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Several months ago I was talking to an entrepreneur that was out raising a Series A round. WIth over $1 million in annual recurring revenue, the prospects of raising money were good. Only, the entrepreneur was referencing revenue multiples from other startups that had published revenues and valuations without subtracting the amount of money raised from the valuation (e.g. Buffer had $4.6M in ARR and raised money at a $60M post-money valuation). When talking about valuation multiples, it’s important to separate the amount raised from the reported valuation to understand the actual revenue multiple.

Here’s an example:

• Startup has $2M in annual recurring revenue
• Startup raises $5M and has a published valuation of $20M
• Startup didn’t raise money at 10x recurring revenue, rather the startup raised money at 7.5x recurring revenue as the pre-money valuation ($15M) and then $5M of capital was added to the business for a post-money valuation of $20M

When reading about revenue and valuations, it’s important to back out the amount of capital raised to get the actual revenue multiple.

What else? What are some more thoughts on reported startup valuations being the post-money amount?

One of the reasons startups are able to beat large incumbents is that they can move faster and stay closer to the customer. Only, as the startup grows, more process and bureaucracy is introduced as people specialize in smaller and smaller functions. I like to think of this as the SOP Continuum:

Seat Of Pants (SOP) <———-> Standard Operating Procedure (SOP)

• Seat Of Pants – Everything is done on the fly. Nothing is documented. Action is fast but quality and consistency can suffer.
• Standard Operating Procedure – Everything has a process and documentation. Things are done as quickly as the plan allows and bottlenecks can be common. Consistency is high.

Entrepreneurs would do well to pay attention to the SOP Continuum in their own companies and find the right balance based on the stage of the business.

What else? What are some more thoughts on the SOP Continuum?

Thanks to Karen from One Team Consulting for the idea.

Earlier today I was talking to several college students at the Atlanta Tech Village and one of the people asked “what’s the most important advice you have for these budding entrepreneurs?” Easy, I said, here are the most important lessons I want every entrepreneur to know:

1. Stay Close to the Customer – Too many entrepreneurs fail by building a product without customer input from the beginning. The challenge of finding product/market fit is real, and even if you find it, you can lose it. Forever, it’s important for entrepreneurs to stay close to the customer.
2. Culture is King – People like to debate what’s most important: shareholders, customers, or employees. The answer: employees. How do you attract and retain great people? Build a great culture.

Yes, there are a number of other important lessons I’ve learned as an entrepreneur but these are easily the two most important. While these two ideas sound pretty straightforward, most entrepreneurs fail before they can appreciate them.

What else? What are your two most important lessons learned as an entrepreneur?

Over the years I’ve talked with at least three different entrepreneurs that have given away a large chunk of equity to a semi-active business partner (non co-founder) only to have the involvement not meet expectations. Now, I’m talking about a role similar to an advisor where the person will help out but doesn’t invest any cash and doesn’t have a committed number of hours per week in the business. Whenever I hear this I ask why they didn’t make it a performance-based equity plan and, naturally, I get a blank stare. A performance-based equity plan is just what it sounds like: equity vests when certain goals are achieved (e.g. when you deliver X million in deals, you get Y percent of the business).

Here are a few thoughts on performance-based equity for semi-active business partners:

• Never give away equity in a startup without expectations being clearly defined (this isn’t limited to semi-active business partners as it’s also applicable to advisors and consultants)
• Always have a buy/sell agreement that defines what happens if someone leaves the business
• Similar to a vesting schedule, provide a schedule for the performance-based equity such that once a milestone is met, more equity vests (e.g. achieve X and 1/3rd vests, achieve Y and the next 1/3rd vests, and achieve Z and the final 1/3rd vests)
• Know that if the person doesn’t want the equity to vest based on performance, they aren’t likely to deliver (if they’re confident in the value they’ll add, they’ll agree to a plan)

My recommendation: make equity performance-based before bringing on a semi-active business partner. If the partner delivers the value, everyone will be happy. If the partner isn’t able to deliver the value, the startup retains the equity.

What else? What are some more thoughts on performance-based equity for semi-active business partners?

Jeff Haynie, co-founder and CEO of Appcelerator, just published a great post titled Five things I will do different for my next startup. Less than a month ago Jeff and his board sold Appcelerator to Axway (see Axway Acquires Mobile App Development Platform Appcelerator) after raising almost $90 million in capital. I got the chance to know Jeff when he first started Appcelerator almost 10 years ago. Early on, Appcelerator was like an AngularJS/EmberJS JavaScript platform and eventually pivoted into a cross-platform mobile app development platform (e.g. write code once and have an iPhone and Android app produced).

Here are Jeff’s five lessons learned:

• Monetize earlier
• Scale slower
• Burn less
• Automate and outsource everything
• Measure everything

Go read Jeff’s Five things I will do different for my next startup post and learn from his experiences.

After receiving another Simplified One Page Strategic Plan as a requirement prior to meeting, I couldn’t help but think that asking for this document in advance of many types of meeting would serve all parties well. Often, the entrepreneur has a tactical thing or two that they want help with, yet there are bigger picture items that need to be addressed. When being able to see the full story in the one page strategic plan, the chance for a more meaningful conversation increases.

Here are a few types of conversations where the one page strategic plan can really help:

• Mentors / Advisors – What better way to provide accountability than to have all the goals with metrics right there? Mentors can better help entrepreneurs with more holistic information.
• Team Members – When employees and other team members have the strategic plan, it helps align their actions and connect what they do on a day-to-day/week-to-week with the big company goals.
• Potential Investors – Having the strategic plan helps investors understand the big picture direction as well as the most important high-level metrics.
• Current Investors – Many angel investors don’t get regular updates from their portfolio companies, which seems crazy but is true. Entrepreneurs would do well to share an updated strategic plan monthly with their investors and have it as a starting point for regular in-person conversations.

The Simplified One Page Strategic Plan is a great starting point for many types of conversations and should be employed by entrepreneurs that want more accountability and alignment with everyone that helps.

What else? What are some more types of conversations that would benefit from having a strategic plan present at the meeting?