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For the first seven years as an entrepreneur I stayed as far away from recruiters as I could. My thinking was that I could find the talent I needed on the open market via word of mouth referrals, Craigslist, etc. More importantly, I thought that people that used recruiters to find jobs were only focused on money, and would promptly move on when another recruiter came along with a better offer. I was wrong.
Recruiters are great for startups when used properly.
The most important thing I didn’t understand with respect to using recruiters has nothing to do with recruiters. It’s entirely about corporate culture. With a strong corporate culture, and associated values, team members can come from anywhere, including recruiters. Recruiters need to understand your corporate culture, your values, and what makes your startup unique. Just like the hiring process internally, each candidate that’s vetted from a recruiter needs feedback given to the recruiter to understand what aspects of the person fit the culture and what aspects didn’t. There’s no right or wrong type of corporate culture. What’s important is that it’s consistent, understood, and strong. Recruiters are an important part of the startup eco-system and should understand your corporate culture.
What else? What are some other thoughts on recruiters and startups?
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Most enterprise Software-as-a-Service (SaaS) startups require an annual contract with their service. A minority of SaaS startups offer a month-to-month option either as the norm or for a premium over their annual contract price. What’s the economic value of an annual contract relative to a month-to-month offering for SaaS startups? How much more do vendors charge for the privilege of not having a contract?
Here are a few data points for prices from popular SaaS vendors (plans prominently highlighted on vendor sites will be used when multiple plans are available):
- Zendesk – $49/agent/month billed annual vs $59 month-to-month (source)
- New Relic – $149/server/month with annual contract vs $199 month-to-month (source)
- Olark – $44/month with annual contract vs $49 month-to-month (source)
Now, this isn’t a large sample size, but for companies that offer different pricing relative to an annual contract or month-to-month, month-to-month is between 10% and 30% higher. It makes sense that committing to a year of service results in a lower price.
What else? What are your thoughts on the economic value of annual contracts vs month-to-month for SaaS startups?
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Customer renewals rates are one of the key tenets for Software-as-a-Service (SaaS) startups. It’s important to track relevant details as to why a customer leaves so that these can be analyzed and addressed.
Here are some common categories for SaaS companies to track in order to assess customer churn trends:
- Product functionality
- Personnel change
- Project needs
Another general question I like to track is whether or not the item was within our control. The idea is that some things, like budget, are outside our control, but product functionality is within our control. Another area to look at when assessing customer renewal rates is to look at the sales reps that brought in the account to see if certain reps are signing clients that aren’t good fits, and thus have higher churn rates. A third exercise is to do SaaS cohort analysis and look at renewal rates of groups of customers from defined time periods (e.g. how do customers signed in Q1 2011 compare to customers signed in Q4 2010).
What else? What other ways do you assess customer renewal rates and churn trends?
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Continuing with yesterday’s post on Founder Equity at Time of IPO, it’s also important to look at how much money each company raised to get to their S-1 filing for an IPO. As expected, the amount raised and the amount of equity the founders own are correlated, with higher amounts of money raised related to less ownership.
Here are some data points on total financing at time of IPO for these venture-backed startups:
Another important element of founder ownership at time of IPO relative to venture funding is how far along the business was when it first raised money. Jive Software, as an example, was very far along before raising money, and thus the co-founders combined still have roughly 30% of the business. Bazaarvoice, which was extremely capital efficient only raising $23.6M, raised money at lower valuations and thus the founders took on greater dilution, resulting in less ownership than the Jive Software founders, even though they raised less than half the money.
Total amount of money raised as well as where in the startup lifecycle the money was raised are two major drivers of founder ownership in a business.
What else? What other thoughts do you have on total financing at time of venture-backed IPO?
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In light of the flurry of VC-backed technology company IPO filings this year, one of the more interesting data points was the beneficial equity ownership of the co-founder(s) (e.g. what percentage of the business did they own).
Here are a few data points on founder equity ownership at time of IPO:
Now this doesn’t take into account founders that cash out some of their equity prior to IPO, which isn’t common but is noted in the ExactTarget S-1 (~$5 million). But, it appears that on average for venture-backed companies that reach an IPO, founders typically have between 4% and 15% of the equity (note that Marc Benioff of salesforce.com had over 30% of the equity at the time of IPO: source).
What else? What are your thoughts on the percentage of ownership founders have at time of IPO?
As a startup grows and matures so too should the tools and processes used. A simple Google Spreadsheet suffices for company-wide forecasting and budgeting until the business expands to the point that each department needs to do it on a more detailed basis. Here is an example marketing budget Google Spreadsheet template we use that includes the following info:
- Categories for Staff, Lead Generation, and Communications
- Monthly, quarterly, and annual totals
- Budget, actual, difference in dollars, and difference in percentage
This marketing budget Google Spreadsheet template for startups isn’t limited to marketing departments and is readily used for any department. Budgets are an important part of the planning process and collaborative tools like Google Spreadsheets make them easy to develop and use.
Note: To use the spreadsheet for your own purposes, load the View-only version and go to File -> Download as Excel from within the File menu on the page (not in the browser window) and then upload the Excel file into your own new Google Spreadsheet.
What else? What are your thoughts on budgets in startups?
