Saturday, December 12, 2015

A simple tool to improve your 2016 planning

In my last post I wrote about the problem with month-over-month growth rates. One of the issues I talked about was that when your revenue plan numbers are based on a constant m/m percentage growth figure (i.e. you're projecting to grow exponentially), your short-term objectives are likely too low relative to your longer-term goals.

As an example, I showed a (fictional) SaaS startup that wants to grow from $1,000 in MRR to ~ $85,000 in MRR within one year. If that company projects exponential growth, it will have to add less than $7,000 in net new MRR in the first half of the year in order to be on track ... but to stay on track, it needs to add more than 10x that amount in the second half of the year!

To follow-up on the topic, I've put together a very simple (Google Sheets based) calculator which startup founders might find useful when they work on their plan for 2016. The purpose of this simple sheet is not to replace a thorough bottom-up planning which is based on the key drivers of your business. Instead, the idea is that it might be a useful input or cross-check for a more detailed plan.

Click here to check out the tool.

Here's what it does:

  • You enter your start MRR in the orange field at the top left
  • You enter your target growth for the year in the orange field in the middle
  • The sheet will then calculate three alternative paths to your target MRR for the end of the year

The first one is based on linear growth. It just takes the total net new MRR that you want to add throughout the year and assumes that you're adding 1/12th of it each month.

The second one is based on an exponential growth assumption, i.e. it assumes that you're growing at a constant percentage growth rate every month.

The third alternative, which I've called "Happy Medium", has a growth curve that sits between the linear and the exponential option. You can see that well if you take a look at the charts below the numbers.

I think most early-stage startups should project a trajectory which, like the "Happy Medium" path", is somewhere between the linear and the exponential option. What do you think?

Monday, November 30, 2015

The problem with month-over-month growth rates

Most fundraising decks contain a slide with a chart that looks roughly like this:

Chart #1

Or this:

Chart #2

I’ve also seen charts that look like this:

Chart #3

Or this:

Chart #4

Chart #3 and #4 are good for a LOL (or a “WTF!”, depending on your sense of humour), and fortunately we’re not getting too many of these (if you don’t know what I’m talking about, take another look at the charts). A chart that looks similar to #1 or #2 is something we look at on a daily basis, though.

What all of these charts and their headlines have in common is that they’re trying to convey exponential growth. Since traction is the #1 factor that determines fundraising success, it’s understandable that founders try hard to show exponential growth (which talking about a m/m growth rate implies). This is especially true if you’re one out of 50 startups that present at a “demo day” and you have three minutes to get investors excited. At some of the demo days that I’ve attended, I felt like this led to an arm’s race for the highest growth rates and sometimes made me feel like this:

Let’s look at the numbers behind chart #1 and #2.

Chart 1:

As you can see, chart #1 shows very strong signs of exponential growth: this (fictional) company’s MRR is growing at a relatively steady rate of 18-21% per month, and the amount of net new MRR which the company is adding is growing every month. Mathematically this looks clearly exponential, and yet, since the absolute numbers are still so low, unless you understand the drivers behind the growth you don’t know if there’s real, sustainable exponential growth (e.g. due to product virality) or if it’s just a series of step changes which makes the numbers look like exponential growth.

If this sounds like an academic question to you, think about its impact on the company’s growth projections. If there’s true exponential growth at a rate of around 20% per month, the company’s numbers will quickly go through the roof. If, on the other hand, the growth isn’t driven by inherently exponential drivers, you should expect the growth rate to decline quickly, leading to much lower projections.

Now let’s turn to the data behind chart #2:

If you take a closer look at the numbers, you can see that in contrast to chart #1, in spite of the chart’s headline and trendline, it doesn’t look like something’s growing exponentially here. The monthly growth rate is higher than 10% in all but two months, but it’s fluctuating heavily and the amount of net new MRR is going up and down. You can calculate a growth rate of 40% per month on average or a compound monthly growth rate (CMGR) of 35% without having to lie, and you can have Excel draw a trendline using an exponential regression. But I believe this is highly misleading. A more reasonable way of describing this company’s revenue growth would be to say that the company has been adding between $300 and $700 in net new MRR per month in the last ~ 12 months.

Again, all of this may sound somewhat academic, but I think it has practical relevance in two ways: The first one is about how you communicate your numbers to potential investors when you’re fundraising. The second one is about how you’re projecting growth and what targets you’re setting for your team. Let’s take a closer look at both of them.

1) When you’re talking to investors you of course want to show your numbers in the best possible light, and to say that you’re increasing revenue by $300-700 per month (to use the example from above) may not sound as exciting as a CMGR of 35%. However, keep in mind that experienced investors have very fine-tuned BS antennas, and if an investor gets the impression that you’re getting too creative in your interpretation of your data, that’s a huge turn-off. Therefore I’d recommend the following:

  • If your numbers look similar to chart #2 from above, don’t try to read exponential growth into the chart.
  • If your numbers look more like chart #1, i.e. your monthly percentage growth is pretty stable and your monthly $ growth (or user growth, if you’re a consumer startup and pre-monetization) is going up consistently, it’s fair to talk about exponential growth. That said, as long as you’re at a very low absolute levels (say below ~ $20k in MRR if you’re a SaaS startup) it doesn’t make too much sense to talk about percentage growth rates, and talking about growth in terms of net new MRR per month may be more useful.
  • When you’ve reached what Jason M. Lemkin calls “Initial Traction” – around $1-2M in ARR – consider talking about y/y growth instead of m/m growth. There’s no strong rationale for that, but I think if you’re talking about longer periods of time, y/y growth is more intuitive to understand.

2) As far as your internal goal-setting goes, the problem with an exponential growth assumption is that for early-stage startups it makes short-term goals too easy and longer-term goals too hard (unless you’re one of the 0.0...1% of startups that have a viral growth engine with a viral coefficient greater than 1).

Let’s say you’re starting (almost) from zero and your goal is to be at roughly $80k in MRR in 12 months. If you’re assuming a constant m/m growth rate it looks like this:

Plan #1

The blue line shows the total MRR at the end of the month; the orange bars show the net new MRR added in each month; and the red line shows your monthly growth rate in %. As you can see, you have to add pretty tiny amounts of net new MRR per month until around month 6 in order to reach your goals. Then it goes up quickly, and in the last two months of the year you’ll have to add $20-30k per month. The problem with a plan like this is that if you’re at $8000 after month 6 you think you’re on track, but actually you’ve only achieved 1/10th of what you have to achieve in the year.

You can of course expect that you’re getting better throughout the year as your product matures and as you’re doing more sales and marketing, but I think the slope of plan #1 is too steep. A more helpful and more realistic plan would look like this:

Plan #2

In this version you reach the same result after 12 months, but how you’re getting there is different. In contrast to plan #1, plan #2 doesn’t assume a constant m/m percentage growth rate. It assumes that the amount of net new MRR that you’re adding per month is growing, but on a linear basis. That may make the chart look less exciting, but I believe plan #2 is much more useful. If you use plan #2 and you’re on track after 6 months, it’s much more likely that you will still be on track after month 12.

