Category: Entrepreneurship

Shawn Carolan has a post up on Steve Blank’s blog titled A Path to a Minimum Viable Product and it is easily the most insightful piece for entrepreneurs starting out that I’ve read this year. With all the excellent literature out there about Customer Discovery and Minimum Viable Product (MVP), there’s not enough how-to around zeroing in on the best opportunities and not falling prey to chasing too many opportunities.

From the article, here are the eight steps:

1. Define Your Big Mission in a Simple Statement
2. Customer Archetypes
3. Jobs to Be Done
4. Execution Branches
5. Scope Out Your Candidate MVPs
6. Evaluate Your Candidate MVPs
7. Pick, Beta, Ship
8. Double-Down

Go read A Path to a Minimum Viable Product and share it with every entrepreneur you know that is searching for product/market fit.

Everett Randle has an excellent piece up titled Playing Different Games: Or why Tiger is eating your lunch (& deals). Here, the big idea is that Tiger Global’s rapid deployment of capital into startups is fundamentally different than traditional venture, and is a better model when executed well. From the article summing up the Tiger Global approach:

• Be (very) aggressive in pre-empting good tech businesses
• Move (very) quickly through diligence & term sheet issuance
• Pay (very) high prices relative to historical norms and/or competitors
• Take a (very) lightweight approach to company involvement post-investment
• Above all, deploy capital, deploy capital, deploy capital

Historically, the VC business is opposite of the startup business. VCs are small, boutique partnerships that don’t scale. Serving on boards, and doing it well, takes time and energy, often limiting VCs to no more than 8-10 engagements. VCs typically have little skin in the game, only providing a tiny percentage of the fund’s capital. In addition, venture firms take many years, if not a full decade, to know how they did for a particular fund.

Knowing that this is the norm, Tiger Global designed their approach to smartly take advantage of the traditional model, summarized as the opposite of the points above:

• Wait for tech businesses to raise money and hope they get networked to you or you met them prior to the round
• Require traditional due diligence and term sheet issuance standards so that investment errors and write-offs are minimized
• Think about historical valuations and pay “fair” prices for startups
• Get involved post investment via a board seat, regular entrepreneur calls, and continued value-add
• Deploy capital on a schedule and hope that there are enough quality deals during that timeframe to do well

Here’s the conundrum: entrepreneurs still need everything in the historical venture playbook. Building a large business is hard and time consuming. Due diligence is important. Board work is important. Prudently deploying capital is important.

Knowing that the yeoman’s work is being done by the seed, Series A, and/or Series B investor to help the entrepreneur build a great business, why not stand on their shoulders and bypass the traditional model? Lighter touch, higher valuations, and faster speed results in a more scalable, higher velocity business.

Welcome to high velocity venture capital.

Over the last few months I’ve had the opportunity to talk to several new entrepreneurs and technologists that have moved to Atlanta as part of a wave of people seeking a better quality of life. The size of this migration has even surprised me. In a recent Bloomberg Businessweek article the author cites the Bureau of Labor Statistics report that Atlanta leads the nation in IT job growth — up an astounding 7.5% year-over-year.

Here are a few ideas for plugging into a new startup community.

Meetups

While meeting up in real life is currently limited, online meetups are still thriving. Check out Meetup’s site and join a group or two.

Angels and VCs

Entrepreneurial activity is near all-time highs as major societal change creates tremendous opportunity. And, thankfully, the amount of investment activity is keeping pace. Reach out to local angels and venture capitalists and introduce yourself. Many of these individuals are in the business of meeting people and making connections.

Attorneys, Accountants, Service Providers

Behind the scenes of every startup community are attorneys, accountants, and other service providers that provide much needed legal, financial, and other specialized work. As a bonus, there’s often a few rainmakers that absolutely love meeting new people. Find these rainmakers.

Colleges and Universities

Every college and university has an entrepreneur club. Seek it out. Find out what’s going on and get involved.

