Category Archives: Startups

Book Review:  From Impossible to Inevitable

This post reviews Aaron Ross and Jason Lemkin’s new book, From Impossible to Inevitable, which is being launched at the SaaStr Conference this week.  The book is a sequel of sorts to Ross’s first book, Predictable Revenue, published in 2011, and which was loaded with great ideas about how to build out your sales machine.

From Impossible to Inevitable is built around what they call The Seven Ingredients of Hypergrowth:

  1. Nail a niche, which is about defining your focus and ensuring you are ready to grow. (Or, as some say “nail it, then scale it.)  Far too many companies try to scale it without first nailing it, and that typically results in frustration and wasted capital.
  2. Create predictable pipeline, which about “seeds” (using existing successful customers), “nets” (classical inbound marketing programs), and “spears” (targeted outbound prospecting) campaigns to create the opportunities sales needs to drive growth.
  3. Make sales scalable, which argues convincingly that specialization is the key to scalable sales. Separate these four functions into discrete jobs:  inbound lead handing, outbound prospecting, selling (i.e., closing new business), and post-sales roles (e.g., customer success manager).  In this section they include a nice headcount analysis of a typical 100-person SaaS company.
  4. Double your deal size, which discusses your customer mix and how to build a balanced business built off a run-rate business of average deals topped up with a lumpier enterprise business of larger deals, along with specific tactics for increasing deal sizes.
  5. Do the time, which provides a nice reality check on just how long it takes to create a $100M ARR SaaS company (e.g., in a great case, 8 years, and often longer), along with the wise expectations management that somewhere along the way you’ll encounter a “Year of Hell.”
  6. Embrace employee ownership, which reminds founders and executives that employees are “renting, not owning, their jobs” and how to treat them accordingly so they can act more like owners than renters.
  7. Define your destiny, which concludes the book with thoughts for employees on how to take responsibility for managing their careers and maximizing the opportunities in front of them.

The book is chock full of practice advice and real-world stories.  What it’s not is theoretical.  If Crossing the Chasm offered a new way of thinking about product lifecycle strategy that earned it a place on the top shelf of the strategy bookcase, From Impossible to Inevitable is a cookbook that you keep in the middle of the kitchen prep table, with Post-It’s sticking out the pages and oil stains on the cover.  This is not a book that offers one big idea with a handful of chapters on how to apply it.  It’s a book full of recipes and tactics for how to improve each piece of your go-to-market machine.

This book — like Predictable Revenue, The Lean Startup, Zero to One, and SalesHood — belongs on your startup executive’s bookshelf.  Read it!  And keep up with Jason’s and Aaron’s great tweetstreams and the awesome SaaStr blog.

The CEO Should Be the Most Bullish Person on the Future of the Company

“I am 100% behind my CEOs up until the day I fire them.” — Don Valentine, Sequoia Capital

I’ve always loved that Don Valentine quote although, like many great quotes, it took me a while to really understand it.  In short, it means that the board of directors should either support the CEO or replace them – there is no third option.  There is no board-runs-the-company option.  The CEO runs the company and the board’s only operating duty is to decide who is CEO.

Over time, I developed my own corollary:

“The CEO should be the most bullish person on the future of the company, up until they’re gone.” — Dave Kellogg

Fair weather or foul.  Making plan or missing plan.  Whether a megavendor just introduced a free directly competitive product or whether you just got a patent on a fundamental industry-enabling technology.  Whether the CEO is quite certain things are going to end well or whether they have some serious doubts.  It doesn’t matter.

I’m not saying CEOs should lie to people.  I am saying that no matter the situation they should always be the most bullish person in the room:  whether atop the mountain’s peak or neck-deep in shit, the CEO should always see the stars.  Why?  Because it’s their job.  The CEO’s job is to find the best path forward, period.  Regardless of whether that path looks easy or hard.

