Vote FOR a renewable energy future by voting AGAINST the Boulder muni

I’m really frustrated with the way many from the the pro-muni block in Boulder have misappropriated the idea that being for municipalizing our local utility infrastructure (condemning the Xcel’s local grid and forming a city-owned and operated electric utility) is the only way to move Boulder towards the goal of 100% renewable energy. They’re trying to co-opt the idea that a vote against muni is a vote for fossil fuels and a vote for it is a vote for renewables. I couldn’t disagree with this line of thinking more. In fact I think the opposite is true – a vote to continue the Boulder muni effort is the wrong way to go about pursuing the goal of lessening our dependence on non-renewable energy sources.

This weekend I wrote a long note to a local friend who came out in support of municipalization. I thought it was worth sharing to a broader audience – especially the answer to his question of why so many from the Boulder tech and business community are against continuing the muni effort (see for example here and here).

The main reason the tech community is against municipalization is that people in the tech community are futurists. We think about where the world is going and have true faith in the ability of new technologies to solve problems. In that context the idea of investing in 100 year old technology and infrastructure makes absolutely no sense. The future of power isn’t centralized power production and an aging, inefficient and outdated electrical grid. But that’s exactly what we’d be buying (and, because of the economics of the buy-out, be locking ourselves into for the next 50-100 years). It’s the equivalent of investing in steamships just before the railroads came about in the mid-1800’s or investing in a land line telecom company in the late 90’s. Both at the time were embedded utilities that one could easily have misunderstood as the future not the past. That’s exactly what we’re proposing doing with the utility grid in Boulder – at any price it’s a bad investment. On top of that, owning outdated infrastructure isn’t the best way to accomplish climate independence. With the money we’ve already wasted pursuing muni we could have already moved almost 10% of Boulder to renewable sources. For a measure that barely passed (the original muni funding “won” by 212 votes of over 26,000 cast) we’re spending like we have an overwhelming mandate. The highest paid person on city payroll is the head of the muni movement. And the PUC has just said that Boulder will be responsible for Xcel’s costs which may double (or more) the cost of this next phase if we choose to pursue it.
From my perspective the likely outcome of extending the muni tax will be continued wasted spending that won’t move us any closer to an energy independent future (and will actually take us further away as we waste time and resources). The business model for the muni makes absolutely no sense (which is why the city fought to keep secret). The economics simply don’t add up – even at a price for the Xcel assets that’s wildly unrealistic. Without massive increases in utility rates Boulder can’t afford to run it’s own municipal system (the original model assume 40% increases’ in the first 2 years of Boulder owning its utility – and that’s assuming a debt load substantially lower than anything close to the reality of what is possible). Personally, I think the economics will prove prohibitive. But if we do move forward I think it’s pretty clear that we’ll bankrupt Boulder. I mean that seriously. I think if muni moves forward we will be consumed with the debt that we incur and ironically will be in the position of fighting progressive (and environmentally friendly) change in the power markets as we fight to keep a rate base to support the 100 year old energy model we will have saddled ourselves with. We’d be much better off spending this money (and for that matter the money we’ve already wasted on muni) on actual energy efficiency. As an aside here, if we keep going with muni we’re going to have to rob the general fund to pay for it. Much of the costs of the next phase of pursuing the muni will happen in the next year or two but the funding through the tax won’t cover it (it’s evenly distributed; and it’s very unclear given the PUCs recent decision on fees whether the tax will even come close to paying for the next phase of this folly) – so we’ll be again sacrificing current priorities to continue to pursue this.
It’s unfortunate that the muni issue has been misconstrued as either being for renewables or against it. It’s really a question of whether Boulder wants to bankrupt itself by making a massive investment in outdated infrastructure or whether it wants to blaze a new path towards renewable energy. To me the choice is obvious.

Is your sales problem really a product problem?

Not suprisingly when companies are having issues in sales they look to their sales or and sales leadership for the source of the problem. In the cliche example (but one which happens all the time) sales will loop in marketing (“we’re not getting enough leads”, “the leads aren’t high quality enough”).