To sum up, my recommendations for modeling growth:

  • In the first 12-24 months or so after launch, plan to get to your target number by assuming a curve similar to the one shown in plan #2.
  • After that, start using a m/m or y/y percentage growth target (ideally roughly in line with the T2D3 concept)

As you may have noticed, my recommendations for how you should manage your targets internally are very much aligned with my recommendations for how you should communicate your numbers to investors. Isn’t that nice? :)

[Update 12/12/2015: As a followup to this post, I created a simple (Google Sheets based) calculator which you might find helpful for your planning.]

Friday, October 23, 2015

What sucks about fundraising

Last week I wrote a post titled “What makes fundraising so stressful?” and asked founders to tell me which parts of the fundraising process suck. As of this writing, about 110 founders have completed the Typeform survey. The results are very interesting, and in some cases shocking. More on that below, but let’s start with the responses to the first question:

“Your optionality is an illusion”

More than 60 founders took the time to answer the additional free-form question (“What else has stressed you out?”). In their comments, many people emphasized and provided additional detail on some of the topics shown above, but several founders also pointed out additional issues. Reading through all of the comments has been very enlightening (and in a few cases humbling). Here’s a small selection of the answers:
"The big egos"
"Everything takes 4x more time than initially thought"
"Associates who constantly want calls without involving a partner who can actually get the deal done (or not)." 
“It's venture capital but I have the feeling no VC will take risks. There is always a reason not to invest.”
"Rejection from seed investors saying 'come back once you have X' (where X is in essence enough to raise Series A)." 
"Some investors haven't mentioned at all that they invested in similar company. I found that after the meeting."
"Startup/investor fit. Finding people who understand the business and can support / advise us going forward, vs. wasting time talking to people who don't understand the venture potential of the business." 
"Investors using their lawyers as bad cops."
"Radio silence and/or stringing me along, in service of ‘maintaining optionality’. Hint: if you do this, I won't come back to you next time I'm raising. Your optionality is an illusion."

"Had an investor back out after a long negotiation that culminated in a SIGNED term sheet. This is outright destructive, and all but killed the company."

The next question was “Which of the following things have happened to you already?”. Here are the results:

The final question was: “Anything else you want to point out? Any other input on what VCs can do to make fundraising less stressful for founders?”. More than 45 people answered this question. The comments included:

"If you are not interested, say it right away (I had some of the best meetings with VCs that said it out early in the conversation)."
"Don't waste our time or yours. Be very upfront about interest or not. Give succinct feedback, and don't sugar-coat why you're reacting the way you are." 
"Had an investor back out after a long negotiation that culminated in a SIGNED (but obviously non-binding) term sheet. This is outright destructive, and all but killed the company. Never, ever, ever do this to a young company. I literally hate this firm now. They are the worst!" 
"If you're transparent, direct, clear and fair, I will respect you and come back to you in the future. If you're weaselly, arrogant, or try to manipulate me, I won't."

What are the take-aways?

1) Founders understand that fundraising takes time and they can deal with rejections. But they hate being left in the dark.

The top issues, that is the issues which founders said suck the most, are:

  • "Not knowing where I am in the process, i.e. no ‘yes’ but also no clear ‘no’"
  • "Not understanding why VCs have passed"
  • "Having to answer dumb questions by VCs who didn’t understand our business"

Interestingly these issues are precisely the ones that could be avoided if VCs did a better job. In contrast, things that cost time and energy but are a natural part of the fundraising process – creating a deck, preparing numbers, having many meetings, getting rejections – suck significantly less.

This theme – founders can deal with rejections, but they need clarity – is also what has been mentioned the most in the free-form questions and is the clearest take-away of the survey.

To my fellow VCs’ defense, if you get 300 or more inbound requests per month it’s very hard to give each founder a timely response, so unless an investor intentionally strings founders along in order to keep optionality (or the illusion thereof) I don’t want to blame him or her. But knowing that this is the #1 issue which stresses founders in the fundraising process, VCs should try very hard to become as responsive and transparent as possible. For us at Point Nine, these results served as a good reminder that we have to further improve our internal processes to make sure that each and every entrepreneur gets a swift answer from us.

2) Fundraising sucks across all stages

We also asked founders to tell us what stage they’re in. 59% said that the last round they’ve raised (or tried to raise) was a seed round. 30% said Series A, 11% said Series B.

The only question which showed a statistically significant correlation with the stage was the question about “Getting initial meetings”. For earlier-stage founders, getting initial meetings has been significantly harder than for later-stage founders. That doesn’t come as a surprise, and maybe it shows that there’s at least one thing which VCs are good at: Getting their portfolio founders meetings with other VCs. :-)

3) Backing out after a term sheet has been signed is much more common than we thought

In the world of private equity and M&A, signing a term sheet may have a different meaning but I’ve always thought that if a VC signs a term sheet it means they are fully committed to making the investment. And they ought to be. The purpose of the final due diligence that takes place after a term sheet is signed is to rule out “skeletons in the closet”. By the time you sign a term sheet, you should have made up your mind and should be done with your “commercial due diligence”.

Apparently that’s not the case. 14 people, a shocking 14% of the respondents, said they’ve already experienced an investor backing out after a term sheet has been signed. Unless these 14 founders had skeletons in their closets, that’s 14 too many. As one founder said in the comments, if this happens it can kill a company.

Based on these findings, founders are well advised to do more due diligence on their part before they sign a term sheet with a VC. One of the things you should do is ask the VC what kind of due diligence they’re still planning to do after the term sheet is signed.

Huge thanks to all founders who took the time to participate in the survey! If you want to dive in even deeper into the survey results, please drop me a line and I’ll send you the Excel sheet with the complete data set.

Tuesday, October 13, 2015

What makes fundraising so stressful?

In theory, raising venture capital could roughly look like this:
  1. You create an investor deck and send it to 5-10 VCs that you like (1 week)
  2. You meet the ones that are interested and quickly figure out the 3-4 that are really bullish (1-2 weeks)
  3. You have a few more meetings with those 3-4 VCs and answer their questions (2 weeks)
  4. You negotiate with 2-3 of them and sign a term sheet with your favorite one (a few days)
  5. You hand it over to your lawyer for the final due diligence and the legal paperwork (3-4 weeks)
So ideally it's a couple of trips to Sand Hill Road (or San Francisco or London or Jaegerstrasse) over a period of 4-6 weeks to get a term sheet, and after another 3-4 weeks you've got the money in your bank account.

In practice, things rarely go so smooth. More often than not, raising venture capital is a huge distraction for the founding team. Even if things go reasonably well, it usually means that one of the founders spends half of his time talking to VCs for several weeks – time that he or she can't spend on building the business. If things go less well, it's not only a huge time sink but can also be an extremely stressful experience.

Why is that, and does it have to be this way? 

To some extent, it's in the nature of things that convincing other people to give you a lot of money (and to commit to supporting you for the next 10 years) for a small stake in your risky early-stage startup is not an easy feat. The vast majority of startups fail, VCs can invest in only 1% or less of the startups they see, fundraising involves a lot of relationship-building, it's a complex process – that's all pretty obvious so I won't elaborate on that.

But the question is if fundraising really has to suck as much as I think many or most founders experience it, and what investors can do to make it suck less. (I've already written about what founders can do on their end, e.g. by having clarity about their numbers and by pre-empting most DD questions.)

To shed some light on that question I put together a short Typeform survey. If you are a founder or CEO and have raised venture capital it would be awesome if you could participate in the survey. It's anonymous and takes only a few minutes to complete (and thanks to Typeform, you can do it on your iPhone :) ). I will share the results in another post shortly.

