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96. Incubating a Startup
Startups incubators are a way for established companies to establish new businesses with reduced risk. Essentially, a team of developers, designers, and product managers within an existing company will launch a new idea before fully committing more resources to it. ElectricSMS is one such startup, incubated within AE Studios. Wesley Magness, AE Studio's Entrepreneur in Residence, joins Melanie Plaza, its Head of Technology, to talk about this unique arrangement.
Becky Jaimes is a product manager at Salesforce. She's interviewing Wesley Magness, the founder of ElectricSMS, and Melanie Plaza, the Head of Technology at AE Studio. ElectricSMS is a service to help consumers manage their various subscriptions, whether that's recurring orders of dog food or monthly boxes of snacks.
ElectricSMS started as a project within AE Studio's incubator program, fitting in with their ethos to empower people through technology. AE Studio is a bootstrapped company that works with clients by offering development, data science, and design help to enable startups and enterprises to build technology products that helps humans, not profits. Their philosophy is to build products that treat their users well, so that the business can grow much more healthily than if you trick users into purchasing something they didn't mean to, or otherwise making it difficult for them to cancel. ElectricSMS is an example of how those principles came together in a collaborative partnership.
For listeners interested in starting their own business, Wesley suggests finding a customer before working on something. You don't need an actual user to work with, but rather, a customer or industry who you know would benefit from what you built. With services like Heroku and Stripe it can be very easy to build an MVP from the ground up. Melanie concurs, and suggests talking to people who might want what you're making, and what their problems and needs are. Research what other solutions have and haven't worked. Startups can also reach out to AE Studio for direct consultation on taking their product to the next level, and potentially join their incubator program as well.
Links from this episode
- ElectricSMS helps users manage their subscriptions through their phone
- Effective altruism movement advocates using evidence and reasoning to determine the most effective ways to benefit others
Becky: Greetings. My name is Becky Jaimes, and I am a product manager here at Salesforce, working with the Salesforce Functions team. And I've been here for almost three years. I've worked before as the product manager for Heroku Postgres, and yeah, I arrived to software via Heroku. And today, we have with us ElectricSMS, and also AE studio, we have Wesley and Melanie, would you like to introduce yourself, Wesley?
Wesley: Yeah, I'm Wesley Magness, and I've been working at AE for a little over two years. Before that I was living on the East coast. So right now we're based out of Venice, California, but I was living in New York City and Philadelphia, and I started a company called Shout that was a hyper-local marketplace. It was really cool. You could buy and sell restaurant reservations and stuff. And we went through Y Combinator, and I basically had started my entrepreneurial journey when I was 20 years old. So eight years later now, moved to California, have a lot more sun in my hair and have been working on a lot of really fun stuff with AE and have been here as an entrepreneur in residence and project manager.
Becky: And earlier you were telling me that something happened to you last week, you got ran over by a car.
Wesley: It didn't run me over, I ran over it, actually. The woman did a U turn, and I like to bike. I'm on a bicycle oftentimes, and yeah, I flew right over the hood of the car. So I've been slightly slower at slacking recently.
Becky: And Melanie, would you like to introduce yourself?
Melanie: I'm Melanie. I'm Head of Technology at AE Studio. Yeah, I've been there for about four years, so a while now, and before that, I worked at a bunch of other startups, like in LA I was a developer or co-founder, CTO, and I also moved from New York, and that was six years ago now, and I don't see myself going back now that I'm finally not sun deprived.
Becky: And so AE Studio subcontracts, ElectricSMS, or...
Wesley: Yeah, we're a subsidiary company of AE Studio.
Wesley: So we very much are still involved or had been involved initially with AE. We were being incubated by AE, and now that we've reached a certain threshold, we are spinning it out as its own separate entity or in the process of that. And a lot of the work that we do is completely separate from AE, but we share resources.
Becky: Tell me about ElectricSMS. You do some engagement via SMS. I want to hear a lot about it because this is really interesting.
Wesley: It's been such a serendipitous surprise for me. I have a roommate who is near and dear to me, and she would be up until three in the morning answering emails. And I thought that she just was a night owl, but it turns out that she's not. It was the fact that most of her customers just didn't know how to log into their accounts. They forgot their emails and their passwords, and I think we can all relate to that. I even have a password manager, and that messes up, so I don't know. It's just a little difficult.
Becky: I don't want to tell you it took me 30 minutes to get... We use Zencastr app to record this podcast, and it did take me 30 minutes to get going with the password thing.
