Category: Operations

Investors love to talk about certain revenue minimums before they’ll consider investing (e.g. $1 million and $5 million are the most common thresholds). In reality, what they really want is a story that shows scalable growth. Let’s look at two examples:

Company A

• Startup has been in business for four years
• Added $50,000 in new recurring revenue last quarter across 50 new customers
• Just hit $1,000,000 in annual recurring revenue last quarter

Company B

• Startup has been in business for three years
• Added $250,000 in new annual recurring revenue last quarter across 100 new customers
• Just hit $500,000 in annual recurring revenue last quarter

Which one is more valuable? Which one will attract more attention from investors? If you hear the message about requiring a million in revenue to garner investor interest, then it appears Company A will be most desirable. Actually, Company B is much more desirable, even with half the annual recurring revenue. Company B is adding more customers at a much higher average customer value in the same period of time. Investors want to see the customer acquisition machine working and Company B clearly has it humming.

What else? What are some other thoughts on telling a story with quarterly growth numbers?

After yesterday’s post on The Culture-Oriented 7 Step Hiring Process, Ron Hollis provided a great comment highlighting some his lesson’s learned starting, growing, and selling a successful tech company. Entrepreneurs have so many great tools and resources readily available that they don’t find some of the most powerful tactics.

Here are three little-used interviewing tips entrepreneurs need to know:

1. Chronological In-Depth Surveys – Follow the Topgrading interview process and really dig into how the person thinks and why they moved from position to position in their career.
2. Threat of Reference Check and Get References Not on the Resume – Everyone is happy to provide a list of references. Get the list of references and then during the chronological in-depth survey ask for three more names and numbers of references beyond the standard list. Then, call these people and confirm that the candidate will be successful in your desired role. The key is to get people that aren’t on their standard list.
3. Writing Skills – More than anything else I’ve encountered, the ability to write well and answer questions in a cohesive manner correlates with success. Always have a written assessment.

Entrepreneurs would do well to incorporate these three little-used interviewing tips into their hiring process. Hiring well is so critical and entrepreneurs need to build a process that works well for their company.

What else? What are some other little-used interviewing tips entrepreneurs need to know?

While I haven’t historically paid any attention to week over week growth, the more I think about it the more I like it. Why? Because in a startup it’s so hard to get things going and the numbers are so small in the early years. A few dollars of revenue here, a few qualified leads there. On an absolute basis the numbers are tiny. Continuing with yesterday’s post on Recurring Revenue and Week Over Week Growth, here are a few more thoughts on tracking week over week growth:

• Watching revenue go from $1,000 to $1,500 isn’t too impactful, but seeing 50% growth is more reassuring
• Small, measurable goals (like 5% per week growth) are easy to understand and get buy-in from team members (e.g. we need to add $500 of recurring revenue this week and everyone will understand it)
• A focus on weekly growth sets a metrics-driven tone for the culture
• Consistent growth gets much harder as the numbers get larger, but it should be achievable in the first one to two years
• Once the startup is larger, tracking growth on a monthly basis and then a quarterly basis becomes more normal

Entrepreneurs would do well to track week over week growth for their key metrics and share the information with everyone via an LED scoreboard.

What else? What are some other thoughts on tracking week over week growth?

Recurring revenue is incredibly powerful for startups. On the Software-as-a-Service (SaaS) front, recurring revenue gets combined with strong gross margins, strong renewal rates (hopefully!), and strong predictability. Only, it’s incredibly difficult to get the engine going. Paul Graham says growth of 5-7% per week is good (see his Growth essay).

Let’s look at how a 5% per week revenue growth rate looks from a base of $5,000:

• End Year 1 – $63,000 (based on 5,000*1.05^52)
• End Year 2 – $800,000 (based on 63,000*1.05^52)
• End Year 3 – $10,100,000 (based on 800,000*1.05^52)

As an example, Pardot’s revenue growth rate was solid, but no where near those numbers. Is 5% per week growth great? Absolutely. Is it realistic after the first year or two? Not likely. Over time the law of large numbers kicks in and growing 5% per week becomes nearly impossible.

Another way to look at it would be start with 5% per week in year one and then lower to 4% per week in year two, and 3% per week in year three. Here’s how that would look from a base on $5,000:

• End Year 1 – $63,000 (based on 5,000*1.05^52)
• End Year 2 – $485,000 (based on 63,000*1.04^52)
• End Year 3 – $2,250,000 (based on 485,000*1.03^52)

Still a great growth rate, and beyond Pardot’s numbers, but much more reasonable.