But typically product is left out of this mix.

To be clear, there are plenty of sales related issues that are directly attributable to poor sales processes, bad training of sales resources, poor time management, etc. But often overlooked is the role product plays in sales challenges. I’m not writing this to offer a ready made excuse for sales teams that aren’t executing but as a reminder to executive teams that when you’re struggling to understand sales challenges be sure to look at closely at product. I’d suggest looking both at how existing customers are actually using your product (often not well understood by companies) and comparing that with both the type of customer you’re targeting (which may be very different than your current mix of customers) and what features they require. I can’t tell you the number of times we’ve looked more closely into this question and found that the problem we’re actually solving isn’t well mapped to a shifting target in sales. Or where there are specific product features that we’re lacking that are preventing product adoption but for whatever reason that feedback insn’t coming through as part of our sales process.

Seasoned execs know to beware of the “if we only had feature X we’d be selling more” feedback from sales and to dive more deeply into what the data are showing them about actual product usage. But more often than it’s given credit for product is key part of sales challenges.

For an older post I wrote on companies making the shift from early product to sales focus see here

The Feature -> Product -> Company Continuum

I’ve been thinking about the continuum between a feature, product and company a lot recently. Specifically the challenge that companies have as they move across this continuum, how rare that last category really is, and the combination of product idea and market potential that is required for companies to actually make it to Company status.

Most companies begin life somewhere between a feature and a product. They’re started by an entrepreneur trying to solve some problem that s/he finds compelling and generally that problem is a feature of some larger set of problems. At this stage most entrepreneurs are given the advice to “focus”. It’s good advice (and advice I give all the time) but does sometimes perpetuate the feature-ness of the business – you spend your time and effort narrowly on a small number of related features and while you may have some inclination for how these stitch together into a larger idea it’s not fully thought through yet.

Often that’s basically where companies end – as a collection of features that if you squint hard enough feel like a product but often times are really somewhere in between.

One of the key – and often mis-understadood – challenges here is that the journey down the company path relies not just on the breath of the product that is being built but also on the overall size of the opportunity as well as how universal the solution you’ve built is to that market. The bigger the opportunity and the more ubiquitous the solution, the more focus can pay off. The smaller the opportunity or the more fragmented it is, the more focus just equates to building a feature not product or company. Take photography as an example. Instagram built a series of relatively simple (focus!) features – filters and frames – into a product. But the opportunity was so large they were able to turn that product into a company by stitching together its users into something larger than a collection of individuals using a bunch of features. Importantly here the features were ubiquitous across the user base – they solved a problem that many, many people had the need for (“how can I make my pictures look better?”) in a way that worked for everyone (“add a filter and put it into frame and my pictures look amazing!”). Contrast that to email management, which was a neat feature that never really graduated to a product. In that case the market was absolutely massive (everyone uses email and almost everyone complains about it) but the solution so fragmented (your version of solving your email problem is just too different to mine) that it never gained traction.

Features provide specific point value to users. Products stitch together related features into bundles that are essentially universal in their need across the problem set you are solving (put another way, if each of your users buys your “product” for a different reason you’ve probably just created a feature set, not a true product). Companies have product that is broad enough in its use and impact that a huge number of users gain value from it in a market that is both large and where the user need is similar enough to drive broad adoption of the same solution.

How to value your SaaS company

If you read my blog regularly you know I love (LOVE) metrics.

So no surprise that when River Cities Capital released an overview of SaaS operating and valuation benchmarks, I hung on every juicy detail. It’s chocked full of them – I’d highly recommend your reading the full report. But if you’re too busy for that, below are some of the key take-aways. I’ve added color commentary of my own that’s more relevant to earlier stage companies as well.

The methodology here was great. They took the 92 public SaaS companies and analyzed their key operating metrics. Beyond that, they actually went back in time and looked at the earlier stage periods for these companies so we can track how some of the world’s best SaaS companies performed at revenue levels more akin to a typical Series B business.