Wesley: That, to me, is just the brightest signal that there's something that needs to be solved. Plus, I also enjoy my sleep, and I live on the bottom floor, so it was selfish too. And I saw that there was a big issue with forgetting emails and passwords, and she has a really cool company that empowers women who are nutritionally deficient to just take a single vitamin a day, right, and her thing is called Gem. And so, in a very short amount of time, I saw that that was a big pain point. And I thought of, well, if you just use someone's phone number as their login then they wouldn't have to deal with as much of that pain. And so, we actually found out through exploring what she was using, which is Shopify and a plugin called Recharge, that you could automate a lot of the actions that people take on their subscriptions with a phone number.
Wesley: So you can, through subscriptions usually, skip an order, swap to a different product or flavor. You can update your billing address. You can do a lot of stuff to manage your subscription, but you typically have to log in to their portal to do it, or you have to reply to an email or whatever. And I'm pretty familiar with messaging bots where you just say to Apple... I don't know if anybody does Apple support, but you can be like, "Help." And then, they'll give you a couple of options in a decision tree. "What do you want to do today? Do you want to schedule an appointment? Do you have an issue that you want to submit?" Whatever.
Wesley: So with ElectricSMS and Gem, I saw there being a really simple use case for it where we could help people skip their upcoming orders and swap to new flavors and update their information. That's how we got started. We, over a very short amount of time, checked out how quick it would be to build this using Heroku and Twilio and some of the resources we have at AE, and we found out that this was going to be a really cool and simple thing to start building. I want to maybe ask Melanie if she could explain a bit more about what AE stands for, and what we focus on.
Melanie: Yeah, so AE stands for Agency Enterprise. So agency as in human agency, empowering people to rethink about technology, should be empowering and allow people to make decisions that they want to make instead of tricking them into mindlessly scrolling on an app for hours or not being able to get into their account to change their upcoming orders, something like that. We think it should be able to help them have more agency, so we started as a profitable bootstrapped company working mostly with client projects as the core business. So really good development, data science and design studio. And so, we work with startups and enterprise companies to build technology products.
Melanie: That's the core profitable business and because we have that, we're not looking for a quick exit, or it's not a big company that we're thinking about quarterly results and that. We can use that to also think about ways to increase an agency's internal projects. ElectricSMS is one of them, but was thought of as a way to really help people with using subscriptions in a way that's useful for them, and we also think increasing this agency is how we try to work with our clients and our employees and also through the products. And we also think it makes good business sense as well, so it's a thing that not only is good for people, but also usually if you treat your users well, it'll help them come back, and they'll want to keep using you, and they'll refer their friends and stuff. So it comes together into something that we think is a good thing for us to do, thinking about what's good for people, but also what's good for companies, and I think ElectricSMS is a really good example of how those come together really nicely.
Wesley: Yeah, so exactly like what Melanie just said. We really do believe that if you treat people well, then you'll have a longer and more profitable relationship with them, as opposed to the dark design stuff, where again, you are holding people's credit card info for hostage where you don't tell them they're about to get charged, and they look back four months later, and they're like, "I just paid $80 for like a toothbrush. What?" And especially right now, when people don't have expendable income, and they're being a little bit more cautious and concerned about where their money is going. It makes so much more sense to be transparent and to be clear about where your money's going. And so that was the hypothesis with ElectricSMS. It was literally like, we send a text message out to you three days before you get charged, and it gives you the option also at any point to change your subscription. But three days before you get charged, we give you a heads up. Like, "Yo, you're about to pay 72 bucks for this. Reply with modify order or skip this or whatever you'd like." Yeah. It's the highest point of engagement too because then you get people to respond.
Becky: Yeah, for someone like me, if I get the same thing in an email, chances are I'm going to ignore it, and if it's an SMS, then I just reply and say, "Actually, no, I don't need an extra toothbrush. Thank you very much."
Wesley: Exactly, so that was another reason for SMS. It wasn't just so that would make it easier to log in. It's eight times more likely to get not only looked at than an email, but responded to, which is pretty cool. Not only responded to, but responded to within the first 15 seconds. So to me, it was, again, selfish. I think of myself and my mom and people that I know who get charged for stuff, and they wish they just had a way easier way to control how to manage that whole thing. So again, our hypothesis was if we treat people well, if we build technology that allows people the transparency and the ability to act on where their money's going, they're going to have a longer relationship with our customers or with the brands that they're purchasing from.
Wesley: And we've proven that out now with over 12 companies that are using ElectricSMS. We're seeing the LTV games and the churn rate just totally plummet, which is really cool, and it's a hard thing. It's a paradigm shift, right, because a lot of companies do it the other way, but when you start to actually see the data panning out and where customers go ahead, and they do skip. They skip, they say like, "This month, I don't need it. No big deal." They then go on to have multiple repurchases because they were given the flexibility that they needed.
