20VC Hubspot CoFounder Dharmesh Shah on The 3 Risks All Startups Face, Angel Investing Rules; No Founder Meetings and No Due Diligence, SMB vs Enterprise; Lessons on Pricing, Distribution and Why You Should Resist Going Enterprise

In this episode of 20vc, Harry Stebbings interviews Dharmesh Shah, the founder and CTO of HubSpot, a comprehensive CRM platform. Shah discusses his journey from bootstrapping his first company, Pyramid Digital Solutions, to creating the multi-billion-dollar enterprise HubSpot, highlighting his commitment to SMBs and the importance of culture within a company. He emphasizes transparency, humility, and the value of community in business success. Additionally, Shah shares insights into his angel investing philosophy, focusing on minimizing time rather than maximizing returns, and his predictions for future market efficiencies. Throughout, Shah advocates for customer-centric approaches and the significance of bold, calculated risks in driving company growth and innovation.

• Dharmesh Shah is the founder and CTO of HubSpot, a comprehensive CRM platform offering marketing, sales, service, and CMS software.
• HubSpot was started in 2006 and is now a publicly traded company with a significant market cap and a large employee base.
• Prior to HubSpot, Dharmesh bootstrapped Pyramid Digital Solutions and eventually saw it acquired by Sungard Business Systems.
• He co-authored "Inbound Marketing" and founded Onstartups.com, a top-ranking startup blogging community.
• Dharmesh is also an angel investor in numerous companies, including Coinbase, AngelList, Gusto, and Okta.

"Now, Dharmesh started HubSpot in 2006 and today it is a publicly traded company with over three and a half thousand people and a market cap of $16.9 billion as of today."

This quote highlights Dharmesh Shah's successful entrepreneurial journey with HubSpot, emphasizing the company's growth and market significance.

• Dharmesh has a history of entrepreneurship, having founded multiple startups including Pyramid Digital Solutions.
• He is an experienced investor with a keen interest in startups and technology.
• Despite initially planning a career in academia, his meeting with Brian Halligan at MIT led to the founding of HubSpot.
• His wife played a crucial role in scouting Brian Halligan, which eventually led to their partnership.

"In addition to all of this, Dharmesh coauthored Inbound marketing. Dharmesh founded and writes for Onstartups.com as top ranking startup blogging community with over a million members."

This quote summarizes Dharmesh's contributions to the startup ecosystem, including his writing and community-building efforts.

• Dharmesh met Brian Halligan at an MIT Sloan cocktail party, which was a significant turning point leading to the creation of HubSpot.
• Despite being an introvert, Dharmesh formed a strong connection with Brian due to their shared passion for SMBs and complementary skill sets.
• The decision to start HubSpot was driven by the desire to work with Brian and to make an impact on small and medium businesses.

"The reason HubSpot started was two reasons. One, I wanted to work with brian, and two, we both had a shared passion for SMBs."

This quote explains the foundational reasons behind HubSpot's creation, highlighting the importance of partnership and shared goals.

• Dharmesh's marriage is characterized by mutual respect, admiration, and complementary personalities.
• He emphasizes the importance of enjoying each other's company and being a supportive team in a relationship.
• Dharmesh and his wife have different professional backgrounds, which contribute to a balanced dynamic.

"The simple thing is you have to kind of enjoy each other's company. That's the number one thing."

This quote captures the essence of Dharmesh's view on marriage, emphasizing the joy of companionship as a key element.

• Dharmesh's leadership is marked by transparency, humility, and a continuous learning mindset.
• He believes in openly sharing his thoughts and being receptive to feedback and debate.
• Dharmesh values low ego-to-accomplishment ratios in individuals and considers it a sign of great leadership.

"The best people I've ever met have a very low ego to accomplishment ratio."

This quote reflects Dharmesh's perspective on leadership, where humility in the face of success is highly regarded.

• Dharmesh assesses potential hires based on their ability to share credit and shoulder responsibility.
• He highlights the concept of "culture debt," which is incurred when hiring non-diverse teams or individuals who do not fit the company culture.
• Culture debt is considered insidious and difficult to pay off, as it can have long-lasting negative effects on an organization.

"Culture debt, 16 years later, like we are now, you're still sort of paying that price."

This quote underlines the enduring impact of early hiring decisions on a company's culture and the challenges of rectifying them.