Thanks in advance!

Thursday, October 08, 2015

The importance of doing reference checks (2/2)

This is part two of Jenny's article about the importance of reference checks. If you haven't read the first part yet, start here.

Last time we spoke about WHY you should do reference checks and what impact a bad hire can have on your organization. In this second part I’d like to share my personal experience as well as some outcomes that have recently been discussed within the Point Nine family around the HOW.

General thoughts on the HOW:

  1. If you do reference checks, make sure they are one of the last steps of your recruitment process. Because if you do them right (I’ll explain further what that means) it will cost you time. You want to make sure that time is invested in the right candidate.
  2. The number of reference checks people do varies greatly between 1 to 15 checks per person. You want to find inconsistencies within the feedback you receive about the person. Depending on how senior the candidate is, ask for more references. A good start is 2 references for junior/entry roles that you want to increase to 3 to 5 references for middle management positions and 6 to 10 references for a senior leadership position.
  3. Make sure you have a mix of suggested references by the candidate as well some that you happen to know or you proactively approach to give you feedback. A good way to start is with the suggested ones. You can ask those guys who else they find you should talk to. Make sure you still top that up with your own research e.g. via LinkedIn or your personal network.

Now how to do them well?!

  • Have questions prepared. Make sure you know what to ask rather just go for the “So, tell me something about John” kind of question. Ask specific questions about the candidate. Remember, you want to find inconsistencies! Don’t be okay with foggy answers, worst case rephrase the question.
  • Try to establish a relationship with the reference you are talking to. Do a video call if possible and try to avoid written references. Take your 2-5 minutes small talk time at the beginning. Why? It’s much harder to lie into your face when I like you :)
  • Don’t only ask direct peers. It’s much more interesting to talk to people e.g. that got fired by that person (they are usually much more honest and open) or in general someone that has worked below him and got directly impacted by that person. A good mix of people above, around and below works quite well!
  • Obviously try to avoid asking someone at the current company the person works unless he got recommended by the candidate.
  • A good way to challenge the integrity upfront is to ask the following question once you’ve received the suggested references: “Would you mind If I talk to Peter, Fran and George as well”? Watch the reaction closely!
  • Always remember: You hire someone for his strengths not lack of weaknesses so tailor your questions about the strengths you are looking for and make sure that you weigh the feedback you receive according to what you really need. Example: Reference says: “Steve, in his role as Head of Sales, was too pushy in his general approach and sometimes went too fast for the Executive Team and the organization, so it was really hard to follow”. This is generally not the best feedback, but if your company is currently trying to attack a market, someone like Steve might be just the right fit for this period of time ;)

Here are some random questions that might be helpful for your day to day reference check. I usually use a mix of those and tailored ones to the specific candidate and role. Remember we’re trying to find inconsistencies, so use a good mix of questions for every reference check.

Some general questions that I find helpful:

  • What is your relationship with Peter like?
  • What was it like to work with Peter?
  • What was Peter’s management style like?
  • Can you describe a tough/very challenging moment Peter was in and how he has managed to get ouf it?
  • If you think about the time you and Peter have worked together, what’s the first memory that pops up your mind?
  • Would you say Peter is more a team player or does he excel more when he’s on his own? Can you give a specific example for it?
  • Would you describe Peter as a hands on person?
  • Do you regret that Peter has left your company? Why?
  • Should I hire Peter? Why?

There is plenty of reading out there with good stuff on that topic. One post that I can highly recommend is Mark Suster’s post “How to make better reference calls”.

What are your thoughts? What are your favorite questions that you use in reference calls to cut through the bullshit politeness?

Tuesday, October 06, 2015

The importance of doing reference checks (1(2)

This is a guest post by Jenny Buch, who recently joined us as a Talent Manager. It's the first in a series of two posts. The second one will appear here soon. 

To follow up on the recently posted interview with Netflix CEO Reed Hastings, I’d love to share my experience about reference checks with you.

So, many of you probably made the experience of hiring someone that you would have stated as “a really promising candidate” upfront. But after four months into the job it turns out that the hire was actually a total fail, that your staff is thinking you’re an idiot for bringing him on board (even if they don’t tell you) and that you now have to pay the debts by firing that person and start a whole new time consuming hiring process again to reduce the mess you’ve just done to your organization.

Well, even though things like these sometimes just happen and can have many reasons, there are ways to dramatically reduce the likelihood. One of them is to have a strong hiring process in place with its most important asset, you can guess it – reference checks!

Or, to say it with Christoph’s words “In God we trust, all others bring references”

Reference checks have been quite common in the US and most of the English speaking countries ever since but are still fairly new to many of the European countries. This is due to cultural differences and different common practice that was established in each country years ago. So why changing that good old practice and do references checks? Here is why:

There is only so much you can get out of a certificate, a CV or an interview. Your goal is to get to know your new “promising candidate” as best as you can within a short period of time to make sure you don’t mess things up! Today, and especially in the startup scene, there’s a different need for different skills than there was when “written references” were the way you did it. Here are some classics of the “must have skills” for any kind of candidate that can only really be proved by a good reference check:

  • Interpersonal skills: Interpersonal skills for any kind of role matter much more these days than they did in the past (or to state it correct: people are more aware of them, they’ve always mattered). The interview situation is not the best way to find out whether or not your candidate is actually a great fit since some candidates are extremely good at selling themselves during an interview.
  • Integrity: Today, an intern can become the CFO. Maybe the company sucks and he only became CFO because he went to the same university as one of the founders. As Ben Horowitz likes to say in his amazing book “The Hard Thing about Hard Things”. “There are two kinds of companies in this world. One where matters what you do and one where matters who you are. You can either be the first one or suck.” You want to make sure that his previous company was out of the first category and that besides his great university connections, he actually was the best candidate for the role and that’s why he got it - because he knows shit, works hard and is an awesome guy. I’m not saying that hiring from your university environment is bad, but it shouldn’t be the only reason for a hire - which it is sadly in many startups these days.
  • Right kind of ambition: You are looking for people with the right kind of ambition. So people that love your idea, bring a “get shit done mentality to work” and that thrive to make your company successful. As a side effect it will help them grow their career - not the other way around.
  • Right kind of person: You are not looking for “the Facebook Head of Sales” or the “CMO from Google”. Even though those guys do an amazing job at their current companies, every company is different and every time in every company is different. You need to find the right candidate for your company at this time. So one of your challenges is to make sure that your candidate has the right skillset for YOUR COMPANY.

I guess I don’t have to tell you how big the impact of a bad hire can be for your organisation. Simply do the math. Really do it! Sit down and calculate how much time and money it takes you to get rid of the wrong hire and find a new person and tell the people that you are sorry rather than using this time to talk to 5 people for 10 minutes upfront. If you do that math correctly you’ll figure out that doing reference checks is going to be the easy, cheap and most efficient way for busy startups to get the right people on their rocket ship!

Saturday, October 03, 2015

PNC SaaS Founder Meetup, Edition #4

Jack Newton, co-founder & CEO of Clio, at
the 1st PNC SaaS Founder Meetup in 2012
About three years ago we thought that it would be nice to organize a little meetup for the founders of our still quite young but growing SaaS portfolio. The idea was that by putting all of the SaaS founders in one room for a day, we'd give them an opportunity to compare notes, share war stories and learn from each other. The result has been nothing short of amazing. After the meetup, many of the attendees told us that they've never attended an event which was nearly as useful as this one, and everyone left the meetup energized and eager to implement all the new learnings.

