Video of the Week: How to make hard choices | Ruth Chang

For our video of the week, watch How to make hard choices by Ruth Chang. Enjoy!

From YouTube:
Here’s a talk that could literally change your life. Which career should I pursue? Should I break up — or get married?! Where should I live? Big decisions like these can be agonizingly difficult. But that’s because we think about them the wrong way, says philosopher Ruth Chang. She offers a powerful new framework for shaping who we truly are.

Most Second Product Initiatives Fail

Recently I was talking with some entrepreneurs and the topic of second products came up. Here, a second product would be an additional product offering that’s a true, standalone product and not an add-on to the original product. Without missing a beat, everyone went around and said that every second product they launched failed.

I’ve been there. I’ve tried launching a second product multiple times and they all failed. Why?

Here are a few thoughts:

  • Lack of Product/Market Fit – Inevitably, a new product doesn’t accurately meet the needs of the customers. Even with one product that does have product/market fit, it’s incredibly hard to build a second one.
  • Must-Have vs Nice-to-Have – Very few products are a must-have. The chances are high that while the first product was a must-have, the second product was a nice-to-have.
  • Best People Challenge – With one product working, the likelihood that the very best people are assigned to a new product is low. And, if they are assigned to the new product and the first product starts to have issues, they’ll be pulled back to the first product immediately.

Second products can work but entrepreneurs would do well to maximize every element of their core product before expanding.

What else? What are some other reasons why second product initiatives fail?

Funding Dynamics for Modest Growth SaaS Startups

Continuing with the discussion around SaaS funding valuations and forward multiples, I was talking with a growth equity investor out of the Northeast yesterday and the topic of valuations came up. Now, growth equity typically targets startups with $10 – $25 million in annual recurring revenue and makes a sizable investment ($10+ million). For this particular firm, they focus on SaaS startups with modest growth between 10% and 30% where they believe the companies can continue to grow for a number of years, but are often overlooked by the larger funds because they don’t have a high growth rate (e.g. 60%+ growth per year).

Here’s how they think about these investments:

  • Growth rate still drives valuation with typical valuation range being 3 – 5x current annual recurring revenue (but usually closer to 3 – 4x)
  • Return expectations are targeted at 3x cash on cash in 3 – 5 years (imagine buying in at 4x run rate, the company doubles in size over a few years, and a buyer comes along that pays a higher multiple)
  • Forward multiples are less relevant as there’s not as much competition among investors driving valuations up
  • Metrics like gross margins and renewal rates, as well as the management team and market size, also play an important role in valuation

Entrepreneurs looking to raise institutional capital at a large multiple need to have a great growth rate to go with it. Otherwise, the valuations are a much lower multiple of a run rate.

What else? What are some more thoughts on funding dynamics for modest growth SaaS startups?

2017 Simplified One Page Strategic Plan

Continuing with yesterday’s post Time for 2017 Budgets, it’s also time to get the 2017 Simplified One Page Strategic Plan ready. The goal with the plan is to align everyone in the company around a simple, straightforward document that outlines the most important things in a concise manner. Too often, the entrepreneur runs around with a number of great ideas in his or her head and doesn’t realize that everyone else in the organization doesn’t see what they see. Communication and alignment takes work; start with a simple plan.

Here are the contents of the Simplified One Page Strategic Plan (Google Doc template and example plan):

Purpose

  • One line purpose

Core Values

  • General – fit on one line
  • People – fit on one line

Market

  • One line description of your market

Brand Promise

  • One line brand promise

Elevator Pitch

  • No more than three sentences for the elevator pitch

3 Year Target

  • One line with the goal

Annual Goals

  • 3-5 annual goals in table format with the start value, current value, and target value

Quarterly Goals

  • 3-5 quarterly goals in table format with the start value, current value, and target value

Quarterly Priority Projects

  • Three one-line priority projects with the percent complete for each

 

That’s it — simple yet powerful. Check out the Simplified One Page Strategic Plan Google Doc template and take a look at an example plan. Good luck!