I’m not saying that CEOs shouldn’t be 100% realistic in situation assessment when devising their strategies.  While I’m not a huge fan of the book for many reasons, Good to Great produced an awesome rule that captures the spirit exactly in the Stockdale Paradox:  you must confront the brutal facts of your current reality and combine that with an unwavering faith in an eventual positive outcome.

The last thing a CEO wants is a bullishness inversion.  Imagine a scenario where the board felt much better about the future than the CEO.  You can almost hear them saying:  “gosh, I just don’t think Dave believes in the future of the company as much as we do.” That, by the way, is the boardroom equivalent of, “gosh, I think we need to invoke the Don Valentine rule and get a new CEO.”

I decided to write this post when I read the New York Times story on the sale of Good Technology to Blackberry.  While I think it’s a must-read story that makes some important points about unicorns, excess financing, dilution, and the potential divergence of interest between preferred and common stock, I think the story was a bit too hard on the Good Technology CEO and took some cheap shots that reflect a failure to fully understand the situation and the job of the CEO.

Before diving in, let me tell you a true story about the scariest flight I ever had.

I was bound for Paris, departing from SFO.  I was tucked nicely in my window seat, eager to dive into the latest Harvard Business Review.  Just after wheels-up I noticed that we took a steep angle of ascent.  I looked out at the wing and noticed little nozzles that I’d somehow never noticed before, and wondered “what are they for?”  Seconds later there was a loud thud and a big bump and white spray was flying out the nozzles.  “Oh yes,” I remembered, “those nozzles are for dumping the fuel IN AN EMERGENCY.”

Seconds later an absolutely nonchalant, The Right Stuff voice came over the intercom, “Ladies and gentlemen, this is Captain Smith up in the cockpit and we’ve had a little problem with the right engine — which has overheated — so we’re going to take a loop around, dump a bit of fuel, and land back at SFO in a few minutes.”

After an emergency briefing from the flight attendants and adopting the brace position, we had a perfect landing at SFO.

“Ladies and gentlemen, this is Captain Smith again.  You may have noticed the people on tarmac spraying foam on the landing gear.  That’s because we couldn’t thrust-reverse to slow down with only one engine, so we had to work the brakes extra hard and now they’ve overheated as well.  This is just a precautionary measure and we’ll have you at the gate in a few minutes.”

That sounded reasonable until I looked out the window and saw (roughly) this:

Fire_fighters_practice_with_spraying_equipment,_March_1981

“OK,” I think, “so the Captain’s telling me everything’s fine but the guys on the ground won’t come within 50 yards of the plane while wearing a full-body silver flame suit.”  But nevertheless, given the Captain’s calm, I didn’t panic.

I thought it was a great example of professional communications keeping everyone both informed and calm in a critical situation.  Now maybe I’m a bad capitalist, but it never occurred to me to call Schwab while we were circling to buy some put options on UAL stock.

Imagine if the pilot had said:

“The right engine has exploded and we are a roman candle full of fuel that we have nowhere near enough time to dump, but we’ll dump what we can while we circle around, and then we are going to land way, way heavier than you’re supposed to, and I won’t be able to slow us down with the thrust reversers so the brakes are going to catch fire, and if they can put that fire out before any fuel leaks on it, then we’ll all be OK.”

Maybe then I’d have thought to buy those put options.  But maybe three people on the plane would have had heart attacks, too.

The pilot’s duty is to get the aircraft through the situation while informing the passengers in such a way that does not make the situation worse.  Whether the pilot knows the odds of success are 95% or 40%, they’re going to deliver roughly the same message.  The pilot’s job, notably, is not to offer financial advice — no one would posthumously sue the pilot for misrepresentation in saying “we’re going to get through this” when they didn’t and for thus denying passengers the opportunity to sell (or buy puts on) the airline’s stock.

