Activating Potential Founders

For the last 15 years we’ve been debating and experimenting with how to grow a startup community. From events to co-working to funding, we’ve tried thousands of ideas. One area that’s under-served is getting potential founders off the sidelines. I believe there are significantly more would-be founders that can build successful companies than are doing so. We need to increase the starting of startups.

Here are some questions we’re asking about how to activate potential founders:

  • What’s holding potential founders back from starting a company?
  • What’s needed from an education, skills, funding, and community perspective?
  • How do we elevate entrepreneurship in the city to make it more top-of-mind?
  • How do we get more people thinking about entrepreneurship in high school or college?
  • How do we get more people with existing careers working on side hustles that could lead to a startup?
  • How do we get existing companies to embrace local startups?

The rise of remote work due to COVID, especially in the startup world, has removed one of the traditional push backs: how are you going to find the talent to scale? Talent is more distributed than ever. While founders can also be anywhere, it behooves our community to have them here to create jobs (some of them, anyway), grow wealth, and give back. Plus, it’s more fun face-to-face. Let’s have the founders be local and the team be anywhere.

While we love when entrepreneurs move to the region, the most opportunity to grow our startup community is getting potential founders into the arena. 

What should we be doing? How do we activate more potential founders?

Priority Should Have No Plural Form

Lately I’ve been studying Andrew McConnell‘s new book Get Out of My Head: Creating Modern Clarity With Stoic Wisdom and listening to his interview on The Atlanta Story podcast. With a number of excellent personal stories and interviews with entrepreneurs, Andrew captures and translates our modern endeavors with that of the Stoics from thousands of years ago. Spoiler alert: many of our life learnings and philosophical outlooks aren’t new. What is new is making it relatable to our generation.

One of my favorite passages from the book was about the word priority. Here’s the text from the section “Less but better”:

“…the very word priority initially had no plural form. By definition it was singular. It was the thing prior to all other things. For five hundred years, from its entry into the English language in the 1400s all the way up to the 1900s, it remained as such.”

One of the most common mistakes I see entrepreneurs make is having too many priorities. When opportunity abounds and there are many different possible directions, it’s easy, and natural, to try and do too much. With the Simple Strategic Plan, there’s a section for “Quarterly Priority Projects” and upon asking entrepreneurs for their plan prior to meeting, 90% of entrepreneurs put more than three priorities and make the priorities too vague and broad. With too many priorities, there are no priorities.

Making it even more simple, there should be no more than one priority per person. Solo entrepreneur? Only one priority project. Three co-founders? Only three priority projects. Similar to the idea of a Directly Responsible Individual (DRI), one single person has to own the initiative and they’re solely accountable for the outcome.

The next time someone mentions their priorities, think single priority and ask about the real priority. Priority should have no plural form. Priority is what comes prior to everything else.

Illiquid Startup Equity as a Feature

With the continued volatility in the public markets, which are now on a strong upswing, it’s tempting to look at the stock prices and investments on a regular basis. Great, the market is up 2% today, how’s my portfolio? Bummer, the market is down 1% today, how’s my portfolio? Of course, it’s outside our control and should be ignored, save for a periodic annual or quarterly review. But, the fact that it’s there, at our finger tips, makes it distracting and compete for our attention.

In the startup world, we have a few measures of the value of our equity. The most common, and often misunderstood, is the valuation from the latest funding round. Let’s say a venture firm invested $5M at a $20M pre-money valuation, such that the company is worth $25M. Well, that’s for preferred stock which often has a number of special features that make it more valuable than common stock (features like dividends and anti-dilution). The next type of valuation that’s well known is the 409A. The 409A is an independent appraisal of the fair market value of the common stock that’s accepted by the IRS so that employees will get long-term capital gains. Put another way, it’s an independent valuation so that employees can be granted stock options at a lower valuation and save on their taxes if everything goes well. As a ballpark, the 409A valuation is 40-50% of the last round’s valuation.