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In light of the Thanksgiving holiday here in the United States the topic of giving thanks in a startup is very apropos. Giving thanks is an important part of startup culture and should be incorporated into the standard rhythm. Here are some ways we give thanks by helping others and by enjoying each others’ company :
- Donate 1% of our time to local non-profits
- Donate used computers and monitors to local non-profits
- Company-wide off-site quarterly celebrations
- Catered Monday morning breakfast and Friday lunch to break bread as a team
Happy Thanksgiving to everyone — all the best and happiness.
What else? What are some other ways to give thanks in a startup?
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ExactTarget, one of the premier email marketing firms, just filed their S-1 for an IPO. Even as one of the largest SaaS companies in the world, ExactTarget has maintained an exceptional growth rate due in part of the execution of the management team, the continued overall market growth, and the power of the SaaS model. The wave of SaaS IPOs has truly arrived with Eloqua, Yelp, BazaarVoice, and more filing this year.
Here are some notes from the ExactTarget S-1 IPO filing:
- Largest marketing SaaS salesforce with 285 reps (pg. 1)
- 4,600 clients (pg. 1)
- No client represented more than 5% of revenue (pg. 2) – question: which client pays them more than $7M per year?
- Pricing is based on volume of contracted utilization, level of functionality, number of interactive marketing channels, number of users and level of customer support (pg. 2)
- 1,100 employees (pg. 3)
- $40 million annual R&D investment in 2011 (pg. 3)
- 500 resellers (pg. 4)
- Corporate culture cited as one of five competitive strengths (pg. 4)
- Revenues (pg. 7):
$148M (2011 first nine months – on pace for 55% growth rate)
- Profits/Losses (pg. 7):
($29.2M) (2011 first nine months)
- Accumulated deficit of $140M (pg. 9)
- Two third-party data centers in Indianapolis and Las Vegas (pg. 13)
- Significant portion of revenue is derived from clients in the retail and e-commerce, media and entertainment, travel and hospitality, financial services and insurance, technology, daily-deal and flash-sale industries (pg. 19) – amazing that daily deal sites are one of their named categories
- Line of credit of $10M and long term debt of $7.5M (pg. 35)
- Recurring subscription revenue by year (pg. 41):
$114.9M (2011 first nine months)
- Recurring subscription revenue excludes revenue above the contracted amount as well as services (pg. 41)
- Recently more clients have requested quarterly and monthly billing resulting in decreased deferred revenue (pg. 41)
- Professional services are available for training, implementation, integration, deliverability, campaign services and strategic consulting (pg. 42)
- Write off of $1.2M due to pulling their 2007 S-1 IPO filing (pg. 53)
- 43 consecutive quarters of revenue growth (pg. 72)
- 401 employees in sales and marketing (pg. 88) – since they have 285 sales reps, assume 30 in sales management, leaves approximately 85 people in marketing
- Beneficial equity ownership (pg. 116):
Technology Crossover Ventures – 25.8%
Greenspring Associates – 17.8%
Battery Ventures – 17.5%
Scale Venture Partners – 7.1%
Co-founder and CEO – 3.8%
COO – 1.2%
- Acquisitions (pg. F-17):
Keymail Marketing LTD. acquired for $1.6M
CoTweet acquired for $15.8M ($14.3M of which was goodwill, which is crazy high relative to purchase price)
mPath Global Pty Ltd. acquired for $2M
Frontier Technologia Ltda. acquired for $5.4M
The ExactTarget S-1 IPO filing was straightforward and didn’t have any surprises.
What else? What other thoughts did you have from the ExactTarget filing?
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When meeting with an entrepreneur one of the questions I like to ask early in the conversation is “What outcome do you want from this meeting?” With so many different topics covered in a typical startup-oriented conversation, there’s a tendency to share useful information but not necessarily spend enough time on the most pressing items.
Here are some of the more common meeting outcome requests:
- Feedback on the idea/concept
- Introductions to investors, partners, and people that can potentially help
- Resources like books and blogs to solve specific problems or better address potential opportunities
- Analysis of a specific issue
The next time you’re in a meeting, be straightforward and ask the question “what outcome do you want from this meeting?” You’ll be able to spend more time on the key issues and get more value from the conversation.
What else? What other general questions do you commonly ask in a conversation?
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An entrepreneur recently asked me for advice regarding the amount of equity to grant to a key hire. There’s a fair amount of information online with the following rough values for a Series A-stage company (the values can vary dramatically for a number of reasons):
- CEO – 5%
- C-level – 2%
- VP – 1%
- Director – .5%
- Manager – .25%
- Engineer/specialist – .1%
Percent ownership is only one piece of the equation, and is best viewed in the context of a number of factors like preferred stock preferences, strike price (assuming stock options), money raised, etc.
Instead of percent ownership, I prefer approaching it in the same manner as Fred Wilson. Here’s a quote from his post titled “Employee Equity: How Much?“
The key thing is to communicate the equity grant in dollar values, not in percentage of the company. Startups should be able to dramatically increase the value of their equity over the four years a stock grant vests. We expect our companies to be able to increase in value three to five times over a four year period. So a grant with a value of $125k could be worth $400k to $600k over the time period it vests. And of course, there is always the possiblilty of a breakout that increases 10x over that time. Talking about grants in dollar values emphasizes that equity aligns interests around increasing the value of the company and makes it tangible to the employees.
So, the next time you’re discussing equity with an employee, explain all the parameters but focus the conversation around dollar values and expected outcomes.
What else? What are your thoughts on determining equity grants for startup employees?