Becky: Yes. I can see if I have a subscription, and I don't want my vegetable box be delivered the next week via text message if I can just say, "No, thank you." I'm not going to go there and be like, "Oh, this is so annoying." I'm going to just cancel this service because I don't use it half the time.
Wesley: And that's the thing. It's like, we would much rather people just have a longer relationship than cancel immediately.
Becky: Oh my gosh. I wish that everybody that I advise stuff uses these things. It would make my life so much easier.
Melanie: Yeah. It's funny too because a lot of companies too think like, "Well, if I stop people from being able to..." I'm not out of my apartment as much these days with COVID, and so I was trying to cancel my gym membership, and I couldn't cancel it in the app, of course. And I had to email them, and so I tried to cancel it. And then, they were like, "Okay, now we need to talk to you on the phone, come into the office, bring your social security card." And people think that that's going to like keep people in there. And I think I might've wound up paying for it for another month accidentally, but I think people are really finding these days that they don't want to be treated like that, and you might get some quick gains from people by tricking them into doing things that they don't want to do, but over the long term.
Becky: And then they hate you.
Wesley: Yeah. I'm not going to name names, but there's plenty of them out there.
Becky: I'm not going to tell you names either, but I have a dog food subscription, Oh man this will solve my problem. Just get me the dog food here, and then my dog started getting really old. So he started eating less and less and less. And I ended up with piles of food, and to cancel it, it was worse than canceling a magazine subscription in the nineties.
Wesley: Well, this is getting to the heart of what we think, again, is, that is not human agency. We're talking about something that takes so much time when we really do have so many things that we'd like to be thinking about outside of that, and so in some ways, we really just want to focus on at AE, products and services that make things easier and have a look at the long-term ism of things too, which I think Melanie can talk a little bit more about.
Melanie: Yeah. I think we really want to create products that increase agency right now, stuff like ElectricSMS, but it's also nice because we have this other part of the company, and that's their core business. We can also think about things that are a little more creative, in the future, far off things that are not immediately going to affect the new thing. But if they did come to pass would have a huge effect on people. I'm really interested in the effective altruism movement also, and I think that a lot of this stuff really aligns well with that. You should do things now that are good for people and help them in the best way possible. We also donate 5% of our profits to highly effective charities.
Melanie: And so, that's a thing that's good to do right now for people and improves their quality of life. But there's also like all these other things in the future that people are starting to think about now, like brain machine interfaces, which if you can imagine a situation where those were designed with not that much agency in mind can be pretty bad. You're watching TV, and you get an advertisement for like pizza delivery. I would probably order it, but it probably would be really bad. So thinking about also some of these stuff is another thing that we're really interested in. We just hired like a BCI researcher and are trying to think about future technology stuff as well, but still applying the same models of thinking about things through a really lean, agile perspective, and how can we break this big problem down into small pieces and make progress towards it.
Melanie: It was pretty exciting that we get to do that, and we're working on a bunch of other small things internally as well as ElectricSMS that are starting off. ElectricSMS is definitely the farthest along, but some things are small and fun too. We made a Slack scheduler app where you can schedule messages, so you don't annoy people at random times during the day, and that was just a thing that we spent not that much time on just to see if people would want to use it. And then, when people really liked it, we spent more time on it, and that's what we're thinking about doing with a lot of other stuff that worked well with ElectricSMS, and I think is a good way to validate ideas about things that might help people and see how they really function in the wild, any if they're practical and people will actually want to use them.
Wesley: Yeah. Melanie was getting to a point too, that we think about a lot here at AE, which is we don't want to just incubate ideas. We want to incubate people, and I am one of those people. And especially as like a, I don't know, "entrepreneur" in the past. I wanted to have a little bit more of the disciplinary structures that I needed, that I can get from a full-time job at an agency to be able to then really, when I do have a good idea, be able to execute on it and thinking about the work that we do for clients, it's been a very incredible opportunity to build in really strong external structures like daily stand-ups and the more agile meetings like design and story writing and estimation meetings and retrospectives. All of that is something that we use on a day-to-day basis that can then get applied to our internal projects.
Wesley: So we really don't waste that much time on anything because we're very disciplined in our approach in how we do work externally. So when an idea comes about that we think would be a good idea for human agency or whatever we think, we're very disciplined in how we approach. "Okay, so let me try and see if I have a customer for this. Is there someone that really needs this?" And we find customers first before we invest too much time in building something out. For ElectricSMS, again, I knew that there was already a customer that was in need, and then I thought, "Well, okay, how can I also convince AE that I should be working on this?" And what I ended up doing was I actually ended up pre-selling ElectricSMS. So like I gave an unlimited license to it, to our first customer. And that gave us the confidence moving forward, knowing that we were going to be able to actually invest time and resources into this.
