Category: Operations

When talking about recent IPO filings and SaaS growth rates, there’s often a reaction that because XYZ company lost millions of dollars last year, it isn’t well run. Inherently, people understand having to lose money to get a startup off the ground as there’s a disconnect between expenses and revenue. Only, once the business has scale, say $50 million in revenue, it seems that the company should be profitable going forward. Often, the SaaS company is choosing to invest in sales and marketing to grow faster.

Losses in a single year are one-time while the recurring revenue added continues indefinitely.

Let’s look at a SaaS company with almost all revenue recurring. If, as an example, you could invest $10 million into a business, and then spend that $10 million on additional sales and marketing all at once (assume other costs like support, R&D, administration, etc wouldn’t go up), and that the additional sales and marketing would generate an incremental $5 million in new annual revenue, that’s a great deal. The $5 million in incremental recurring revenue would make the company $25 million more valuable (assume a 5x revenue multiple for a SaaS company with a good growth rate) and it would add $3 – $4 million of gross margin to the business each year (assume 60% – 80% gross margins and a 100% renewal rate).

When reading about heavy losses due to expanded sales and marketing, it’s important to remember that the losses are one-time, sales and marketing can be easily cut back, and that the recurring revenues generated are indefinite.

What else? What are your thoughts on the relationship between losses from heavily investing in sales and marketing vs the recurring revenues that are indefinite?

So, you’re about to close on a $300k seed round and investors are asking for a first-year budget. Not having started a company before, the $300k number seemed right since other startups were raising a similar amount. Time to allocate the $300k and come up with a plan.

Here’s an example $300k budget for the first 12 months of a startup:

• Salaries
  – Two founders with $40k salaries = $80,000
  – Lead engineer @ $70k salary = $70,000
  – Employer taxes = $15,000
• Benefits
  – High deductible health insurance for the individual only @ $200/month times three people = $7,200
• Legal
  – Help with closing, operating agreement, and other standard docs = $5,000
• Domain Name
  – Great domain name = $5,000
• Design
  – Logo and simple branding = $1,000
• Office Space
  – Three team members plus an un-paid intern for a total of four people @ $300/month = $14,400
• Equipment
  – Used MacBook Airs for four people @ $1,000/each = $4,000
• Web Hosting
  – $1,000/month on Amazon Web Services = $12,000
• Web Apps (CRM, marketing automation, help desk, accounting, etc)
  – $1,000/month = $12,000

Adding up each of these items comes to a total of ~$225,000. Thus, the $300k seed round pays for a small team to work 12 months to find product / market fit with a healthy cushion to experiment on more items or stretch the runway out six more months (things always take longer than expected).

What else? What are your thoughts on this $300k budget and how would you change it?

For years I had wanted to buy a building for my company but it never made sense. Owning a building for a startup is like buying a fish tank for a goldfish — it’ll grow to the optimal size for the tank and no more. Startups, by their very nature, are growth-focused (see PG’s essay Startup = Growth), thus size and lease terms need to be as flexible as possible.

Now that I’ve been in the commercial real estate business for six months with the Atlanta Tech Village, I have a few initial thoughts on how it differs from the software business. Here goes:

• Software has infinite inventory and little marginal cost for each additional sale while commercial real estate is extremely fixed both in available space and costs
• Real estate has many more nuances and opportunities related to depreciation, tax credits, and other items that you can tell lobbyists help put in place (e.g. put in cheap and expensive lights in the same room as a workaround so you can depreciate the more expensive ones significantly faster)
• People-wise, commercial real estate is more fun due to the in-person customer relationships compared to software, which is mostly virtual
• Software is much riskier with the opportunity to go out of business or go big much more likely than commercial real estate

Overall, commercial real estate has been more fun than I expected, but in the end, I enjoy software more.

What else? What are some other thoughts comparing the commercial real estate and software businesses?

Cvent, one of the oldest and largest online event management software companies, just released their S-1 IPO filing. Cvent has an interesting background raising money as a dot com startup in the late 90s, growing without much capital for over a decade, and then raising a large round of $135.9 million in July 2011 to recapitalize the business and accelerate growth. Event management software, especially with a two sided offering like Cvent provides, has the potential to be a winner-take-most market.

Here are notes from the Cvent S-1 IPO filing:

• Mission is to transform the meetings and events industry (pg. 1)
• For some hotels events and group meetings constitute one-third of total revenue (pg. 2)
• More than 6,200 event and meeting planner customers (pg. 2)
• More than 4,700 hotels and venues have purchased marketing solutions from them (pg. 2)
• Offers six products for event and meeting planners: event management software, strategic meetings management software, mobile event apps, pre- and post-event web surveys, ticketing software, and Cvent Supplier Network (pg. 4)
• 1.1 million RFPs were transmitted using Cvent software in 2012 (pg. 4)
• 600 employees in India (pg. 6)
• 1,300 total employees (pg. 8)
• Revenue (pg. 11)
  2010 – $45 million
  2011 – $60.9 million
  2012 – $83.5 million
• Income (profits! – pg. 11)
  2010 – $7.7 million
  2011 – $2.6 million
  2012 – $8.7 million
• Accumulated deficit of $19.5 million (pg. 24)
• Three acquisitions in 2012 (pg. 62)
  Seed Labs LLC – $1.4 million in cash and $0.9 million in stock
  CrowdCompass, Inc – $5.8 million in cash
  TicketMob LLC – $5.2 million in cash
• Research and development expenses were 9% of revenue in 2012 (pg. 92)
• CEO/co-founder owns 16% (pg. 111)

Overall, it’s an impressive story of profitable growth and execution, with a huge market opportunity. I predict the IPO will do well and the public markets will like the company.