Now, let’s flip back to the Good Technology story.  Look at these excerpts:

At a May company meeting, Ms. Wyatt said the company missed financial projections and addressed an email from a competitor that said Good would soon run out of cash …

At an all-hands company meeting in June, Ms. Wyatt again said Good was spending responsibly. Thanks to the cash from a recent $26 million legal settlement, she added, the company had “a ton of options”

I’d argue she was actually pretty transparent.  She told employees they were missing plan and that were it not for a one-time legal windfall they’d be in cash trouble.  She even gave them idea of the scale.  (A $200M breakeven company spends about $50M/quarter which means they were within about half a quarter, or 6 weeks, of running out of money.)

My question is simple:  what do you want her to say at those meetings?

Well that competitive email does some valid math and there certainly are scenarios where we run out of cash, which means we’ll probably have drastic layoffs.  We’re basically almost out of money now — we got lucky with that windfall from the lawsuit so we’re still able to make payroll.  Boy, the board and I sure feel stupid for declining that buyout offer from CA, but with a bit of luck we might get through this.

What happens then?  The employees start looking for jobs, the best ones find them first, so you start losing your best people — who you need to get out of the situation.  You also start losing deals to the competitor who is spraying FUD on you, which means you will have lower cash collections.  You make the situation worse.

But her job is to get the company through the situation, so if she sends the scarier message and makes the situation worse, then she’s not doing her job.  In addition, because her job is find a way through the maze, she probably genuinely believes that she can get the company to a reasonable outcome — and if she doesn’t believe that then, per my rule, maybe she shouldn’t be running the company.  You want a pilot in the chair who thinks they can land the plane.

This wouldn’t be much of a paradox were it not for the fact that Good was a private company that had an active secondary market in its stock.  This is the problem.  In short, we have a company following private-company communications practices with a public-like market in its stock.

Public companies have precise rules about what gets communicated, when, how and to whom, when it comes to financial information and future guidance.  Public companies have trading windows which prohibit trading the stock during sensitive periods.   Public companies have detailed safe harbor disclaimers when it comes to discussing forward-looking  statements.

Private companies don’t.  Historically they haven’t needed them because historically there were no secondary markets for private company stock.  In the old days, employees exercised options (1) when they left the company, (2) when they wanted to play a (dangerous) ISO buy-and-hold tax strategy that takes a year execute and is thus insensitive to short-term news, and (3) through a same-day sale once the company was public.

But with an active secondary market, employees can decide to either sell (or not sell) shares to a third-party at pretty much any time.  There is a complete dearth of information for buyer and seller in these secondary markets.  Most companies won’t release financial information to either party both because they want it kept private and they don’t want liability for any errors it might contain.  So they trade on rumor and hearsay.

And to think all this has happened as a result of the government trying to protect investors post-bubble and post-Enron with regulations like SOX.  In this case, pretty much the opposite has happened. Remember Ronald Reagan’s quote about the nine scariest words in the English language:  “We’re from the government and we’re here to help.”

If I were common stockholder of Good Technology, I’d be unhappy but not surprised about the outcome — when a company that’s raised $300M sells for $425M, it’s clear that they’ll be at most $125M for the common shareholders and quite possibly less:  if there’s debt to repay, multiple liquidation preferences, or if the preferred stock is participating.  I’d be upset about the board declining the buyout offers from CA and Thoma Bravo — but such mistakes happen all the time (e.g., Yahoo declining the Microsoft offer).

But I wouldn’t be mad at the CEO for being a calm pilot and trying to navigate through a difficult situation without making it worse.  She was doing her job.  Even neck-deep in shit, as she apparently was, she needed to be the most bullish person on the future of the company and find a way to a successful outcome.

Finally, should private companies start adapting internal communications to the new reality of private companies with public-like stock?   Yes, no doubt.

And, in my opinion, in a perfect world, we’d roll back to the days when companies could go public at $30M (as we did at Business Objects) and eliminate a lot of problems created by pushing IPOs out much further out into a company’s lifespan.  For that is the root cause of the problem.

Postscript
Let me help my readers avoid some problems that Good Technology employees faced .  First, remember the dangers of ISO buy-and-hold strategies that many learned that hard way in Bubble 1.0.  Second, if you have stock-related compensation, you should learn the important basics about it by reading a book like Consider Your Options.  Third, you should always get advice from your tax and finance professionals before making any stock option moves.  Finally, remember that I am not offering financial advice and you should go here for a reminder of this and other Kellblog disclaimers.

