Category: entrepreneurship

Public Market Multiples and the Impact on Private Market Valuations



Jason Lemkin has an excellent piece up titled Zendesk and Anaplan: A Tale of Two Very Similar, And Very Different, $10B SaaS Acquisitions.

The big idea is that Anaplan and Zendesk selling for $10B while having similar growth rates and public market premiums is a function of market timing. Anaplan at 14x run-rate and Zendesk at 6x run-rate shows how valuations can change quickly. Public valuations as a multiple of run-rate were more than twice as high a mere six months ago. Now, we’re in a new era of valuations.

Public market valuations often govern private market valuations. If two SaaS companies are growing at the same rate with similar margins, addressable market, cost of customer acquisition, and net dollar retention, with one being public and trading at 6x run-rate, the private one will most likely be valued at 6x run-rate, or less. Historically, private companies with similar metrics as public ones would have a lower valuation due to lack of marketable securities, smaller revenue base, more limited financial audits, etc. Surprisingly, during the Great Exuberance of the last few years, private company valuations became more valuable than comparable public companies. Of course, it didn’t make sense unless there was something fundamentally different e.g. size of addressable market or quality of viral distribution — almost all private companies didn’t qualify.

Now, with markets back to normal, startups that raised at valuations above public market (Read more...)

Navigating Choppy Waters


This post is by Brad Feld from Brad Feld


In the last seven months, the venture / entrepreneurial world has gone from “the only thing that matters is massive growth” to “the world is going to end.” For perspective, all you need to do is look at a dozen high-flying IPOs from 2020 or 2021 to see that the peak happened just before Thanksgiving.

The private markets lag the public markets. That’s not new. This time around, the lag was about a quarter, as many VCs started to talk about what was happening around the beginning of Q2.

There is no doubt that we are in the middle of, well, whatever you want to call it. “Correction” and “Choppy Waters” is probably a generous phrase for what is going on.

Having lived through this as an entrepreneur in 1987, an entrepreneur and VC in 2001, a VC in 2008, and a VC today, I embrace that this is just part of the entrepreneurial and economic cycle. I also know that many people freak out at this moment. If you’ve never been through this (like I hadn’t in 1987), it can be terrifying. If you are experienced and suddenly find yourself caught flat-footed for any number of reasons, it can be equally terrifying.

I no longer believe in clichés or prognostications such as “make sure you have three years of money in the bank” or “do a RIF quickly and deeply regardless of the situation you are in.” Instead, I think it is crucial for each company to understand its (Read more...)

Magazines Create Empathy That Can Change the World. Here’s How To Save Them.



“The print magazine is an antidote to information overload, a form of media that contains a finite amount of content, releasing readers from the laborious task of deciding what to consume in the limited spaces of time in a day.”

Magazines are my favorite media. I read an ode to the power of the printed word in magazines this week and it reminded me of all the things I love about them. The process of curating this email is a constant battle to avoid overload, and I find that magazines always help. Unlike a lot of online content, the stories and images in magazines are usually professionally produced by real talented editors and creators. The long take they regularly offer is unique and their ability to select and publish stories that are timely without feeling outdated is a constant inspiration for me to try and do the same.

Sadly, many magazines are ceasing operations or moving to an online format only. The good news is, magazine subscriptions remain a steal compared to the cost of other things. So if you’re like some of the people interviewed in the article and have forgotten about the appeal of magazines, maybe now is a good time to restart some of those subscriptions you once had – or find some new ones.

Founder as Shock Absorber for the Startup



Recently I heard an entrepreneur interview and the question of the founder’s role came up. Normally, you hear the typical answers like set the vision, recruit the team, make sure there’s cash in the bank, etc. Only, here I heard one I hadn’t heard before: the founder acts as a shock absorber for the startup.

The more I think about this, the more I like it. A shock absorber is defined as “something that serves to reduce or mitigate the worst effects of an unwelcome occurrence or experience.” In startupland, high highs and low lows are a regular occurrence. While thoughtful transparency of the good and bad is often the right approach, it does need to be modulated and presented with the appropriate commentary.

