mind in terms of when we’re going to get to a billion dollars in revenue, and it’s less than eternity. Considerably less. I think we’ve actually told investors that we’re targeting 2020. A nice, round number.
Jason: Looking back, is the accelerant that will get you there, and I’m sure the answers to this are many, but is it that SMBs are running more and more of their business on the Web, so they need to manage more inbound marketing? Is that bigger than ever? Is it more subtle or complex than that?
Dharmesh: That’s a lot of it. The thing that’s happened is as HubSpot has grown, the car goes into new gears. We’re doing all this work trying to increase retention rate, and we move it by half a point, despite putting the entire company against that one goal. It’s hard to move.
Then, something happens, some non-linear shift happens. We don’t know what causes it. We had one of those about a year, year and a half ago where all the numbers start looking better. I think one of them is before HubSpot was like, “We have to tell you why inbound marketing is a good thing. Not to drop everything else that you’re doing, but why this is a good thing.”
Now, they already get that part. It’s like, “OK, I know I’m going to need to do inbound marketing. Which thing am I going to pick? Am I going to pick HubSpot or one of its competitors? How am I going to accomplish it?” There’s less of the why should I do this and more how do I get that done? It reduces the friction, and the acquisition time, and all that stuff.
Jason: Related to your point about segmentation and SMBs, I don’t think that when you guys started it, or even today, I doubt you’re dogmatic about anything. You just wanted to build a winner product that you believed in and have a great market, right?
Dharmesh: We are red-blooded capitalists in the positive sense of the term. We’re very analytical.
Jason: Twist the question around any way you want. How do you resist the temptation to go upmarket? Do you disclose what your biggest customer is, who pays the most?
Dharmesh: We’ve disclosed it. I don’t happen to know who it is.
Jason: Rough and tough, right?
Dharmesh: Our average is about $800 a month.
Jason: That I know. What’s a biggie?
Dharmesh: Not that big. Maybe 10 times that, but not huge.
Jason: That’s 100K a year. How do you resist the temptation, “Let’s go do more 100K years.” Same unit input for the output.
Dharmesh: That’s a great question, and I’ll give you the short version of my answer. The short version is a bunch of good things happen when you drift up into the enterprise. It’s very easy, and everybody does it for a reason. There’s a kind of reverse gravity, because it’s always easier to move upstream than down.
Jason: It’s reverse gravity if you can do it.
Dharmesh: Reverse gravity. You just get pulled up. Listen to your customers, you get more money. Everything makes sense. There are downsides to moving to the enterprise, one of the biggest of which is the enterprise, because everybody drifts there, is so much more competitive. An order of magnitude more competitive.
You have Salesforce there, you have Oracle there, you’ve got Marketo, everybody’s up there.
Jason: Everyone’s there.
Dharmesh: In the SMB space, there are very few people that are crazy enough to do what we did and stay there. We have relatively unfettered blue ocean access to millions of companies that we can just grow. That’s worked out well for us.
If that starts to not become true, if it’s like, “Well, from a competitive perspective, it’s not that big of a deal,” and then we think we could do this, and it’s not going to complicate the product too much, and we’ve got this way we’re going to meander through, we’re not dogmatically against enterprise. We like to think we’re good entrepreneurs.
It’s been nine and a half years, and we don’t see any evidence of that changing any time soon like all of a sudden SMBs are going to decide they don’t need to do marketing anymore.
Jason: Thinking through that, I don’t want to challenge you for HubSpot, but let’s think about other companies. Thinking through it, I haven’t done the survey or the quant side, I actually think, as it gets more enterprise, there’s often fewer competitors.
The investment in business process change and workflows gets so complicated that who the hell is going to build Salesforce again? There will be a paradigm change in Salesforce, but no one’s going to ever build Salesforce again. No one’s going to build these things.
What’s the general learning for founders? Maybe this can be our last question, but we can tease it out. What happens to a lot of founders is you get a pie. You get small, medium, and large customers. Sometimes large is not large, but it’s segmented by three.
When you see three different categories, how do you know where to invest your time when you have customers in each segment?
Dharmesh: I’ll tell you what we did. We actually have those three. We have what we think of as very small business customers, like less than 10 employees.
Jason: Very small.
Dharmesh: Very small. We have the mid market, which is our actual focus, and we have larger, enterprisey. We call them enterprise. They’re not really. The decision we made is well we don’t want to sell to the enterprise, but that doesn’t mean we won’t take that money.
The reason we avoid the enterprise is we don’t want that distorting the product road map. That’s number one reason. If someone, and we have this all the time now, is like X Fortune 500 company bought HubSpot, but it’s a department within X company that…
Dharmesh: …behaves a lot like a mid-market and they’re making their own independent decisions, there’s no corporate governancey thing that says, “We will choose X.” They behave just like all of our other customers. They’re not asking us for eight levels of security and all these enterprisey features. That, to us, is just fine.
As long as we can maintain the purity around where our focus is. Same thing with the small businesses, very small business customers. We don’t build a product for them, we don’t build a sales machine around them, we don’t build marketing around them, but we will take the money.
Jason: In other words, if we looked at your pie chart, I should know this data, I should’ve studied it, but your M category, you’re putting all the effort in the M. It’s your medium. It could be somebody else’s small, but it’s your medium.
Dharmesh: Yup, it’s our medium.
Jason: Some smalls that are more sophisticated can take advantage of that and some silos can, but M’s the largest, so put all the energy behind that wood. Put all of it into the part of the pie chart that’s the biggest piece. That’s really the zen answer to it all, right?
Dharmesh: It’s not so much that the pie chart’s the biggest. It’s the all factors in. It’s the highest accretive EV over the long term. This is the thing we think we can do well.
Jason: Most accretive or most revenue?
Dharmesh: Most accretive. Where do we have the most advantage long term? It’s not just what we make this quarter or this year. We’re worried, but we’re not that worried about quarter after quarter, year after year. The thing we ask ourselves is, is this more likely to make us the company we want to be someday? We’re willing to take short term hits.
Jason: What segment can you dominate.
Dharmesh: Right now, it’s working so far.
Jason: It’s a good segment. All right, we could go for another hour, but Dharmesh, thank you very much. This was terrific.
See Dharmesh’s slides here.