False Competition – Why Defining Axes of Competition Matters

In the eleventh episode of Masters of Scale, Reid Hoffman interviews Peter Thiel. The episode revolves around the idea that to truly succeed, a startup must not beat the competition, but break free of competition entirely. The episode has many great points, but the one that stood out most to me is the idea of false competition.

You could say that Coke and Pepsi compete very intensely, on the other hand you could say that there’s somehow quite differentiated from a brand so that in practice different people prefer Coke or prefer Pepsi and they’re actually is a much smaller set of people who view them as interchangeable products. And so, I think measuring how much actual competition is happening is not always a straightforward thing to do. transcript

There is the classic perspective on the cola wars. Sweetened, colored, carbonated water is a commodity virtually indistinguishable aside from the Continue reading "False Competition – Why Defining Axes of Competition Matters"

Disagree and Commit – A Management Principle for Highly Functioning Teams

Disagree and commit. I first read about this idea in the 2016 Amazon Shareholders letter. But the idea can be traced back to Andy Grove at Intel. Grove wrote about this topic in High Output Management. Disagree and commit is a management technique for handling conflict. There are two parts to it. First, expecting and demanding teammates to voice their disgreement. Second, no matter their point of view, once a decision has been made, everyone commits to its success.

Bezos described it this way:

Have Backbone; Disagree and Commit. “Leaders are obligated to respectfully challenge decisions when they disagree, even when doing so is uncomfortable or exhausting. Leaders have conviction and are tenacious. They do not compromise for the sake of social cohesion. Once a decision is determined, they commit wholly.”

I’ve worked in environments in the past where management clearly communicated the obligation to dissent - and it’s Continue reading "Disagree and Commit – A Management Principle for Highly Functioning Teams"

The False Confidence of the LTV/CAC Ratio for Early Stage SaaS Startups

Founders often describe their unit economics in terms of their LTV/CAC ratio - the ratio of the Lifetime Value (LTV) of a customer to the Cost of Customer Acquisition (CAC). The LTV/CAC metric can be a powerful metric to unpack the health of the go-to-market team of a company, as Netsuite has shown. But this figure is often meaningless for early stage startups.

Why? Because a company one or two or even three years into sales can’t yet accurately forecast customer lifetimes. If a business suffers from a very high churn rate, then, yes, it’s possible to calculate LTV in just a few years.

But most software companies will see 10% or less unit churn per year. At 10% unit churn, three years from now, 73% of customers will still be paying, adding to their LTV. How long will those customers stay? You could project a straight line churn, a Continue reading "The False Confidence of the LTV/CAC Ratio for Early Stage SaaS Startups"

The Latent Purchasing Power in the SaaS Acquisition Market

The startup acquisition market is off by roughly 35% year-over-year. Why the decline? One consistent response from potential acquirers is that they are waiting for tax reform to happen. If it does happen, and when acquirers do decide to pursue acquisitions, I suspect we will enter a very acquisitive environment for three reasons.

First, the cash available to finance acquisitions on the balance sheets of publics as companies has grown by 20 X over the last 10 years and now totals more than $8.5 billion.

Second, the market capitalizations of the public SaaS companies have increased by 28X over the same time period. This is even more staggering considering the multibillion-dollar acquisitions of the past few years. For example, LinkedIn at $26 billion, Netsuite at $9.3 billion and Concur at $8.3 billion. In addition, we seen a flurry of take private by private equity firms of Marketo, Continue reading "The Latent Purchasing Power in the SaaS Acquisition Market"

Just How Disruptive Are ICOs to the Classic VC Model?

Initial Coin Offerings, a fundraising mechanism for companies using cryptocurrencies as a mechanism to buy their service, seem to be upending the world of venture capital. Filecoin raised $250M through an ICO. Tezos raised $232M. Bancor raised $153M. These are massive amounts of money. Recently, I’ve been wondering how prevalent ICOs are and whether they could potentially be a substitute for venture capital.

The chart above shows the number and size of ICOs since the beginning of this year. Though November 6, 130 ICOs have raised $2.7B. 18 have raised more than $100M, while 120 have raised up to $50M. That’s an enormous amount of money.

And the trend is up and to the right. ICOs have raised more than $350M in each of the last five months.

To put this momentum into context, let’s compare ICO activity to Series A activity globally. Unlike crowdfunding which has never exceeded

Continue reading "Just How Disruptive Are ICOs to the Classic VC Model?"

The Implication of Secular Increases in SaaS CAC

One of the major trends facing SaaS companies today is the rising cost of customer acquisition. Data on this trend has been difficult to find. Fortunately, Patrick at ProfitWell sent me his survey results across about 800 companies. The chart above shows the increasing cost of customer acquisition on a per company basis. Those surveyed have observed a ~65% increase in cost of customer acquisition over the last five years.

This increasing customer acquisition cost likely has two root causes. The first is competition.

The second is scale. As a company grows, the initial customer acquisition channels become less efficient with saturation. Consequently, the business must develop a portfolio of customer acquisition channels. Typically, each marginal channel has a higher cost of customer acquisition.

Regardless of the cause, the impact to unit economics remains the same.

Over the next year, companies doing businesses internationally will face a compounding factor: GDPR.

Continue reading "The Implication of Secular Increases in SaaS CAC"

Important Changes in Revenue and Profitability Definitions for SaaS Companies

Starting in January, public software companies will report their financials using ASC 606. Normally, accounting changes are not that interesting, but ASC 606 will change several of the key attributes and benchmarks SaaS startups use. The two most important changes are changes to revenue and profitability.

Today, all software revenue is recognized ratably over the contract period. If a business finds a 12 month contract for $12,000, the company record $1000 of revenue for each month. Under ASC 606, hosted revenue recognition doesn’t change.

But if the software is run on the customer’s servers, sometimes called an on-premises deployment, the entire revenue value of the contract is recognized immediately, not over the life of the contract. The same is true for renewals. Before, new bookings translated smoothly into revenue, but with the new guidelines, revenue can become quite lumpy.

Imagine a $10M ARR company that books a $1M recurring on-premises Continue reading "Important Changes in Revenue and Profitability Definitions for SaaS Companies"