How to recover from a cashflow crisis without mortgaging your home

Nathan Barry is back and I’m going to be honest about why.

Awhile back Nathan was in a situation where he needed money to keep his company going. He was even considering mortgaging his house.

Since then he’s built up his company on such sturdy ground and I have to find out how he did it.

Nathan Barry is the founder of ConvertKit, email marketing for professional bloggers.

I want to hear what his revenues are and how he got out of that situation.

Nathan Barry

Nathan Barry

ConvertKit

Nathan Barry is the founder of ConvertKit, email marketing for professional bloggers.

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Full Interview Transcript

Andrew: Hey, everyone. My name is Andrew Warner. I’ve interviewed over a thousand entrepreneurs and today I get to talk to one of my favorites, a guy who’s coming back. His name is Nathan Barry.

One of my best experiences–the reason I can tell you he’s one of my favorites with complete openness and honesty is because a while back, he was here at the office having scotch with me and some other entrepreneurs who came to town for a conference. We were just talking about all kinds of personal things that were going on with everyone’s company. It was a really good group of entrepreneurs.

I saw that Nathan was just kind of like this. Nathan is usually open. But he was holding back. I don’t know if you remember this, but even your body language, the way you were crossing your legs, the way you were holding back on some of the conversation made me feel like something was going on and then Nathan drove the conversation to like at what point, “Do you want to raise outside money? At what point are you risking your house?” Then someone else said, “I think any entrepreneur should take out a mortgage,” and then others said, “No, we should always take out a mortgage to fund a business.”

Anyway, it turned out that he was in a situation where he needed a little bit of money to keep this company going. And here’s why I tell you that I know that Nathan is one of my favorite people. Immediately, I said, “I’d lend you money. How much do you need?” I was thinking, “Do I have a checkbook in my office? Do I even own a checkbook if he took me up on this?”

Nathan didn’t take me up on that, but a few days later he emailed me and said, “If that’s still an option. I’d love to do it.” I said, “How do I wire money?” I wired money to him and I said, “Look, I love you. I love your company. If at some point there’s an opportunity to convert his into equity, I’d love it, but if not, I do not ever want you to give me interest. I’ll just give you this free loan because we’re friend and because I believe in what you’re doing and I believe in who you are.”

So, I gave him the money. He gave it back to me and I didn’t get any equity. That’s the sad part about all this. But the happy part is damn, this guy has built up his company so freaking big and so well on such sturdy ground since then that I had to have him on here to talk about how he did it.

His name, as I said, is Nathan Barry. He is the founder of ConvertKit. If you’re a blogger, if you’re a content creator, you probably already know about his software. If you’re a Mixergy fan, you know about his software. ConvertKit does email marketing for professional bloggers. It’s got the intelligence you’re looking for as a blogger. It also has a nice design for collecting email addresses, a really well-created piece of software.

We’re going to talk about how he did it and where his revenues are and what was going on at the time that he had scotch here with the other entrepreneurs at Mixergy headquarters. And this whole thing is sponsored by two great companies. The first is Toptal. It will help you hire your next great developer. The next is Bench. They will do your books for you.

Nathan, good to have you here.

Nathan: Yeah. Thanks for having me. That’s quite the story to tell to kick things off.

Andrew: Right? Go ahead.

Nathan: I was just going to say that one of my favorite things about that–one, that you saw and picked up on how stressed out I was and wanted to do something to help it. And then two, you were like–you had one rule for that money. You were like, “The only thing coming out of this that I will be offended with is if you try to pay me interest.” I thought that was great because that was saying you were truly doing it to help me. I’ve always really, really appreciated that.

Andrew: Good. I even said if for some reason you can’t ever pay it back, it’s totally fine. This isn’t like, “Now you owe me for the rest of your life.” I just knew it wasn’t going to be an issue. I feel like friends take care of each other. Frankly, the amount of interest you saved from that is basically the equivalent of a burger. It’s not that big. It was more of a point of saying here’s how much I’m willing to help because I believe so much in what you’re doing. The weird thing was you were on an upswing at the time, right? Talk about the situation that you were in that put you in that sense of anxiety.

Nathan: Yeah. The company actually was growing fantastically. We were growing 25% to 30% month over month. That must have been February, 2016, actually.

Andrew: Yeah, roughly around January or February.

Nathan: I think I was in town for the SaaStr annual conference. So, we were doing $100k in monthly recurring revenue. We were growing insanely fast. We were growing $35,000 in monthly recurring revenue in the previous 30 days. We were adding like $1,000 in new revenue every day after churn. So, that’s fantastic. And we were profitable. We were not losing money every month. But what we ran into was this scenario that I never expected where revenue could grow so fast and expenses were growing in lock step with that.

So, our cash balance was growing every month and it was growing by like $2,000 or $3,000. So, what that meant is I had $100,000 in revenue, $97,000 in expenses and like $29,000 in cash on hand. So, even though I projected it out, “Next month I’ll have $34,000 cash on hand, the month after that $38,000.”

So, even though that number was going up, if you looked at it as days’ worth of expenses in the bank, that number was dropping very quickly. It was going from like 17 days of expenses in the bank, 12 days of expenses in the bank. So, I knew if there was any kind of a hiccup, we couldn’t do anything. We would be in trouble.

Andrew: What kind of hiccup could you have?

Nathan: I thought hard about that, like what could happen. Maybe we could screw up email deliverability so badly that we had to refund all of our customers, where like the right thing to do is refund and all of sudden you actually only need to refund a quarter of the customers in that scenario and you’re screwed on cash.

Andrew: Yeah.

Nathan: Other things could be Stripe decided, “Hey, you’ve got a bunch of fraudulent charges coming through,” because you just got targeted by some credit card skimming operation using your Stripe account to test all their cards.

Andrew: Right. Or even if they would have frozen your money–

Nathan: For any amount of time.

Andrew: So, what did you do to fix it? We’ll get into the story of how you built this up. I know you documented a lot of it online. I’ve got some questions based on what I read about your process. But what did you do to fix this situation?

Nathan: Yeah. So, first I went out and tried to get a loan. I thought we have fantastic metrics. We have awesome growth. I don’t want to go out and raise venture capital, though right there I was on that line of do we raise or not because we’ve got the growth numbers to do it, but I don’t know, maybe we can pull this off.

Andrew: My understanding was Jason Lemkin, the founder of SaaStr would have invested in your company. It’s the kind of company he’d be interested in, am I right?

Nathan: So, I hadn’t had a conversation with him specifically. Where that came about is he had said from stage if you hit $1 million ARR, so $83,000 a month in revenue, and you’re growing at anything over 20% month over month, you’re in the absolute top tier of SaaS companies for growth. And I was like, “Interesting. What if you hit that and you’re growing at 40% month over month?” because we were.

So, I hadn’t had a conversation with Jason, but I heard him say that earlier in day before I had come to scotch night and was thinking, “Okay, if we’re growing at that rate, maybe it is time to raise money.” I was already there in San Francisco and so I had meetings with a bunch of investors.

Andrew: I see. So, why didn’t you want to take funding?

Nathan: I was worried that I would lose control, that it would change the trajectory of the business and that we would–it would become all about growth no matter what. We’ve always had a bigger mission. We haven’t always been clear on it. But internally, I’ve had this bigger mission to help bloggers earn a living and help creators earn a living. I wanted it to be more about our audience than about the business. That’s a whole thing to get into. But I was worried that it would fundamentally change who are.

Andrew: Why couldn’t you get a loan?

Nathan: So, I went to four or five different banks in the preceding months and they’re all like–so, I looked at getting additional mortgage on the house. That one would have worked for about–we didn’t have very much equity in the house, but I could have gotten $25k or something like that. And I talked to Wells Fargo, where we kept our banks and they were just like, “No.”

And then other business banks were like, “Okay, do have a building? Do you have trucks? Like if this loan goes south, what do we get out of it? What can we repossess?” The answer is nothing. We have a handful of laptop computers and we’ve got some software. So, then we even looked at talking to Silicon Valley Bank or some of those who understand like SaaS metrics. They said, “Look, we only loan to companies that have raised funding.”

