Last week we had the closing dinner for a startup that was acquired earlier this year. A closing dinner is a ritual to celebrate the success of a transaction with the founders, executives, investors, advisors, bankers, and anyone else heavily connected to the company. Put more simply, it’s a feast to give thanks.
Much like the name implies, the closing dinner is both the closing of the deal and the closing of that chapter of the business. In this case, it’s an opportunity to recognize everyone involved, share stories of key moments along the journey (especially the early days), and talk about lessons learned. There’s a bit of nostalgia — acknowledging that a major phase is done often brings this one — along with a bit of poking fun at how little we knew at the beginning. In other words, cathartic.
Human connection is one of the deepest desires and memories are the glue that binds us together. Closing dinners are a time-honored ritual to bring the team together and reflect on a major accomplishment.
For many years we’ve been pushing the idea to entrepreneurs that it’s the same amount of work to create a company that has a huge impact as it is to create a company that has a more modest impact. Impact can be defined as lives touched, jobs created, revenue generated, wealth created, or any other measure. Regardless, it requires working thousands of hours over 7-10 years to build anything successful, so it’s best to strive to make the biggest impact possible. This is even more so if the entrepreneur is going to raise money from investors and take on capital, adding pressure to create an out-sized return.
While the concept might be new to me in the last 10 years, it’s clearly been well understood historically in many different contexts. I was reminded of this recently seeing the famous Make No Little Plans on a historical sign:
Make no little plans. They have no magic to stir men’s blood and probably will not themselves be realized. Make big plans, aim high in hope and work, remembering that a noble, logical diagram once recorded will never die, but long after we are gone will be a living thing, asserting itself with ever growing insistency.
Daniel Burnham, Architect and Urban Planner
Human nature is to look at the ideas directly ahead. What problem do I have right now? What idea do I care most about? While these are the logical starting point, and should be encouraged, it’s important for entrepreneurs to step back and think big. If everything went stunningly well, what could this become? Does that meet my ambitions? While some ideas start small and become bigger than expected, most often, small ideas start small and stay small. During idea selection, take the time and energy to think more about what could be and ensure there’s the potential for greatness.
Make no little plans.
Last week marked the 10-year anniversary of the Pardot exit to ExactTarget. Like all great experiences in life, I have fond memories of the team, customers, partners, advisors, and everyone else we worked with along the way. Of course, there were plenty of high highs and low lows as that comes with the territory when building a startup. I’m most proud of partnering with Adam Blitzer to build an incredible business that made our own little mark on the marketing technology community and Atlanta startup community.
Here are 5 random notes reflecting on Pardot in the context of the 10 years since our sale:
- The Pardot Name – Incredibly, the Pardot name lived on as part of Salesforce.com all the way until April of this year when it was renamed “Marketing Cloud Account Engagement.” While there is some debate about the quality of the new name selection, for the Pardot brand to live on for 9.5 years is amazing. Most brands in the Salesforce.com portfolio are removed and a generic one created within a couple years, so Pardot had a great run.
- pi.pardot.com – The sign-in URL lives on as thousands of sites point back to this address to run mission critical functionality on their own site (e.g. visitor tracking and forms). A little known fact is that we chose pi.pardot.com in the early days because Pardot was the company name and Prospect Insight was the product name. Plus, pi is nice and nerdy. Note to founders: make the company name and product name the same until you’re a massive success and need to introduce other products.
- Co-founders Reunited – Early this month Calendly announced Adam Blitzer as the newest board member. I’m excited to work with Adam again after our 10 year hiatus. Fun fact: in the 5.5 years Pardot existed from start to exit, Adam and I never had a board meeting. Our last Calendly board meeting was the first board meeting we participated in. Hah!
- Today’s Pardot Revenue – Before Salesforce.com renamed Pardot earlier this year, the business, as a standalone product, was over $500 million in annual recurring revenue. To put that in context, when we sold the company we had less than $14 million in annual recurring revenue. Depending on the growth rate, gross margins, and renewal rate, a company of that size today would be worth billions of dollars.
- ExactTarget Friends – Pardot was bought by ExactTarget which was then quickly bought by Salesforce.com. After the ExactTarget leaders left Salesforce.com a couple years later, they started a venture firm called High Alpha. We’ve worked with High Alpha since inception and co-invested in several companies including Salesloft and Terminus.
Being a part of the Pardot journey brings me incredible joy. Seeing the team and product continue to thrive a decade later makes it even more special. A big thanks to everyone involved and my sincerest thanks.
Last week I was talking to an entrepreneur that was out raising money. As they had raised their Series A in the middle of 2021, made good but not great progress, and spent all their capital, they were in a tough spot. When I asked how much they were looking to raise, and at what valuation, I received the expected answer: we’re raising X as an extension of our A round at the same valuation.
