Madhavan Ramanujam of 49 Palms Ventures joins Nick to discuss Prioritizing Monetization: Beautifully Simple Pricing, AI Models for Profitable Growth, and Guardrails for Freemium and Expansion Tiers. In this episode we cover:
- Scaling Innovation: A Sequel to Monetizing Innovation
- Balancing Value and Price
- Enterprise Adoption of Outcome-Based Models
- Usage-Based Pricing and Cost Management
- Strategic Advice for Different Startup Phases
- Implementing Sub-Optimal Pricing Strategies
- Nine Strategies to Architect Profitable Growth
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0:17
Madhavan Ramanujam is back on the program and joins us today from Palo Alto. He’s a co founder and general partner at 49 palms ventures, a venture firm focused on seed and series A investments. Before launching 49 palms, he was a managing partner at Simon Kutcher, where he advised over 250 companies, including more than 30 unicorns, and authored the influential monetizing innovation, where many of you in the audience have known him from his previous book, but he’s also the co founder of the newly released scaling innovation, how smart companies architect profitable growth. Madhavan, welcome back
0:57
to the show. Absolutely pleasure to be back. Nick, thanks so much for inviting me.
1:02
100% I’ve heard so many compliments and comments on your episode from many years ago, and very excited about the new book and excited to have you back on so maybe just to start here. Ramadavan, can you remind us of your background and kind of what you focused on for the past 15 years? You know, at in your work with startups,
1:20
yeah, absolutely. Like you said, I’ve worked with over 250 companies, more than 30 unicorns, and the work was specifically focused on helping these companies navigate monetization and, you know, grow fast and profitably. That’s what I focused on, and that’s been a great ride. Built a reputation for being a world’s leading authority on monetization and super excited for, you know, a translating that to also venture.
1:47
Well, you made this leap, as you said, you know, moving to venture. So you were an operator and and an advisor, and now you’re a VC. You know, what was the catalyst for that shift, and how does it change the way that you work with founders?
2:00
Yeah, it’s a great question. So the reason for shifting was primarily to work with AI companies. You know, unlike the previous breed of companies, AI companies need monetization advice way earlier. I mean, when we started testing and learning our thesis, we thought, okay, if we would probably be more relevant in, you know, a slash B series. But what we actually found out through our test and learn was that even pre seed seed companies actually nowadays need advice to monetize and how to navigate monetization, because with AI, you get cost dynamics for the first time in the industry. But there’s also a huge value capture opportunity because of increased autonomy and attribution. And how do you navigate early POCs? You know, what kind of monetization model you actually start with that kind of dictates your rest of the journey. So this topic has become really relevant, and for that stage of companies, you know, a professional services setting does not work for us right now. It’s very simple. If you’re in the cap table, we’ll roll up our seats and work with early stage entrepreneurs on everything.
2:59
Monetization perfect. So last time we had you on, we talked about monetizing monetizing innovation, you know, the very famous book, but you have a new book, scaling innovation. You know. Why did you write it?
3:10
Madhavan, yeah, so scaling innovation is a sequel to monetizing innovation. You know, monetizing innovation. The core thesis was we talked about how to build great products around what customers need, what they value and what they are willing to pay for. You know, not just build a product, slap on a price and hope to monetize, but how do you build great breakthrough products? You know, over the years, it’s been probably nine years since we wrote that book, and over the years, we keep getting this question, saying, Okay, I built a great product based on your thesis. You know, my customers need the product. They’re willing to pay for it. How do I scale the business? And that is why we wrote scaling innovation, which is a sequel to monetizing innovation, where we talk about how to build a great business by balancing, you know, acquisition, monetization and retention and architecting towards profitable
3:57
growth. Perfect. So you describe common founder archetypes, and you also talk about traps they fall into. What’s one that you’ve seen seasoned entrepreneurs still getting wrong?
4:10
Yeah, I think one of the traps that people get into is postponing monetization and just trying to grow and hope to figure out monetization that never works, especially in tech. What I’ve seen over and over again is 20% of what you build drives 80% of willingness to pay. And the irony is that this 20% is often the easiest thing to build. And what entrepreneurs do in a rush to get the products out of the market, they build this 20% label it as MVP, maybe even give it away for free, and then they’re chasing their tails to build 80% stuff that’s only driving 20% willingness to pay, and inadvertently, they just train their customers to expect more for less. So being really thoughtful about what product are you landing with? How do you expand where is the willingness to pay and how can you architect towards profitable growth becomes the key thing. And not falling into what I call the 2080 trap.
5:03
And how does one balance sort of the value that they’re delivering with the price that maybe a customer said is anchored on? And the reason I ask this is because I work with a bunch of portfolio companies. And take somebody selling some sort of sales software to SDRs and AES and BDRs, and they’re used to paying a certain amount per seat, maybe they’re anchored on Gong pricing, right? Or maybe it’s 100 bucks per seat per month. But this new offering, let’s say, is 10x the value of where the customer is anchored for similar types of software. Like, what advice would you give founders in that scenario?
