Scale of success? Markets, Markets, Markets

Last week I was talking to an entrepreneur and the topic of scale in the context of success came up. Some entrepreneurs do the impossible and build massive companies while others do an incredible job, but the company is still relatively small. Of course, the scale of success is not nearly as important as positively contributing to the world and making a strong impact on the community. With that said, scale and size is an important consideration when thinking about level of ambition and effort.

Yesterday, I was reminded of this scale conversation when reading Michael Dell’s new book Play Nice But Win: A CEO’s Journey from Founder to Leader. The Dell Computer Corporation story is well known, but even with that background, learning hundreds of new details and anecdotes made it even more amazing. One detail stood out the most, especially in the context of scale: six years after founding the company, the business made the Fortune 500 with ~$1 billion of revenue, all done organically with almost no capital. Simple stunning. The Fortune 500, by its very definition, is the 500 largest public companies in the United States as ranked by revenue. To build a Fortune 500 company in a lifetime is rarefied air, but to do it organically in six years is unfathomable.

What does this have to do with the scale of an entrepreneur’s success? Markets. Markets drive everything. No matter how talented the entrepreneur and team, without a great market, the level of success will be stunted. There’s an old saying in the startup world from Andy Rachleff, founder of Benchmark Capital, “When a great team meets a lousy market, markets win.” Ideally, an entrepreneur will pick a great market initially, or pivot into a great one fairly quickly, but without that, the chance of major success drops dramatically.

Entrepreneurs have a tendency to rush into the next shiny opportunity that presents itself. The lesson here is to step back and spend more time evaluating the market. What are the trends? How big is the opportunity? How much is it a must-have product? What’s holding back adoption today? Naturally, there’s no way to predict how a small market today will turn into a massive market tomorrow. With thoughtful research, it is possible to evaluate markets and make the best decision with the information available.

When it comes to the scale of success, markets drive everything. Choose wisely.

Core Venture Studio Questions

Last week I had the opportunity to meet with the team behind a new venture studio. A venture studio, like our Atlanta Ventures, is a meta startup that creates more startups. Similar to an incubator, a venture studio brings all the ingredients together for new company creation.

Like any business strategy, there are unlimited number of permutations with no right or wrong answers. In the venture studio world, there are a series of questions that come up repeatedly. Here are the core venture studio questions:

  • What do you look for in entrepreneurs?
  • How do you find entrepreneurs?
  • How do you come up with startup ideas?
  • How do you decide which ideas to pursue?
  • How much money do you invest in each startup?
  • Do you take outside money for subsequent rounds?
  • How is the equity split with the entrepreneurs?
  • How many new ones do you start per year?
  • What does the recurring interaction with each startup look like?
  • How many will you have going at any given time?
  • What types of startups and business models will you do?
  • How do you define success?

Answering these questions covers the majority of the questions for the general direction of a venture studio. Naturally, the model evolves over time and answers will change, but the basic approach is fairly consistent.

Creating a venture studio is incredibly fun, and terribly difficult at the same time. Free markets and an abundance of capital make for heavy competition, but there’s always more whitespace to invent the future. Thankfully, innovation isn’t a zero-sum game — it’s additive to the world.

Want to join a venture studio as an entrepreneur? Want to start your own venture studio? Reach out to us and let’s talk.

Favorite Questions to Ask Entrepreneurs

Last week I was at a dinner sitting next to a successful entrepreneur that had built his business to hundreds of employees over the course of 10+ years. Once we finished with the standard chit chat, I asked my favorite question for late stage entrepreneurs:

When did you know you were going to be successful?

Often, it takes two, three, or even four plus years before it feels like you’ve made it. Of course, it isn’t a switch that turns on overnight. Rather, it’s the confluence of hiring momentum, sales progress, market adoption, and scalable infrastructure.