The takeaway is to focus on growing at least 5% per week when starting out and to slowly lower the growth rate requirement over time.

What else? What are some other thoughts on recurring revenue and week over week growth?

I’ll be the first to admit it: I’m not the best at communicating. I have a ton of ideas in my head and I know exactly where we’re going, but I have a tendency to overlook the fact that just because I feel confident about things that everyone else feels confident as well. Fortunately, I recognize that communicating is critical, so I’ve come up with a rhythm and process. In general, I think entrepreneurs should err on the side of over-communicating.

Here are a few ideas to help with developing a communication rhythm:

• Implement daily check-ins
• Facilitate weekly tactical meetings
• Send a weekly update email every Sunday night with the top three things from last week for each department
• Run quarterly check-ins with every team member
• Develop a Simplified One Page Strategic Plan each quarter

For some entrepreneurs, communicating consistently and clearly comes naturally. For others, like myself, communication takes a more deliberate rhythm and process. Entrepreneurs should work hard to over-communicate with their constituents.

What else? What are some other thoughts on over-communicating in a startup?

Back in 2006 and 2007 there were a number of articles talking about a new type of founder stock called “FF class”, named after Founders Fund. These class of shares were designed for founders that might want to take money off the table at some point before selling the company (see this VentureBeat article on Series FF). As a founder, the most common type of equity is that of common shares which don’t have any special privileges. Where common shares break down is in valuation relative to recent financing and corresponding tax treatment if you want to sell some stock.

Investors typically buy preferred shares in the company that come with special rights (e.g. investors get their money back before other shareholders get any money), and as such command a higher valuation. When it comes to valuations, these preferred shares are often worth 3-7x more than the common shares. 409A valuations are done by third-parties to establish a value for things like employee stock options so that the valuation would hold up in an IRS audit. Any money that a founder sells shares for above the price of the common would be taxed as ordinary income instead of long-term capital gains.

Let’s look at an example. A founder starts a company and buys common shares (founders buy into their own company for next to nothing). The startup does well and investors want to put in $1 million to buy preferred shares at a $4 million pre-money valuation (making the post-money valuation $5 million). As part of the financing, the investors are comfortable having the entrepreneur sell $100,000 worth of shares (e.g. redeem some stock for cash). Now, this is where things get difficult since the founder has common shares and not FF shares. Since the common shares are worth a fraction of the preferred shares (e.g. say 1/5th of the value for a valuation of $1 million), the founder either has to sell 5x more shares to get the $100,000 with long-term capital gains treatment or sell shares at the price of the preferred, but then pay ordinary income taxes on 80% of the proceeds and long-term capital gains on 20% of the proceeds (the delta between the value of a common share and a preferred share).

As a founder, the solution is have a second class of shares at time of formation that are similar to common shares but have the option to convert to preferred shares in the event of redemption (taking money off the table), thus being able to be pegged at a higher valuation and being able to receive long-term capital gains for the proceeds. Founder equity shouldn’t be common stock so that founders have the option to sell shares with long-term capital gains treatment at a future time.

What else? What are your thoughts on founder equity being a special Series FF class so that founders can receive long-term capital gains at the valuation of the most recent round?

Note: Talk to a lawyer when considering this and make sure the lawyer has experience in it as many aren’t specialists in startups.

Allen Nance put up a post this afternoon on the 8 Dimensions of Leadership. In it, he identifies himself as “Pioneering” whereby two of his top weaknesses are as follows:

1. Lack of attention to planning (e.g. he’ll brainstorm with a group, say make it so, and be done)
2. Lack of accountability (e.g. when someone says they’ll do something, it’s assumed it’ll get done, and that’s that)

After reading the post I immediately recognized that it describes me as well. Not big on planning? Check. Not big on accountability? Check. My workaround is to force myself to follow the Mastering the Rockefeller Habits which results in more time spent on planning and accountability. For me, the two biggest things are doing a Simplified One Page Strategic Plan every quarter (planning) and doing daily check-ins (accountability). There are a number of other techniques like weekly tacticals, quarterly check-ins, and LED scoreboards to help with planning and accountability. Overall, I recognize planning and accountability aren’t strengths of mine, but I do well at setting up simple processes to address them so as to operate at an acceptable level.

What else? What are some other thoughts on common leadership weaknesses of entrepreneurs?