Andrew: Yeah. Do you want to know how clubby that is? I don’t think they’ve ever talked about this stuff publicly, but they will do things like give VCs essentially free loans for their homes. We’re talking about like a percent interest, maybe even less, just to curry favor with the VCs who will eventually bring in business from the startups they invest in because, “Look, I just gave you money for your house,” right? It’s that clubby. There’s no way they’re going to love you the way they love this guy they’ve invested so much in, in relationship and taking care of their family.

All right. I see that. Let’s get back into what you did to turn things around at that point.

Nathan: Yeah. So, the next day after we’d had that conversation after scotch night, I was thinking through who was there at the conference that I might be able to get advice from. I ended up–I was in a conversation with one guy. Someone else came up who was also like a–they were both, I think, Toronto entrepreneurs talking.

The guy who joined the conversation walks away after a minute. His name was Mike. The guy I’d been talking to originally looks at me and goes, “You know that was Mike McDerment, the CEO of FreshBooks, right?” And I was like, “No, I didn’t know that.” His badge was turned around. He just said, “Hey, I’m Mike.”

So, I was like, “Okay.” They did raise a tiny bit of money and since then they’ve raised a big chunk. But they built this largely self-funded, largely capital efficient business to hundreds of employees and so I thought, “I bet Mike has dealt with this problem in some way or I bet he might be willing to help.”

So, sitting in a session like an hour or two later, just like at-messaged him on Twitter and said, “Hey, Mike, I’m at that SaaStr conference. If you have five minutes, I’d love to ask you about cash flow on a self-funded company.” What I didn’t realize is he was sitting two seats over from me. He had seen me pull up his Twitter profile when he walked in. So, he leans forward and goes, “Hi.”

Andrew: He’s good that way.”

Nathan: When I messaged him, he’s like, “This session is not very good, do you want to get out?” So, we went and talked. He asked for a deep dive on all the numbers and looked through it. He dove into all the expenses, everything I could show him. He basically said your growing expenses lockstep all the way along and you don’t have to do that. Now, I felt like we were behind on customer support, we were behind on engineering, we were stuck on infrastructure. So, I was spending all the money in order to just keep our heads above water.

And it was almost like he gave us the permission to say like, “You can do it. With the exact dollar amount you’re spending now, you can continue to grow revenue.” I had this idea and maybe it was hanging out in the Silicon Valley startup world, where it’s like you’ve got to spend money to make money and you’ve got to–

Andrew: Spend it on what? He gave you permission to cut your expenses. Is it on people? Is it on ad spend? What was it?

Nathan: So, we didn’t actually cut expenses at all. We just froze them and didn’t grow them at all. We didn’t hire another person because before we were like on customer support, we’ve got to hire more just to keep up. It forced us to be a lot smarter. Before, it was like there’s a tiny bit of money there and this isn’t working.

Andrew: So, you would have said, “We’re about to grow. I need to hire another customer service person to be on this.” And instead you said, “I’m not going to.”

Nathan: Yeah. So, basically before the solution to the problem was like, “Oh shoot, we have two-day response times. What do we do? We’ve got to hire another customer service person.” And so instead, when that option was taken off the table, we were not allowed to spend another dollar, we actually have to get really creative with how we solve problems. It turns out there are tons of ways to solve problems besides spending money.

Andrew: Like what? Give me an example.

Nathan: So, we immediately started looking at what exactly causes–taking a look at the customer support problem because we had 48-hour response times, we looked at what causes the most tickets and immediately–this wasn’t like some long project, but it was like, “What can I do? I have the rails app code up in front of me. What can I do in the next four hours that will cut down on the number of tickets coming in?”

Andrew: I see.

Nathan: I added help text in like six or seven key places. And then we started looking at, “What’s the quality of the team? How much are people spending time on like managing the team versus actually getting in there and doing tickets?” So, for the first time in I like really dove in and saw the efficiency of each person in our customer support team. And that showed me that I needed to let our head of customer support go. And then it was also like a big push on motivation. Everyone felt like they were drowning and you can never get ahead. That’s pretty debilitating.

Andrew: Yeah.

Nathan: I gave this little talk to the whole team about how the number of tickets piling up, we have to do all of them no matter what. It’s kind of like doing the dishes, where you can have a kitchen that’s a disaster and every day you can go from a completely a disaster to like mostly a disaster and then back up again, right? Or you can do this deep purge and clean everything and put in a ton of work and then you can go from like a perfectly clean kitchen to a little bit dirty and back. It’s the same amount of effort. The only difference is how much work you put up front to get the initial state.

Andrew: I see.

Nathan: So, we were like 200 tickets in the queue and we’d go from 200 to 150 and then back up to 200. So, we basically did this huge amount of work to get as close to zero as we could and then I basically showed the team like, “Hey, this is possible. We don’t have to be drowning.” We’re able to maintain. We’re able to keep up. We weren’t able to get through the back log. It was a bunch of things like that.

Andrew: And you personally went in and worked on that. You became your head of customer service for a while, right?

Nathan: Yeah. I think I’ve worn every single hat in this company.

Andrew: Didn’t the rest of the business suffer for that, the marketing, the promotion, you being out there and talking to people?

Nathan: It might have. I don’t know. We followed it up with a couple of our best months of growth.

Andrew: I can see that. I see a chart that you put up on your site a while back, I guess it’s June of 2016, where I can see the blue line for revenue is going up consistently and more so even after this period. The green line for expenses starts to immediately flatten out after that SaaStr conversation with Mike McDerment. By the way, that conference seems like the best conference for software entrepreneurs that I’ve seen. Am I right?

Nathan: It depends on what you’re in it for. I go there because I want a different perspective because I hang out a lot in the bootstrap software circles. This was my original thought. If we get to $80,000 a month in revenue, we’ve made it. That’s amazing. That was my idea going into ConvertKit. You can read that in my initial blog post. It’s just like, “Let’s get to $5k a month in revenue.”

Andrew: Right.

Nathan: So, these days, we’re at $600,000 a month in revenue. I’m looking for a bigger perspective and a bigger world view. The tagline of that conference is the first $100 million in annual run rate is the hardest. Like they just have this idea that you’re going big. So, I go there for a perspective shift.

Andrew: When you go there–the reason I know about is because people who go to SaaStr will come to scotch night at Mixergy and I get to hear their feedback on it. It seems like the quality of the experience people have is directly correlated with how many other entrepreneurs who are further ahead of them they meet. If they do a dinner or drinks or something like you did, they love it. If they just saw the sessions, it’s like a really good podcast that they were forced to listen to.

Nathan: Right.

Andrew: But that’s where they give me more of a, “Meh,” recommendation. Am I right?

Nathan: Yeah. Absolutely.

Andrew: What do you do then to talk to people beyond just messaging Mike?

Nathan: Yeah. The first thing that I do, they release the attendee list. It’s in the app. It’s an absurd nm of attendees. It’s like 5,000. I read through the entire attendee list before my flight lands in San Francisco. Then I end up with a checklist of 25 people who I want to meet.

Andrew: And you just go out of your way to meet them, but you’re not doing the drinks. You’re not doing breakfast. You’re not doing anything specific yourself.

Nathan: I’m not that good about organizing the dinners. That’s something that I absolutely have to work on. Another good friend of mine who is very good at that kind of thing was like, “Look, I’ve been telling you for a long. . .” he actually just said this to me three days ago. “I’ve been telling to do this for a long time and I’m not going to have the conversation with you again until you actually execute on it. Fly to the city. Have dinner with the five people that you really need to.”

Andrew: I think I know who that is. It’s what’s his name? The founder. . . I forget. What’s the name of the person who told you?

Nathan: Ryan Delk.

Andrew: Oh, Ryan Delk is good at that. Ryan’s fantastic at that stuff.

Nathan: He’s so good.

Andrew: Yeah. Well, if you ever want to, I’d host a dinner with you and I’ll invite the people out. I love that stuff.

Nathan: Sounds good.

Andrew: That’s always my favorite part of the conference. All right. Just to underline, you said you were at $600,000. I happen to know the exact number. Your monthly recurring revenue is $629,000. That’s as of this last 30 days. That’s fan-freaking-tastic. The reason I know it is because ConvertKit.Baremetrics.com shows all of your numbers publicly, lifetime value of a customer, average revenue per user, user churn, the whole freaking thing, annual run rate, $7.5 million. So, anyone who wants to go check it out at ConvertKit.Baremetrics.com. Why do you do all that? Why do you put all your stuff so publicly?

