Category: startups
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In a world where there are no secrets, where innovations are quickly imitated or become obsolete, the theory of competitive advantage may have had its day. Realistically, ask yourself, If all your competitors gave their strategic plans to each other, would it really make a difference?
In 1986, Amar Bhide wrote “Hustle as Strategy” for the Harvard Business Review. At the time, he was an assistant professor at HBS.
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Why does growth rate matter so much? Why does growth rate influence valuation so much? I was reading a book recently written by a hedge fund manager who discussed valuation frameworks. His explanation was one of the best I’ve come across.
If your business is growing at 100% next year, then 90% the year after, and then about 80% the year after, the business will have grown 6.9x. That’s the way I’ve always looked at company.
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Rewind a decade. Angel investing was an important part of the Startupland ecosystem. Today, you can’t make the same argument. 2018 observed the fewest number of angel-led financing rounds since before 2010. Angels led 156 rounds last year, a figure that collapsed from 714 in 2015. In that same time period, the median angel round has fallen from $500k to $270k. And the total number of dollars invested by angels halved from a peak of $365M to $177M.
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Startups are business machines engineered to grow quickly. The forces of hypergrowth exert enormous strain on every aspect of the company. Internal break all the time as the company moults into a new skin. This is one of the most important things to keep in mind when hiring. Every lead hired today, whether marketing , sales, engineering or product, will have a very different job nine months from now, much less two years from now.
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Jacob’s Ladder is a toy of thin wooden blocks attached by ribbon. If you hold it in your hand and rotate it to touch the second block, it seems to set off a cascade of blocks falling from the top. The blocks haven’t changed positions, though they do rotate. It’s a moving optical illusion. When I watch this toy, I’m reminded of the current state of the fundraising market.
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There are three types of product features, a seasoned head of product told me recently. MMRs, neutralizers, and differentiators. MMRs are minimum market requirements; basic features that every customer expects and demands. Neutralizers mitigate competitive threat. Differentiators are your startup’s competitive advantage. As a product manager, I’d never thought about this type of roadmap segmentation before. But it made a lot of sense to me.
When a startup has established product market fit, the differentiator is clear.
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There’s a theory to the idea that winner takes most in Startupland. The startup that grows a bit faster at the beginning demonstrates more momentum. The startup raises capital sooner, hires people, builds the product, markets and sells the product, grows more, and raises capital. Repeat the process for each round of capital. Is it borne out in reality?
This theory suggests that irrespective of the category, the winner should capture most of the market value.
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Earlier this week, I wrote about the collapse in the number of seed investments. I received many questions about the data, all the same. Why is this happening? This is a deeper dive into the data.
First, there are fewer seed investors participating in the market than in 2015, about 40% fewer.
Second, many of the most active seed investors and institutional seed funds are investing in fewer companies.
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In the last six years, the median time between seed and Series A has more than tripled from about 200 days to about 750 days. Why? The seed market is in the midst of some secular changes. Seed rounds have declined 63% from their peak. Total dollars invested have fallen by 37%. But the median round size is up 3x in the same time period. In other words, investors are concentrating capital in fewer startups.
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2018 is a blockbuster year for software M&A multiples. The prices companies fetch relative to their revenues surpass any of those in the past 7 years. Billion-dollar plus acquisitions in 2018 have commanded a median 17.7x trailing enterprise value to revenue multiple. Nothing in the past seven years is close. In fact, there is not a single acquisition in that range.
In 2018, three acquirers have paid greater than 14x trailing multiples, and two have paid greater than 20x trailing.
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You’ve just raised a round of financing. Your next step is to build your management team. There are several criteria for finding the right executive. Competency in the field, cultural fit, communication skills, management experience. All of those should be obvious. There is one that is often overlooked. Network.
Recruiting is one of the most important responsibilities for a head of a department. That head will need to scale the team to meet the objectives of the company.
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There are five forces driving the startup ecosystem today. They are working together to reinforce a high valuation environment. These forces are:
An infusion of capital into Startupland. There are many reasons for this. The money supply in the US has doubled in the last 10 years. A low interest rate environment means a low cost of capital, which means yield is hard to find for cash. VCs raise larger funds and more frequently.
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A dollar today is worth more than a dollar tomorrow. This statement underpins all of finance. The idea has a fancy name: the Time Value of Money. It applies to all types of investments, including startups. Time Value of Money is the economic argument for startups to raise money when it’s available.
If I give you a million dollars today, you can invest it. You might buy 151 bitcoins. Or invest in a certificate of deposit at 1.
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The Ideal Customer Profile. The perfect customer. Can you describe it for your startup? The more precisely you can describe it, the better. That will simplify disqualification. But articulating the ICP well isn’t enough.
Vague ICPs are problematic. The company will focus on too broad a customer base, waste time and effort with unqualified prospects, and blunt their sales pitch with irrelevant value propositions.
Clear ICPs can also be problematic.
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In the US, the median seed round has nearly quadrupled over the past seven years. In the mean time, seed investment has grown more than 7x and then fallen to a bit more than half of the high. As the market has grown and retrenched during that time period, I’ve been wondering about the geographic diversity of these seed dollars. Throughout these cycles, are startups in other states benefitting? Are they increasing their share of investment dollars?
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It’s one of the most important questions a CEO can ask. Why does our sales team lose potential sales? One of the companies I work with, Chorus, listens and analyzes sales calls to provide insights to heads of sales and account executives. Chorus explored the reasons account executives lose sales opportunities.
Set aside losses from competition. Of the remaining lost opportunities, 48% of prospects lacked budget. A further 38% demonstrated no urgency to buy.
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Recently, I met an exceptional marketer. She described the purpose, strategy and tactics of a marketing department remarkably succinctly. Marketing’s methods can seem intangible. But she explained them simply and elegantly. I drew the chart above based on her vision of marketing’s roadmap.
At the highest level, marketing articulates a compelling narrative. This is step 1.The narrative brings the market forward by contrasting the current state of affairs with a persuasive view of the future.
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You’re two or three years into your startup. You have hired a great team and want to retain them. It’s time to consider refreshing their stock options to motivate them to stay longer. How many options should you grant to each employee?
Startups should pay key people market rate to retain them. Otherwise, they may leave the business, lured by the promise of greater compensation elsewhere. Let’s walk through an example.
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There’s a crisis in the scientific academic world. It’s called the Replication Crisis. Scientists have found that they cannot replicate the results published by many scientific studies. The same thing is happening in the world of business.
Over the last 15 years I’ve read several hundred business books, and I’ve written one. Across those 15 years, one of the most interesting is a book called The Management Myth, which traces the history of management science back to its less than solid origins.
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The cash conversion cycle is a key metric for startups, but one that often isn’t talked about until a business hires a CFO. Once a business established product market fit, the cash conversion cycle is a key metric of a company’s cash efficiency - how quickly a company can convert a dollar of investment into a dollar of cash flow.
To calculate the cash conversion cycle for a software company, the formula is
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One of the hardest thing to do in sales, especially for early stage SaaS companies, is to disqualify customers. When a startup disqualifies a customer, they turn away a revenue opportunity, a chance to add $1k of MRR or $3k of MRR, and meaningfully grow the top line. But if the customer isn’t the right customer, that incremental revenue bears a hidden cost.
In the earliest days of the business, those potential customers waving checks promise an attractive revenue boost.
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Win probability charts like the one above have become the icons of popular predictive data analysis. I love data, but let me whisper a heresy to you. I detest these charts. I Instead of provoking thought, insight and questions, they close minds. They support the ideas of inevitability, of odds too great to overcome.
Congratulations to the Patriots who faced a 99% probability of losing the game, but passed the ball down the field into the endzone twice, and rendered this fallacious prediction worthless.
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I met a physicist this week who told me all the Nobel laureates he had met in his studies have been the most modest of physicists. “They realize how small they are in the world, after discovering something incredibly special and new.” Separately, I referenced an executive this week. A former colleague of this person told me,” this is not a person who sees a model work once or twice, and instantly subscribes to the notion that it will work every time for every business.
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Which is the more important priority? Growth or churn? Churn or growth? Early-stage companies have limited resources to focus their efforts. On one hand, growth is important in order to raise a venture capital round. Growth shows demand for a product. On the other hand, churn is a huge source of friction and raises questions of product market fit.
Especially in the early stage, churn is the more important of the two priorities, and when founders ask me which to emphasize that the seed and series A, I’ll always respond churn.
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How much should a founder raise for their startup? I imagine almost every founder contemplating a fundraising round ponders this question. There are many different paths to developing an answer. The right answer that every startup founder has told me is as much capital as possible at the highest possible price. But what strategies exist to justify increasing the round size and consequently price?
These are the three most common I’ve observed.
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Over the last seven years, software startup investing has changed quite a bit. In 2010, classic SaaS was booming, the benefits of a subscription model were finally becoming clear to the public markets and the mass-market. Since then, many other types of software businesses have been created in new categories like agriculture technology and robotics. Which of these markets are growing the fastest for investment dollars?