Entrepreneurs that raised rounds at 20, 30, 50, or even 100x revenues have a challenge on their hands. The public market multiples for cloud companies have gone down 40 – 80% this year. Companies that were previously trading for 20x run rate, with strong metrics, are now routinely trading for 6x run rate. Public market multiples have a serious influence on private market multiples.
Why the push for an extension of the Series A round at the same valuation? Simple, to avoid a down round and provide an easy path forward. When a startup raises money at a valuation less than the last round, anti-dilution measures kick in. Say investors put in $10M in the last round at a $100M post-money valuation and own 10% of the company. If the new round is at a $50M post-money valuation, those previous investors that owned 10% of the company for $10M now own 20% of the company ($10M is 20% of the new $50M valuation) and didn’t put any additional capital in the business (assuming basic anti-dilution rights). Everyone, especially the founders and employees, are heavily diluted by both the existing investors owning a larger percentage of the business as well as the new investors that supplied capital in this most recent round. It’s a tough pill to swallow after things were frothy for so long.
Down rounds also create challenges around employee equity, especially stock options. If some employees were issued options at a strike price of X, and now the company is valued at 50% of X, those options are much less desirable. Does the company issue new options at the new strike price for everyone? Only some employees? Do they issue the new options at the lower price with an aggregate dollar value that’s the same as before resulting in more option pool dilution? There are ramifications throughout.
Entrepreneurs would do well to seek new capital as an extension of the last round if the startup hasn’t made enough progress for an up round. When it hasn’t, and a down round is inevitable, it’s much more challenging, but all is not lost. Figure out the options, get capital in the business, and most importantly, get momentum back.
With the large number of startups that have already announced layoffs this year, and the belief that more layoffs are on the horizon due to the economic downturn, there’s a second-order effect that will exacerbate the challenges for SaaS companies: reduced renewal rates. Most SaaS companies sell their solution on a per user basis, and a material number of SaaS companies sell to other venture-backed startups. When the customer comes up for renewal, even when they’ve had a great experience and received real value, now needs fewer users because they’ve downsized the team, they’ll renew a smaller contract. The SaaS company hasn’t done anything wrong, and likely has delivered a valuable solution, only to see the account shrink.
Reduced renewal rates then have several third-order effects. First, with additional churn, it’s harder to grow as more of the newly signed customers are required to offset the customers that have downsized. Second, with a lower growth rate, the valuation premium is reduced as growth rate is a major driver of the valuation multiple and the Rule of 40 score goes down. Third, budgets and annual plans have to be updated to reflect the reduced demand, and this often results in reduced hiring or layoffs, especially in the context of capital being more expensive and valuations being lower. It’s not a death spiral, but it is a serious change in the playbook.
Thankfully, SaaS as a category is still growing incredibly fast with public SaaS companies growing at an average rate of 35% annually. The growth won’t come to a complete halt, but it will be impacted. Ideally, the economic downturn would be temporary (12 – 24 months, hopefully!) as inflation is tamed and the normal creative destruction process plays out. Entrepreneurs would do well to know that their growth metrics, especially renewal rates, will likely be challenged for a period of time, and to plan accordingly.
In the startup world there’s a common narrative that if the business is going to work, it’ll take off exponentially in a year or two from creation. Either you have crazy success right away, or it’s not happening. While that does happen on occasion, and many startup stories embellish the outliers, the reality is that it often takes longer, much longer.
Just this past week, two more unicorn stories were in the news and for each it took four years before the startup took off.
First, the startup world has been enthralled by the news that Adobe is acquiring Figma for $20 billion. At 50x the approximately $400 million of annual recurring revenue, deals like this make the venture capital industry work (extreme power laws). While Figma was founded in 2012, it wasn’t until 2016 when growth exploded. Four years of working through the details, refining product/market fit, earning those first loyal users, and still not knowing what lies ahead.
Second, this week’s Invest Like the Best show featured Trina Spear in the episode titled Billion Dollar Scrubs. Trina, the founder of publicly traded FIGS (note the random “fig” connection between the two companies), shares her story and recalls how the early years were a slow grind building a direct to consumer online scrubs business. In her words, it wasn’t until year four that growth and scale made it clear they were onto to something large.
While we all want the instant success, when it does work out, it almost always takes several years. From these anecdotal stories, and my personal experiences, four years feels like a more common length of time to know the startup is going to work and have enough traction to see a big opportunity ahead. Pace yourself, four years requires tremendous commitment and fortitude.
Last week an entrepreneur was sharing about a concept he heard on a recent podcast episode from My First Million. Generally, one of the best ways to grow and learn is from other entrepreneurs. Only, it shouldn’t be done randomly. Instead, there are three groups of people entrepreneurs should seek out and building relationships with:
- Done it Before
Entrepreneurs that have done it before and are already successful is the most common and sought after group. This group is often the highest demand, so it can be challenging to break into, but often has rich wisdom and experience to share. Sometimes the best route to access this group is indirectly through service providers or other trusted connections. Ask your lawyer, accountant, and banker if they have any introductions. Also, try reaching out directly to people in this group through email or direct messages with a compelling reason why you’d like to meet them and talk.
