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Years ago I was much more averse to startups raising capital. I believed, naively, that the best businesses grew at the natural rate of customer acquisition and needed that governor to scale elegantly and cohesively. With time, and more varied experiences, I’ve seen hypergrowth, fueled by substantial amounts of capital and customer demand, scale in a quality manner while maintaining a strong culture.

Now, knowing there’s more math around when it makes financial sense to raise capital, I’ve also come to believe that if you’re going to get on the fundraising train, it’s important to plan for enough capital to get to a scale that provides for some exit opportunities in the event the business doesn’t achieve hypergrowth. Translation: the business needs to get to $10M of annual recurring revenue growing 30% or more for potential acquirers, especially private equity, to get interested.

Over the years, I’ve talked to a number of entrepreneurs that raised some money, achieved single digit millions in recurring revenue, and stalled. The startup had enough gross margin to keep the lights on indefinitely, but didn’t have enough scale or growth to find a home that made everyone happy. Herein lies the land of zombie startups. Too big to die, too small to matter.

Often, the solution is to manufacture growth with more capital. While not always efficient, more capital allows the startup to get to more scale which provides more outcome options. Scale matters to potential acquirers much more than entrepreneurs realize.

The next time an entrepreneur is on the fundraising train, make sure they know that getting to scale is one of the most important things needed to have options, so raise a bit more money than needed, or plan for another round sooner than desired. More capital is often needed for exit opportunities, so plan accordingly.

As part of my personal rhythm, I read for 30 minutes daily on a physical Kindle Paperwhite next to my bed and keep my phone on the other side of the house. My approach is mostly that of snacking on books — reading a chapter here or there based on what’s resonating with me at that moment in time. I like to jump around different books and look for new ideas or concepts.

Here are some recent entrepreneurial books I’ve snacked on:

• Amp It Up: Leading for Hypergrowth by Raising Expectations, Increasing Urgency, and Elevating Intensity
  Frank Slootman brings the heat sharing stories from his incredible career, with a focus on expecting more from the team
• Endurance: Shackleton’s Incredible Voyage
  Alfred Lansing tells one of the all-time great stories of perseverance and resilience in the face of unimaginable difficulty.
• Leadership and Self-Deception: Getting Out of the Box
  The Arbinger Institute’s classic managerial story about leadership being defined by who we are, not what we do.
• Be Where Your Feet Are: Seven Principles to Keep You Present, Grounded, and Thriving
  Scott O’Neil shares a number of excellent life stories from the world of professional sports, family, business, and life in general.
• The End of Jobs: Money, Meaning and Freedom Without the 9-to-5
  Taylor Pearson makes the case for entrepreneurship, entrepreneurship, and more entrepreneurship. The best future is to create your own.
• Becoming Trader Joe: How I Did Business My Way and Still Beat the Big Guys
  Joe Coulombe shares his amazing journey creating Trader Joe’s from scratch and building what we know it for today.
• The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time
  Jim McKelvey, founder of Square, unpacks his theory of innovation and lessons learned along the way.

I’ve enjoyed this list of books and I’m always looking for new ones.

What should be added that you’ve read recently?

One of the ways we promote the Atlanta Tech Village is that it’s a community of entrepreneurs helping other entrepreneurs. Entrepreneurs are typically great at one thing — say fundraising, product development, or sales — and not as strong in other areas. Yet, entrepreneurs are almost always glass-half-full people that want to help and bring out the best in others. So, by having hundreds of entrepreneurs in the same building, they inevitably help each other with the ultimate goal: increasing the chance of success for the whole community.

Only, this isn’t unique to entrepreneurs helping entrepreneurs. Anyone can make a difference and help an entrepreneur.

Know any potential customers?

Know any potential mentors?

Know any potential employees?

Know any potential investors?

See, entrepreneurs always need help with something. The best way to find out? Just ask.

The next time you talk to an entrepreneur, ask them where they need help. Who knows, you just might have the solution.

Go help an entrepreneur. Let’s increase everyone’s chance of success.

Last week I was meeting with an entrepreneur and he described a number of projects in flight. They were raising money, launching a new product release, hiring two new VPs, and the list went on and on. We were about to drill into a few things he mentioned when he said, “With all that said, we have one main goal for the year: raise gross customer retention to 85%.” Then, he shared how everyone is driving towards that common goal.

If there are too many priorities, there are no priorities.

If there are too many goals, there are no goals.

For this startup, everyone was 100% aligned that raising their retention metrics was the most important thing.

For sales, it was was selling better-fit customers (won’t reflect in this year’s numbers but will in subsequent years).

