Kellblog covers topics related to starting, leading, and scaling enterprise software startups including company strategy, financing strategy, go-to-market strategy, sales, marketing, positioning, messaging, and metrics
It’s always fun to go back and look at my stats, and my best-of page (which amazingly came in at #11) is getting sufficiently long that I need to find additional summarization mechanisms.
So this year, I thought I’d share the top-ten Kellblog posts of 2024 (year to date) regardless of the year in which they were written.
Kellblog predictions for 2024. My tenth annual predictions post topped the list. I’m already working on my 2025 predictions which I hope to publish before the end of December.
Simplifiers go far, complexifiers get stuck. This classic from 2015 starts with a poignant joke. Question: What does a complexifier call a simplifier? Answer: Boss. Learn why by reading it.
Since many of you are in the midst of presenting your annual marketing budgets to your CEO, CFO, and board, I thought I’d write a quick post to remind people what board members actually care about when it comes to the marketing budget.
I understand that, in the throes of budgeting, CMOs can get dragged down into a lot of detail. Diving to a deep level of detail is important, because that’s usually the difference between a real plan and a basic budget.
But, remember people: when we’re talking to the board, we need to be board level. Otherwise, they’re going to mistake you for the VP of marketing operations. (Was the CMO out sick today?)
The board doesn’t want:
Vapid marketing cheerleading, particularly if the company is missing plan
Overwhelming volume (e.g., 28 slides with a 15-slide appendix)
“Banker slides” that overload them with numbers
Recycled QBR slides, built for a different audience and purpose
While I’m all in favor of a few introductory slides that present current-year marketing performance, they should be sober and matter of fact. Too often, when CMOs try to present such slides, they end up sounding like this:
So what does the board want?
A short deck, maybe 5-8 slides (with a slide on 2024 performance, a list of key objectives, an organization chart, and an overall budget)
Some slicing-and-dicing of the demandgen budget that discusses both coverage and efficiency
Slides that are custom built for the board audience
And what are the questions that are actually on their mind?
What are marketing’s key objectives for the year? Do they align to corporate strategy? Do they align to sales? Are they the right objectives?
Where did the budget come from? Was it trended off last year or built from a bottom-up model?
If it was trended, is the total spend growing slower than revenue? Could it be growing slower still? Should it be growing faster?
If it was built off a model, who built the model? Are they any good? Is there a single model for sales, marketing, and finance, or is there a cage fight behind the scenes? Can we hit plan if we rely on this model?
What does marketing spend look like as a percent of revenue? As a percent of new ARR bookings? Are those percents going down over time? How do they compare to benchmarks?
What is our CAC ratio and CAC payback period? How much is marketing contributing to each? Is marketing’s relative contribution going down or up?
And if they’re good, what is the sales/marketing expense ratio and how has that trended over time? How does it compare to industry benchmarks? On whose back are we placing the GTM efficiency monkey, and what risks does that entail?
Where does the CMO want to spend the marketing money? How much is going to people vs. programs vs. infrastructure? How has that mix changed over time?
Is there any marketing money outside marketing? Does the CEO carry a pet-projects budget for billboards? Do we run a massive user conference? If that money’s not in the budget I’m looking at, then where is it?
Do the CRO and CMO seem aligned on the marketing budget and priorities? If not, where do they differ? Does the CMO seem caught in the middle between CEO and CRO priorities?
Has each pipeline owner accepted clear responsibility for their portion of the pipeline and a have a clear plan to deliver it?
Does marketing have a plan for how they are going to spend the proposed demandgen dollars? Can I compare that plan to our historical performance to see if it’s realistic?
Does the marketing plan show pipe/spend and cost/oppty ratios? How does the plan compare to our historical performance? Are we increasing efficiency? Is that spreadsheet magic or are there actual reasons why those ratios should increase?
Where are we looking at using AI to improve marketing efficiency? What are we experimenting with? How big an improvement can we expect? Have we looked at AI SDRs?
How much money is going into squishy things like branding? Can the CMO defend that proposed expense? Do the CEO and CRO agree that this squishy spend is a priority?