- Doing it Now
Entrepreneurs actively in the arena scaling their company are my favorite group to learn from. Organizations like EO, YPO, and Endeavor have incredible programs and peer group forums designed specifically for learning and growing. Often, you can reach out directly to this group and share you’re in the same city, industry, or vertical. Check out a list like the Inc. 5000 to start searching for entrepreneurs.
- Starting Out
Entrepreneurs that are just starting out have the most energy, unique perspectives, and unbridled optimism. For entrepreneurs that have been doing it a while, this group can bring the newest ideas and freshest insights. Many communities have Meetup groups across a number of categories and topics that bring entrepreneurs together.
The next time an entrepreneur says they’re looking for help and mentorship from other entrepreneurs, share that they should seek out entrepreneurs from three different groups — ones that have Done it Before, are Doing it Now, and just Starting Out.
Several months ago Jon Birdsong introduced me to the Founders Podcast. I subscribed and started listening sporadically to some of the episodes. Then another friend sent me a link to an older episode #134 Edwin Land: A Triumph of Genius and I really enjoyed it. Finally, Invest Like the Best featured the entrepreneur behind the Founders Podcast recently in the episode David Senra – Passion & Pain, and it was excellent.
On the surface, it felt like this amazing podcast came out of nowhere. Of course, that’s not true. The first episodes started appearing in 2017, and new ones have been steadily produced ever since. With 250+ episodes now, Senra has clearly put the time and effort in to hone his craft and publish incredible content. From his site, he shares a quote that summarizes why he does what he does:
“There are thousands of years of history in which lots and lots of very smart people worked very hard and ran all types of experiments on how to create new businesses, invent new technology, new ways to manage etc. They ran these experiments throughout their entire lives. At some point, somebody put these lessons down in a book. For very little money and a few hours of time, you can learn from someone’s accumulated experience. There is so much more to learn from the past than we often realize. You could productively spend your time reading experiences of great people who have come before and you learn every time.”
Ready to learn from the entrepreneurs that came before us? Head on over to the Founders Podcast and start immediately.
This past week I was talking to a potential entrepreneur and he asked about startup ideas, markets, fundraising, and more. After sharing that I believe market selection is the main determinant for the scale of success, we started riffing on different startup ideas. He asked where the best startup ideas come from and I shared my favorite strategy. Ready for it? Ask an entrepreneur you respect the following question:
If you weren’t working on your current business, what business would you start?
Entrepreneurs, by definition, are active in their own company looking for ways to grow, improve, and generally win. Because they’re deep in their own idea, they’ve already gone through the process of evaluating markets, selecting an idea, and finding product/market fit.
Once an entrepreneur has gone through this process, they can’t help but see other startup ideas. New sales/marketing/product/finance/people challenge? Potential startup idea to fix it. A new process or strategy that’s working well? Potential startup idea to productize it.
Startup ideas are everywhere. Entrepreneurs in the arena are uniquely attune to opportunities that would make their own business better. And, knowing what they now know about their current business idea and market, they can’t help but compare potential ideas and markets to what they’re working on. Often, they have ideas that are even better than what they’re doing, but they have too much momentum, progress, and scale to change course.
Looking for a startup idea? Ask an entrepreneur what they’d be working on it if they weren’t already working on their current business.
Last week I was at an event for the Entrepreneurs’ Organization and I bumped into an entrepreneur that I had met only one time before, a full 10 years ago. A minute into the conversation he looked at me and said, “You changed my business.” Not remembering the conversation from such a long time ago, I had to probe further. He went on the explain that I recommended the book Predictable Revenue at our previous conversation and he promptly bought it, read it, and implemented it. The methodologies and ideas from the book worked and today his company is thriving with hundreds of employees.
Paying it forward through sharing lessons learned, building community, and helping the next generation of entrepreneurs is the real joy. Recommending a book that you believe in is easy. The harder part is proactively putting yourself in a position to be able to help. Whether it’s going to events in-person or online, participating in industry groups, or meeting people one-on-one, it takes time and effort to do so. Only, from that effort so many new relationships, opportunities, and insights emerge. Life blossoms.
Paying it forward is a strange concept. We’re wired to act in our own self interest optimizing for instant gratification. Yet, we’re also social creatures drawn to community and clusters of likeminded people. When we act in someone else’s interests, with no expectation of something in return, we’re helping move everyone forward, which in turn helps us.
The next time an opportunity emerges to pay it forward, do it. In a world of little certainty, there’s always value in trying to help and support others.