A Failure at Raising Money

Back in 2009, we were in our third year of Pardot and things were looking good, really good. We had just cracked $1M in annual recurring revenue (a big milestone!) and went out to the market to raise money from venture capitalists. Only, we botched the process (actually, it was all my fault). Some of the mistakes:

  • Made the timeline to raise money too loose such that we were at different phases with different investors over the course of several months (best practice is to run a serious process over 4-6 weeks)
  • Made the personal time commitment too loose such that I was still 80% on the business and 20% fundraising when it should be the other way around
  • Met with 29 VCs from Atlanta to D.C. to Boston to Silicon Valley and didn’t do a good job of lumping meetings together resulting in lots of flights with only one or two meetings
  • Personally prepared the financial forecast without outside expertise resulting in a session with a VC where I was being grilled why gross margins were going down three years out instead of up, and I wasn’t prepared
  • Not really understanding how to put more money to work other than pointing to our cost of customer acquisition relative to payback period and saying we’d put most of the money into sales and marketing (a bottom-up SaaS revenue forecast is the way to go)

In the end, it didn’t matter. After doing some spreadsheet jockeying, it was clear that we were better off continuing to bootstrap the business as we couldn’t see a 5-to-1 payback on raising money (e.g. invest $1 and make the business $5 more valuable). Raising money doesn’t ensure success, but if you are going that route, don’t make the same mistakes we made.

What else? What are some more lessons learned from raising money?

Two Routes to Starting Great Startups: Audience Building and Consulting

Earlier this week I was at SalesLoft’s annual Rainmaker conference and couldn’t help but be in awe of the palpable energy from 1,000+ attendees. People were smiling, talking (go figure with a bunch of sales people attending a sales conference!), and genuinely excited to be there. After reflecting on the event, it reminded me of the early days of SalesLoft at the Atlanta Tech Village.

From the start of SalesLoft, Kyle Porter, the founder/CEO, focused on building a passionate audience of modern sales professionals through public speaking, blogging, and interviewing of sales leaders. Site traffic, email subscribers, and Twitter followers grew tremendously. Only, the company didn’t have a product sales people wanted — the first product was a nice-to-have and not a must have.

Despite limited commercial success with the first product, the passionate audience was there and growing. So, if the product isn’t working but there are a ton of fans of the company, the next step is to ask the them what they want. After many conversations, and more product iterations, sales engagement was identified as the next major opportunity in the sales technology market. Today, SalesLoft has thousands of paying customers and is one of the fastest growing startups in the country.

Now, contrast it to another amazing startup: Terminus. Terminus is the leader in account-based marketing and was founded by Eric Spett. The first year of Terminus was completely focused on consulting for marketers with an eye towards finding a product opportunity and turning it into a SaaS platform. And, that’s exactly what happened.

Consulting is generally a tough way to start a startup because it’s easy to get comfortable with a decent paycheck and not have the time to build a compelling product. Yet, consulting actually works well in that there’s a professional that needs a problem solved, and is willing to pay money to solve it — the perfect environment to do customer discovery. In the case of Terminus, as soon as the market opportunity was clear, the shift was made away from consulting and to full-on product development. Today, thousands of marketers use the Terminus product.

Ultimately, there are many different paths to success. Too often, entrepreneurs get enamored with their initial idea and don’t evolve it fast enough to meet the needs of the market. Building a passionate audience and doing consulting work are two different routes that get close to the customer and help accelerate success.

The Simply SaaS Forum – Network and Learn from SaaS Pros

Next month we’re hosting the first of many Simply SaaS Forums in the Southeast. Taking a page from Jason Lemkin and SaaStr Annual, we’ve set out to build a community for SaaS entrepreneurs and professionals that want to network and learn from other experts. The faster you learn, the faster you grow.

As for the structure, it’s a 4.5 hour event from 1-5:30pm with an optional dinner afterwards. Being in Atlanta, we have direct flights and short drives for more than 80 million people in the Southeast whereby you can travel here in the morning, get a tremendous amount of value in the afternoon, and be home that night without having to even get a hotel room. We understand the grind and are providing a program and format to take actionable insights across a variety of functions for SaaS pros.

As for the program, we’ve broken it out into sales, marketing, product/engineering, and people/culture followed by a founder discussion on scaling from $0 to millions in recurring revenue. Here’s our first lineup:

  • Tonni Bennett, VP of Sales at Terminus – Tonni will share her lessons learned as a sales leader growing Terminus from $0 to tens of millions in ARR.
  • Tami McQueen, Co-founder of 31south – Tami McQueen, formerly of SalesLoft, will share marketing lessons learned when growing SalesLoft into one of the largest sales engagement platforms on the market.
  • Hubert Liu, Engineering Lead at Atlanta Ventures – Hubert Liu will share experiences from his time as CTO at Rigor about what it takes to grow a product from $0 to Inc. 500.
  • Karen Houghton, VP of Atlanta Tech Village – Karen has been with Atlanta Tech Village since the beginning and will share lessons learned on building great culture for startups.
  • Craig Hyde, CEO of Rigor – Craig is the founder/CEO of Rigor and was recognized last year in the Inc. 500 as one of the fastest growing companies in the United States.