• The culture code deck is a reflection of Dharmesh's view of culture as a product that requires deliberate design and feedback from employees.
• He treats culture as a product, applying principles of product management to culture creation and improvement.
• Dharmesh believes in involving employees in the culture creation process and values their feedback on what makes them happy or unhappy at work.

"Culture is a product. So we build a product. If you're a tech company, you build a product for your customers."

This quote illustrates the approach of treating company culture as a product that needs to be thoughtfully crafted and maintained.

• Dharmesh Shah discusses how some HubSpot employees were concerned that the company was changing due to new cultural initiatives.
• Employees equated culture with mission statements and words like "integrity" and "excellence," fearing a shift towards an impersonal corporate atmosphere.
• Shah reassured them that the intent was not to become a big company with hollow values but to define the attributes of people who succeed at HubSpot.
• The first version of the culture code deck aimed to answer what kinds of people are likely to succeed at HubSpot.

"Once we got through that, talked people off the ledge and I understood better why they were reacting negatively is because culture, as it had been practiced before, was mission statements on the wall and high fluten words like integrity and this and excellence and whatever."

This quote explains the initial misunderstanding among employees about the company's cultural shift, associating it with superficial corporate practices rather than meaningful values.

• The culture code was created to identify attributes correlated with success at HubSpot.
• Shah considered these attributes as coefficients of a function that would define success at the company.
• Transparency, humility, empathy, and adaptability were identified as key attributes.
• The culture code became a baseline for hiring and promotions, integrating these values throughout the company.

"And that's when we came up with the original set of what some people call values. I think of them as coefficients or the attributes of people. And transparency was up there, humility was up there, empathy was up there in terms of the attributes that really kind of stood out."

The quote highlights the core attributes that HubSpot identified as essential for success within the company, moving away from generic values to specific, actionable traits.

• Shah advises startups to focus on culture from the beginning, at time "t equals zero."
• Founders should have conversations about the type of company they want to create and the people they want to attract.
• Culture is as important as product development and should be addressed immediately if not already established.

"Regardless of where in kind of stage of evolution you are, the best time to work on culture is time t equals zero. Simultaneous to thinking about the product, think about the people."

This quote emphasizes the critical importance of prioritizing company culture from the inception of a startup, suggesting that it should be developed alongside the product.

• Shah discusses his ongoing battle with impostor syndrome throughout his life.
• He feels like he is catching up due to a lack of early exposure to education and technology.
• Despite his insecurities, Shah does not compare himself to others and instead focuses on learning and enduring the noise for valuable insights.

"The big one is just around impostor syndrome. Everyone has it, people talk about it. I've had it my entire life and I didn't know what it was called until much later in my life."

This quote reveals Shah's personal struggle with impostor syndrome, a common experience among successful individuals, highlighting its impact on his perception of his achievements.

• Shah discusses the challenge of instilling work ethic and values in his son, who has a different lifestyle than Shah's own upbringing.
• He believes in leveraging his son's interests, like video games and programming, to teach him about technology and entrepreneurship.
• Shah shares a personal project with his son, creating a Wordle app, to demonstrate the practical application of software development and the power of the internet.

"It's borderline impossible because it's such a diametrically opposed thing. So then the question is what we will call drive or ambition, or just this kind of need to build or create value."

The quote captures the difficulty of instilling the same drive and ambition in a child who grows up in a different environment than the parent, acknowledging the influence of upbringing on one's motivation.

• Shah agrees with the importance of distribution over product for startup success.
• He outlines three types of risks in startups: product, market, and financial risk.
• Shah advises focusing on market risk first by validating demand with actual sales rather than getting caught up in product development.
• He believes in the power of data and learning from customer behavior through sales and retention.

"Most founders, they almost always jump directly into the product risk and try to mitigate that risk by just starting to build the product."

This quote advises against the common startup mistake of prioritizing product development over market validation, emphasizing the importance of proving market demand early on.

• Shah reflects on HubSpot's simple initial pricing strategy and the benefits of charging early.
• He warns against the difficulty of lowering prices once they've been raised due to the impact on recurring revenue.
• Shah advocates for generosity in pricing, leaving money on the table for the sake of goodwill and long-term benefits.
• He does not universally agree with the sentiment to raise prices, as it can limit market accessibility and flexibility.

"But the one big value to it, it was simple. And the thing we were trying to do was we were not necessarily trying to optimize for the cash."

