Category: Operations

Over time, I’ve found that having a rhythm and process actually makes things easier. Similar to the old adage that it’s important to set aside aside time for thinking and personal reflecting, I also believe it’s important to set aside time to work on the business.

Here are five things entrepreneurs should do every month:

1. Review and update the Simplified One Page Strategic Plan
2. Walk through the key metrics in the SaaS Metrics dashboard
3. Facilitate a monthly strategic dinner or meeting with the senior team (most important once the startup has at least 15 people)
4. Meet with one advisor or mentor and walk through the most important issues at hand
5. Attend an EO/YPO forum with a group of like-minded peers

Entrepreneurs would do well to find a monthly rhythm that empowers more strategic thinking and analysis. After running the process for several months it’ll begin to feel like a habit and commonplace.

What else? What are some other things entrepreneurs should do every month?

Startups, on average, don’t track enough relevant metrics on a regular basis. Some engineering-led startups are very analytical and track so many metrics that it’s difficult to know what’s important. Overall, it’s important to align quantity of metrics with the scale of the startup.

Here are a few ideas on metrics tracking based on startup scale:

• Always measure cash on hand and cash burn (if applicable), regardless of scale
• Based on the four stages of a startup, increase the number of metrics tracked at each stage
• Operational metrics become much more important once product / market fit has been achieved (see assessing fit) and the focus turns to building a repeatable customer acquisition machine
• Managers and department heads should have 2-3 main metrics shared with the whole company and many more tracked internally (so, as you add managers, add metrics)

Here’s an example set of metrics to track on a weekly or monthly basis after product / market fit:

Overall

• Annual recurring revenue
• Cash on hand (or months of runway)

Sales

• New annual recurring revenue (ARR)
• 30-day weighted pipeline

Marketing

• Marketing qualified leads (MQLs)
• MQL opportunity value

Support

• New tickets
• Closed tickets

Product

• Net promoter score
• Net churn ARR

Engineering

• Sprint completion %
• New bugs

As a startup grows and matures, so should the number of metrics tracked.

What else? What are some other thoughts on metrics tracking based on startup scale?

Continuing with the previous post titled Entrepreneurs on Annual Revenue Goals, the clear next step is talking about controlling your own destiny. For almost all entrepreneurs, one of the biggest milestones on the startup roller coaster is achieving entrepreneurial freedom: financial break even in the business while also paying a salary that covers personal expenses and obligations. With a self-sustaining business and a self-sustaining personal lifestyle, stress and financial pressures are relieved.

Here are a few thoughts on getting to entrepreneurial freedom:

• Keep the team lean and focus on customer acquisition (see Simplifying it Down to Selling or Building)
• Remember to keep the seed round small to minimize dilution and maximize ownership (see Death to the $700k Seed Round)
• Ignore the desire to raise VC money for idea validation and instead build a great business that can raise money on its own terms (or never raise money)
• Never forget the four stages of a B2B startup (e.g. don’t start investing in one stage when the previous stage isn’t fully developed)

Whether bootstrapping the business or enlisting the help of investors, one of the most liberating moments is growing the business to the point that it can exist indefinitely on its own. While not easy, achieving entrepreneurial freedom is well worth the challenge.

What else? What are some other thoughts on getting to entrepreneurial freedom?

Entrepreneurs are an optimistic bunch. When talking about revenue goals for the year, the most common approach is to pick numbers that feel reasonable and idealistic while also fitting into a spreadsheet narrative. Of course, it’s extremely difficult to estimate revenue without a repeatable customer acquisition process in place for a year. Why? For the most accurate revenue forecasting, a bottom-up financial model is superior to educated guessing.

Here are a few thoughts on annual revenue goals:

• Consider number of sales people, length of sales rep ramp up time, ratio of sales reps that work out to ones that don’t work out, number of leads required per sales rep, and more (hence the need to have operating history with reliable data for each category)
• Analyze key metrics like cost of customer acquisition, gross margin, lifetime value of the customer, annual renewal rate, annual up-sell rate, and more to make sure that the numbers in the plan are inline or below industry averages (they should be worse than industry averages because economies of scale haven’t kicked in yet)
• Without operating history from a repeatable customer acquisition process, take whatever data that’s available and conservatively extrapolate it out into a plan (this is where optimism combines with rose colored glasses)
• Pardot’s revenues, previously published for magazine and newspaper awards, were as follows:
  Year 1 – ~$3,000
  Year 2 – ~$400,000
  Year 3 – ~$1,200,000
  Year 4 – ~$3,200,000
  Pardot isn’t the norm and that was the revenue growth with an amazing team, product, and market.

