The Rich Niche Group blog interviews and enables you to hear directly from successful entrepreneurs and product managers about the steps they took to grow their businesses/products and how they were able to create, penetrate, and/or dominate their niche.  This week we interview Gregg Freishtat, the founder of four different start-ups and board member and advisor to several venture capitalist and venture-backed companies.

Why Selected:  Gregg is a four-time entrepreneur and has successfully sold three software companies over the past 10 years – Telet Communications sold to PGI in 1996, VerticalOne sold to S1 in 1999 and Proficient Systems – sold to LPSN in 2006. Gregg serves on many private company and philanthropic boards including: SONE; MarketWorks; Relevant Knowledge; Outweb; Proficient Systems; VerticalOne; Telet Communications; JDRF; and the Jewish Federation.

I had the pleasure of working with Gregg back in the late 1990’s and have always been impressed with his ability to grasp the power of new technologies, the impact they can have on the business world, and his ability to build a business around that technology.  Just as important, Gregg makes those around him better at what they do and always makes working together fun and enjoyable.

In the following interview, Gregg takes us through how he was able to build off the success of each of his start-ups and what he learned along the way.  During the interview, Gregg points out what he believes other entrepreneurs can do to help position themselves and their companies for success.  The key points you’ll take away include:

1. Maintain the flexibility to adjust (morph) your business based on customer/prospect needs. 
2. When evangelizing your business remember, “Big vision for investors; Simple and safe for customers.
3. One of the biggest keys to success and potential obstacle are: People, people, people!
4. Establish your culture early and don’t do business with or for people you don’t like. 

You are now on your 4th start-up, how has each of them differed from one another?

Vertical Acuity is my fourth start up as a founder/CEO.  The business model and vision for each company was based upon the learning’s of the past.  In reality, all the companies are simply an evolution of a single business vision which inevitably gets morphed once we start working with customers and succumb to the realities of producing and growing revenues.  Our first company – Telet Communications – was focused on connecting and integrating voice, email, and fax using IP.

Next, Vertical One expanded the vision of collecting “stuff” from various and disparate back end systems – connected to each other for the first time using the Internet – by aggregating personal information (credit card, bank, brokerage, sky miles, etc).  At Vertical One we began to look at how analytics could be used to better understand the account data we were aggregating and started exploring new applications that could be built by analyzing large scale and real time data on the Internet.  After the sale of Vertical One, we started Proficient Systems to continue the notion of “Real Time Data Mining”.

After the sale of Proficient, we started Vertical Acuity to explore and expand upon this vision by analyzing data (this time content) from many related sites to determine what content was/is most likely to be consumed.  We are now working on re-inventing how content is discovered and delivered.  So…all the companies have been contributing to what we are doing today.  We gather content from many back end systems, analyze what content is in demand and by whom, and deliver it.

What drove you to start your first company and what made you believe you could evangelize the concept to end users, investors and partners? 

If I had thought about having to evangelize to end users, investors and partners, I never would have started my first company.  I just thought it was obvious that the internet was connecting systems that had never talked to each other and that with a little software you could make life easier by getting stuff in one place that used to require you to go to three or four places.  I had no idea what I was getting into – I was 24.  Practicing law seemed to always be looking into the past to figure out “who struck John” and then try to make it right.  Building software seemed like “let’s make something up and push some 0’s and 1’s around until it changes how stuff works.”  Software seemed like more fun – and it is.

When evangelizing the business, I have found many entrepreneurs have the same pitch for each audience.  Can you share your experience and the need to different pitches for each target audience (investors, partners, end-users)?

That’s a good question.   Early on, I would evangelize the vision to whoever would listen.  Over time, I have learned that different constituents require different messages.   Investors need to see big opportunities, radical growth, and revolutionary change.  These things terrify most established corporate customers.  Businesses are just large collections of people doing the same thing in close proximity.  All decisions are personal – folks don’t want to risk losing their job on a “radical, revolutionary” product.  They would rather go with IBM because they won’t lose their job for doing so.  Big vision for investors; Simple and safe for customers.  None of our companies sold directly to end users so I can’t comment on that but I am sure that’s tough as well.

What were the biggest obstacles you ran into at the different stages of your companies’ growth and how did you overcome them? 

People.   People.  People.  If you have the right folks in the right position, you can overcome most any obstacle so long as your business plan is sound.  Most of the big problems are the result of either having the wrong folks or having them in the wrong spot.  My biggest mistakes were not letting the wrong folks go soon enough.