Right now, things are especially choppy in the world of startups. With so many startups laying off people, it’s easy to just see the doom and gloom. In reality, many startups have strong businesses and will continue to do well, but they also got ahead of themselves raising too much money and burning too much capital. Founders, as shock absorbers, need to get out in front and work with team members and other constituents to help “mitigate the worst effects of an unwelcome experience.” Communication, beyond simply writing an email or blog post, is always the best approach. People naturally get worried and need to be reassured repeatedly. Communicate, communicate, communicate.

The next time you think of a founder’s roles and responsibilities, add shock absorber to (Read more...)

Be Single-Minded Long Enough to Get Lucky



Recently I was sitting outside at a restaurant and my ears perked up when the gentleman at the table behind me started talking about entrepreneurs with his guest. When pressed by his companion as to what makes for a successful entrepreneur he replied, “Be single-minded long enough to get lucky.”

This phrase has been on my mind ever since hearing it.

Single-mindedness is a critical trait of entrepreneurs. Adversity, ups and downs, and continuous challenges are part of the startup experience. Most people, faced with regular setbacks, give up and move on. Irrational persistence is one of the most distinguishing entrepreneur characteristics.

Then, combine single-mindedness with longevity — persistence over a long period of time, makes for an even more remarkable, and rare, combination. The longer the time, the more people are going to give up, especially when core milestones like product/market fit or a repeatable customer acquisition process haven’t been achieved.

As much as we like to think our intelligence and effort determines success, there is a large element of luck. Timing, people, geography, etc. plays a role in the size and scale of success — components outside the control of the entrepreneur. I’ve seen people that are incredibly smart try and fail as entrepreneurs. I’ve seen people that are incredibly hard workers try and fail as entrepreneurs. From being at the right place at the right time, fired from a job and making the leap, hired into a certain industry at an early age, or some life event, (Read more...)

Book: Startup Boards, 2nd Edition Is Available


This post is by Brad Feld from Brad Feld


The 2nd Edition of my book Startup Boards: A Field Guide to Building and Leading an Effective Board of Directors launched today.

My co-authors, Matt Blumberg, the CEO of Bolster, and Mahendra Ramsinghani, were a joy to work with.

While the 1st Edition was a good book, I wasn’t particularly proud of it because I didn’t feel like it was my best writing. We worked hard on this edition, and I now feel like it’s equivalent in quality to my other books.

Effective boards are critical at this moment in the entrepreneurial ecosystem. While I hope this downturn is short, I think it will be long and painful. In either case, highly functioning boards can help startups navigate this moment, while dysfunctional and weak boards can accelerate the demise of startups.

If you have a board of directors, want to have a well functioning one, are a director, or want to be a director, I encourage you to grab a copy of Startup Boards: A Field Guide to Building and Leading an Effective Board of Directors.

The post Book: Startup Boards, 2nd Edition Is Available appeared first on Brad Feld.

Back to the Rule of 40 for Startups



With the Great Exuberance behind us and more restructuring pain ahead of us, it’s clear that we’re back to the standard Rule of 40 in startup land. For several years, it was growth at all costs. Want to raise exceptional amounts of money? Show strong growth. Now that those days are done, let’s review the Rule of 40.

The Rule of 40 is a score that combines growth rate and profit margin.

Growth rate, as we all know, is typically measured year-over-year. So, if the startup was at $10 million annual recurring revenue (ARR) 12 months ago and is at $15 million ARR today, that’s a 50% growth rate. As always, the higher the better. The big difference now is that it’s in the context of profits/losses, as a percentage of revenue.

Profit margin is talked about a few different ways from EBITDA to free cash flow. For our purposes here, we’re going to focus on free cash flow. Free cash flow is the cash left over after paying all expenses and capital expenditures. As part of the Rule of 40, we’re interested in free cash flow as a percentage of revenue — profit margin. If we receive $10 million in revenue and generate $2 million of free cash flow, that’s 20%. If we receive $10 million in revenue and lose $2 million, that’s -20%.