The chart above breaks out 14 different software categories and shows the amount of dollars invested in each category indexed to 2010 levels.
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Over the last few days, I’ve been reading Shoe Dog, Phil Knight’s autobiographical tale describing the formation of Nike, and I think it might be one of the very best founding stories I’ve read. Easy to read, brimming with passion, full of harrowing business crises, the book is an inspiration to anyone who has a crazy idea and commits to persevering.
At twenty-four I did have a Crazy Idea, and somehow, despite being dizzy with existential angst, and fears about the future, and doubts about myself, as all young men and women in their midtwenties are, I did decide that the world is made up of crazy ideas.
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Calendars contain one of the under-studied data sets within companies. How we spend our days, is of course, how we spend our lives, wrote Anne Dillard. How we spend our days at work determines what we and the company ultimately achieve.
I remember meeting Ryan Fuller of Volometrix several years ago. He shared the story of the business he and his colleagues had built analyzing the way companies spend their days.
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Recently, we examined the comparative efficiency of bottoms-up and top-down businesses. Today, we’ll dig into valuation metrics to see if there’s any systematic bias in the investor community for SMB, Mid-Market and Enterprise SaaS companies.
Using public data, I categorized the 50 or so public companies by ACV at IPO. SMB is less than $10k, Mid-Market is between $10k and $100k, and Enterprise is greater than $100k in average customer value.
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How fast could a SaaS business grow on paid acquisition? If the business decided today to sprint and acquire as many customers as possible?
We can model it with some assumptions, some of which are quite aggressive. Let’s take a startup with $1.2M on the balance dedicated to customer acquisition. Assume a $10,000 CAC, an 80% gross margin and a payback period of 12 months. We’ll assume customers begin to pay the month after they sign up, and all this math implies customers pay a monthly fee of $1042 ($12,500 ACV over 12 months).
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If I made a word cloud of the terms in 2016 that dominated Startupland, burn would be among them and perhaps the largest. On the contrary, burn would be absent from the 2015 list, replaced by unicorn. Starting in the end of 2015, Public companies have markedly shifted the way they manage their businesses pushing toward cash flow positive and net income positive. In parallel, startup founders and CEOs have markedly shifted the way they communicate and manage their businesses.
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Creating and optimizing a sales plan for an early stage SaaS company is a challenging task. There are lots of different variables to manage and the truth is it’s always a work in progress even for massively successful businesses. But at the very earliest days, where do you start?
Quota is a function of number of deals closed, sales cycle, price point and conversion rate. When a SaaS company is just releasing its products, none of these are known figures.
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If your SaaS startup were to trade in the public markets today, what would it be worth? The true answer is we don’t know, but we can approximate it by comparing it to the other publicly traded SaaS companies and benchmarking the business by its growth rate.
The chart above shows the median multiple of public SaaS companies by growth rate bucket, 25%-49%, 50%-74%, and 75%+ trailing twelve month revenue growth rate.
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Success has 1000 fathers and failure is an orphan.
I heard this aphorism in my first year as a venture capitalist having forgotten it. There’s a lot of wisdom to it and I think it’s most applicable when interviewing. I remind myself of the same each time I speak with a candidate for a role.
When I see a sterling resume, I know that I am susceptible to confirmation bias.
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I met an entrepreneur last week with an amazing command of technology history. He spoke about the way the Xerox Alto has influenced graphical design over the past forty years. I learned a lot. For this first computer’s monitor has a portrait orientation, not a landscape orientation? His knowledge of history provides him a huge competitive advantage because he understands why things have evolved a certain way and the assumptions that underpinned previous decisions.
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McKinsey released a study of high growth software companies entitled Grow Fast or Die Slow. One salient conclusion:
If a software company grows at 20% annually, it has a 92 percent chance of ceasing to exist within a few years.
In other words, software companies must grow quickly to survive. Slow growing businesses suffer from the lack of oxygen that fuels growth. Raising money is more expensive. Hiring becomes challenging.
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The rate of new software company formation seems to have declined materially in the past few years. In 2011-2013, about 1450 software companies were founded each year on average. In 2014, that figure fell to 1186 and in 2015, we count 481.
Why does Crunchbase data indicate this decline? First, there might be a few data issues in the most recent years. Perhaps software companies remain in stealth longer. Perhaps there a substantial delay between when the business is founded and when it appears in Crunchbase.
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Party rounds symbolized the heyday of the startup seed market just a last year. Called parties because of the number of investors who collaboratively financed seed rounds of startups, the lists became almost comically long as seed sizes ballooned and investor syndicates swelled with them. Recently, I have heard from founders that they are less interested in party rounds, but does the data support the case?
The chart above plots the percentage of seed investments for US startups by the number of investors in their seed round.
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In “How People Learn to Become Resilient” Maria Konnikova retells the story of Norman Garmezy and George Bonnano, the first developmental psychologists to study grit and resilience.
It’s only when you’re faced with obstacles, stress, and other environmental threats that resilience, or the lack of it, emerges: Do you succumb or do you surmount?…One of the central elements of resilience, Bonnano has found, is perception: Do you conceptualize an event as traumatic, or as an opportunity to learn and grow?
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The single most important business decision in evaluating a business is pricing power. And if you need a prayer session before raising price, then you’ve got a terrible business –Warren Buffett
I read this quote in Confessions of the Pricing Man: How Price Affects Everything, written by Hermann Simon. Simon is a former academic, an ex-professor at INSEAD Stanford, Harvard, and London business schools, who extensively researched and taught pricing theory.
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My father keeps a copy of Michael Porter’s Competitive Strategy on his bookshelf. An imposing dark gray tome, Competitive Strategy is a business classic. I remember reading it sometime in high school, and not understanding very much of it. It was only six years later in a college macroeconomics class, my professor helped me understand the value of the Five Forces. For startups entering a period of increased capital cost, the wisdom of Porter’s Five Forces is more important to consider now than they have been in the past few years.
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The fundraising markets have infused more cash into startups in 2015 than in any year since 2001. But, the venture backed IPO markets touched five year lows and whispers of a bubble have become a meme in the past six months. What’s really going on? And should that impact when founders start companies?
No one can time the financial markets. If you can, you should be trading stocks, bonds and options and retiring very soon.
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After a startup attains product market fit and begins to exceed the first breaking point of the startup management structure around 10 employees, it’s time to codify the company’s values. The values of the company are the most concrete way for a business to determine whether candidates might make good employees.
At two separate SaaS Office Hours recently, we heard similar stories from Maia at Greenhouse and Pete at Optimizely.
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As the temperament of the fundraising market shifts, particularly in the later stages, the question of how much a startup should burn will become increasingly important. We’re living in a historic period of very inexpensive venture capital. These cheap dollars have fueled spectacular companies with record-setting growth rates. In such an environment, growth at almost any cost is handsomely rewarded. But we’re observing the ecosystem starting a correction - particularly in the late stage of the market.
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Last night, at our inaugural event, SaaS Office Hours welcomed Bill Macaitis, CMO of Slack, former CMO of Zendesk and former SVP of Online Marketing and Operations at Salesforce. Having worked in three hypergrowth companies, Bill is an expert in building massively successful marketing teams. These are the five kernels of wisdom I learned last night.
When is the right time to hire a head of marketing? The right time to hire a head of marketing for your startup is when the company has found product market fit.
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When I was a PM at Google, we conducted customer research often to understand our customers’ opinions on AdSense. In 2005, Google, Yahoo and Microsoft were vying to win dominant share of advertising pages across large publishers. Customer knowledge, both qualitative and quantitative, informed product development, and that research became a key part of AdSense’s success.
A few years later when I joined Redpoint, I learned that venture capitalists perform similar customer research during diligence.
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I learned to drive a car at age 19 on a warm Santiago de Chile night, in an unusual way. A friend named Jose Pedro resolved to teach me after dinner at his apartment, suprised to learn I didn’t know how. It was past two am, and without anyone on the streets, it would be safe, he assured me. As we sat in the car, he showed me how to manage the three pedals and the gear shift, and explained the how the clutch worked.
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Earlier this week, we examined the trends in the major categories of startup investment including eCommerce, Software, Social Networking and Education. But which lesser known startup sectors are starting to raise venture dollars? Where are founders finding unique opportunities to innovate?
Bitcoin is the fastest growing sector followed by photo sharing and physical storage (which includes moving and self storage companies). Each year, starting in mid-2012 through mid-2015, these sectors have grown their investment dollars by more than 145%, according to Mattermark data.
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About two years ago, we examined the new Second Seed, a tactic employed by startups who raise an initial seed round, achieve a set of milestones and raise a second seed round, before raising a series A. During the two years since that analysis, this trend has continued.
In the last 24 months, Second Seeds have grown From 7.5% to 18% of US technology seed rounds, both in number and in dollars invested according to Crunchbase data.
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Creating a sense of urgency is one of the most powerful sales tools available to SaaS companies. There are many different ways of accomplishing this, but one of the most common ways is to offer discounts that expire. Discounts are powerful incentives to increase sales. But, they have to be crafted correctly, or they can have dramatic impact on a startup’s cash position. This is why sales incentives should be designed hand-in-hand with the company’s finance team.
