David Cummings on Startups

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  • Bessemer’s 2017 State of the Cloud Report

    There was so much good content at the SaaStr Annual that it’s going to time to get through it all. Next of the list is Bessemer’s 2017 State of the Cloud Report.

    http://www.slideshare.net/AnnaKhan9/the-state-of-the-cloud-report-2017-bessemer-venture-partners

    Here are a few notes from the Bessemer slide deck:

    • 40% of the market cap of publicly traded SaaS companies has already been acquired representing greater than $300 billion in value
    • Key questions from top CEOs:
      • How fast should I be growing?
      • How much should I burn?
      • How do I scale?
    • How fast should I be growing?
      • Dropbox is the fastest SaaS company ever to hit $1B in run rate (did it in eight years)
      • The pace is quickening for SaaS companies going from $1M – $100M in recurring revenue (5.3 years for top 25%, 7.3 years median, 10.6 years bottom 25%)
      • BVP Growth Benchmark for ARR
        • Good
          • $1 – $10M in four years
          • $1 – $100M in 10 years
        • Better
          • $1 – $10M in three years
          • $1 – $100M in 7 years
        • Best
          • $1 – $10M in two years
          • $1 – $100M in five years
    • How much should I burn?
      • Rule of 40 = % Annual Revenue Growth + % Profit Margins
      • Efficiency Score = % Annual CARR Growth + % Burn
      • BVP Efficiency Rule (> $30M ARR)
        • Expansion ($30 – $60M ARR) – 70% efficiency score
        • IPO (~$100M ARR) – 50% efficiency score
        • Public (>$150M ARR) – 30% efficiency score
      • BVP Efficiency Rule (< $30M ARR)
        • Net New ARR / Net Cash Burn > 1
        • Meaning, for every dollar burned, company needs $1 or more net new dollars of ARR
    • How do I scale?
      • Customer Acquisition Cost (CAC) Payback = Total Sales and Marketing Costs Last Quarter / New CMRR Added Last Quarter * % Gross Margin
      • Understanding Your Sales Model
        • SMB
          • CAC Payback 3-6 months
          • AVG ACV < $12k
          • Churn/Upsell < 3% monthly
        • Midmarket
          • CAC Payback 12 months
          • AVG ACV $12 – $50k
          • Churn/Upsell 1% monthly
        • Enterprise
          • CAC Payback 3-6 months
          • AVG ACV $50k+
          • Churn/Upsell < 1% monthly, upsell

    Thanks to the team at Bessemer for putting together the great information. Every SaaS entrepreneur should read Bessemer’s 2017 State of the Cloud Report.

  • Video of the Week: Artificial Intelligence – What Everyone Needs to Know

    For our video of the week, watch Jerry Kaplan present Artificial Intelligence: What Everyone Needs to Know. Enjoy!

    From YouTube:
    Over the coming decades, artificial intelligence will profoundly impact the way we live, work, wage war, play, seek a mate, educate our young and care for our elderly. It is likely to greatly increase our aggregate wealth, but it will also upend our labor markets, reshuffle our social order, and strain our private and public institutions. Eventually it may alter how we see our place in the universe, as machines pursue goals independent of their creators and outperform us in domains previously believed to be the sole dominion of humans. Jerry Kaplan is widely known as an artificial intelligence expert, serial entrepreneur, technical innovator, educator, bestselling author and futurist. He co-founded four Silicon Valley startups, two of which became publicly traded companies, and teaches at Stanford University.

    Join Kaplan for an illuminating conversation about the future of artificial intelligence and how much humans should entrust to machines.

  • SaaS Numbers that Actually Matter

    Continuing with 12 Key Levers of SaaS Success from David Skok at SaaStr, Mamoon Hamid gave an excellent presentation Numbers that Actually Matter. Finding Your North Star.

    http://www.slideshare.net/03133938319/numbers-that-actually-matter-finding-your-north-star

    Here are a few notes from the presentation:

    • Quick Ratio (QR) = New MRR + Expansion MRR / Churned MRR + Contraction MRR
    • Goal is a Quick Ratio greater than 4
    • Product-market fit happens one customer at a time one month at a time
      • Mostly ignored any product-market fit metrics
    • Churn/Expansion/Contraction MRR is a lagging indicator of product-market fit
    • MRR is the price that the customer pays, the North Star is the value that they get
    • Focus on a leading indicator of the MRR decision
    • Your North Star measures the value you deliver
    • Bad: Mostly measuring price paid as opposed to value delivered
      • MRR, paid seats
    • Good: Measures value delivered in bulk
      • MAU, DAU, messages sent
    • Better: Unquestionably indicates Product Market fit has been reached with the customer
      • Number of users with L28 >= 16
      • Messages sent w/in 30 days in signup

    Read the presentation Numbers that Actually Matter. Finding Your North Star. and figure out the North Star for your product.

