As we grow in our careers, we first become individual contributors, then managers of individuals, and then managers of managers. That transition is a tough one, and one that comes very quickly in startups. A bit flips and a leader must begin to delegate. Delegation is the only way a leader of a team or company develops leverage in the organization.
A good friend told me about a Vanity Fair interview with former President Obama.
In a recent meeting, a founder asked me what I thought of the fundraising environment. My answer was: it’s become incredibly sophisticated along three dimensions: diversity of product offering, pricing sophistication, and efficiency of investment processes.
If you read eBoys or Done Deals or Creative Capital, you’ll get a sense of the early days of the venture industry. It started out with six men at a famous restaurant in San Francisco hearing pitches over lunch. None of them could afford to lead the entire round, so they would syndicate and take turns on the board. That was the “industry.”
A public market investors asked me if there are any patterns in the list of recent software IPOs with the best sales efficiencies. As I looked through the list, I noticed one.
All of these businesses sell bottom up with small initial ACVs that grow dramatically. Atlassian, Zoom, Twilio, Slack, New Relic, Elastic. All of them target small groups of users within larger organization who introduce the vendor. Over time, usage grows, accounts expand. Some acquire through open source, others through virality (Zoom).
As I looked through the list of public SaaS companies this morning, I read their forward multiples. ZScaler: 23.1x; Okta: 21.8x; Veeva: 18.8x; Coupa: 18.6x; Shopify: 17.0x. Those multiples are calculated by dividing the enterprise value today by its projected future revenue of the company. But what do they mean? What do they imply?
First, we need to set some context. There are two kinds of companies: those valued on growth and those valued on profits. All of the companies mentioned above and the vast majority of startups are valued on growth. That’s because most of the value creation of the business is yet to occur. Companies valued on profits typically grow at rates of -15% to 15% annually are likely to be valued on profits, typically EBITDA.
Slack has transformed the way we work. By replacing email with beautiful and simple internal chat, Slack has productized productivity. Founded as a gaming company called Tiny Speck in 2009, the company’s initial product, Glitch, didn’t catch on as expected. So the business pivoted to commercialize an internal tool - a Searchable Log of All Conversation and Knowledge, Slack. Since those early days, the company has grown to employ 1500 employees according to their S-1. The company filed to trade under the ticker SK.
Charlie Munger is famous for championing the idea of mental models. Mental models help us think about the world by simplifying very complex topics into more digestible and tractable ideas. The challenge with mental models is first learning about them and second figuring out which model applies when.
We use mental models in our daily lives. The 80/20 rule is the Pareto Principle. Focus on the stuff that will yield 80% of the result with 20% of the work.
It’s time to start SaaS Office Hours again! Starting on May 14, I’ll be hosting a monthly event from the Redpoint San Francisco offices called SaaS Office Hours. During these two hours, we will discuss the tactical issues and questions facing seed and Series A SaaS companies in a small group. That’s why we call them Office Hours. We’ve done them in the past and they’ve been a great success.
Rather than deliver presentations, SaaS Office Hours are meant to be casual, tactical and collaborative. Sometimes, we’ll invite guests for off-the-cuff conversations and Q&A focused on focused questions like how should I build my startup’s marketing team? How can I evangelize my product to developers? How do I create the right kind of recruiting process?
Since writing The AI Agency: A Novel GTM for Machine Learning Startups, I’ve been meeting many companies who operate this way. These startups use machine learning to disrupt an industry traditionally dominated by agencies: law, accounting, recruiting, translation, debt collection, marketing…the list is long. I will publish a landscape soon on the area. If you’re operating an AI Agency, I’d love to hear from you.
In meeting many of these innovative businesses, I’ve observed they face four strategic questions.
In a world where there are no secrets, where innovations are quickly imitated or become obsolete, the theory of competitive advantage may have had its day. Realistically, ask yourself, If all your competitors gave their strategic plans to each other, would it really make a difference?
In 1986, Amar Bhide wrote “Hustle as Strategy” for the Harvard Business Review. At the time, he was an assistant professor at HBS. He examined the dynamics within the financial services market. Why was Goldman Sachs earning so much in profits relative to its peers? It’s not a powerful new strategy that a new leader infuses into the organization. Instead, it’s about focus and hustle.
Why does growth rate matter so much? Why does growth rate influence valuation so much? I was reading a book recently written by a hedge fund manager who discussed valuation frameworks. His explanation was one of the best I’ve come across.
If your business is growing at 100% next year, then 90% the year after, and then about 80% the year after, the business will have grown 6.9x. That’s the way I’ve always looked at company.