The success of the first meetup, which took place in San Francisco at the end of 2012, encouraged us to do another, bigger event in 2013 in Berlin and an even bigger one in 2014, again in San Francisco. By now it has become a tradition, and last week the 4th annual PNC SaaS Founder Meetup took place in Berlin. Thanks to all the great people from our portfolio and our guest speakers it has once again been fantastic. Here are some (visual) impressions.

One of the reasons why the event is so effective is that it gives early-stage SaaS founders an opportunity to learn from later-stage SaaS founders and other SaaS experts who have already been through many of the challenges faced by the early-stage guys. Especially for founders from Europe and other places outside of the Bay area, this is a pretty unique opportunity to learn from some of the best people who've done it before. Therefore we're incredibly grateful to people like Mikkel Svane (co-founder & CEO of Zendesk), Jack Newton (co-founder & CEO of Clio), Paolo Negri (co-founder & CTO of Contentful), Olly Headey (co-founder & CTO of FreeAgent) and many others who participated in the first meetup in 2012 and keep coming to the PNC SaaS Founder Meetups ever since. Thanks guys, the startup world is a better place with you in it. :-)

PS: If you're a co-investor or friend of Point Nine and wondered why you didn't get an invitation this year: It's nothing personal, we've made it a portfolio-only event this time.

Wednesday, September 30, 2015

Introducing Jenny Buch, Talent Manager at Point Nine

Once a startup has released the first version of its product, raised some funding, started to get the word out and is getting some traction, the biggest challenge almost always becomes hiring. No matter how great the founders are and how much good advice they get from investors and advisors: You need people to get shit things done. And before long, you need more people (AKA managers) to help other people get shit things done, too. Recruiting great people can be extremely time-consuming and difficult, but if you don’t manage to build a great team, you are guaranteed to fail.

Or, as Michael Wolfe put it in his awesome talk at our 4th annual SaaS Founder Meetup last week:

All companies start differently but end up the same:
Success depends on hiring and managing a great leadership team.

Given that hiring is the #1 challenge for almost all of our portfolio companies, it has always bugged me that we’re not better at helping our founders find great people. It’s not like we haven’t been trying it and sometimes we’ve been able to find someone in our network for an open position at a portfolio company. But I’ve always wished that we’d be able to provide much more help.

Jenny sent me two pics ... and
forgot to tell me that I should pick one. ;-)
That’s why we’re thrilled that we’ve hired an experienced recruiter with a strong network, Jenny Buch, to focus on this challenge full-time. In her role at Point Nine, Jenny will (besides taking care of internal HR issues) advise our portfolio companies on anything related to recruiting, culture, employee engagement and HR strategy and will help them hire awesome people. In her previous roles, Jenny has recruited dozens if not hundreds of people for fast-growing tech startups and we can’t wait to see her magic unfold in the Point Nine family.

Welcome, Jenny!

PS: Hiring a talent manager isn’t a new idea in the VC world, and large firms like A16Z have built big teams to support their portfolio companies in a variety of areas. We can't compete with that, but we’re a little proud that we’re one of the first (the first?) micro VC funds to invest heavily into this role. :)

Monday, September 28, 2015

What animals are WE hunting?

[This article first appeared as a guest post on VentureBeat. Thank you for publishing it, VentureBeat. I'm re-posting it here with a few small edits.]

Of all posts that I’ve written so far, the one in which I asked what kind of animals you’re hunting was one of the most popular ones. That begs the question: What kind of animals are we hunting?

Paul Graham wants to farm black swans. Dave McClure likes ugly ducklings, little ponies and centaurs. Almost all large VC funds are looking for unicorns, while some people argue that investors should hunt dragons and others talk about decacorns.

If you have no idea WTF I’m talking about, here’s a quick refresher. The term unicorn was coined by Aileen Lee about two years ago to describe those rare and magical tech startups that have reached a valuation of $1 billion or more. Since then, $1B valuations have become somewhat less rare and there are now several private tech companies valued at $10 billion or more, for which the industry has come up with another name: decacorns. Before unicorns were called unicorns, people used to call these rare outlier companies, which create massive returns for their early investors, black swans (or homeruns – back then, it wasn’t mandatory to borrow terms from the animal kingdom). Duckling is Dave McClure’s name for companies that don’t become quite as as huge, and ponies and centaurs is what he calls the ones that have reached valuations of $10 million and $100 million, respectively. Finally, a dragon is a company that returns an entire VC fund.

So – what I mean by the question in the title of this post is what kind of exits we are aiming for. It’s a question which every VC needs to think about: If you have, say, a $250M fund and your goal is to return $1B before costs, should you aim for one huge outlier, e.g. a $10B exit in which you own 10%? Or are you better off shooting for 20% stakes in 50 companies which exit at $100M each? Or something in between?

For large funds the answer is pretty clear. Although the number of smaller exits is of course much bigger than the number of large exits, the exit value is highly concentrated on a small number of huge winners. This power law distribution of venture returns, which Peter Thiel has spoken about extensively, is what makes it almost impossible to return a large fund without hitting one or more outliers. Or as Jason M. Lemkin put it: VCs need multiple unicorns just to survive.

But what about a small (~$60M) early-stage fund like ours? We spent a lot of time thinking about this question in the last years, and our conclusion – or, let’s say working assumption, because it’s still early days for us – is that (sticking to the terminology described above) we’re hunting for dragons, hoping for unicorns.

In spite of the growing number of unicorns in the last years it’s still exceedingly rare for a startup to reach a valuation of $1B or more. According to Aileen Lee’s research, only 0.14% of venture-backed tech startups become unicorns. We can make around 30-40 investments with our fund, so statistically the chances of hitting a unicorn are very low. That doesn’t mean that we’re not trying hard to beat the odds – and if you don’t believe that you can beat the odds you should never become a founder or a VC in the first place – but it means that our business model is not dependent on having a unicorn in every fund that we raise.

We’re small enough for not being dependent on unicorns, but – and that’s the big difference to angel investing – we’re too big for generating a great performance by piling up a larger number of small exits. If we tried to get to, say, $240M in exit proceeds in chunks of $10M (corresponding with e.g. 20% of a $50M exit) we’d need 24 of these exits. It’s not realistic that 60-80% of the companies, in which we invest at a stage when there’s often just a handful of people and a few thousand dollars in revenues, will go on to become $50M exits though. That’s why we need a few of the animals which in the beginning of this post have been called dragons and which we internally just call “fund-makers”: Investments which return an entire fund, which in our case means, for example, 20% of a $300M exit or 15% of a $400M exit.

The final question is if all of this has any practical implications at all. Isn’t it impossible to look at a seed-stage startup and predict how large it can become anyway? Those are very hard prediction to make indeed, but still, knowing what kinds of exits we need informs several important decisions that we have to make – how many companies we want to invest in, what ownership stakes we’re aiming for, how much capital we reserve for follow-on financings, and so on. It also makes it clear that we shouldn’t invest in companies which for some reason we feel don’t have enough potential to move the needle for our fund.