What else? What are some more thoughts on the Simplified One Page Strategic Plan?

Time for 2017 Budgets

With the end of 2016 almost upon us, it’s a great time to start planning for 2017, and that means making budgets. Budgeting, especially for seed and early stage startups, is more about outlining the costs to execute a plan and defining a not-to-exceed number as things are fluid and change rapidly with new information.

For budgeting, I like a simple Google Spreadsheet (see this budget example) as follows:

  • One tab for XYZ Budget Detail and one tab for XYZ Budget Summary
  • One column for each month “Budget” and one column for each month “Actual” followed by the corresponding quarter “Budget” and “Actual”
  • A concluding column for the year “Budget” and the year “Actual”
  • In the “Detail” sheet, a line item for each thing in the category followed by a summary row for the category
  • In the “Summary” sheet, a line item for each category summary followed by a row total for the month, quarter, and year

Here’s an example budget Google Sheet that works well for a department and can be copied and customized.

Budgets aren’t the most fun project but are an important part of a startup when scaling the organization.

What else? What are some more thoughts on budgeting?

SaaS Funding Valuations Based on a Forward Multiple

Continuing with last week’s post on 3 Quick Ideas When Thinking about SaaS Valuations, there’s another common way to determine a SaaS valuation for funding purposes based on a multiple of what the revenue or run-rate will be in 12 months. This approach is known as a “forward multiple”, and because the valuation is based on an expected amount in the future, it effectively takes into account the current growth rate, which is one of the largest, if not the largest, drivers of valuation, everything else being constant.

Long term, SaaS companies will likely trade at 4-6x revenue based on strong recurring revenue, great gross margins, and excellent economies of scale. As a simple example, if a SaaS company was put into harvest mode, it could generate 60-80% profit margins and get an EBITDA multiple of 6 – 10x, resulting in the same value as 4-6x revenue.

So, if a startup is doubling year over year, and expects to double again next year, a funding valuation could be 4-6x the expected run-rate in twelve months. If a startup is at $5 million today, and will clearly be at $10 million in 12 months, asking for a pre-money valuation of $40 – $60 million might get funded, assuming a great team and market. Investors would be willing to “pay up” for a fast-growing startup as they believe it’ll continuing growing fast and has the opportunity to be a large, meaningful business.

For entrepreneurs raising money, use the idea of a forward multiple when discussing valuation.

What else? What are some more thoughts on SaaS funding valuations based on a forward multiple?

3 Reasons Founders Might Not Make Any Money After Raising Venture Capital

Yesterday’s post on Most Founders that Raise Venture Capital Don’t Make Any Money prompted a number of comments and questions. One of the popular questions was “why?” If a startup raises millions of dollars of institutional capital, why would a founder not make any money? Here are three reasons:

  1. Stacked Preferences – Most venture investments are either participating or non-participating preferred equity such that investors get their money back first in the event of a sale. For example, if the startup raises $25 million in capital and ends up exiting for $20 million, the $20 million would go to the investors and the founders wouldn’t make anything (unless there was a carve out or incentive plan to join the new company). The more money the startup raises, the higher the bar to sell where everyone is happy.
  2. Down Round – If a startup raises a round at a valuation lower than the previous round, a variety of anti-dilution clauses kick in that “true up” the previous investors’ quantity of shares to reflect their previous investment in the context of the new, lower valuation. Depending on how much lower the valuation, these anti-dilution measures can completely wipe out the common shareholders including the founders.
  3. Bankruptcy – Not all venture-backed startups succeed, and a small percentage go bankrupt even after raising institutional capital. With a bankruptcy, shareholders are wiped out, including the founders.

A general rule is that if the startup sells for 3x the amount of money raised, things are usually OK for the founders. If the startup sells for 10x the amount of money raised, things are great for the founders.

Most founders don’t make any money after raising a venture round and these are a few reasons why.

What else? What are some more reasons founders might not make any money after raising venture capital?