Naturally, entrepreneurs are going to be optimistic thinking through annual revenue goals, but it’s important to use data and make them realistic. Growing revenue is always much more difficult than it appears on a spreadsheet.

What else? What are some other thoughts on entrepreneurs and annual revenue goals?

People love to think of a startup’s valuation as readily determinable by a valuation expert based on agreed upon financial formulas. In reality, a startup is only worth what an acquirer is willing to pay. This is true because equity in a startup is an illiquid security that is very difficult to turn into cash, especially in a reasonable amount of time. Of course, valuations are set all the time based on things like public market comparables, multiples of profit (a typical company is worth 4-6x profit), combination of growth rate plus revenue, and other factors.

For startups, there’s an even a more unusual relationship between revenue and valuation over time as there’s no-to-little operating history, no-to-little revenue, and no profits. Here are a few data points over time:

• Month 1 – With a fresh idea and unlimited potential, the startup is actually worth more than when it starts to generate early revenue (e.g. valuation of $2M pre-money for an angel investor)
• $50,000 in annual recurring revenue (ARR) – With a few paying customers and some product / market fit, investors will begin digging into the start of a financial model, and since there’s some revenue, will start talking about multiples of revenue or annual run rate (e.g. valuation of $1.5M pre-money even though the company is clearly further along than month one yet the valuation isn’t better)
• $1,000,000 in ARR – With the magical seven figures market crossed, a whole new class of investors emerge (many VCs won’t invest unless the startup has at least a million in recurring revenue), valuations are discussed as multiples of revenue (e.g. a valuation of $5M pre-money based on 5x run rate)
• $5,000,000 in ARR – With an even more substantial base of revenue, product / market fit clearly in place, and market adoption risk negated, the revenue multiple starts to expand, especially with a high growth rate (e.g. a valuation of $35M pre-money based on 7x run rate)

So, valuation stays flat or even goes down from the initial formation of the company though the first or second year. Then, as revenue starts to grow, valuation grows at an even greater rate and really expands at a few different inflection points. Today, Software-as-a-Service is super hot and the market leaders are often trading at 13x revenue, which isn’t sustainable, but is the current state of affairs. Revenues and valuation don’t have a straight relationship over time.

What else? What are some other thoughts about the unusual relationship between revenue and valuation over time?

With the ring of a doorbell on Christmas Eve, Clark Griswold (played by Chevy Chase) eagerly rushes to the door in anticipation of his annual company bonus check. Only, after opening the envelope, he quickly reads that there’s no bonus, and, instead he’s receiving an annual supply of jelly. Yes, jelly. Then, to the 10+ family members gathered around, he announces that he’s received a Christmas bonus for 17 straight years and is devastated to not have one.

This scene from National Lampoon’s Christmas Vacation captures the number one problem with annual corporate bonuses: people view the bonus as part of their standard compensation and don’t see it as a bonus. If you take away the bonus, it seriously hurts morale. If the bonus is given out, people don’t think anything of it. If you make the bonus tied to individual performance, people naturally game the system to their best interests. If you tie the bonus to company performance, people don’t feel they have much control over it.

Harvard Business Review has an article in their most recent issue titled How Netflix Reinvented HR where the author, Patty McCord, former head of HR at Netflix, talks about corporate bonuses. McCord writes:

During my tenure Netflix didn’t pay performance bonuses, because we believed that they’re unnecessary if you hire the right people. If your employees are fully formed adults who put the company first, an annual bonus won’t make them work harder or smarter.

McCord nails it perfectly. Bonuses don’t do what they’re intended to do and are perpetuated because that’s how it’s always been done.

What’s the solution if you do away with annual bonuses? Pay competitive, market-rate salaries as short-term compensation and include equity or stock options as long-term compensation.

What else? What are your thoughts on the idea that companies shouldn’t do annual bonuses?