Last week I had the opportunity to join an Endeavor Zoom meeting with Brad Feld to talk about his updated and revised book The Startup Community Way: Evolving an Entrepreneurial Ecosystem. Brad’s predecessor book, Startup Communities, was excellent and something that I read back in 2012. For the previous book, my main takeaway was that startup communities must be lead by the entrepreneurs. Top-down government- lead entrepreneurial efforts don’t work, getting bogged down by different agendas and struggle to ignite the necessary sparks. Entrepreneur-lead communities work because entrepreneurs are more resourceful and innovative — as expected.
From Brad’s talk, the biggest addition to the new book is a focus on startup communities as complex systems, and digging into to what it means to be a complex system in the ecosystem context.
From Wikipedia on complex systems:
A complex system is a system composed of many components which may interact with each other.
Complex systems are systems whose behavior is intrinsically difficult to model due to the dependencies, competitions, relationships, or other types of interactions between their parts or between a given system and its environment.
Thinking about startup ecosystems in the complex system theory feels right. An event over here, groups over there, entrepreneurs everywhere, and without prompting it, magic happens.
A startup is formed by people who met through the community.
A startup achieves a breakthrough with the help of a stranger.
Personally, I’ve seen this so many times that I know it works.
I’m looking forward to reading Brad Feld’s new book when it comes out next week.
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In the past I’ve argued that a quick and dirty SaaS valuation was 10 times the annual revenue run-rate times the trailing twelve months growth rate. This formula is a good proxy for valuation but misses a major characteristic: profitability.
Profitability, or lack thereof, is a huge factor in valuing a SaaS business, especially in the age of a pandemic when private investors are more conservative.
The Rule of 40 is a metric that adds the past 12 month growth rate to the past 12 month profitability rate with a value of 40 being good. A value higher than 40 is even better and a value lower than 40 is OK, or even bad depending on how low (or negative) the number.
Personally, I’m a huge fan of the Rule of 40 as it captures the tradeoff between growth and cash burn for startups. Put another way, it presents executives and investors with a simple formula and target using the two most important startup metrics: growth rate and cash consumption.
So, if growth rate and profitability/cash burned combined with revenue run rate are the biggest drivers of valuation, there’s another, more nebulous factor that fluctuates called market sentiment. Take the 电脑怎么开启vp which has an enterprise value to revenue multiple of 17.3x right now. Wowza, SaaS is hot! This says that for the public SaaS companies, their enterprise value (valuation less debt and cash on hand) divided by their revenue over the last twelve months is 17.3x. Put another way, a company with $100 million of trailing twelve months revenue and no debt or cash would be worth $1.73 billion. The average growth rate for these public SaaS companies is 35.5%. Very impressive. Let’s assume a free cash flow percentage between 5 and 10% and public SaaS companies, on average, are right around the Rule of 40 as a collection.
Now, we know that public SaaS companies at the Rule of 40 are worth 17x trailing 12 month recognized revenue (a lower number than revenue run-rate because there’s growth). Assuming a 35% growth rate, to calculate the rough enterprise value to revenue run-rate multiple, we’ll go back to our example and do $1.73 billion divided by $135 million ($100 million times 1.35 to reflect the 35% growth rate, which isn’t exact as growth usually slows with time) to get a multiple of 12.8.
With the public market average right at the Rule of 40, and the public market average revenue run-rate multiple of 12.8, we can use that are our market sentiment number.
A simple SaaS valuation is the annual revenue run-rate times the Rule of 40 number times the market sentiment. As an example, a $10 million revenue run-rate SaaS company right at the Rule of 40 would be valued $128 million, less some discount for lack of liquidity being a private company.
Long term, I believe the market sentiment will be more in the 4-8 range based on how valuations have fluctuated over time. Pick a market sentiment value here, say six, and a $10 million revenue run-rate SaaS company right at the Rule of 40 would be valued at $60 million. If in this example the company is growing 60% per year and negative 20% free cash flow resulting in a Rule of 40 value of 40, this hits our previous SaaS valuation formula perfectly. In the previous formula, companies burning cash were overvalued and company printing cash were undervalued.
Using the Rule of 40 to think about SaaS valuations captures how growth and cash burn contribute to the value of the business and is a simple, albeit powerful tool.
Controlling your own destiny, as impossible as it is, is magical.
