An Often Forgotten Characteristic About Your Startup’s Ideal Customer Profile

The Ideal Customer Profile. The perfect customer. Can you describe it for your startup? The more precisely you can describe it, the better. That will simplify disqualification. But articulating the ICP well isn’t enough. Vague ICPs are problematic. The company will focus on too broad a customer base, waste time and effort with unqualified prospects, and blunt their sales pitch with irrelevant value propositions. Clear ICPs can also be problematic. To describe the ideal customer well is not enough. Let’s use an example. A clear but useless ICP might be: a disenchanted thirtysomething mechanic who likes to play German board games, read Nietzsche and watch MMA. I can clearly articulate my ICP to myself and others. The target market is clear (and niche!) But how do I identify this person if I’m looking to sell to him? Where do I begin generating leads? Mechanics meetups? Board game conventions? Nihilist Continue reading "An Often Forgotten Characteristic About Your Startup’s Ideal Customer Profile"

The Salesforce/Mulesoft is a Bellwether for the 2018 M&A Market

Yesterday, Salesforce announced it will acquire Mulesoft for $6.5B. A recent addition to the list of public software companies, Mulesoft is a tremendous business. The company generated $297M of revenue in 2017 at a 73% gross margin, and grew by 58%. Salesforce is acquiring the business for an astounding 21x enterprise value to trailing twelve months revenue multiple - nearly 2x the next closest.
Transaction Price ($M) TTM Rev ($M) Growth Rate Gross Margin Year of Acquisition Enterprise Value EV/TTM Rev
Salesforce/Mulesoft 6,500 297 58% 73% 2018 6,296 21.0
SAP/Concur 8,300 546 32% 63% 2014 5,988 11.0
SAP/SuccessFactors 3,764 328 59% 66% 2011 3,599 11.0
Salesforce/Demandware 2,800 274 40% 71% 2016 2,502 9.1
Oracle/Eloqua 957 95.8 34% 72% 2012 864 9.0
SAP/Callidus 2,400 253 22% 61% 2018 2,247 9.0
SAP/Ariba 4,607 517 27% 66% 2012 4,390 8.5
Microsoft/LinkedIn 26,500 3615 30%
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Where are We in the SaaS Valuation Cycle?

Recently, people have been asking just where are we in the SaaS valuation cycle. I last updated the chart above more than six months ago. The answer is close to ten year highs. The chart above shows the median enterprise value to forward revenue multiple to multiple. Enterprise value is the market of a publicly traded company minus the available cash the company holds. Forward revenue is the sum of the next 12 months’ revenue. Since 2013, we seen an incredible amount of volatility in SaaS forward multiples. The peak occurred in February 2014 at 7.7x. The nadir followed almost exactly 2 years later. A 57% drop in multiples occurred when public investors rotated from growth stocks into value stocks. Since that moment, SaaS multiples have more than doubled from to 7.2x. Not every name has benefited, but nearly all of them have. Only six companies have witnessed
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Is Geographic Dispersion of Seed Dollars Really Happening?

In the US, the median seed round has nearly quadrupled over the past seven years. In the mean time, seed investment has grown more than 7x and then fallen to a bit more than half of the high. As the market has grown and retrenched during that time period, I’ve been wondering about the geographic diversity of these seed dollars. Throughout these cycles, are startups in other states benefitting? Are they increasing their share of investment dollars? The chart above shows the share of seed investment dollars by state over the last 7 years. California remains the leader with about 40-50% of dollars over time. New York oscillates between 10% and 20%. Illinois has seen some growth, like Texas. But on the whole, dollars haven’t changed geographies. Which states produce the largest seed rounds? Utah, New York, Massachussets, Indiana and California have the top 5 median seed rounds size. But
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Why Does Your Sales Team Lose Deals?

It’s one of the most important questions a CEO can ask. Why does our sales team lose potential sales? One of the companies I work with, Chorus, listens and analyzes sales calls to provide insights to heads of sales and account executives. Chorus explored the reasons account executives lose sales opportunities. Set aside losses from competition. Of the remaining lost opportunities, 48% of prospects lacked budget. A further 38% demonstrated no urgency to buy. The remaining 13% of prospects didn’t have the buying authority. This is great news. These problems are simple to resolve. Each of these three objections should be a prospect qualification question. Your team may use MEDDIC, SPIN, or any of the other 6 sales methodologies. Each of them focuses on identifying the budget, the buyer and the urgency. The best run sales teams are disciplined qualifiers. They identify unlikely prospects early. The team will spend Continue reading "Why Does Your Sales Team Lose Deals?"