5:46
Yeah, absolutely. So I think the predominant advice I would have is, you know, how you charge is often way more important than how much you charge. So being thoughtful about your pricing model or monetization model that can actually recoup the value that you’re actually bringing to the table. So in the cases that you mentioned, should you actually be on a seed based licensing model, or should you actually pivot to something like more of an outcome based model and participate in the outcome generation? And can you actually now pivot to more of a value based pricing philosophy? This is literally the question that many of the AI startups have, because unlike the previous vintage of companies, what has happened with AI is there’s been increased autonomy and also increased attribution. With that, you get a lot of pricing power, but how do you unlock it? And often that is through picking the right pricing archetype or the right pricing model to actually start with.
6:37
And what do you mean by the differences in autonomy and attribution? Yeah, let’s
6:42
probably unpack that a bit, right? Because when you think about autonomy and attribution, let’s just think about it as a two by two, like, you know, autonomy on the y axis and attribution on the x axis. So if you take the lowest quadrant, like the bottom left, you have low autonomy and low attribution. Low autonomy, as in, you still need a human in the loop. So if you’re an AI company, where as human is still needed in the loop, you’re operating as a kind of a co pilot. If your attribution is less, you know you’re probably relegated to, like, a seed based licensing model. I mean, take an example, like, for instance, if you’re slack, you can actually say that productivity goes up, but you can’t actually measure it, meter it, monitor it. Neither can you monetize on it. So if you’re in that bottom left quadrant where you’re kind of enabling workflows, it’s a copilot, but your attribution is not strong, then you have to be on a seed based licensing model. But if you actually go to the bottom right where attribution is high and autonomy is still low, autonomy is still low, so you need to be on a copilot, but you have higher attribution. So here you can choose a pricing model that’s more of a hybrid pricing model, which is kind of where many AI startups are right now, whereas a blend between a seed based model plus also a usage kind of overlay on top of it, and there’s more smarter to actually do, because pricing based on seeds is catching a falling life, especially if the seeds are reducing in a company. So like the hedge against that is, if you have attribution that you’re bringing core value, then you can also have usage elements along with it. So like companies, like, for instance, cray or cursor would actually fall in this quadrant where it’s still a seed based model. But each of the, let’s say, packages come with certain provision of AI credits, and you can use that towards actions. And if, though, if you run out of those credits, then you can actually buy more AI credits. So there’s a use user seed based and a usage based hybrid model that actually makes sense in those kind of cases. I think the interesting ones are in the top quadrant. So like, if you take the top left quadrant, where autonomy is high, but your attribution is low. Likely you’re not affecting the business outcomes directly of a company. You cannot like claim that you’re impacting key KPI. So your attribution is lesser, but you’re fully autonomous, as in, you don’t need a human in the loop to actually do the work. That’s a classic quadrant to be purely on a usage based pricing model. So like a company like Twilio, for instance, would squarely fit in that bracket where it’s high autonomy, but, you know, lower on the attribution scale. The quadrant that is the, you know, sort of the best quadrant to be in, if you can, is the top right, where there’s more autonomy and also more attribution. So if you get into that quadrant, then you can actually get into more of an outcome based model. Why? Because the AI is actually now autonomous and doing stuff on its own, and it’s also attributable, as in, the value that the you know AI brings to the table is attributable and measurable. So a good, good example here is, you know, Fin AI from intercom. So what they actually do is they only charge for a AI resolution ticket, as in, if a ticket is resolved by an AI agent, independent of any human intervention, then they actually charge for it. If there’s a human intervention is that’s necessary, they don’t charge for it that’s purely based on an outcome based model. Now, in a sense. That if your product actually works as advertised, and you’re bringing clear attribution and is working on its own, then you can now start partaking in an outcome based model. And we are seeing a lot of AI companies where there is core attribution autonomy. There are companies that can, you know, save 25% of, let’s say, you know, all the cost savings in a company, and you can actually demonstrate it and it’s fully autonomous, then you can say, Okay, I want to take a percentage of that 25% savings, and that becomes your pricing model. So today, when you look at it about I would say less than 5% of companies are in an outcome based pricing model in that top right quadrant. But if I fast forward probably three years, we expect that at least 25% of companies would be in that quadrant, and that those are the types of companies that we’re also actively working with. You know, how do you get to a state where you’re fully autonomous and there’s also high attribution, which unlocks insane pricing power?
10:54
And do you find that enterprises and customers are open to embracing outcome based models. I mean, you would, you’d think it’s a win, win. But I’ve been a part of large corporates and stuff in the past where they’re just very uncomfortable with something that’s not, you know, based on product transfer, based on seats, or something very uniform and predictable.