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Every morning, it seems like a startup raises a massive growth round. In fact, the data proves the point. In 2014, there were 251 working days and 211 $40M+ growth rounds - just about one per day.
In contrast to the frenetic private market, there were 15 US IT venture-backed IPOs with offerings greater than $40M last year, slightly more one IPO per month in 2014. Private market rounds were 14x as common as IPOs in 2014, compared to the 2004-2007 era, when IPOs were about as equally common as large private financings.
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Whether implicitly or explicitly, it’s critical for a startup to map out accounts to understand the purchasing dynamics of a buyer. When sales teams start selling, their goal should be to create the sales playbook. The playbook all begins with understanding the key dynamics among the five players in the sales process. These are the five people:
The Proponent of the Sale champions the sales. The Salesperson must equip this champion with all the tools to convince the other stakeholders to pursue the transaction.
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If you want to understand how to build a great SaaS sales organization, you should read Mark Roberge’s The Sales Acceleration Formula. It’s the single best book on the topic.
Mark is the Chief Revenue Office at Hubspot, a company which has created tremendous success by perfecting the inbound marketing plus sales model. The book is invaluable for every founder, CEO and member of the management team because it not only explains how the Hubspot sales team is structured, but why the structure came to be.
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There’s a magical property to the classic sales funnel SaaS startups use to evaluate the effectiveness of their go-to-market organizations: an increase in effectiveness at any stage of a sales funnel cascades through to the end funnel. But improvements to the early parts of the funnel are more important than those later in the funnel, because they meaningfully improve key SaaS metrics like cost-of-customer acquisition and pay-back period.
Most startups employ a four stage funnel: prospect, lead, opportunity, customer.
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Over the past four years, the amount of seed investment has increased by more than 200%. And the typical seed investment size has risen by 25% in just the last 12 months.
In 2014, for the first time in four years, median Series A round size have increased. When we analyzed the data last year, this wasn’t the case. But in 2014, the median Series A hit $6.8M, increasing 14% over the trailing three year average.
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After writing about the Seed Market in 2015, I wondered whether I could find some data to support Sam Altman’s observation that acquihires have fallen in frequency over the past year by 66-75%. The chart above shows an estimate of the acquihires in US technology companies over the past four years.
There is no perfect data set on acquihires because many of these transactions are never announced. So this estimate, which I created using Crunchbase data, likely underestimates the total number of acquihires in every period.
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Once a startup has found an initial product market fit, the business must evolve the way it models its growth. Before product market fit, a startup’s financial projections focus on costs. The company has no visibility into their revenue growth. So, the management team should minimize costs, maximize cash and lengthen runway to provide as much time as possible to find that product market fit. As we’ve seen, staff are both the greatest asset of a business and also the greatest cost, at least initially, and modeling those is straightforward.
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In 2009, the Corporate Executive Board, a consultancy providing expertise to some of the world’s largest companies, studied the distinguishing characteristics of great sales people and well-run sales processes. They surveyed more than 6,000 sales reps across 90+ businesses. The analysis revealed three interesting things.
First, most customers don’t perceive a difference between competitive products.
Over and over we found that customers, generally speaking, see significantly less difference between us and the competition than we do ourselves.
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It’s becoming more and more expensive to scale a startup in San Francisco. In fact, it’s twice as costly to operate a startup in 2014 as it was in 2009.
According to data from Jones Lang LaSalle, office prices in San Francisco have nearly doubled in five years from $36 per square foot per year to $63. Typically businesses allocate about 150 square feet of office space per employee. Given the market rate for office space and annual salaries, hypothetical 20 person Series A startup will spend about $200k per year per employee in 2015.
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After a SaaS startup has achieved some degree of product market fit, the business will likely ramp the go-to-market teams, and in particular the sales team. Measuring and tracking the performance of a growing sales team is critical to the growth and financial health of a business.
The report above is the most effective view of the performance of a sales team I’ve found for SaaS startups. A VP of Sales at a Redpoint portfolio company introduced this report to me, and now I can’t live without it.
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SaaS companies are marvelous businesses. They are more predictable than most other kinds of companies and in addition they demonstrate leverage from technology. The best SaaS companies are able to build strong brands, develop scalable products and hire teams to bring those products to market effectively.
To show the power of the convergence of these forces, I’ve analyzed the employee productivity patterns of the 50+ publicly traded SaaS companies.
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What percentage of SaaS IPOs in the last four years have the founding CEOs of the business been CEO at the time of IPO?
62.5%. In about two thirds of SaaS IPOs from 2011-2014, the founding CEO is the current CEO.
Is there a meaningful difference between the equity stake of a founder who is CEO at IPO, and a founder who is no longer CEO?
About 1.1 percentage points.
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Are startups growing much faster than they have in the past? The chart above plots the time required for startups to raise rounds at $1B or greater valuation, over the past ten years. The blue line is a logarithmic regression demonstrating the decrease from about 7.5 years to less than 2.5 years. The answer seems to be an unequivocal yes.
Let’s break this chart down by type of company: B2B and B2C.
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At the DEMO conference, Danielle Morrill, the founder and CEO of Mattermark presented an impressive statistic. Seed, Series A, Series B and Later Stage startups employ 1M people, up from 650,000 just six months ago, according to Mattermark’s data sources.
While it’s logical to think that the largest and fastest growing startups might employ the majority of startup employees because they hire at stupendous rates, this isn’t the case today.
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At the beginning, a startup is only people, a group of friends who share a passion to change the world in some way. There is no product, no brand, no management team, no PR, no swag, no internal processes, no hierarchy.
Over time, by virtue of all the effort of the people within the company, startups evolve into semi-autonomous machines; machines that acquire and serve customers with a great product in exchange for revenue.
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Most interviews are a waste of time. According to Adam Grant, a professor of Organizational Behavior at Wharton, “standard interviews only accounted for 8% of the differences in performance and productivity.” The typical interview fails to predict performance accurately because it is subject to interviewer biases and candidate biases, and fails to compare the candidates with a consistent rubric.
In a talent market as competitive as today’s, startups who can more accurately assess candidates’ future performance will create a tremendous recruiting efficiency and ultimately execution advantage.
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Seed investments are booming. According to Crunchbase data, the number of seed rounds in US companies has grown by 10x in 6 years from 200 per year to more than 2,200 in 2013. This is driven by the expansion of the institutional seed investor and the tripling of seed stage capital available to founders.
With all that capital entering the market, seed round sizes have also increased. The top quartile seed rounds have expanded by 44% in 8 years, and by 75% since 2008.
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Most startups play defense when discussing pricing with customers. They dance between asking for too little, leaving money on the table, and asking for too much, only to lose the customer’s interest. The very best companies lead their customers in that dance. They use pricing as an offensive tool to reinforce their product’s value and underscore the company’s core marketing message.
For many founding teams, pricing is one of the most difficult and complex decisions for the business.
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At some point, most startups will begin to measure their customers’ happiness. Customer satisfaction is an important predictor of loyalty and can foster fantastically efficient word-of-mouth growth. Many companies employ Net Promoter Score to quantify customer satisfaction. NPS measures the fraction of a customer base which are promoters and detractors of a company’s product. I’ve been told that NPS scores greater than 50 are impressive, but this is simply a rule of thumb.
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When we analyzed the impact of location on a startup’s ability to raise capital, we found no statistically significant difference. Startups in San Francisco, Seattle, Pittsburgh, Austin and many other cities all demonstrated similar ability to raise follow-on rounds. But is the same true for investors of various locations? Do investors across the US invest similarly across Seed, Series A and Series B?
They do not. In fact, there is a statistically significant difference in investment patterns of investors depending on their location.
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Bill Macaitis, the former CMO of Zendesk, articulates how a SaaS marketing team should operate better than anybody else I’ve met. At a recent Point9 conference, Bill outlined the 9 marketing disciplines of great SaaS companies and how they fit together to create a marketing powerhouse. I’ve copied my notes from Bill’s talk below.
Ops & Analytics Team
The operations and analytics teams is the first marketing team every SaaS company should build because this team erects the experimental infrastructure for determining which marketing tactics are viable.
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The startup acquisition market is poised to have its best year in nearly a decade. If acquirers maintain the same pace from the first nine months of the year through Q4, more than 450 venture-backed startups will have been acquired, generating more than $25B in proceeds.
Given this state of affairs, it’s a good time to take stock of the major trends in the startup market. I’ve observed four:
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I started working in venture capital three months before Lehman imploded. After the bankruptcy, the fundraising market contracted as investors internalized the new normal of the public markets. Over the past six years, the fundraising markets flipped from quite bearish to mildly bullish to extremely bullish. Or at least, that’s the way it feels to me.
I’ve often struggled to convey the magnitude of the change and its unevenness. So I thought I could do it with data.
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The market for startups raising capital has changed dramatically over the past few years. Round sizes have ballooned: startups raise 50%+ larger rounds than a few years ago. The looming Series A crunch never occurred. Instead, we’ve seen the bifurcation of the Series B market. Series Bs are the spring of hope for some startups who raise megarounds and the winter of despair for others who must compete for increasingly scarce Series B dollars.