The Great Reckoning: Thoughts on the Deflation of Technology Bubble 2.0

This post shares a collection of thoughts on what I’ve variously heard referred to as “the tightening,” “the unwinding,” “the unraveling,” or “the great reckoning” — the already-in-process but largely still-coming deflation of technology-oriented stock valuations, particularly in consumer-oriented companies and particularly in those that took large, late-stage private financings.

The Four Horsemen

Here are four key signs that trouble has already arrived:

  • The IPO as last resort.  Box is the best example of this, and while I can’t find any articles, I have heard numerous stories of companies deciding to go public because they are unable to raise high-valuation, late-stage private money.
  • The markdowns.  Fortune ran a series of articles on Fidelity and other mutual funds marking down companies like Snapchat (25%), Zenefits (48%), MongoDB (54%), or Dataminr (35%).  A unique feature of Bubble 2.0 is publicly-traded mutual funds investing in private, VC-backed companies resulting in some CEOs feeling, “it’s like we went public without even knowing it.”
  • The denial.  No bubble would be complete without strong community leaders arguing there is no bubble.  Marc Andreessen seems to have taken point in this regard, and has argued repeatedly that we’re not in a technology bubble and his firm has built a great data-rich deck to support that argument.

The Unicorn Phenom

If those aren’t sufficient signs of bubbledom, consider that mainstream media like Vanity Fair were writing about unicorns  and describing San Francisco as the “city by the froth” back in September.

It’s hard to talk about Bubble 2.0 without mentioning the public fascination with unicorns — private tech companies with valuations at $1B+.  The Google search “technology unicorn” returns 1.6M hits, complete with two unicorn trackers, one from Fortune and the other from CBInsights.  The inherent oxymoron that unicorns were so named because they were supposed to be exceptionally rare can only be lost in Silicon Valley.  (“Look, there’s something rare but we’re so special, we’ve got 130 of them.”)  My favorite post on the unicorn phenom comes from Mark Suster and is entitled:  Why I Effing Hate Unicorns and the Culture They Breed.

As the bubble has started to deflate, we now hear terms like formercorns, onceacorns, unicorpses, or just plain old ponies (with birthday hats on) to describe the downfallen.  Rumors of Gilt Groupe, once valued at $1.1B, possibly selling to The Hudson’s Bay Company for $250M stokes the fire.

What Lies Ahead?

While this time it’s different is often said and rarely true, I do believe we are in case when the unwinding will happen differently for two reasons:  (1) the bubble is in illiquid assets (private company preferred shares) that don’t trade freely on any market and (2) the owners of these illiquid shares are themselves illiquid, typically structured as ten-year limited partnerships like most hedge, private equity growth/equity, or venture capital funds.

All this illiquidity suggests not a bubble bursting overnight but a steady deflation when it comes to asset prices.  As one Wall Street analyst friend put it, “if it took 7 years to get into this situation, expect it to take at least 3.5 years to get out.”

Within companies, particularly those addicted to cheap cash and high burn, change will be more dramatic as management teams will quickly shift gears from maximizing growth to preserving cash, once and when they realize that the supply of cheap fuel is finite.

So what’s coming?