Wesley: So it's a really sweet spot where, again, I think there's this romantic idea as an entrepreneur or whatever that you have to be working with a candle burning on both ends, literally like a candle, wax dripping by your computer and reading all of Paul Graham's essays, which you should, by the way, but reading them and having them pasted on their wall, and It's true. You do need to have hustle and grit, and you need to know how to just like put the work in, but having the ability to be incubated at an agency, especially one like AE, has been tremendously valuable for someone like me who doesn't want to be burning the candle at both ends, but really does need to have a dojo to go to and where I can practice all of my skills as a PM with other people's really impressive startups. I get to watch also the founders that we work with and learn about all of their traits, and I get to see the diligence that they have on a day-to-day basis. I get to see the inspiring stuff that they pay attention to that I can mimic and model after. And so it's a really interesting situation that we have at AE where we can model after what we're working on for our internal projects, which is really cool too.
Becky: And you mentioned earlier that there's no VC funding, that you guys are bootstrap, right?
Wesley: Yeah. AE itself is bootstrapped. And again, I think it comes from all of us having been in this situation where we were VC funded, and it's not to say that there's something super negative about it, but it's really nice to be able to make decisions free of interference, and we've really created a nice little incubator for that, both at AE and at some of these internal projects that we're working on, so it gives us the ability to just act rationally without decision-making at all times. We don't get affected by anybody else's emotions or anything.
Becky: And how big is AE right now?
Melanie: We're about 40 people right now, and that's full stack developers and designers, PMs and data scientists mostly. We've actually grown a lot too over the past two years, a lot faster than I think we were expecting to. And I think a lot of the reason too is because there's actually a ton of alignment with working on client projects and working on internal projects. I think a lot of times the people who are the best at working closely with startup founders or closely with teams and bigger companies that want to be more startup and agile are people who are also really entrepreneurial minded and get it. And so I think having people who are interested in that at AE working on these projects is really valuable and having the entrepreneurial mindset they can apply when working with clients and making decisions with them really helps with that and makes those projects go a lot better.
Melanie: It's always interesting too because as a startup founder, you do get emotionally attached to your projects, and we really care about our client projects going well, but we don't have necessarily the same biases about them that you might have as a founder of your own company where you're like, "This is my baby." And so it's good also to get that reality check and to try to make a product successful in a very methodical way where you don't have that, "This is my baby." "But no, my vision.", or whatever. When you apply that to your own startup too, I think that also makes it go a lot better and less too with ElectricSMS. He like really carries that and hustles to get it done. But I think I've seen you too, even over the past year, you're rational about it, but also increasingly so where you realize sometimes that you might have to like think of something differently than you originally did and stuff. And I think a lot of it's from working really closely with clients too, where you're able to exercise that a lot.
Wesley: It's true. I mean, it also comes back to, everybody says, "Listen to your customer." But again, a founder can just be so obsessed with the idea and their attachment to it that they want to, but they just don't. Whereas again, we get to really just separate at all times the signal through the noise. The noise is the emotional attachment and those ideas that I have or that the team has. And then, the signal is really like, "Well, okay, eight of our customers are asking for this. We need these folks on this now." And to prioritize that and just get that done. That's just the only thing we need to do. And that's proven time and time again, to be the best business model, but it's through the ability for us to have that emotional discipline through the external work that we do to act like that.
Becky: How do you pick your customers?
Wesley: They pick us. I mean, we've had a lot of really great referrals. We work well with a lot of companies, and we end up doing great work, and that's a virtuous cycle there.
Becky: And for these people that need someone like you to help them executing this idea, what advice do you have for them?
Wesley: I think for me again, I went about it in the best way that you can, which is to find your first customer before you even start working on something, just knowing that there's someone who's out there who is willing to pay for what you're about to build, and then learning how to develop quickly, right, not waste too much time. And that is why we have used Heroku because we've used it time and time again in the past, and it's the easiest thing for us to leverage to get things up and running really quickly, also like other external APIs that exist now, it's insane, like Stripe for payment processing, just so much exists already that can be encapsulated into what you're building, and so we try and just really encourage people to try and do as much as they possibly can on their own before coming to someone like us, because that not only proves the business model, but it also proves a certain type of personality that they're going to get it done no matter what, but maybe just needs to get a little bit more like development resources and to get a little bit more coaching on how to do things technically.
