2021 Will be a Banner Year for Private Equity SaaS Acquisitions

Earlier this week I was talking to a SaaS entrepreneur and he brought up how much better his financials were now. Curious, I asked what made the difference.

This is a business that was growing modestly while burning cash. With the onset of the pandemic a few months ago, they made the difficult decision to let go of staff, cut all travel expenses, and change the overall focus to profitable growth. Instead of trying to squeeze out a slightly higher growth rate, they’d focus on gross margin and grow at the rate of the market.

The business has grown through the pandemic, albeit more slowly, but the swing from losing money to making decent money has been dramatic.

This is not an isolated case. Hundreds, if not thousands, of SaaS startups that were losing money at the start of the year are cashflow breakeven, if not nicely profitable.

Private equity, as a potential exit route for SaaS startups, has been growing rapidly over the years. Whenever I talk to a private equity investor, they lament that too many SaaS startups are losing money, making them undesirable as acquisition targets. PE is happy to fund growth, but has almost no appetite to fund losses. 

Now, a tremendous number of SaaS startups have made hard changes, and those hard changes have made them much more attractive to PE acquirers.

Look for a large percentage of SaaS startups to stay the new profitable course and next year to be a banner year for private equity SaaS acquisitions.

MarTech Madness and the Secret Staying Power

Just this past week I learned of two MarTech companies I hadn’t encountered that are north of $2M in annual recurring revenue and growing fast. We’ve all seen the crazy Marketing Technology Landscape Supergraphic: Martech 5000 that visually highlights what a crowded space it is out there. A number of people have speculated that massive consolidation in MarTech is imminent — I don’t agree. Yes, Terminus has acquired BrightFunnel, Sigstr, and Ramble Chat, but that’s the exception.

So, what’s the secret staying power resulting in so many MarTech startups?

Simple: good software with a clear return on investment makes for a sustainable business even with modest scale.

If you’re a marketer making money using the product, why switch? Combine that with the amazing components of SaaS — recurring revenue, cash flow predictability, strong gross margins — and you have a ton of niche companies. Add in some modest scale, like $1 million of annual gross margin, and you have the recurring cash to pay a team indefinitely. Good recurring cash flow, happy customers that renew, and decent employee salaries makes for a business that will never go away. 

More acquisitions will happen in the future due to investor fatigue and fund-life dynamics rather than companies gobbling up other companies to achieve more scale. If a venture investment in a MarTech company isn’t performing, it’s often better for the VC to hold onto the investment, assuming they have time, rather than push for a sale that results in recognizing a loss. Put another way, there are a ton of zombie MarTech companies out there that are sustainable businesses, but will sell for less than their last valuation, creating a scenario where it’s better to do nothing and hope something will improve.

MarTech fragmentation, and proliferation, is here to stay. The secret staying power is a combination of software that helps marketers make money and the beauty of SaaS.

5 Immediate Ways to Support Atlanta’s Black Tech Founders

America is hurting. Atlanta is hurting. We can do better. We must do better.

This past week I was asked what we can do to support Atlanta’s black tech founders. Start with action.

Here are five immediate ways to support Atlanta’s black tech founders.

Startup Runway – Focused exclusively on introducing under-represented entrepreneurs to investors. Donate immediately to the 501 c(3), volunteer to help, get involved.

It Takes a Village Pre-Accelerator – Free 4-month program for under-represented founders providing direct access to community, education, mentorship, and capital. Volunteer, mentor, become a customer. Cohort five just wrapped up and cohort six is accepting applications (apply now).

Valor Ventures – Only venture fund in the region focused on under-represented founders. Become a limited partner (write a big check!), refer a potential investment, help. Contact Valor now.

Atlanta Founders Academy by Google – A series of hands-on programs from Googlers, experts, and investors to support under-represented Atlanta startup founders on topics such as sales, strategy, hiring and fundraising. Get involved, give back.

Become a Customer – Check out Calendly, LeaseQuery, Storj, Patientory, Goodr, and many more. Use your resources and buying power to purchase software and subscriptions from our local black tech founders.

With so many challenges and injustices, on so many fronts, it’s daunting where to begin.

Start small, start now.

EO and YPO for Entrepreneur Peer Groups

Last week I was talking to a local entrepreneur about peer groups. This particular entrepreneur has built a multi-million dollar revenue business with dozens of employees after years of high growth. Now, the business is much larger than him and he’s spending more time as a business manager, and less as a scrappy, growth-oriented entrepreneur. He wants to scale to the next level, and is looking for a peer group to share ideas and grow as a leader.

My recommendation was to consider the Entrepreneurs’ Organization (EO) and the Young Presidents’ Organization (YPO), both of which have been immensely valuable to me. In addition to strong programming and networking, the heart of each organization is the small group (usually eight members) forum experience. Forums meet monthly for four hours in a setting of strict confidence and high commitment. The confidentiality is serious — nobody, nothing, never.