11:19
Yeah. I think if you take the previous vintage of companies, necessarily, software was sold on access basis. So it means that being on a seed based licensing models in the old SaaS way actually made sense. But in what’s really happened with the AI wave is we moved from paying for access to like paying for jobs being done. So if you take that framework, people are more, you know, sort of open to like, outcome based models. Of course, the industry is shaping as we speak, but when we actually look at some of our, you know, companies and their buyers, they’re very open to it. Here’s the thing, Nick, even if, even if, they’re not open for it, but playing on outcome actually gives you some really interesting advantage is to actually even have a higher fixed fee in those outcomes, because you can give a choice to customers and where it’s a higher fixed fee but a lower fixed and an outcome based even if they don’t want the outcome, they probably don’t wink on the higher fixed fee because you’re willing to put a skin in the game and there’s a lower price point on the table. Interesting.
12:20
Love it. So let’s talk more about usage based pricing. You know, in some cases, this can be a double edged sword for AI startups, speaking with one the other day, and you know, costs were spiraling out of control for customers. You know inference, when they’re paying based on inference. You know that that can spike without predictability. So how should startups plan and position a product with usage based pricing?
12:47
Yeah, I think the first thing is to adopt a value based mindset and not a cost plus mindset. If you’re having a cost plus mindset, essentially what you’re doing is just passing on that cost with some markups and margins, and that way things are quite volatile. And people would ask you, like, why is this cost the way it is? And then there’s all sorts of discussions around, if the costs go down, should you also go down in pricing, et cetera. But if you actually choose a pricing metric or model that is aligned on a value metric, then you can actually avoid those kind of discussions. So like, for instance, if you say your metric, like in the intercom case, is a ticket resolved. That’s actually an outcome, as opposed to, like, how many AI credits was actually required to, you know, resolve that particular ticket. So thinking about it more as a, you know, value based outcome. And if you, if you you know, you have to worry about cost spiraling when your value is not very clear to your end customers, if it is actually clear and they understand that it is, they’re getting a lot of value from the costs, then you can easily circumvent that kind of situation, right? So it’s it really comes down to also training your customers, doing value audits and showcasing that, you know, you are able to add tremendous value. So the costs are in context. But that said, there are also other ways to actually even have, let’s say, a fixed licensing agreement for a year with a certain amount of provisions, which can be revisited on a renegotiation basis. But if you have shown the value, then you still have pricing power in those renegotiations.
14:14
This can even be a problem for the startup themselves, right? Like, if they’re running a bunch of cycles with AI, the startup costs can start to spike, right? It’s a little different than SaaS, where it’s zero marginal cost. You, in theory, build it once you sell it many times, right? But with AI, you know, your cogs, so to speak, can spike in this scenario. So again, is kind of your advice there to really tie it to the outcome, so that revenue is scaling as much as the cost side is.
14:47
Yeah, exactly. I mean, thinking about it more on a value basis, and scaling on the revenue with costs as a, you know, check. And this is also, frankly, why we are, you know, pivoted to, like, working with very early stage startups through. To a venture setup, because how to navigate those cost dynamics becomes key. I mean, if you have a large cost bill, you’re growing revenue, but it’s at negative margin. Is that a great business, versus capturing the right price based on the value that you actually deliver, and then having a more profitable growth business? And that’s also the thesis of the book, you know, scaling innovation, how to architect profitable growth and being thoughtful about those things.
15:24
How does your strategic advice differ for a company that’s at like this, zero to one phase versus the one to five phase versus five to N
15:33
Yeah, so in the very early stages, there are two topics that you know come up over and over again where we are helping, let’s say pre seed and seed stage companies. The two topics are, how do I navigate POCs and commercial discussions? Because many of these AI startups are in the B to B space, and even the buyer on the other side wants to understand what value would this product actually deliver before embarking on a commercial discussion. But that requires a lot of thought around how to showcase the POC more as a business case building exercise, as opposed to, like, you know, tech validation, and then how to frame that business case based on the ROI. And what portion of that ROI can you actually take, how to have the right commercial discussions? How do you negotiate properly? What tactics would you use? So those are the topics that we are actually really working with early stage companies. And the other topic is the how to charge, which is the right monetization model, because you don’t want to keep changing that too often, picking the right model based on the archetype, based on your attribution and autonomy. And then how do you build more attribution and autonomy and try to see if you can move towards purely, more of an outcome based model. So these two topics become very relevant very early stage. When you get go to that one to five phase, there are other topics around monetization that become key. For instance, if I now become a multi product company, how do I package products? How do I bundle? How do I cross sell? How do I upsell? Those topic becomes very relevant. And then if you fast forward a bit more, how do I prevent churn from happening? You know, how to stop that, and retention management and how to like partner and scale and grow those topics actually become relevant. So monetization is a, you know, bit of a journey. It starts with having the right, you know, POCs and commercial discussions and the right monetization model, but then you quickly evolve into like given a suite of products, how do you actually land and expand and improve the customer lifetime value? So that’s those are the topics that we work in later
17:29
stages. Bhanavan, in what cases should a startup implement a sub optimal pricing strategy in order to get proof points necessary and case studies in order to optimize monetization later.