Can I trust the CMO to execute this plan? If we give them what they ask, will they deliver on the pipeline generation goals and key objectives?
I’m not suggesting that you proactively answer each of these questions in your eight slides. But these are the questions you should be ready for. In terms of how I’d map these to slides:
Current-year marketing performance. Metrics on the left, OKRs on the right.
Menu of 3-5 optional programs with benefits and costs — i.e., try to sell the top ideas you couldn’t fit into the baseline plan in a quest for incremental money.
(Edited 12/2/24 at 9:04am to include last section on slide mapping.)
The cleverest answer I’ve heard to the question “When would you sell your startup?” is, “When somebody offers me more than I think it’s worth.”
It’s clever alright, but it’s not that helpful. It’s a meta-answer that sidesteps the question of value. In this post, I’m going to offer a simple rule for when you should consider selling your company if someone comes along and makes a serious offer.
Selling a company is a hugely difficult decision that involves both personal considerations and big, strategic questions like:
If I say no, what might that strategic suitor do instead? Will my top partner become my top competitor, potentially overnight?
What is happening to the space at large? Are my competitors being gobbled up? Might I be the one left without a chair when the category consolidation music stops?
Does the market require a Switzerland, an independent vendor who’s not owned by any of the megavendors? (For example, as data integration has historically.)
If I “keep on keeping on” — given my size, growth rate, and financing ability — where I am likely to end up? As a clear market leader? As an undifferentiated, fifth-place also-ran? (And those don’t trade for median multiples.)
Or, will I “pull a VMware” and sell a business for $625M that will one day be worth $60B? (And conversely, if I own 30% of it, how much difference will that 100x uplift actually make in my life?)
In this post, we’re going to keep it simple by focusing not on whether you should sell your company, but on whether you should consider selling it.
And, as is often the case, I have a simple rule. You should consider selling your company when an offer takes three years of risk off the table.
What does that mean?
Go look at your three-year model (and this is one of many reasons why you should have one)
Find your ARR is twelve quarters out
Multiply that ARR by what you think will be a reasonable ARR multiple given your future growth rate
If the offer on the table is greater than or equal to the number you just calculated, you should consider selling.
Why do I think this formula works? Because:
Most three-year models are optimistic. For most companies, you’re looking at a best-case estimate of what ARR will be in three years.
You’ll probably overestimate the “reasonable” multiple. If the market data suggests 4-6x, you might round up to 6-8x. Human nature.
You’ll therefore generally arrive at a generous future valuation that will take no small amount of work to realize.
And a lot of shit can go wrong along the way.
Why consider taking that valuation? Simple. Because building companies is hard. As one founder often said, “not just harder than you think, but harder than you can possibly imagine.” I’ve played a leading part in building four enterprise software companies and I’d say it’s just plain hard. But maybe that’s because I have a better imagination. Or an imagination fueled by more experience.
So, if you want to pay me now what I think the company will objectively be worth in three years — if everything goes smashingly — then I’m going to need to seriously consider that offer.
Note that I am not suggesting you should automatically take any offer that’s N times your 3-year forward ARR (for whatever value of N). You need to answer all those personal and strategic questions first. But I am also saying that — unless conversely you see storm clouds on the horizon — that you shouldn’t invest too much time considering offers that take 1-2 years of operating risk off the table.
Why?
Your one-year-forward ARR is basically your operating plan. And, if you’ve followed my planning advice (“make a plan that you can beat“), then you should have pretty high confidence in that plan. So an offer that takes one year of risk off the table shouldn’t be that compelling.
Your two-year-forward ARR is not the layup that your one-year plan should be, but if you think your model is realistic — and I admit this is completely subjective — selling off two-year-forward ARR just doesn’t seem worth it. You’re trading away future upside for a number that you’re still pretty confident you can hit. Two years is a long time, yes, but not that long.
For me, at three years, the tone changes. A lot can happen in three years. New competitors. Category consolidation. New vendors entering the space. Bad C-level hires. Product development disasters. Failed acquisitions. Geographic restarts. Channel programs that don’t take. And other scary things that go bump in the corporate night.