You serve on several start-ups and small business’ boards, what do you see as the most common mistake leaders of those companies are making?

Back to People.  And this odd view of dilution.  Many small companies are scared to hire folks that have the experience required to grow because they are intimidated or fearful that they will lose “control” or their role.  Roles change and management and the board’s biggest challenge in managing the change and growth required to go from a small company to a bigger one (the goal for venture backed companies) is to have proven, experienced leadership in the key roles.    The odd view of dilution comes from folks not understanding how the VC world really works and what to focus on.  If you raise $3M – the main issue is not how dilutive it is but rather how much value you can create with the cash.  Until you know both – you don’t know if it’s dilutive or accretive.

Describe how you suggest leaders of start-ups and small businesses interact and utilize their Board of Directors?  How often should executive management be interacting with board members?

Board Members serve different roles at different stages of a company’s development.  Early on it is helpful to get independent credible board members to both help guide the company and to provide credibility for potential investors.  Having an industry leading board member show that he/she is willing to put their name behind an entrepreneurs venture and, in turn, this helps attract outside capital and provides a balance to the board once investors take a seat. 

As a company develops it is key to have board members with the experience and expertise to govern.   Having great leadership and advice on audit and compensation committees helps ensure good decision making and keeps a balance between management and investors perspectives.  Early on meetings should be every month or two and as the company matures once a quarter.  The frequency of meetings should be driven by how productive they are and how much is required by the outside investors.

In general, what piece of advice would you give to someone who is either starting a new company or getting ready to launch a new product which they are hoping to either create and/or penetrate a niche?

Find the right people and partners.  If you don’t love working at your own start up – it’s not for you.  There is a lot of risk but even more opportunity – for enjoyment, growth, and building something of great value.  Establish your culture early and don’t do business with or for people you don’t like.  This includes partners, employees, investors, and even customers.  Everyone involved should pass the three C’s test:  Character, Competency, and Charisma.   You have pass each C to get to the next and must pass the first two C’s or you are out.

 John Goodman, Co-Founder & Vice Chairman of TARP Worldwide and Author

The Rich Niche Group blog interviews and enables you to hear directly from successful entrepreneurs, product managers, venture capitalists and others about the steps they took to grow their businesses/products and how they were able to create, penetrate, and/or dominate their niche.  This week we interview John Goodman.

Interviewee:  John Goodman, Vice Chairman and co-founder of TARP World­wide. 

Why Selected: As a pioneer in the science of quantifying, managing, and optimizing the customer experience, John (and his company TARP Worldwide) gives us the opportunity to glean a little bit of his knowledge on how a start-up, small business or any business can perfect their customer’s experience.  It is not often we have the chance to hear from someone running a company referred to by renowned author and consultant Tom Peters as “(TARP is) perhaps America’s premier customer service research firm.”  John is also an author, and in his new book Strategic Customer Service: Managing the Customer Experience to Increase Positive Word of Mouth, Build Loyalty and Maximize Profits, he shows how successful companies use customer service as a “catalyst,…making the organization more proactive, accelerating responsiveness, and boosting its effectiveness.”  John also points out the financial impact good and/or bad/no customer service can have on an organization.

In the following interview, John takes us through how TARP got started and how the importance of moving customer service from a complaint department to one that can have a positive financial impact on your organization.  The key points you’ll take away include:

1.  The impact of great service on your financials is ten to twenty times the cost. 

2.  Many companies that hire a market research firm to conduct a study read their final reports then put them up on a shelf.  Find ways to make sure your clients use information and the advantages you bring to them.  This will lead to repeat business.

3.  When clients and prospects want to negotiate on price make sure you take out work/services/product accordingly.  Just reducing prices can lessen the perceived value of your offering. 

4.  In order to gain traction in a market dominated by one or few companies , look for ways you can out innovate them and find the one or two people at some of their clients who are the most unhappy and then deliver outstanding service to them.

What drove you to start TARP and how did you plan penetrating the market research niche clearly dominated by the big research houses? 

 TARP was started as a student group doing interesting client research – we were approached by someone in the government who wanted similar research done which then created positive word of mouth about our activities that got us a large contract from the White House Office of consumer Affairs (which no longer exists). We aimed to do government research on a sole source basis so we didn’t have to compete at the beginning. We had a unique enough product that we tended not to compete – we would only take contracts if we were the only company being considered.  Our advantage was that we were small enough that we could survive with low prices due to low overhead. We also had very motivated employees who could directly see the impact of their work on large companies.