  • 4 Reasons Startups Need to Stay Lean After the Seed Round

    Over the last year couple years I’ve helped several startups after they’ve raised a modest seed round and searched for product/market fit. In every case, the entrepreneurs were too optimistic, drove product development hard, and fell well short of their revenue goals. Fundamentally, the mistake is believing that once investors write the check, everything is going to go according to the spreadsheet model. That never happens.

    Here are four reasons startups need to stay lean after the seed round:

    1. Product Development is Never Finished – Entrepreneurs always cite product development as the main focus for the seed round. Only, with a small seed round, adding one or two engineers seriously increases the burn rate. Product development is never finished, so know that product/market fit comes with having the most fit, not the most features.
    2. No Repeatable Sales Process – A handful of unaffiliated customers is far from a repeatable sales process. Building a repeatable sales process is harder, and slower, than expected, so plan accordingly.
    3. Plan for 24 Months – Most entrepreneurs burn through whatever capital is raised in 12-16 months, as they’re optimistic and see opportunity. Instead, make the money last 24 months so that there’s more runway to course correct. It’s always easier to ramp up than it is to ramp down.
    4. Scrappy at the Core – Creating a resourceful culture starts on day one. Each round of financing creates an internal tension around how much of that scrappiness needs to let up in search of faster growth. Stay scrappy through the seed round.

    Startups needs to stay lean even after raising a seed round. Focus on customers and ensure enough runway to hit the key milestones.

    What else? What are some more reasons startups need to stay lean after raising a seed round?

  • 12 Key Levers of SaaS Success from David Skok

    David Skok of forEntrepreneurs and Matrix Partners has a great new slide deck up from his presentation at SaaStr Annual titled 12 Key Levers of SaaS Success.

    http://www.slideshare.net/DavidSkok/12-key-levers-of-saas-success/1

    Here are the 12 key levers:

    1. Product/market fit
    2. Top of the funnel flow
    3. Conversion rate
    4. CAC (customer acquisition cost)
    5. Number of sales people
    6. PPR (productivity per rep)
    7. Getting enough leads
    8. Pricing
    9. Customer retention rate
    10. Dollar retention rate
    11. Months to recover CAC
    12. Recruiting, onboarding & management

    Haven’t read it yet? Head on over to 12 Key Levers of SaaS Success and read it now.

  • 4 Reasons Investors Shouldn’t Do Convertible Notes

    Over the last week the topic of convertible notes came up in two different conversations. Convertible notes are essentially a loan to a startup that converts to equity on a certain date or if the startup raises a certain amount of capital. Convertible notes (and subsequently the safe) became popular several years ago as investors wanted to move fast, keep initial legal costs down, and defer the valuation topic to the next investor. Basically, a much simpler transaction. Only, it put convertible note holders in a poor position.

    Here are four reasons investors shouldn’t do convertible notes:

    1. Misalignment on Valuation – Convertible notes often have a cap which represents a maximum valuation for the investor (e.g. a cap of $3 million such that if the startup raises money at a $4 million valuation, the investors’ debt converts at the lower of the two valuations). Only, the convertible note investor is incentivized for the startup to raise money at a lower valuation so that they’ll get more equity for their money (assuming everything else about the terms is equal). Entrepreneurs want to raise money on good terms and good valuations, but that isn’t aligned with the convertible note holders as they have negative benefit with a higher valuation.
    2. Limited Initial Upside – Most convertible notes have a discount of 20% to the next round of financing (e.g. if the round is at a $5 million valuation, the convertible note holders get their equity at a $4 million valuation as that’s 20% less). Yet, raising convertible debt doesn’t guarantee a subsequent round of financing happens quickly. If the financing round takes 6-12 months (or more), the investor is only getting a paper return of 20% for taking on outsized risk. Investors typically want to see their portfolio companies raise money each round at a minimum of twice the last valuation.
    3. Lack of Future Qualified Financing Event – Most convertible notes only convert at a qualified financing event (some have a conversion date far in the future). If the startup doesn’t raise more money, or can’t raise more money, the investor is essentially stuck with a low interest loan in a high risk investment.
    4. No Governance – Convertible notes are simple debt with limited covenants and no governance rights. Ideally, the startup will raise a “normal” round and have the governance that comes from a board and a lead investor in the future, but there’s no definitive timeline. Without governance, the entrepreneurs can do what they please with the money with limited recourse.