The “Rule of 40” is important. The rule of 40 is a benchmark that adds growth rate and EBIDA together. The idea is that if the addition of these two numbers is greater than 40% your business is on track. The valuation metrics show this clearly. Companies in the study that scored 40% of greater had TTM revenue multiples of 6.4x on average. Companies that scored between 20% and 40%, 5.3x, 0%-20% 3.8x and below 0% 1.9x. Healthy SaaS companies balance growth and profitability.

At IPO only 7 of 39 companies that have gone publics since 2013 had positive EBITDA. More on this below, but growth is more important than profitability, subject to the balance in the rule of 40 note above.

There are a ton of private SaaS financings. In 2016 there were over 2,000 financing rounds of private SaaS companies ($18.5Bn invested). Over 2,000 different firms participated in these rounds. This has contributed to companies raising more money than in the past before they go public (almost $100M on average for SaaS businesses that went public after 2011 vs. less than half that for those that went public before). It’s not clear from the study how much of this increase is going to shareholder liquidity, but clearly that’s driving some of this difference. Note in the graphic below the next point how this number has been increasing over time.

The average SaaS company is now 12 years old and has over $100M in revenue at the time of their IPO . See the graphs below.

 

 

 

 

 

Capital efficiency was not as good as I was expecting. The River Cities study measured the ratio of revenue to money raised. Not surprisingly companies raised well above their revenue level in the earlier stages as they built product and sales and marketing. The curve goes up for sure, but was lower (i.e., had a lower slope) than I expected. But note the increasing divergence between higher performing companies (3rd quartile and better) vs average. The better companies more quickly become capital efficient (in the $30-$50M revenue range) vs. their average peers.

 

 

 

 

 

 

 

Interestingly growth and capital efficiency stats are down. Companies who went public after 2011 are less efficient with their capital and growing more slowly than their pre-2011 IPO peers. I imagine this is in part due to secondary liquidity (driving presumably by larger funds driving larger check sized into pre-IPO companies) – this counts as money invested in the capital efficiency score but in actuality doesn’t reflect money used to grow the business. This also may reflect the overall crowding of the marketplace and increased competition these businesses are facing.

Growth still matters. I’ve written about the growth imperative before (and it’s counterpart the profit imperative). While not quite as crazy as it was in the fall of 205 when I wrote that first post, growth still matters. The chart below illustrates this. Interestingly at the time of IPO growth above 40% doesn’t move the needle (I’ve heard this from bankers as well before seeing these data). Top performing SaaS businesses grow quite quickly. The average public SaaS business took 6 years to go from $5M TTM revenue to over $100M (but worth noting that Concur, Ultimate Software and Vocus each took 11 years to do the same and ultimately became quite successful). Page 17 of the report digs into some additional data that felt too detailed for this summary but is worth looking at relative to the nuance of these growth rates from various revenue starting points.

 

 

 

 

Not surprisingly churn matters. Ultimately churn is a drag on growth and on sales efficiency. Good SaaS businesses retain > 85% of their customers and have close to 100% revenue renewal rates when including upsell. You’ve probably heard this from your investors before, but there’s a reason for that.

Sales efficiency was not as good as I expected it to be. I generally prefer CAC payback (vs LTV to CAC ratio) – especially for earlier stage businesses. And as a rule of thumb for businesses in our portfolio we target payback periods of 12 months or less. The study actually showed that these payback periods were longer than I would have expected with medians across company size closer to 24 months than to 12 (note in the graph below the meaning of quartile is flipped from the efficiency graph above).  I have an upcoming post about this but a company’s ability to invest in longer payback periods relates closely to both the capital on its balance sheet and it’s access to additional capital.

 

 

 

 

 

 

 

 

Verticalization. There are some interesting notes in the report about greater efficiency for vertically focused SaaS businesses which I initially found counter intuitive and are worth considering in the context of your own SaaS business. Overall the SaaS market is becoming more vertically focused as, I think, a natural reaction to specialization in the industry (not to mention crowding in the marketplace as companies seek more specific niches for their products).