Nathan: Yeah. This goes back to the first time that I wrote an eBook. If someone wants to get into that, we told that story in a previous Mixergy episode. Knowing exactly how people make money or how much money people make, I feel like that’s the context to a lot of these conversations. If we’re having a conversation and you’re like, “Yeah, I built a great business,” I can’t learn anything from that. There’s no context and no detail. But if there are actual numbers to it, then whoa, in this period of time, someone could build a business that does $10 million a year? That’s amazing.

Andrew: I see.

Nathan: Or for me back then, if someone publishes an eBook to like a tiny group of designers and they can make $5,000 off of the launch, that’s amazing. That changed my world view. So, I see it as paying that forward of if there are a couple of entrepreneurs out there who can look at, “I’m wonder for February of last year to June of last year what ConvertKit did and what they were doing,” and that helps like three other SaaS founders, then that’s totally worth it for me.

Andrew: I see.

Nathan: I see it as other people sharing their numbers really helped me and so this is just me paying it forward.

Andrew: I find the people who are upset with more for accidentally leaking information in–I never say it. I’ve never been accused of saying something I shouldn’t. You saw before the interview started, I said, “Here are a few things I know that are private about you. Am I okay talking about it?” You said, “Yeah, sure.” I never leak something I’m not supposed to, but the entrepreneurs who leak things they’d rather not say, it’s often them giving away numbers without any purpose in it. They don’t have a vision for it.

A lot of times when I ask entrepreneurs, “Why do you want to give away your revenue?” They’ll say, “Other people raised more money. I need to show that we’re a strong company. I need a platform to share my revenue and I know that if I share it on Mixergy, people are going to trust it more than if I just post it on Twitter.” That kind of thing makes sense. I get how you have a purpose for it.

By the way, speaking of money, I’ve got to talk my first sponsor. Sorry to interrupt you, but we’re going to come back to your story. The first sponsor is a company called Bench. Here’s why I like Bench. I like Bench because they do your books. I used to have the worst–the worst–books possible. I think speaking of Mike McDerment, I think I’m–well, I did use FreshBooks to invoice people. So, my invoices were starting to get paid. But then I couldn’t keep track of things like my expenses. I couldn’t keep track of revenue that was coming in from Stripe, etc. It’s just such a freaking hassle.

When you’re an entrepreneur and you can’t keep track of your money, not only are you at a disadvantage because you don’t know how much you spend. Look at what you did, Nathan, you were spending up to the last dollar. But also you feel so embarrassed that it starts to weigh on you and you can’t get passed it because you have, like I said, a dirty kitchen where not just the sink is a mess, but the whole freaking kitchen is a mess. There are dishes underneath the cabinet. There are dishes on the floor.

So, the reason that I like Bench is that Bench is not just software that will suck in your data from places like Stripe. But it’s a team of people who will go over whatever the software sucks in and makes sure it’s organized well and makes sure you can actually have your books done properly. You’ve used Bench. Is there anything you can say about it that drew you to it? Anything about Bench that you liked?

Nathan: Yeah. I’ve spent years doing taxes where like taxes would also mean doing the books right at year end, where you’re like, “I wonder what all these numbers are.”

Andrew: I’ve done that.

Nathan: In switching to Bench, I used them for about a year and a half or two years up until we got like a full CPA firm.

Andrew: Does your CPA firm now do your books for you?

Nathan: Yeah. We have everything through one company. Let’s come back to that in a bit.

Andrew: Okay.

Nathan: But the big picture for Bench is that when it comes time to do your taxes, all the numbers are there. That was exactly my experience. I highly recommend it.

Andrew: All right. Cool. If you guys are out there and you want to use Bench to do your books, let go of the guilt or let go of the fact that you don’t like your bookkeeper. If you’re not into whoever’s doing your books, there is a better way.

It’s incredibly inexpensive and they’re very efficient. You’ve heard me bring this up multiple times in past interviews and I’ve been open when someone has switched away from Bench. It’s, I think, every single time for the same reason that Nathan did, they outgrew having a software and they wanted to have a full on CPA to do their taxes and do the books and everything else.

So, if you want to get started with them, go check out Bench.co/Mixergy. They’re going to give you 20% off your first six months and then in addition to that, this is something they’re not offering anywhere else. They’re going to start you off for free. So, you can actually get started for free with them. All you have to do is go to Bench.co/Mixergy. And I’m grateful to them for sponsoring.

What’s the thing with the CPA firm? Tell me about that.

Nathan: Okay. I was for a while working with a local CPA firm, good-sized 40 or 50-person firm or something like that. And then a friend of mine, Ian Landsman, who runs a company called HelpSpot, they’re a customer support software more focused on the enterprise side of things, he was like, “Hey, do you know about applying the manufacturing tax deduction to software?” And I was like, “I haven’t heard anything about that.” And he basically said, “Okay, read these articles.” I’ll have to find some stuff you can post in the show notes.

But basically an end result is a couple comments from another software founder, I had a bunch of notes to my CPA firm, they were like, “Oh, yes, you do qualify for all of these because software counts as manufacturing under this research and development.” In that first year, it saved us like $10,000 in taxes and this next year when we have far more expenses, it’s saving like $150,000 in taxes.

Andrew: What is it that’s allowed you to do it?

Nathan: It’s part of the IRS code and it’s about the manufacturing tax deduction that you can apply to software in some cases.

Andrew: So, whatever you’re investing to manufacture, in this case you’re “manufacturing” software, you get a tax deduction for some part of it?

Nathan: Yes. You’re able to get additional money off of your taxes for a portion of what you’re spending on salaries for your engineers.

Andrew: You know what? You’re actually really good at staying in touch with other entrepreneurs like this. What do you do? Are you on Slack with a handful of other SaaS entrepreneurs?

Nathan: Yeah, Slack.

Andrew: What do you do? Talk about that.

Nathan: There are three different–I’m just using because Slack is open here on the screen. I guess now there are two Slack groups I’m a part of. One is like a whole bunch of bootstrapped founders and the other one is a larger group that Josh from Baremetrics runs. There are like 30 or 40 great SaaS founders in there.

Andrew: Is this the same one Josh from Baremetrics does publicly? He also has a private one, doesn’t he?

Nathan: This would be the private one.

Andrew: It’s like him, where he wants to get to know other entrepreneurs, so he put them in a slack group as opposed to the one for his product.

Nathan: Exactly. This is–

Andrew: What makes those so useful? That was the conference that I had. I forget the other entrepreneurs who were in the room. It will come to me in a moment. Oh, the founder of CloudSponge was in there and he was the one who said he was getting a lot of value out of a handful of Slack groups. I said, “Tell me about them.” He pulled up his phone, he showed me a little bit about it. I don’t fully understand what he loved about a Slack group because I do know some that are useful and many others that are a big freaking waste of time. What’s useful about these.

Nathan: Yeah. So, as a founder, unless you talk to other founders, it’s pretty lonely because no one else knows exactly what you’re going through. No one else is carrying the weight of the company on their shoulders. No one else is dealing with like these hiring and firing decisions. “How long until we run out of cash? We’re not growing fast enough,” etc. except for other founders.

So, what ended up in this room is that people post in there and say like, “Hey, give me a gut check on this. I think I need to let this employee go and they post a couple paragraphs,” not about the employee in particular but about the situation and then people are like, “Oh yeah, absolutely. Absolutely.” Or they say like even conversations like what credit card do you use for the most points for all your business spending. People are like, “These are all the recommendations.”

Andrew: I see.

Nathan: Someone else just posted and said, “Hey, one of our early employees that has been with us for the last five years is moving on another company now.” And like he’s not asking for help or advice, he just needs a place to share that, like he’s happy for the person, but it really sucks.

Andrew: I see. It seems like because of the collection of people that Josh has in that group.

Nathan: Absolutely.

Andrew: You know what I noticed about you? You are very, very open. It’s not like you’re going to come on here and talk to me about the problems you had with your wife or just share for the sake of sharing. Your Twitter is pretty professional. But I did notice that when we were having that scotch–by the way, it’s not that the scotch is the social lubricant. We’re talking about very little scotch. I can pour a ton of scotch, but I really believe in appreciating it much more than getting drunk off of it.

