Startup Success: Team, Stream, and Not a Meme

Over the years I’ve spent many hours trying to figure out why some startups are successful, and most are not. The goal: distill startup success down into as simple a framework as possible. Of course, startup success is hard and messy, but it’s helpful to have a high-level context for the over-arching components of success.

Alright, let’s get to it. The three components of startup success:

  • Team
  • Stream
  • Not a Meme

Team represents the group of people working together to achieve the mission. Some of the most important attributes are resourcefulness, grit, and determination. Startups are an environment of limited resources, repeated failure, and long odds. Most people don’t thrive in a startup. The best teams figure out what needs to be done and makes it happen.

Stream represents movement and speed whereby disruption is happening, and it’s clear that a new, better way is possible. The best streams are large, major shifts where entire industries are transformed. The more disruption, the more opportunity for startup success. Examples include the shift from offline advertising dollars to online, the shift from telephone lines to voice over the Internet, and the shift from field sales to inside sales.

‘Not a meme’ represents things that are must haves, not nice-to-haves. Memes are funny or witty quips that represent a cultural phenomenon. As an example, Chuck Norris has a number of memes around things he can do that no one else can. One of my favorites: Chuck Norris gets Chick-fil-A on Sundays.

Most startups build nice-to-have products and fail. Nice-to-have can be a product that isn’t valuable, a product that’s useful but in an over crowded market, or something that’s too far ahead of its time.

Let’s take AirWatch, an Atlanta success story that VMWare acquired for $1.5 billion. The original team was comprised of the Manhattan Associates (NASDAQ:MANH) founder and another executive that had worked together before. The stream was the rise of the smartphone and people bringing their own devices to work (major transformations). The ‘not a meme’ was companies needing to enforce security rules and policies across thousands of employees’ smart phones. All three components — team, stream, and ‘not a meme’ — were combined with a massive market.

The next time you evaluate a startup idea for yourself, or meet with an entrepreneur, ask these three questions:

  • Why is this team going to win in this market?
  • What fast moving stream is shaking things up and causing disruption?
  • How is the product ‘not a meme’ such that it’s a must-have for customers?

Answer the team, stream, and ‘not a meme’ questions correctly to predict startup success.

High End SaaS Valuations Using the 2017 Inc. 5000 Data

Every year I love pouring over the Inc. 500 (now Inc. 5000). When I first read Inc. magazine in high school in the late 90s, I made it a personal goal to win the award. As a founder/CEO, I first succeeded with Hannon Hill (#247 on the 2007 Inc. 500) and then with Pardot (#172 on the 2012 Inc. 500). And, now, as a co-founder/chairman, succeeded with Rigor this year (#430 on the 2017 Inc. 500).

When looking through this year’s list, a number of well funded SaaS startups appeared:

  • Gainsight – $23.1M, 3,843% growth, #102
  • Bizible – $3.4M, 2,405% growth, #179
  • Domo – $79.9M, 2,250% growth, #192
  • GuideSpark – $24.8M, 525% growth, #856
  • Smartsheet – $64.3M, 425% growth, #1021

Let’s take Gainsight as it has the highest growth rate and look at some high end SaaS valuations from their funding rounds.

Gainsight Notes

  • Funding rounds listed in Crunchbase:
    • May, 2017 – $52M Series E
    • Nov, 2015 – $50M Series D
    • Oct, 2014 – $25M Series C
    • Nov, 2013 – $20M Series B
  • Recognized revenue by year:
  • Estimated end of year run rate (run rate is always ahead of recognized revenue for fast growing companies):
    • 2016 – $30M
    • 2015 – $17M
    • 2014 – $8.5M
    • 2013 – $3.5M
  • Published valuations:
    • Nov, 2015 – $348M post-money (source)
  • Estimated valuation as a multiple of run rate:
    • Nov, 2015 – $16M run rate with a $298M pre-money valuation making a valuation multiple of 18.6 times run rate
    • Nov, 2013 – $3M run rate with an estimated $80M pre-money valuation making a valuation multiple of 26.7 times run rate

SaaS valuations are typically in the range of 3-5x run rate and can go as high as 10x run rate for the fastest growing startups (see SaaS Funding Valuations Based on a Forward Multiple). When valuations are 18 and 26 times run rate, it’s a bet on building the category winner and a different game compared to 99% of the venture capitalists out there.

Want to explore more? Check out the 2017 Inc. 5000 and Crunchbase.

When Angel Investing Isn’t Charity

Over the years I’ve gone on the record saying angel investing should be viewed as charity work for the majority of investors out there. Why? As an angel investor you get intangible benefits helping entrepreneurs and you’ll almost always lose all your money. Yep, sounds like charity to me.