17:45
Yeah, I wouldn’t call it sub optimal. I think it’s being thoughtful about where you start and what are you actually pricing. Because often your early proof points become like a storyboard for doing everything later, and those set the anchors internally and externally. So even for early discussions, it really comes down to understanding, you know, what value are you delivering. So like when we talk about these POCs, now, when we advise startups, we talk about building a business case based on an ROI, and an ROI typically is built around three pillars, so that is incremental revenue, or, you know, incremental stuff that you can bring to the top line, like you help reduce churn, or you increase the revenue. Those are all incremental. Then there’s also tangible cost savings. Like, for instance, you might make other licenses unnecessary, so there are license saving costs, or there could be FTE reductions. So those are all cost savings. The third bucket is opportunity costs. Like, for instance, if your AI now is able to free up, you know, 1010, hours for a person, what do they do with that? What is the dollar amount for, like, freeing up that productivity. So when you frame your POCs around, you know, building and CO, creating an ROI case with your customer, then you can actually have a proper, you know, monetization conversation when you actually get to a commercial stage, and even if you’re actually, let’s say, giving in a bit for just getting the deal, you’ve been thoughtful about what is the true value. So you’re not just guessing and slapping on a price, but being thoughtful about the value that you actually create.
19:14
Are you a proponent of a freemium model in the early case, maybe as a pilot, just to demonstrate that ROI so that customers can have more depth, more concrete examples to bring to their senior leadership, you know, as they do a car or requisition, you know, for for the new software?
19:36
Yeah, absolutely. I mean, there’s an entire chapter on this in the new book on how to land and expand the lure of free is what I call it, for sure. Freemium strategy actually makes sense in many cases, but it really comes down to being thoughtful about not giving the farm away in the freemium then you don’t have anything to monetize later on, right? How do you fence your offering so that you know people get a taste for the value, but with more? Value addition, they’re actually willing to pay for it, and that’s the real key. So can you fence your freemium based on the right features or by the right usage amounts or guardrails, so that once you get the taste for it, you actually want the full meal, and then you actually pay for it because you’ve seen the value so being thoughtful about that is key. If you’re not, then you fall into that 2080, you know, axiom that I talked about, because you gave away the farm and then you’re chasing to like, you know, only represent 20% of the willingness to pay. So that’s, that’s the one trap that you can fall into if you just purely give away on freemium. But being thoughtful about that is absolutely essential. And we talk about how to construct the right premium model and what are the right principles to actually use in the chapter that we discussed,
20:43
perfect Madhavan, you’ve identified nine strategies to architect profitable growth. Can you call out maybe one or two that you see founders consistently under utilizing and why?
20:57
Yeah, so let’s unpack that. So the nine strategies in the book. They’re divided into two sections. The first four strategies apply for that, you know, zero to one phase that you talked about, which is like very early stage. And there are five strategies for, okay, you’ve at least reached some scale. How do you say scale further the one to five stage that you talked about? So maybe we can pick one strategy for each of those startup phase and the scale up phase. On the startup phase, one of the key things that you need to do is keep your pricing, what I call as beautifully simple, and what that actually means is being able to tell a value story through your pricing. And that becomes very important. You don’t want the pricing to be simple in the sense that it’s so simplistic that you’re leaving money on the table. But you need to be able to tell a story as to why you’re charging what you’re charging, and also tie back your pricing to the value that you bring. A great example that we talk about in the chapter is from superhuman, right? If you think about what Rahul and team did at superhuman, you know, when they started the product, they were competing with other free alternatives, like Gmail, like, would he would anyone even pay for like, you know, souped up email software? So they actually, you know, use the principles in the book monetizing innovation that we talked about, figured out that $30 you know, pricing was the right pricing for their product. But what was key is they, you know, the the way they contextualize that price. So if I tell you I’m going to charge you $30 for a premium email subscription, people might be like, Okay, do I need this? I can get a free alternative, and there’s no story behind it. But if I actually say it’s $1 per day to get five hours of productivity back in a week, that suddenly sounds like, Oh, that’s a deal I would take that’s probably, you know, the price of a latte or two to get my time back, and then that becomes a, you know, a no brainer kind of argument. That’s kind of how they contextualize their price, I mean. And contextualizing doesn’t even have to be, you know, a premium price offering like the $5 foot long subway was a great way to actually contextualize price back in the day too, right? So keeping your pricing beautifully simple in such a way that people understand why they pay, what they pay. And the acid test for founders is if they go back to their, let’s say, customers, and tell them, articulate my pricing strategy back to me, as in, how would you sell this product? If you were my salesperson, if your customers struggle to articulate it, then you don’t have a beautifully simple pricing. If they actually come up with a hey, this is a no brainer way that I would actually pitch your pricing, then you have a beautifully simple