For marketing, it was more messaging around value and ROI.

For support, it was improving customer satisfaction scores and going deeper than just resolving a ticket.

For product, it was prioritizing bug fixes and more difficult edge cases.

Every team, and every team member, was completed aligned around raising customer retention rates as the main goal for the year.

The next time the desire emerges to have more goals and more priorities, fight the urge and focus on one thing. Achieving one critical goal is more important than chasing multiple less important ones.

What’s your main goal for the year?

One of my favorite types of entrepreneur meeting is the successful bootstrapped founder contemplating how to grow faster. Partly, this is because I was in this situation in the past, and partly because it’s a nuanced topic with no easy answer. Outside of considerations like personal dreams/aspirations, capital availability, and lifestyle, the most tactical area to drill into is the financial aspects. More specifically, how to answer the question: when does it make financial sense to raise capital?

To answer this question, I imagine a business as a machine. The goal of the machine is put money into it and generate an output that’s a more than what was put in plus a return for the effort, cost of capital, etc. Taking this one step further in the context of raising money, and the corresponding dilution to the founders and the team, the value that’s created taking on the capital has to more than make up for the reduced ownership in the business.

Let’s break it down into a company valuation formula:

Valuation

• Annual Recurring Revenue (ARR) * Growth Rate (GR) * 1.5(Net Dollar Retention (NDR)) * 15 (this number goes up and down dramatically based on the public markets, gross margins, customer acquisition costs, total addressable market, etc.) = Valuation
• Example: $10M ARR growing 50% YoY with 120% NDR is roughly valued at $10M * .5 * 1.8 * 15 = $135M
• Note: BVP Cloud Index is at a 14x average revenue multiple, so this example at ~13.5x ARR is inline (this example is growing faster than the public company average but doesn’t have public company scale)

So, the primary levers are recurring revenue and growth rate with a secondary lever being net dollar retention (if net dollar retention is below 100%, it starts penalizing the valuation quickly).

For simple math, let’s peg it as costing $2 to add $1 of recurring revenue. Assuming growth rate and net dollar retention stay constant (growth rate as an annual percentage usually declines 10% per year), we now know that for every $2 we put into the business we add $13.50 in value (or $1 for $6.75 in value). A good trade! This value then compounds on itself due to the net dollar retention above 100%, making the business grow in value each year without additional investment (assuming growth rate didn’t change, which it would).

If the example startup is worth $135M and a new investor puts in $10M, the business will become $67.5M more valuable by adding $5M in new annual recurring revenue. Assuming 7% equity dilution for this new money ($10M/$145M), and a 50% increase in valuation, this is an accretive deal to the founders. Ideally, there would be a large difference between equity value reduced from dilution and equity value gained from increased valuation to account for uncertainty.

Entrepreneurs should consider a formula that takes into account valuation, dilution, and valuation changes due to capital deployment in an effort to assess if it makes financial sense to raise capital. When the engine is working well, it often makes sense. When the engine isn’t working, it’s time to fix the engine before raising money, if possible.

In the last All-In Podcast, David Friedberg laid out a great rubric for business value creation. While visionaries get excited by a future state and entrepreneurs get excited by an idea, it takes all that, and more, to create real value.

David Friedberg’s rubric for value creation in a business All-In podcast episode 62 (at the 50 minute mark):

1. Can you make a product?

2. Do people want to buy your product?

3. Can you make a positive gross margin selling the product?

4. Can you make a return on the marketing dollars you have to spend to
generate the gross profit?

5. Can you scale the amount of money to grow your business such that
as you grow the return goes up, not down?

6. Can you transition to being a platform (multi-product company)?

This articulation of the business value creation journey is the best I’ve ever seen. Share this with every entrepreneur you know and ensure they think through it on their journey.

Last week I was looking at the pricing plans for a startup and it screamed complexity. Tons of plans, tons of upsells, tons of dimensions — it felt like optimizing for the business as opposed to the consumer. Of course, we see complexity on a regular basis (healthcare invoices, etc.), unfortunately making them feel more acceptable.

Instead of having 50 questions on the quarterly survey, have the 10 most important.

Instead of having six pricing plans, have three and a “call for custom” option.

Instead of providing a four page menu, have a two page menu with the best items.

The simplicity tradeoff is worth it.

Yes, some money might be left on the table. Yes, some options will have room for more variability.

Fight the urge to optimize. Fight the desire to add more complexity.

Instead, focus on reduced friction. Focus on higher effort to value for everyone involved.