Entrepreneurs

Of course, the heart of every startup community is the entrepreneurs themselves. Look for entrepreneurs that are active in the community putting on programs, blogging about concepts, and tweeting ideas.

Conclusion

Plugging into a new startup community is a great way to make new friends, pay it forward, and be a part of something bigger. While the world is more remote than ever, it’s great to be local as well.

Last week I was talking to a soon-to-be startup founder and I asked why he wanted to start this new company. Easy, he said — after working at other startups, and the most recent one being a success, he believes he can do it. Watching the founders in action showed him that he has the skills and work ethic.

Seeing is believing as a potential entrepreneur.

Many stories have been written about the quest to run a mile in less than four minutes. No person had achieved this feat until Roger Banister in 1954. Once he did it other runners realized it was possible and many more followed suit. Today, over 1,400 people have done it.

Seeing is believing for human potential.

As an entrepreneur, it’s one thing to read about startups on TechCrunch or watch founder stories on YouTube, but it’s an entirely different, more powerful experience to see another founder succeed. Seeing the founders in action shows they’re merely human, like everyone else. They had an idea, entered the arena, and made it happen.

Want to be an entrepreneur?

Join an entrepreneur group.

Work at a startup.

Seeing other entrepreneurs succeed is one of the most powerful forces for potential entrepreneurs.

This past week I had two conversations with entrepreneurs that boiled down to the same thing: every successful venture starts by delighting a customer. Simple, right? Wrong. Entrepreneurs love dreaming about the future, how the world should work, and what needs to be created. Only, as the creator of the idea, it’s easy to believe things should function a certain way.

We should sell to job titles X, Y, and Z because they’ve always been the buyers.

We should avoid doing X because it’s never worked for other companies.

We should charge X to ensure Y gross margins.

We shouldn’t spend more than X to acquire customers.

We should avoid custom work and one-off services as they aren’t scalable.

None of it matters if customers don’t love the product. Put another way, don’t optimize the business model around what makes a “good business.” Instead, optimize the business model around customer delight and then figure out the rest.

Start with customer delight. Without happy customers, nothing else matters.

For as long as I can remember, I believed that the amount of capital in a startup community was driven exclusively by the quality of the local startups. Want more capital? Build better startups. Now, I believe I was wrong and more capital results in more startups.

Many years ago when we tried to raise money for Pardot, we thought we’d checked all the boxes. Great market. Great customer base. Great growth rate. Yet, capital was still incredibly hard to come by. I didn’t feel our difficulty raising capital was a function of local capital as we pitched investors from Boston to Silicon Valley. Our difficulty was because we didn’t do an amazing job convincing investors we’d build a big business. Regardless of our fundraising challenges, our community had limited capital and we looked nationally.

Fast forward to today and our community is brimming with capital and startups. Seed stage investors have raised over $100M, which is an enormous amount when the check sizes are often $250,000. Coupled with all the investors, there’s a commensurate number of pre-accelerators, accelerators, university initiatives, and scale up programs. Startups are everywhere.

Investors have to put capital to work in order to earn their fees and profits (ideally!) from their own investors. If there’s more seed stage capital now, which there is, it translates into more startups raising that type of capital — the money has to go somewhere.

But where are the new startups coming from?

A few ideas:

• Science Projects – A couple developers put something together on nights and weekends to demonstrate a prototype. Before, they’d have to have some traction to raise money. Now, it’s a less of an issue and science projects are getting funded.
• Spin Outs – A team within a startup identified an unrelated issue and started building a solution. After a few conversations, they decide to spin it out as a new startup and raise capital.
• Bridges – A young startup is making progress, but not enough to raise a big new round. Instead, investors do a bridge round in an effort to keep things going with an eye towards hitting a meaningful milestone.
• Less Tech – Before, most startups were software/Internet businesses. Now, more have a tech component but aren’t primarily tech, and are raising money from tech investors.
• Startup Programs – Accelerators and other community programs are achieving their intended function by helping startups raise money at higher rates.