The very last thing I want to say, just to be sure that I’m not misunderstood, is that I have absolutely nothing against unicorns. :-) In fact, we love ‘em. We’ve found two so far, Zendesk and Delivery Hero, so we’ve seen the beautiful side of the power law distribution first-hand. So: Hunting for dragons, hoping for unicorns.

Thursday, August 27, 2015

6 reasons to be bullish on SaaS

Yesterday I argued that SaaS founders and investors shouldn’t worry about short-term movements of SaaS stocks and said that there are a lot of reasons to be bullish about the Cloud. Here are some of them.

1) SaaS is quickly becoming the norm
In the last years there’s been a dramatic shift in deployment preferences of software buyers. According to a survey by technology evaluation business Software Advice, 88% of buyers with a deployment preference preferred on-premise solutions in 2008. Just six years later, the results were completely upside-down: In 2014, 87% of all buyers with a deployment preference preferred Cloud solutions.

2) Billions of dollars of on-premise revenues are still up for grabs
In spite of this tectonic shift of deployment preferences, IDC estimates that in 2015 the market share of on-premise deployments in the enterprise applications market is still almost 80%. That means that billions of dollars will move from on-premise to the Cloud in the next ten years.

3) Millennials will move up through the ranks
In the near future, more and more IT decision maker positions will be taken over by millennials. For this generation, which grew up with Facebook and Gmail, SaaS will be the default choice. In fact, most of them will laugh at the idea that software could not be Cloud-based.

4) The entire software market will continue to grow
It’s not only about increasing the Cloud’s piece at the expense of the on-premise piece, though. Pen & paper or Excel sheets are still used by myriads of people for all kinds of business processes, especially in SMBs. Building better, Cloud-based solutions for these use cases will significantly increase the size of the total software cake.

5) Mobile expands the market to non-desk workers
About ten years ago, the number of smartphone users was negligible. Today there are more than two billion smartphone users worldwide. This development, which I think is nothing short of amazing, has (almost) suddenly increased the number of target users for B2B software companies by tens of millions in the industrialized countries alone. People in industries like construction, landscaping, hospitality and many other areas of “non-desk work”, who previously weren’t using any software, are now getting mobile apps that help them become more efficient.

6) New technologies will catalyze adoption
SaaS has always been more than just a better deployment option. It has enabled the creation of new ecosystems (, new business models (Zenefits), new distribution strategies (Zendesk) and much more. The next wave of enterprise software will likely be powered by machine learning (check out this TechCrunch post for a good primer) and continued consumerization (and in some cases, new hardware). These and other innovations will allow SaaS applications to get even wider adoption and to provide even more value to its customers.

This is by no means meant to be an exhaustive list, and there are many more reasons to be bullish on SaaS. Want to let me know what you’re most bullish about? Tweet it to me!

Tuesday, August 25, 2015

Is SaaS doomed?

If one looks at the stock price development of public SaaS companies in the last few weeks, one could come to the conclusion that SaaS is over the hill. 17% down from its 52 week high. Veeva: 30% down from its 52 week high. Workday is 29% down, Box 47%, Hubspot 22%. Everyone got hit, as you can see in Tomasz Tunguz' post about the topic.

There are several reasons why this conclusion (that SaaS is past its prime) is wrong. Firstly, it's not just SaaS stocks which took a dive. The NASDAQ and the Dow Jones are both down more than 13% from their 52 week highs, too. Secondly, as this chart of the BVP Cloud Computing Index shows, SaaS stocks have outperformed the market significantly in the last couple of years, and it's not surprising that when the market corrects, stocks that went up more strongly than others are going down more strongly as well.

More importantly though, while public markets are good at valuing companies in the very long run, short term movements are – if not random – the result of all kinds of factors, most importantly supply and demand for stocks as an asset class, which itself depend on all kinds of factors that are not related to a specific company's ability to generate profits in the long run. That's why long-term public markets investors – let alone SaaS founders or VCs – shouldn't worry about the short-term movements of SaaS stocks. 

Fundamentally, there are lot of reasons to be bullish about the Cloud. I'll follow-up on that with another post soon.

Friday, July 17, 2015

The evolution of the SaaS landing page

When you look at the landing pages (or homepages or marketing sites, however you want to call them) of today's SaaS companies, they usually look quite beautiful. They typically have a clean, simple and friendly look, with very little text and a lot of images or videos. In many cases, these websites could just as well advertise a consumer product. This doesn't come as a surprise, since the consumerizaton of enterprise software has been one of the most important driving forces in the software world in the last years. But B2B software websites haven't always looked like this and it's fascinating to see how much things have changed. Join me as I go back in time and take a look at how SaaS landing pages looked like some years ago.

The SaaS Stone Age

Fast-backward about 16 years. This is how the website of - the most innovative software company of that time – looked like in 1999: in 1999
(click for a larger version)

Interestingly, as horrible as the site looks by today's standards, it does have a bit of a consumer-ish feel and it actually became more enterprise-y over time (you can browse the history on the Internet Archive, which I've used to take these screenshots). So maybe in 1999 and the early 2000s the world wasn't ready for consumerization yet, or didn't figure out the right approach or they just saw more success with a top-down enterprise sales approach.

The Beginnings of Modern (SaaS) Times

Not much happened on the SaaS design front in the following years. Until 2004, that is, when a small, Chicago-based web design agency called 37signals launched its project management tool called Basecamp:

Basecamp in 2004
(click for a larger version)

Basecamp looked radically different from any other piece of B2B software. If it's possible to pinpoint the beginning of modern SaaS to a specific company or product, I think this honor is due to Jason Fried and his colleagues at 37signals. As much as I disagree with Jason on many things he writes about how to build a business – kudos to 37signals for their focus on product, design and usability. No other SaaS company had a bigger influence on SaaS design.

It took a few years – which shows how much ahead of its time 37signals was – but eventually other SaaS companies redesigned their websites or rebuilt them from the ground up:

Campaign Monitor in 2008
(click for a larger version)

The trend was clear: Less and less text, bigger font sizes, larger images, videos. SaaS companies which were founded at that time had a stronger focus on design from the get-go:

Clio in early 2009
(click for a larger version)
Zendesk in 2010
(click for a larger version)

Contemporary SaaS Design

In the years that followed, the trend towards simplicity, focus on design and consumerization continued, and I'd say that since around 2012 or 2013, having a reasonably beautiful and conversion-optimized marketing website is more or less table stakes. Today you can buy a SaaS landing page template for $18. A $18 design which looks better than every B2B website that was built before 2004 – makes me wonder if Moore's law applies in design, too. ;-)

Since most people are trend-followers rather than trend-setters, SaaS landing pages started to look more and more alike in the last few years: A navigation bar at the top; 1-2 devices that were made in Cupertino, with product screenshots on them; a large headline and smaller sub-headline; 1-2 call-to-action buttons; some customer logos. This (plus a few other things) was the anatomy of almost every SaaS landing page in 2014. Not bad, don't get me wrong, but if everyone follows that recipe it gets harder and harder to stand out and build something memorable.

But just when things started to get boring, some cutting-edge design-led SaaS companies pushed the envelope further:

Geckoboard's current website
Go to to see it live
Typeform's current website
Go to to see it live
Another view of Typeform's current website
Go to to see it live

Both examples make heavy use of video so the screenshots don't do them justice. Please go to Geckoboard and Typeform to see them in action. While still being focused on conversion, I think these websites are almost indistinguishable from art. Using high-quality video footage, very little text and beautiful typography, crafted with incredible attention to detail, these websites bring across a  value proposition in a fresh, unique and highly emotional way.

