Overview: When starting a SaaS company in the early days, one of the most significant challenges is identifying a target market that is large enough to sustain long-term company growth. This may seem obvious, but the majority of companies fail to do this and do not survive. In the words of Marc Andreessen, “the #1 company killer is lack of market”.
How can founders identify a great market? We had the privilege of asking Scott Dorsey, co-founder of ExactTarget, whose company was a pioneer in digital marketing automation and rode that market to a very large exit. It is important to note that 645 Ventures was not an investor in ExactTarget, and we interviewed Scott solely due to our firm’s admiration for the company’s success.
Before online marketing, companies primarily communicated directly with customers via mail, which offered limited customization and limited ability to track customer responses. Companies were practically flying blind when it came to their ability to assess customer responses to marketing campaigns.
In late 2000, Scott was studying Internet business models while getting his MBA at Northwestern, and became convinced of the Internet’s potential to transform business. His brother-in-law, Chris Baggott, happened to work in traditional database marketing, and realized that the Internet had the power to transform database marketing by deepening relationships with customers. Traditional database marketing, which had been developed in the 1980’s, focused on using databases to track information on customers and potential customers, and emphasized “the use of statistical techniques to develop models of customer behavior, which are then used to select customers for communications.”
Email in particular not only offered the opportunity to tailor marketing campaigns to specific customer groups, but to track their responses in real-time in order to measure the effectiveness of digital marketing campaigns. It offered the potential to develop a much more granular, detailed view of a customer, which would result in more relevant advertisement. The growth of database storage capacity due to technology advancement also offered the ability to store a greater amount of information on each prospective customer.
Scott, Chris and Peter McCormick began by sketching out the idea for ExactTarget on the back of a cocktail napkin. They came from humble beginnings, raising only $200,000 of capital from themselves and angels. The company was unconventional in several ways, including not having a technical co-founder on its founding team, and also being headquartered in Indianapolis, far from Silicon Valley. They were turned down by several venture capital firms. Their lack of technical background made it difficult to raise capital. Inability to raise capital was also due to the fact that they were first-time entrepreneurs, that they were building a company soon after the dotcom bust, and that they were located in Indianapolis. Scott and his co-founders instead showed grit and dedication in building the business, focusing on creating a very strong culture that emphasized employee success. The company’s discipline resulted in their avoiding raising large capital rounds even when capital became highly available, waiting to raise big capital until they were confident in what investment was needed to win the market.
ExactTarget accurately predicted the rise of email campaigns as a primary marketing channel for companies, and envisioned how they could apply database-marketing principles from the print world to the online world. Co-founder Chris Baggott believed that “the Internet was going to transform marketing and that email marketing in particular and permission-based email [were] going to be a very powerful way for small businesses to get to know their customers better.”
ExactTarget eventually grew to become one of the huge winners in the first generation of SaaS, first going public in 2012 and then being acquired for $2.5 billion just one year later. Having created an initial foundation in email, the company successfully expanded into mobile and social marketing, becoming a true digital marketing platform. When it was acquired, ExactTarget had reached almost $300 million of revenues.
Summary: ExactTarget was a pioneer in the SaaS email marketing industry, providing a software suite to enable companies of all sizes to run email-marketing campaigns.
Founders: Scott Dorsey (SD), Chris Baggott, and Peter McCormick
Year Founded: 2001
Interview with Scott Dorsey:
Q: Could you take us back to the early days of ExactTarget? What were some of the key factors that contributed to your company’s early success?
SD: We started the company in 2001. We were three founders with sales and marketing experience — we didn’t have a technical co-founder. We were three hustlers and no hackers. We eventually brought on a 4th partner who had a technical background. But we weren’t a traditional startup. We headquartered the company in Indianapolis.
We experimented with three sales models, because we weren’t sure which sales model would be effective. We tried field sales, telesales, and selling via digital agencies. Our goal was to build a repeatable sales model, so we started by experimenting.
Surprisingly all three sales models ended up working for us. That made us unique as a company. We built a grassroots brand in smaller markets, for example Atlanta, where we weren’t competing with companies in larger markets. In particular, we discovered that digital agencies could help power digital marketing, because they had valuable content and connections. We built a reseller model through agencies, where we were powering campaigns for Home Depot and other companies. So that sales channel worked very well for us. Field sales and telesales also worked for us.
Q: What was the initial customer profile for ExactTarget? Who were the early adopters of your software?