But at one point, I said, “I think I understand this. So, for example, if you had this much in revenue and this many in sales, is that the issue?” You said, “Hang on, let’s just stop with the theoretical. I’m going to tell you exactly my problem.” And you gave the numbers and you gave the specific issue and you started getting into what was eating away at you. I think that helps.

All right. So, let me go back in time here a little bit. I read the post again where you announced that you wanted to create SaaS. You said, “I got these books. They do well. Within three months, I can actually earn $80,000. It’s really good, but to be honest, it’s kind of feast or famine. I have these big months and then I also have these low months. I want to start making something that will produce, here’s the big number, $5,000 a month in sales.” It’s interesting for you to look back and say, “That was my mindset back then. I was thinking very small. I could have thought much bigger.”

But a very organized way of thinking–you said, “I’m going to do customer development calls. I’m going to talk to potential customers once I pick my industry and understand what their issues are and then create a product.” And then you said, “I can talk to accountants, people who mow lawns, etc.” And you came back and you said–I’m setting this up for a reason.

You came back and you said, “Amy Hoy caught that and tweeted at me, ‘Dude, you’re wasting your advantage here. You have an advantage in that you’re talking to content creators. You’ve written books for them. You’ve taught them with books like Authority how to actually have authority and built up their presence. Why are you going to talk to lawyers, accountants anyone else? Focus on that.” And then next post is, “All right, here’s the product I created because of what I needed. I needed an easy way to collect email addresses and to drip out this content.”

I’m wondering–did you, Nathan, do any calls to customers to see if anyone else had this problem or if they solved this problem already using one of the existing software. What happened there?

Nathan: Yeah. So, once we turned and looked in at like what my problems were that was really–I was pushed that way because of Amy. One other important point that she said was, “If you pick one of these other industries, you go after realtors–for some reason, everyone always wants to build stuff for realtors.”

She was like, “Do you like realtors? Do you spend all your time thinking, ‘I wish I could hang out with more realtors.’ Do you want to do that for the next ten years?” I was like, “No, I really want to hang out with bloggers and content creators.” She was like, “Great. You get to scratch your own itch, build it for people that you like.”

So, that was a big part of the reason. But then when I looked at exactly the problems that I had, I wrote those out and then I got on calls with ten different people who I knew were using email marketing and then talked to them and I just said, “I thinking about building an email marketing product. I want to know what all your opinions and frustrations are.” We went through that.

Andrew: Do you remember who they were or one of them?

Nathan: I can name three–Hiten Shah, James Clear, Josh Kaufman.

Andrew: Why Hiten Shah? I don’t think of him as a content marketer.

Nathan: Kissmetrics is one of the greatest like content marketing blogs out there. They grew that whole business.

Andrew: That’s true. So, you said to him and James Clear–who’s speaking at your conference, isn’t he?

Nathan: Yeah, he is.

Andrew: That’s pretty cool. So, you said, “Look, do you have any problems related to content marketing?” Were you that open-ended about it?

Nathan: No, specifically to email. These were all people who knew the value of email marketing. They didn’t have to be convinced that the conversion rates were high or anything like that. They were all growing email list. I said, “What are your frustrations.” So, Hiten was like, “It’s really a pain to do these content upgrades and get this whole process going.” And then I can’t remember what the other frustrations were on other people. I think Josh, he’s a programmer himself and he was like, “I just code it all myself because that’s the way I prefer to do it.”

But with each of them, each conversation that I had, I’d take more notes, start working on wireframes and then as I’d get into the next conversation, I’d refine those. And all these people had similar problems to what I did. It was a pain. Most of them were using MailChimp or AWeber and it was a pain to put a bunch of different forms up that all went to one–or that all gave away a different bonus, a different interview but all went to one list and then had an easy auto-responder after that.

Andrew: I see. Yeah. That was an issue. I remember it. People were at the time, starting to understand content upgrades and a content upgrade is like you listen to this interview and if I had a content upgrade, it would be get the checklist to all the things that Nathan used to build up his business.

To get that, you’d have to enter your email address and then I would give you a checklist. To do that in most software apps, especially the more sophisticated ones, you have to go and create essentially a new funnel where you provide that offering and then you feed people into your existing funnel. You said, “Okay. I think I can solve that.” How did you know that was the winner, that was the one that they would be willing to actually pay for?

Nathan: So, I asked them all like, “Great, would you pay for this?” They’re like, “Yeah, absolutely.” I said, “How much would you pay for it?” There were a bunch more people that I talked to. And it ranged. Some people it was like, “This is a small problem. I’d pay $50 a month.” I think I remember Hiten saying, “I’d pay $250 a month.” That just comes to scale of the business, scale of the problem.

Andrew: Which is a problem with Hiten, by the way. I feel like you can get Hiten on the phone even though he’s a really successful person with a lot of people calling for his attention, the founder of Kissmetrics, today he’s doing Quick Sprout. Kissmetrics does analytics. Quick Sprout is now doing–actually, another analytics business now that I think about it. He bought Hello Bar. But the problem is that he also so cares about you that he’d be willing to pay you a lot of money.

Nathan: Right. He might set you up for failure in that way by being overly helpful.

Andrew: Right. James Clear I think might be a little bit more open about what it would actually cost him and what the value is for him, not that I know James super well. All right. So, I see it. You got out and say I’m going to build this for these guys. Was there anything surprising about them or anything different than you or could you have just said, “I’m scratching my own itch?”

Nathan: I think it was validation that other people had the same problems I did. They came back to the exact same problems. I think there were some fringe ones. The Venn diagram was my problems and then like serious overlap with all of theirs and I could basically just cut out the fringe that didn’t overlap.

Andrew: And the first version of ConvertKit was an easy way to collect email addresses and then to drip out email, right? It was I think the top tabs were collect email address and then course or something.

Nathan: Yeah. It was forms and courses. Then a little while after that, we added broadcasts. So, you could actually send a one-time email.

Andrew: Wow. Were you sending people’s email addresses to services like AWeber at the time?

Nathan: We were using Mailgun. We still use them.

Andrew: But you weren’t–if someone were switching to you, they couldn’t use you for all of their email, right?

Nathan: So, that was a hard thing because–this is the problem where I have to back up a tiny bit. I talked to those people and said, “Great, would you buy this?” “Yes.” “How much would you pay?” “X-amount, $50, $200 a month, whatever.” I couldn’t follow through with the most important step, which is, “Great, may I have your credit card please?”

So, what happened is I went away and said, “I don’t have a way for you to pay and I also don’t have a product. I’m going to go away into my cave and go build this product.” Then I came back and said, “It’s ready for you to pre-order.” And that’s when the real questions came out. People were like, “How do I send a one-time email?” All these actual questions that if you’re making a buying decision, you absolutely ask.

Andrew: I see. You don’t think about, “How do I import my list?” until you’re ready to get started.

Nathan: Yeah. And if I’m asking you, “Hey, will you buy this thing?” They’re like, “I like Nathan. It’s a good idea. He’s trying to solve my problems. Yes. I want him to be successful. I’ll help him out.” But these are all hypothetical questions. It’s not real until I ask you for money.”

Andrew: What else did you miss because you didn’t ask them for money?

Nathan: I think that was the biggest thing of seeing the difference between like a hypothetical conversation and something I’m buying.

Andrew: A real–I almost knocked over my drink–a real conversation would have brought up, “How do I import all of my email addresses? If this is what you want me to use as a mailing,” a real conversation would have a brought up, “How do I send out broadcast emails if I have something to say, like a discount for this weekend or I have a new article going out on Monday, how do I tee that up?” Those are the things that came up. I see. So, did you go back and fix it or did you say, “Ah, these guys are really not my customers, they gave me enough direction. It’s time for me to go get someone else?”

Nathan: So, I was doing both at the same time because I knew that we needed to build all that stuff, but I needed money then. So, Hiten pre-ordered. No one else out of that original 10 did. But luckily I went to that email list and that audience that Amy Hoy told me to build for. And I said, “Hey, will you guys pre-order it?” And the plan was to do the direct sales kind of approach and the audience approach. And luckily about 35 people did. And that came to about $5,000 in revenue and that was enough to keep building along this product.