Hopefully the benchmarks I summarized here will be helpful to you as you think about your own business’ trajectory relative to your peers. Again, I’d urge you to read the full report as River Cities did a really nice job of analyzing a large data set and presenting the information in an easily digestible format.

 

Drowning

I’m struggling and I’ve avoided talking about it.

I’m used to being busy and I’ve often said that what I like most about my job is the constant phase shifting – it fits my personality and, frankly, my attention span. I’m used to a certain amount of chaos and uncertainty. But lately I’ve been feeling overwhelmed by it. I’m not sure if it’s the constant barrage of news from a president I can’t stand and who I think is ruining our country. Or the friend who was just diagnosed with advanced metastatic stage 4 pancreatic cancer. Or the other friend who was diagnosed with stomach cancer. Or the crap that’s going on in tech and venture that makes my stomach turn. Or just the day to day busy life of a family of 5 with school, sports and everything in between. I feel distracted. I think of Matt and Reggie a lot (and at unexpected times). I’m struggling to focus.

I’ve long prided myself on always being able to take on more. But I think I’ve hit the wall. I both wanted to be open about how I was feeling – maybe others are feeling the same? – and to brainstorm a bit about what I’m trying to do about it. I always feel better when I have a “plan” and I’m trying through this post to create one.

  1. Slow down. I’m starting to take things off my calendar and say no to more stuff. Bouncing from meeting to meeting isn’t productive and robs me of time both to think and to be proactive.
  2. Spend more time with the people I love. Seems obvious but in the face of a busy schedule and travel it’s easy for this to get lost. My wife and I are taking more walks together. I’m spending more time with my kids. I’m spending time with my partners. And I’m not trying to hide it on my calendar or in email responses (“I can’t meet then – I’m going home early that night”). I don’t care if people think I’m cool or always at work.
  3. Define myself more though my relationships than my work. I love my work, but it doesn’t and shouldn’t define me. And I’ve gotten comfortable with my role in our partnership.
  4. Be deliberate. I’m not just more deliberate with my time and schedule but also with what I’m focused on. I’m really making an effort to spend time on things that really have impact – on Foundry, on our portfolio, on our investors, on our industry. At work these are my highest priorities – not the day to day bullshit that can so easily consume me.
  5. Speak out. I’m taking stands about the things that are important to me. I’m ignoring the haters. More on this in a separate post…
  6. Breathe. I’m not particularly into meditation but as part of slowing down I’m taking some deliberate time to stop, stretch and breathe. It’s helping.

Sorry for the overly personal post here. I feel better having written it. Life goes in cycles…this too shall pass.

/sjl

Humility Over Pride

[a version of this was originally posted at Unreasonable.is. i was thinking about it today and wanted to repost it here with some additional commentary. in light of some of what we’re reading about in the tech press it would seem that a remind about this is due]
__________________________

This advice would seem obvious, if only more people followed it.

I was attending a board meeting recently where a company put up the following as one of its core values: “Humility over pride”

As I think about how often I interact with people who are so ego-centric and hubris; as I consider how seldom these people show any self-awareness or emotional intelligence; and as I reflect on how universally unpleasant it is to work with people who put themselves first, it reinforces how critically important this principal is.

  • Humility over pride means giving before getting.
  • Humility over pride means playing a non zero-sum game where everyone benefits.
  • Humility over pride means listening before reacting.
  • Humility over pride means admitting when you’re wrong or when someone else has a better idea.
  • Humility over pride means putting your organization or company’s goals over your own.

I recently gave an interview for the Eyesight Collective where I talked about an experience I had early in my career that completely changed my attitude and outlook on life. In the video I describe the moment when I went from cocky late 20-something back down to earth in a single, transformative experience. I learned a lot from this moment in my life and I hope by sharing it others will too.

