The annual Pacific Crest survey of SaaS companies is ready and published. It is an amazing piece of work. Comprehensive, actionable and very insightful, it is a must read for any SaaS entrepreneur. I highly recommend you take the 30 minutes to read it if you are in the business. Even if you are not and are interested in learning about how our personal and work lives will change with the new models of consumption and delivery of software, this is a good read.

A total of 300 companies participated, so this is a good sample size of the estimated 7000+ SaaS companies in the world.

Some highlights that I think you should definitely not miss if you are not going to read it.

1. If you are in the US and fewer than 50 people or < $4 Million in annual recurring revenue, you are below average – so this report is skewed towards growing companies, not idea or prototype stage.
2. If your company is growing revenues < 45% annually you are below average as well.
3. If you expect to grow <36% next year, well, that’s below average
4. If you are only hiring your own sales people and not using a marketplace such as Salesforce AppExchange or others, then you will grow significantly slower.
5. If you are < $2.5 M in revenue, 63% of revenues are likely coming from other Very Small Businesses on average.

As your company “matures” in Average Contract Value (ACV) expect to have a mixture of “inside” – telesales and “outside” – field sales. The magic number seems to be $25K/year or $2K per month. Beyond that, it seems you will need a field channel.

More than $1K per year in ACV and “Internet” self-service sales, or friction free sales is rather over – or it drops from almost 50% to < 20%. You can still use the Internet for lead generation, but the viral – try, buy and grow is pretty much only try and use after $10K per month.

I am a firm believer that one should focus intensely on the one thing at hand to get something meaningful accomplished. I do also have one side project (it changes based on my availability, learning objective, etc) that I am always tinkering with all the time though – these are experiments that help me learn, build or experiment.

There are many documented benefits of side projects, as long as they dont take up too much of your mind space. Some of the most creative products in the world were born from side projects (although they are the ones we talk about the most – #slack, #twitter, etc.).

The benefits I have found are many fold, I thought I’d list them to encourage entrepreneurs to influence their employees to try stuff out. Why?

1. When you do a side project, you learn something new – always. I have found that even if it is an idea that I know a lot about or a problem that I am critically aware of, I end up learning a nuance or two about the problem, positioning, distribution, human behavior. For example with a project we did on monitoring the media for elections, I found that most news media properties were woefully staffed to do data driven projects.

2. It helps you tide rough times during your primary job. Every job has its “days” and some down periods – not down time where it is “waiting for someone to do something”, but time when you don’t see things going your way and need a break, so you can come back to the primary job with a fresh perspective and new set of eyes. For entrepreneurs, I would say this should reduce your overall attrition, since people realize that most side projects go “nowhere”, but once in a while the side project will take over an employee’s life and likely cause you heartburn. It is still worth the effort.

3. It helps you create and get a productivity rush, which gives you more dopamine, less adrenalin. Both are useful, but for most of us, who are in largely desk-bound jobs, the need for a “feeling” of doing something that you don’t have to do is wonderful and fulfilling. For entrepreneurs, the employees that have positive attitude (which dopamine causes) is awesome to have around.

4. It helps your brain be sharp. Yesterday, I was listening to a podcast that talked about brain amnesia. Basically most people remember numbers and artifacts from many years ago, but cannot remember a single important number from the last 2-3 years. The smartphone has taken away the need to remember these mundane things was the conclusion of the reporter and you have “amnesia” since your short term memory remembers fewer and fewer things. With the increase in online distractions at work, including social networks, videos, news, etc. the best way to keep your mind occupied with “junk food” for the brain is to have a good side project.

5. It helps you get out of “boring routines”, prevent doing the same things over and over again, expecting different results. After a while at anything you will get proficient at it enough to not only go past the “productive” phase but then get into the plateau phase. The plateau is when you “settle down”.

Settling down is for ground coffee. You ask hyperactive kids, who have had a candy binge to, “settle down”.

I think for entrepreneurs who are hesitant to encourage their employees to do side projects, personally, the benefits far outweigh the downsides. I have heard of projects taking up too much time, intellectual property being infringed up on, and a few other stories, which are all likely true and a cause of problems.

Still the best framework to think about side projects is – will you learn something new? Is it going to help you explore a new area? Will it help you grow as an individual?

If the answer is yes, please by all means, do it.

Having a side project when you are already doing side projects, though is just a big waste of time, is what I have found.

From time to time I meet a company that blows my mind and I have to pinch myself to think that they reached out to me seeking investment.

Epidermal electronics are a class of electronic systems that achieve thicknesses, effective elastic moduli, bending stiffnesses, and areal mass densities matched to the epidermis (your outer layer or skin). This has been reported in the National Institute of health. There’s been a lot written about this apparently, but I was ignorant.