Andrew: One of the coolest things about the way you worked was I remember at that scotch night, everyone was talking about hiring difficulties and you had no issues with that. That’s where you were able to say, “I just went to my audience and asked them and that’s how I hired them.” I went back today to look at your blog post. You posted and you got 17 responses, then you started to whittle those down until you found the two people who you started to work with. Sorry?

Nathan: Yeah. I found the two people that I actually worked with on that. Having an audience is like the biggest cheat code for business ever. It just makes life so much easier. Now we get engineers applying and you’re asking them, “Why do you want to work here in particular?” They’re like, “I didn’t actually apply at any other company. I love my current job.” But they’re saying like this is a huge benefit of having the numbers public, having the blog posts appearing on shows like this is people say, “I just want to work for ConvertKit.” So, by telling the story, especially early on when there’s like no real story to tell other than I’m struggling.

Andrew: The story was, “Look, I have a little bit of money that I’m going to invest and here’s what I’m going to do with it.” One of them at least ended up going to work for Baremetrics for a little bit. These are good guys, Ben Sharp and I don’t know how to pronounce Sam’s last name.

Nathan: Sam Baumgarten.

Andrew: Baumgarten.

Nathan: Yeah.

Andrew: I think Sam’s the one who ended up going to work for Baremetrics.

Nathan: Ben was.

Andrew: Oh, sorry, Ben Sharp. The reason I know it’s Ben is because he just posted something about Baremetrics’ new recovery feature. So, you ended up with good people. All right. Let me take a break here and just talk quickly about Toptal.

For anyone who’s listening to me who does not have a huge audience but does have a need to find really good developers–and you can see, the really good developers, there’s a reason why companies fight for them because they don’t just create the product. They create it in a way that you couldn’t have anticipated. The bad developers and the bad entrepreneurs think you’re just going to write out a list you need and the developers are going to build it and everything is going to work out. The good developers will understand your problem and come up with solutions you couldn’t understand because you’re not a developer like they are.

So, if you’re looking for that, that’s the whole idea behind Toptal–Nathan, I’m not going to rope you into this add because I know you have no experience. The nice thing about Toptal is they are so obsessive about finding the right group of people to put into their network. By the way, Nathan, here’s a little inside stuff that I don’t talk about much.

I got Toptal to come in here to do a course on something, on how to work as a diversified team. I said, “Look, you flew all the way here from,” I forget where the guy came from, I think he was in Brazil, but I could be wrong, a South American country. I said, “Look, will you do a course about how you guys hire about Toptal.” He said, “No, they’re going to tell me not to do it.” I said, “You have my word. I will not publish this. I will not leak it. Let’s record it while you’re here and then we’ll go back to the CEO of the company and we’ll see if I can publish it.” He goes, “Okay, but he’s not going to let you publish it.”

So, I said, “All right, let’s go through it.” And I sat there and I grilled him. I’m like a good griller for information. We got the step by step process. The whole time he’s a little reluctant, but he says, “I trust him. He’s known the founders of Toptal for a long time.” He tells me this whole process. We record the whole process. I bring in a videographer. I fly him in to record this. We record it beautifully. I then go to get permission. With all of my persuasion skills, I could not get them to say yes to it. This is something they are so obsessed with they will not let me publish. So, basically the guy did all this work for nothing and I did all the work for nothing.

I bring this up because that’s how obsessive they are with their hiring process. They do believe it’s their secret sauce and I can see why it has an advantage over other people. What happens when you’re looking to hire from Toptal–and Nathan, who knows? Maybe one day you’ll want to. The first thing they’ll do is they’ll connect you with a matcher who will understand the way you work. What do you build this platform on? What are your weird quirks? Who do you have on the team right now? What are you looking for, part-time, full-time, etc.?

And then they match you to someone. If you like, you can get started with them often within 24 hours. If you want a whole team, you can also get started with them within a matter of days at times. That’s the idea behind Toptal. If you’re listening to me, you can go get started at Toptal.com/Mixergy. Toptal.com/Mixergy, several Mixergy interviewees have used them and many, many people in the audience is, which is why they keep locking up all these ads.

I’m getting complaints from people who say, “It’s the same sponsor over and over again.” I know. They insisted on locking up the whole freaking year before the year started.

Nathan: We’ll have to come back and sponsor again just to add a little variety.

Andrew: I feel like my ads for you did not work that well.

Nathan: You know what? This is something that is actually far more difficult than I expected. One of our biggest challenges over this last nine months in particular is getting really good metrics in place. So, like Baremetrics is great for everything on the front end, but like if you did a particular promotion, how do you know six months later exactly how it performed and not what the churn is overall but the churn for that one?

Andrew: Baremetrics doesn’t do that. I could really use that. You’re right. How do you know how much a Mixergy listener is worth or a Facebook ad customer or a Facebook ad customer based on this tag who came from this specific ad?

Nathan: Yeah. We custom coded all of that using a tool–we have this like awkward combination of like Mixpanel, Segment, Metabase, which is like an open source analytics platform, like an Amazon Redshift instance to store all the data. Like it’s a disaster. But we finally, now if I were to do a Mixergy podcast again, I could tell you exactly how many we got from that and then a year later or six months later, I could tell you exactly the churn and the revenue and everything from that. So, now I want to try it again.

Andrew: Now I’ve got your competitors who are locked in battle to get this ad locked up. I understand why, by the way. This market has started out as an AWeber market for content creators. AWeber, all due respect to them, they got us all very far, they did not innovate at all, so you really stuck with a very clunky–this is not you talking. This is me talking. I’m going to hurt my relationship with AWeber by saying this.

They really were very clunky. If you wanted to tag someone, there was no way to do it. You had to create a whole other mailing list. Their founder, when I interviewed him, was not at all open to these needs at all. Fine. It was either AWeber and then MailChimp came in and created a beautiful experience but it wasn’t smart. It was very limited.

Now marketers are starting to understand there’s marketing automation. You want to drip out a certain number of emails to people. You want a nice form to put on your site without having to go install 50 different plugins to get it. All these needs are finally being understood and the incumbents I think either are too slow to do it in some cases. In other cases, it’s just not their target market.

When you’re operating on NPR, when you’re buying ads on NPR and you’re getting the local store to sign up for your service, you don’t want to confuse the local store with drip marketing and here’s how you’re going to do a course via email. It’s just too much. There was an absolute opening and you jumped on it, which is why I would have loved to have invested because I knew you jumped on something.

On the other end, by the way, the high end stuff that’s out there for marketing automation is too complicated. You could understand it. I love it. I could geek out on it. The problem is that other people on the team have trouble with it. It’s prone to problems because if every tag could kick off 50 different sequences, one of those sequences is going to be out of date and going to embarrass you, right?

Let’s come back into this. You talked about getting to 5,000. You then told me that you started to go down and revenue was getting hurt. Then you met Hiten Shah at an event. Can we say that was Rob Walling’s event?

Nathan: Yeah. It was MicroConf 2013.

Andrew: Yes. The reason I thought maybe you were hesitating on saying it was MicroConf is because Rob Walling ended up creating a product that ended up competing with you guys.

Nathan: Yeah.

Andrew: I have theories on why Rob Walling’s company and–like, I feel like you did more revenue than they did before the sale, but I don’t know that for sure because–

Nathan: I know it for sure.

Andrew: How do you know their numbers?

Nathan: So, this is the downside of like sharing some numbers publically. Rob said on their podcast the amount that Drip grew over a particular year. He was public with his numbers until they were about $35k of MRR. So, I had a slide from MicroConf when he had said those numbers. I could take this other piece of data and combine the two.

Andrew: And you know where his numbers are, which is why the founder of Toptal does not want to reveal anything. He has told me that he will see people reveal something publically on their blog. He has his team go back and reverse engineer to figure out all the numbers they could and then they could take down the company and take down the competitor. I can say that publically because he said it at an event where I interviewed him.