This little journey through time has shown that up until now, the evolution of the SaaS landing page has been a development towards ever more simplicity. It will be interesting to see if this trend continues in the coming years.

Disclosure: I'm an investor in Clio, Zendesk, Geckoboard and Typeform.

Thursday, June 25, 2015

By the time you're at $2-3M in ARR, you need a VP of Sales who's done it before

For most SaaS startups, the VP of Sales (along with the VP of Marketing) is one of the most crucial hires they need to make. Unless you have a no/low touch sales model and you're growing virally (a.k.a. you're successfully hunting flies or mice), someone needs to build a scalable sales organization, whether it's an inside sales team (a.k.a. hunting rabbits or deer) or a field sales team (a.k.a. hunting elephants).

It's also one of the toughest hires. Jason M. Lemkin gave an epic talk about the subject at our 3rd annual SaaS Founder Meetup, last year in San Francisco. Jason also wrote extensively about the topic on SaaStr. If you haven't read his articles yet, make sure you read all of them.

As Jason explained in this post, one of the things that makes hiring the right VP of Sales so hard is the timing. If you try to hire your "Mr. Make it Repeatable" or your "Ms. Go Big" VP of Sales too early, say at $500k in ARR, you'll almost certainly not get a great one. The reason is that a great one will most likely not leave his or her current position at a successful, fast-growing, well-funded SaaS company, which pays him or her hundreds of thousands of dollars in salary and bonus/commission per year, to join your tiny little startup.

Starting to look for your VP of Sales too late is equally dangerous, though. If you want to grow roughly in line with the T2D3 formula, which most venture-funded SaaS startups should shoot for, you need to hire a lot of sales people in year 3. An exception are SaaS startups with a no/low-touch sales model and viral growth (see above) and potentially companies which have a massively negative net MRR churn rate and therefore don't have to acquire as many new customers. If you're fortunate to be in one of these categories, you may not need a big sales team, but most SaaS companies aren't.

That's why I think most SaaS companies that don't have sales management experience in the founder team need to start looking for a VP of Sales by the time they're at around $1.5-2M in ARR so that by the time they're at around $2-3M, they've recruited a VP of Sales who can take them to $10M and beyond. My thinking becomes clearer if you take a look at this model, which calculates how many sales people you need to get from, say, $1M in ARR to $10M. Note that a big and productive sales team may be necessary to achieve that goal, but it's obviously not sufficient. You also need a great product, great marketing, etc. – otherwise your sales team won't have enough warm leads and closing them will be too hard.

(click for a larger version)

Click here to download the Excel sheet.

Here's how the model works:

  • Enter your current ARR in cell D10. You can of course also enter your ARR target for a future date, depending on what you want to calculate. In the template, I'm assuming that you're at or close to the end of year 1 and want to work out your hiring plan for year 2 and year 3.
  • Enter the monthly growth rate that you're targeting for year 2 and year 3 in cells D11 and D12, respectively. Note that this should be your "net MRR/ARR growth rate", which takes into account all MRR movements like churn, expansion or contraction. The sample data that I've put in reflects the T2D3 formula (grow to $1M in ARR in year 1, triple in year 2 and triple again in year 3).
  • Input your monthly net MRR churn rate (i.e. [churn MRR plus contraction MRR] minus [expansion MRR plus reactivation MRR]) in cell D13.

Using these inputs, the spreadsheet will calculate the new ARR from new customers that you have to acquire in order to meet your growth targets. See row 25.

Now ... how many sales people do you need to achieve these target numbers? This depends on the following inputs:

  • Your AEs' quota, i.e. how much new ARR you expect each AE to bring per month. The model assumes that your AEs will on average meet their quota. In reality, some of your sales people won't meet their quota and some will exceed it, so this number really is just the average which you expect to achieve.
  • Ramp-up time, i.e. the time it takes your AEs to reach full productivity. The model assumes that they're 100% productive in month 4. For months 1-3, you can enter different percentages in cells G10-12.
  • The size of your sales support team. In cells K10-14 you can enter how many Sales Directors, SDRs and SDR Directors you expect you'll need in proportion to the number of AEs.

The sample numbers that I'm using in the template are broadly in line with the results of this benchmarking survey. As you can see in the spreadsheet and in the chart, based on these assumptions your total sales headcount increases from 2 to 9 in year 2 and from 9 to 30 in year 3. So in year 3 you'll have to hire and train 21 new sales people (plus replacements for people that leave or are let go). 

Without a VP of Sales who has built and scaled a sales team before, that's tough. 

PS: As you can see in the chart below, there's a 1:1 correlation (approximately) between ARR and sales headcount. That's OK in the $1-10M ARR stage, but in the longer term the best SaaS companies manage to grow revenues faster than sales spendings, primarily by focusing on account expansions to achieve an ever-increasing negative MRR churn rate and by continuously getting up sales efficiency.

(click for a larger version)

Tuesday, June 16, 2015

Why we politely ask for a deck first

When founders reach out to us to pitch us for an investment, they usually have a fundraising deck which they’re happy to send over. But every so often it also happens that a founder wants to set up a call or a meeting before sending over any material. In these cases I usually ask the founder if he or she could send us a deck first, with a view to have a call or meeting as a potential second step. But every time I do this, it makes me feel uncomfortable because I don’t want to come across as impolite, arrogant or unapproachable. In this post I’d like to give some background on how we work, which will hopefully make it easier to understand our behavior in the scenario I described above.

I have understanding for founders who want to walk us through their story and vision rather than sending over some slides. A startup is a founder’s baby which they often have a deeply emotional relationship with, and it’s understandable that when they pitch it, they want to leave the best possible first impression. It’s also understandable that founders want to get to know us first and learn more about us before sending us confidential information. What’s more, most founders are very smart people who are great to talk to. For all these reasons, I wish we could talk to all founders who reach out to us.

But it’s impossible. In the last 90 days we’ve logged 987 potential investments in our Zendesk (which we use for deal-flow management). Even with three Associates and one Intern, we can’t talk to all of these startups. If we did, we wouldn’t have enough time to dive in deeply into sectors, do due diligences, spend time with our portfolio companies and do many other things which are important for our business.

This is why using the pitch deck as the first filter is so important for us. When we go through a deck, a couple of minutes are usually enough to determine if we want to learn more. There are plenty of reasons why a company may not be the right fit for us (and Point Nine not the right partner for the company): It may be too early-stage or too late-stage. It may be a sector we’ve looked at before and aren’t excited about or it may be an area which we don’t have any expertise in. Or it may be in a field that’s too close to one of our existing portfolio companies. Most of the time when we pass quickly after having seen a deck, it doesn’t say anything about the quality of the startup and only means that the company is outside of our investment focus.

Obviously our process isn’t perfect. Not taking a closer look at each incoming request means we will miss great companies (and grow our anti-portfolio). But the same is true for any other approach.