Put simply, investors take more risks now. More ideas and “projects” are getting funded. More programs are prepping startups to raise money, and succeeding in their efforts. It’s a great time to be an entrepreneur and the capital is flowing.

More capital does equal more startups. The money has to go somewhere.

Last week, during two separate conversations with entrepreneurs, it was offered up that their startup’s messaging was too complicated. Tons of jargon, buzzwords, and technobabble were attempting to drive home a particular feature set and positioning. Only, it was doing the opposite.

More complexity is a failure to distill messaging down to its essence.

More complexity is a crutch for not taking the time to present what really matters.

More complexity is the easy way to avoid being uncomfortably narrow.

In school, we’re told to do assignments where you have to write 1,000 words. Volume of words is a primary driver of the output. More words is conferred as more value. In business, it’s easy to fall into that trap.

In lieu of more words, the focus needs to be more clarity. More thought over more verbosity. More crispness over more jargony.

The next time you describe your product, competitive position in the market, or value add, reduce the complexity of the verbiage. Increase the understandability. Make it clear.

There’s a never-ending debate in the entrepreneur world: build it and they will come or demonstrate authentic demand first before building it. The first approach — build it and they will come — a.k.a. the “Field of Dreams” approach is the most common. Inspiration for a new idea hits an entrepreneur and they work to bring it to life. Entrepreneurs that study the Lean Startup take a more modern approach whereby customer discovery is employed to truly uncover a meaningful pain or opportunity before building a solution. Customer discovery yields better outcomes but there are plenty of pros and cons with each approach.

Entrepreneurs should start with The Mom Test: How to talk to customers & learn if your business is a good idea when everyone is lying to you and unlearn their natural tendencies of leading the witness during customer discovery as well as being too broad with the initial idea. Entrepreneurs are naturally optimistic and eager to get to validation. Most people want to be supportive and say it’s a good idea regardless of whether they’re the ideal customer or having any expertise to back it up. Asking harder questions and seeking objective feedback takes more work, and delivers better results.

Once the basics are in place, it’s time to hunt for authentic demand. Authentic demand represents prospects that want to buy something but have no options — there’s an unfulfilled market need. The hunt for authentic demand is no different than a sales rep looking to build a pipeline, and that’s precisely how entrepreneurs should treat it. Here are a few sales tactics to use in the hunt for authentic demand:

• Cold Calling – Pick up the phone. Call the people that fit the ideal customer profile. Ask great questions. Yes, most people don’t like answering the phone but there are still plenty that do, especially in certain industries.
• Outbound Emails – Email is easy, fast, and effective. People respond to unwanted email when the message resonates and the pain is real.
• LinkedIn InMails – More expensive than email but often more effective, LinkedIn InMail works. Tailor the message. Find the authentic demand.
• Social Media – Follow the ideal buyers. Understand their view of the world. Find a connection point and make the ask.
• Networking – Talk to anyone that’ll listen — friends, family, co-workers, etc. Share the story and ask for intros.

Treat the hunt for authentic demand like a sales process. Come up with a goal — say 100 activities a day — and develop a system. Then, work the system. The more experiments and activities, the more certainty that authentic demand is real (or non existent and it’s time to move on). If there’s authentic demand, and the hunt was a success, the greater the chance of the startup succeeding.

Start with the hunt for authentic demand.

Last week I was reading through the DigitalOcean S-1 IPO filing and seeing their cloud hosting business at $357M of recurring revenue growing 25% year-over-year reminded me how large, fast growing markets continually create opportunities.

At Pardot, for most of our run with the business, we used SoftLayer for our cloud hosting. At the time, SoftLayer was the up-and-comer that primarily did dedicated hosting with a strong price-to-feature ratio. Rackspace was the much larger player in the industry commanding a premium and differentiating via their customer service model.

Today, SoftLayer and Rackspace are much smaller players compared to the juggernauts of Amazon Web Services, Microsoft Azure, and Google Cloud. From the outside looking in, it felt like the market was wrapped up. How would a relatively new startup like DigitalOcean compete with three trillion dollar companies?