So, you then start to go down. Hiten Shah says to you, “Hey, listen, you either have to get all in on this thing, ConvertKit, or all in on blogging and close out ConvertKit. But this dicking around doing a little bit of this, a little bit of that is not going to work out. You then decided, “You know what? I’m going to stop doing everything else and focus on ConvertKit.” I’m wondering why. You had a reputation. You had good content. You had a good following for your content. Why didn’t you say, “I’m going to go all in on the content that’s producing more revenue than ConvertKit?”

Nathan: Yeah. I went back and forth so much on this. Another good friend of mine, Brennan Dunn, he and I were at the same place, where he had a SaaS company doing more revenue. I’m not even sure–maybe it was $5k, $10k, something like that, he’s talked about it publicly. And he had this great content business. We both had this hybrid. I went all in on SaaS and he went all in on content and sold off his SaaS business.

Andrew: And he was a guy who was giving you advice in the beginning. He was like your unofficial mentor. It’s interesting he went in that direction. Why didn’t you go in the content direction the way that he did?

Nathan: Yeah. It really came down to a couple things. One, I asked myself like, “Do I still want this? Do I still want to be the CEO of a SaaS company as much now as I did a year and a half ago?” And like yeah, I absolutely still wanted it. Really, if I could ask that and say like, “No, it was a fun experiment, but it’s too much work, I don’t want this,” then like shut it down and move on. Don’t even waste another minute on it.” But I still wanted it.

Then I just asked like, “Have I give this every possible chance to succeed?” I didn’t want to shut it down and a year later go, “If I’d done this, I totally could have made it work,” or always wondered that. So, since I felt like I hadn’t given it my best shot, I knew I would probably for years to come be questioning like, “Had I really tried and given everything I had, could I have made it work?” And I wasn’t willing to live with like questioning myself.

Andrew: I see. I also get the sense that you wanted to be a software person for a long time. I think one of the visits that you had here on Mixergy–I think you taught a course here, you did an interview and in one case, I was looking back at my old notes and they introduced you, my team did, to me in their research, as the founder of Legend, which was a development shop, right?

Nathan: Yeah.

Andrew: I sensed like going over your history that you want to create this stuff. You don’t just want to talk about it, you want to build it, right?

Nathan: Yeah. For sure. When I spent a bit of time–I wrote about designing iPhone applications, a book on designing web applications. It’s how I made my living as a blogger and as an author. And I found this time, I love that. At one point I looked back and like for the last six months, I hadn’t written a line of code or designed an application. I was like, “What am I doing?” I missed that part of it. I wanted to be building products.

Andrew: There’s someone else who I feel is in the same boat as you, which is Bryan Harris. I feel like Bryan Harris has this need for software development inside of him. He has no coding experience as far as I know, but he’s a guy who will call up someone he admires and says, “I like your 5:00 a.m. club. I want to create an app for you.” And then figure out how to have an app created for him. This need keeps coming back.

I have a sense that he’s not ever going to be in your situation or Brennan’s where he has to figure out one or the other because he’s such a freaking systemized person that his teeth will brush themselves if he doesn’t wake up tomorrow and decide to do it. He has some process that will do it for him in the shower. It’s got to be in the shower because why waste time doing it over the sink where you could be multitasking. I get the sense there are people like that.

Here’s the thing that I found was really interesting. Do you have another ten minutes?

Nathan: Absolutely. I was going to say I have a text from Bryan Harris talking about software he’s working on from literally an hour.

Andrew: Yeah. I totally get it. Every conversation with him is–and frankly, he’s a creator that way, right? Like the kid who will keep drawing on his notebooks in elementary school who knows he has to be an artist at some point later on. You can either fight it or accept it. It’s got to be more than just drawing on notebooks. By the way, he’s also good the way you are at asking for advice. He will ping you with a text. He will ask you specific questions then he’ll go do something about it.

All right. Coming back to my original question, I saw what you did after that was you said, “I’m going to do direct sales. I’m going to cold call people. I’m going to talk to them over the phone. I’m going to get the money.” You through that learned a lot. I’m wondering why you decided to do that instead of what I kind of get the sense that Bryan was doing, where he was spending time figuring out Facebook ad buys, where he was doing things that were more growth-oriented. Why did you make phone calls?

Nathan: Yeah. I realized that I didn’t know why people weren’t buying ConvertKit. So, if I was putting content out there, obviously someone is rejecting that. They’re like, “Oh, interesting. This could solve my problem.” Then somewhere through there, they’re not buying. And they’re not saying why. So, if I ask you to buy a product, like, “Hey, Andrew, you should buy ConvertKit,” you can’t say like, “Uh. . .” and then just like not answer and awkwardly leave. You’re socially obligated to tell me why and ask questions and we have to have a conversation.

But online, that’s exactly what happens. If you’re reading a blog post, it’s like, “Here’s why you should buy this.” You click to the sales page, etc. and you hit the back button, that’s the same thing as you awkwardly leaving the conversation without following up. So, in person, you had to get actual reasons.

You had to find out the biggest objection where people are like, “Look, I’m worried I’m going to be your biggest customer,” with like 10,000 email subscribers. I was like, “Okay, that I can overcome. I have 25,000 on my blog list. For sure it will work for 10,000.” And then I close a bigger account like, “He’s got 100,000. He’s using us.”

Andrew: I see. That told you, “I need to show proof that we handle companies bigger than the one coming to my site.” How did you find these people? Were you just emailing people who had big blogging audiences?

Nathan: Yeah. So, it helped that I had been blogging all the way along, so I had some relationships. I started with a lot of people I knew or had met at conferences or things like that. What was really important was getting the exact messaging and going after a specific niche. Early on, it was like email marketing for people who have similar problems to Nathan. It’s really hard to buy Facebook ads or make a list against that.

But we really hammered in on email marketing for professional bloggers, so now I just have to go make a list of all the bloggers that I know and then I go into a sub-industry of that and I’m like, “Interesting. There’s a whole industry of paleo recipe bloggers. I wonder how many there are.” It turns out there’s an absurd number.

Andrew: I see. I’m looking at an early version of your site. It says, “Does your conversion rate keep you up at night?” And your whole focus was on helping people get more email addresses, increasing their conversions. It’s these phone calls that helped you realize it’s not about anyone who needs to increase their conversion rates. It’s about bloggers. How did you know through these phone calls that this was the group of people you needed to zoom in on?

Nathan: I was looking at the people who I knew who were having the most success with email but were also small enough that I could get to the decision maker. Bloggers were really key there because there’s only one person to talk to, usually. They might have a small team. They might have an assistant or something like that. But you can get ahold of and talk to the person who buys and they have large email lists.

There are a lot of great SaaS companies out there that have built email lists, but chances are they’re tiny compared to the health and wellness or the mommy blog that’s built up like 400,000 subscribers, whereas like a SaaS company doing decently well with content marketing is going to build a list of like 20,000 people. I saw this of like I can get to a decision maker. They have larger lists so they’re spending more and I don’t have to go through an enterprise sales process. And they’re people like me. The have the same problems that I did.

Andrew: And it was small developers who you had to say no to in your–if you were focusing on them, who were you not spending time on who you thought you needed to? It sounds like small developers were a big group of people, right? Developers like you, they have apps like you but they’re not a good fit for you. Who else did you realize through these phone calls were not a good fit?

Nathan: For a while I went after like earlier on, I was going after beginners because I had this idea that switching email providers is such a pain, no one is going to do it. Then I realized beginners churn out like crazy. So, the best people are the ones who are already successful and I can help them be more successful.

Andrew: How did you know that from your phone calls?

Nathan: Well, I knew it from like the previous year and a half of ConvertKit of just seeing such a high churn rate. I kept thinking I wish I could get to the people that are more sophisticated and already successful but look, they need more features than I have. So, what the pitch started to be is like, “You’ll have access to me as well.”

So, I’d written enough about email marketing that people want to know how to optimize their funnels and that sort of thing, so I said not only if you switch over will you have these other tools, you’ll lose some of this other functionality because we haven’t built it yet because I have two part-time developers. But I will help you. I will coach you on optimizing your funnels. I basically did everything possible to get the sale.

Andrew: I see. And that’s when you figured out who your market was and that’s when you started to bring in revenue and then how do you scale that?

