Berkley Library Digital Collections has a collection of first-hand, very lightly edited interviews with some of the first venture capitalists called Bay Area Venture Capitalist: Shaping the Economic and Business Landscape. The interviewees are a collection of venture capital O.G.s including Don Valentine (Sequoia), Tom Perkins (Kleiner & Perkins) and Ann Winblad (Hummer Winblad), Arthur Rock, and Franklin ‘Pitch’ Johnson.
Sort of a written version of Something Ventured.
Last year I really enjoyed Danny Myers autobiography Setting the Table on his life in the restaurant business founding and running Union Square Hospitality Group (Gramercy Tavern, Union Square Café etc) and Shake Shak. His appearance on Tim Ferris’ podcast is a good listen.
Substack and Clue have both announced that they are raising capital from their users (also known as equity crowdfunding).
Historically raising equity crowdfunding after having raised venture capital has been a sign that the company isn’t doing well enough to able to raise from traditional investors.
I think it can make sense for community-driven services like Substack and Clue to raise capital from its users. But as always there are a bunch of caveats. For fundraising from a community it, in my mind, boils down to “treat your fans well”. Especially when the fans might be neither rich nor financially sophisticated.
Substack is raising $5 million at a $585 million valuation (extending its Series B round from 2021). This seems like a stretch, given what has happened with the valuation of low revenue/high valuation Series B companies since 2021 (Substack did about $11 million in gross revenue in 2021, and my guess is that it likely did less than $30 million in 2022). A company should reveal current high level financial information like revenue, profit/loss etcetera when raising capital. Especially when it must be assumed that old investors have access to that information.
Clue has only put out initial information that it will do an equity crowdfunding round, so the full terms are not known yet. One thing that seems to better than in the Substack raise is that crowdfunding investors will be joining a March 2023 round led by USV and Balderton. It is much fairer for small, new investors to invest a current valuation (if done at arms’ length) than a pre-crash valuation from 2021.
Tren Griffin has a good collection of quotes on the argument around how to make money when investing.
Andy Rachleff (former partner at Benchmark) is quoted: “Investment can be explained with a 2×2 matrix. On one axis you can be right or wrong. And on the other axis you can be consensus or non-consensus. Now obviously if you’re wrong you don’t make money. The only way as an investor and as an entrepreneur to make outsized returns is by being right and non-consensus.”
For venture capital backed startups I think A16Z partner Alex Rampbell’s comment better captures what is needed: “Again, you have to be right because if you’re wrong, not going to work. But the challenge with being non-consensus right is if you think, “Okay, this is a very, very interesting field. It’s going to require a hundred million dollars of capital for this business to actually get to the promised land and get enough customers and get enough revenue and get enough scale. I’m going to invest in their $10 million Series A, which means they’re going to eventually need to raise another $90 million in many successive rounds.” And this is a crazy, crazy idea that nobody except for me on planet earth believes in. Well, then who’s going to lead the Series B? This is the challenge. So it’s fine if you’re a non-consensus and then it trends towards consensus, but if the investment is non-consensus long enough, that’s actually great for public markets, typically. It’s not great for the private markets because you tend to need somebody else to believe and actually coalesce around what is your consensus.”
In my mind a founder raising capital should always want investors to see the startup as consensus and right (i.e. many firms believe “this will be a winner and therefore I want to invest”), as that should lead to the highest valuation and best terms.
An early-stage venture investor can live with non-consensus and right, if the startup can reach milestones before the next funding round that makes it consensus and right (as Alex Rampell argued).
After many years of few layoffs in large, profitable technology companies, it almost seemed like that was something that never had and never would happen.
Obviously the last 9-12 months have disproved the notion that it wouldn’t happen. And a little research, or just being born in the late eighties or earlier, gave plenty of examples that it has happened.
One good example is a Microsoft memo from 1993 called Shrimp and Weenie Guideline (via Steven Sinofsky) directed to its managers. It’s a good example of communicating that efficiency and profitability is important, even when a company is respected and very profitable.
Some issues in the memo that feel as relevant today as 30 years ago: avoiding unnecessary spending, leading by example is more powerful than just having rules and policies, headcount growth is not always necessary to reach objectives and it is important to make tough personnel decisions.
While technology changes fast, many business challenges are essentially the same decade after decade.
Matthew Ball has written the free mini-book The Streaming Book covering the development of online video streaming. Matthew has written about streaming for a long time and has gathered the history of streaming, metrics, cost of production etcetera in an easy-to-read format.
I’ve previously written about the current status of online video streaming market, where five of six major U.S. streaming companies each are making annual losses of $2-4 billions. It is a situation that is likely to change, especially in an environment where consumer and advertising spending is likely to continue to be under pressure and the stock market doesn’t like large losses.
To me a reasonable overall response is to lower investments in new content combined with consolidation to keep value for money high and churn low, lower marketing spend and layoffs.
One interesting data point, of many, is the value of long-term, loyal subscribers (more than 24 months). If you have a great product, the month to month churn goes dow to below 2 %. The problem is that you need a great product and that it takes two years to get there
Startups in general and SaaS in particular have the ability (and tendency) to look at a lot of metrics. But looking at too many metrics make it difficult to communicate how things are going. Even if there are 40 things to improve, there shouldn’t be that many key metrics.
Don Valentine, the founder of Sequoia Capital, said: “There are two things in business that matter […] high gross margins and cash flow. All the other financial metrics you can forget. […] if you have a product with high gross margins, and Fairchild did, it generates huge cash flow. And that means you can grow the company as fast as the market will allow. “
As most costs in a SaaS company are personell related (which is different from many consumer companies that have significant non-personell marketing costs), looking at revenue per employee as an overall efficiency metric is effective. (Jason Lemkin pointed out that if a SaaS company reaches $400,000+ in annual revenue per employee it should be cash flow positive.)
Revenue growth, gross margin, cash flow and revenue per employee will not replace all dashboards and metrics, but if those four numbers are good a SaaS company should be in a good place.
Bessemer Venture Partners have written a guide with 40 areas software companies can address to increase gross profit and efficiency. It covers a bunch of areas and is a good checklist, even if there is no groundbreaking ideas (which would be surprising when you are looking to increase efficiency).
One interesting data point is their benchmark for payback time for customer acquisition costs for SaaS. Payback time can be longer for larger customers, not surprising as it often takes longer to acquire them, but should be below 12 months to be great for all types of customers.
(source: Bessemer Venture Partners)
Two other data points are that public cloud companies spend 20 % of revenue on R&D (mainly engineering) and 12 % on G&A (everything that is not sales & marketing or research & development). Those are numbers to aim for and try to beat as a SaaS company grows.
The Difficulty Ratio is a good read, by David Sacks, on sales, pricing and sales cycles. The idea is that in order for sales at a particular level of pricing to work, it cannot take too long to close a deal.
Combining Sacks’ pricing vs time to close and Mosaic Ventures pricing vs viable GTM approach give a useful framework for thinking about B2B sales.
(Source: The Difficulty Ratio)
The article has some practical tips on how to fix the situation if you are pricing too cheap to your sales velocity (or selling too slow to your pricing), including pricing, features, targeting new customer segments and making your sales more efficient.
On April 1st, 2006 Spotify was founded. It is almost impossible to overestimate the importance of Spotify to Stockholm as a technology ecosystem. While founders’ dreams and intentions are interesting, what truly matters is creating something that matters to a lot of people and has impact at scale.
Happy Birthday Spotify!