Turning profitable, and jumping off the fundraising treadmill, is the right course of action for most startups. Yes, there are some winner-take-most/capture-the-market startups where VC makes sense. But, for the vast, vast majority of startups, VC doesn’t make sense.
Once on the venture treadmill, getting off is extremely difficult. The burn rate is aligned for the next funding event. The board composition is aligned for raising more money. The extra office space rented is aligned for raising more money. The promises made to existing investors are aligned for raising more money.
There’s no easy solution once venture money has been raised to change directions.
For years, one of the biggest knocks on Atlanta’s startup community was the dearth of early stage capital. Capital is hard to come by outside the money-center regions in the country, but people assumed most big city startup communities still had enough. This was not the case, especially for Atlanta, which has a vibrant startup scene.
With last week’s announcement that Tech Square Ventures just closed on the first $26 million of their new $75 million fund, it dawned on me that Atlanta now has a respectable amount of early stage capital. Finally. With so many funded startups (see Crunchbase Atlanta), and most of the funding come from outside the region, I was optimistic we’d develop local venture funds.
Here are most of the Atlanta funds that invest in seed and Series A startups:
Atlanta Seed Company
BLH Venture Partners
BIP Capital
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Fulcrum Equity Partners
Johnson Venture Partners
Kinetic Ventures
Knoll Ventures
Mosley Ventures
Noro-Moseley Partners
Overline
TechOperators Venture Capital
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Tech Square Ventures
TTV Capital
Valor Ventures
Vocap Partners
Atlanta’s startup community is brimming with seed and early stage capital. Now, it’s time to 好用的PC端的vp.
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Two months ago we were talking about ways to help jump start Georgia economically. With unemployment at an all-time high and the pandemic still raging, the answer was clear: entrepreneurship. Entrepreneurship is one of the greatest forces for good in the world. Inventing a new product or service and taking it to market isn’t a zero sum game — a new widget to help save time, a new medicine to improve the quality of life, a new material to make the world safer — all of these are possible and everyone benefits.
With this backdrop, we just launched Start It Up Georgia as a free, 12-week program to start and launch a new company.
Start It Up Georgia is a combination weekly lesson labs, small accountability groups, and demo day. Everything is virtual and everyone is welcome. Thanks to sponsors, there’s no cost and we even have tens of thousands of dollars available in grant money available to the top startups at demo day.
Please help us spread the word.
Please consider applying.
Please tell a friend.
It’s go time for entrepreneurs — start it up, Georgia.
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In the past few weeks I’ve talked with several startups that are severely impaired by the pandemic. Before the pandemic their companies were doing well enough to raise venture money, but not well enough to be obvious winners in meaningful markets. Then, the pandemic hit and it exposed their businesses in a way that showed they weren’t great businesses to begin with, and raising money wasn’t the appropriate route to go.
There’s enough revenue and gross margin to keep the lights on, but with revenue declining there’s no clear path to reverse course and accelerate growth. Unfortunately, with declining revenue and a suffering business, if they were to raise money, it’d be a down round, if at all possible. Down rounds are almost always the kiss of death, due to a number of reasons.
While this desire to eventually return investors’ money is in fact honorable, it actually makes all parties worse off. From a time perspective, investors are better off moving on and focusing their energies elsewhere. Startup investing in its purest form is a game of maximizing upside, not minimizing downside. Some investors would struggle with recognizing the loss if they have limited partners or are trying to raise a new fund, but that shouldn’t be an issue with successful investors.
Founders are often better off shutting the startup down, or going into harvest mode, so as to return some capital to investors and prepare for their next endeavor. Time and energy are two of the most important components of successful founders, and running a zombie startup for years beyond what makes sense depletes both.
Earlier this week I was talking to a SaaS entrepreneur and he brought up how much better his financials were now. Curious, I asked what made the difference.
This is a business that was growing modestly while burning cash. With the onset of the pandemic a few months ago, they made the difficult decision to let go of staff, cut all travel expenses, and change the overall focus to profitable growth. Instead of trying to squeeze out a slightly higher growth rate, they’d focus on gross margin and grow at the rate of the market.
The business has grown through the pandemic, albeit more slowly, but the swing from losing money to making decent money has been dramatic.
This is not an isolated case. Hundreds, if not thousands, of SaaS startups that were losing money at the start of the year are cashflow breakeven, if not nicely profitable.
Private equity, as a potential exit route for SaaS startups, has been growing rapidly over the years. Whenever I talk to a private equity investor, they lament that too many SaaS startups are losing money, making them undesirable as acquisition targets. PE is happy to fund growth, but has almost no appetite to fund losses.