Unlike traditional wafer-based technologies, laminating such devices onto the skin leads to conformal contact and adequate adhesion, in a manner that is mechanically invisible to the user. A few companies have been trying this technology for purposes of sports measurement and concussion detection.

These systems incorporate electrophysiological (measuring heart rhythm) , temperature, and strain sensors, as well as transistors, light-emitting diodes, photodetectors, radio frequency inductors, capacitors, oscillators, and rectifying diodes.

Solar cells and wireless coils provide options for power supply. This type of technology is used to measure electrical activity produced by the heart, brain, and skeletal muscles and show that the resulting data contain sufficient information for an unusual type of computer game controller.

The applications are few right now, since the company I spoke with only focused on temperature sensors for patients (older) who need constant monitoring, but they can do things beyond temperature.

The picture the entrepreneur painted for me is what I was most excited about. There are a class of health monitoring devices that are purely temporary. You will need them for a bit of time, when you are unwell, but you need them constantly during that period and then you dont need them (hopefully) at all after that, until your next time.

The entrepreneur I spoke with mentioned that this area is still in the “Research” and “Exploratory” phases of development and the FDA approvals would take years, but there are companies that are starting to do this.

Imagine an imprinted tattoo on your skin that is temporary that measures some key indicators constantly and keeps sending you signals (or your doctor) on your progress. The tattoo is personal (lesser chance of infection), it is designed to be multi-functional (can be used to measure skin response for multiple measurements) and can also be removed after the period of detection is completed.

The implications for managed health are enormous. Currently the market for medical devices for personal monitoring alone is about $15 Billion.

I had a chance to meet 4 startups at the LunchBox event this week, at Startup Hall. There were 4 startups that were vying for $10K in prizes. Each startup was given 5 minutes to pitch with 4 judges and 5 min for Q&A. Lisa from Frog Design, Todd Paris and Krish Gopalan and me were the judges.

The 4 startups that presented were, FasterBids.com, which brings catalogs and pricing information from home improvement product manufacturers online, Siren.mobi, a dating site for women, Crelate, a CRM for recruiters to help manage interviews and Camp Native a campsite booking eCommerce site.

All of the presenters stayed under their 5 min pitches, were crisp, very focused on what their traction, team and unique value proposition was. I was really impressed to see the up-leveling of the presentations, even though many had not been through an accelerator program where you practice your pitch till you perfect it.

Most of them were looking to raise some money – between $500K to $750K and some were close to finishing their round with angel investors.

The thing that struck me was how many of them were solving a good problem, had great traction and some were even solving a meaningful problem that exists in a mid-sized, but very competitive market. I think most of them will raise some angel investment, which is pretty good, but getting to their series A and later will be a challenge for all of them.

When you did the bottom’s up back-of-the-envelope calculation for most of their markets, they were largely mid-sized – $500M to about a $1B. In these Unicorn chasing days of VC-land, most of them will end up raising multiple seed, post seed and bridge rounds before they get to a series A from an institutional VC.

Which means if they are very capital efficient and smart about their growth, they will be a good business, but will unlikely excite a VC unless they change their pitch to talk about much larger market sizes.

The 3 key parts of the market – size (is it big enough), growth (will it grow fast) and scale (can you grow it in a capital efficient fashion) are no for less than 1% of the companies who want venture capital. Which is why less than 1% of companies that start get any form of VC funding, but nearly 3%-5% of companies (or more ) get angel funded. Since it costs lower to get companies started, the money required might be much less to get a sizable exit (greater than $50 Million), so that’s the opportunity really for Micro VC funds and angel syndicates.

For entrepreneurs, though, the road to getting some angel investment and then executing well enough towards a larger market potential might be the sure way to a “Unicorn” – after all, most Unicorns probably did not know they were going to be one, were they?

On the other hand, just raising enough to get a good exit might be the best option for others.

Either ways, the fork in the road is post your seed round, but having a sense of the map so you have a good framework for that decision is a good thing to think about.

Yesterday I met with two really young and intelligent entrepreneurs. One of them is a clinical diagnostics technician and another is a software developer. I have know the software developer for over a year. He is someone I would consider on the top end of the spectrum for programming skills.

His brother (the clinician) has been facing this problem for consolidated radiology and EMR management daily. So, he wants to fix the problem. One of the biggest challenges in this space is FDA approval (yes, you need approval for certain type of software) and HIPPA compliance. Which, in itself is not a deterrent, because it is a process that all companies in the space go through, so it is an even playing field for healthcare software companies.

Not so for social networks, on-demand food delivery, consumer Internet and SaaS software companies.

I met them over lunch yesterday to understand what they were doing. To be honest, I did not understand it. Not even close. The value proposition was clear – saving money and time for nurses, doctors, clinicians and patients, but dig one level deeper and unless you are an “insider” you will get lost.