A few closing comments:

  • I know that most other VCs feel the same about this, so if you want to raise money, spending time on producing a great pitch deck is time well spent. I also think that creating a deck is a great exercise because it helps you think through each area of your business systematically.
  • Michael wrote a great post about “What should be in my fundraising slides”.
  • Don’t ask for NDAs.
  • Don't send your pitch deck to dozens of VCs. Do your research to find out which 5-10 firms look like the best fit for you and start with those.
  • You don’t have to include everything in your “teaser” deck. I would recommend to include KPIs in the deck, since these are crucial for the investor to determine if you’re at the right stage, but it’s perfectly fine to leave out sensitive information like details on your product roadmap.

Wednesday, June 03, 2015

Announcing Point Nine Capital III

Today we’ve announced Point Nine Capital III, our new €55M fund. Investors in PNC III include institutional investors like Horsley Bridge Partners, Sapphire Ventures, Flossbach von Storch and Vintage Investment Partners as well as a number of highly successful Internet entrepreneurs. To our existing LPs: Thank you for your continued trust! To the new ones: Welcome on board!

When we raised PNC II, our goal was to build a leading independent European early-stage venture capital firm. While it’s still very early days for us, we think we’ve made good progress towards that goal in the last years.

PNC II was based on a couple of ideas and principles:

Live Berlin, think world
We saw a strong need for a Berlin-based seed VC because Berlin was starting to become a great startup destination, yet there was not a single VC that was headquartered in the city. At the same time, we didn’t want to limit ourselves to investing only in Berlin (or only in Germany for that matter) because we saw great startups being founded all over Europe (and elsewhere). Before PNC II we had already invested in Berlin-based companies like DaWanda, Delivery Hero and Mister Spex as well as in companies from Denmark (Zendesk), the UK (FreeAgent, Geckoboard, Server Density), Canada (Clio, Unbounce), the US (StyleSeat, Couchsurfing,...) and even New Zealand (Vend) and Japan (Gengo), so we were already used to this approach.

Focus on early-stage investments in SaaS, marketplaces and eCommerce
While we wanted to be pretty agnostic with respect to geography, we were going to be pretty focused when it comes to stage and industry. We’d only do early-stage investments (seed and early Series A) and would focus on three categories: SaaS, marketplaces and eCommerce.

Be “The Angel VC”
Both Pawel and I had a background as angel investors, and just because we raised a fund we didn’t want to give up our angel investor mentality. We wanted to combine a founder-friendly, no-nonsense, value-add approach with the ability to make bigger investments and do more follow-on financing.

Think long-term and give before you take
VC investing is an incredibly relationship-driven business. To be successful, you constantly need other people’s help and goodwill. What that means is that if you’re a newcomer, you should try to “give” as much as you can to as many people as you can in order to build long-lasting relationships.

Small is beautiful
Our original goal for PNC II was to raise €30M. We ended up raising a little more (~ €40M), but it was still a typical micro VC size. One reason for becoming a micro VC was, of course, that we wouldn’t have been able to raise a €100-200M fund, so it was an easy decision. :-) But we also felt that a €30-40M fund was the right size for a European seed fund: Big enough to invest needle-moving amounts in startups and have capacity for follow-ons, but not a size at which you need multiple unicorns just to survive, as my friend Jason M. Lemkin put it. (Not that we have anything against unicorns, but you know what I mean.)

Three years later

Three years later we feel encouraged by the early results of our strategy. Many PNC II portfolio companies have raised large follow-on financings from great investors like Accel, Acton, Balderton, Bessemer, Emergence, General Catalyst, Matrix, MHS, Storm, Valar and others. In many cases, valuation has gone up significantly since our initial investment, in a few cases as much as 10-20x and more. Again, it’s still very early and it will take another five years or so to see if we’ve done a good job with PNC II, but we’re super excited that so many of our portfolio companies are on a great track. We’re also extremely grateful for the appreciation that we’re getting for our work – from portfolio founders, other investors, our LPs and the bigger startup community.

Finally, we’re also extremely happy with the team that we’ve been able to build. Assessing an ever-increasing number of investment opportunities and managing a portfolio of around 50 companies wouldn’t be possible without the fantastic work of our Associates or our Operations Team. Thanks guys, you’re awesome. :)

So, we’re happy with our strategy, and we’re going to continue it with PNC III. We’ll continue to invest heavily in Berlin but will also continue to invest all over Europe and beyond. We’ll keep our “Angel VC” tagline, and we’ll continue to do our best to be a “good VC”. We’ll stick to early-stage, and while PNC III is a little bigger than PNC II, we’re not leaving micro VC territory.

In terms of sectors, we’ll stay focused on SaaS and marketplaces, although we’ll also keep exploring new areas like bitcoin, IoT or drones (interestingly, the investments which we’ve made in these new areas so far all fall under SaaS or marketplaces from a business model perspective). The one area which we got somewhat less excited about in the last years is eCommerce, mainly because it requires so much capital and because the margins are usually small. There are (very) notable exceptions, of course – Westwing is one of the best-performing companies of PNC I, and if Stefan Smalla ever starts another eCommerce company we’ll invest in it again in a heartbeat.

Copy & paste?

So a lot of things are going to stay the same, which explains why, when we told our partners at Horsley Bridge about our plans for the new fund, Kathryn said, with her inimitable wit: “Sounds like copy & paste”. That’s true, but I should point out that other things have changed and will continue to change rapidly. Some of the “pattern matching” that we’ve used to pick great companies 3-7 years ago doesn’t work any more because what used to be innovative a couple of years ago is table stakes today. Many of tomorrow’s unicorns might and probably will be based on technologies which barely exist today. Add all the changes that are happening in the funding ecosystem, and it’s clear that while we’ll stick to our core values, we’ll have to keep re-inventing ourselves to stay relevant. So don’t worry about us getting slow and saturated. We’ll stay hungry and foolish.

Friday, May 08, 2015

A closer look at the 6 things to pre-empt 90% of Due Diligence

Since last week's post about 6-7 things to pre-empt 90% of Due Diligence was liked/shared/retweeted quite a bit, I'd like to follow up with some additional details on what exactly SaaS Series A/B investors will look for when you supply them with the data and material that I've mentioned. In my post I suggested that you should prepare a key metrics spreadsheet, a chart with your MRR movements, a cohort analysis, a financial plan, an analysis of your customer acquisition channels and, if you're selling to bigger customers, information about your sales pipeline and details about your largest customers. Let's go through these items one by one and try to anticipate some of the questions potential investors will think about.

As a caveat, I'm going to mention some benchmark numbers but it's very important to note that none of these numbers can be viewed in isolation. There is not one number which will determine if investors want to invest. It's always about many puzzle pieces which together form a picture of the strength of your company.

Key metrics spreadsheet

  • What's your visitor-to-signup conversion rate? Typically this metric is in the 1-5% range. If you're significantly below that, that doesn't have to be a red flag – there can be good reasons for a lower rate – but it may raise questions.
  • What's your signup-to-paying conversion rate? In my experience, most good SaaS companies convert 5-20% of their trial signups into paying customers (but again, there can be exceptions).
  • What's your lead velocity? Are you getting more and more new trials/leads every month?
  • What's your account churn rate and more importantly your MRR churn rate? The best SaaS companies have an account churn rate of less than 1.5% per month and a negative MRR churn rate (which doesn't mean that you can't have a great company with somewhat higher churn or that you have to be at negative MRR churn at the time of your Series A/B).
  • How fast and how consistently have you been growing MRR? Have you been adding an ever-increasing amount of net new MRR month over month?
  • How has your ARPA developed? Have you been able to increase it?
  • Are you able to sell annual plans?
  • How long did it take you to get to $1M ARR? The best SaaS companies get there within 12-15 months after launch (but again, lots of exceptions ... there are companies that start slowly and skyrocket later).
  • How much have you been spending on customer acquisition? As a rule of thumb, most SaaS companies should target a CAC payback time of 6-12 months, although in some cases there can be good reasons to spend significantly more.
  • What are your CoGS and what's your Gross Profit Margin? As a pre Series A startup you're probably not great at tracking/attributing CoGS ... which I think is OK.