pricing. So we talk about the checklists on how to actually get to beautiful, simple pricing, and also like some frameworks to actually achieve that, like Rahul did with super human that’s really important in the, you know, zero to one phase, yes, where pricing becomes more of a value story, right? Because when, when most people think about price, they think about a, you know, dollar figure. That’s just a price point. The way you should think about price, it’s a measure, like, liter is a measure of volume, price is a measure of value. And if you can articulate value, you can command the right price. So if you forward now to the scale up strategies in the one to five zone, what really matters is, you know, how do you, especially if you’re a B to B companies, how do you ace negotiations? And, you know, master that? That becomes key. Because, yeah, till date, at least it’s a human having a human conversation and selling it. Maybe that changes in due course. But how do you contextualize your price when you’re actually having a conversation? You can sell all the pricing you want, but you’re sitting across the table and, you know, sort of negotiating. So how do you come up with the right, you know, framing, right negotiation tactics, value selling. That’s what we talk about in that chapter. I’ll give you a, you know, simple example to, like, tie back some of the points that we already made in this part. One of the founders that we were actually advising, you know, was building an AI product that actually creates some insane outcomes, like, you know, in the millions, and, you know, 10s of millions for their customers. When we talked about, you know, what is the money? Model. His response was, it’s a 50k fixed. But the unlock on on that particular product because of high attribution and high autonomy, even their customers realize that they’re getting 10s of millions back. So is 50k the right price? Absolutely not. But the entrepreneur did not necessarily have the courage to put a larger number on the table. He’s like, I don’t want to lose this deal. I just want the logo or the 50k is probably enough. We can figure it out later. And he’s like, No, I mean, given the unlock, let’s do this in the negotiation. So what we trained him to do was to put two options on the table, right? So go with a 50k plus a 10% of the outcome that you actually unlock like, if you can measure incremental revenue of like, let’s say 20,000,010% of that and a 50k to actually participate, or a 500k fixed option. So when you put this in a negotiation, what happens is, your buyer is now focused on, what is that 50k and 10% How do you measure that 10% How do you meter it? How do you talk about outcomes? Where is the value being delivered? That is awesome, because now you’re having a value based discussion. No one is talking about the 500k fixed at that point, right? And and once they understand the value and the attribution, the 500k doesn’t even seem like a high price that they are paying. But this mechanism literally allowed the founder to get courage to put a higher price point on the table. Now they, this particular customer, talked a lot about the outcomes, everything else, and then they’re like, You know what? We just want to do a fixed fee. We don’t want to do an outcome because they felt that that’s a better deal for them. So they negotiated the 500k to 400k if he hadn’t done that, the 50k would have been negotiated 40k so he just 10x this price based on how he frames the negotiations with giving people choices and options. And similarly, if the customer truly wanted to partake in the 50k and 10% outcome creation, that’s a high class problem and situation, because now you’re actually going to probably get paid back much more if your product does what it’s supposed to do. So these kind of choices is, you know, more common than we think. Many founders, you know, try to say that I want to keep things simple, so I will just lead with one product and one price. But then what are you doing? Immediately the conversation will switch to like, what is that price? How much can I bargain? But if you have options on the table, you start steering the conversation to a value based conversation, and then try to see what is the right option for people, and it’s way more common than we think, like when you go to a pizza store, a pizza by a slice or a pizza by a pie, those are two different pricing models. It’s all around us. So you can actually craft things in a simple manner, but still put across in a negotiation different options to steer the outcome. So we talk a lot about how to actually do that, how to be thoughtful about the gives and gets, how to build the right ROI, what is the right value, selling methodologies all in that chapter. So that becomes really relevant. I mean, these two things stand out, but there’s also other strategies which are equally important. We talk about, for instance, how to have a price increase conversation without having a prayer session, and how to actually do that systematically in a one to five phase. Or how? Just a couple tips on that? Yeah, absolutely. The mistake that you know, many founders make in a price increase conversation is, you know, they think of this. It like, should I price increase? That’s the first question. Would my customers actually churn. So often a price increase conversation is more internal and emotional. It is not external and logical. I mean, if you look at, you know, prices of like products that you consume, they go up year over year based on inflation. But how do you actually, you know, have the right conversation? One of the key mistakes that people make is try to do a blanket price increase, let’s say a 10% and then hope for the best. That’s the worst way, worst way to actually do it. You need to be more thoughtful about who are your customers, what segments are they belonging to, and how to actually tackle price increases across different segments. So for instance, if you see a customer who’s deriving a lot of value from a product, but you also have another product that you can actually sell, rather than having the 10% price increase conversation, the right conversation to actually have is an upsell conversation, saying, hey, you’ve