Category: Entrepreneurship

Five years ago I published a list of a few dozen entrepreneur blogs that I enjoyed reading on a regular basis. Over time, preferences and styles changed. Now, I still read ~10 posts on a daily basis but I no longer read 100+ like I used to do. Here are the nine blogs entrepreneurs should read on a regular basis:

• Steve Blank
• The Growth Guy
• A VC
• infoChachkie
• Both Sides of the Table
• Hacker News (content aggregator)
• First Round Review
• Begin the Begin
• Ben’s Blog

These blogs, read using Digg Reader (both in my Chrome browser and the native app on my iPhone), make for quality, fresh content on a daily basis that I find invaluable.

What else? What other blogs would you add to this list of top startup blogs for entrepreneurs?

Back in summer 2009 we had just cleared $1 million in annual recurring revenue at Pardot after being in business for almost two-and-a-half years. Globally, the macro economy was in the dumps and Software-as-a-Service (SaaS) companies weren’t in favor. Marketing automation as a market appeared to be a huge opportunity and all signs from our customers pointed to the product being a pain killer and not a vitamin. The next logical step was to raise venture capital and build a huge company. Or so we thought.

Fundraising was a full-time job for four months. After talking to 29 venture firms, doing a half dozen full partner pitches, and getting to verbal term sheet discussions, we decided to call off the process and focus on building the business without institutional capital (see 4 Reasons to Raise Venture Capital). Here are a few thoughts on fundraising while still building a business:

• Know that fundraising is a full-time job, and plan accordingly
• Seek help from team members to offload non-essential tasks and free up responsibilities
• Align potential investors around a desired timeframe and close date, so that there’s a sense of urgency
• Create a competitive process to bring multiple options to the table in order to maximize strength
• Always have a backup plan in place in the event fundraising doesn’t work out as planned

Raising money is incredibly difficult, and, combined with building a business, makes it even harder. Fundraising should be a team effort and everyone needs to be on the same page around responsibilities and continuing to push the startup forward.

What else? What are some other thoughts on fundraising while still building a business?

Entrepreneurs love seeking feedback and help from other entrepreneurs, it’s human nature. Over time, it’s important to find an appropriate time allocation for helping others while balancing other priorities. With modest entrepreneurial success, it’s easy to be overwhelmed with requests to grab coffee.

Now, I’m trying a new tactic with referrals to entrepreneurs requesting a meeting: complete a simplified one page strategic plan first and then we’ll coordinate a time (assuming it makes sense). Completing a one page plan in advance provides several benefits:

• Stage of idea/startup is readily apparent
• Area of desired help is obvious (sometimes it shows that we don’t need to meet due to inability to help)
• Goal realism shows whether or not they have experience and/or have done their homework (too often it still says their goal is $50 million in revenue by the third year)

Much like Jeff’s paying it forward requirement to meet with him, adding some effort and friction to the process of getting together results in higher quality meetings and more productive time. The next time you feel overwhelmed with requests to meet, figure out how to make the meetings more valuable by requiring extra effort from the other party.

What else? What are your thoughts on requiring a one page strategic plan prior to meeting with an entrepreneur?

Imagine for a second that you make $50,000/year salary as an employee at a startup. Feeling the entrepreneurial itch, you make the plunge and start a company thinking that one of your first financial goals is to grow the company to the point that you can make $50,000/year in profit. Only, once you achieve $50,000/year in profit, you quickly realize that $50,000 in profit doesn’t equal your previous compensation. As a business owner, to pay a $50,000 salary, you also have to pay employer taxes (roughly 10% or $5,000 in the case of this salary) as well as employee benefits (easily $5,000 per year). Thus, to pay yourself the previous $50,000 salary, it’s really closer to $60,000 in expenses. All the taxes and extras are distortionary in that many people don’t think through the costs involved.

