Category Archives: Startups

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:


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:


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.”

Curse of the Megaround: Expectations and Power

I’ve written before about the curse of the megaround which can happen, for example, when a startup raises $100M at a unicorn valuation and I’ve described before what typically happens next:

  • The company is under great pressure to invest the money to drive strong growth.  Late-stage investors don’t give you money to put in the bank at 0.2% interest.  They want you to invest it, typically over the next 2-3 years, implying something like an insane $15 to $20M/quarter burn rate.
  • As a result of this spending pressure the company gets inverted — instead of making a plan and finding money to finance it, the company gets a pile of money and then needs to figure out how to spend it.  This is backwards.
  • The company over-expands and over-invests.  You end up in 10 countries not 3.  You double your employee base in 9 months.  You sign up not just for projects 1-3, but for 4-9 as well.  It sounds great until you realize that half your countries are executing the wrong strategy, half the new employees can’t articulate the company message, and that projects 4-9 were down-the-list for a reason:  they were dubious ideas that shouldn’t have been funded in the first place.
  • The soon-to-be-former CEO develops a sudden interest in spending more time with his/her family.  A new CEO is hired to “bring focus” to the situation.  He/she ceases operations in 5 of the countries, lays off 35% of the employees, and shuts down projects 4-9.

If you were paying attention, you probably just noticed that $50M went up in smoke in the process.  Fortunately, in Woodsideno one can hear a venture capitalist scream.

The Math Behind the Problem:  Expectations and Power
In this post on the Silicon Valley hype machine, I argued that unicorns were the product of three trends:

  • The cost and hassle of being a public company.  Why go public if you don’t have to?
  • The ability to raise formerly IPO-sized rounds in the private markets.
  • A generally frothy environment in late-stage financing .

This got me thinking about what really differentiates a $100M IPO from a $100M late-stage private financing.  Benchmark Capital’s Bill Gurley recently did a great post on this precise subject where he points out several major differences:

  • The private round has far less scrutiny due to lack of an IPO process.  The numbers in a financing deck may not be the same numbers that would have been in the S-1.
  • In the private financing, the money is much more likely to have  perverse effects on operating discipline (as I detailed above).
  • In an IPO the company usually ends up with a single class of (common) stock, putting everyone on an equal footing.  The $100M private round will be preferred stock, with strings attached in the form of liquidation preferences.   This creates a difference between a common stockholder’s nominal and effective ownership positions and — if the business subsequently gets in any trouble — can literally wipe out the value of the common stock in an M&A exit scenario.  This can be devastating for employees who typically are unaware of the terms (e.g., multiple and/or participating preferences) that create the gap between nominal and effective ownership.

While I think Bill’s post his excellent, I think he missed two factors that are particularly important from the CEO’s perspective:  expectations and power.  Specifically, what are the go-forward expectations for the stock and what is the power of the people who have them?

In the IPO scenario, there is a short-term expectation of an immediate pop in the stock price, which is conveniently handled by the endemic under-pricing of IPOs.  So, assuming that takes care of itself through the usual process, what are the general expectations of an IPO stock after that, say during the next three years?

I spent some time researching this, looking at several studies and reviewing the capital asset pricing model.  Since I didn’t find any authoritative source (and since many IPOs actually under-perform), I will somewhat arbitrarily suggest that an public-market investor would be happy with a 20 to 25% annual return on an IPO stock purchased a few days after the offering.  I would be.

What does our late-stage private investor want?  Everybody knows that:  the rule of threes.  They want a 3x return over 3 years.  That’s a 44% annual return.   And, in today’s markets, that will often be atop a considerably higher initial valuation.

So the first big difference is about expectations.  Our private buyer expects roughly double the return of our public buyers.

The second big difference is about power:  who, exactly, wants that return?

  • In the IPO scenario, it’s a series of portfolio managers at institutions like Fidelity who each own positions worth single-digit millions.  If they get mad at you, they can sell their shares or their sell-side analysts can downgrade the stock.
  • In the private scenario, it’s a board member from a VC/PE firm that owns maybe $75M worth of stock.  If they get mad at you, they can try to fire the CEO at the next board meeting.

So other than getting an investor with infinitely more power seeking double the return, in an environment with far less scrutiny over the numbers, in a situation more likely to cause a loss of operational discipline, and the use of structure / preferences that create potentially large gaps between nominal and effective ownership, there’s no real difference between doing a $100M private round and an IPO.

Well, at least the CEO can sometimes sell into the late-stage round.  He or she may well need to.

The Venture Capital Inversion

There used to a be time in Silicon Valley when a startup created a strategy, made a business plan to go execute it, and then raised the amount of money required to execute the business plan.

That seems pretty  quaint these days.  Because today, many companies have this upside-down.  Instead of making a plan and raising funds to execute it, they raise a pile of money and then go figure out how to spend it.

This is happening largely because of the frothy, particularly mid- to late-stage financing environment that exists today.  More and more money is going into later-stage VC and PE growth funds, funds get bigger, minimum check sizes get bigger, and all of sudden you have a bunch of investors who each need to write checks of $50M to $100m to make their funds work and those check sizes start dominating round sizes in Silicon Valley.