I did not attempt to understand, because, the number one thing with these folks,  on my mind was, if I fund this company, will they be able to get more funding again, later to grow, and scale?

That’s sad. Very sad.

Are they solving a big problem? Possibly, again i don’t know.

Do I like the entrepreneurs and do I think they are a great team? Yes.

Do I like the market? No

Do I think I can add value? Not in the areas they will need help.

Do I think I will make money on this opportunity? Likely not. More on this later.

Do I think this has the opportunity to scale? Likely not.

Will it change the world? Most likely, but only at scale.

So, in a 2 min window I went from I really like the entrepreneur to I still like him, but the opportunity is not where I will make money.

The problem is now with my fund, I have a conflict of interest if I invest personally. I have to get approval for deals that I think are not a fit for the fund, but are good for a personal investment.

For a small fund, like ours, every deal matters. I cant take even one deal that may not return the fund and grow “large’ to return the $10 Million.

Which means many “meaningful” opportunities that will do well and make some money, but may not actually grow big fast, will be passed on.

That’s unfortunate for me and for the entrepreneurs who are doing something meaningful but things that dont scale.

What’s the point of that? Make yet another social network app that optimizes ad inventory?

Going against the grain is tough, but I think I might have to do just that to get outsized returns.

Which was the point of the fund. The only problem is this is my first fund, so I am treading carefully to ensure I don’t make too many rookie mistakes.

Maybe that’s the biggest mistake – being too cautious and only focusing on the “proven” way to fund large hits.

There are 5 key inflection points I have noticed which makes founders question their startup, to either make a call to continue working on their startup, pivot to a new problem or quit their startup altogether.

It is at these points that you really get to know the startup founder and their hunger and drive to be successful. I don’t think I can characterize those that choose to quit as “losers” or “quitters” because of many extraneous circumstances, but there is a lot of value that most investors see in entrepreneurs who face an uphill part of their journey to come out on the other side more confident and stronger.

These five inflection points are:

1. When you have to get the first customers to use and pay for the product you have built after you have “shipped” an alpha / beta / first version. Entrepreneurs quit because they have not found the product-market-fit – because the customer don’t care about the product, there is no market need, or the product is really poorly built, or a host of other reasons.
2. When you have to start to raise the first external round of financing from people you are not familiar with at all. Entrepreneurs quit because while it is hard to get customers and hire people, it is much more harder to get a smaller set of investors to part with their money, if you do not have “traction”, or “the right management team” or a “killer product”.
3. When you have to push to break even (financially) and sustain the company to path of being self sufficient. Entrepreneurs quit at this stage because they have now the ability to do multiple things at the same time – grow revenues and manage costs, and many of them like to do one but realize it is hard to do that without affecting the other. So, rather than feel stuck they decide to quit.
4. When you have to scale and grow faster that the competition – which might mean to hire faster, to get more customers, to drive more sales, or to completely rethink their problem statement and devise new ways to grow faster. Entrepreneurs quit at this point because they are consumed by the magnitude of the problem. They overassess the impact the competition will have on their company, give them too much credit or focus way too much on the competitors, thereby driving their company to the ground.
5. At any point in the journey, when the founders lose the passion, vision or the drive to succeed. Entrepreneurs quit a these points because they have challenges with their co founder, they don’t agree with the direction they have to take, or encounter the “grass is greener on the other side” syndrome.

While I have observed many entrepreneurs at these stages at  discrete points in time, I have also had the opportunity to observe some entrepreneurs in the continuum, and I am going to give you my observations on 3 of the many folks I have known, who, have quit.

One went back to college to finish his MBA after getting a running business to a point of near breakeven, another found the business much harder than he originally thought he would and got a job at a larger company and the third was just unable to have the drive to go past 11 “no’s”‘ from angel investors. Over the last 8 years, if I look at my deeper interactions with over 90 entrepreneurs, who I would have spent at least 100+ hours each, I would say that of the 24 people that are not longer in their startup, the one thing that stands out among the ones that persevere is that it is not “passion” or “vision” at all.

It is the inherent belief that they are solving a problem that they believe is their “calling”. They also don’t believe that there is any other problem that’s worth solving as much, even though there may be easier ways to make money.

So most of my questions of entrepreneurs to test whether they will pivot or quit are around why they want to solve this problem (which I am looking to see if they know enough about in the first place) versus any other one.

The answer to that question is the best indicator I have found to be the difference between the pivots, the leavers and the rest.

Yesterday I was listening to the Corner Office podcast in which Elon Musk was interviewed. There was a part in the episode when he talks for about 7 minutes of the 25 minutes of the podcast about the car door. If you have the time, I’d highly recommend listening to the entire podcast, but the part about the door (15+ min into it) is awesome as well.

In the video showing off his new SUV, he talks about the door, showing how much thought has gone into the creation, design and support of the accessibility to the 3rd row of seats.