Yesterday’s post titled Example Founder Dilution Over Multiple Financing Rounds didn’t touch on an important topic: participating preferred stock. Much like the example above with salaries, taxes, and benefits, where it isn’t what it seems at first glance, participating preferred stock is also distortionary. The idea behind participating preferred stock is that at time of sale the investors get some multiple of their money back first, typically 1-3x, and then also get their percentage ownership as well. Also known as a double dip, investors with participating preferred equity really own more of the economic interests of the business than their ownership percentage reflects.

Here’s a participating preferred stock example:

• Entrepreneur wants to raise $10 million at a $40 million pre-money valuation
• Investors think it’s worth $30 million pre-money, but want to do a deal, so they offer $10 million with a $40 million pre-money, and a 1x participating preferred liquidity preference
• Entrepreneur accepts the deal and is happy for the perceived $40 million pre-money valuation and investors are happy that they now get $10 million plus 20% of the business in the event of a sale
• If the business ultimately sells for $50 million, investors nearly double their money ($10 million as part of the preference and $8 million as part of the 20% of $40 million after the preference is removed)
• If the business sells for $10 million, investors get all $10 million as the preference are stacked in front of the other equity holders
• If the business sells for $510 million, investors get $10 million plus 20% of the remaining $500 million, for a total of $110 million

In the end, it doesn’t matter too much if the business is sold at several times the original valuation, otherwise, participating preferences significantly skew the perceived valuation. When talking valuations, always clarify if there are any participating preferred preferences.

What else? What are some other thoughts on how participating preferred stock can skew valuations?

Continuing with yesterday’s post titled Dilution With Every Round of Financing, it’s instructive to walk through an example as a founder. Before the example, I like to highlight the stories of ultra-successful entrepreneurs that have taken their company public, and the vast majority own less than 20% of the equity at time of IPO (e.g. Marketo’s founder had 6.6% and Cvent’s founder had 16%) . Now, 20% of $500 million is still a massive number, but it’s a far cry from what people might otherwise think the entrepreneur owns.

Here’s an example walkthrough of dilution over several rounds of raising money:

• Two entrepreneurs come together and start a company, splitting the equity in half (so, each has 50% of the equity)
• Angel investors are excited about the working product and early customers, deciding to invest $300,000 for 20% of the business (the entrepreneur now owns 40%)
• Recruiting great early employees requires equity, so 10% of the shares are set aside for an employee stock option pool (the entrepreneur now owns 36%)
• Venture capitalists buy into the big vision, value the $1 million in recurring revenue milestone, and purchase 30% of the business for $3 million as part of a Series A round (the entrepreneur now owns 25%)
• Expansion of the employee base requires a new stock option plan, diluting everyone further by 15% (the entrepreneur now owns 21%)
• Growth is explosive and investors compete to be part of the $10 million Series B round, buying 25% of the business (the entrepreneur now owns 16%)
• Sales are skyrocketing and the paradox of more growth consuming more capital sets in requiring a $30 million Series C for 30% of the business (the entrepreneur now owns 11%)

So, after an angel round, three rounds of venture capital, and a couple employee stock option pools, the entrepreneur owns 11% of the company, and they haven’t gone public yet. Of course, the company is doing great and it’s better to own a slice of a watermelon than the majority of a grape.

What else? What are some other thoughts on founder dilution over multiple rounds of financing?

Every time a startup raises money there’s a parade of announcements and media coverage. Raising money isn’t a sign of inevitable success, yet it’s treated as one of the ultimate achievements. For the entrepreneurs and employees, a round of funding results in dilution. And, more and more rounds of funding equals more and more dilution.

Here are a few thoughts on dilution and funding:

• Dilution, of course, depends on amount of money raised and pre-money valuation (the amount the company is valued at before the money is invested)
• Equity isn’t static as stock options can be granted multiple times (e.g. existing options might be diluted by a new round of funding but could be partially off-set by the granting of additional options)
• As a percentage, dilution is often in the 20-50% range, depending on how well the startup is performing and how many investors competed to win the business
• Companies on the hyper growth track often raise a tremendous amount of money, and dilution is a normal part of the process

Whenever funding, and fundraising is mentioned, dilution should also come to mind as the two go hand in hand.

What else? What are some other thoughts on dilution with every round of funding?