Accountability in a Startup

As the startup grows from a small group of co-founders to the first early employees and beyond, organizational accountability needs to scale as well. Co-founders, talking so frequently and being self-starters, often mind-meld on a daily basis and don’t need as much structure. Only, that doesn’t scale.

Here are a few ideas for accountability in a startup:

Accountability in a startup takes work. Make it a system with the right rhythm, data, and priorities.

What else? What are some more thoughts on accountability in a startup?

Quick Notes from Marc Andreessen’s AMA

Stripe has an excellent post up titled Marc Andreessen answers questions from Stripe Atlas founders. Andreesseen, as always, doesn’t disappoint (see the article about him in The New Yorker). Here are a few quick notes from the article:

  • On raising money:
    • At the seed stage, when a startup is brand new, the decision is driven almost entirely by the people.
    • At the venture stage, when a startup has a prototype or an initial product but not yet a fully functional business, the decision is some combination of the people, as with seed rounds, but also product/market fit
    • At the growth stage, when a startup is fully in market and building out sales and marketing efforts to expand, the decision becomes far more about the financial characteristics of the business
  • How many pitches annually:
    • Out of the 2,000 we see, we will make somewhere between 20 and 40 investments per year. So around a 1-2% hit rate.
    • The very best VCs in the US collectively make perhaps 200 investments per year. Out of those 200, about 15 of them will generate 90%+ of the investment returns for the entire year.
  • On SaaS pricing:
    • But if I were to give general advice, I’d say that we see far more SAAS startups underpricing their product than overpricing.
    • TLDR: When in doubt, double prices. 🙂

Want to read more? Head on over to Marc Andreessen answers questions from Stripe Atlas founders.

5 Strong Core Values from Godard Abel

Godard Abel, co-founder of G2 Crowd, published an excellent blog post earlier today titled Home Again With My Entrepreneurial Family. After selling his last company Steelbrick to, he rejoined G2 Crowd. In the post, he highlighted their five core values, referring to them as “mantras”:

  • Work with joy
  • Learn quickly and continuously
  • Buyers come first
  • Slap and tickle
  • Live at the peak

Entrepreneurs should define their core values and ensure they’re deeply integrated throughout the company. These five core values are a great starting point.

What else? What are some more example core values that you like?

Personal Loans for Founder Stock

Recently I was talking to a successful entrepreneur that’s interested in some personal liquidity (e.g. selling startup equity for cash) but doesn’t want to send the wrong message to the board and investors by selling some of his founder stock. Generally, there aren’t many options in this case. I offered up that there’s likely a market — depending on the appetite for the private company stock — to get a high interest personal loan that’s collateralized against his equity that doesn’t require a personal guarantee.

Here’s how it might work:

  • Startup was valued at $200 million post-money after their last round
  • Founder owns 15% (so, $30 million of value on paper, but not liquid)
  • Founder borrows $1,000,000 with the following terms:
    • 10% annual interest rate
    • Sale proceeds of 10% of the loan amount in equity at last valuation (like a warrant that increases or decreases in value as equity value changes)
    • 3 year term
    • Collateralized against $3 million of equity based on the last valuation

Example exit scenarios:

  • If the startup exits 12 months later at a $300 million valuation, the founder would repay the loan as follows:
    • $1,000,000 in principal
    • $100,000 in interest
    • $150,000 in sale proceeds (the 10% of loan value was $100,000 and increased to $150,000 as the company value increased 50%)
  • If the startup exits 12 months later at a $100 million valuation, the founder would repay the loan as follows:
    • $1,000,000 in principal
    • $100,000 in interest
    • $50,000 in sale proceeds (the 10% of loan value was $100,000 and decreased to $50,000 as the company value decreased 50%)

Obviously, this would be a very expensive loan. But, as an entrepreneur that’s looking for options, and optimistic that the value of the equity will increase substantially, this is a better way to get some liquidity now without selling the equity immediately.

As more startups achieve scale and substantial valuations, look for new methods for entrepreneurs to get partial liquidity.

What else? What are some more thoughts on personal loans for founder stock?

4 Criteria for a 5-8x Adjusted EBITDA Software Exit

Upland Software is a publicly-traded SaaS company based in Austin, TX that specializes in acquiring sub-scale SaaS companies and rolling them into the portfolio. To date, they’ve acquired 14 companies and are actively looking to buy more. With a market cap of $480 million and an annualized run-rate of $80 million (source UPLD), they’ve executed this strategy for 7+ years.

Here are the four criteria for Upland Software acquisitions:

  • Financial Profile – Revenues in the $5-$25 million range
  • Recurring Revenue Base – Renewal Rates > 90%
  • Enterprise Applications – Built-for-purpose Enterprise Work Management
  • Geography – U.S., Canada and E.U.

According to their press release from a few months ago they pay 5-8x pro forma Adjusted EBITDA:

The acquisition is within Upland’s target range of 5-8x pro forma Adjusted EBITDA and will be immediately accretive to Upland’s Adjusted EBITDA per share.

Long term, their target is an Adjusted EBITDA margin of 40%.

Here’s how an acquisition might work:

  • $10 million/year SaaS business makes $3 million/year Adjusted EBITDA
  • Upland acquires the SaaS company for $21 million (e.g. 7x Adjusted EBITDA)
  • Upland cuts expenses and raises the Adjusted EBITDA from $3 million to $4 million (e.g. 40% target)
  • Upland’s stock trades at ~18x Adjusted EBITDA (e.g. $26 million Adjusted EBITDA expectation for 2017 with a valuation of $480 million ignoring current assets and debt – source)
  • $4 million of new Adjusted EBITDA increases the value of the business by $72 million, making the $21 million acquisition very profitable

Entrepreneurs thinking through potential exit value for their startup should understand these values and how a financial buyer might value the business.

What else? What are some more thoughts on this example with four criteria for a 5-8x Adjusted EBITDA software exit?

Find the Fastest Growing Markets

When a potential entrepreneur says they’re seeking startup ideas, I like to ask a few questions regarding areas of interest and domain expertise. Then, after going through the importance of customer discovery and getting feedback during the product building process, I offer up my favorite piece of advice: find the fastest growing markets.

Ideally, the market is small and fast growing with the potential to be massive — those are the best. Big companies ignore them because they aren’t worthwhile now but by the time the size is meaningful, it’s too late to get in. This is the perfect spot for entrepreneurs to build large companies.

Looking for fast growing markets? Start with the 2017 Internet Trends (also, look at The best Meeker 2017 Internet Trends slides and what they mean). Timing is the most important startup consideration, so find the fastest growing markets as the starting point.

What else? What are some more thoughts on finding the fastest growing markets?

Video of the Week – Founder’s Dilemmas: Equity Splits

For our video of the week, watch Noam Wasserman share his research in Founder’s Dilemmas: Equity Splits. Enjoy!

From YouTube: Lots of founders make decisions about equity splits very early in the life of their company. Professor Noam Wasserman says making these decisions without considering how things can change is a recipe for disappointment, and potentially failure.

What can go wrong when you split 50-50?
What are the pitfalls?
How should you think about splitting equity?