Melanie: I mean, I think we also work with people who are like, a little earlier in the timeline for customer and for them also, we do think it's really important to build the MVP though. Some things are a little harder to do on your own, but you can still definitely do the part that Wes was talking about where it's validating it. Even if you don't have a product, do some user research. Talk to people you think might want it and see where the needs are. Is this actually something that people seem like they would use? And then, when you do start developing... We do sometimes work with people who really do just have an idea, but they have some real traction behind it. People are asking for it, and they want it.
Melanie: And they've done research about it too, and they can see there's a real market need for it. And like with them too, we really do encourage people to build an MVP first. It can be really tempting to go beyond that, and you can think of so many ways that your product can be improved, but it is really better to be scrappy in the beginning because even if you know customers want something in general, specific things that might need to be pivoted or tweaked are probably going to happen too. And we just think it's best to try to get it into customer's hands earlier, doing things that really are the basic version of what you're trying to do with spending the least amount of time that you can on that. And then, releasing early and iterating on it and doing testing along the way. It usually makes for a better product in the end if you do this iterative build out, and that's also even during projects or working with people, we do things really agile, and we're constantly trying to be delivering things that are working software to them so they can see things as they're being built rather than just being like, "I have this like huge list of things I know people want. Here you go, build a Lamborghini style version of that." All of it right away. In the end, it's usually not as good.
Wesley: I mean, I have to say Shopify is pretty killer. I mean, again, that's for consumer packaged goods and e-comm stuff, but Shopify is amazing, the CRM stuff, appointment schedulers that have payment processing in them like Squarespace, which are really cool, and Webflow is pretty cool as well. And then, a lot of plugins, like Google Drive and Google Sheets and all that stuff are used in tandem with it. Yeah. We're seeing a lot of momentum in those platforms.
Becky: Do people still use WordPress?
Wesley: Unfortunately, yeah. No, I mean, it's not that bad, but yeah. People still definitely use WordPress. WordPress is awesome. We always get an MVP built out of WordPress, and we're like, "Oh no." I don't know. I think we have just so many great new startups that are coming up, and it's just amazing to watch them getting built on Shopify too. I'm really deep into Shopify's ecosystem right now with ElectricSMS, so I'm really impressed with what's being built on top of it. I think it could all be done really well or way better, but yeah, I'd say Shopify is pretty great.
Becky: The barrier of entry is not very steep either. If you can build something in WordPress, do yourself a favor and just go to Shopify if you're going to do some e-commerce in there.
Wesley: It's also cool just being part of... I know this is a tangent, but being part of Slack communities too and just learning from people through communities that you're chatting with. I know there's probably some on Facebook and stuff too, but there's a lot of really cool Slack groups that are talking to one another on a day-to-day basis.
Melanie: Yeah. The no code space is also really blowing up these days, and I think even if it's not your final product that you're actually going to launch with, you can do a lot of stuff in there to at least make a little prototype of what the functions might be for people to test out and validate it.
Becky: Okay, this is great. So for all those people that are listening and that are working their side projects, they should reach out to agencies like AE to help it take to the next level and to even just refine their idea better.
Wesley: We actually have an incredible process. It's a scoping session, and obviously, we have to be cautious and not scope everything out, but where we run through, what's been built and what they're looking to do. And then, we talk about possible solutions and what an ideal MVP would look like. And again, what Melanie had mentioned is we really focus on what an MVP is, minimum viable product. So it's a cool thing that we do at AE, and I'm sure some other agencies do it, but I think we're very unique in that if you do come to us with an idea...
Becky: Yeah, for those folks that want to come to you with an idea, how do you guys charge? Do you... How does that work? Do they have to pay you, or do you guys get equity in this companies and those customers that you help, or how does it work?
Wesley: Yeah, we're an hourly-based studio. And we have now a little bit more experience taking in some level of ownership and equity in companies that we work with. And we know how to go about that process, but really well. But again, a lot of that is that time and materials is focused on the MVP. So we might scope something very big out, but we already got the MVP portion of it done relatively early on. So it helped us to be highly iterative. But yeah, we're also very at a meta level. We're really thinking about being a source and centralized studio and where we can have multiple little incubative things going on, and where we're sharing resources and think on a more local, global scale of how we can help our fellow entrepreneurs and people in the area. So there's a lot to look forward to. It's definitely the start of a really cool conversation.
Becky: I think a lot of people are going to be very interested because as I said, this could help a lot of people, but yeah, it was great chatting with you guys. Wesley and Melanie, this was awesome.
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