Now, a tremendous number of SaaS startups have made hard changes, and those hard changes have made them much more attractive to PE acquirers.
Look for a large percentage of SaaS startups to stay the new profitable course and next year to be a banner year for private equity SaaS acquisitions.
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Just this past week I learned of two MarTech companies I hadn’t encountered that are north of $2M in annual recurring revenue and growing fast. We’ve all seen the crazy Marketing Technology Landscape Supergraphic: Martech 5000 that visually highlights what a crowded space it is out there. A number of people have speculated that massive consolidation in MarTech is imminent — I don’t agree. Yes, Terminus has acquired BrightFunnel, Sigstr, and Ramble Chat, but that’s the exception.
So, what’s the secret staying power resulting in so many MarTech startups?
Simple: good software with a clear return on investment makes for a sustainable business even with modest scale.
More acquisitions will happen in the future due to investor fatigue and fund-life dynamics rather than companies gobbling up other companies to achieve more scale. If a venture investment in a MarTech company isn’t performing, it’s often better for the VC to hold onto the investment, assuming they have time, rather than push for a sale that results in recognizing a loss. Put another way, there are a ton of zombie MarTech companies out there that are sustainable businesses, but will sell for less than their last valuation, creating a scenario where it’s better to do nothing and hope something will improve.
MarTech fragmentation, and proliferation, is here to stay. The secret staying power is a combination of software that helps marketers make money and the beauty of SaaS.
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America is hurting. Atlanta is hurting. We can do better. We must do better.
This past week I was asked what we can do to support Atlanta’s black tech founders. Start with action.
Here are five immediate ways to support Atlanta’s black tech founders.
Startup Runway – Focused exclusively on introducing under-represented entrepreneurs to investors. Donate immediately to the 501 c(3), volunteer to help, get involved.
It Takes a Village Pre-Accelerator – Free 4-month program for under-represented founders providing direct access to community, education, mentorship, and capital. Volunteer, mentor, become a customer. Cohort five just wrapped up and cohort six is accepting applications (apply now).
Valor Ventures – Only venture fund in the region focused on under-represented founders. Become a limited partner (write a big check!), refer a potential investment, help. 电脑怎么开启vp.
Atlanta Founders Academy by Google – A series of hands-on programs from Googlers, experts, and investors to support under-represented Atlanta startup founders on topics such as sales, strategy, hiring and fundraising. Get involved, give back.
电脑免费vp推荐 – Check out Calendly, LeaseQuery, 电脑免费vp推荐, Patientory, 电脑免费vp推荐, and many more. Use your resources and buying power to purchase software and subscriptions from our local black tech founders.
Last week I was talking to a local entrepreneur about peer groups. This particular entrepreneur has built a multi-million dollar revenue business with dozens of employees after years of high growth. Now, the business is much larger than him and he’s spending more time as a business manager, and less as a scrappy, growth-oriented entrepreneur. He wants to scale to the next level, and is looking for a peer group to share ideas and grow as a leader.
My recommendation was to consider the Entrepreneurs’ Organization (EO) and the Young Presidents’ Organization (YPO), both of which have been immensely valuable to me. In addition to strong programming and networking, the heart of each organization is the small group (usually eight members) forum experience. Forums meet monthly for four hours in a setting of strict confidence and high commitment. The confidentiality is serious — nobody, nothing, never.
Forums often have a consistent agenda:
Opening
Lightning round
Short questions for every person in the group to answer
Monthly updates (10 – 15 minutes per person, inclusive of questions)
Business
Last 30 days
Highlights
Lowlights
Next 30 days
Most looking forward to
Least looking forward to
Family
Last 30 days
Highlights
Lowlights
Next 30 days
Most looking forward to
Least looking forward to
Personal
Last 30 days
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Lowlights
Next 30 days
Most looking forward to
Least looking forward to
Presentations
Member does a deep dive on a topic, the groups asks questions, the group shares experiences, and the presenting member closes with any takeaways
Entrepreneurs would do well to seek out a peer group like EO or YPO. For me, it’s made a tremendous impact.
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Amazing! twitter.com/kc_houghton/st… 3 days ago
Over 400 entrepreneurs have signed up for Start It Up Georgia.
400!
And, we have room for more.
Join us and star… twitter.com/i/web/status/1… 2 weeks ago