Even with these valuations, there’s often no way to sell stock. Sometimes, at the later stages, existing or new investors will offer to buy some of the employee stock. In addition, there are different marketplaces to buy and sell private stock, but they are often limited to the most well known and desirable startups (read: only famous startups have much trading activity) and many startups prohibit selling stock without approval (startups don’t want to violate government rules around too many shareholders and other challenges with unknown shareholders).

The biggest downside to lack of liquidity with startup equity is that it’s worthless most of the time and thus there’s no financial gain from it. The majority of startups fail, even after raising money from investors. Startups sell for less than the capital raised making the common stock worthless. Many startups are zombies where they continue to operate but don’t make enough progress to create substantial value, and thus no opportunities for liquidity.

Even with these illiquid challenges, for startups that work out, illiquidity is a feature. Why? When a startup succeeds, there’s a tremendous amount of compounding value. If there were opportunities to regularly sell shares, like with a public company, it’s too easy to do so and lose the upside. Compounding value is one of the most powerful forces. Forced deferral of selling startup stock, in scenarios where the startup is successful, is a feature because it creates the most value and wealth for the team.

Illiquid startup equity is a feature, not a bug, when the startup works out as there aren’t daily distractions of the stock price and the team benefits from compounding the value of their equity at a high rate for the life of their tenure. The next time someone laments about not being able to sell their startup stock, focus on the upsides.

Notes on Corporate Retreats for Startups

Earlier this month I had the opportunity to attend a corporate retreat for a large startup that’s now fully remote. As part of spending a couple hours at the multi-day event, I asked general questions about the retreat to a variety of team members from the frontlines to senior executives. Primarily, my questions where ones like what did you like, what didn’t you like, and what would you change.

Now, this was a big event with several hundred employees. The format was roughly two days of speakers ranging from company leadership to hired experts on topics like personal productivity. After the main event for all employees, some departments and teams stayed an extra day for more specific workshops and working sessions. Counting the time to fly in ahead of the first day and fly out after the third day, it was a full four day commitment for a huge number of people.

Here are some of the notes I took after talking to several people:

  • Multiple, interesting venues – The two main days were held at different locations with one being a stadium and one being a local theater. Employees enjoyed having different venues and getting a feel for two of the most iconic places in town. Without question, the theater was considered the better venue for acoustics as a large stadium usually isn’t ideal for sound quality.
  • Mix of corporate topics and “fun” topics – Team members liked how the company invested in great outside speakers and mixed them in with presentations on the roadmap, fireside chats, and general corporate topics. Quality speakers cost extra, but are well worth it if financially feasible.
  • Becoming an event planner / travel agent – Senior execs I talked to were emphatic that it took way more time and energy to plan and coordinate the event. One likened it to the effort to organize and run a giant wedding. From travel to hotel to food to venues to speakers, it was the equivalent work of multiple full-time people for the months prior to make it all happen.
  • Face-to-face is incredibly valuable – Without prompting, the first response from everyone was how great it was to see co-workers in person and build deeper relationships. Of course, there were some comments about how it’s natural to build up a more complete image of someone where you’ve only seen their head on a screen only to find out people were taller or shorter than expected, different mannerisms, and other characteristics you wouldn’t know without human interaction.
  • Ad-hoc questions and side-bar conversations – The last item I heard was around the value of ad-hoc questions and side-bar conversations. So often, typical meetings, chat rooms, and email exchanges have a specific focus or agenda. Hanging out at a multi-day event inevitably has downtime that leads to talking about so much more than the standard topics. There’s tremendous value here that’s hard to quantify.

With huge numbers of startups now remote or hybrid, the growth in corporate retreats is exceptional. Look for many more best practices and resources to emerge as this area of the startup world grows.

What else? What are your favorite best practices for corporate retreats?

SingleOps Partners with FTV Capital

Many years ago I had the opportunity to meet Sean McCormick when he was working on a startup in the automotive space. Immediately, I took a liking to him and admired his poise and thoughtfulness. We talked a bit and each time he would diligently follow up on our conversations and questions. While the automotive idea wasn’t the right fit, a few years later we reconnected on his latest idea SingleOps: business management software for the green industry. Put more simply, software to help tree care and landscaping companies run their entire business. Think everything from scheduling crews in the field to sending sales proposals to collecting payments — all focused on outdoor service businesses. 