The quote conveys the strategic decision to prioritize simplicity and market validation over maximizing immediate revenue in HubSpot's early pricing strategy.

• Shah expresses strong opinions against rushing to the enterprise market, particularly for startups with a home in SMB.
• He discusses the downsides of enterprise software, such as revenue concentration, long sales cycles, and reduced agility.
• Shah believes that smaller feedback loops and the ability to quickly learn from the market are more advantageous for startups.

"So I have strong opinions on this and I'll share them. I told you, when Brian and I started the company, one of the top two reasons we started HubSpot was we wanted to work together. The second reason was we had a passion around SMB."

This quote explains Shah's preference for the SMB market and his rationale for choosing it over the enterprise market when starting HubSpot, emphasizing the agility and feedback opportunities in SMB.

• Iterations are crucial for improvement; more iterations lead to better performance.
• Enterprise sales have longer cycles, resulting in less frequent data feedback.
• Consumer products can have bimodal outcomes: massive success or complete failure.
• SMBs (Small and Medium-sized Businesses) offer the scale of consumer markets with a chargeable business model like enterprises.

"ome is based on the number of iterations. That's the one predictor of it. So if I can go through something a thousand times and someone else went through it 100 times, I'm going to do something fundamentally better."

This quote emphasizes the importance of repetition and iterations in mastering a task or business process. The more you repeat, the better you become.

"I just believe that as long as you have a data piping back into the system on the enterprise side, because the sales cycles are so long, the amount of data coming in, which is the amount of evidence, the amount of insight coming in, is just one 10th of what you would see in a non enterprise company."

The quote underlines the challenge of getting frequent and substantial data feedback in enterprise sales due to longer sales cycles, which hampers rapid learning and iteration.

"The value of SMB, from an economics, from a startup perspective, is that you have the scale of consumer, literally millions of them out there. But then you have the business model of enterprise, which is you can actually charge people money and you don't have the bimodal outcome that you have in consumer."

This quote highlights the economic advantage of SMBs, which combine the scale potential of consumer markets with a sustainable, chargeable business model, avoiding the extreme win-or-lose outcomes common in consumer products.

• Companies naturally drift towards serving enterprise clients due to improved metrics.
• Moving upmarket improves retention and average revenue per user (ARPU).
• However, the competitive landscape becomes tougher with more established players.
• Founders should have a plan for scaling and evidence for the market they are targeting.

"There's this thing in, I'll say software, but even tech more broadly, which I call reverse gravity, that left to your own devices, your company will be pulled up into the enterprise always."

The quote introduces the concept of "reverse gravity" where tech companies are naturally drawn towards the enterprise market due to seemingly improved business metrics.

"And the only way not to be pulled up into the enterprise is you have to spend energy to resist that pull."

This quote suggests that to avoid being pulled into the enterprise market, companies must actively resist and focus on their chosen market segment.

"It's okay to do things that don't scale, that I'm okay with. If you're doing it for learning and you have a pass, it's like, okay, well, this is the path all along, but you have to sort of have a plan that says, okay."

The quote stresses that while it's acceptable to engage in non-scalable activities for learning purposes, it is crucial to have a strategic plan for growth and scaling.

• Founders must understand the reasons for launching a second product.
• Valid reasons include market saturation, declining market category, and natural market adjacencies.
• HubSpot's expansion into CRM was due to the natural fit with their marketing software and defensive strategy.
• The decision to launch a second product should be delayed as long as possible to maintain focus.

"One is you need to know why you're launching a second product. That's the number one question."

This quote emphasizes the need for a clear rationale behind launching a second product, ensuring it aligns with the company's growth strategy.

"Founders should put off the second product for as long as they can, but not forever."

The quote suggests a cautious approach to introducing a second product, advocating for focus on the core offering before diversifying.

• Complexity increases significantly when introducing a second product.
• Founders should be fully committed when launching a new product, putting the best resources into it.
• The potential return from the new product should justify the investment and risk.

"When you go from product n equals one to product n equals two. And that is a huge gap because everything in the business, when you launch your second product becomes harder, every decision becomes harder."

This quote explains that introducing a second product adds a significant layer of complexity to every aspect of the business.

"I believe in self fulfilling prophecies when it comes to product investment."

The quote reflects the belief that a strong commitment and positive mindset toward a new product can increase its chances of success.