  • Management changes.  As I wrote in The Curse of the Megaround, big rounds at $1B+ valuations come wrapped in high expectations (e.g., typically a 3x valuation increase in 3 years).  Executives will be expected to deliver against those expectations, and those who do not may develop sudden urges to “spend more time with the family.”  Some CEOs will discover that they are not in the same protected class as founders when these expectations go unmet.
  • Layoffs.  Many unicorns are burning $10M or more each quarter.  At a $10M quarterly burn, a company will need to layoff somewhere between 200 and 400 people to get to cashflow breakeven.  Layoffs of this size can be highly destabilizing, particularly when the team was putting in long hours, predicated on the company’s unprecedented success and hypergrowth, all of which presumably lead to a great exit.  Now that the exit looks less probable — and maybe not so great — enthusiasm for 70-hour weeks may vanish.
  • Lawsuits from common stockholders.  Only recently has the valuation-obsessed media noticed that many of those super valuations were achieved via the use of special terms, such as ratchets or multiple liquidation preferences.   For example, if a $100M company has a $300M preference stack and the last $100M went in with a 3x preference, then the common stock would be be worthless in a $500M sale of the company.  In this case, an executive with a 0.5% nominal ownership stake discovers his effective ownership is 0.0% because the first $500M of the sale price (i.e., all of it) goes to the preferred shareholders.  When people find they’re making either “no money” or “car money” when they expected “house money,” disappointment, anger, and lawsuits can result.  This New York Times story about the sale of formercorn Good Technology provides a real example of what I’m talking about, complete with the lawsuits.
  • Focus will be the new fashion.  Newly-hired replacement executive teams will credit the core technology of their businesses, but trash their predecessors for their lack of focus on core markets and products.  Customers unlucky enough to be outside the new core business will be abandoned — so they should be careful to ask themselves and their vendors whether their application is central to the company’s business, even in a downturn or refocus scenario.
  • Attention to customer success.  Investors are going to focus back on customer success in assessing the real lifetime value of a customer or contract.  People will remember that the operative word in SaaS is not software, but service, and that customers don’t pay for services that aren’t delivering.  Companies that emphasized TCV over ARR will be shown to have been swimming naked when the tide goes out, and much of that TCV is proven theoretical as opposed to collectible.
  • Attention to switching costs.  There is a tendency in Silicon Valley to assume all markets have high switching costs.  While this is certainly true in many categories (e.g., DBMS, ERP), investors are going to start to question just how hard it is to move from one service to another when companies are investing heavily in customer acquisition on potentially invalid assumptions about long-term relationships and high pricing power.

Despite considerable turmoil some great companies will be born from the wreckage.  And overall, it will be a great period for Silicon Valley with a convergence to the mean around basics like focus, customer success, and sustainable business models.  The real beauty of the system is not that it never goes out of kilter, but that it always returns to it, and that great companies continue to be produced both by, and in cases despite, the ever-evolving Silicon Valley process.

# # #

Footnotes

This post was inadvertently published on 12/23/15 with an incomplete ending and various notes-to-self at the bottom.  While I realized my mistake immediately (hitting PUBLISH instead of SAVE) and did my best to pull back the post (e.g., deleted the post and the auto-generated tweet to it, created a draft with a new name/URL), as the movie Sex Tape portrays, once something gets out in the cloud, it can be hard to get it back.

Theoretical TCV: A Necessary New SaaS Metric?

The more I hear about SaaS companies talking up big total contract value (TCV) figures, the more I worry about The Tightening, and the more I think we should create a new SaaS metric:  TTCV = theoretical total contract value.

TTCV = PCV + NPCV

Prepaid contract value (PCV) is the prepaid portion and NPCV is the non-prepaid portion of the subscription in multi-year SaaS agreements.  We could then calculate your corporate hype ratio (CHR) with TTCV/ARR, the amount by which you overstate ARR by talking about TTCV.

I make the suggestion tongue-in-cheek, but do so to make real point.

I am not against multi-year SaaS contracts.  I am not against prepaid SaaS contracts.  In high-consideration enterprise SaaS categories (e.g., EPM), buyers have spent months in thorough evaluations validating that the software can do the job.  Thus, it can make good sense for both buyer and seller to enter into a multi-year agreement.  The seller can shield contracts from annual churn risk and the buyer can get a modest discount for the contractual commitment to renew (e.g., shielding from annual prices increases) or a bigger discount for that plus a prepayment.

But it’s all about degree.  A three-year  prepaid contract often makes sense.  But, for example, an eight-year agreement with two-years prepaid (8/2) often doesn’t.  Particularly if the seller is a startup and not well established.  Why?