 As a pioneer in the concept of tying customer’s dissatisfaction to company revenue, how was the concept initially received by clients and how did you overcome their hesitancy to try a new model?

 We didn’t stress the satisfaction aspects but rather the financial aspects – we said that the revenue implications of great service were ten to twenty times the cost implications. Further we quantified the word of mouth implications which were of great interest to CMOs. We aimed our pitch at the CFO and the CMO.

 What were the biggest obstacles you ran into at the different stages of TARP’s growth and how did you overcome them?

At the beginning it was awareness. We dealt with that by doing papers, publishing articles and giving workshops at conventions. The next challenge was scaling up and still retaining profitability. We made sure our clients actually used our findings rather than putting them on the shelf which often got us repeat engagements. Further, we carefully raised prices with happy clients and made sure we took work out if we had to lower the price to meet their available budget. Our third challenge was competition copying our methods, so we had to keep updating them and answering new questions. We got those enhancements and new questions by listening to our clients and understanding their current and emerging challenges. Obviously we made many mistakes along the way but executing each strategy even 50% gave us an advantage over most MR companies that are relatively static.

After a while TARP, became known as the Customer Experience Measurement niche leader. Once in that position, what did you set-up so that TARP stayed in that leadership position?  What were you doing different than others?

We set up a council of 8-10 clients who met twice a year to push us on the emerging issues. We also used what we learned in one industry and asked how it would apply in another. I have always said that what works for Motorola will often work for McDonalds.

In general, what piece of advice would you give to someone who is either starting a new company or getting ready to launch a new product which they are hoping to either create and/or penetrate a niche?

Get exposure and learn the market by giving speeches and writing articles – often with clients – don’t charge much but do small projects that allow you to learn from the customer and let the customer learn about you. Coauthoring articles with practitioners is great way to both learn and build relationships as well as getting exposure.

What are the key characteristics of companies that have been able to penetrate a niche, even niches dominated by another company?

Specialization with value added that takes the findings through to implementation. Most services have little impact – if you can push the client to use the results you go beyond the standard company that moves onto the next customer and seldom looks back.

When you think of companies that dominate a niche, who do you think of and what do you see them doing to keep that dominating spot?

They tend to be companies that created a new niche – Starbucks or even Chocolate Moose on L St downtown (Washington D.C.). The have wacky gifts and great service and have succeeded where most gift shops fold after a few years. Where else can you buy a Sigmund Freud action figure?

What are the biggest threats to losing that dominating position? I would assume these same threats would be the opportunities for those looking to penetrate a niche?

Getting comfortable and relatively successful. Stop getting critical feedback from customers. No news is not good news.

Finally, which companies come to mind who once held a niche dominating position and then lost them and why do you think they lost that position?

Companies that lost their position of dominance did so as a result of complacency, lack of consistent value and failure to continually innovate.

Dharmesh Shah, Founder & CTO of HubSpot, Serial Software Entrepreneur and Startup Blogger 

The Rich Niche Group blog interviews and enables you to hear directly from successful entrepreneurs, product managers, venture capitalists and others about the steps they took to grow their businesses/products and how they were able to create, penetrate, and/or dominate their niche.  This week we interview Dharmesh Shah.

Interviewee:  Dharmesh Shah, serial entrepreneur, author and startup blogger. 

Why Selected:  Dharmesh is the founder and CTO of HubSpot.  HubSpot provides marketing software for small businesses.  The company, based in Cambridge, Massachusetts, has raised over $30 million in venture capital, and has over 1,700 customers. 

He developed grader.com – a free suite of online tools for marketing measurement.  These tools, including WebsiteGrader.com and TwitterGrader.com have won numerous awards and have been used by millions.

Dharmesh is the co-author of the new book “Inbound Marketing: Get Found Using Google, Social Media, and Blogs,” published by Wiley in October, 2009.  The book has been consistently ranked in the top 100 business books on Amazon.

He also authors OnStartups.com, a top-ranking startup blog with over 15,000 subscribers and 100,000 members in its online community.  He is an active member of the Boston area entrepreneurial community and a frequent speaker on the topic of startups and internet marketing.

Dharmesh has a B.S. in Computer Science from UAB and an M.S. in the Management of Technology from MIT.

