Technology innovations swing to a pendulum’s cadence. Sometimes innovations begin with infrastructure changes and reverberate up the stack. Other times, front-end engineers innovate at the application layer, which demand downstream changes in the infrastructure to scale.
The last major epoch of front end evolution has celebrated its ten year anniversary. We’re in a period of punctuated equilibrium. When will we see rapid speciation?
Web 2.0 and mobile applications built on iPhone and Android transformed the way users interacted with technology.
One could argue there have been innovations at the platform tier. React changed front end deployment, for example. But aside from touch interfaces and the elimination of the page refresh with each click, not much has changed in human computer interaction in a decade.
In contrast, in the last five or ten years, infrastructure has been reinvented, revolutionized, reborn.
Infrastructure-as-a-service provided by Amazon, Google and Microsoft among others empowers Continue reading "When Will the Next Wave of UI Advances Happen?"
I remember the first time I wrote an OKR (objective and key result) at Google. “You should set your goals so that you attain 70%. That’s success,” my manager told me. “Even better if you have a moonshot goal in there, with a 5% likelihood of success.” I was uneasy with calling 70% goal achievement as success. The habits formed from 17 years of schooling and a 100 point scale run deep.
John Doerr’s book Measure What Matters is a paean to the OKR. Andy Grove introduces Doerr to the idea at Intel and Doerr brings the concept to Google. Several years later, I found myself writing them.
An OKR is a an objective with a key result. The objective is a goal. The key result is a quantified measure of success.`
There are many goal management techniques, each with positives and negatives. I found OKRs effective for Continue reading "An Ode to the OKR – How to Motivate Greater Ambition in Teams"
At Redpoint’s annual investor meeting earlier this year, I quipped, “The day-trading taxi drivers of the dotcom era have been replaced by crypto-trading Uber drivers.” But over the weekend, a grizzled Uber driver with a mane of grey hair and wind-and-sunburnt cheeks asked me about crypto. “Can you explain to me why public key/private key technology is important on the Blockchain?” He pointed out the Bitcoin ATM that charges 10% from his cigarette-infused Prius. “That’s for suckers; Coinbase charges only 2%,” he said as we whizzed past.
A former yacht broker and pilot, he likened crypto to Powerball. “I can put in a few bucks, buy some Dogecoin or Jesuscoin, and maybe it goes up 100x overnight and I’ve changed my life. I like Monero, too.”
A few hours later, as I boarded the plane home, I read Fred Wilson’s post on Buffett and Munger’s critique Continue reading "A Crypto-Trading Uber Driver and a Billionaire’s Spat over Candy – On The Importance of Sticking to Your Strategy"
There’s the challenge of dealing with uncertainty, where you’re operating in the weird zone that you’re making decisions that have significant long term impact or that are difficult to reverse or course-correct in the face of great uncertainty.
Uncertainty is often unnecessary in the sense that you could, in principle, reduce the uncertainty. You could go research the question more. You could obtain more information, or run an experiment.
It’s not cosmic uncertainty, without absolute knowability. When there’s true, deep, un-mitigatable uncertainty then it’s not to hard to say, “we’re just going to choose something and make the best decision we can.”
There’s a more frustrating uncertainty. When the uncertainty is not necessary. But the thing that’s limited is the cost in obtaining further information to reduce that uncertainty. And so you’re left in a dissatisfying situation in which I have to make a highly consequential decision with a Continue reading "The Challenge of Uncertainty"
“Don’t be so hard on yourself when things go badly and don’t be so proud of yourself when they go well.” I think this is one of the hardest pieces of advice to follow. Chance is an important contributor to any outcome. sometimes we just get lucky. That recent crypto trade in which you made 25% in an hour. The time you met your significant other for the first time. The hiring decision in your startup that was a wild guess, but worked out beautifully.
Annie Duke, a professional poker player, said the quote above. In hold ‘em poker, you may draw a King-high straight flush, one of the strongest hands in the game, and yet lose all your money. The odds are 1.5 million to 1. But you can still bust.
In a recent interview, Duke talked about distinguishing the quality of the outcome and the Continue reading "The Quality of the Outcome and the Quality of the Decision"
The venture capital markets are flush with capital. We’re approaching the heady days of the dot com era. In that epoch, despite the record volumes of venture dollars, startups went public quickly, in 4-5 years. Today, that timeframe is no longer realistic. In fact, the surfeit of private dollars delay IPOs.
From 2000-2005, the “typical” IPO-bound startup listed on an exchange 5 years after founding. After the Lehman collapse and the crisis of 2008, the IPO closed, and startup age spiked to 16 years median.