Let’s pretend the 8/2 deal was written by an established leader like Salesforce.  In that case:

  • There is a very high likelihood the software will work.
  • If there are problems, Salesforce has major resources to put behind making it work.
  • If the customer is nevertheless unhappy, Salesforce will presumably not be a legal lightweight and enforce the payment provisions of the contract.

Now, let’s pretend that 8/2 deal was written by a wannacorn, a SaaS vendor who raised a lot of money, made big promises in so doing, and is way out over its skis in terms of commitments.

  • There is a lower likelihood the software will work, particularly if working means building a custom application, as opposed to simply customizing an off-the-shelf app.
  • If there are problems, the wannacorn has far fewer available resources to help drive success — particularly if they are spread thin already.
  • If the customer is unhappy they are much less likely to pay because they will be far more willing to say “sue me” to a high-burn startup than to an established leader.

So while that 8/2 deal might be a reasonable piece of business for an established leader, it looks quite different from the perspective of the startup:  three-fourths of its value may well end up noncollectable — and ergo theoretical.  That’s why startups should neither make those deals (because they are offering something for an effectively fictitious commitment) nor talk them up (because large portions of the value may never be realized).

Yet many do.  And somehow — at least before The Tightening — some investors seem to buy the hype.  Remember the corporate hype ratio:  TTCV / ARR.

 

Memo to Startups: How are you Feeling About Taking that Public Money?

The first time I encountered the issue of inadvertent disclosure of venture capital / private company information was back in 2004, when this ground-breaking Wall Street Journal story hit, Venture Capitalists Scramble to Keep Their Numbers Secret.

The issue was pretty simple.  If public money were being invested in venture funds, then a conflict emerged between non-disclosure agreements required by the venture funds and the FOIA requirements of those funds to disclose their holdings.  In this case the issue wasn’t the valuations of individual holdings, but the performance of the funds themselves.  In the end FOIA appears to have won and it looks like CALPERS, for example, no longer invests with either Kleiner Perkins or Sequoia, though a quick search here shows that GGV and Khosla were seemingly willing to put up with the disclosure requirements.

I had two takeaways from the situation:

  • I was surprised that people didn’t think of it in advance.  The issue seemed to sneak up on the VCs.
  • When there is a disclosure conflict, the rules governing the investing party will tend to win.

I guess not everybody got that memo because recently we’ve had  a similar issue with publicly-traded mutual funds that have invested in privately-held, venture-backed companies.

A series of stories by Dan Primack in Fortune discussed the markdowns of companies including SnapChat (25%), Zenefits/YourPeople (48%), DataMinr (35%), or e-cigarette maker NJoy (90%+).  The second story showed that MongoDB has been cut in half since Fidelity’s original investment, while Domo has doubled.  The third story discussed the consequences of all this including

  • It will presumably be harder for Fidelity and other funds to get into these private deals
  • There will be pressure on the VCs to mark the holdings to similar levels in their portfolios
  • It presumably hurts the startups themselves via reputation damage and could hurt their ability to recruit new talent (though lower valuations can actually help here for sophisticated people)

But the more interesting question is did this take any of the companies by surprise?  Was it an overlooked detail in a pile of closing documents?  Did the Fidelity’s of the world have a right but not an obligation to disclose (e.g., materiality)?

I don’t know, but I would say the whole episode seems to have sneaked up on everyone the way FOIA did in 2004.  This story in The Information seems to confirm my belief:

It’s like we went public without even knowing it.

So it seems to me that in the hurry to these mega-round, unicorn-round deals that nobody paid attention to the lawyers — or maybe the lawyers didn’t speak loud enough — about the disclosure risks when taking money from publicly-traded mutual funds.

I’m guessing the answer to my question is “not so good” and startups are going to think twice, maybe three times, before taking money from this class of investor, even if it’s “dumb money” at a high valuation.