SD: We focused on the small and mid-market. We were basically creating a market for ourselves. We had to do a lot of evangelizing. Evangelizing later became a standard for us. We weren’t competing against anyone at that time because the other companies were going after the high end of the market, the large companies. Email marketing became a standard later, but at that time it was new.
So we started out selling to small retailers and mom-and-pop businesses. Our deals were as small as $1k per year. What’s interesting is that we eventually were able to sell to very large companies. Before we were acquired we had sold deals that were as large as $10 million per year. So we were able to expand to enterprise, where we had started by focusing on the lower end of the market.
Q: What was your company’s growth in the early years?
SD: We did $300k of sales in year 1, $3 million in year 2, and $9 million in year 3. We grew quickly. We were able to bootstrap the company in the early days. We were very strong in sales from the beginning, in part because we came from sales and marketing backgrounds.
Our salespeople had to do everything. We had very good sales coverage. You won’t believe this, but at one point we had 44 people on our team and 26 of them were in sales. We basically only had salespeople and developers.
Q: What were the key metrics that you tracked in the early days of ExactTarget?
SD: We focused on salesperson productivity — productivity per rep was a key metric. We also focused on average deal size and bookings. As we grew, we also focused more on optimization of our marketing.
We were very oriented to sales bookings. We had a quarterly bonus program for our sales reps that incentivized growth in bookings. We created a performance-driven culture.
Q: What advice would you give to SaaS founders that are building early-stage companies today?
SD: Product pricing and packaging are very important. You need to be very clear in the problem you are solving, and once you have a product, you need to price and package it correctly. Don’t underprice your product. Learn what a sound pricing strategy is and focus on customer segmentation. Also understand industry verticals. Also focus on unit economics, and make the right investments in marketing.
Q: Thank you for your time, Scott.
Key Learnings from ExactTarget:
· Identifying a Market Opportunity: The founders of ExactTarget identified a nascent market, digital marketing, which had the potential to grow to very large scale. Fortune favors the prepared mind, and in the case of ExactTarget, Scott Dorsey’s understanding of the potential of the Internet, combined with Chris Baggott’s experienced in database marketing, were a killer combination.
· Building a Technology Team: As the success of ExactTarget demonstrates, having a technical founding team at the outset is not a requirement to building a successful technology business. ExactTarget got started with a web development firm, but over time they brought their technology operation in-house. Their path shows that it is possible to start with outsourced development, but also that eventually building a strong technology team is important to enable rapid scaling.
· Product Expansion: ExactTarget successfully broadened its product portfolio as it grew, resulting in growth in average deal size. The business was able to add mobile and social marketing to its email marketing foundation, becoming a true digital marketing platform.
· Value of Bootstrapping: Although raising venture capital in the early days of a company is often glamourized, ExactTarget bootstrapped its business. They proved their value proposition by growing to over $9 million of revenue before raising venture capital. They created and preserved a scrappy, resourceful culture. Their bootstrapping paid large dividends. When the company initially filed for IPO in December of 2007, the company had grown to $48 million of GAAP revenues and still had $4.5m of its initial capital round on the balance sheet. Entrepreneurs can learn a lesson from their success in building a company the right way.
· Power of Multi-Channel Sales Model: ExactTarget was unique in their ability to sell their product via three unique sales models: direct sales representatives, telesales people, and digital media agencies. While building a multi-channel sales model is not easy, it enabled the company to sell to a broad range of customer sizes. As an example, SMB customers are conducive to volume-based telesales operations where small deals can be done over the phone, while enterprise customers require direct sales. Entrepreneurs are well-suited to learn from ExactTarget by matching their sales model to their target customer, and to identify ways to build a multi-channel sales approach over time.
 See “Part 4: The only thing that matters”, The Pmarca Guide to Startups by Marc Andreessen.
 As an analyst at Insight Venture Partners in 2004, 645 Ventures’ co-founder Nnamdi Okike played a negligible role in the firm’s investment due diligence on its initial ExactTarget investment. Nevertheless, he still proudly keeps his deal toy on his desk to this day.
 “Database Marketing,” Wikipedia.
 “From Back-of-the-Napkin to $2.7 Billion Exit: Sitting Down with ExactTarget’s Scott Dorsey”, by Blake Bartlett.
 “Scott Dorsey (ExactTarget, High Alpha): The Journey to a Unicorn”.
 “Here’s Why Salesforce Spent a Whopping $2.5 Billion on ExactTarget”, Julie Bort, Business Insider.
645 Ventures is a New York City early-stage venture capital firm, making technology investments in the East Coast and Bay Area regions. Learn more about us and get to know our portfolio here.