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Bill Gurley and Fred Wilson have focused on burn rates as an important topic for startups. The immediate question that follows this commentary is: How much does the typical startup burn throughout its life? And what is a “risky” burn rate for a company?
I use a rule of thumb to evaluate the burn rate of a Series A startup. I multiply the number of employees by about $10-12k, depending on the location of the company.
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The startups that build and retain the best teams develop a huge competitive advantage. It’s no surprise that managers are the most important influencers of team development and retention.
The most frequent and consequently most powerful tool for managers to coach, develop and lead their teams are one-on-ones, weekly meetings between a manager and his or her individual reports. Most one-on-ones are ad-hoc, loosely structured 15-30 minute meetings. While extemporaneous meetings can work, leaders who manage their teams this way forgo an important opportunity to further their team’s success.
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I remember many the great TED talks I’ve watched. Sir Ken Robinson’s ,“How Schools Kill Creativity” and the story of a little girl whose genius was unrecognized in school until she was allow do dance, and ultimately became a prima-ballerina, is simply unforgettable. In most of my meetings, I remember Amy Cuddy’s “Body Language” talk for a split-second. Commanding her body language changed her career. And who can forget Steve Jobs announcement of the iPhone?
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I wish I had been in Stanford’s CS183 class in 2012, the year Peter Thiel taught it. A student of the class, Blake Masters, copied all the class notes and I read every post, like thousands of other visitors to the site. In a few days, Thiel and Masters will release a book version of these notes called Zero to One: Notes on Startups or How to Build the Future.
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Is there an optimal price for a product to maximize a SaaS startup’s sales efficiency? As I’ve been analyzing the S-1s of publicly traded SaaS companies, most recently of HubSpot and Zendesk, I’ve been asking myself that question. Do million-dollar enterprise price points and field sales people create more efficient sales organizations than content-marketing-driven SMB startups? Or are the high-velocity inside sales teams of the pursuing the mid-market, the most efficient?
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Earlier this week, Google celebrated the tenth anniversary of its IPO. I re-read the Founder’s IPO Letter and found this passage which captured so much about Google’s values:
Google is not a conventional company. We do not intend to become one…We will not shy away from high-risk, high-reward projects because of short-term earnings pressure. Some of our past bets have gone extraordinarily well, and others have not. Because we recognize the pursuit of such projects as the key to our long-term success, we will continue to seek them out.
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Though the term k-factor, a measure of the virality of an application, has waned in popularity since Facebook’s sheep-throwing glory days, the idea of spreading a product through referrals lives on. We all know a good referral mechanism when we see one. Dropbox’s invite-a-friend feature which awards free storage for both the inviter and the invited is the canonical example and resulted in torrid growth for the company. In April 2010, Dropbox users sent 2.
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Consumer companies on the whole tend to grow faster and do so will less spending on sales and marketing, and research and development than SaaS companies.
The chart above shows the revenue growth rates of 60 or so recent consumer and enterprise IPOs by years since founding. Enterprise/SaaS companies in the sample achieved very small revenue in their second year and grew consistently through year 8, at which point there’s a decline.
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Yesterday, I spoke to a small group of people at Google. By coincidence, the presentation was held in the same building I used to work in, and a wave of nostalgia swept over me. Participating in Google’s speaker series brought back memories of when I was in the audience seven or eight years ago. I’ll never forget the first time I met Paul Graham in that very same room right after the first Startup School.
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More than 100B mobile applications have been downloaded since the launch of the Apple iOS and Google Play stores. As the number of users, downloads and apps have exploded, the dynamics of the app store have also changed. During the past 18 months, the competitive behavior within the Free Apps section of these app stores has evolved substantially in four meaningful ways:
First, the Android Play store has become substantially more welcoming to startups/new entrants than 18 months ago.
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When starting a company, founders often decide between two structures: the S-Corp and the LLC. But, as James Surowiecki writes in “Companies with Benefits,” there is a new option called the B-Corporation, the Benefit Corporation.
The Benefit Corporation became an option in 2010 when Maryland’s legislature signed it into law. Subsequently, nearly twenty states have followed suit including California and Delaware. In the past four years, more than 1,000 companies have become B-Corporations including some very well known brands in technology and consumer goods: Warby Parker, Patagonia, Seventh Generation, Method Soaps, Etsy, New Belgium Brewery, Ben & Jerry’s, among others.
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I’ve listened to thousands of fundraising pitches in my six years so far at Redpoint. Some with demos, some without. Some with hockey-stick charts, and others just an idea. I’ll never forget one meeting when the founders presented an entirely hand-drawn deck on 12 pieces of paper. The extent of founders’ creativity is hard to over-state.
Most founders do cover the essentials of a pitch in their presentations. But what distinguishes the best pitches?
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One of the most important changes is the workplace in the last 20 years is the notion that most employees are free agents. We are hired and fired and resign at will. It’s a markedly different era than the career salarymen of IBM’s heyday who remained with the company for decades from college graduation through retirement. In this highly-competitive talent market, where every employee is a free agent, hiring and retaining talent has become a key strategic advantage.
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“Advice is one person’s experience generalized”, an entrepreneur told me once. “It’s a single point of view with all kinds of survivorship and attribution bias. Advice can be a terribly dangerous thing, because it can be used as a shortcut for thinking.”
When I asked how he responded to requests for advice, because as a successful entrepreneur he was often solicited for it, he replied that he first shared the structure and the framework he used to look at the problem.
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Recently I met a startup founder who explained a technique for building his product roadmap in a novel way. “We research what our users are doing three minutes before they start using our product and the three minutes after.” I like the idea because it is a simple and ingenious mechanism for brainstorming product ideas, and this type of product development exploration evokes empathy from a product team, which is a the first step of the Stanford d.
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image credit: Svjetlana Tepavcevic
Is it better to raise your startup’s seed round from only angel investors, or is it better to include a VC or two? Several founders on the precipice of launching their seed fundraising processes have asked me this question.
It’s a very difficult one to answer hypothetically because there are many different variables to balance. For example, VCs may invest larger sums than angel investors. The imprimatur of a VC’s investment in a company might help convince potential customers and recruits.
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For the past several years, early stage VCs have entered the seed market with vigor. VC’s entry has resulted five different important trends in the past five years:
The total dollars entering the seed market has increased by 132%. The mean seed round size has increased by 114% to $1.4M. VCs’ typical seed investment has grown by 50%. Mega-seeds, those seed investments over $2M, have reached historic highs exceeding 80 instances in 2013.
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Marketing investments are unlike any other investment a startup. They are the least-tangible, least-measurable investments and that’s why they are perceived as the riskiest investments.
After raising a round of capital, a startup’s management team has a pool of capital to invest. They can choose from different projects: growing the engineering team to build products faster, spending more on infrastructure to speed page load times, moving to a bigger office, adding salespeople to prospect more customers.
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HBS Professor Michael Porter created the Five Forces Framework in 1979 in a landmark book called Competitive Strategy. One of those forces, the threat of substitutes has intrigued me for quite a while because in the world of the Internet, the prevailing wisdom on switching costs argues they are trivial on the web. After all, how difficult is it to change from Google search to Bing search? This is the question Google wrestled with during its search share battle in the mid 00s.
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Is there a common characteristic of successful freemium companies? Piotr asked this question earlier this week. This is the framework I’ve seen work well for freemium startups.
At its core, freemium is a novel marketing tactic that entices new users and ultimately potential customers to try a product and educate themselves about its benefits on their own. By shifting the education workload from a sales team to the customer, the cost of sales can decrease dramatically.
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Fenwick’s report on the state of the venture market and I came across these three data points that summarise one facet of the market in Silicon Valley succinctly:
11 venture backed companies raised funds at a valuation of over $1 billion in Q114, more than did so in all of 2013. Hedge and mutual funds participated in 23 venture deals through mid-April, compared to 41 in all of 2013 Investment in later stage comprised 47% of all dollars invested in Q1, while Series A investment fell to a five quarter low at 15%.
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In this week’s New Yorker, Jill Lepore reviews Cubed: A Secret History of the Workplace, a book whose author asks the question, what is the work place of the future?
The information worker is a relatively new concept. Peter Drucker coined the term in the 50s. By then companies had already developed new ways of housing information workers. The very first information workers were accountants hunched over “Bob Crachit” desks in the back rooms of factories.
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Startups are in a state of perpetual change. During a startup’s first few years of establishing product market and winning the first set of customers, this state of change is obvious. But as a startup scales, the company must adapt by learning and reinventing. Whether it’s building the processes to grow the team, creating new sales and marketing initiatives to pursue adjacent customers, developing customer success teams or handling an unforseen crisis, this process of reacting to the market and evolving the company happens at every level in each function.
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Predictability is sexy. Startups that have tuned their growth engines well enough to accurately forecast their growth, presuming these growth rates are attractive, will command much higher valuations in the market, simply because there is less risk in the company. As a result, investors prize these companies disproportionately.