Seeing my dad run his small business on Ortho2 for four decades, I knew the power and stickiness of vertical SaaS deeply tailored to an industry. I was very interested. After a few quick discussions, I lead the seed round for SingleOps in 2017 and joined the board. As hoped, Sean and his team executed well growing the business over 10x, establishing the premier brand in the industry, and winning a spot on the Inc. 5000. Now, thousands of people use SingleOps daily to run their own business and deliver solutions to their customers. If you have a tree care or landscaping business, you should use SingleOps.

Last week, SingleOps announced a $74 million investment from FTV Capital to accelerate growth and help realize the long-term vision. So many tree care and landscaping small business owners still run their companies by hand without specialized technology — much like going on a long road trip without a GPS, there’s a better way. It’s only a matter of time before SingleOps becomes the default standard and the majority of the industry runs on the platform. While my time on the board of SingleOps is done, I remain a cheerleader and supporter of Sean and his team. Thanks for including me in the journey. Onward and upward!

Challenging Life Experience as Entrepreneur Characteristic

One of the more popular questions I get is, “What are characteristics of successful entrepreneurs?” Beyond basic personality attributes like passionate, opinionated, confident, resourceful, positive, and self-motivated, I like to offer an even more qualitative thought: successful entrepreneurs have often overcome a challenging life experience. Thinking about it more, here are a few of the common life experiences among this cohort:

  • Death of a parent or sibling at an early age
  • Watching a parent desperately struggle
  • Run-in with the law or similar extreme mistake
  • Immigrating to a new country

What to make of this? Possibly, it’s a situation where the entrepreneur has already experienced an incredibly difficult life situation and believes they can persevere in future challenges, like starting a business. If you’ve seen rock bottom, or personally been through a life-changing difficulty, potential unknowns don’t seem as scary. Psychologically, to most people, starting a business is a giant leap into the unknown that they want to avoid. If you’ve already experienced the worst, the bar is much higher for bad, and you’re more willing to take on the challenge.

Alternatively, by going through such a challenging situation, some people want to try and control more of the things in life that are possibly controllable. Most things in life, other than a select few choices like attitude, aren’t controllable. Entrepreneurs often have a high locus of control, and believe they can influence and control more than the average person. If you’ve seen bad, and want to avoid it, or at least reduce it’s impact, creating an environment with more control is an ideal route. For some, building a company creates more control and eliminates risk.

The next time you hear the story of a successful entrepreneur, see if there’s a challenging life experience in there. More often than not, an unusual hardship or family situation is part of that life scrapbook.

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 multiples will have an even more difficult time raising money at a price greater than their last round unless they’ve grown substantially. With an impending recession, growth is going to be even more challenging.

Public market multiples directly impact private company valuations. Other than a brief period of time recently, it’s been this way forever. As entrepreneurs, we should understand this relationship and take it into consideration as part of our fundraising plans.

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 the list.

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, luck plays a role.

The next time an entrepreneur asks what it takes to be successful, consider the idea, “be single-minded long enough to get lucky.”

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 unrelated percentages, we call the resulting value a score. Some simple examples to achieve 40:

  • Grow 60% with -20% profit margins (lose money)
  • Grow 40% at break even
  • Grow 20% with 20% profit margins (make money)

The challenge in startup land today is that too many startups have a Rule of 40 score well below 40, with some even having a negative score. To get to a score of 40, or higher, many of these startups are laying off employees to cut expenses to reduce their losses and improve their margins. For all startups, cost cutting is the fastest way to improve the Rule of 40 score.

Beyond being an important overall metric for startups, it’s also an important score to use for educating and aligning employees. As you can see, there’s an indefinite trade-off between growth and profits. Startups, by their very definition, are growth-oriented companies. So, growth is a given, yet it’s constrained by cash — both cash from investors and cash generated/lost from operations. The more team members keep the Rule of 40 as an important driver in their decisions, the more they’ll optimize for capital efficient growth.

Entrepreneurs would do well to make the Rule of 40 score one of the key metrics of their business and ensure all stakeholders understand the importance.