In the following interview, Dharmesh discusses how he used inbound marketing techniques to help his company’s grow and how any business regardless of the sector it is in can use these same techniques to reach its customer base.  During the interview, Dharmesh provided some great insights on what it takes to launch, grow and sustain a company in today’s market.  The key points you’ll take away include:

1. It is critical for entrepreneurs to figure out a way to efficiently gain access to customers and to really reach people, you need to give them something that is valuable and compelling. 
2. As your company grows, one of the challenges you needed to be prepared for is how to stay on top of rapid growth and ensure that the organization shares a common vision and maintains the culture that has made it successful thus far.
3. Successful companies that enter a niche have a good understanding of how the existing players are failing to deliver sufficient customer value.
4. Companies that dominate a niche find some sort of “network effect” whereby each additional customer adds value to the remaining ones.

In your new book, Inbound Marketing: Get Found Using Google, Social Media, and Blogs, you show how any business can use inbound marketing to help their business drive prospects and clients to them; can you describe how you have personally used these techniques to build the companies you started? 

 My startup HubSpot was built from the ground-up with inbound marketing techniques.  We’ve used several different forms of content to effectively draw prospects in.  For example, in the early days of the company, we started a blog on the topic of small business and marketing.  This blog (http://blog.hubspot.com) is now one of our top 5 sources of leads for the company.  Another example is our suite of free tools, including Website Grader and Twitter Grader, both of which have been great marketing vehicles.

 Many internet and high-tech start-ups use inbound marketing, can you talk about how important it is for other smaller businesses and sole proprietors such as doctors, lawyers, plumbers, interior decorators, etc. to utilize the techniques you describe to help them maintain and grow their businesses? 

Inbound marketing actually works even better for mainstream, non-technology businesses.  The reason for this is that high-tech businesses are often very innovative — and pursuing an entirely new market or creating a new category.  Though inbound marketing can certainly help businesses, one challenge is that in these new, emerging industries, there may not be strong existing demand for the offering (people are not searching for those products, because nobody knows about them yet).  On the other hand, mainstream businesses like lawyers and interior designers often have very strong existing demand.  Inbound marketing is a great way for these kinds of businesses to connect to that existing demand and pull in customers.

 If inbound marketing works best for mainstream companies, how do you suggest they get started?  Most of them have never used inbound marketing and thus could use a few simple steps to get started.

 The best way to get started with inbound marketing is to start getting involved in the blogosphere.  Before writing the blog, it’s helpful to start finding relevant blogs in the industry and start engaging in the existing discussion.  Then, begin engaging in social media sites (LinkedIn, twitter, Facebook) and find relevant people/discussions there.  The idea is to start forging connections with those in the industry.  Then, start producing valuable content (usually a blog).  

 In today’s market business professionals and consumers are bombarded with marketing messages in everything we do, in your opinion, what can a small business and/or start-up do to ensure their message gets through to their target audience and drive them to come to your business to either learn more or buy?  

 The answer is very simple — but not easy.  Product content that is useful and interesting:  One of the common mistakes that marketers make is to believe that their customers are different than they are.  They’re not.  Just like us, our prospects hate cold calls, throw away junk mail, and ignore most advertising.  To really reach these people, we need to give them something that is valuable.  We need to create content that is compelling and will pull them in.  Websites that are nothing more than brochureware just won’t work — people ignore those.

 You are currently on your second start-up (HubSpot), what have been the biggest obstacles at the different stages of each of the two companies? 

 Each company had different challenges.  In my first startup (Pyramid Digital Solutions), the challenge was always one of resources.  The company was bootstrapped and did not raise any venture capital.  This meant that we could only grow as fast as our revenues allowed.  In many ways this was great, but it was tough because there were never enough people to pursue all of our ambitions.  At HubSpot, we have a different problem. We’ve raised significant outside funding ($33 million) and as such, have been able to hire exceptional talent consistently.  The challenge now is — to stay on top of this growth and ensure that the organization shares a common vision and maintains the culture that has made it successful so far.

You talk about maintaining the culture as HubSpot has grown, what specific steps did you take to ensure the culture did not get outstripped by the company’s growth?

 Several things:  First, we make “cultural fit” one of the key hiring criteria.  You’d be surprised at how many companies don’t have this in their list of priorities when recruiting.  We try to maintain an environment of “passionate and fun” in the office.  It’s a good work environment and it’s not possible to spend 15 minutes in the office without hearing someone laughing.  We have regular work-but-not-work activities that help people come together.  This includes a live weekly web TV show on Friday afternoons where we invite anyone from the outside to be part of the studio audience.  The idea is not to be overly serious, but not be frivolous either.  It’s not just about free beer on Fridays.  It’s about recognizing that HubSpot occupies a large part of our people’s lives and we’d be silly not to recognize that and make the environment as pleasant as possible so great people can work with other great people and do spectacular things.