Yes, everything may go right over your coming three years. Maybe you’ll even beat that optimistic three-year model.
But at three years, I start to do some hard thinking about both strategic and operational risks. I’ll need to feel very good about the future to say, “no thanks, we’ll roll the dice.” Particularly if that suitor is a megavendor with intent to enter the market anyway. Or, if multiples are currently high relative to historic averages — meaning that I might get offered 10x $50M today, but by the time I’m actually at $50M, the market may be trading at 6x. That’s three more years of work for 40% less money assuming everything goes great. All because multiples moved down on me.
Let’s insert a little model to make this concrete:
Using my rule, if someone offered me $675M for this company, I’d have to seriously consider it. Note that’s 45x this year’s ending ARR and 22x next year’s. But since it’s November, I’m already worth $233M, the 15x multiple coming courtesy of my 107% growth rate. (Feel free to quibble with me on the numbers; I think they’re representative, but the approach is the point.)
If someone offered me $354M, then I’d say no and roll the dice on achieving my operating plan. Because once I do, I’ll be objectively worth that in 12 months.
At $535M, I start to get queasy because that’s 2.3x what the company is objectively worth today. This is why I made the model — to make things concrete — because I might well consider that offer, particularly because my decelerating growth drops my 2027 multiple to 8x, meaning only $141M of incremental value is created in 2027. I wouldn’t definitely consider it, but I probably would and I’d be arguing the whole time that we can make it worth more given “only” three years’ work. (My change in tune here is a negotiation posture.)
At $676M, I’d definitely consider the offer for the reason stated above: that’s what the company should be objectively worth in three years if everything goes well. And a lot can go not-so-well over a three-year period.
Note that I did one sneaky thing in the model. I included the number of AEs I’d need to make those numbers using that as a rough proxy for work. To make the plan work, I’m going to have to hire 35 reps — net of attrition — over the next three years. And all the support resources they need and/or generate, e.g., SDRs, SCs, managers, post-sales consultants, CSMs. For me, it helps to make the anticipated work visceral.
Let me address some anticipated objections to this approach:
It doesn’t consider long-term strategic value. You’re right. It doesn’t. That’s why you need to consider that under the big strategic questions. Don’t pull a VMware. Or, arguably, a YouTube.
If I did this three years ago, I’d have sold for pennies. To be concrete, let’s say the company’s annual ARR ramp was (0, 1.0, 2.5, 7.5, 15.5), which dovetails into the table above. That means you’d have seriously considered an offer of $46.5M three years ago when you were $1.0M in ARR. If you’re VC backed, there’s no way you’d sell, so you can consider it as much as you want. And if you looked at personal and strategic considerations, you probably would have said no anyway. But yes, the rule doesn’t scale particularly well back to $0.
This will backfire going into a valuation bubble. And it will. Say multiples now are 6-8x for your growth rate and you model off 6-8x in your three-year calculation. If the market gets frothy, those multiples could double to 12-16x. Ergo, this formula will underestimate your future value by half. I have two responses: (1) the opposite is true as well; you win when you apply bubble multiples to future non-bubble ones, and (2) the ARR figure is probably over-estimated which should mitigate but not eliminate that effect.
It doesn’t include a hockey stick when we hit some market inflection point. That’s Silicon Valley speak for the model might underestimate three-year ARR because of [insert miracle here]. And it might. But for every 100 companies I see waiting for those miracles, maybe 2-4 get them. It’s rare. And if you really think that inflection point is going to happen, put it in the three-year model.
All the great founders are all-in, YOLO. I have two words for you: survivor bias. I know lots of great founders who were all-in, got sunk on the river, and wish they’d taken some money off the table. Ultimately, this will come down to your personal goals. (And it’s one reason why I think VCs love second-time founders. Dave Duffield was never going to sell Workday too early because he had all the money he ever needed from PeopleSoft. And since VCs would generally rather sell too late than too early — because it’s a “hits business” — that creates a deep, natural alignment.)
My purpose here was to give you a rational framework for thinking about this decision, and here it is: think about how many years of risk gets taken off the table. That’s what you get in exchange for trading away whatever potentially bright future awaits.