The Perils of Measuring a SaaS Business on Total Contract Value (TCV)

It’s a frothy time and during such times people can develop a tendency to get sloppy about their numbers.  The first sign of froth is when people routinely discuss company size using market capitalization instead of revenue.  This happened constantly during Bubble 1.0 and started again several years ago – e.g., all the talk of unicorns, private companies with $1B+ valuations.

Oneupsmanship becomes the name of the game in frothy times.  If your competitor’s site had 1M pageviews to your own site’s 750K, marketing quickly came up with a new metric on which you could win:  “we had 1.5M eyeballs.”  This kind of gaming, pardon the pun, is seen through rather easily.

The more disturbing distortions are those intended to impress industry influencers to validate strategy.  Analysts – whose job is supposedly to analyze – have a troubling tendency to not judge strategies on their logical merits but on their results.  So if vendor has a silly, unfocused, or simply bad strategy, the vendor doesn’t need to argue that it actually makes sense, they just need find a way to show that it is producing results – and the ensuing Halo Effects will serve as validation.

Public companies try to demonstrate results through revenue allocation games, robbing from non-strategic SKUs to pump up strategic ones (e.g., “cloudwashing” as the megavendors are now often accused).   Private companies have free reign and can either point to unverifiable lofty financing valuations as supposed proof that their strategy is working, or to unverifiable sales growth figures where sales is typically defined as the metric that looked best last quarter.

Most people would quickly agree that at a SaaS business, the best metric for measuring sales is growth in new annual recurring revenue (ARR).  They’d also agree that the best metric for valuing the business is ending ARR and its growth.  (LTV/CAC would come in right behind.)  Using my leaky bucket analogy, the best way to measure sales is by how fast they pour water in the bucket.  The best way to measure the value of the business is the water level of the bucket and how fast it is going up.

But it’s a frothy time, and sometimes the numbers produced using the correct SaaS measures don’t produces numbers that, well, sufficiently impress.  So what’s a poor CEO to do?  Embellish.  The Wall Street Journal recently ran a piece that compared company claims about size/growth made while the company was still private to those later revealed in the S-1.  The results were disappointing, if not perhaps surprising.

Put differently, what’s the SaaS equivalent of “eyeballs”?

The answer is simple:  bookings or, more precisely, total contract value (TCV) bookings.  To show this, we’ll need to define some terms.

  • ARR = annual recurring revenue, the annual subscription fee
  • NSB = new subscription bookings, the prepaid (and – no gaming — quickly collectible) portion of the contract. Since enterprise SaaS contracts are often multi-year and can be fully, partially, or only first-year prepaid, we need a metric to understand the cash implications of the deal.
  • TCV = total contract value, including both prepaid and non-prepaid subscription as well as services. TCV is the largest metric because it includes everything.  Some people exclude services but, to me, total means total.

Now, let’s look at several ways to transform a simple $100K ARR deal in the following spreadsheet:

peril1

Note that in each case, the ARR is $100K.  But by varying deal terms the TCV can vary from $150K to $750K.  Now in the real world if someone was going to pay you $100K for one-year deal, they are unlikely to pay $300K for a three-year prepay or contractual commitment.  They will want something in return; typically a discount.

Let’s combine these ideas in one more example.  Say you run a SaaS company and want to impress everyone that you’re doing really well.  The trouble is you’re not.  You sold $10M in new ARR in 2014 (all one-year, prepaid) and think you can sell $10M again in 2015 on those same terms.   If you measure yourself on new ARR growth, that’s 0% and no one is going to think you are cool or write you up on the tech blogs.  But if you switch to TCV and increase your contract duration, you get a lot more flexibility:

peril2

If you switch to TCV, the good news is you can grow literally as fast as you want just by playing with contract terms.  Want to grow at 60%?  Switch to 2-year prepaids and give a 20% discount.  That’s not fast enough and you want to grow at 101%?  Move to 3-year prepaids by effectively doing a year-long “buy 2 get 1 free” promotion.   That’s not good enough?  Move to 5-year non-prepaids and you can grow at a dazzling 235% and get nice TechCrunch articles about your strategic vision, your hypergrowth, and your unique culture (that is, most probably, just like everyone else’s unique culture).