Since then, the trend has continued. 2017 and 2018 IPO startups are 11 years old when they do go public, more than double the early aughts.
The corollary to delayed IPOs: great companies age like bacterial colonies. They grow bigger with time. In 2017, the median company generated more than $160M in revenue. In 2018, the median IPO generated more than $340M.
Will this trend Continue reading "The Effect of Flush Private Markets on Software IPOs"
“When I die, I want all the people with whom I worked on group projects to lower me into my grave, so they can let me down one last time.” Someone once sent me this e-card as a joke. I laughed and laughed, and never forgot it. I can’t remember a school group project which teammembers contributed equally. Paradoxically, I bet everyone in the group felt the same way.
There’s a good reason I bristled in those group projects. Every person in a team overestimates his or her contributions to the team. The bigger the team, the greater the overestimation - “especially when group members’ unequal responsibility allocations are made explicit.” Add an egocentrist, someone who takes more credit, and the social dynamics boil.
Why does this happen?
I suffer from a terrible bias. I know intimately the hardships and sacrifices I make. The late nights. Dead ends. Continue reading "Why I Overestimate My Contribution to My Team"
Ten years ago, Guy Kawasaki took this photograph of me. I was attending my first YCombinator Demo Day, maybe three months into my time at Redpoint. Much has changed. I’m am not as young or as green. YCombinator has thrived and scaled. And the startup demo has disappeared.
At that August Demo Day, each pitch lasted eight minutes. Without fail each featured a demonstration of the product. It was the height of the Web 2.0 era. The iPhone was just a year old and mobile hadn’t blossomed yet. The web was still the center of innovation. And the demo provided founders a chance to explain these innovations. I felt like I was seeing a wisp of the future incarnated in code.
For example, this is Sachin Agarwal, the founder and CEO of Posterous. He was showing the audience how to create a blog post from an email. We were Continue reading "The Disappearance of the Fundraising Demo"
Ben Franklin’s edits to the Declaration of Independence
The average English sentence has been shortened by half over the last five hundred years. Read the first sentence of the Declaration of Independence to see why. It is 71 words long and contains 8 recursive clauses. I read it ten times before I understood it. I have 48 seconds with you, my reader. No time to mince words. To reach more people with your content, shorten your sentences and ditch the jargon.
Why do we see jargon in business? The narrower the group of speakers, the more impenetrable the language. Linguists have observed this in Native American tongues.
the Mohawk word sahonwanhotónkwahse conveys as much meaning as the English sentence “She opened the door for him again.” In English, you need two clauses (one embedded inside the other) to say “He says she’s leaving,” but in Yup’ik, a language Continue reading "How to Reach More People with Content Marketing by Changing How You Write"
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 1.5%. Or pay a team of four engineers to build a feature for your software startup. Each of these are investments with some risk and some potential reward.
If I promise you a million dollars a year from now, that’s worth much less. Bitcoin might 10x in that time, and you wouldn’t have missed the rally. You would have lost $15k in interest income from the CD. You would have to wait Continue reading "The Importance of Time Value of Money for Startups"
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. To describe the ideal customer well is not enough. Let’s use an example. A clear but useless ICP might be: a disenchanted thirtysomething mechanic who likes to play German board games, read Nietzsche and watch MMA. I can clearly articulate my ICP to myself and others. The target market is clear (and niche!)
But how do I identify this person if I’m looking to sell to him? Where do I begin generating leads? Mechanics meetups? Board game conventions? Nihilist Continue reading "An Often Forgotten Characteristic About Your Startup’s Ideal Customer Profile"
Yesterday, Salesforce announced it will acquire Mulesoft for $6.5B. A recent addition to the list of public software companies, Mulesoft is a tremendous business. The company generated $297M of revenue in 2017 at a 73% gross margin, and grew by 58%. Salesforce is acquiring the business for an astounding 21x enterprise value to trailing twelve months revenue multiple - nearly 2x the next closest.
||TTM Rev ($M)
||Year of Acquisition
|| Continue reading "The Salesforce/Mulesoft Acquisition is a Bellwether for the 2018 M&A Market"|
Recently, people have been asking just where are we in the SaaS valuation cycle. I last updated the chart above more than six months ago. The answer is close to ten year highs.
The chart above shows the median enterprise value to forward revenue multiple to multiple. Enterprise value is the market of a publicly traded company minus the available cash the company holds. Forward revenue is the sum of the next 12 months’ revenue.