How have the two start-ups differed and what key piece of knowledge from your first company (Pyramid Digital Solutions) helped you the most when launching your second business?

 The two companies were very different.  Pyramid was focused in a very niche (but lucrative) market whereas HubSpot is in a much broader and bigger market.  The big lesson from Pyramid was that in order to build a very big company, there needs to be a market opportunity to support it.  Though Pyramid was very successful, there were intrinsic limits to how big it could grow. Though I learned a lot from the experience, I always felt that I wanted to pursue larger opportunities.  So, with HubSpot, I made sure that the opportunity was large enough that I could potentially build a big, successful business.

When the CEO of a start-up and/or small business is putting together their Board, what advice would you give them and how often they and the company’s executive staff should be interacting with Board members? 

 This varies a lot based on the situation.  A common board meeting schedule is usually once every 2-3 months — particularly if the company has raised capital and has investors as board members.  The key to a functional board relationship is to ensure that there’s a good balance between standard “governance” and strategic decisions.  The board and executive team should be able to have candid discussions around company issues and opportunities.  Done correctly, the board can bring great value to the management team because there’s often a wealth of experience and wisdom.

How often do/did you interact with your Board and how important are/were they to the success of your business?

 When we first formed our board, we met about every 6 weeks.  Now we meet every 10-12 weeks.  Our board has been extremely helpful with some key issues — particularly during the early stages.  Areas where we received the most help were around marketing, sales, finance and strategy.

In general, what piece of advice would you give to someone who is either starting a new company or getting ready to launch a new product which they are hoping to either create and/or penetrate a niche?

 Today, it is critical for entrepreneurs to figure out a way to efficiently gain access to customers.  Most of the startups that I talk to don’t have issues with building a reasonably good product, they struggle with marketing and sales.  As such, my advice would be to start very, very early with inbound marketing efforts (the topic of my recent book, Inbound Marketing: Get Found Using Google, Social Media, and Blogs.  The idea is to start creating content and building a network within your target community.  This should happen well in advance of a product launch (and in fact, done correctly, can help you figure out what product to build). 

What are the key characteristics of companies that have been able to penetrate a niche, even niches dominated by another company?

 Usually, successful companies that enter a niche have a good understanding of how the existing players are failing to deliver sufficient customer value.  The key is to figure out what’s wrong with what’s out there now, make sure the problem is worth fixing and talk to as many customers as possible to figure out a viable solution.  It also helps to find industries that are going through a transformation whereby the existing offerings are becoming less and less effective.  The important thing is to be realistic as to whether or not your solution is *significantly* better such that some number of customers are willing to take the risk and adopt a new product.

When you think of companies that dominate a niche, who do you think of and what do you see them doing to keep that dominating spot?

 They generally deliver a fair amount of customer value (or at least they did in the early days).  They leverage this be deepening the relationship with the customer and making switching costs higher.  Often, they find some sort of “network effect” whereby each additional customer adds value to the remaining ones.  This kind of effect can act as a major barrier to entry for new market entrants.  (NOTE: for more on this see the earlier blog interview with Ara Bagdasarian and how this “effect” played an important role in his company).

What are the biggest threats to losing that dominating position? I would assume these same threats would be the opportunities for those looking to penetrate a niche?

 The biggest threat to a dominant player is to have the level of “unhappiness” in the customer base exceed the switching costs.  If customers are unhappy enough, they will consider switching, regardless of the level of vendor “lock-in” that might exist.  The other big threat (discussed in depth in the “Innovator’s Dilemma“) is that a new market entrant can focus on a different dimension of performance than the existing players.  A good example would include Southwest Airlines.  Often, a simpler, easier product will beat out existing players (over time) despite being much worse on a primary dimension of performance that historically was important and defined the industry.  But, a new class of customer often has different needs. 

Finally, which companies come to mind who once held a niche dominating position and then lost them and why do you think they lost that position?

 One example that jumps to mind is Siebel.  They had a dominant position in the CRM industry.  However, salesforce.com entered the market with a much simpler, lower risk option.  Despite the fact that salesforce.com was not nearly as powerful and had a fraction of the features (when it launched), it was “good enough” for many companies.  Over time, the product got better and better, and salesforce.com wedged its way into significant market share. 

Please let others know about the blog and our Entrepreneurs & Small Business Leaders group on LinkedIn.  The larger we can make the group, the more helpful it can be to everyone. We are also always looking for new topics and/or people to interview for the blog, please send any recommendations to Ken Balog at ken@richnichegroup.com