The Three Critical Monthly Cash Questions

Whenever I meet with an entrepreneur that’s raising money I ask about current funding, burn rate, and the number of months of runway. Managing cash, and understanding the corresponding business unit economics, are two critical functions of an entrepreneur, yet many don’t do it. In fact, ensuring that there’s always enough cash in the bank is one of the three most important things a CEO does.

Every month, entrepreneurs should be able to answer these three questions immediately:

  • How much cash do we have?
  • How much cash are we burning each month?
  • How many months do we have until we run out of money?

Pretty simple, right? Only, many entrepreneurs I talk to can’t answer these three questions with confidence. Entrepreneurs need to understand the importance of cash and manage it accordingly.

What else? What are some more thoughts on the three simple monthly cash questions?

Quarterly Simplified One Page Strategic Plan

Once a startup has product/market fit, one of the best things they can do is a Simplified One Page Strategic Plan and update it on a quarterly basis. The concept is easy: put the most important high-level things about the business on one side of one sheet of paper and ensure everyone in the organization understands all aspects of it. Nothing more, nothing less — make it a simple doc.

Here are the contents of the Simplified One Page Strategic Plan (Google Doc template and example plan):

Purpose

  • One line purpose

Core Values

  • General – fit on one line
  • People – fit on one line

Market

  • One line description of your market

Brand Promise

  • One line brand promise

Elevator Pitch

  • No more than three sentences for the elevator pitch

3 Year Target

  • One line with the goal

Annual Goals

  • 3-5 annual goals in table format with the start value, current value, and target value

Quarterly Goals

  • 3-5 quarterly goals in table format with the start value, current value, and target value

Quarterly Priority Projects

  • Three one-line priority projects with the percent complete for each

 

Entrepreneurs would do well to implement the Simplified One Page Strategic Plan (Google Doc template, example plan) and update it on a quarterly basis.

What else? What are some more thoughts on the Quarterly Simplified One Page Strategic Plan?

Notes from the Okta S-1 IPO Filing

Okta, a SaaS identity management platform (software to manage which corporate applications people can use), just released their S-1 IPO filing to go public. You might wonder how big the market is to manage authentication and authorization in the cloud, and as we’ll see, it’s quite large.

Here are a few notes for the Okta S-1 IPO filing:

  • Founded in 2009 (pg. 1 – Note: founding to IPO in eight years is fast!)
  • 2 million people use Okta daily (pg. 1)
  • 2,900 customers (pg. 2)
  • Revenues (pg. 2)
    • 2015 – $41 million
    • 2016 – $86 million
    • Last nine months – $112 million
  • Losses (pg. 2)
    • 2015 – $59 million
    • 2016 – $76 million
    • Last nine months – $65.3 million
  • Estimated $18 billion global opportunity (pg. 3)
  • Over 5,000 integrations available (pg. 4 – Note: strong network effect)
  • Product modules (pg. 4)
    • Universal directory
    • Single sign-on
    • Multi-factor authentication
    • Lifecycle management
    • Mobility management
    • API access management
  • Original company name: Saasure (pg. 6)
  • 12% internation revenue (pg. 34)
  • Accumulated deficit of $270 million (pg. 51)
  • 11% of revenue from professional services (pg. 57)
  • Weighted-average contract duration of 2.4 years (pg. 62)
  • Define contribution margin as the annual contract value of subscription commitments, or ACV, from the customer cohort at the end of a period less the associated cost of subscription revenue and sales and marketing expenses (pg. 63 – Note: this is the SaaS Magic Number)
  • 443 customers with an annual contract value over $100,000 (pg. 65)
  • Deferred revenue of $100 million (pg. 78 – Note: this means customers pay their annual subscription upfront making for a significant amount of “free” working capital)
  • “Okta” is the unit of measure for cloud cover in meteorology (pg. 88)
  • Ownership (pg. 132)
    • Co-founder/CEO – 10.3%
    • Co-founder/COO – 6.2%
    • VCs – 65.7%

Okta is like a utility providing a core service that everyone needs but doesn’t get much attention. Identity management in the cloud is critical infrastructure with a massive market and Okta, as the leader, will have a successful IPO.

Congratulations to Todd and the team!

What else? What are some more thoughts on Okta’s S-1 IPO filing?

Quick Notes on Fast-Growing SaaS Startup Intercom

Intercom is a fast-growing SaaS startup that provides customer communication software for doing live chat, in-app customer messages, email triggers, helpdesk support, and knowledge base content. Their CEO recently published an interesting blog post titled Vanity metrics, the future, and 100,000 thank yous with a number of interesting metrics.

Here are a few notes on the blog post and Intercom:

  • Started in 2011 (source)
  • Took four months to raise $500k (source)
  • Raised $1M angel round in 2012 (source)
  • Raised $6M Series A in June 2013 (source)
  • Raised $23M Series B 30 months after starting the business (source)
  • 7,000 paying customers after four years (source)
  • 50% of the 280 employees are in product and engineering as of last year (source)
  • Raised $35M Series C four years to the day they started the company (source)
  • Raised $50M Series C-1 in mid 2016 for a total of $116M (source)
  • Took two years to hit $1M in annual recurring revenue
  • 300+ employees today
  • 100,000 monthly active users
  • 400,000,000 customer conversations per month
  • Educate, the knowledge base product, is at $1.5M ARR
  • 17,000 companies that are paying customers
  • Grew from $1-50M in ARR in three years ($2,941 average revenue per year per customer)
  • Revenue run rate at end of year:
    • 2013 – $1M
    • 2014 – $7M
    • 2015 – $22M
    • 2016 – $50M
  • 2016 operating margin of -36%

Impressive metrics all around and easily one of the fastest growing SaaS companies in the world. Congrats to Intercom on reimagining customer communication for the modern business and building an incredible company.

