Month: September 2021

One of the popular topics right now is asset prices and valuations. Everywhere you look, things are priced at all-time highs — public companies, startups, homes, cars, etc. Whether investing, or consuming, the current market dynamics are highly unusual. In startupland, with the BVP Cloud Index publishing an average revenue multiple of 23x, public Internet companies are priced to perfection. But does that matter?

Let’s say the valuation of all public (and therefore private) cloud companies are cut in half — 11.5x revenue multiples. The BVP Cloud Index average growth rate is 37%. Assuming growth stays the same (which it won’t), and valuation multiples are halved, how long will it take to grow into the previous valuations?

Let’s break down the math:

Current Valuation is $1 billion

At a valuation multiple of 23x revenue, revenue is $43.5 million.

If the new valuations were cut in half, $43.5M * 11.5 = ~$500M.

Assuming a constant growth rate of 37%, let’s look at how long it takes for the $500M valuation to get back to a $1B valuation.

Year 1

$43.5M * 1.37 = $59.6M revenue

$59.6M revenue * 11.5 multiple = $685M valuation

Year 2

$59.6M * 1.37 = $81.6M

$81.6M revenue * 11.5 multiple = $940M valuation

Now we know: if valuations get cut in half, it’ll take just over 24 months to grow back into the previous valuation, assuming a constant growth rate. And, assuming continued growth, the startups will dramatically appreciate in value once again post valuation reset.

Growth, growth, growth. As long as there’s strong growth ahead, valuations can be drastically reset and there’s still great value creation in the future.

Wow, last week was an amazing one on the announcements front for the tech and startup scene in Atlanta. For years, we’d have one or two big announcements per quarter. We’ve had four just in the last five days. Momentum!

Let’s take a look.

MailChimp Acquisition by Intuit for $12 Billion

This is one of the largest bootstrapped acquisitions of all-time. Nothing Atlanta specific, this is one of the biggest deals in the world for a bootstrapped tech company. In addition to the founders becoming multi-billionaires, the staff is getting $500 million as bonuses and equity awards. One of the big ideas is that success begets success in a startup community, and having tons of new millionaires (and billionaires!) in the community will help fund the next generation of startups.

Roadie Acquisition by UPS

A logistics startup in a logistics town acquired by one of the largest logistics companies in the world. Yep, that’s Atlanta for you. Roadie, which provides same-day delivery, announced their acquisition by UPS for an undisclosed price that is rumored to be a huge number. Per Crunchbase, Roadie has raised $62M since their founding in 2014.

Stord Raises $90 Million at a $1.1 Billion Valuation

The unicorn stampede continues. Local supply chain and logistics startup Stord announced a $90M round at a $1.1 billion valuation led by Kleiner Perkins. Stord is especially interesting as it came out of CREATE-X at Georgia Tech and is only a few years old. More logistics in Atlanta.

GreenSky Acquisition by Goldman Sachs for $2.2 Billion

The buy now, pay later space is on fire (Zoolander, so hot right now) and GreenSky, which specializes in home improvement financing, just announced their acquisition by Goldman Sachs for $2.2 billion. GreenSky was one of the more recent Atlanta startup IPOs and it’s great to see they found a long-term home.

All in all, a pretty amazing week for the tech and startup scene in Atlanta. I’m excited for the what the future holds.

During the early Pardot days we’d be out pitching venture capitalists and they’d always ask about customer onboarding.

How long does it take to get a new customer live?

What are the steps involved?

How much manual labor is required?

We’d outline the process of how it’d take 30-45 days, how it was “productized services” with a repeatable template, and that it’d usually require 10 hours of manual labor plus some group webinar sessions. All in, it might be $1,000 of work to get a new customer up-and-running. Then, inevitably, the investors would ask how we can bring that cost down. How could we make it more self-service? Knowing that some could be automated but most effort is manual making sure the CRM sync was working, that the landing pages looked correct, that the emails rendered in the inbox, etc.

I felt we were inferior. We weren’t self-service freemium. We had wonderful humans helping make our customers successful, and that took time.

Only later did I realize that this was actually a positive, and not a negative.

The more effort it takes to onboard a customer, the more committed they are to the product. The more committed they are to working through the inevitable kinks. The more likely they are to renew, assuming a good experience.

There’s a direct correlation between onboarding effort and retention rates. Yes, exceptions exist but more effort to get on means more effort to leave. In SaaS, renewal rate, gross and net, are two of the most important metrics, and onboarding effort correlates with better renewal rates.

The next time the topic of effort to onboarding new customers comes up, know that in addition to generally increasing the chance of customer success, it also correlates positively with renewal rate. Put the effort in and reap the rewards.

Over the years I’ve seen a variety of bonus and incentive plans for startup executives. Ideally, equity compensation alone would drive the appropriate behaviors to optimize what’s best for the business but bonuses and incentive compensation are commonplace as the startup scales.

In the early years, below a few million in revenue, it typically doesn’t make sense for an executive bonus plan as the business doesn’t have enough repeatability, there are few executives, and it isn’t worth the overhead. With time and success, a bonus plan should be added.

There are a few guidelines I like to think through for a startup executive bonus plan:

• Keep it Simple
  Too often, I see plans that are overly complex. The main goal of the bonus plan is to drive behavior that aligns with the business goals. Multiple priorities equals no priorities. For an initial plan, err on the side of being too simple and go from there.
• Target the Most Important Metrics
  While there are dozens of metrics that should be tracked weekly, it’s best that a bonus plan align with 1-3 metrics that are both easy to understand and the most important in the business. For example with SaaS, growth rate is a huge driver of valuation and is a common bonus metric.
• Counterbalance the Metrics
  Ideally, one or more of the bonus metrics have a counterbalance metric so that the combined results are best for the business. As an example, if growth rate is the first metric, the second metric would be cash burn such that the executives are aligned to grow as fast as possible while burning an appropriate amount of cash. Faster growth might be possible with more cash burn, but the executives would be incentivized to get the mix just right for their bonuses, and this would align with the board expectations.
• Tied to Base Salary
  Bonuses are usually connected to the salary as a percentage of base compensation. For example, a bonus that is 30-40% of base salary is most common so that executives have the majority of their short-term compensation paid out regularly and once a year they get their bonus (typically paid out after the fiscal year is closed out).

So, as an example, an executive bonus plan would be 40% of base salary and weighted with 70% for growth rate and 30% for cash burn and paid out annually. The percentages and metrics vary from business to business but the general ideas stay the same: keep it simple, target the most important metrics, counterbalance the metrics, and tie it to the base salary.