The Information reported last week that in 2014, only 11% of tech IPOs in 2014 were profitable when they became publicly traded companies, an all time low stretching back to 1980, when the figure was 88%. This raises the seemingly absurd question, how important is it to be profitable for a startup? After all, growth is the largest determinant of valuation at IPO, not profitability.
Yesterday, I met with a bright entrepreneur who asked me to clarify four numbers for SaaS companies: bookings, monthly recurring revenue, recognized revenue and cash collections. These four numbers are critical to understanding the health of a SaaS startup, so it's important to have a strong grasp on the distinctions between them.
"Is there a bubble?" is a question that seems to be asked every day. But it's the wrong question. Maybe there is a bubble. Maybe there isn't. Instead of asking the question, let's just presume we are in a bubble. Then, the far more important debate surfaces: given the bubble, how should a team manage a startup differently?
In the Innovator's Dilemma for SaaS Startups, I outlined the path of many software companies, which disrupt incumbents by first serving the small-to-medium business and then move up-market by transitioning to serve larger enterprises with outbound sales teams. I argued this transition is largely due to the more attractive characteristics of larger customers, namely higher sales efficiency and reduced churn rates. This is the "traditional" way of disrupting. But, as Kenny van Zant of Asana and Mike Cannon-Brookes Atlassian told me, there's another way, a novel way of building companies that still isn't very well understood: the Flywheel SaaS Company.
Sales cycles, the time from acquiring a lead to closing an account, vary quite a bit by industry, product type, and price point. But universally speaking for startups, shorter sales cycles are better. Maintaining a short sales cycle is a competitive advantage for several important reasons.
How many companies sell each year for $1B or more? In the last ten years, on average, 2.5 US venture backed IT companies are acquired for $1B+. In the last ten years, a total of 20 companies have sold themselves for greater than $1B. Over the past 20 years, that trend has been relatively constant, with the exception of the euphoria in 1999 and 2000.
Performance reviews tax organizations, managers and employees to such an extent that some companies have abolished them outright. Reviews are emotionally complex conversations. Positive and negative feedback are intertwined with conversations about career progression, raises and equity grants. These meetings are emotional powder kegs; and it's no wonder they stress us.
In a post earlier this week, Josh Kopelman coined the term Private IPO to describe patterns in the runaway late stage financing market. In addition to the points Josh makes about the dangers of stale valuations, there is another important and related implication for founders.
here's a familiar path now to SaaS companies that start in the SMB (small-to-medium business) part of the market. Over time, they seem to inevitably begin serving larger customers. Box, Hubspot, Zendesk and among many others have exhibited this pattern. Why does this happen?
Yesterday, Redpoint announced something amazing: Andy Rubin, the creator of Android is joining Redpoint. I remember reading about Google's Android acquisition in 2005 and wondering what would become of the technology; and then later at Google seeing some of the first versions of the G1, the first Android phone. Since then, Android has become a standard, and powers 81% of phone shipped last year. My partner, Jeff, has worked with Andy for about 20 years. Jeff and Andy's relationship is an example of one of the special things that struck me about Redpoint when I joined seven years ago: the importance Redpoint places on long term relationships.