Notes from the MuleSoft S-1 IPO Filing

MuleSoft, a fast-growing data and application integration software provider, just released their S-1 IPO filing. As more companies move to the cloud, the demand for connecting these applications, and the legacy installed applications, has grown as well.

Here are a few notes on the MuleSoft S-1 IPO filing:

  • Key metrics as of December 31, 2016 (pg. 1)
    • > 1,000 customers
    • 117% dollar-based net retention
    • 70% revenue growth
    • $188 million in revenue
    • -1.4% operating cash flow margin
  • Customers use the Anypoint Platform to connect their applications, data, and devices into an “application network” in which these IT assets are pluggable using application programming interfaces, or APIs, instead of glued together with custom integration code. (pg. 1)
  • Estimate the current market opportunity to be $29 billion. (pg. 3)
  • 30 customers with over $1.0 million in annual contract value of subscription and support contracts. (pg. 3)
  • Revenue (pg. 3)
    • 2014 – $57.6 million
    • 2015 – $110.3 million
    • 2016 – $187.7 million
  • Net losses (pg. 3)
    • 2014 – $47.8 million
    • 2015 – $65.4 million,
    • 2016 – $49.6 million
  • Professional services revenue (pg. 8)
    • 2014 – $9.1 million
    • 2015 – $22.2 million
    • 2016 – $34.9 million
  • Accumulated deficit of $236.2 million as of December 31, 2016 (pg. 12)
  • In 2014, 2015, and 2016, total sales and marketing expense represented 102%, 84%, and 65% of revenue (pg. 15)
  • Outsource the cloud infrastructure to Amazon Web Services, or AWS, which hosts the platform (pg. 16)
  • Platform is deployed in a wide variety of technology environments, both on-premises and in the cloud (pg. 16)
  • 38% of the revenue from customers located outside the United States in 2016 (pg. 27)
  • 156 employees located in Argentina at the end of 2016 (pg. 29)
  • Ross Mason created Mule in 2006 to address the frustrations of manually connecting disparate systems and applications. Mule took its name from Ross’s desire to take the “donkey work” out of legacy approaches to technology integration. (pg. 57)
  • Annual contract value of $169,000 in 2016 (pg. 58)
  • Subscription pricing is based primarily on the amount of computing capacity on which the customers run the software (pg. 58)
  • Founder owns 5.9% (pg. 134)
  • VCs own 67.8% (pg. 134)

MuleSoft is a hybrid cloud and on-premise software provider with a pricing model that bills everything like SaaS. Data and application integration is a massive market and MuleSoft is well positioned to grow for many years and have a strong IPO. Like AppDynamics, look for large strategics to take an interest in MuleSoft as well.

Think Gross Margin When Considering Metrics

Earlier today I was talking to a growth stage startup in town and was reminded of the importance of gross margin when considering metrics. From Wikipedia:

Gross margin is the difference between revenue and cost of goods sold, or COGS, divided by revenue, expressed as a percentage.

In the SaaS world, gross margins are assumed to be in the 75-85% range such that the heuristics, like The Golden Metric for SaaS – $1 Burned for $1 of Recurring Revenue is consistent from company to company. Yet, most companies don’t have SaaS gross margins (and different cost of goods sold), such that when thinking about metrics and best practices, they should be recalibrated for the gross margins of the specific company. Meaning, if the Golden Metric for SaaS is $1 of cash burned for $1 of net new annual recurring revenue, that assumes 80% gross margins. If the company has 40% gross margins, the Golden Metric would be $1 of cash burned for $2 of net new annual recurring revenue (half the margin so need twice the revenue).

Whenever you hear metrics and best practices mentioned, factor in the gross margin.

What else? What are some more thoughts on considering gross margin when thinking about metrics?

The Golden Metric for SaaS – $1 Burned for $1 of Recurring Revenue

Thinking more about the post from a couple weeks ago titled Evaluating a Startup Based on Cash Burned vs Recurring Revenue and how the same idea was brought up again two days ago in Bessemer’s 2017 State of the Cloud Report, I’ve come to believe that $1 of cash burned for $1 of net new recurring revenue is the Golden Metric for SaaS.

As an idea, it’s easy to understand.

As a metric, it’s easy to track.

As a way to create value, it’s excellent.

As a benchmark for entrepreneurs to measure against, it’s perfect.

Some startups will choose to burn more than $1 for each $1 of new new recurring revenue, but most won’t have that luxury. Startups that achieve scale, and burn $1 (or less!) for every $1 of net new recurring revenue, will do well for all stakeholders involved.

What else? What are some more thoughts on the Golden Metric for SaaS being $1 of cash burned for $1 of net new recurring revenue?