Since 2013, we seen an incredible amount of volatility in SaaS forward multiples. The peak occurred in February 2014 at 7.7x. The nadir followed almost exactly 2 years later. A 57% drop in multiples occurred when public investors rotated from growth stocks into value stocks. Since that moment, SaaS multiples have more than doubled from to 7.2x.
Not every name has benefited, but nearly all of them have. Only six companies have witnessed Continue reading "Where are We in the SaaS Valuation Cycle?"
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?
The chart above shows the share of seed investment dollars by state over the last 7 years. California remains the leader with about 40-50% of dollars over time. New York oscillates between 10% and 20%. Illinois has seen some growth, like Texas. But on the whole, dollars haven’t changed geographies.
Which states produce the largest seed rounds? Utah, New York, Massachussets, Indiana and California have the top 5 median seed rounds size. But
Continue reading "Is Geographic Dispersion of Seed Dollars Really Happening?"
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. The remaining 13% of prospects didn’t have the buying authority.
This is great news. These problems are simple to resolve. Each of these three objections should be a prospect qualification question. Your team may use MEDDIC, SPIN, or any of the other 6 sales methodologies. Each of them focuses on identifying the budget, the buyer and the urgency.
The best run sales teams are disciplined qualifiers. They identify unlikely prospects early. The team will spend Continue reading "Why Does Your Sales Team Lose Deals?"
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. This is a Gap Analysis - a comparison of the current state of affairs to the desired potential.
By buying this product, your future will be better. In software, this typically means the buyer will be promoted. Marketing equips the internal champion to understand a change in the market and articulates the compelling reasons to act - to buy the software. The benefit to the business is important and real, resulting in a promotion. Continue reading "The Clearest Articulation of a Marketing Roadmap"
At Saastr, Jason and I discussed the role of private equity in SaaS on stage as a potential acquisition path for SaaS startups. Private equity hasn’t been a common exit route for venture backed startups in the past. But that’s changing.
The chart above depicts the total disclosed value of US venture-backed SaaS startups which have been acquired by PE firms since 2010. The aggregate value has grown from zero to about $13B over that time period.
That’s roughly equal to the \$14B spent by corporate strategics in the same market. Said another way, PE firms are spending as much buying SaaS startups as corporate acquirers.
What’s changed? There’s a surfeit of capital in private equity. The excess increases prices and valuation multiples for acquisition targets. The result? PE firms pay the same or greater multiples than corporate acquirers, which hasn’t been the case in the past.
Deal sizes Continue reading "Private Equity as an Exit Option for SaaS Startups"
Founded in 2007, Dropbox epitomizes the freemium go-to-market. Dropbox has grown from 0 to 500 million users over that time period. 2% of those users convert to paid and pay an average of $9.33 per month. 90% of revenue originates through self serve channels - an astounding figure for company that generated more than $1B in revenue last year.
Dropbox’s revenue grew from $604M to $1.1B from 2015 to 2017, a compound annual growth rate of 35%.
More impressive still: the company has managed to nearly double revenues while decreasing the amount they spent on COGs annually. COGs stands for cost of goods sold. Images of Dropbox, which stores billions of files, hard disks and storage are the principal component of COGs.
This decrease is driven by user policy changes that affect users who have been inactive for a year or more, and a shift to operating their
Continue reading "Dropbox S-1 Analysis – The King of Freemium"
What should be the return on investment of a startup’s cash burn? Fred Wilson posed this question last year in his post Some Thoughts on Burn Rates. In that post, he suggests, and I agree, that a 5x ROI on cash burn is a good target.
How does one calculate ROI? It’s a simple formula:
Cash_Burn_ROI = Revenue_Multiple/Revenue_Pay_Back_in_Years1
If a business is worth 7x revenues and revenue payback is 14 months, the burn ROI is 6x or 7 / 1.2. If a business is worth 5x revenues and revenue payback is 18 months, the ROI is 3x. Note, I’m using revenue payback, not gross margin payback here.
This math reaffirms the importance of unit economics. Startups have no influence over their multiple.2 So the best place to focus is payback period.
This equation does highlight an important phenomenon. When the market pays high multiples for businesses, startups Continue reading "The ROI of Cash Burn for SaaS Startups"
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.
Assume Anna is a key employee at a startup RedCircle which wants to keep her.
Anna received a grant of 100,000 options on her start date. These options have a standard vesting schedule: a four-year vest with a one year cliff.
This means the first 25,000 options vest after Anna has remained with the company for one year. Thereafter, the remaining 75,000 options vest monthly: 2083 options per month. The table below shows her annual vesting schedule through the Continue reading "Startup Best Practices 27 – How to Use Options to Retain Key Employees in Your Startup"