MRR movements

  • How much MRR have you been gaining by acquiring new customers? Have you been able to add MRR by expanding existing accounts as well? 
  • How much MRR have you been losing due to churn or downgrades?
  • Mamoon Hamid of Social+Capital has coined the term "Quick Ratio" for the ratio between added MRR and lost MRR, and he's looking for companies with a Quick Ratio of > 4. If your Quick Ratio is significantly below that, is it trending in the right direction?

Cohort analysis

  • How does your account and MRR retention look like for some of your older customer cohorts? Do you have low or even negative MRR churn?
  • Taking a "vertical" look at the cohort analysis, are you getting better and better over time, i.e. do your younger cohorts look better than older ones?
  • What's your estimated CLTV based on this cohort data?
  • How does usage activity look like on a cohort basis? Is there a lot of "hidden churn" (customers who got inactive and are likely to cancel soon)?

Financial plan

  • Is your plan both ambitious and realistic? Most investors are looking for T2D3 type growth, i.e. once you've reached around $1M in ARR you should try to grow 3x y/y for two years.
  • Is your plan a coherent continuation of your historic/present numbers, both methodically and with respect to your key assumptions? Projecting a sudden, drastic improvement of your key drivers is understandably much harder to sell to investors.
  • Are your key assumptions plausible, and what's the impact of somewhat more pessimistic assumptions?
  • Did you sanity check the outcome of your model? If the result of your model is that you'll be a money printing machine within two years, that's usually a sign that you're underestimating future costs. :)

Customer acquisition channels

  • How did your customers find you? Organic, paid, both? Ideally you have strong organic growth (which is strong proof of product/market fit) as well as some success with paid customer acquisition channels (which can be scaled more easily).
  • How does your conversion funnel look like for different sources of traffic? What are your costs per lead and per customer for different marketing channels?
  • How close are you to building a (somewhat) predictable and repeatable sales and marketing machine? Do you have a sense for the scalability of your customer acquisition channels

Sales pipeline

  • How does your current pipeline look like? Do your short-term targets look realistic based on your "in closing" pipeline? Does your overall pipeline support your mid-term targets?
  • How has your pipeline developed? Has it become stronger and stronger over time?
  • Are you starting to get a handle on closing probabilities and closing timelines?

In the original post I said as a bonus tip that if you're an enterprise SaaS company, you should put together some additional information about your largest customers. Here's another bonus tip: Include information about your NPS (which is hopefully very high) and how it has developed over time.

Ideally, all these puzzle pieces together, along with the size and attractiveness of the opportunity you're going after and the strength of you and your team, will form the picture of a SaaS startup which has clear product/market fit, enthusiastic customers, strong initial traction, continuously improving metrics and which is on its way to building a repeatable, scalable and profitable customer acquisition engine.

Friday, May 01, 2015

6 things to pre-empt 90% of Due Diligence

The founder of a portfolio company recently asked me what kind of numbers and other material he'll need when he goes into his next round of fundraising. He wanted to make sure that when he starts talking to new potential investors, he'll have answers ready to most of the questions he'll be asked.

That was a great question. By putting together a comprehensive set of data you can pre-empt 90% of the questions which investors will ask you when they assess a potential investment. This has a number of important advantages:

  • It saves you time because you'll have to answer fewer individual questions and requests in a piecemeal fashion.
  • It can speed up the fundraising process dramatically if investors get almost everything they need at once (or almost immediately upon request).
  • It makes you look better, because it shows that you're on top of things.
  • Almost all of the numbers (good) investors ask for are things that you should be highly interested in anyway, since they are important for understanding and running your business.

What kind of numbers you should prepare of course depends on the industry and stage you're in. I'm going to assume that you're a SaaS company and that you're going for a Series A or a Series B round. In this case, the following things will help you pre-empt a lot of DD questions:

1) A spreadsheet with your key metrics, since launch, on a monthly basis. It should include funnel metrics (visitors, signups, conversions etc.) as well as key financial metrics (MRR, CoGS, CACs etc.). If you haven't seen it yet, I put together a template for a KPI dashboard some time ago, which should serve as a good start.

You are probably tracking most of these numbers already anyway, so you can use a copy of your internal dashboard, but make sure that it's clean, comprehensible and that you're using the right terms.  If your dashboard contains any ambiguous metrics, add footnotes with precise definitions to make sure that an outsider understands exactly what he's looking at.

2) A chart with your MRR movements, since launch, on a monthly basis. That is, a chart that shows your new MRR, expansion MRR, contraction MRR, churn MRR and reactivation MRR for each month since launch.

MRR movements in ChartMogul
If you have a very wide range of customer size, consider breaking down the MRR movement analysis by your customer segments, because in that case the aggregate numbers across all customers may not tell the full story. So if you're selling to both SMBs and bigger enterprises, consider showing one MRR movement chart for the SMB customer segment and another one for the enterprise customer segment.

Make sure to provide the raw data along with these charts (and any other charts you provide) to allow the viewer to do his or her own calculations.

3) A cohort analysis, showing each monthly customer cohort since launch and how the cohort’s MRR has developed over time. I created a template for that, too. If you're selling to both SMBs and enterprise customers, you should again consider doing a separate analysis for each of the two segments.

Also consider adding a cohort analysis which is based on an activity metric. Think about what your key usage indicator is, then run a cohort analysis that shows the development of that number over time.

4) A financial plan for the next three years. The plan should follow the same logic as your historic KPI dashboard and should be relatively simple. Don't hard-code many numbers and make it easy to understand which assumptions the model is based on. Here are a few additional tips, and here's a template for a financial plan I built some time ago.

5) An overview of your customer acquisition channels. That is, a breakdown of your website visitors, leads and customers by source and data about your customer acquisition costs. 

Try to add some data points or estimates on the scalability of your customer acquisition channels. I know this is very hard and sometimes impossible, especially for inbound marketing driven companies, but some projections are probably better than having none at all.

6) If you're selling bigger deals, detailed information about your current sales pipeline. This should include a list of all qualified opportunities, and for each opportunity the potential deal size (in terms of MRR or ARR), pipeline stage and, if you have enough historic data to make a solid guess, closing probability and timeline. If you're a low-touch sales, high-velocity, low ARPA SaaS company you can leave this out.

Bonus tip: If you're an enterprise SaaS company, put together some additional information about your largest customers. Think of it as a little case study, with some information about how the customer found you, how the sales process looked like and how the account has developed over time.

What do you think? Does this capture most of the data Series A/B investors want to know?

[Update 5/8/2015]: I wrote a follow-up post with some additional details on what exactly SaaS Series A/B investors will look for when you supply them with the data and material mentioned above.]