derived a lot of value from this. The prices are going up. But by the way, we also have this other product where you can actually get even more value. And for you, we might be able to, like, you know, give that same product at a slightly lesser headline price. That’s a amazing way to actually have an upsell conversation during a price increase. But you also might find that there are pockets of customers that truly are price sensitive, and then you need to ask yourself, do you really need to pass a price increase for them? Or, how do you actually mitigate if they actually want to churn, what would you actually do? Perhaps you would say, Okay, look for you. We would keep the pricing the same for the next year, and after that, we will figure it out. So you train them more now on, why were they price sensitive? And focus your attention on showing them where the value is being created. So the next time you come to the table, you can actually command that price. So being thoughtful and segmented is key. And there’s also other ways to actually achieve a price increase, like we just talked about the negotiation example, for instance, that’s another way to actually achieve a price increase, or changing your pricing model itself can actually be a reason for price increasing because you’ve now pivoted from, let’s say, just a seat base to a hybrid seat and usage base. So there are various ways to achieve a price increase. Doing it as a blanket, you know, 10% and hoping for the best is actually the worst way to actually do it. And we talk about how to do a proper price increase. I think Warren Buffett said this really well. He said, You know, if you have a prayer session every time you have a 10% pricing increase, price increase, you have a terrible business so like, how do you actually navigate around that and have really command the right price based on the value that you’re delivering? And we also have other chapters, like, for instance, how to stop churn before it happens? Because if you’re trying to tackle churn as it’s happening, you’re being extremely reactive. The secret to, like, stopping churn from happening is to actually identify types of customers who actually stay and who are actually great customers, and they are happy to pay for you. Who are these types of customers? And how can I channelize all of my marketing dollars to get more of them? Then you stop churn before it actually happens. So being thoughtful about those so many other strategies how to do, packaging, bundling, cross, selling, all of that. So these nine strategies essentially Nick What it really lets entrepreneurs do is balance both market share and wallet share, and that is the key thing that people have to do, because if you just focus on either market share or wallet share at an exclusion of the other then you start getting to all kinds of traps, like, I’m just going to grow and then figure out monetization, or I focus so much on monetization that I turn some customers away. Or you focus on neither, and then you’re focused only on a small set of customers. You train them to expect more for less, and you miss adjacent markets because you’re so focused on your existing customers. So the core thesis of the book is how to architect profitable growth by balancing both market share and wallet share. That does not mean you’re putting equal efforts in every stage of the company, but you’re putting equal attention. And that’s the whole point.
32:14
I see. You know it reminds me many years ago in my own entrepreneurial journey, selling a product and always having an ROI and a value proposition for the PnL owner, which was, you know, hard numbers, but also having a strong value prop for the users, right? Like there might be a knowledge worker or somebody else using the product and making sure that it’s so delightful in so many ways making their jobs easier. You know, do you cover this in the book as well, like making sure that you’re selling into multiple stakeholders and encouraging usage while also driving ROI for the decision maker?
32:55
Absolutely, we cover that. And it goes beyond just showcasing that during the initial conversation. An ROI is actually an ongoing conversation. What that means is companies also need to do what I call as value audits, like every, let’s say, six months doing a value audit to actually demonstrate what value that you actually brought to the table, especially with AI companies. This becomes crucial, because if you have increased autonomy and attribution, What value did you actually bring? And CO creating this value case with your, let’s say, customers. So there is a person on the other side who’s actually creating this, and it becomes their internal case that they can then champion across, you know, multiple decision makers. And they they become the smart person in the room where they say, Hey, I actually brought this folks in, and this is the value that we were actually able to create. And they become your evangelist for like so showcasing all the business case, and we talk about how to actually achieve that. And you know, when we talk about negotiations, gives and gets are important in the sense that if you just give people, let’s say, discounts, keep giving it, you’re just indicating to the buyer that they can keep beating you up till they get a better price, like having some gets in negotiations, brings more authenticity in a negotiation. So the next time, let’s say a founder is in negotiation and someone says, give me a 20% price break. You say it’s okay, but what I’m going to get in return for that is we agree that after six months, or every six months, we will do a value audit. And that actually becomes a mechanism where they’re like, Okay, that’s fine. That’s we can do that. But that actually gives you tremendous renegotiation power, because if they have built a value, you can charge based on that. So you can start tying in all these concepts of ROI, multiple decision makers, how to showcase it initially, how to showcase it ongoing. And we talk a lot about that.
34:40
So you’ve said that postponing pricing and growth at all costs is a mistake. You know? How do you convince founders to prioritize monetization, but also without slowing innovation?