This is great.  Why doesn’t everybody do it?  Because you’re mortgaging the future:

  • The discounts you’re giving to get multi-year deals are crushing ARR; new ARR growth is shrinking in all cases.
  • You are therefore crushing both revenue and cash collections over the time period(s)
  • The prepaid deals create a drug addiction problem because you’re not collecting cash in the out years. So you build a dependency either on lots of capital or lots more prepaid deals.
  • Worse yet, on the non-prepaid deals you may not ever collect the money at all.

Wait, what did he say?

In my opinion, non-prepaid multi-year deals are often not worth the paper they are written on.  Why?  Just look at it from the customer’s perspective.  Say you sign a $100K five-year deal with only the first year paid up-front.  And say the software’s not delivering.  It took more work to implement than you thought.  You’ve fallen short on the requirements.  It’s not performing very well.  You’ve called for help but the company can’t fix it because they’re too busy doing other 5-year non-prepaid deals with other customers.

What do you do?  Simple:  you don’t pay the invoice when it comes.  Technically,  yes, you are very much breaking the contract that you signed — but if the software really isn’t delivering, when the vendor calls you say:  “sue me.”

Since software companies generally don’t like suing customers, the vendor – especially if they know the implementation failed – will generally walk away and write it your receivable as bad debt.   If they are particularly devious (and incorrect) they might not even take it as churn until the end of the five-year period when the contract is supposed to renew.   I wouldn’t be shocked if you could find a company that did it this way.

Most sophisticated SaaS people know that SaaS companies shouldn’t be run on TCV or bookings and are well aware of the problems doing so creates with ARR, revenue, and cash.

However, I have never heard anyone make the simple additional point I’m making here:  in a frothy environment dubious companies can create a fictitious bubble around themselves using TCV.  However, because non-prepaid multi-year deals only work when the customers are happy, if the company is out over its skis on promises and implementations, then many of the customers will not end up happy, and the company will never collect much of that TCV.  Meaning, that it was never really “value” in the first place.

Beware Greeks bearing gifts and SaaS vendors talking TCV.

CEO is Not a Part-Time Job

While I’m not that close to the whole Twitter situation and although I’m a moderately heavy user (@Kellblog), I don’t study their financials or other statistics.  That said, as a user, I feel a certain malaise around the service and I think it’s definitely in need of some new energy.

What I don’t get it is apparently soon-to-be-made permanent appointment of Jack Dorsey to CEO while simultaneously serving as CEO of Square.  Dorsey is undoubtedly an amazing guy, that’s not the question.

The question is simple:  is CEO a part-time job?  And the answer is equally simple:  no.

I can say this having worked for many CEOs over my 30 year career (e.g., at Business Objects for nearly a decade) and having been a CEO for about a decade as well between MarkLogic and Host Analytics.  No way, no how, no matter how amazing the person, CEO is not a part-time job.

Now the great part about Silicon Valley is that there are, indeed, a lot of amazing people out there.  There is no logical reason why Twitter cannot find someone amazing — who doesn’t already have a full-time job — to run the company.  So please add me to the “I don’t get it” list.

What I’m making is a general statement.  My logic is only compounded by the situation:

  • Square is working toward an IPO in the fairly short-term.  This is an extremely demanding phase for a company and its CEO.
  • Twitter has become a turnaround.  This is an even more demanding phase for company, and they don’t always end well.

So if I’m going to argue that if it’s impossible in general, then it’s kind of impossible-squared when one company is IPO mode and the other is in turnaround mode.

Is it totally unprecedented? No, per this story, but I nevertheless think it’s a bad idea, as two folks who’ve done it seem to agree.

Though rare, it’s not unheard of for a person to run two large companies. That’s what Steve Jobs did with Apple and Pixar, though he described it as “the worst time in [his] life.” Elon Musk, CEO of Tesla and SpaceX, put it more mildly: “It is quite difficult to be CEO at two companies.”