From the DigitalOcean S-1 (page ii):

DigitalOcean was founded with a focus on creating simple solutions that developers love. Our mission is to simplify cloud computing so developers and businesses can spend more time creating software that changes the world. We estimate there are approximately 100 million SMBs globally today and 14 million new businesses started each year across the globe. We believe DigitalOcean is the perfect place for them to start, get lift-off and build their businesses.

DigitalOcean S-1 page ii

For DigitalOcean, it was “simple solutions that developers love.” The early days of Amazon Web Services were focused on developers as well, but back then the technology was significantly more complicated and difficult to use. DigitalOcean nurtured a loyal community of developers with simpler tools and a stronger focus on community. Now, nine years later, it’s blossomed into an IPO-scale business.

Big markets continually create new opportunities. Even with major incumbents that seem to do it all, new areas of opportunity emerge, and the bigger the market, the more opportunity a small slice represents.

Last week I was talking to a prominent investor and I asked about the current state of the investment climate. He said that startups a year ago raising money at 30-50x revenue were off limits to his firm and today they’re commonplace. Hearing this, it made me think of Fabrice Grinda’s excellent Welcome to the Everything Bubble.

Ten years ago, a hot, fast growing SaaS company would get a 6-8x run-rate valuation (see ExactTarget at IPO in 2012). Then, in the last 4-6 years, hot, fast growing SaaS companies moved to a 10-12x run-rate valuation (see Zoom raising $100M at a $1B valuation in 2017). Now, there are dozens of public SaaS companies trading north of 20x run-rate and plenty trading north of 30x run-rate (see BVP Cloud Index). What gives?

The main factors:

• Market Size – The total addressable market for SaaS is much larger now, providing more confidence that startups can grow to a scale even bigger than previously anticipated.
• Digital Transformation – COVID has accelerated the adoption of many SaaS products as companies have been forced to work in a distributed fashion, driving up growth rates.
• Interest Rates – With the Fed interest rate effectively at 0%, the bar for a quality rate of return has been dramatically lowered, making investors willing to pay a higher price to achieve the same outcome.
• Money Supply – With so many stimulus dollars flooding the system, and not a corresponding drop in overall incomes, the money has to go somewhere, and many people have put it in the stock market, thereby driving up valuations.

Ultimately, I think about it as a function of startup growth rate and how many years of future growth an investor is willing to pay for now. Let’s say long term, in a normal financial environment, SaaS companies are worth 4-8x revenue because of great gross margins, ability to have high free cash flow margins, predictability of business, growth expectations, etc. If a SaaS company is expected to grow 100% top-line in the next 12 months, and grow 80% in the following 12 months (growth rates typically decline such that growth is 80-85% of the previous year’s growth, depending on a myriad of factors), there’s some basic modeling to look at potential valuations:

• Year 1
  • $10M ARR
  • 100% expected growth rate
• Year 2
  • $20M ARR
  • 80% expected growth rate
• Year 3
  • $36M ARR
  • 60% expected growth rate
• Year 4
  • $58M ARR

Assume at the end of 36 months, the $10M ARR SaaS startup will be at $58M ARR with a trailing twelve months growth rate of 60%. Assume, for simple math, it has a constant future valuation of 8x run-rate (growth rate will slow but economies of scale will expand). At the end of 36 months, it’ll be valued at $464M ($58M x 8).

Now, take different hypothetical valuation climates:

• Ultra Hot – 30x run-rate representing a $300M valuation
• Hot – 20x run-rate representation a $200M valuation
• Great – 12x run-rate representing a $120M valuation
• Good – 8x run-rate representing an $80M valuation

If you could predict the future, and know with certainty the outcome, whether investing at 8x run-rate or 30x run-rate, all scenarios generate quality returns. Reality is much more complicated, but as interest rates go down and availability of money goes up, there are still worthwhile returns even paying what appears to be exceptional valuations.

SaaS valuations are part art and part science. In the age of the Everything Bubble, as long as there are good returns to be made paying ultra hot valuations, looking for high multiples to persist.