34:54
Yeah, so two ways. For the first book, monetizing innovation talks about, you know, how to. Build the right product based on customer willingness to pay and how to test what is that willingness to pay? That was the core thesis of the book, right? Because when you when we talk to founders, they all understand the concept of product market price, product market fit, right? I mean, that’s a vocabulary that’s pretty common with founders. You know, if someone comes and asks me, do you like this mug, I’m like, I like it. Do you like it at $200 the whole conversation is different. So if you didn’t put pricing as part of that product market fit, often you start hearing what you want to hear. So what you want to really test and learn when you’re building products is to achieve a product market price fit, as in, is there a willingness to pay? What is that willingness to pay? And how do you capture it? So if you’re being thoughtful about that, then you already architected a product based on willingness to pay. And we’ve showcased in that first book, you know, chapter four, where we talk about how to have that willingness to pay conversation, right? That’s, that’s the most important thing. And that’s literally the chapter that the folks at superhuman and use to, like, figure out their own pricing strategy. The second way, I would probably say of being thoughtful is, I mean, you need to grow fast yet profitably, and that’s the catch. It is not just one or the other, and being thoughtful about both market share and wallet share, and that’s where these nine strategies really play in. We are not talking about slowing down growth because you’re focusing on profitability. But how do you grow fast, but keeping an eye on being profitable, and that is the key. And so these strategies that we talk about help balance acquisition, monetization and retention. Because if you think about acquisition, monetization, retention, there are some inherent trade offs. I can price less, I will acquire, but I won’t monetize. I can price higher, I would monetize, but I might not retain. If I have a pay as you go model, I might acquire more, but if I have, like, let’s say, a recurring revenue model, I might actually improve retention. So if I have one product, I might acquire faster, but if I have three products, I might monetize more, because I can land and expand. So like, how do you balance these forces and think about acquisition, monetization, retention in the right way from the get go, and have the right strategies to enable you to get both market share and wallet share. And in the initial stages of a company, you might be more indexed on market share. That is totally fine, but having the right attention on wallet share becomes important. So even if you’re doing any actions that get you market share being thoughtful about, how would you get wallet share in the future? If you didn’t have that thinking, then you’re just building it based on hope. You’re selling $1 for 80 cents and hoping
37:30
for the best. Well, we don’t love hope strategies around here, while we’re talking about one
37:35
lots of companies that we can talk about that I just built purely on hope.
37:39
So Madhav on, let’s talk about 49 palms. So new venture firm investing out of your first fund. Give us a sense for your thesis and portfolio construction.
37:49
Yeah, absolutely. Maybe I will talk about why we named the firm 49 palms. That probably emphasizes the thesis. You know, when Josh, my co founder, Josh and I, we both have very similar backgrounds. Each of us have worked with over 250 companies combined. We have worked with over 50 unicorns. You know, when we started this, we were looking for like, California landmarks to like, you know, say that we are from California, and we saw 49 palms was actually available. And that also happens to be, you know, the place where we take our families on vacation, destinations, the Joshua Tree National Park. You can actually see our picture there too, exactly. So that actually was, you know, interesting. And we’re like, yeah, that speaks to us. But there’s, you know, if I have a geek out on this a bit, there’s a hidden thing that speaks to us even more. So in the book monetizing innovation, I talked about, you know, four failure types when it comes to monetization, and a nine step framework to actually building breakthrough success. So the numbers four nine actually means monetizing innovation for us, and similarly, palms is the ability to scale and grow even in the toughest environments. That’s like scaling innovation. So the thesis of our fund is really helping companies monetize and scale, right? So our our focus area is investing in very early stage AI companies, pre seed, seed and series A and pretty much rolling up our sleeves and helping founders, you know, navigate monetization and being an extended part of that their team. And what is probably also more interesting about our fund, compared to, like, say, many other venture firms that you might talk to, we necessarily picked a co investment strategy. What that means is we are not leading rounds. We are not pricing rounds. We leave that to the other top tier venture firms that we actually work with. What we are trying to do is take a modest allocation on the cap table, and if we are in the cap table, we roll up our sleeves and work with the founders on monetization topics, which makes it a win win for everyone, because if you focus on profitable growth, you have better exits, better unit economics, better valuation for the companies, because you’ve been thoughtful about pricing that helps the founders, that also helps the lead investors, and that also helps us. And our LPs. So that’s, that’s how we make it a win win, where we are co investing alongside some of the top tier venture firms and rolling up our sleeves and working with founders.
40:09
Is that how you describe your edge? Kind of the
40:13
Yeah. I mean, get into these deals. Yeah, exactly the edge. When I talk to founders my edges, I say, hey, look, we bring mastery on a topic that keeps most founders up at night, monetization. If you’re in the cap table, we will be part of your extended team and roll up our sleeves and work with you on it. So that’s the
40:30
name I like. The name Madhavan. It’s a clever metaphor. You know, very limited water, strong trunk can deal with heavy winds. That’s pretty good.
40:38
Once you understand the meaning, then it’s probably even more memorable. So do you
40:44
think there’s, like, specific sectors or trends that you’re well positioned for, you know, in this new wave of AI and and monetization?
40:52
Sure, we are looking at, you know, of course, AI as a broad thesis, but we are, let’s say, sector industry agnostic. What we are really looking for is companies that can demonstrate clear autonomy and attribution, which means you actually have great monetization potential. And those are the ones that we want to find, and those are the ones that we want to invest in, because if you have great monetization and pricing potential, we can help unlock that. And so our picking strategy essentially emphasizes hand picking companies that actually have demonstrable monetization willingness to pay in the markets. And how do we actually unlock that? And that’s where we are kind of focusing on, and it’s also in a stage wise, it’s pre seed, seed and series here, like I talked our, you know, check sizes, typically from a fund construction standpoint, on average, you know, 2 million check like, again, a co investor position. But that’s, that’s what we are focusing on. We are not playing on the very bottom layer of llms, etc, but more on the, you know, infrastructure tools and also, like, you know, vertical AI and industry agnostic for that.
