How an Employee Stole $50,000 from Pardot

One of the more challenging stories I haven’t told is how an employee stole $50,000 from us at Pardot back in 2012. At the time, we had this great receptionist that was thoughtful, attentive, and a great culture fit. We were running a program where if a customer referred a prospect to us that did a demo, we rewarded the customer with a $100 Amazon.com gift card. To make it more personal, we’d physically mail the gift card to the customer with a handwritten thank you note.

The program had been running a couple months and was growing in success. To take some load off the sales reps that were doing it, we had everything go through the receptionist. Now, things were humming and the receptionist was ordering a number of Amazon.com gift cards on a regular basis, yet we weren’t tracking who requested what and how much was being spent on these gift cards (mistake #1).

The receptionist, being nefarious, tried adding a couple extra gift cards to an order to see if anyone would notice. Nope, no one noticed.

Next, the receptionist figured out that because we were constantly exceeding our Amex credit limit (fast growing company!) we were now paying the credit card bill twice a month such that there was a two week window from when you could put items on the Amex and someone would check the online statement (mistake #2).

Finally, it was time for the big move by the receptionist: max out the credit card with gift cards right before it was about to paid off, wait until he heard accounting made a payment on it, and then go for the kill. Being the receptionist, he took delivery of all the Amazon.com packages daily, so he decided to order a number of expensive personal items, and more gift cards with next day deliver. The very next day, several packages arrived for him and he promptly took them to his car and left calling in with a fake family emergency. We never saw him again.

After putting the pieces together, including analyzing the Amazon.com purchases, the receptionist had stolen $50,000 from Pardot. Naturally, we called the police to report him but there was no interest in pursuing a non-violent white collar crime. He got away free and clear.

As an entrepreneur, this is one of those bummer moments that’s a good learning experience. We didn’t see it coming and we made sure it wouldn’t happen again. In the end, we moved on and it turned out to be a small event in the overall story.

When it comes to money and situations like this, put in some basic processes and controls — don’t make the same mistake we did.

In Search of Great Startup Ideas

After last week’s post on The SaaS Startup Studio, one of the most common questions was if you have to apply with an idea or are there already existing ideas to choose from. The answer: both. Finding a great idea is really hard, and most people fret too much over finding the perfect idea. Instead of a perfect idea, we’re taking a good-to-great idea that can be validated quickly through customer discovery to make a go/no-go decision in 3-6 months. Generally, it’s more about working through many ideas and learning fast, rather that going deep on one single idea.

Well, what are some ways to find a startup idea? Here are a few thoughts:

Ideas are all around us. Ask a friend about their recent ideas. Ask an executive about their biggest business problem. Ask a colleague what can be improved in the company.

Great ideas can be found with enough effort and time. Good luck!

The SaaS Startup Studio

One area I’ve been fascinated with is how to systematically start successful startups. I’ve talked to hundreds of successful entrepreneurs and thousands of unsuccessful entrepreneurs in search of patterns, best practices, and any insights into what does and doesn’t work. Even after talking to thousands of people, writing thousands of blogs posts, and reading hundreds of books, I can’t tell what will and won’t work.

What I have seen is characteristics that increase the chance of entrepreneurial success.

Founders full of grit, resourcefulness, and a past full-time entrepreneurial failure are more likely to succeed. The team matters.

Markets that are undergoing change and transformation are more likely to have great opportunities. The disruptive stream matters.

Must-have products that are clearly differentiated and not a nice-to-have are more likely to win. A not-a-meme product matters.

Over the last several years I’ve worked with a number of excellent entrepreneurs to start companies such as PardotRigor, SalesLoft, and Terminus. Some thrive, most fail. Personally, I’ve started many more that have failed than succeeded. Thankfully, the power of SaaS plus bigger markets makes winners cover many losses.

Now, our amazing team is working on a startup studio to systematically start and grow successful startups. We’ll combine past learning with new learnings to start several companies per year and help accelerate the next wave of startups.

Know anyone looking to become a SaaS entrepreneur? We’re hiring entrepreneurs-in-residence (EIRs) to evaluate and build new startups. Please let me know here or on LinkedIn.

Planning vs Doing as an Entrepreneur

Back in college I spent 100+ hours working on a full 50-page business plan for the Duke Startup Challenge. Everything was meticulously spelled out in painstaking detail with projections out to two decimal places. After submitting the plan I waited, and waited, only to hear back that I didn’t make it past the first round. Crushed.

Without third-party approval of my idea, Hannon Hill would never be successful. I needed external validation. I needed to be told that my idea would succeed. Not true. I didn’t need anyone’s approval. The only thing I needed was a customer. And that’s what I did — pushed forward with a failed business plan and focused on the customer. We signed up one customer, and then another, building one of the most important content management systems for higher education.

As an entrepreneur, I oscillate between planning and doing. Mentally, I know that working on the business is more important than working in the business, but I’m predisposed to getting stuff done — doing is my default. Of course, as the startup grows more time needs to be spent planning, and just as important, aligning the team and getting buy-in.

On the planning side, my favorite tool is the Simple Strategic Plan. Over the years I’ve tried a number of different worksheets and exercises but none are as comprehensive and easy to follow. The most important thing: implement a planning process and run the process on a regular basis (at least quarterly).

Entrepreneurs need to find a balance between planning and doing. Early days require more doing and later years require more planning. Recognize the need and act accordingly.

When SaaS Valuations Weren’t So Rosy

With Thomasz Tunguz’s recent post The 5 Forces Driving Startup Valuations Today it reminded me that SaaS valuations weren’t always so rosy. Today, the median forward multiple for public SaaS companies is 8.5x (meaning, these companies are valued at 8.5x expected revenues).