Now, angel investing isn’t always charity. I know a handful of people in town — less than 10 — that have done well as angel investors. Here’s what they have in common:

  • Long-Term Focus – Angel investing has incredibly long-time horizons. An “average” investment takes 7-10 years to see a return, and most investments don’t see any returns. Angel investors that do it for fun when the market is hot — known as “tourists” — quickly leave when they see just how hard it is to make money, and how messy it is to build a startup.
  • Dozens of Investments – Angels often think that if they make three or four investments, one of them will do well. For angels to make it work, it takes dozens of investments. Think about investing $50,000 per deal, and saving 2x that for startups that go on to raise future rounds. Over dozens of rounds, plus a limited number of follow on rounds, it’s well over $1,000,000 to build a true portfolio.
  • Time Allocation – Sourcing dozens of investments, and talking to hundreds of entrepreneurs, requires a huge amount of time. Most entrepreneurs and ideas aren’t investable upon first meeting, and all investments take multiple meetings.
  • Defined Strategy – With tons of entrepreneurial styles, startup industries, and technologies, it can be overwhelming to pick investments. Successful angels define a thesis or strategy and use it to help in their decision making process. Most bet on people and markets.

For angel investors that have a long-term focus, make dozens of investments, allocate a sufficient amount of time, and have a defined strategy, angel investing isn’t charity work. For all others, they’re providing a charitable service.

What else? What are some more thoughts on when angel investing isn’t charity?

Desired Proof Points to Raise a Seed Round

Over the last few weeks several entrepreneurs have reached out asking for advice on what’s required to raise a seed round of several hundred thousand dollars. Now, most seed rounds are still a huge leap of faith, but with enough validation some of the risk can be reduced.

Here are a few desired proof points to raise a seed round:

  • A Must-Have Product – In the nice-to-have vs must-have product debate, it needs to be a clear must-have product (see 5 Questions to Determine a Must-Have Product).
  • Modest Metrics + Revenue – The seed stage is all about proving product/market fit and the start of a repeatable customer acquisition process. Progress with simple weekly metrics is important combined with low six-figures of recurring revenue.
  • Strong Weekly Growth – With modest metrics and revenue, the key is showing that they’re moving in the right direction on a weekly basis. Weekly revenue growth of at least 5% is ideal (see Recurring Revenue and Week Over Week Growth).

Raising a seed round is done based more on belief than hard facts, but having these three proof points greatly increases the chance of success.

What else? What are some more proof points to raise a seed round?

4 Questions to Ask Before Making an Angel Investment

Continuing with yesterday’s post Book Review: Angel by Jason Calacanis, there are a number of recommendations and best practices that Jason uses as part of his angel investing strategy. Mid-way through the book he offers up four excellent questions to ask before making an angel investment.

From the book (pg. 141):

  1. Why has this founder chosen this business?
  2. How committed is this founder?
  3. What this founder’s chances of succeeding in this business–and in life?
  4. What does winning look like in terms of revenue and my return?

Too often, investors get enamored by the idea. Jason’s advice: it’s all about the founder. Ask these four questions the next time you’re considering an angel investment.

What else? What are some more questions you like to ask before making an angel investment?

Book Review: Angel by Jason Calacanis

When I read Jasaon Calacanis had a new book called Angel: How to Invest in Technology Startups, I knew I had to read it. Now, Jason’s style is very different from mine, but his wit and insight are excellent. Overall, I’d describe the book as a strong introduction to angel investing combined with a heavy dose of in-your-face attitude.

A few notes:

  • He invested $25,000 into Uber at a $5 million pre-money valuation (Uber is now valued at $70 billion)
  • Was one of the first Sequoia scouts where Sequoia supplied the capital and he received 45% of the profits
  • Prefers founders who are willing to pursue their visions long before an investor comes along
  • Recommends selling half the angel equity in future rounds, if possible (called “idiot insurance”)
  • Believes only way to be successful as angel investor requires being based in Silicon Valley (I believe angel investing should be viewed as charity work)
  • Offers starting with advising and/or AngelList as a no/low cost way to start investing

If you’re curious about angel investing in tech startups and want a heavily opinionated view point, Angel: How to Invest in Technology Startups is a great place to start.

What else? What are some more thoughts on the book?

Investment Failure as an Angel

Last week I was catching up with a friend and he said he could never be an angel investor as he’s too worried the investment would fail and be worthless. I offered up that most angel investments fail and it’s better viewed as charity that helps entrepreneurs. Thinking more about it, investment failure doesn’t bother me for several reasons:

  • What Could Be – Investing is a leap of faith that there’s an opportunity to build a great company.
  • Opportunity to Learn – Every deal is different. Every market is different. Every entrepreneur is different. There’s so much learning with each investment.
  • Paying it Forward – Helping entrepreneurs is a core value for me. It’s what I enjoy doing.
  • Upside > Downside – If we succeed, the return could be 10x or 100x the original investment. If we lose, the downside is only the original investment.

Investment failure as an angel is never fun but the enjoyment and potential upside outweighs the risks.

What else? What are some more thoughts on investment failure as an angel?