Erring on the side of simplicity is worth it. Similar to the famous quote, “If I had more time, I would have written a shorter letter”, take the time to cut out the complexity and make it simpler.

After an entrepreneur has achieved product/market fit, I like to ask about their execution methodology. What do they use? Why? How did they select it? What parts do they like? What parts don’t they like? Quite often, I get a response that they don’t have an execution methodology and they are interested in learning more.

An execution methodology is simply a framework for getting things done personally and in your organization.

Early in the entrepreneurial journey it’s easy to keep everyone on the same page due to the continuous interaction and iteration. Only, as the organization grows, complexity grows exponentially. Systems and methodologies provide a way to scale in a maintainable, elegant manner.

Here are a few execution methodologies entrepreneurs use and their main categories of focus:

Scaling Up / Mastering the Rockefeller Habits

• People
• Strategy
• Execution
• Cash

Traction / Entrepreneur Operating System

• Vision
• People
• Data
• Issues
• Process
• Traction

The 4 Disciplines

• Focus on the Wildly Important
• Act on the Lead Measures
• Keep a Compelling Scorecard
• Create a Cadence of Accountability

And, of course, one my personal favorites for ease of use is the Simple Strategic Plan.

Whatever the case, pick an execution methodology. Embrace the core concepts and help your organization scale.

Happy New Year!

Christmas came a few days early this year when we announced Vista Equity acquired a majority stake in Salesloft. Salesloft powers the modern revenue workspace for digital selling, insights, and coaching. Think of software that helps sales team significantly increase their effectiveness at selling and is directly in the path of revenue.

Salesloft is partly a story of major pivots. 10 years ago the initial product was a job change alerts app that notified sales reps when a contact joined a new company. That idea failed and the company morphed into a contact scraping and leads database. While the prospector product took off and generated millions of revenue, it was eventually shutdown. From there, the final pivot was to a sales engagement platform that achieved the proverbial hockey stick growth and recently hit $100M in annual recurring revenue. Prior to the Vista Equity acquisition, Salesloft had $246M of funding (Crunchbase) and 762 employees (LinkedIn).

Salesloft is mostly the story of the will, determination, and grit of the entrepreneur Kyle Porter. From a full reboot of the business in the early days, to multiple pivots, and recently navigating the pandemic, Kyle has endured the high highs and low lows of entrepreneurship many times over. And, one of his super powers is recruiting an amazing team starting with Rob Forman. Rob was introduced to Kyle through a chance encounter at a local event. From there, the two hit it off and developed one of the strongest yin/yang partnerships I’ve ever seen. The team grew to include incredible leaders across all the functions including Ellie, Sydney, Scott, Chad, Steve, and many others.

Of course, Kyle was the visionary all along. Through a strong focus on organization health, never ending love for the customer (#saleslove), bold acquisitions of several companies, and masterful fundraising, Kyle operated in one of the most aggressive, yet thoughtful, ways imaginable.

I’m going to miss being on the board of Salesloft for the next stage of the journey but Kyle and the amazing team at Vista Equity will take it to new heights. Being on the Salesloft journey for the last 10 years with Kyle and his team was one of the highlights of my career and I’m incredibly humbled and appreciative to be a small part of it. Onward and upward!

Last week I had the opportunity to join a panel with Lisa Calhoun and Kyle Porter moderated by Godard Abel of G2. Near the end of the audience Q&A session, someone asked for advice we’d share with entrepreneurs and Kyle offered up the best answer: personally grow faster than the startup. While it sounds easy at first, it’s incredibly hard.

Everyone focuses on startup growth. What about this sales and marketing strategy? What about a freemium model? Should we invest more in this? While that deservedly gets attention, when startup growth is working, even more attention needs to be paid to personal growth.

So, how do you grow faster than the startup?

Invest in yourself.

Invest in a peer group. Join the Entrepreneurs’ Organization or the Young Presidents’ Organization. Search Meetup for local startup and tech groups. Ask your local Tech Village equivalent for organizations in the area. Seek out groups of other people that want to grow and get involved.

Invest in learning. Find entrepreneurs you admire and read their books. Find authors that write about topics you care about and read their blogs. Find conferences and programs where you can immerse yourself.

Invest in a coach. Find a business coach that you meet with regularly. Commit to a program and process. Let someone else help you maximize your potential.

Invest in yourself in a systematic way. Carve out the time. Put in on your schedule. Make the commitment.

Growing personally is one of life’s great joys. Doing so in a way that keeps you ahead of your startup’s growth is one of the secrets to success. Put a plan in place and ensure that personal growth is faster than startup growth.