• Dharmesh Shah focuses on three areas: platform, brand, and boldness.
• Encouraging boldness involves pushing the organization to take more calculated risks.
• Celebrating failure and learning from it is key to fostering a culture of innovation.

"Non 0% of my waking hours and even my non waking hours are around. How do I push the to take more calculated risk?"

Dharmesh Shah dedicates his efforts to encouraging the company to take calculated risks, which is essential for innovation and avoiding stagnation.

"You cannot rely on osmosis for anything good that that's going to happen. You have to sort of beat the drum."

The quote underscores the need for continuous communication and reinforcement of company values and strategies, especially in a growing company.

• Key milestones in HubSpot's growth included launching a second product and expanding internationally.
• These decisions were pivotal but challenging due to the shift from established strengths and entering uncharted territories.

"Product two, big, big lots of pain going to product two."

This quote reflects the challenges HubSpot faced when deciding to launch a second product, which was a significant and painful shift for the company.

"Going international, it's like, okay, well, we're going to not just sell to the United States."

The quote captures the strategic milestone of HubSpot's international expansion, which involved adapting to new markets beyond the United States.

• Product marketing today is often seen as bland and unexciting.
• Exceptional product marketing stands out and evokes strong emotions in customers.

"Do you not think the state of product marketing stay is pretty abysmal?"

The quote reflects a critical view of the current state of product marketing, suggesting it lacks distinctiveness and excitement.

"To me, product marketing is all about c"

Unfortunately, the transcript is cut off and does not provide the complete thoughts on product marketing from the speaker.

• HubSpot focused on building a community before having a product.
• They challenged the status quo of marketing, advocating for inbound marketing.
• HubSpot aimed to polarize the market, believing that not everyone should agree with their message.

"So one of the things that I think HubSpot got right is that we were kind of builders of community well before we even had a product, right?"

This quote highlights the strategic move by HubSpot to establish a community as a foundation for their business, even before they had a product to sell.

"You have to kind of polarize your market. 100% of the people cannot agree with what you're saying because then you're basically in the middle."

This quote emphasizes the need to create a distinct position in the market that may not appeal to everyone, as this differentiation is crucial for standing out.

• Community is about unlocking value for members, not just a marketing list.
• A true community involves interactions among members, not just a passive audience.
• The goal is to connect community members and create mutual value.

"A real community is one when the community participants are getting value from each other and you are there as the host, you're not up on stage."

The quote clarifies that the essence of a community lies in the value exchange between its members, with the host facilitating rather than dominating the interactions.

• Dharmesh Shah has had various high conviction beliefs from 2017 to 2020.
• In 2022, he believes the connection between buyers and sellers is broken due to data ownership issues.

"My answer would be that the way buyers and sellers connect is fundamentally broken because you don't own your data."

This quote presents Shah's belief that the current model where consumers do not own their data is flawed and that this will change in the future.

• Shah got into angel investing to experience startups without running one.
• He set up guardrails to minimize time spent on angel investing, focusing on his startup.
• He avoids founder calls, negotiations, and follow-on investments to save time.

"So number one principle of my angel investing is solve for minimizing time, not maximizing return."

This quote explains Shah's primary rule for angel investing, which is to conserve his time for his main venture, HubSpot.

• Shah has made mistakes by investing in physical products and ignoring red flags about founders.
• His biggest miss was not investing in Dropbox despite knowing the founder.

"One is investing in ideas that involved atoms instead of just bits... And then secondly is not trusting my instincts when kind of my ego accomplishment thing was raising yellow flags."

This quote reveals Shah's self-reflection on his investment mistakes, emphasizing the importance of trusting one's instincts.

• Shah values the ability to separate skills from talent and is non confrontational.
• He regrets not trusting that the SMB bet would work out for HubSpot.
• He wishes for more founder focus on customer problems rather than early solutions.

"Biggest strength is the ability to separate skills from talent... Biggest weakness is I'm pathologically non confrontational."

This quote gives insight into Shah's self-perceived strengths and weaknesses, which have shaped his approach to business and management.

• Shah envisions continuing his role at HubSpot and solving more customer problems.
• He believes HubSpot is still in the early stages of its potential growth.

"HubSpot will have grown further and solved more of our customer problems. Feels like we're in early innings."

This quote expresses Shah's long-term vision for HubSpot and his commitment to its ongoing development.