The challenge with predictability is predictability isn’t an end state. A business doesn’t become predictable one day and remain in that state in perpetuity.
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Has there been optimal time of year to raise a seed round? The chart above shows the number of seed rounds by quarter of the year from 2009-2013. At first blush, it would seem that the first quarter of the year is the most attractive period to raise a seed round. But that’s a faulty conclusion.
First, there’s no statistical difference between the number of rounds raised in each quarter, according to a t-test on the four years of Crunchbase data I tested.
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Some of the best content to be found about startups is locked in books. Thomas Kjemperud asked me yesterday for a 140 character recommendation of one book for founders. Reducing my list to just one and condensing an argument for why founders ought to read it in just 117 characters was just too great a challenge for me. Instead I’ve written a blog post about the nine favorite books I’ve read over the last five years have helped me understand startups and the processes that make them successful.
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Last week, we reviewed the state of the public SaaS market and observed the average company had lost 33% of its value from their highs. How have newly public consumer companies fared in the same environment and what does that mean for the tech industry broadly?
I created a basket of most of the venture-backed consumer IPOs since 2010 and added bellwethers Facebook and Google. Above is a chart of these companies enterprise value (market cap minus cash) over the past six months.
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At a board meeting last week, one of the VPs of Marketing I’m lucky to work with presented a brilliantly simple way of explaining the evolution of a startup’s marketing tactics. I’ve drawn a diagram of the idea above, which borrows heavily from McKinsey’s 3 horizons.
Startups have many different marketing options at their disposal: SEO/SEM, print, radio, TV, mail, affiliate, content marketing…The list goes on and on. Faced with this litany of options, how does a startup maximize their marketing effectiveness?
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Earlier this week, I wrote about the increase in cash compensation and decline in equity grants to VPs of Engineering and Product in startups. I received a lot of comments about the analysis, and in particular hypotheses to explain the data. I dug a bit deeper into the data set to find an explanation.
Founding employees keep more equity today than ever through the Series A and Series B. On average, founders retain 30-33% more equity than 4 years ago through those first two rounds of institutional investment.
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Since 2008, there has been a secular trend to increase cash compensation and decrease equity to startup management teams. Tho two tables below tell the story for VPs of Engineering (VPE) and VPs of Product (VPP) across the US broadly and in the SF Bay Area.
VPEUSSF Cash+10%+16% Equity-19%-17% VPPUSSF Cash+26%+8% Equity-31%-25%
In the past 5 years, VPEs have benefitted from a 10 to 16% increase in their cash compensation, but have seen their equity grants fall by 17-19%.
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The chart above compares the contribution of two hypothetical inside sales people with $400,000 quotas to an early-stage startup’s finances. In this case, contribution is the 18 month revenue of sold customers tallied cumulatively minus the salary costs of $100k annualized of the sales person. I’ve modeled a six month linear ramp for the sales person to reach 100% of quota.
The red line shows the case for a successful sales hire.
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Pricing is one of the hardest things for startups to get right because there is no universal and constant price optimum. As a SaaS startup’s product evolves and offers more features, the product’s price points should increase. As a sales team or marketing team engages different customer segments, price points may vary wildly. The contract for a F500 should have very different pricing than a startup, because of the stark contrast in the different companies’ willingness to pay and value associated with buying the product.
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When the meeting first appeared on my calendar, I incredulous at the idea of a management coach. “A business shrink who would sap another hour from my frenetic day,” I thought.
I was a few months into being a product manager at Google and stressed because I was in over my head. Most difficult of all, I lacked any type of formal authority. Google structured its product teams to have authority through influence, not direct management of engineering teams or marketing teams or sales teams.
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Last week, we analyzed the fund raising history of billion dollar SaaS companies and determined SaaS startups are raising nearly twice as much capital as 16 years ago before going public. Given that trend, I wondered if there is there any truth to the idea that startups today require less capital than before to succeed.
To answer that question, I’ve taken the same basket of public SaaS companies and computed a revenue-on-invested-capital (ROIC) across the four 4-year IPO cohorts from 1998-2014.
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One of the cloud’s great promise has been cost-reduction and for a while, we’ve chanted a mantra that startups require less capital than before to get started and ultimately succeed. As the number of publicly traded SaaS companies has grown with time, it’s possible today to examine whether those statements are proven in the data, at least for those 41 publicly traded companies.
I’ve gathered the financing histories of the 41 publicly traded SaaS companies and adjusted them for inflation.
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Imagine a city council meeting with three agenda items: a $100M power plant zoning approval, a request to build a $10,000 bike rack for city sidewalks and and a $100 proposal to buy refreshments for the annual picnic. The power plant discussion takes all of 3 minutes to reach approval, as does the refreshment budget. But the $1000 bike rack debate drags on for hours as council members debate the right materials, the best color scheme and the right way to announce the project.
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Over the past few years, I’ve debated the existence of a Series A crunch and found in that analysis that the volume of Series As was increasing. This trend hasn’t abated. The number of Series As has grown by 31% annually for the past 5 years, reaching more than 831 Series As in 2013, up from 284 in 2009. In short, no founder should be concerned about the Series A market.
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Each morning’s news seems to bring another fund-raising announcement of ever larger scale. Just a few months ago, Pure Storage raised $150M in the largest ever venture investment in a storage company. These record financings certainly generate significant press interest. But how representative of the fund raising environment are these mega-rounds?
The chart above breaks down fund-raising activity in US tech companies using Crunchbase data. Each chart shows the number of rounds raised bucketed by size from $0 to $5M and up to $150M to $200M from 2005 to 2013.
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Last week, Sean Ellis made an interesting comment in response to this post on public SaaS companies’ growth rates:
I’m guilty of giving the same advice to startup founders without providing a transparent rationale. This post is my explanation of why the 15-20% MRR growth number is a reasonably good target for post-Seed/pre-Series A SaaS startups to aim for.
Let’s create a hypothetical SaaS startup called SaaSCo with a set of founders who aspire to a fund-raising trajectory like the one in table below.
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Over the last 12 years, the number of startups founded has grown each year by 25%, according to Crunchbase data. That’s quite an acceleration each year! See the chart here. As the number of companies in a sector grows, do the odds of successfully raising capital decrease?
The chart above shows startup company formation rates, the number of new companies formed each year from 2004-2011 by Crunchbase sector. I didn’t graph the 2012 or 2013 data because the Crunchbase team told me the data sets need about 2 years to mature.
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Raising capital from venture capitalists at any stage can seem like a very strange, ambiguous and amorphous process. I’ve written about the way Redpoint diligences/researches a startup and its market and what questions we tend to ask at each stage. In this post, I’ll focus on the process from entrepreneur’s point of view.
When raising capital, entrepreneurs will see potential investors move through four phases of investment decision-making process: screening, socialization, diligence, and decision.
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The process of creating the right culture in a startup has always been mysterious to me. Each company’s culture evolves in its own way. I’ve wondered whether the culture is set by the personalities of the founders, or prominently displayed value statements and mission, or biases purposely imposed in the hiring processes like Google’s googliness filter. Or is understanding the psychological forces at play among employees the most important element?
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A few days ago, Simply Business published an infographic and data on the acquisition patterns of Amazon, Apple, Facebook, Google and Yahoo. Looking at that data, I wondered which acquirers pay the most for startups. Ideally, this data provides some negotiating leverage to founders selling their businesses.
I’ve prepared three charts and a table to tell the story. The first compares the average acquisition prices over the life of each of the tech monoliths.
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When a startup is confronted with the prospect of hiring a head of marketing, founders heads often spin.
What should be the day-to-day tasks for this person? What skill sets are important? Because of the seeming abstract nature of marketing, founders sometimes delay finding a head of marketing until they feel acute pain, at which point they can clearly identify the attributes of the right candidate. But underinvestment in marketing, like underinvestment in infrastructure or software or product, isn’t a good idea.
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Great entrepreneurs can come from anywhere. But do the locations of startups affect their ability to raise follow on capital? Do seed stage companies in the Bay Area face lower likelihoods of raising a Series A because of more competition? Or is it that New York based startups, because of a smaller ecosystem, face more difficulty?
Using Crunchbase data, I charted the financing follow-on rates across the 12 US cities in which at least 10 seeds, 3 Series As and 3 Series Bs have occured in the Crunchbase data set from 2005-2014.
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Has it become harder to raise money? is a question I hear all the time. On one hand, the total dollars invested by VCs is relatively flat at just under $30B per year, according to the NVCA. On the other hand, the stories of difficulty raising series As and Bs have become a steady drumbeat.
To get some sense of the patterns, I analyzed 917 companies from seed through Series B over the past 14 years, using Crunchbase data.
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The average seed stage startup has a 20% chance of raising a Series A according to Crunchbase data for IT startups who raised seed and Series A rounds between 2006 and 2013. But this figure varies significantly sector by sector.
Below is a chart of the different startups’ sectors and their rates of raising Series A capital net of the mean of 20%. To contrast two diametric examples, 40% of seed-stage search startups raised Series As, while on average only 10% of hardware startups raise Series As.