Forums often have a consistent agenda:

  • Opening
  • Lightning round
    • Short questions for every person in the group to answer
  • Monthly updates (10 – 15 minutes per person, inclusive of questions)
    • Business
      • Last 30 days
        • Highlights
        • Lowlights
      • Next 30 days
        • Most looking forward to
        • Least looking forward to
    • Family
      • Last 30 days
        • Highlights
        • Lowlights
      • Next 30 days
        • Most looking forward to
        • Least looking forward to
    • Personal
      • Last 30 days
        • Highlights
        • Lowlights
      • Next 30 days
        • Most looking forward to
        • Least looking forward to
  • Presentations
    • Member does a deep dive on a topic, the groups asks questions, the group shares experiences, and the presenting member closes with any takeaways
  • Closing

A small group of people committed to helping each other and meeting on a regular basis is one of the most powerful things I’ve ever experienced.

Entrepreneurs would do well to seek out a peer group like EO or YPO. For me, it’s made a tremendous impact.

Remote Work’s Role in the Future of Work

Remote-first companies, once an odd side-show with few household names (Automattic is likely the best known), has now become a daily topic with major companies like Shopify, Twitter, Square, most of Facebook, and more announcing that they’re moving to a remote work model permanently. The world was slowly moving this way, and Covid-19 accelerated it by 20 years — that’s a good thing.

Now, I’m not a fan of the name “remote work” to explain that employees don’t have to work in a corporate office, but I understand the rationale. Other terms like “work from home” don’t capture the freedom of being able to work anytime, anywhere (wanna work from the beach? go for it!). Shopify’s CEO, Tobi Lutke, calls it “digital by default“, which is interesting, but too difficult to understand for it to win the naming game. My favorite choice: work.

Work is work, regardless where you want to do it. “Work” becomes the default and “office work” is going into the office to do work. We’re already working at home, at the coffee shop, on the train, etc. even if we have a traditional office job. Work has been detached from an office for years.

With work moving away from being office-centric, how do offices fit in? Offices are still critically important. Only their size and design needs to dramatically change. Face-to-face collaboration is superior to digital collaboration, but most collaboration doesn’t need the overhead of in-person meetings. Office space, whether shared or dedicated, becomes primarily for collaboration, meetings, and the subset of employees that don’t have access to a high quality work setup (e.g. poor internet connection or kids at home).

Some companies will want dedicated offices that have their own style and feel. One CEO described it as wanting to have 10 cities each with one floor of office space instead of having 10 floors in one building in one city. Employees still don’t have to be in one of those 10 cities. Work is work. If an employee does like going into an office (hello extraverts!), plenty of cities are available.

Co-working spaces are going to get even more popular. As companies move to the modern work arrangement, and away from traditional, dedicated offices, co-working fills the space need for in-person meetings and collaboration, but in a way that is 10x more flexible and affordable. Need five desks for employees that have a six-month project? Done. Need an event center to have a 100-person all-hands meeting once a month? Done. The company’s needs are met with lower cost and greater flexibility.

The human-to-human connection has never been more important, yet now has to be more intentional than colleagues sitting together in the same place.

Remote work is now just work. The future has arrived and we’re better off for it.

5 Controllable Factors in the Pardot Story

One of my favorite questions to ask is “why are you an entrepreneur?” I like to understand the motivation and drive for the person. Also, I’m interested in entrepreneurs that want to control their own destiny (an answer that resonates with me!). Of course, you can’t control much of anything in the world other than the most important things — your attitude, your actions, and your behaviors.

Entrepreneurs that I meet with like to tell me they want to build the “Pardot of X” where X is some industry or type of product. I’ve come to primarily understand this to mean they want to build a SaaS company that doesn’t involve raising money and does involve selling it for a meaningful amount of money. While that’s a worthwhile goal, I like to share the controllable factors in the Pardot story.

Here are the five most important controllable factors from the Pardot experience:

  1. Employees-First –
    Our focus on culture was maniacal. Employees came before customers and all other constituents. Everything we did internally was focused on our core values of positive, self-starting, and supportive. The ultimate reason we succeeded was because of our people.
  2. In the Path of Revenue –
    Our product unequivocally helped our customers make more money. We showed return on investment. We showed value. Our product helped turn marketing from a fuzzy role to a metrics-driven role.
  3. Must-Have Product –
    Our product was the core of the majority of the B2B marketing functions. If you ripped it out, many of the marketing channels stopped working (email, lead forms, etc.). It was not a nice-to-have.
  4. Complementary Co-Founders –
    Adam and I are very different yet complemented each other incredibly well. We knew our strengths and weaknesses and built an awesome organization.
  5. Focused Solution –
    Our product delivered the most value with the best experience possible at the $1,000/month price point. We were focused on providing the most bang-for-your-buck in the SMB market, and we executed well. This was especially important as our market was so noisy.