After asking this question, it got me thinking about other fun questions for entrepreneurs. Here are my favorites:

  1. What was the inspiration for your startup?
  2. What was the biggest inflection point in your startup?
  3. How long have you known you wanted to be an entrepreneur?
  4. How did you meet your co-founder?
  5. When did you know the time was right to go full-time?
  6. What was your original idea and how did it change with market feedback?
  7. How did you find your first customers?
  8. How did you find your first investors?
  9. What are your biggest learnings so far?
  10. What were your biggest challenges?
  11. What would you have done differently?
  12. Who was your most important mentor?
  13. What keeps you busy now?

Try these questions out the next time you talk to an entrepreneur and see where the conversation goes. Learning from entrepreneurs is one of my favorite things, and these questions set the stage.

Try these questions and let me know some of your favorite questions to add to the list.

When the Direction Doesn’t Feel Right, Get the Team Together

Last week I got together for a multi-hour strategic session with a great entrepreneur and his team. We’d been talking about a specific, important item for a couple months and the general direction was clear but a critical piece of it didn’t feel right.

As a team, we worked hard to define what we stand for, what we will, and won’t do, and some of our goals for the next 5-7 years. We asked important questions like the following:

Why do we exist?

What is our #1 goal?

What have we learned so far?

What do we need to learn next?

After we went up a couple levels and worked on the most strategic questions, when we finally came back down to the 2022 plan, we were able to ask better questions. From here, we were able to articulate what was needed. And, thankfully, we were able to ask the hard questions about why a current piece didn’t feel right, and find a better solution.

When the current direction doesn’t feel right, get the team together. Go as strategic as possible, frame the discussion, ask the hard questions, and find a better solution.

250 Startup Employees Per Spinoff Startup

Recently, I was asked how often new startups are formed from employees that worked together at previous startups. Good question. Most startups emerge from an entrepreneur encountering an unmet need or opportunity in the market, often informed by their previous job. While I don’t have hard stats, I do have anecdotes from local startups.

Two high-growth startups in town are Terminus and Salesloft. Terminus does multi-channel account-based marketing, has 363 employees listed on LinkedIn, and has raised $120M according to Crunchbase. Salesloft does sales engagement software, has 726 employees listed on LinkedIn, and has raised $246M according to Crunchbase.

From these two pre-IPO stage startups, I know of at least four startups that were started by alumni:

  • Tourial – Self-guided product experiences
  • Sonar – Tech stack monitoring
  • Spaceship – Continuous delivery platform
  • OrderNerd – Restaurant online order management

These startups emerged over the last few years, and the number of startup spinoffs is obviously not static as there are likely more. Let’s call it four startup spinoffs from a combined 1,000 employees, making it one spinoff for every 250 employees.

Startup success begets more startup success, and for every 250 startup employees, look for a new startup spinoff to emerge.

Filter Customer Requests Against the Vision

One of the human behaviors I’ve seen many times, and fallen prey to myself, is trying to do all things for all customers. A feature request comes in from one customer — let’s do it. A “must have” request comes in from a prospect — let’s do it. An item is listed on an RFP that won’t do have — let’s do it. Ultimately, if you do this, and stay alive long enough, the result is a Frankenstein of a product. Sure, it does a multitude of things but it’s only OK at a number of items and not incredibly good at any of them.

Many more entrepreneurial dreams die of indigestion than starvation.

For every request that comes in, ask the question: how does this fit our vision? Not the vision of where we are today, rather the vision of where we want to be in five or 10 years. It’s easy to get caught up in keeping the lights on (important!), pleasing investors, and making progress, but don’t do so without critically thinking through how this impacts where you’re headed.

Need help deciding what fits in the vision and what doesn’t? Paint a picture of your ideal customer. What does he or she do? What problem are they solving? Why are they buying from you? Why do they absolutely love your solution? By continuously refining the vision for the ideal customer, and comparing incoming requests to their need, it’s easy to see what does, and doesn’t, fit.

The next time a request comes in, filter it against the vision. The strongest products have an opinionated view of what they will, and won’t, do. Build for the ideal customer and avoid being all things to all people.

Growing Into Reset Startup Valuations

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 startup land, 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.

Continued Startup Momentum in Atlanta

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.

Customer Onboarding Effort and Retention

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.

Startup Executive Bonus Plans

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.