But it’s all upside down.  Companies shouldn’t raise more money because investors want to write bigger checks.  Companies should only raise more money if they need it to fund their plan.

A key part of building a startup is focus.  Flooding companies with money works against focus.  Remember the startup epitaph:


When startups “just do both” they fail to choose — in so doing, often choose to fail.  When you flood a startup with money, it tends not just to do both, but perhaps all 4 or 5, of the ideas that were in discussion.

When a company gets caught in the VC inversion bad things happen.  For details, see this post I wrote entitled Curse of the Megaround, but the short summary is that startups with too much cash make too many questionable investments that defocus the company and don’t provide returns, ultimately resulting in the termination of the CEO and usually a chunk of the executive team along with him/her.  In short, turmoil.

Remember this tweet from Marc Andreessen:


So the next time you hear a company celebrating a $100M round ask yourself these questions:

  • Can they actually put the money to productive use?
  • What distractions will they start or continue to invest in?
  • How much longer will the CEO and executive team last given the new, heavy pressure put on the valuation?

Startups should be about entrepreneurs driving a vision for customers that benefits the founders and employees, with the VCs along for the ride.  Let’s not get that inverted and end up with startups being run for the late-stage investors with the customers, employees, and founders along for the ride.

Are Your Managers Good Enough? A Simple Test

When I listen to senior executives talk about their first- and second-line managers, I sometimes get pretty concerned.  That happens when I hear what I call “good enough” thinking.

“Yeah, he’s not great, but he’s good enough.”

“She’s doing a solid job, but nothing too inspirational.”

“He’s not a great manager, but he can stay on top of the business.”

The purpose of this post is a to provide a brief inspirational reminder:  good enough isn’t.

I know why executives and managers fall victim to “good enough” thinking:

  • Hiring is hard
  • Management is hard
  • Hiring managers is therefore hard^2

So while most executives demand excellence from their front-line employees, they seem to dial back their expectations when it comes to management.  The only thing scarier than hiring new salesreps or product managers is hiring sales managers or product management directors.  Scary though it may be, it’s their job to do so.

In mulling this, I have come up with a simple test to determine if you managers are good enough:


If your managers don’t pass that test, then maybe they shouldn’t be managing.

More Turmoil at Adaptive Insights

I always have mixed feelings about competitive blog posts and to keep my life simple and the blog pure, I generally try to avoid doing them.  However, for a bevy of reasons related primarily to how Adaptive Insights chooses to compete with Host Analytics, I have made and will continue to make a few exceptions.

From the day I joined Host Analytics, Adaptive made a deliberate FUD campaign against Host Analytics and aimed very much at the company.

  • They’d point out I was a new CEO and that new was scary.  They’d forget to say experienced CEO who already grew a company to $80M, knew the BI/EPM category, and was running a $500M division at Salesforce.
  • They’d say we had scary management turnover.  They’d forget to say that I was building a new team to take the company to the next level and rather than examining the simple fact of change, you should evaluate whether the change was good or bad.  The real question was whether the team I was building was well suited to moving the company forward.  Did the people have the right experience?  Had they built startups before?  Did they know the category?
  • They’d talk about their funding and tell customers (crossing the defamation line in my humble opinion) that we were risky to buy from due to financing issues.  Anaplan shut that down pretty fast after raising a $100M round and to date Crunchbase reports that Host Analytics has raised $86M and Adaptive $101M — no big difference there.
  • They’d boast that they hired our former people.  They’d forget the part about “that we didn’t want.”  In my tenure we’ve never hired someone in the reverse direction, and I don’t expect we will.  Our aim is to be “the Hyperion of the cloud” and you don’t get there with low-end people pumping low-end product.

Adaptive’s argument was simple:  customers should (1) buy from the company who’s raised the most money in the space and (2) not buy from a company if they have had senior management changes.  Thus, I am pleased to report by Adaptive’s own “insights” (i.e., reasoning), that customers should not buy from them.


If you want the company whose raised the most capital, it’s not Adaptive, it’s Anaplan at $144M.

Note that I never made the argument that most money is best.  Business Objects was grown to $1B+ in revenues on something like $4M in VC.  Tableau is worth $8B today and was built on $15M in (as I hear it, unneeded) VC.  In my opinion, when it comes to startups and VC, the Goldilocks rule applies:  neither too much nor too little — but just right.

If you want to avoid companies with management turmoil, consider the following:

  • By my count, Adaptive Insights is on its fourth CEO since 2011.  Count:  (1) the interim guy whose name I can’t remember, (2) Rob Hull who I believe acted as interim at some point, (3) John Herr who was exited in July 2014, and now (4) retired East Coast venture capitalist Tom Bogan.
  • Long-time SVP of Sales Neil Thomas left the company this past November after 8 years.

Quick: what’s the #1 reason people with quotas suddenly leave companies?

I will try to avoid the tendency to editorialize about the subjective question of whether the new team is the right one, with the right experience, in the right categories, et cetera and simply observe this fact:  if you believe Adaptive’s argument that you should not buy from companies with management changes, then you shouldn’t buy from Adaptive.