Nathan: Initially you don’t. Everyone is so concerned about doing things that scale. I just say like if you’ve got $1,000 of monthly recurring revenue, you don’t need anything to scale. You just need customers. We did it totally organically until about $20,000 of MRR and then at that point, the word of mouth started to kick in a bit more. Word of mouth is a very frustrating phrase to use.

Andrew: Yes, as a interview I hate it because what am I leaving the audience with? Yeah.

Nathan: And you’re like, “Oh, right, word of mouth, why didn’t I think of that one? I’ll implement that now and my business will explode.” So, I see direct sales as being the way that you kick start word of mouth. So, by actually selling people and doing that, then what I found was that every account that I sold, the next one got the tiniest bit easier.

As I went after bigger accounts eventually getting people like Pat Flynn on the platform, once he let me talk about that, then I was able to say like people would do the old like, “Who uses you?” And eventually I could be like, “Pat Flynn.” And they’re like, “Oh, okay. I’m in. If it’s good enough for Pat, it’s good enough for me.”

Andrew: So, when I ask people about what happened between you and Drip, what I’ve discovered was you had Pat Flynn and that was maybe the best form of marketing, am I right about that?

Nathan: I think it’s the audience we went after.

Andrew: And the audience is the second one. Your competitors were email marketing for anyone. You were email marketing for bloggers, for content creators and the other one was I felt that and I heard it was the fact that Pat Flynn blogged about you–I’m sensing something in your eyes now. What’s going on about Pat Flynn? Is he still talking about you guys?

Nathan: Yeah. Absolutely. I was just saying I think the market was actually–Pat Flynn was absolutely crucial. But we ended up with the equivalent of Pat in a couple different industries because the blogging world is very, very diverse. I think the industry mattered more. Drip was email marketing for SaaS companies. You run into this problem where the SaaS companies, they don’t have the same reach and they don’t have the same audience size.

Andrew: Okay.

Nathan: Whereas you go after a Pat Flynn and get someone like him talking about it, then he doesn’t tell his five SaaS buddies in his Slack chatroom. He tells 100,000 of his closest friends.

Andrew: I see.

Nathan: Bloggers do that over and over again. The other thing is affiliate marketing is not a common thing outside of the blogging world. No SaaS company says, “I want to add to my revenue by becoming an affiliate for this other thing.” As SaaS founders, all we care about is what increases our monthly recurring revenue from our subscriptions that run through Stripe, you know? But bloggers are like, “Interesting, I can make some recurring revenue on the side from this affiliate program.” So, it’s really, really natural. I think the audience played a huge role in it.

Andrew: Pat Flynn is the founder of Smart Passive Income. I’m looking at his February 26th–oh, there it is. It’s February, 2017. You contributed $11,698.46 in affiliate revenue to him. Do you have any other financial relationship with him?

Nathan: Yeah. So, he’s an advisor to ConvertKit. He came in July, 2015 when he switched his account over. Then from there, he was–at first he was like, “You are not allowed to talk about this.” I was like, “Okay. I’m just going to make you super happy as a customer.” Then he started to get into it be like, “This is smart. This works really well.” Then he said, “I think I want to write a blog post about this. What’s your affiliate program?”

We were just starting to roll out an affiliate program. Later, he just kept saying, “I’m going to do this. I have this other idea. We’ll put it on SPI TV.” And then he was like, “Okay, final thing–I’ve decided that October is going to be email marketing month.” He showed me his content plan and ConvertKit was promoted in like every other piece of content for the entire month. It was a ton of stuff, like on the podcast and everything else.

I’m like, “Pat, this is more than an affiliate. Do you want to come on and be an advisor for the company? If you do this, you’re making a huge impact on where we go as a company.” So, from there, he came on as an advisor and it’s been pretty fantastic.

Andrew: So, he gets equity?

Nathan: Yeah.

Andrew: Who else gets equity and why did you go through all this if you didn’t want to take on funding?

Nathan: It was different giving out equity in those–that’s a much easier thing and I still have control of it. So, at this point, I have 90–it’s just changed a little bit recently as I bought some equity back from someone–96.5% of the company.

Andrew: I see. Who else have equity?

Nathan: A couple of key employees, Pat and Ryan Delk.

Andrew: Why Ryan Delk? I love Ryan. I feel like I didn’t get into the heart of who he was on Mixergy.

Nathan: Yeah. So, Ryan actually flew up to Boise just this last weekend and we spent an entire weekend doing a deep dive on everything related to ConvertKit’s growth. He and I have been friends for a long time. He’s the kind of person who he can get ahold of absolutely everyone. So, when he ran growth at Gumroad, he got–even in the music scene, he got Taylor Swift, Eminem, Bon Jovi and Justin Bieber to all sell on Gumroad like through his connections and purely through his hustle.

But he came up this weekend to do a deep dive with us, my whole growth team on how exactly we can grow in a scalable way–I’m kind of a hustle sort of–I’ll come up with an idea and do a bunch of work to get to that next $25k of MRR. Then all day long I’ve stacked those chunks of $10k from this, $25k from that, etc. Ryan is so much more system-focused that he did that whole plan with us and it was fantastic. I have pages of notes.

Andrew: Can you be specific? What’s one thing either this last time that you talked to him or some other time? I feel like he plays the same role that Andrew Chen does for Noah Kagan, that system thought out process.

Nathan: So, we had like all these marketing efforts going on over here. Then we had a three-person sales team that’s like taking care of demo requests and inbound things. Marketing is trying to get more content out there, more page views. Coming out of this weekend, it became very clear that marketing’s job is to drive demo requests.

Andrew: I see. As opposed to. . .

Nathan: As opposed to any of these other metrics of like increase brand awareness–

Andrew: Signups.

Nathan: Maybe total signups. We found that our flow to demo requests is converting that much better. What really, he helped us get a lot of clarity maybe that we should have already had. But ongoing directly from each step of the process.

Andrew: I see.

Nathan: Then Barrett, who heads our marketing was like, “Okay, if you need more demo requests and we’re clear on that, I know exactly how to get you 2,000 demo requests in the next 30 days.” He says to the head of sales, “Do you think you can handle that?” “Hell yes, if you find a way to get me that money, I will absolutely handle that and close 30% of them.”

Andrew: I see. That’s very counterintuitive because it sounds like you’re adding more manpower, which means it’s more cost versus just automating the whole process.

Nathan: It was really about how to get the entire company to work together and the entire thing to work together as one growth engine rather than everybody is doing their own thing. Then we’ve gotten so good–we still have a long ways to go–but related to the metrics and tracking everything back and finding what promotion worked. Ryan’s helped a ton in that.

Andrew: He’s a guy who used to work at Gumroad. Gumroad is the platform they use to sell your eBooks on. So, he’s someone who I could never capture in person what he’s about. Not to like put people on notice that I’m paying attention to them, but I pay attention to them. The guy comes over to dinner at my house. I think he was the quietest, shiest person, had to leave early type of person.

I could think back at the dinner. It was a pretty decent dinner. It was a good dinner. We had really good entrepreneurs over there, really smart people hanging out, brought girlfriends, if I’m thinking of the right one, brought girlfriends over out of nowhere because they were having such a good time, like, “Can I ping someone who I met two days ago because I really like her?” “Sure, bring her over.” I felt like he was really quiet. But here’s in like one Facebook message chain, I realized how freaking bright he is.

He got into Omni, which is at its heart a service that makes so much freaking sense. You just go to the app and they’ll go pick up anything from you, like your record player, your desk, your full books and store it. Where he was telling me where he was thinking was going with this thing in like two sentences, I go, “Freaking a, this guy is so bright.” I don’t know if I can say it because he told me privately. I’m sure at this point it’s public, but I’m not 100% sure and I don’t want to screw around with my friendship with people and my trustworthiness.

Nathan: Just tell people to go follow Omni and see where it turns out because I agree. It’s brilliant.

Andrew: Omni is so–if I were an investor and I couldn’t get into Omni, I’d be pissed. As soon as he describes it to you, you realize, “Of course it makes sense.” At the heart of it, you understand because people have a bunch of crap in their houses and they live in smaller places, so they want to get rid of the crap. Once he tells you then where it’s going, of course it makes sense. I haven’t talked to him in months about it. For all I know, privately he could be saying, “This is the worst idea ever. Why doesn’t it scale?”

