PandoDaily has a great piece up on how hard it is to build an enterprise Software-as-a-Service (SaaS) business that includes key data from the last 12 SaaS IPOs. Of the 12 SaaS companies, most have been profiled here including Eloqua, Rally Software, ExactTarget, ServiceNow, Marin Software, Marketo, and Bazaarvoice.
Here are some key takeaways from the article on the last 12 SaaS IPOs:
- Company Age at IPO: Average of 9.5 years with median of 8 years
- Rounds of Financing: Average of 4.5
- Amount Raised: Average of $109 million with median of $75 million
- Revenue: Average of $71 million with median of $61 million
- Sales and Marketing Employees: Average of 35% of the workforce
- Employees: Average of 532 with median of 363
- Professional Services Revenue Percentage: Average of 20% with median of 17%
- Compounded Annual Growth Rate: Average of 59% with median of 55%
- Gross Margin: Average of 65% with a median of 66%
The moral of the story is that SaaS companies require substantial capital, scale, and growth to have a successful IPO.
What else? What are some other thoughts on the data from the last 12 SaaS IPOs?
With so many different management tools like the simplified one page strategic plan, quarterly check-ins, and board decks, it’s easy to spend an inordinate amount of time doing management stuff instead of building the business. Only, too often, I’ve seen management tools not commensurate with startup stage.
Here are a few thoughts on management tools related to startup stage:
- Basic management materials should be developed regardless of stage (yes to a business model canvas, no to a business plan)
- Financials should be fairly simple with a focus on cash and burn rate at first and become progressively more sophisticated as the business matures
- Board decks should focus on strategic issues with tactical items and standard data review done in advance on the meeting
- KPIs and goals should always be kept as minimal, measurable, and memorable as possible
Err on the side of simple and let the sophistication of the management tools grow as the startup grows.
What else? What are your thoughts on management tools relative to startup stage?
Terms sheets are relatively short legal documents that outline the proposed high-level details of an investment or acquisition. Over my career, I’ve been involved in a half-dozen term sheets on both sides of the table. While term sheets can be complicated, they’ve been more standardized over the years with open source legal docs like the Series AA Equity Financing Documents from Y Combinator and the AngelList Docs.
Here are a few thoughts on common terms:
- Pre-Money Valuation – This is the value of the company before the investment (so, if $1 million is invested at a pre-money valuation of $2 million, the post-money valuation is $3 million)
- Liquidation Preference – Investors with a 1x non-participating preferred liquidation preference get their money back or their percentage ownership in the event of a sale vs a 1x participating preferred liquidation where investors get their money back plus their percent ownership of the amount left over (double dip). 1x non-participating preferred is most common for seed stage investments while participating preferred is often used when there’s a discrepancy between the desired valuations of the entrepreneur and investor.
- Dividends – Similar to interest payments for the preferred shares, these are used to improve returns. Seed and early stage investments don’t typically include a dividend component.
- Anti-Dilution – If the company raises money in the future at a lower valuation, the previous investors get more shares to account for the new, lower per share price. Weighted average anti-dilution is the most common.
- Option Pool - With each round of funding, investors often require new equity allocations to the employee stock option pool, usually in the 10 – 15% range. Most importantly, the option pool shuffle comes into play and it’s important to model out the difference of the option pool being formed pre or post investment.
Now, there are a number of additional items like pro-rata rights, information rights, preemptive rights, registration rights, and more, but they are fairly standard. Term sheets are best reviewed by experienced startup attorneys and not general practitioners.
What else? What are some other thoughts on the common term sheet items?
Money, money, money — that’s the focus when entrepreneurs are raising money. Only, talk to any entrepreneur who’s raised money from multiple investors and he’ll tell you that no two investors are created equal. One area that doesn’t get the requisite level of attention is amount of investor involvement.
As with anything, the level of involvement varies dramatically. Here are a few thoughts:
- Many investors take a hands-off approach and don’t add value (the opposite of smart money)
- Some investors are very collaborative with regular phone calls and even attend weekly staff meetings to help out (reportedly, several of the most successful VCs in the world are on-site at their portfolio companies every week)
- Certain investors are more top-down and prefer to give direction at board meetings while staying out of the details and minutiae
- All investors pitch providing introductions and rolodex-related help as one of their value-adds — ask them to help before they invest and test out the value before you buy the whole thing
Investor involvement is a serious consideration and it’s best to do due diligence before taking money.
What else? What are some other thoughts on investor involvement when raising money?
In Atlanta there’s an ongoing discussion about the lack of early stage risk capital for startups. One side argues that if more capital is present, more deals will get funded. The other side argues that there aren’t enough talented entrepreneurs yet, and that when the entrepreneurs are here, the money will follow. From my perspective, capital is mobile and entrepreneurs with a good market, team, and idea will be able to get funding, locally or otherwise.
There’s another tightly related topic that needs more discussion as well: startups in Atlanta and other places outside the major startup centers have a higher bar for an exit. Here are a few thoughts on exits in Atlanta:
- Historically, 4-6 total tech startups get acquired per year for more than $10 million, meaning it’s a rare occurrence
- Strategic acquirers, in order to have a new remote office, need to have meaningful scale to be worthwhile (e.g. 50+ employees)
- Press and PR is harder to come by when bootstrapping or raising limited capital, making awareness by potential acquirers less likely
- Acqui-hires, regardless of being good or bad, almost never happen
For a startup, the best approach is to build a successful, sustainable business and not focus on an exit. As for exits, in Atlanta and most other places, the bar for an exit is much higher than expected.
What else? What are your thoughts on Atlanta startups having a higher exit bar?
As a follow up to the Notes from the Marketo S-1 IPO Filing, Marketo priced their IPO at $13/share earlier today. At the $13/share price, Marketo has an enterprise value of $435 million and a market cap of $540 million (the enterprise value plus cash on hand). Of course, the stock is likely to have a nice run up tomorrow when the markets open due to the high demand for fast-growing Software-as-a-Service companies.
Here are a few thoughts and some speculation:
- Raising $107 million in venture capital and having an enterprise value of $435 million at time of IPO feels low
- With an $80 million run rate, and a fast growth rate, my guess is that the stock goes up 20 – 30% tomorrow (~$17/share)
- Existing investor Battery Ventures bought 500,000 more shares at the IPO price, showing a belief that the stock has significant upside (source)
- Within 18 months a large tech company will buy the company for north of a billion (e.g. Adobe, Salesforce.com, SAP, etc)
It’s great to see that Marketo successfully went public and further validated the marketing automation space. I look forward to tracking their progress.
What else? What are your thoughts on Marketo going public and their future?
Many entrepreneurs love the thrilling of starting something new, and get bored easily. All too often, when talking with entrepreneurs, I hear stories of working on the second or third company, in parallel with the first company. Naturally, entrepreneurs should only focus on one idea and startup at a time, but there are times when a second entrepreneurial itch needs to be scratched.
Here are some entrepreneur guidelines for starting a second company:
- Ensure that the first company has achieved your definition of success (my definition of success)
- Create an environment in the first company where a CEO and/or management team run the business
- Remove any personal day-to-day responsibilities
- Say no to all meetings and interruptions for a month to find any weaknesses or deficiencies
- Focus exclusively on the new venture full-time, with only minimal time allotted for a weekly check-in with the first company
The vast majority of the time, the first business isn’t independent enough from the entrepreneur for the entrepreneur to successful start a second company. With time, effort, infrastructure, and money, entrepreneurs can make their first business independent such that they can focus on their new, second company.
What else? What are some other entrepreneur guidelines for starting a new, second company?