Reading Your VC Pitch Meeting

I’ve come to realize that many – most – entrepreneurs suck at reading pitch meetings. Frequently what I hear from a company CEO is completely uncorrelated to what I hear from the VC they were pitching. In thinking about why this is, the answer is actually relatively straightforward:

VCs are predisposed to give good meetings. AND By being equivocal at the end of a meeting they preserve maximum option value.

Parsing this a bit further, VCs take a lot of meetings. And they do so with varied motivations. Sometimes they’re legitimately interested in a market space or even a specific business. Sometimes another VC or entrepreneur asks them to take a meeting and they’re trying to preserve a relationship. Sometimes they weren’t paying close enough attention to your email and said yes when they meant to say no. There are lots of varying reasons why you might find yourself in front of a venture capitalist making your pitch. And the quality of those pitches varies a lot. Even among relatively experienced entrepreneurs their ability to convey their business idea varies widely. But all of that said, once you’re in a room with a VC they generally want you to have a good experience. Part of their business, in fact, is to make sure you have a good experience pitching them. Historically this wasn’t the case, but with the fluidity of information that gets passed around among entrepreneurs and the general accessibility of VCs these days most venture capitalists will try their best to make sure that your experience pitching to them is positive.  This isn’t a bad thing. But it does lead entrepreneurs into the trap of incorrectly reading a good meeting. Good meetings sometimes just mean that the VC you were pitching to was doing their job.

Ok – so you’ve had a good meeting experience. Now what? Most VCs are not particularly adept at reacting to your idea in real time. Sure, they’ll give you some relatively generic feedback. And if there’s some glaring mismatch between their investment profile and your business they’ll tell you. But for the most part you won’t get a lot of specifics out of them. This is less calculating than it sounds – they often just need to think about what you just presented a bit more and by being equivocating they preserve as much option value as possible. To some extent this is changing as the next generation of venture capitalists are more direct, open and reactive to what they’re hearing in meetings (we certainly try to be at Foundry). But for the most part, left to their own devices, the VC you’ve just pitched will try to get out of your meeting without tipping off their hand too much.

The result of these two factors tends to be good meetings where you leave feeling positive, that the person you met with was “really engaged” (a term I hear a lot from entrepreneurs post meetings), but with undefined next steps and no real understanding of where you stand.

This is a mistake that you shouldn’t make.

The solution here is actually quite simple but you need to be willing to be direct. It starts with being a good time manager of your meeting – if you run out of time you won’t be able to do this. Make sure you hit pause 5 minutes before the meeting is due to end to give yourself time to wrap up. Then be blunt: “What did you think?” (I probably hear this in only about 5% of meetings). The right follow up question should then be about what additional information you can provide to the VC you were meeting with. It’s ok to ask what next steps are but most of the time you’ll get a nebulous answer; by coming up with additional information you can provide you create another touch point that you control while at the same time honing in on areas of your pitch that they either didn’t understand or want to dig further into. The combination of these two questions should give you a better idea of where things stand. A few potential things you’ll hear and their general meaning below:

“Let me noodle on this a bit and get back to you” – means “I’m going to say no, but don’t want to do it in person.”

“Hmm…Let me talk to my partners about it” – means “I’m going to say no and blame my partners”

“Let me introduce you to [person] at another portfolio company to get their take” means – “I’m trending no, but want to be sure I’m not missing something first”

“I’d like to understand more about [insert thing to hear more about]” means – “I have some interest but also some questions. I’m willing to put in at least some more work”

“Can I talk to a few customers” means “I don’t know what the fuck I’m doing and respect neither your time nor your key relationships”

“Let’s schedule another meeting to dig into [thing to dig into]” means “I’m interested and willing to commit more time to this”

Hopefully this is a helpful guide to getting the most out of your pitches and leaving with a realistic view of where you stand. It’s critical in the fundraising process to be spending time with those people who are legitimately interested in your idea and to be realistic about what your actual funding pipeline looks like.

I’d love to hear about your experiences in pitch meetings. And I should probably add to the list above so let me know what other things you’ve heard at the end of your pitch meetings.