It is kind of weird that he sends you this beautiful van. A guy comes over with white gloves, takes my old antique record, puts it in this thing all for free and then the next day I look at the app and there’s a beautiful set of photos of the record player, it’s like a celebrity was just shot by Vanity Fair. It’s that kind of spread.

I think I’ve got everything. To me, the big takeaways are this–the audience, of course, but that’s not anything new with you. You have an audience and you have something to sell to. You have people who are going to take your phone calls. You have people who are going to try your software and pay you in the case of Hiten ever before the product is good for them. The bigger takeaway is the set of questions that you ask them to understand what to create and the set of questions that you should have asked them including, maybe especially, “Will you buy this right now so you can validate it?”

The next thing is we always think of that as the thing you do in the beginning when you get customers, but here you are coming back and saying how do I grow and in order to grow, you had to basically come back and do the same thing, which is sell to understand what people are looking for to get turned down a little bit to get a lot of yes.’ Am I right?

Nathan: Yeah. And if I had to start over, I would do direct sales starting from day zero all the way–I still do it today. I cold emailed three people this morning saying, “Hey, is there anything frustrating you with MailChimp? Is there anything frustrating you with Infusionsoft?”

Andrew: What do you use to understand who’s using MailChimp and Infusionsoft?

Nathan: I use two tools, BuiltWith and NerdyData.

Andrew: And you pay for that?

Nathan: Yeah. BuiltWith is like $300 a month and NerdyData is like $100 a month.

Andrew: What’s NerdyData versus BuiltWith? Why do you use them?

Nathan: I settled on BuiltWith for the most part, but Bryan Harris says that NerdyData is better and so I’ve kept that subscription around. I need to dive back into it.

Andrew: What do you think of this? You are about to give or you already did give Bryan Harris all kinds of feedback about his stuff. He wrote a post about you and a post about someone else and a post about everyone else where he basically said, “When it comes to this kind of automation. It’s not done well with ConvertKit.”

Nathan: Yeah. It’s not good enough. It’s not up to Bryan Harris–

Andrew: He gave it like a D.

Nathan: Yeah.

Andrew: It’s not an overall D, by the way. A lot of things he pointed out I didn’t know and I wouldn’t have paid attention to and he pointed out some really useful features that work elegantly well. But the tagging, the automation, the ability to say, “Here’s a webinar,” and the specific date. Do you feel like, “Hey, dude, Judas, why am I texting you now?”

Nathan: We text back and forth a lot about that. He said, “I’m not changing anything, but before it goes live, here’s the review.” It was interesting because we describe ConvertKit like a shorthand way to describe it. Some people say, “The Uber of whatever.” We describe it as, “The power of Infusionsoft but easier to use than MailChimp,” because then someone who knows the industry knows how to like bracket you within these things.” So, he described it, he came from Infusionsoft. He was like, “What the hell? How can you say that and you don’t have all these features that Infusionsoft has?”

So, I was trying to explain where we’re coming from like for our target market, etc. Then he went and did his MailChimp review like three reviews later and he was like, “Okay, I get it now. I understand what you mean of like MailChimp not having tags and all this functionality.” It is bringing some of those key parts.

Andrew: Honestly, do you feel a little bit betrayed? Do you feel personally hurt?

Nathan: We had a call where I was like, “Bryan. . .” and he was like, “It is very important to me that I be completely objective.” And I respect that. But I did have this feeling of like, “Come on, man.”

Andrew: I get it. Why do an eight-minute video telling me that this feature we’re not supposed to be good at is not working very well with you? I respect it. I can sense in his writing that he felt a little bit bad about saying it.

Nathan: But I respect him more for it.

Andrew: That’s good to hear. Good. Are you happy that only one person commented on that, where his other posts would have gotten tons of comments and I feel like maybe he’s not promoting it that much? I couldn’t even find it. I had to go and look it up.

Nathan: Yeah. That post still drove us a lot of business.

Andrew: It did?

Nathan: It’s interesting. Through all of this, I just see like creating–maintaining the relationships being so important. I was at SaaStr annual a month and a half ago, a year later. I was walking up the stairs and about to be done for the evening. I walk up the stairs and turn and there’s Rob Walling. I haven’t talked to this guy for a long time. I really respect him like a lot.

Andrew: Me too.

Nathan: So, we get in this conversation–it was really funny because we said hi. I don’t know, it was a little awkward at first. But we were talking and this other guy walks by walking from behind me and sees Rob and recognizes him and walks up and says, “Hey, you’re the Startups for the Rest of Us guy.” Then he like turns and sees me and then like does this back and forth, like, “You two aren’t supposed to be. . . Don’t you compete?” That whole thing. I’ve just never seen it that way. It was a really fun conversation.

Andrew: In many ways, I feel like that’s not helpful. It’s not a smart thing to do. Did you see “The Founder,” this movie, it feels like it’s just a hatchet job of Ray Kroc, the founder of McDonalds?

Nathan: I haven’t seen it.

Andrew: All it is, is about how much he will destroy you if you are in his way. Even if you’re sleeping in his bed and you’re married to him, if you’re not helpful, that’s it. It’s gone. It has the famous line from Ray Kroc, “If I saw my competitor drowning, I would shove a live fire hose in his mouth.” But I get it. I actually don’t think it works.

Here’s why I don’t think it works. I had a competitor who I was heavy in competition with. I kept talking to him and we were friends. There was a piece of my business I wanted to pass on to somebody because I was burned out. I needed to move on. I needed somebody who would know how to run it. I said, “Who knows how to run it better than this guy who’s been watching every freaking step I took and we had dinners with every time he came to New York?”

So, I was able to contact him and say, “I can do this. Here’s the thing. I can’t show up Monday. So, take it and I’m going away.” It was really helpful. I know another situation where someone was trying to screw me over by going to work with him because he said you guys are competitive. He goes, “Hey, Andrew, he’s a guy who’s trying to screw you over. You should be aware of it.” “Thanks for that heads up.” I get it. And you guys are both decent people, unfortunately, right? If one of you is a jerk, it would be so easy.

Nathan: It would be. We had this rule for the longest time. This rule–we do direct sales a lot. Our whole thing is taking customers from other platforms. Up until the sale to Leadpages, we had this rule that we would not take customers from Drip. We would be doing direct outreach and find out, “They’re using Drip,” and we would just not email them. If someone came to us and said, “For whatever reason, I want to switch,” we’ll have that conversation.

Andrew: That’s good. First of all it’s good because it keeps the relationship from going nuclear, but also, frankly, that’s not where the big pain point is. The big pain point, I said this all along, the big competitors are not meant for most people. If you need to hire a consulting team to run your email software, you should rethink your email software. And if you’re using the same email software that you heard NPR say it’s perfect for your local store, you have to realize, “That’s not me.”

I get it, but there’s no way that what the local store is using is the same as what I’m using. The local store isn’t even using Google docs. They’re using Microsoft Word and passing emails back and forth to each other with docs and revision history attached to the end of the file name. So, if you’re at that point, you’re not in a good space and it’s time to reconsider and if you’re starting out, you should pay attention to say, “This is where the future is. I can see why Andrew is so hot about this. I think I better at least consider the alternative.”

All right. That’s the end of this. Thanks for spending extra time with me. I’m now officially late for my next meeting by a lot, but it was worth it. There was a lot here I wanted to cover that was useful to me. To me, again, the most useful part is how you talk to your customers to figure out what your product is and I love hearing that.

All right. The website is–did we even give it out at some point? Probably not. It’s ConvertKit.com. I don’t even need to spell it or anything. And the two sponsors who have paid for this are Toptal. If you need to hire a great developer, go to Toptal.com/Mixergy. And if you need somebody to do your books right, go check out Bench.co/Mixergy. Thank you all for being a part of this. Thank you, Nathan.

Nathan: Thanks.

Andrew: Bye, everyone.


  • This conversation rocked (made for an amazing bike ride while listening).

    Nathan gave a great talk in Austin at Sumocon in 2016, but didn’t get this deep. Amazing growth in MRR!

  • John Davydov

    I really enjoyed the interview. I think a lot of people don’t talk about taxes when it comes to online business. Can you please talk more about “applying the manufacturing tax deduction to softwares” or any tax savings tips for online business and saas companies.

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