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Naming your startup can be one of the hardest things to do when starting a company. Each founder must agree. The domain must be available to buy. Last and perhaps most importantly, investors need to like it because the first letter of startup’s name has meaningful impact on how easily the company will be able to raise money.
Whatever you do, don’t pick a name that starts with the letter J.
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How large of a seed round should founders raise to maximize their chances of raising a Series A? Smaller seed rounds are simpler and faster to raise because they typically require fewer investors. They may also require less dilution because of the smaller investment size. On the other hand, to raise a Series A, the startup needs enough runway to hire a team and prove certain milestones to Series A investors.
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In What’s Up with the Series A, Nikhil Basu Trivedi documents the bifurcation in the Series A market. While there are a handful of startups that raise blockbuster Series As of greater than $10M, the average Series A investment size remains relatively constant over the past 6 years just around $5.3M for US technology companies according to Crunchbase data[1].
After reading his post, I wondered if a big seed round is a leading indicator of a big series A.
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OODA was a technique coined by John Boyd, one of the leading military thinkers of the last 100 years, based on the German’s Blitzkrieg-style warfare which prioritized speed and surprise over the traditional win, hold and grind attrition techniques of trench warfare. After @pmarca tweeted about the concept, I read one of the books on the topic called Certain to Win.
Boyd’s thesis is that leaders of successful teams have to enable their organization to move rapidly, which means empowering people at all levels to make decisions.
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Aside from a startup’s internal considerations about the right time to raise money, founders should weigh the seasonality of the fund raising market when planning their raise. There’s a rule of thumb batted around the valley that the worst times to raise capital are in the dog-days of summer and after Thanksgiving. As it turns out, this aphorism is only a half-truth.
Below is a chart of the dollars VCs have invested by month of year.
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When I worked as an engineer, I loved crafting code and feeling the satisfaction of having built something each day. But there was one thing about coding I never grew to love, despite its importance: forecasting my coding time.
Every two weeks, I trudged into a planning meeting that exposed my incompetent forecasting. During these meetings, each person in turn would review their commitments for the last two weeks and provide an update.
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Each year the National Venture Capital Association and Thomson Reuters release data characterizing the state of the startup market. I’ve analyzed the 2013 data and there are three important trends I observed. All in all, the startup exit market is quite healthy.
Startup exit values are increasing more than 7% per year, on average. The number of exits is flat-to-down during the ten year period I studied. The public markets have opened to startups again, doubling their share of exits.
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On the heels of last week’s post about the Health of the Public Technology Market, Felix Salmon asked the thought-provoking question above. Despite the 68x growth in the value of technology market caps since 1980, are newer average technology companies worth less?
Surprisingly, yes.
The average public tech company value has falled by more than 2/3rds from $4.3B in the early 80s to $1.4B today, as measured in 2014 dollars.
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In “Why Winning Streaks End”, Rosabeth Kantar, a professor at HBS, explains the key to maintaining momentum in any company is maintaining the discipline of every day processes. Similarly, Atul Gawande’s book Better echoes this idea. For surgeons, the best way to keep patients safe and healthy is ticking through a checklist before each surgery.
As I’ve watched a handful of startups grow, the pattern I see emerging from most of them is their ability to persistently transform chaos into process.
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I’ll never forget the first time I was assigned a sales quota. I was six months into a sales role at Google in which I on-boarded and managed the accounts of social networks running AdSense ads. Our key metric was customer satisfaction and retention. After a few months, I was starting to get into a groove. And then, our team was assigned a new manager who put the team on a quota, sending me into a tailspin.
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In the last 35 years, the tech industry has exploded in size from $62B in total market cap to more than $9.7T today, as the chart above shows. In that time, the tech industry has birthed some behemoths. In 2013, Apple became the largest publicly traded company, the first time a technology company held that distinction.
Despite the number of massive companies built over the past three decades, these tech giants represent an increasingly small amount of the total value in the technology sector.
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Earlier this week, Zappos declared they will abandon traditional management structure for holacracy, a management ethos that eschews pyramids and hierarchy in favor of self-organizing groups, called holons. It’s not a structure without management, but one of distributed authority and management. Below is a schematic describing holacracy at a high level.
Holacracy has been adopted by a handful of other companies including David Allen’s company, the blogging platform Medium and some non-profits.
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Like many others, during my work day I fall into the firefighting trap, a time mis-allocation problem that leaves me focusing on urgent, but not necessarily important tasks. Firefighting is addictive because it’s fast-paced, nonstop and fun.
But firefighting is exhausting and leaves me feeling as if I haven’t made progress toward my goals. In addition, firefighting inhibits effective time allocation. A week can pass and I find that the non-urgent but important projects like preparing for a board meeting and researching a new sector like Bitcoin have been starved for time.
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You’re walking down the hallway at work from one meeting to the next. A colleague or report stops you en route, asks for a minute and presents an important problem. It’s easy to respond with “let me think about it” and duck into the meeting. In that half-second, all the responsibility of the decision has been transferred. Unlike a minute ago, you have the monkey on your back.
The challenge with these situations is two-fold.
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One way of measuring the efficiency of a company’s revenue model is to benchmark revenue per employee. Google and Facebook, the two most efficient companies, generate $1M per revenue per employee per year.
Setting aside those exceptional cases and focusing instead on SaaS companies, the typical average revenue per employee is about $190k to $210k per year. The histogram above shows the ranges for publicly traded SaaS companies.
In the scatterplot above, which compares revenue per employee to revenues (in log10 scale), the outliers pop out.
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Financial statements are a Rosetta Stone for startups. They reveal the strategies and the tactics of how to bring a product to market. These are the ten metrics I look at when sifting through a startup’s operational model, whether when considering an investment or in a board meeting.
Revenue growth indicates how quickly a company can grow under the current way of doing business. The top line shows whether the market affords steady growth (SaaS) or lumpy revenue growth created by the long sales cycles of big customers (Telecom) and whether the company must sell one product or a collection of complementary products.
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The traditional theoretical price demand curve is often drawn like this. The chart makes two points: there is some relationship between price and demand / revenue opportunity, and customer segments underpin that relationship. Each segment demands different products to satisfy different needs and presents a different revenue/profit opportunity.
Even if the details are very hazy, price demand curves are useful tools to inform product strategy and prioritization. To make PD curves useful requires marketing research.
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Raising money for a startup is expensive. The typical legal fees for a Series A are about 1% of the total money raised: roughly $40k on $4M. Of course, this doesn’t factor in the time for the process and the dilution of the investment.
But if your startup is considering an IPO be prepared to pay eight times as much in fees. Across 360 venture backed technology IPOs in the last 10+ years which on average raised $107M, 8.
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When startups are acquired, there are many considerations in accepting an offer. Does the vision of the acquirer fit the startup? Will the startup operate independently or be integrated? What is the price and structure of the transaction?
Most of these questions have to be answered through extensive conversations with suitors. As for the structure of the acquisition, there’s data that can be used for benchmarking. I’ve assembled about 2400 M&A events of venture-backed technology companies since 2000 to compare the fraction of the total consideration which is stock and cash.
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Sam Altman argues in How to Grow Huge that the only way for a startup to grow really large is to create products that people love and promote. As the user base grows, users attract ever larger numbers of users to the product, producing compounding growth.
The point is a terrific one and I think it can be generalized. To grow really large, startups have to create proprietary distribution channels. The one Sam champions, word of mouth marketing intrinsic to a strong brand, is one example of a proprietary distribution channel.
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A key component in a startup’s formula for success is educating customers about the product and driving sales. The sales and marketing teams of a startup are responsible for this. There are many ways to structure sales and marketing teams.
The diagram above outlines a sales and marketing team structure that I’ve observed across many startups. It is consistent with the organizational design Salesforce used to drive revenue from $0 to $100M, described Aaron Ross’s book, Predictable Revenue.
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At its core, a startup’s advantage in the market is the speed created by focus. When a team is well orchestrated, they can accomplish amazing things. Creating an environment that fosters communication best is therefore an essential part of startup management. But how best to do it? Founders have to balance span-of-control with span-of-managerial-responsibility.
In an article this week’s New Yorker, Amazon’s founder/CEO Jeff Bezos is quoted on the subject with a contrarian point of view:
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How much cash does a tech venture-backed company burn through before IPO? The median 2013 VC-backed tech IPO burned $33M and the average company burned $76M. The chart above shows the net income/burn rate of 2013 tech IPO by years since founding.
Four categories of companies jump out in the chart: the profit leaders, the middle-of-the-pack, the negative hockey stick, and the go-for-broke. The profit leaders, Veeva(VEEV) and RetailMeNot(SALE), have generated tremendous profits from the outset.
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In response to yesterday’s post on management design patterns, many readers asked for examples of best practices. So I’m going to write about the management best practices I have been taught and I have observed in startups. This is the first post of that series. The first management technique is called Situational Management, one that my wife, a terrific manager at Google, taught me.
A manager’s most important function in a startup is to motivate employees to accomplish the business’s goal.