For our Rule of 40 score, we add growth rate and profit margin together, with a target of 40 or higher. Since we’re adding two (Read more...)

Down Rounds: Deal With Reality


This post is by Brad Feld from Brad Feld


Connie Loizos is one of the long-time tech industry writers who I respect. I don’t respond to many interview requests these days, but I’ll always talk to her.

She has a good article today in TechCrunch titled Embrace the down round (it’s going to be okay, maybe). I like the quote she pulled out of me in our conversation.

[Brad Feld] says his “strong belief” that “just doing a clean resetting — at whatever the valuation so that everybody is aligned and dealing with reality —  is much, much better for a company.”

Now, I’m not encouraging anyone to do a down round if unnecessary., especially when many existing investors are currently willing to add on additional dollars at the most recent valuation. If you can do this cleanly, take the money.

Rather, when you have a choice between a financing at a lower valuation and a financing with all kinds of crazy structure to try to maintain a previous valuation, negotiate the best price you can but do a clean financing with no structure.

If you don’t know what I mean by structure, they are terms like:

  • Multiple liquidation preferences (you’ll start seeing lots of 2x and 3x on new money)
  • Participating preferred on new money
  • Weird ratchets (other than the typical weighted average), including full ratchets, on next round financings
  • Annual preferred return, including PIK and cash pay on new money
  • Blocks on all kinds of things that a new investor should not have blocking rights on

… and (Read more...)

False Choices


This post is by Reid Hoffman from Reid Hoffman


In today’s world, the rules change — fast. Unexpected things happen: Strange shifts you couldn’t have imagined. Competition comes out of nowhere. Technologies disrupt the playing field. Jobs, even entire industries, disappear. The very fabric of the game changes, and whole new careers are born. In the early 2000s, if you told people that in a few years creators would be making a good living by posting video makeup tutorials, would they have believed you? Of course not! It would’ve sounded absurd.

Some people succeed in this rapidly changing world. Others don’t. To carve out a career in this environment, should you follow a plan or stay flexible? Should you listen to your heart or listen to the market? The answer is both. To think you have to choose one or the other is a false choice.

Entrepreneurs are often dealt many of these same false choices. They’re told they must be relentlessly persistent in fulfilling their vision, but also be ready to change their business based on market feedback. They are told to create a company they’re passionate about, but also to adapt to customer needs.

Successful startups do both. They are flexibly persistent: Their founders start companies that are true to their values and vision, yet they remain flexible enough to adapt. They are obsessed with customer feedback, yet they also determine when not to listen to their customers. They draw up plans, but they’re also nimble enough to stray from those plans when appropriate. And they are (Read more...)

Startup Ecosystem Optimism Post Correction



Our startup ecosystem, like all markets, goes through regular ups and downs. Sometimes we go through a period of unusually high highs, like the back half of 2020 and most of 2021. Sometimes we go through periods of unusually low lows, like the aftermath of the Great Recession post 2008. Now, we’re in the unwinding period of the most recent Great Exuberance and it’ll be painful as we work through the necessary changes.

Only, I don’t believe we’re headed for a long winter. We have too many positive characteristics in our favor. Let’s look at a few:

Depth of Business Model Understanding

Metrics, best practices, and playbooks on how to build SaaS, cloud, and marketplaces abound. We have numerous examples of startups that have scaled past $100M in revenue and a growing number that have scaled past $1B in revenue. While we’re still advancing our understanding of the business model, it’s clear we’re in a good spot with decades of foundational work.

Base of Existing Revenue

While some startups were raising money at astronomical revenue multiples, the vast majority raised at normal-to-high revenue multiples, and therefore have a strong base of revenue. Because these are high margin, capital efficient businesses, almost all revenue goes towards employee salaries plus sales and marketing expenses. If funding were to completely dry up, these startups could dramatically cut costs (layoff employees) and become profitable (cash flow positive) almost immediately. Once profitable, the startup is no longer on the fundraising treadmill and is default alive (Read more...)