    Investors would do well to understand the pros and cons of convertible debt. Personally, I require equity and don’t invest via convertible debt.

    What else? What are some more reasons why convertible debt can be worse off for investors?

  • 4 Reasons Why Startup Stock Options are Usually Worthless

    Following up with the post New Car, New House, or New Life Concept for Employee Equity Value, the reality is that almost all employee stock options in startups end up being worthless. Why? Well, 99% of tech startups never hit $1 million in revenue in a calendar year such that there’s no value in the business to begin with. Even then, there a number of reasons why startup stock options are usually worthless. Here are four:

    1. Few Exits – Compared to the number of startups out there, and even the number that get funded, there are very few exits. Then, if you look at the exits in the Bay Area vs outside the Bay Area, the number drops even more.
    2. More Capital Raised than Exit Price – Even when a company is acquired, if it isn’t acquired for a price substantially more than the amount of capital raised, the stock options are worthless. Investors structure their investment to get their money back first before anyone else in the event of a sale that’s less than the amount of money raised.
    3. Leave Before Exit – Most stock option plans require the options be exercised (turned into actual equity) within 30 days of the leaving the company. Only, it costs money to exercise the options (the number of options times the strike price) such that most people don’t do it because they’ll be paying money for something that could very well have no value.
    4. Down Round – When a startup raises money at a valuation lower than their last valuation it’s known as a down round. When this happens, common stockholders (e.g. employees, advisors, etc.) are often wiped out (diluted to where there’s really no chance of value).

    Stock options, in most cases, should be viewed as icing on the cake. The salary compensation, experiences gained, and general journey should be the core value with stock options as a nice addition.

    What else? What are some more reasons why stock options are usually worthless?

  • Video of the Week: Artificial Intelligence is the New Electricity

    For our video of the week watch Andrew Ng: Artificial Intelligence is the New Electricity. Enjoy!

    From YouTube:
    On Wednesday, January 25, 2017, Baidu chief scientist, Coursera co-founder, and Stanford adjunct professor Andrew Ng spoke at the Stanford MSx Future Forum. The Future Forum is a discussion series that explores the trends that are changing the future. During his talk, Professor Ng discussed how artificial intelligence (AI) is transforming industry after industry.

  • New Car, New House, or New Life Concept for Employee Equity Value

    Last week the topic of employee stock options and grants came up in a conversation. We got to debating the best way to talk through the potential value. I offered up my favorite way to think about them in the context of expectation setting should things go well: new car, new house, new life.

    Here’s how the new car, new house, or new life concept for employee equity value looks:

    • New Car – $50,000 – Commensurate with the position and time of joining the startup, a quality exit might result in the stock options being able to pay for a nice car (e.g. owning .15% of a $50M exit and then paying the corresponding taxes).
    • New House – $500,000 – A bigger exit, or larger ownership position, might result in being able to buy a nice house (e.g. owning 1.5% of a $50M exit and then paying the corresponding taxes).
    • New Life – $5,000,000 – A massive exit, or large ownership position, could be completely life changing and provide financial freedom forever (e.g. owning 1.5% of a $500M exit and then paying the corresponding taxes).

    The next time you’re setting expectations about the potential value of employee equity, consider the new car, new house, and new life concept.

    What else? What are some more thoughts on the new car, new house, new life idea for thinking about potential employee equity value?

  • 4 Quick Ways to Evaluate a Startup Idea as an Investor

    Earlier this week an entrepreneur casually threw out an idea he had on the side that wasn’t related to his startup. My recommendation: don’t judge an entrepreneur’s idea. Push them to do customer discovery and let the market plus their internal motivation decide if the idea makes sense or not.

    Now, as an investor, once you get past the common requirements of a great team and market, there are four quick ways I like to evaluate an idea:

    1. Must-Have vs Nice-to-Have – If the app is taken away from customers tomorrow, how much do they complain? How replaceable is the app if they just went back to email and spreadsheets?
    2. In the Path of Revenue – Where the app in the path of revenue? How clear is it that the app helps the company make more money?
    3. System of Record vs Utility – What functional category does the app fall in? Do people live in the app most of the day? Once a week? Set it and forget it?
    4. Timing – Where’s the market in the adoption lifecycle? Is it too early? Too late? Timing is 10x more important than people realize.

    Evaluating an idea is hard. These four quick ways help me develop a mental model of a startup idea to see if I should pursue it further.

    What else? What are some other quick ways to evaluate a startup ideas as an investor?