41:59
Well, maybe there will be an opportunity to share a cap table here. Maravon, that would be fantastic. Nick maravon, if we could feature anyone here on the show. Who do you think we should interview and what topic would you like to hear them speak about?
42:11
Yeah, I think I would love to hear from you know, operators who also have funds. I mean, people who come to mind. I think Imad would be a good one from mercury or Rahul or from superhuman. I mean, these guys are CEOs and founders of, like, very established companies, but they still have the time to actually raise a fund invest. I think Imad has probably done over 300 angel investments. Probably Rahul has 100 plus himself, the, you know, IA fund that ima does, or like the Todd and Rahul fund that you know Rahul does, I would love to know a how do they balance having a full time job and also investing, like, how do they unpack that? And the second, because they do it in such a manner, they should have insane pattern recognition in terms of how they actually pick the right founders. Because your time is limited. If you have all the time, and that’s your full time job, at least, you can say you’re devoting a lot of energy to that. So love to unpack their fund construction, their thesis. How do they select founders? How do they invest? And you know, because they’ve actually, both of them have have had some really good venture backed companies that they have supported. So love to hear from them their core investment philosophy,
43:20
that’s great. Bhadavan, what book, article or video, aside from scaling innovation, would you recommend to listeners?
43:29
Yeah, I think there. I love the intersection of, you know, rational and irrational thinking, because no matter, I mean, classic economics will teach you that every human being is rational, but that’s we all know. That’s actually not true. So the behavioral psychology books really appeal to me, like, you know, predictably irrational, or thinking fast, thinking slow, because those kind of work actually translate itself into, like, any kind of domain that you’re operating on, even if you’re in a negotiation. It’s a human having a human conversation. It’s, it’s part, you know, rational, part irrational. So I think those, those two books definitely, you know, stand out for me in terms of navigating these kind of things, in terms of, like, other assets. I think I love Lenny’s sub stack. I think he puts a lot of thought into very different articles, very actionable for founders. And in terms of, let’s say, a podcast episode, I think Bill gully had a recent podcast with Patrick, and invest like the best. I love that episode. I think that’s something that I would also ask listeners to listen to if they haven’t listened to it yet.
44:30
So perfect. Maravon, do you have any habits or behaviors that are a secret weapon?
44:34
Yeah. I mean, a secret weapon would be, would be calling it a bit much, but I can tell you about a like, something that I practice that’s been very advantageous for me. So what I do is I try to creatively visualize outcomes. What this actually means is, you know, before I go to a, you know, main stage presentation, or, like an important meeting, I create imagery around it. I think about it. And that’s how I prepare. I think about. About, you know, what questions I might get, who’s in the audience, and I kind of visualize the whole thing, tough questions, then the easy ones. How do I answer it? How do I pace myself? And this really helps me, because when I actually walk into the meeting or a presentation, you know, I’m almost on autopilot. And then I and then I’ve found, time and again, that my visualization also manifests itself in practice, and that becomes reality. So I think that’s that’s something that I actively preach. There’s also a book by this title, by this, you know, title called creative visualization, which is also a good asset for people to actually read if they haven’t read it. But that’s something that I practice very actively. Think about large ACVs, everyone out there exactly. That’s all you need to do. If you’re a founder large ACVs. How do I negotiate? What would my procurement person ask me? How do I navigate it? It’s really it all comes down to preparation, right? I mean, if you just wing it and you’re thinking about your negotiation, a taxi ride to the or an Uber right to like your client, then, yeah, all bets are off. Perfect.
46:01
And then finally, here Madhavan, what’s the best way for listeners to connect with you, follow along with the firm and pick up your book,
46:08
for sure. I mean, you can Google the words monetizing innovation or scaling innovation, you’ll probably land with a lot of assets in terms of the books and thought leadership that I’ve already put out. Easy way to like link with me is on LinkedIn. I plan to create a, you know, Delphi of my own, so that’s hopefully going to release soon. So that’s another way for people to engage with me, where you can talk to me on, you know, video or audio, and I can my AI version, can actually answer questions. And also you can go to 49 pounds, vc.com, and leave us a note in case you’re a founder or an LP, and we’ll be right back in touch.
46:43
Right? He is Madhavan. Ramanujam, the firm is 49 palms, and the book is scaling innovation. Give him a follow and pick up the book. I know many of our founders have gotten great returns out of monetizing innovation. Maravan, it’s been a pleasure. Thank you so much for joining us.
47:01
Thanks, Nick, it was great catching up again.
47:06
All right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social, or shoot them an email. Let them know what particularly resonated with you. I can’t tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same, a compliment goes a long way. Okay, that’s a wrap for today. Until next time, remember to over, prepare, choose carefully and invest confidently. Thanks so much for listening.