What else? What are your thoughts on the Cvent S-1 IPO filing?

It turns out that the open office layout I mentioned last week is more controversial than I expected. The main culprits are noise, privacy, and ability to focus for an extended period of time. Since the post, a number of people have suggested different ideas to help provide more options for team members, especially when the phone is involved.

Here are a few privacy ideas for an open office layout:

• Replica British telephone booths throughout the space
• Several BuzziSpace BuzziHoods, which are wall mountable acoustic cocoons (imagine a something like a large square helmet that’s three feet across and is comfortable to stand under while blocking out most sound)
• Multiple Framery modern glass phone booths that are soundproof
• White noise machines that are exceptional at blocking out casual conversations while being barely noticeable

There are a number of privacy options to try out and we’ll be experimenting shortly.

What else? What are some other privacy ideas for an open office layout?

With so many different management tools like the simplified one page strategic plan, quarterly check-ins, and board decks, it’s easy to spend an inordinate amount of time doing management stuff instead of building the business. Only, too often, I’ve seen management tools not commensurate with startup stage.

Here are a few thoughts on management tools related to startup stage:

• Basic management materials should be developed regardless of stage (yes to a business model canvas, no to a business plan)
• Financials should be fairly simple with a focus on cash and burn rate at first and become progressively more sophisticated as the business matures
• Board decks should focus on strategic issues with tactical items and standard data review done in advance on the meeting
• KPIs and goals should always be kept as minimal, measurable, and memorable as possible

Err on the side of simple and let the sophistication of the management tools grow as the startup grows.

What else? What are your thoughts on management tools relative to startup stage?

Terms sheets are relatively short legal documents that outline the proposed high-level details of an investment or acquisition. Over my career, I’ve been involved in a half-dozen term sheets on both sides of the table. While term sheets can be complicated, they’ve been more standardized over the years with open source legal docs like the Series AA Equity Financing Documents from Y Combinator and the AngelList Docs.

Here are a few thoughts on common terms:

• Pre-Money Valuation – This is the value of the company before the investment (so, if $1 million is invested at a pre-money valuation of $2 million, the post-money valuation is $3 million)
• Liquidation Preference – Investors with a 1x non-participating preferred liquidation preference get their money back or their percentage ownership in the event of a sale vs a 1x participating preferred liquidation where investors get their money back plus their percent ownership of the amount left over (double dip). 1x non-participating preferred is most common for seed stage investments while participating preferred is often used when there’s a discrepancy between the desired valuations of the entrepreneur and investor.
• Dividends – Similar to interest payments for the preferred shares, these are used to improve returns. Seed and early stage investments don’t typically include a dividend component.
• Anti-Dilution – If the company raises money in the future at a lower valuation, the previous investors get more shares to account for the new, lower per share price. Weighted average anti-dilution is the most common.
• Option Pool – With each round of funding, investors often require new equity allocations to the employee stock option pool, usually in the 10 – 15% range. Most importantly, the option pool shuffle comes into play and it’s important to model out the difference of the option pool being formed pre or post investment.

Now, there are a number of additional items like pro-rata rights, information rights, preemptive rights, registration rights, and more, but they are fairly standard. Term sheets are best reviewed by experienced startup attorneys and not general practitioners.

What else? What are some other thoughts on the common term sheet items?

Way back in 1961 investors were working on buying the Empire State building and they didn’t enlist a bank to finance it. Instead, they sold approximately 3,300 units at $10,000 each to regular people in the community, especially people that took pride in owning a piece of the most iconic building in the world, so reports a recent NY Times article labelled A Nasty, Epic Battle With Stakes 102 Stories High.

Of course, we should all be so fortunate to make a $10,000 investment and have it be worth $332,000 52 years later (not even counting dividends!) — a great success story for crowdfunding. Now, investing in existing real estate is different than investing in an entrepreneur’s idea, but several core items are the same:

• People invest in people, especially people they already know
• People want businesses in their local community to succeed (not all crowdfunding is for local businesses but I bet the majority goes towards that)
• People are more likely to invest if they can already feel, touch, and experience the product or service (like real estate)

In retrospect, the Empire State building proved to be a great crowdfunding investment. I don’t know how crowdfunding will affect the startup world, but I’m looking forward to seeing it play out.

What else? What are your thoughts on crowdfunding?

One of the common questions I get from people in the commercial real estate field is “How do the Atlanta Tech Village per person per suite fees compare to traditional commercial real estate rates?” The short answer is that it’s complicated as it isn’t an apples to apples comparison. Here’s the long answer as to how a 10 person modular suite @ $3,250/month compares to traditional real estate:

• 1,010 rentable square feet @ $20/ft is $2,025/month
• $35 per person per month for furniture is $350/month
• $50 per person per month for food and drink is $500/month
• $25 per person per month for a managed firewall and fiber internet is $250/month
• 5 parking spots @ $90 per month is $450/month
• Total: $3,575/month

So, by commercial real estate standards, the number brokers are looking for is the $20 per rentable square foot amount. It still isn’t quite the same because a six month agreement for a space with nice finishes isn’t available in the regular world, let alone one that’s so small and furnished. Of course, the real value-add is in the community and camaraderie that comes with being in one of the largest tech entrepreneur centers in the country.

What else? What are some other thoughts about translating the per person Atlanta Tech Village costs to standard commercial real estate rates?