The rest is up to you — and your board. Good luck with it.
# # #
(Revised 3:59pm. Sorry, this was accidentally published before final spellchecking and copy editing was complete.)
“Phew, we sure have a lot of challenges right now,” the frustrated CEO mused after completing a day at the annual planning offsite. “While my executive team is pretty solid day to day, they’re too in-the-box. They’re not creative. They never have any new ideas about how to fix our problems.”
“Other than asking me for more headcount. They’re pretty darn good at doing that,” the CEO chuckled, gazing pensively over the whitecaps from the patio of the luxury resort where the executive leadership team (ELT) was huddled.
“Wait. I’ve got an idea. We can rely on our people. They’re great. They’re out there every day with our customers. I bet they have tons of ideas on what we can do better. How we can improve our organization and processes. What features we should put into the product to make customers happier. And maybe even what new products we should build.”
“Eureka!” the CEO thought. “Since we feel kind of stuck here, I’ll declare the Leverage Our Super Team initiative. We’ll ask every employee for a good idea about how to improve the company. They’re going to love this. People are going to feel so engaged and they’ll love that all their voices are being heard.”
The road to hell is paved with good intentions. And there are plenty of good intentions here. Intentions are not the problem.
But what happens Monday morning, when everyone sees the company-wide message announcing the new initiative?
By noon, half the company is polishing up their resumes. And that’s after having called their significant others to delay any pending large purchases.
This is what you might hear, if you could eavesdrop by the virtual watercooler:
We’re screwed with a capital S.
Jeez, I thought we were in trouble before, but now I’m sure.
Our leadership team is quite simply out of its depth. Nice people, but they don’t know how to run the company.
We’re caught in a strategic squeeze and the best they can come up with — after three days at an offsite — is asking us what to do?
Don’t they get the big bucks in order to actually run the company?
Sure, we’re in a tough situation right now, but we can get out of it. What we need is leadership, but this ain’t it.
Did anybody notice that the acronym for the new, save-the-company initiative is LOST? Leverage Our Super Team. That’s just perfect.
This happens all the time. I’ve seen it at just about every company I’ve worked at for 30+ years.
The first time I saw one of these initiatives, it came complete with a marketing graphic, a depiction of teamwork featuring an eight-person crew boat with everyone pulling together — but missing the coxswain.
You literally cannot make this shit up.
The point here being:
People expect leaders to lead.
They get scared when they don’t.
People understand when the company’s in a tough spot.
All they generally want to hear is that leadership is aware of the situation (i.e., not in denial) and has a reasonable plan to address it.
As for the “idea bake sale” (think: sales will make brownies, marketing will make cookies, and finance will make cupcakes to save the company), it’s a terrible idea because it does the opposite:
Leaders abdicate instead of lead.
It clearly demonstrates that there is no plan. (Let’s hold the idea bake sale to make one.)
In some cases, it’s patently absurd. (Let’s ask the receptionist what new products to build.)
And, if everyone were doing their job, for the most part we wouldn’t need one.
Isn’t it PM’s job to know what features customers want? Isn’t it management’s job to work on improving our processes? Isn’t it the CEO, CPO, and CTO’s job to work on product strategy, including product line expansion? If those processes aren’t working, let’s fix the root cause. Not have an idea bake sale.
I’m all for the odd hackathon to flush out potential new features. Or the brainstorming meeting with PM to discuss product line strategy. Or the town hall with the sellers to hear concerns about our sales process. Or the partner summit where we can hear from people outside the company about how we’re doing. These events harness energy and drive discussion. And they’re all normal parts of a leader’s job.
But that is not the same as throwing your hands in the air and effectively saying, “we don’t know what to do — what do you people think?”
The moral: one day, if you find yourself in a meeting where somebody suggests an idea bake sale, do these three things:
Kill the idea off quickly
Directly address any failing core processes that made it seem necessary
Ensure that you’re doing the usual communications and strategy events
Most importantly, recognize that the bake sale might just be a distraction from an elephant in the room, and what needs discussion is the elephant, not the bake sale.
