Posts

I remember sitting in the second floor of the engineering building late into the night in front of an SGI Indigo workstation during grad school. The machine was a deep purple, and the keyboard was gray, and the screen showed a terminal with a little blinking green box. I spent many nights trying to figure out how to complete work with that little prompt. And now I find myself going back there.

Distributed autonomous organizations (DAOs) are one of the most vibrant areas of crypto. DAOs are groups of people with the right to vote to change how a crypto company operates.

DAOs pop up for many different reasons: to form a social club that requires a token to join, to buy a copy of the Constitution, to manage open source software. Almost any group of people can organize a DAO to pursue a shared purpose.

Microservices has become the default architecture for many companies. By breaking down large codebases into smaller pieces, microservices empower engineers to ship code faster. Continuous integration, the process of constantly folding new code into production (live on the website or service), further accelerates the software velocity.

There’s a cost to this speed: coordination. Engineers developing microservices work with the ground shifting underneath them all the time. An engineer building a new microservice that enables up-selling customers relies on other software written by teammates. The upsell service might use three services: customer identity, billing, and feature flags to update the CRM with an upsell, increase billing, and flip on the new features using LaunchDarkly.

Will year-end Series A and B valuations top or trail those of January? This question sits atop most founders’ lips and boardroom agendas. The broad market sentiment is they will be lower.

Public-market software valuations have withered more than 60% from their highs. Alarm about interest rates, QE ending, and geopolitical risk have swirled around public technology companies, kinking the valuation curve.

Amidst this gloomy backdrop, The Information published a story on hedge funds’ strategy shift. Instead of late-stage opportunities, they’ll be focusing on early-stage venture in 2022. If true, Series A and B markets may surge upward against the countervailing depressive momentum.

The most consistent sales leader I’ve worked with hit plan 27 consecutive quarters. How can a sales leader develop similar repeatability? Much goes into it here are the reports he used to manage his team at the board level.

The PQR (pipeline-to-quota) funnel is first. Pipeline is the total value of the accounts within a stage or later. Quota is the aggregate quota on the street for the quarter. Divide P by Q to get PQR.

Over the last few years, I’ve been lucky to work with founders and management teams to sell about $5b of startups. During that time, I’ve observed a few things about M&A. Here are 10 of my learnings:

1. Most acquirers have built a relationship with the acquisition target. Suitors introduced during a sale process wrestle with doubts of understanding what they don’t know about the space, the team, and the business. Leaders should build relationships with partners and potential buyers if M&A may be in the company’s future.
2. Startups are sold to individuals, not to companies. The champion - often a product leader, the CEO, or a general manager - risks their career by buying a startup. The deal sponsor must construct a business case, forge trust with the startup’s team, and amass enough conviction to overcome inertia and internal friction to consummate the sale.
3. Be wary of first-time acquirers. They may lack the internal know-how to complete a transaction. Acquisitions require significant cross-functional alignment. Mustering consensus can be problematic during the ordinary course of business, and it’s even more challenging under duress.
4. The deal isn’t done until the money is in the bank. I’ve seen acquisitions fall apart the day of close, out of the blue.
5. There are three types of sales: team, team & tech, and team, tech, & traction. Each one is more valuable than the last, provided the company grows. The greater the revenue, the more likely the acquirer prices a target on a revenue multiple.
6. Should a management team and board decide to sell, they should understand the buyer’s motivation. As Simon Sinek would say, start with the why. It will inform how to weave the most compelling vision of a union.
7. The startup can exert maximum leverage immediately before signing the term sheet. Once the term sheet is signed, the startup’s leverage vaporizes. The startup must plod through the days or months of maximum weakness: the exclusivity period between the term sheet signing and the definitive agreement. Negotiate the crucial points before signing the term sheet.
8. The essential components of a merger term sheet often include:
   • price: the amount and the structure (cash vs stock; merger or asset purchase)
   • executive compensation: especially equity revesting
   • escrow terms: percent of the consideration in escrow, length the escrow, insurance
   • net-working capital: is the purchase price cash-free/debt-free?
   • no-shop period: how long is the exclusivity?
   • fundamental representations and warranties: the key assertions the target makes about itself and its business. Best to talk to your friendly company counsel on this one.
   • break-up fee: if the transaction is large enough to warrant one
9. Regulatory delays have become more common recently when selling to a large technology company. Most mergers close on time. But should a transaction be subject to review by the US, the EU, the UK, or other jurisdictions, the closing period can take many months, a year, or longer.
10. Referencing a buyer paints a picture of the company and teams’ future post-sale. How does the acquirer integrate a company? Treat founders throughout their vesting period? What will it be like to work there next year?

Sales processes are convoluted and complex. There are some parallels to raising capital in that success rates improve by building auction pressure. But the mananging the nuances are critical should you decide to pursue a merger.

In 1968, Milton Friedman argued “In the Price of Money,” that higher interest rates don’t mean less borrowing. He would echo this sentiment in an article Reviving Japan.

“After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high-interest rates and easy money with low-interest rates was dead. Apparently, old fallacies never die.”

Suppose you launch a web3 company tomorrow. The business builds software to help other crypto companies grow. Perhaps you’ll sell infrastructure to help other startups scale or software to manage internal operations. After you’ve launched the product, you’ll encounter a new phenomenon. Your customers prefer to pay you in crypto.

Fast forward three years, your business thrives. The customer roster brims with the best names, each client increases their spend every year, and the sales team outpaces its quota handsomely.

If I gave you $10,000 to invest in one company today among the following four software businesses, which would you pick?

The first company is a $100m ARR business growing at 100%, trading at 50x ARR, a $5b enterprise value. The fourth company grows 65% on $7b in ARR, implying a $29b EV.

I remember the first time I spoke with Frank Slootman. Beforehand, I read his book Tape Sucks, watched some of his videos on YouTube, and read his blog posts. After few minutes, I couldn’t deny his unique passion for growth and scale.

I called him on a Sunday in the summer. Frank told me most companies don’t focus enough; that there’s only one priority for him: growth. He said if he were to join a startup’s board he would push the business very hard - very, very hard. The company and the board needed to sign up for exactly that.