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Earlier this week, I chatted with a friend of mine who has founded an incredibly successful business, which he and his co-founder have been scaling impressively. I asked him about his biggest learning over the past few years. He said before having started his company and having built the team, he perceived management as a Band-Aid, as a fix for something wrong in the organizational design, communication or day-to-day operations of the company.
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Steven Blank wrote yesterday about a novel way of depicting a startup’s competitive landscape in a pitch deck, called a petal diagram. While the petal diagram is a great way of describing an ecosystem or a go-to-market strategy, I don’t think it’s a great way to show a competitive landscape because petal diagrams don’t communicate the startup’s unique way of competing in the market.
The ideal competition slide accomplishes at least one but up to four goals.
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Constrained by a limited budget while seeking to grow as quickly as possible, startup founders must decide how to balance growing their engineering teams with their sales & marketing teams. To help inform those decisions, I’ve benchmarked the relative sizes of the sales and engineering teams of the 36 publicly-traded SaaS companies from founding to IPO, typically 7 years later.
The graph above shows the average Sales & Marketing allocation in turquoise and Research & Development investment in red.
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In 2013, growth trumps all other considerations. For the average 2013 venture backed tech IPO, half of the startup’s enterprise value is explained by its growth rate, while none of it is explained by profitability.
The market has spoken and startups have responded. Of the 25 IPOs I surveyed, both pending and completed, only 20% are profitable. On average, these startups operate at about -20% net income margins but are growing at 162% annually.
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How do you validate an idea for a software startup before the product is built? Last week, a founder of a SaaS business and I were wrestling with this problem. It’s a question without a universal answer. After a while, we came up with quick and dirty rule of thumb for his business. Can he hit his quota?
Suppose this founder wasn’t the founder, but the first inside sales hire for the startup.
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There’s an interesting phenomemon occurring in founder compensation for post-Series A companies: founding CEOs are swapping cash for larger equity stakes in their companies. Founding CEO salaries, post Series A, have fallen by about 24% while founder equity has increased by 32%.
This trend is broad. Each year, Redpoint portfolio companies participate in a compensation survey along with the portfolio companies of about 50 other firms, totaling about 800 startups. A third party pools the data to benchmark compensation trends across the executive functions in startups (CEO, VP of Product, VP of Marketing, VP of Sales, and so on) across the different financing series, locations, development stages and founders vs non-founders.
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There’s a perpetual and roaring debate in Startupland about the ideal founding team. Should the ideal team be entirely computer scientists? How important to success is having an MBA/business person? What about the stories of billionaire dropouts?
To answer that question, I’ve aggregated the academic backgrounds of 30 of the top startups of the past few years and analyzed the make up of each of those founding teams.
Above is a chart comparing the number of “billion” dollar startups by the total number of founders and the share of technical founders.
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Financial statements are the Rosetta Stone for a business. They are the most succinct way of communicating how a business operates to management teams and boards, who weigh the trade-offs of different investments.
In the early stages of the startup, financial statements aren’t used much as a management tool. They are most often used to keep an eye on monthly burn rate. But as companies grow, startups hire leaders to manage marketing and sales and product and engineering.
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At all hands meetings on Tuesday afternoons, our 75 person AdSense Ops team reviewed the most important metrics for the business: top-two box customer satisfaction scores, revenue growth and customer churn.
But unlike every other all hands meeting I attended, these meetings ended with a monkey and a dog. Our director, Kim Malone, would stand up and call for two stuffed animals, first, Whoops the Monkey and Second, Duke the Dog, both of whom employees had carried to the meeting.
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Freemium SaaS and free-to-play games have a lot in common. If you’ve ever harvested crops on Farmville or raised an army in Dragons of Atlantis, you’ve experienced an aspirational product. The same is true if you’ve signed up to use a freemium CRM, expense reporting tool or note taking app.
Freemium SaaS businesses, like free-to-play gaming companies, seek to build a large funnel, extract data from the free users, and leverage that data to increase the conversion and retention of users into long-term paying customers.
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It’s an important question and one that arises most often as a SaaS startup scales. Churn, masked by growth, becomes a limiting factor of growth. How much should the business invest in managing churn? Our SaaS benchmarks from earlier this week tell us the average public SaaS company has a 3% monthly revenue churn or a 2 year lifetime and a sales efficiency of 0.8, which implies a 5 quarter pay back period on cost-of-sales and cost-to-serve.
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For most startups, a website or mobile app is the primary place to establish and reinforce a brand, a critical part of building a valuable company. But brand health tends to be a hand-wavy, amorphous concept.
A founder and head of marketing at a company I worked with posed this simple but brilliant question to concretely gauge brand health:
If you removed the logo from the website/mobile app, could our customers identify the experience as ours?
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Credit: O'Reilly
Startups, you are doing data science wrong. That’s the title of a post penned by Ryan Weald in GigaOm this week. Weald echoes DJ Patil’s idea: “product-focused data science is different than the current business intelligence style of data science.”
Weald points to a different model of data scientist, an engineer, not a statistician, who can perform queries and based upon some insights, improve the product with a few code changes and a push to git.
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The single best content marketing channel is email subscriptions powered by Twitter/social media distribution. Thirty days ago, I began an experiment with this blog to determine whether email, Twitter or RSS would be the better content marketing channel. My goals with RSS, Twitter and email are two: first to maintain a relationship with a reader longer than a single website visit by creating a communication channel and second to use that marketing channel to drive re-engagement.
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We know by heart that half of our marketing dollars are spent improperly. But what’s worse is most products waste half of their chances to deepen a relationship with their customers.
There are two different kinds of email within products: product marketing emails and transactional emails. The first of these marketers optimize continuously and the other is oft forgotten.
Product marketing emails include acquisition campaigns, lifecycle marketing, retention marketing, cross-selling, up-selling and content marketing.
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One of the hardest but least spoken about transitions in a startup’s life is crossing people management chasm.
At the outset of the startup, there might be three people, then eight, then fifteen. As they grow, startups often create ad hoc managers I call team leads.
Team leads manage 3 to 5 people. They work alongside their team, whether engineering, sales or marketing and contribute actively to achieving the goals of that team team.
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It’s not engagement. Engagement, (time-on-site, page views, number of sessions per day) is the wrong concept because it doesn’t apply to most products. The best metric is share of habit. Engagement fails the majority of products as the best metric to optimize because maximizing engagement/time-on-site contradicts the product’s purpose. Google relentlessly whittles down the time it takes for users to complete a search. Sparrow reduces email client use. Online travel agents and e-commerce companies minimize conversion funnel duration.
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There’s a concept in computer programming called operator overloading that neatly describes the current Series A investment market. Overloading means using the same code for two very different purposes depending on inputs. For example, a programmer could redefine the + function so that instead of adding two numbers, the function would multiply the numbers if one of the numbers was negative. Overloading can create lots of confusion in programming because the same function name can return very different results.
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For bloggers and content marketers, choosing the right content syndication tools to distribute posts is critical to developing an audience. The author/marketer must balance four attributes: distribution, measurement, retention and brand. Table 1: Balancing Syndication Tools Attributes Channel Distribution Measurement Retention Brand RSS Poor: only one subscriber Poor: volatile metrics Good but declining So so: controlled by RSS reader Email Poor: only one subscriber, double-opt in Poor: limited engagement stats Poor: Low unsubscribe rates; GMail filtering decreases visibliity Good: total control over UI Content Hubs Great: siphon site traffic, new readers Good: proprietary tools or GA Poor: often lacking follow or subscribe mechanisms Poor: limited control over UI Social Media Volatile: dependent on the audience but huge upside potential Great: use traditional web analytics plus follower data plus retweet So so: follower model creates 2 way relationship; no way to assure delivery Good: customize profile + traffic goes to website RSS’s end is nigh.
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Credit: Karl Scotland
When I started at Redpoint in 2008, I wanted to find every way of analyzing companies I could. Consultants scrutinize the inner-workings of companies daily and create simple frameworks for explaining their operations. So I bugged a handful of friends with experience at the Big 3 consulting firms for their most used frameworks.
Recently I came across an old friend, a framework I studied then called McKinsey’s Three Horizons in The Lean Entrepreneur, an anthology of lean startup techniques and case studies.
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Cohort analysis provides deep insight into customer bases because cohorts expose how customer accounts grow, evolve and churn. Plus, cohort analysis provides a framework to evaluate product releases, marketing pushes and advertising campaign performance.
The Six Cohort Reports I Use to Understand Trends Below is a list of the six reports I create when analyzing cohorts. The combination of these six reports provides a robust summary of the state of a customer base.
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Atul Gawande, the American surgeon known for his book “Better”, wrote an article in this week’s New Yorker called “Slow Ideas: Some innovations spread fast. How do you speed the ones that don’t?” He describes the challenges faced by healthcare institutions all over the world: despite the advances in research, the most difficult part of improving care isn’t availing doctors and nurses to these breakthroughs, but changing their behavior. Some doctors simply won’t wash their hands no matter how many times they are told it reduces infection rates.