“You’re fired,” said the general counsel (GC) of the public, multi-billion-dollar software company and I wasn’t just happy, I was ecstatic.
I’d known this company for a long time. I’d helped their VCs with diligence. I’d worked with them in the early days as an advisor, and received a stock option as compensation. So when I contacted the company to sell the shares (from the option I’d exercised long ago), I was surprised to find a folder called “Grant 2.” They’d given me a second grant that I’d actually forgotten about. OMG, this was my lucky day.
I told the stock administrator that I wanted to exercise the second option grant.
“You can’t,” she said. “It’s been canceled.”
“Why?” I said, watching a G-Wagon disappear before my eyes.
“Because you discontinued your service to the company.”
“No, I didn’t. You just stopped calling. That’s the nature of advisory work. You call and I answer.”
This launched a multi-week argument about if and when I’d stopped providing services and many questions about why I’d not been notified of any termination — so I’d have at least known the 90-day option exercise window had started. The dispute eventually escalated to the GC who, in firing me, started my 90-day clock, admitting the option was still valid.
Why do I tell you this story? First, because it’s hilarious. The GC could easily just have said he’d honor the option, but instead chose to communicate that good news by firing me. Second, because this is what happens when you use paperwork written for employees to engage with advisors.
In this post, I’ll share what I’ve learned over the past fifteen years advising startups to give you a better idea of what to do when someone asks you to advise their startup. See my disclaimers, remember that this is not legal or financial advice and that you should hire professionals to get advice specific to your situation.
When asked to be an advisor of an early-stage company, I think you should do four things:
Decide if you want to advise the company
Discuss and set clear expectations on both sides
Agree on compensation, which is typically but not always, stock
Put a good, quick legal agreement in place
Decide If You Want to Advise the Company
This may seem like an obvious first step, but sometimes the answer really should be no. There are lots of good reasons to advise a company. For example, you can:
Build your network with the company’s team and investors
Learn by seeing more business situations
Sow seeds for potential downstream relationships (e.g., employee or board)
Pay it forward
But there are also some good reasons not to advise a company, including:
Bad chemistry. Life’s too short. Avoid deals where the investors are trying to impose you as an advisor to a reluctant executive.
Poor fit. You want to be asked about problems you’ve seen dozens of times. You’ll give better answers and it will take less of your time.
When they have a one-shot problem. Advising is a long-term, relationship game. If a company just needs help with one thing (e.g., positioning, re-organization), everyone could be better off if you do a cash consulting deal or just offer some input for free.
Restrictive terms in the advisor agreement, such as non-solicitation, no-hire, or non-compete agreements. Once you’re advising company A, you may discover that you wish you were advising company B. While switching horses may or may not be prohibited under the agreement, it’s always bad form and bad for your reputation. This is now the top reason I decline advisory deals. There is an opportunity cost associated with advising that many overlook.
Discuss and Agree on Clear Expectations
I don’t think this needs to be contractual — or even necessarily written down since most agreements feature bilateral termination for convenience anyway — but I do think it’s important to have a detailed conversation about expectations.
These are all great topics to include in that conversation:
The specific areas where the company wants help. For me, that might be SaaS metrics, marketing, board presentations, and CEO mentoring.
The form of the help. Some people want you to build their financial model; I just want to provide feedback to your finance head who can then iterate and improve it themself.
Interaction frequency. For me, that’s typically measured in times per month.
In-office attendance. Some of my friends like to show up once/week and have watercooler encounters to really get to know the company and its scuttlebutt. Me, not so much.
Periodic vs. ad hoc meetings. I like to meet because there’s something to discuss, not because it’s Tuesday. But different people see this differently and compensation structure impacts this as well.
Time commitment. Some people like to agree on hours/month, I don’t. When you buy experience, you’re paying for fast answers, so hours is the wrong metric. Value is measured by how quickly I can solve a problem, not how slowly.
Agree on Compensation
Because I’m talking about early-stage (e.g., seed, pre-seed) advisory, the typical company doesn’t have much cash and wants to pay advisors in stock, typically measured in the tenths of a percent.