Notice that timing is nowhere in these factors, even though it‘s easily one of the most important considerations. We didn’t know if we had good timing. We didn’t know when to start. We did know that by entering the arena, we gave ourselves a chance. And we got it right.

Control what you can control. Everything else is noise.

Quarterly Review Formats for Employees

Last week I was reading the excellent Iacocca: An Autobiography of Lee Iacocca — one of my favorite book genres is life adventures of people who created or changed an industry. Here, the stories are superb, and one of the comments by Iacocca caught my attention. The author writes:

If our stockholders had a quarterly review system, why shouldn’t our executives?…I’ve asked my key people a few basic questions:

What are your objectives for the next ninety days?

What are your plans, your priorities, your hopes?

And how do you intend to go about achieving them?

Now, the book was published in 1984. 1984! When I started my entrepreneurial career full-time in the early 2000s, people were still talking about annual reviews. Annual reviews never made sense to me. A year was much too long of a time frame with most of the review comments being the current, top-of-mind items.

When we were building Pardot, and working towards establishing our company as one of the top market automation platforms, we modeled our quarter review process based on a variation of Patrick Lencioni’s recommendations. Everyone answered the following questions in a simple Google Doc and shared it with their manager and direct reports:

What did you accomplish last quarter?

What are you going to accomplish next quarter?

How can you improve?

How are you following the values?

Simple. Effective. Repeatable. Regardless of the quarterly review format used, it’s important to develop a rhythm that aligns the team and focuses everyone on the mission.

Figure out what your team needs and consider these two different approaches to the quarterly review process.

The Canada Rule in Startups

Yesterday I finished reading That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea by Marc Randolph, the founder of Netflix. Told through the format of a live narrative, Marc does a great job capturing the ups and downs of the first five years of the Netflix journey. One of the recurring themes throughout the book is the importance of the Canada Rule.

The Canada Rule was originally introduced by Marc when they debated at Netflix whether or not to expand to Canada. Netflix was small, but growing fast domestically. Canada, at roughly 10% of the size of the United States, was obvious for geographic expansion, but would add significant complexity. The Canada Rule, simply, is to focus on the core business and not get distracted by expansion ideas. Do one thing, and do it well.

The old adage still rings true: many more startups died of indigestion than starvation. 

The next time someone brings up a great expansion idea, but takes away from continuing to improve and optimize the core business, invoke the Canada Rule. Focus, focus, focus.

Strategies in Our Control and Scenarios Outside Our Control

While many startups have already done brutal layoffs and expense cutting, there’s still the same amount of uncertainty, if not more, in the world. Sequoia Capital has an excellent post up titled The Matrix for COVID-19 with a visual way to think through potential strategies in the control of the entrepreneur vs macro scenarios outside the control of the entrepreneur.

Entrepreneurs generally have a strong locus of control and extreme uncertainty exacerbates the desire to control things. The best course of action? Develop multiple plans to address potential scenarios. In the example matrix above, it references three scenarios with lockdowns ranging from three months to 12 months along with three plans range from no change in operating expenses to cutting operating expenses by 25%. For many startups, cutting expenses by 25% won’t be enough, and a more aggressive plan is necessary.

Entrepreneurs should develop multiple plans under different scenarios and do their best to control what they can control.

Digital Simplification in Time of Crisis

As the crisis continues with an indefinite timeline, I’ve been looking for ways to simplify digitally. Now that I’m doing multiple Zoom calls per day, and not getting the same variety of face-to-face interactions, I’ve been more conscious of regular screen time outside the professional context.

Here are a few of my changes:

  • Turn off all iPhone notifications, including the Lock Screen, Notification Center, Banners, and Badges for all apps. The only notifications allowed? Texts and calls. That’s it. Removing my Slack and Gmail notifications greatly simplified things.
  • Turn on Do Not Disturb for all hours outside normal working hours and enable Allow Calls from Favorites. Shut everything down when you aren’t working. Everything. We don’t need more interruptions.
  • Remove distracting apps like the News app. I found myself constantly reading the news, and with much of it was about the crisis, I was hurting my focus even more. Eliminate noise. 
  • Combine the email inbox and to do list into one. I use my Gmail Inbox and the excellent Snooze function to constantly prioritize what’s important, and when. New to do list item? I email it to myself and then Snooze it to when I focus on it. If I have extra time, I visit the Snoozed folder in Gmail and look at the outstanding items. Constant reprioritization.

With time, I’m sure more ideas to simplify digitally with emerge. I’m pleased with the progress so far and recommend these easy changes. And, of course, these changes should have been done prior to the crisis.

What else? What are some more ideas to simplify digitally?