Even though Elon Musk is an exception, his trait for being obsessed over the details stands out. One of the things that’s pretty obvious to me is that the best founders obsess over every small detail. Primarily there are 3 areas that I expect founders to pay the most attention to: Product, Customer empathy and Hiring.

These 3 go pretty much hand in glove, so I am not sure if any of them is more important than the other, but it usually starts with customer empathy, then product and finally hiring.

The part I notice about the best entrepreneurs about customer empathy and detail is how some of them (maybe 35%) are their own best customers, who “scratch their own itch”, but the rest of them spend a lot of time with customers understanding, observing and engaging their users. The observations and questions tell you more about the scope and breadth of what they know about their customer.

That’s typically what I look for. How much do you know about the customers’ daily life, their life outside of your product, their schedule, their fears, what motivates them, etc.

While most good entrepreneurs can articulate their customer specific problem set fairly well, which their product solves, the best ones can tell me more about their customer’s overall state of mind and are open to other opportunities that might come up in their ability to expand the footprint of their product with their customers.

Product obsession comes naturally if you are solving a problem you know deeply. That comes from either spending enough time with it for years, or having the problem yourself. The most obvious manifestation of product obsession we see is in the User experience.

The trick I have noticed is that the best founders obsess over documentation, architecture, code coverage, commenting and code reviews as well. If you ask questions about a specific portion of their product – from the logo to the website template and their choice of naming their product plans, they can have detailed discussions on the thought they have put into each of these areas.

Finally when it comes to hiring there are 3 important things I look for – how much time they spend on reference checks, what kinds of questions they ask and how well they put together their job descriptions.

Is starts with a clear understanding of who they are trying to hire, so I ask for their job descriptions first. Not having them gives me indications as well. Some people claim to have “hired” from their network, alone, but if you don’t know who you need to hire, with what particular skills or experiences, then you are “taking” what you get, which is a signal as well. I want to also understand their interview process and steps they have to get candidates through the process. Are they keeping the bar high, or compromising? Are they attracting good talent or picking who comes in? All these give me clues about the entrepreneurs attention to detail.

While it is impossible for an entrepreneur to have attention to detail in every part of their business, their culture usually permeates through the rest of the organization.

Every week, I get about 3-4 emails from young people interested in becoming a Venture Capitalist. They want to understand how they can get a job at a good VC firm and would like my advice or connections. Even though I wrote a post about this – How to get a job as a venture capitalist, they are looking for personalized advice.

Which is nearly impossible to give without listening, learning and then processing their background. That takes time, typically 30-45 minutes, which I dont have at all.

This is a real problem not just for Venture Capital job seekers, but also for the millions of people who want help with their career path. They know where they are – their current role, where they want to get to – a specific role (in some cases) or want to understand options (in other cases(, but dont know how to get there or what do to to get there.

For example, an engineer who does not like coding sees a profile of a Group Product Manager and wants to understand how to get there – what opportunities should she be looking for, what courses should she take, what educational background does she still need to fulfill, who should she take on as a mentor, etc.

Most employees at any mid-sized to large company have been told – you have to be in charge of your career, and not expect your manager or the HR team to do that. The problem is most of employees can only do it in hindsight, after 15 years, looking back.

To solve this problem, I think we can borrow a leaf from the “Roboinvesting” startups like Wealth Front or Motif and look at creating Robo Career Counselor service.

This will be a web service, which a potential user will log into using LinkedIn. Given their background, education and title, etc, it has relevant background about their past and present.

It will then ask a series of questions such as likes and dislikes (professional job specific ones, not the ones that Facebook has) and suggest 10 profiles of other successful role models or people who currently have that role / title. It has to also ask more questions about achievements and metrics which the individual currently has at their job.

Then it can help you connect with those people for a fee. Obviously those people, the mentors or coaches, have opted in, so they can be contacted and are willing to spend the time and energy for a fee.

In some ways this becomes a marketplace for career counseling or “democratizing personalized career advice” if you will.

The service can provide many ancillary services to the mentors or coaches themselves on how to ask questions, train them on available resources and help build frameworks for the user to leverage.

This service I think will be immensely popular and solves a key pain point that many folks (not all, but a large enough market) have.

To be clear, LinkedIn could do this themselves, but I have such a poor and low opinion of the company, that I think even if they wanted to they’d mess it up.They also have the inherent advantage of having a lot of data, so they should be treated as the biggest competition for this service.

On the other hand, I suspect if you do a great job, they’d acquire this service, if they were smart. I believe they are, very smart, so I am willing to fund a company in this space.

What you need to have is 2 full stack developers, with a great background in shipping products at scale, some data related background is ideal, and a person in your startup who has been selling to or understands the career counseling space.

Best way to pitch me is not email, or Facebook or LinkedIn or a Direct Message, but on twitter @mukund.