Let’s do some sample math which will rely on a bunch of assumptions:
Shares granted: 0.2%
Anticipated dilution before exit: 50%
Shares after dilution: 0.1%
Assumed exit price: $500M
Value: $500K
Probability: 5%
Expected value: $25K
Hours invested over 7 years at 2 hours/month: 168 hours
Expected value, hourly rate: $149
You might see the $500K here and think “amazing money,” and you’d be right — in the unlikely case this actually happens. In a more realistic $500M exit scenario, those shares might be worth $250K due to debt and preferences. In a dire scenario, e.g., with multiple liquidation preferences and a large amount of capital raised, they might be worth $0.
(Note that this example assumes no debt, no participating preferred shares, and an exit value that clears the preference stack by enough that all investors take their pro rata ownership instead of their preferences.)
So, to go back to the point – the majority of these deals pay $0 to the advisor. When you average out the occasional big hit across the rest you might end up making $150/hour. And the cashflow is lumpy. It’s a fun hobby, but it’s no way to make a living.
So, when evaluating an advisory opportunity, do the math and run some scenarios. Then think about the commitment you’re willing to make. And, more than anything, do the work because it’s fun and you grow by doing it — not because you’re banking on any big hit.
If you consider any compensation whatsoever as upside, you’ll always be happy — and maybe sometimes when you get lucky — very happy.
Put a Good, Quick Legal Agreement in Place
The problem here is that neither side is interested in spending money on a good advisor agreement. The cash-starved startup, running on the founder’s savings, doesn’t want to. Nor does the would-be advisor, who’s well aware their most likely outcome is $0. Who wants to spend a few thousand in legal fees on that?
So you end up running on a stock-option agreement written for employees that you repurpose for advisors (which was the case with my company in the opening story). Or a consulting agreement. Or a simple letter. Or nothing at all.
None of that sounds very good to me.
What do I do in this situation? I start with the FAST advisory agreement. I like it because:
It’s standard. To my knowledge a lot of people use it.
It’s neutral, not having been created by either the company or the advisor.
It covers many of the obvious basics (e.g., non-disclosure, independent contractor relationship, non-conflict).
And, if you want to use their matrix, it even includes compensation.
I’m not a lawyer (and you should ask your own), but the FAST agreement strikes me as doing a reasonable job of providing a stage-appropriate agreement for advising an early-stage company. Per the Founder Institute who’s created it:
The FAST Agreement is used by tens of thousands of entrepreneurs and advisors per year to establish productive working relationships, trading advice and support for a standardized amount of equity. […]
With just a signature and a checkbox on the FAST Agreement, entrepreneurs and advisors can agree in minutes on how to work together, on what to accomplish, and on the right amount of equity compensation.
The only catch is that while I like the compensation matrix and the idea of using stage vs. expertise to determine compensation, I don’t like the specific definitions in Schedule A because, among other reasons, they include fixed time commitments that I think are too high. So I either negotiate them out or rewrite that schedule.
I hope this post will help you in thinking about your next steps when and if someone asks you to advise their startup.
I’m Dave Kellogg, advisor, director, blogger, and podcaster. I am an EIR at Balderton Capital and principal of my own eponymous consulting business.
I bring an uncommon perspective to enterprise software, having more than ten years’ experience in each of the CEO, CMO, and independent director roles in companies from zero to over $1B in revenues.
From 2012 to 2018, I was CEO of Host Analytics, where we quintupled ARR while halving customer acquisition costs, ultimately selling the company in a private equity transaction.
Previously, I was SVP/GM of the $500M Service Cloud business at Salesforce; CEO of MarkLogic, which we grew from zero to $80M over six years; and CMO at Business Objects for nearly a decade as we grew from $30M to over $1B in revenues.
I love disruptive startups and and have had the pleasure of working in varied capacities with companies including Bluecore, FloQast, Gainsight, Hex, Logikcull, MongoDB, Pigment, Recorded Future, Tableau, and Unaric.
I currently serve on the boards of Cyber Guru, Light, Scoro, TechWolf, and Vic.ai. I have previously served on boards including Alation, Aster Data, Granular, Nuxeo, Profisee, and SMA Technologies.