10 years ago we were out actively raising money for Pardot after hitting $1M in annual recurring revenue. We met with 29 different venture firms in Atlanta, D.C., Boston, and Silicon Valley. After being turned down several times with the message that the total addressable market for marketing automation was too small (hah!), we had three interested parties that floated valuations and wanted to talk potential term sheets.

By the time of these advanced conversations, we had $1M in trailing twelve months recognized revenue, $1.3M annual run rate, and 300% growth rate. Here were the verbal offers:

  • $500,000 investment at a $2M pre-money valuation
  • $1M investment at a $2.5M pre-money valuation
  • $5M investment at a $7M pre-money valuation

After doing some spreadsheet math it became clear that we were better off not raising money and continuing to go it alone. We decided not to raise money and kindly discontinued conversations with the VCs. If the valuations back then were what they are today, the spreadsheet math would have likely turned out differently.

Know that SaaS valuations have never been better but that we’re in unusually good times — it wasn’t that long ago when they were substantially lower. Still, do what’s best for the business and don’t raise money just because valuations are high.

What else? What are some more thoughts on SaaS valuations?

3 Alternative SaaS Funding Strategies

One of the things I love about startups is that every week I’m learning something new. Naturally, there’s no one way to do things and so entrepreneurs are always trying out different ideas and occasionally sharing them with the world. Earlier this week three different blog posts came out detailing alternative SaaS funding strategies a) Raise one time from angels ($1.3M) and might do more, b) Raise from multiple rounds but smaller amounts ($2.5M) each time depending on the progress of the business, and c) Raise a tremendous amount of money ($700M+) as quickly as possible over multiple rounds. Let’s dive into some of the highlights.

SparkToro Raised a Very Unusual Round of Funding & We’re Open-Sourcing Our Docs

  • “We believe that there’s room for a company that can be successful for its customers, employees, founders, and investors (generally in that order) without demanding a multi-hundred-million or billion-dollar outcome. We spent a lot of time discussing the frustrating binary (succeed on a massive scale or die trying) of the classic tech startup model, and how we might craft a creative structure that would allow for the potential of a huge outcome without forcing an unhealthy growth rate or a destructively impatient approach.”
  • Only raise from non institutional investors so that there’s no timeline
  • Investors initially expected to get their money back via dividends (1x non pref)
  • Keep optionality open to go the venture route but don’t drive towards that

Anatomy of our $5 million seed round

  • “SaaS companies do not require large amounts of capital all at once in order to fund expensive R&D, brand marketing, or giant sales teams. Instead, we require small amounts of capital over an extended period of time, in order to experiment and continuously push harder on the things that work. This is why most SaaS companies today should raise several smaller rounds of funding during their “seed phase” before raising a series A. The ideal funding for a SaaS company looks closer to an IV drip than a shot of adrenaline to the heart. We need more funding sources that understand this.”
  • Most SaaS startups don’t warrant the traditional VC model of go big or go home
  • Raise enough money each round to get to breakeven at another milestone
  • SaaS supports dripping in more modest amounts of capital and still producing great outcomes

Domo IPO | S-1 Breakdown

  • “Domo recently drew down $100M from their credit facility and currently only has ~6 months of cash left with their current burn rate. Given they raised $730M in equity capital from investors and another $100M through their credit facility, it implies they have spent roughly $750M over the past 8 years to reach a little over $100M in ARR, an extraordinary and unprecedented amount of cash burn for a SaaS company.”
  • Last quarter burned $40M to add $8M of new ARR
  • CAC of $430k with avg ACV of $67k
  • Median payback of 98 months

It’s great to see people detailing different funding strategies as there’s room for innovation and new ideas. Figure out what’s best for the business and execute accordingly.

SaaS Winners and Daily Newspapers in the 1980s

After reading Buffett: the making of an American capitalist by Roger Lowenstein I couldn’t help but equate Warren Buffett’s views on daily newspapers in the 1980s with the SaaS winners of today.

After Buffett bought The Buffalo News he was sued by the other daily paper for launching a Sunday edition and initially lost on the grounds that it was anti-competitive (which was patently false). In the trial, a number of statements came out including the idea that owning a daily newspaper with no competitors was like having an exclusive toll bridge that crossed the main river in town. Buffett was focused on businesses that had pricing power such that they could raise prices and continue to thrive even in an inflation-heavy environment (a.k.a. a strong moat!). Eventually, the other daily newspaper in Buffalo went out of business and The Buffalo News generated a tremendous amount of cash for many years until the Internet disrupted it.

SaaS winners demonstrate many of the same characteristics as monopoly daily newspapers in the 1980s. Only, instead of being specific to a geography, they are specific to a market and a segment. People love to comment how marketing automation had many success stories, but it really was a winner per segment at time of market consolidation:

  • Eloqua – enterprise
  • Marketo – mid-market
  • Pardot – low mid-market
  • HubSpot – small business

Just like New York is a market and Buffalo is a segment for daily newspapers, there are hundreds of SaaS markets and thousands of segments that will produce winners. Let’s look at some more comparisons between daily newspapers pre-Internet and SaaS winners:

One question I’ve been asked many times over the years is, “Why can’t Google take 10 software engineers and just copy XYZ product?” The answer, it seems, is the similar to trying to be the number two or three daily newspaper in the 1980s: the scale, expertise, product/market fit, and accumulated brand value was too much for an upstart. Put more simply, the market and segment coalesced around one winner and that momentum steamrolled everyone else. Google took 1,000 software engineers and tried to compete with Facebook as a new social network, only to lose miserably.

Now, in this comparison, one type is a monopoly media provider to consumers and the other type is a business software provider to businesses, but many of the same desirable characteristics that Buffett looks for applies to both. Winning a SaaS market and segment is incredibly valuable, just like monopoly newspapers in the 1980s.