The Clearest Articulation of a Marketing Roadmap

Recently, I met an exceptional marketer. She described the purpose, strategy and tactics of a marketing department remarkably succinctly. Marketing’s methods can seem intangible. But she explained them simply and elegantly. I drew the chart above based on her vision of marketing’s roadmap. At the highest level, marketing articulates a compelling narrative. This is step 1.The narrative brings the market forward by contrasting the current state of affairs with a persuasive view of the future. This is a Gap Analysis - a comparison of the current state of affairs to the desired potential. By buying this product, your future will be better. In software, this typically means the buyer will be promoted. Marketing equips the internal champion to understand a change in the market and articulates the compelling reasons to act - to buy the software. The benefit to the business is important and real, resulting in a promotion. Continue reading "The Clearest Articulation of a Marketing Roadmap"

Private Equity as an Exit Option for SaaS Startups

At Saastr, Jason and I discussed the role of private equity in SaaS on stage as a potential acquisition path for SaaS startups. Private equity hasn’t been a common exit route for venture backed startups in the past. But that’s changing. The chart above depicts the total disclosed value of US venture-backed SaaS startups which have been acquired by PE firms since 2010. The aggregate value has grown from zero to about $13B over that time period. That’s roughly equal to the \$14B spent by corporate strategics in the same market. Said another way, PE firms are spending as much buying SaaS startups as corporate acquirers. What’s changed? There’s a surfeit of capital in private equity. The excess increases prices and valuation multiples for acquisition targets. The result? PE firms pay the same or greater multiples than corporate acquirers, which hasn’t been the case in the past. Deal sizes
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Dropbox S-1 Analysis – The King of Freemium

Founded in 2007, Dropbox epitomizes the freemium go-to-market. Dropbox has grown from 0 to 500 million users over that time period. 2% of those users convert to paid and pay an average of $9.33 per month. 90% of revenue originates through self serve channels - an astounding figure for company that generated more than $1B in revenue last year. Dropbox’s revenue grew from $604M to $1.1B from 2015 to 2017, a compound annual growth rate of 35%. More impressive still: the company has managed to nearly double revenues while decreasing the amount they spent on COGs annually. COGs stands for cost of goods sold. Images of Dropbox, which stores billions of files, hard disks and storage are the principal component of COGs. This decrease is driven by user policy changes that affect users who have been inactive for a year or more, and a shift to operating their
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The ROI of Cash Burn for SaaS Startups

What should be the return on investment of a startup’s cash burn? Fred Wilson posed this question last year in his post Some Thoughts on Burn Rates. In that post, he suggests, and I agree, that a 5x ROI on cash burn is a good target. How does one calculate ROI? It’s a simple formula: Cash_Burn_ROI = Revenue_Multiple/Revenue_Pay_Back_in_Years1 If a business is worth 7x revenues and revenue payback is 14 months, the burn ROI is 6x or 7 / 1.2. If a business is worth 5x revenues and revenue payback is 18 months, the ROI is 3x. Note, I’m using revenue payback, not gross margin payback here. This math reaffirms the importance of unit economics. Startups have no influence over their multiple.2 So the best place to focus is payback period. This equation does highlight an important phenomenon. When the market pays high multiples for businesses, startups Continue reading "The ROI of Cash Burn for SaaS Startups"

Startup Best Practices 27 – How to Use Options to Retain Key Employees in Your Startup

You’re two or three years into your startup. You have hired a great team and want to retain them. It’s time to consider refreshing their stock options to motivate them to stay longer. How many options should you grant to each employee? Startups should pay key people market rate to retain them. Otherwise, they may leave the business, lured by the promise of greater compensation elsewhere. Let’s walk through an example. Assume Anna is a key employee at a startup RedCircle which wants to keep her. Anna received a grant of 100,000 options on her start date. These options have a standard vesting schedule: a four-year vest with a one year cliff. This means the first 25,000 options vest after Anna has remained with the company for one year. Thereafter, the remaining 75,000 options vest monthly: 2083 options per month. The table below shows her annual vesting schedule through the Continue reading "Startup Best Practices 27 – How to Use Options to Retain Key Employees in Your Startup"