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This week, I visited a startup whose office had a very unusual feature: a usability lab. There I was in a soundproofed room with a table in the center flanked by two chairs, one for a user and one product manager or UX researcher. On the table, a constellation of web cams record a user’s facial expressions and interactions with a mobile phone or laptop while a microphone captures the user’s voice.
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Earlier this week, I met an experienced head of sales. During our meeting, the candidate shared a simple way of thinking about a startup’s sales process that resonated with me.
A startup’s sales evolution contains three phases: beta, reference customer, ROI calculator.
Beta: A founder of the startup develops relationships with a handful of customers who will work in tandem with the company to design, tune and improve the product.
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There’s an adage that is being passed around by entrepreneurs that goes something like this: “As soon as you raise this round, it’s time to start worrying about the next round.” I think it’s a wise adage.
It’s similar to my most important principle of fund raising which is “Raise enough money to achieve a set of milestones that will attract a subsequent round of investment from new investors.”
Those two ideas are simple and logical.
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Pricing is one of the most challenging decisions for any startup. One of the simplest ways of discovering customer willingness to pay is simply to ask them.
At first blush, that might seem a reasonable and effective solution, it is prone to wild inaccuracy. Absolute pricing judgments are hard without reference points. For example:
How much would you be willing to pay for a new iPhone?
It’s a very challenging question to answer in the abstract.
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The reason most startups go out of business is they run out of money. The CEO bears the responsibility for raising money, managing those assets and growing the business into profitability and ultimate sustainability.
But the CEO shouldn’t bear this load alone. To help defray that critical responsibility, the CEO ought to have a consigliere, an advisor who helps plan, allocate resources, and illuminate the trade-offs between decisions. That consigliere is the head of finance and the most under-appreciated startup team member.
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Who can forget gems like these word problems from 3rd grade math class?
Q: Jack walked from Santa Clara to Palo Alto. It took 1 hour 25 minutes to walk from Santa Clara to Los Altos. Then it took 25 minutes to walk from Los Altos to Palo Alto. He arrived in Palo Alto at 2:45 P.M. At what time did he leave Santa Clara?
It was during those classes that our mathematics teachers taught us how to work backwards through the problem.
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As a founder, you’re always selling. You’re selling yourself, your team, your product, your company. But your pitch is likely missing one of two key components.
A pitch needs to accomplish two goals to be effective. Most pitches solve the first, but omit the second. First, the pitch must convince the audience who might be investors, employees, recruits, or customers of some premise. Second, the pitch has to equip your champions, now convinced of your argument, to sell on your behalf.
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In his Stanford GSB lectures,Peter Thiel spoke about secrets. But he defined secrets for startups in a different way than one might expect.
A secret is not an unknown. Rather, it’s something just not widely believed to be achievable or feasible. In other words, it’s an insight, a thesis that isn’t widely held. Exploiting that secret should be the aim of every entrepreneur. Leveraging the secret means disruption and ultimately success.
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There are three types of vision that a successful startup needs: product vision, business vision and team vision.
Product vision is the dream. It’s how your company changes the world. It’s the problem that you’re solving and the solution to that problem. Product visions don’t end on launch day. They extend for years through the company’s growth. A product vision isn’t a certain feature or even a completed product. It’s the state of having solved a problem for a user or providing an experience for a user.
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With the analytics tools today, it’s easy to measure hundreds if not thousands of different metrics for your business. Cutting through all the chaff to determine the most important or insightful metrics can be quite a challenge. Below are the ten metrics I’ve found to be most useful in board meetings. They answer the questions of how should a startup founder might measure the business at the highest level. You should have many more metrics than these, but I’ve highlighted the ones that I recommend presenting to your board and reviewing each week.
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To be truly successful, I believe startups should determine which of the four core disciplines is their strength: product, engineering, marketing and sales - and focus, focus, focus on leveraging that advantage in the market. Product driven startups - At their outset Twitter, Pinterest and Instagram were exploratory products driven by their respective creators, Jack Dorsey Ben Silbermann, and Kevin Systrom, who were each product managers building a product of their own vision.
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Photo: flickr/nemabix
I don’t remember much of junior year chemistry class except the lab experiment in which we made fireworks. My lab partner and I doubled and tripled the amounts of strontium, potassium, calcium and other explosives specified in the instructions. Our firecracker dwarfed our classmates' in size and when we lit them after two unbearable weeks of baking, there was no question we misunderstood chemistry. We expected an inferno and were rewarded with a pathetic fizzle and a C-.
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Over lunch last week, a good friend who is an entrepreneur and I were brainstorming about the features of his optimal initial target market. His product hasn’t yet launched so he still had some decisions to make about which users and use cases to target. We wondered if there were a rule of thumb about initial target customer segments. We took out a blank sheet of paper and came up with this:
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Last week I wrote about the importance of a financial plan for startups at every stage. It’s a challenge to balance the predictability the board requests and the ambition the company wants. Often, as startups grow, they adopt two plans: a board plan and a company plan. By creating two plans and presenting each to the right audience, founders can communicate and motivate their teams effectively. The board plan is the more conservative of the two.
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This morning NPR profiled an education researcher comparing and contrasting the way different cultures approach intelligence and learning in schools. Though the debate about education methodologies is fascinating, I found the one of the stories in the report reminded me of the importance of transparent cultures in startups. In 1979, Jim Stigler, a researcher from UMich went to study education in Japan. Sitting in the back of a fourth grade math class, he watched as the teacher asked the class to draw cubes.
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There’s a Pixar movie that captures the ethos of Silicon Valley’s entrepreneurship culture which it summarizes this way:
While not everyone can be a great chef, a great chef can come from anywhere
The magic of the valley is that there is no path, no formula, no stencil for how to be successful. There is no university one must attend, no incubator one must join, no technology one must master to be successful.
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It’s tempting to burrow within a garage or basement or apartment to develop a product for several months and emerge from the darkness with a new shiny product. But the launch will likely fall flat. Products must be launched into ecosystems, in particular, into receptive ecosystems. In my view, there are three types of ecosystems that startups should cultivate. These ecosystems provide distribution leverage - that’s what makes them so powerful and so essential at the start of a company.
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Every social service aims to achieve massive growth and deep engagement. But if forced to choose just one of these attributes, I would pick engagement every time. An active user base implies product/user fit for a social service. Aside from the core functionality of social services, which is a solved problem (profiles, messaging, feed), the essence of a social startup is culture - the values of the community, the mores, the manners of interaction.
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For Fortune 500 companies, patents can be offensive and defensive weapons generating billions of dollars worth of royalty and licensing revenues. …if someone at Apple can dream it up, then we should apply for a patent, because even if we never build it, it’s a defensive tool,” Nancy R. Heinen, Apple’s former general counsel The Patent, as a Sword: But startups shouldn’t approach patents the same way large companies do.
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This week Amazon made public its advertising initiatives. Given the massive trove of invaluable purchasing data Amazon collects, I’m certain Amazon could build a rival to AdSense. But they aren’t. Below is a quote from an interview with Lisa Utzschneider, the head of Amazon Media Group:
Q: Can you give us a sense of how important advertising is to Amazon?
A: I think the way Jeff [Bezos] would answer that is, if we think about Amazon in two worlds, one world is an Amazon with ads and lower prices.
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Culturally, we tend to associate leadership with extroversion and attach less importance to judgment, vision and mettle. We prize leaders who are eager talkers over those who have something to say.
Must great leaders be gregarious?
Susan Cain wrote an OpEd this weekend in the Times containing the quote above. In Silicon Valley, the culture seems very much to embrace the idea of introverted leadership. One might even say the two kinds of leaders live in harmony.
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When serving B2B customers, your pricing will be dictated by your customers' margins. The more money they make, the more they can pay for new technology. Most businesses fund new initiatives including marketing and technology projects from profits. The more profits a company generates the greater their willingness to pay for services and ultimately the larger the market size for a startup.
Let’s compare the margins of grocery stores to restaurants to software companies to prove the point.
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The most effective financing processes, like the most effective auctions, create scarcity. Of late, many founders have been triggering pre-emptive financing processes for their raises. This is my interpretation of their playbook.
Strategy First, founders build credibility with investors. This can be done in many ways like cultivating a long term relationship with a handful of VCs or in less direct ways like brand building through social media and blogging. Founders have established credibility through referrals from people-in-common.
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We negotiate every day in almost every conversation and exchange, whether it’s rescheduling a flight, asking for a product return or responding to a term sheet. I’ve been reading Getting More, a book by Stuart Diamond, who trains the military, Google and many others on negotiation. Everyone should read it. This book is set apart because it recognizes the nature of relationships, emotion and human nature, forgoing concepts like ZOPA and BATNA.
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At the center of every startup is a secret. A secret is not an unknown. Rather, it’s something just not widely believed to be achievable or feasible. In other words, it’s an insight. Exploiting that secret should be the aim of every entrepreneur. Leveraging the secret means disruption and ultimately success.
The genesis of every secret is the word why. “Why are things done this way? Why can’t we do better?