Overall, we’re on a mission to connect the Southeastern SaaS community with great content and programs to ultimately increase our quantity and scale of success. Please join us on our journey.

Venture-Backed SaaS Must Have a Fast Path to $100M Revenue

Rory O’Driscoll just published an excellent post titled Understanding the Mendoza Line for SaaS growth where he argues that the minimum requirement for a SaaS company to raise venture capital is a path to $100 million of revenue growing at least 25% at that milestone. Of course, as a startup grows the law of large numbers kicks in and fast growth becomes harder and harder. Historical data from SaaS companies that have gone public (considered best-in-class) shows that they typically grow between 80 and 85 percent of the prior year once past $10 million of revenue.

From the post, here’s an example with numbers:

  • Year 1 – Grew 120% from $4.5M to $10M
  • Year 2 – Grew 98% from $10M to $19.8M
  • Year 3 – Grew 81% from $19.8M to $34.8M
  • Year 4 – Grew 66% from $34.8M to $59.6M
  • Year 5 – Grew 54% from $59.6M to $91.9M
  • Year 6 – Grew 44% from $91.9M to $132.8M

SaaS entrepreneurs need to understand the calculus for raising venture capital and have the requisite growth rate to make it worthwhile.

Want to learn more? Head over and read Understanding the Mendoza Line for SaaS growth.

State of the Cloud 2018

Byron Deeter of Bessemer Venture Partners has an excellent slide deck titled State of the Cloud Report 2018. Byron and his team do an excellent job reviewing trends in the industry and predicting the next big areas for cloud-enabled B2B software.

Some notes:

  • Five largest companies in the world by market cap are tech companies
  • IPOs are sill below historical norm
  • Public cloud companies outperform the overall market
  • Many private companies are getting premiums compared to public companies due to faster growth rates
  • VC-backed startups exits have gone down the last three years
  • ARR growth rate from $1M to $10M is a major indicator (best is doing it in two years)
  • ARR Multiple divided by Year-over-Year (YoY) annual growth has stayed constant
  • Example: 10x ARR multiple divided by 150% YoY growth would be an ARRG value of 6.7x
  • Best valuations for SaaS startups as follows:
    • CARR revenue growth of 200% (e.g. tripled ARR in last 12 months)
    • CAC payback < 12 months
    • Churn is net negative
    • Cash flow efficiency > 1
  • Predictions:
    • Rise of serverless computing
    • API’s drive innovation
    • Blockchains finds a home in the enterprise
    • Payments-as-a-service
    • The move from system of record to system of results
    • The screenless software movement
    • Values create value
    • The cloud is flat; innovation outside the Valley

Interested in SaaS? Head over and read State of the Cloud Report 2018.

The Winner Effect in SaaS

One important component of SaaS that isn’t talked about enough is the “Winner Effect.” Simply put, the Winner Effect is all the benefits that accrue to the winner in a specific market that ultimately results in a significantly more valuable company. SaaS is well known for its high quality business model: substantial recurring revenue, high gross margin, and tremendous predictability. The Winner Effect makes the model even more profound.

Here are a few elements of the Winner Effect:

  • Sales Opportunities – Instead of hunting to find the potential deals in the market, the Winner Effect results in being in almost all the sales opportunities by default. Every prospect brings the winner in and it’s up to the upstarts to try and unseat the leader.
  • Public Relations – The #1 in a market gets 10x the number of media mentions than the #2. This PR results in even more separation between first place and second place, which compounds over time.
  • Third-Party Integrations – Even with all the middleware tools out there, integrating products is still a challenge, especially for the deep, more comprehensive integrations. As the winner in the market, more third-parties write integrations back into the platform creating an even larger moat for the next set of challengers.
  • Valuations – Ultimately, category winners get a valuation premium both when raising money from investors and when going public or selling to a strategic. Look at the some of the high end SaaS valuations to see investors that believe they’re betting on winners.

Another way to put it is that SaaS has a real network effect that snowballs as the business gets larger and larger and becomes the de facto winner in the market.

The Winner Effect is real. Entrepreneurs would do well to understand it and seek it for their business.

What else? What are some more thoughts on the Winner Effect?

Co-Founder Complement: Go-To-Market + Product Experts

Earlier this week I was talking to one of the top SaaS entrepreneurs in town about his experience from a simple start at the Atlanta Tech Village five years ago to raising $75 million last year. We got into a discussion about team, stream, and not a meme and I realized my previous definition of the team element was incorrect. Before, I characterized it as a heroic sales person and a heroic product person.

The heroic sales person brings in deals with lots of passion and vision, yet has an incomplete product. The heroic product person builds the product on the fly while delighting customers all the while. My phrasing it as the heroic sales person was wrong.

What’s the right way to describe this person? They’re the amazing go-to-market leader. Acquiring customers happens through a variety of channels. What matters, especially early on, is finding one channel that works. The go-to-market leader could be great at selling directly, generating demand through road shows, or generating quality leads through search marketing. In the end, the result is  a steady flow of people that want to buy the product.

Pair the amazing go-to-market person with the amazing product person and you have the most successful founding team combination. The ultimate co-founder complement is combining someone who can attract customers with someone who can delight them.

What else? What are some more thoughts on the best co-founder combination being a go-to-market person and a product person?