Category Archives: VC

Is a Dream a Lie if It Don’t Come True? Founders, Aspirations, and Company Potential

“Is a dream a lie if don’t come true?” — Bruce Springsteen

The River was one of my favorite songs in college and whenever I listen to the above line near the end, I start thinking about Silicon Valley.

Consider three entrepreneurs.

Founder 1:  Elizabeth Holmes.  Was she simple con artist who chose fraud over business failure or a broken visionary trying to walk in the footsteps of Steve Jobs?

Founder 2:  Adam Neumann who dressed up the equivalent of Regus as a tech company and successfully raised money at valuations up to $47B before flaming out on the approach to an IPO.  (Now seemingly running a similar play with Flow.)

Founder 3:  Joe, our friend at BigCo who quit his VP-level job to found a company, spent 10 years sweating it out, pivoted, recapped, and finally threw in the towel for a carve-out in a $30M sale that didn’t clear the preference stack.

Which are they?  Were they dreamers or liars?

To try and sort that out, I’d consider three questions:

  • Did they truly believe in the dream?  It’s hard to know what anyone truly believes [1] — and we need to separate visionaries from lunatics [2] — but in many situations you can develop a sense for whether someone is a true believer or a poser.  This one’s hard to assess, but important.
  • Were they lying about progress?  While there is a small gray zone of exaggeration, misunderstanding, and embellishment [3], for the most part this one is black and white.  Were the numbers real?  Was the demo faked?  Were the milestones hit?
  • Were they making big money before realizing the dream?  This didn’t used to be possible in Silicon Valley, but a side effect of the recent financing environment [4] was the rise of secondary sales that made it possible for founders to reap 10s to 100s of millions before a liquidity event that shared success more broadly across investors and employees.  Situations where a founder can make “done” (or “lifestyle changing”) money before realizing the dream can present the potential for conflicts of interest.

We ask a lot from founders.  And what we ask is often in diametric oppposition.   We ask founders to be:

  • Unreasonable, but reasonable.  Founding a startup against long odds is an inherently unreasonable thing to do.  But, aside from that, we want them to be reasonable people.
  • Optimistic, but realistic.  We want them to believe they can accomplish the nearly impossible, but be realisitic in setting goals and operating plan targets.
  • Big-picture, but detail-oriented.  We want them to create a disruptive, big-picture vision of the market, but be able recite SaaS metrics from memory.

This alone is a good reason to have both co-founders and a strong executive team.  While F Scott Fitzgerald said, “the test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time,” it’s hard to do so in every situation, all the time.

While plenty has been written about Holmes and Neumann inspired a TV series, nobody talks much about Joe.   And there are a lot of Joe’s out there.

Joe’s employees and investors are disappointed in him and might be mad at him.  After all, Joe probably said:

  • The company faced an amazing opportunity
  • The space had the potential to produce a public company
  • He believed they could beat BadCo and WorseCo to win the market

But what did we want Joe to say?   Yes, Joe needs to be careful.  He needs to speak precisely and make precise claims.  He needs to hedge his language and not make promises.  But Joe is not only allowed to be optimistic, it’s his job.

As I’ve often said,

“As CEO, even if you’re standing neck-deep in shit, you need to be looking at the stars.”

Put differently, while the CEO needs to be aware of the company’s situation and have credible plans to address it (i.e., the neck-deep part), they must always be focused on and believe in the potential of the company [5].  The day they can’t do that is when they should turn in their badge.

So, going back to Springsteen, “is a dream a lie if it don’t come true — or is it something worse?”

# # #

Notes

[1]  I’d argue it’s sometimes easier to know when they don’t — e.g., if they’re telling all their friends they’re running a scam.

[2] For example, the difference between trying to emulate Steve Jobs and thinking that you have been sent by God as the reincarnation of Steve Jobs.

[3] Larry Ellison reportedly once said, “sometimes I just get my verb tenses mixed up” when speaking about product capabilities vs. roadmap.

[4] E.g., higher valuations, longer time to liquidity, higher bar on IPOs.

[5] My take on what’s known as the Stockdale paradox.

Appearance on the AI and the Future of Work Podcast

Just a quick post to highlight my recent appearance on the AI and the Future of Work podcast hosted by my friend Dan Turchin.

I joined Dan to discuss my work-in-process 2023 predictions post (which I really need to get finished in the next week).  We start out by reviewing a few of my 2022 predictions, where Dan takes a somewhat European angle in his questioning given my work with Balderton Capital.  After that, based on the sneak preview of my 2023 predictions that I gave to Dan, he asks some questions about what I see coming in 2023.

It’s a long episode.  Dan asks some great questions, and I give some rambling answers, so if you’re listening on the treadmill make sure you pace yourself.  You’ll be burning a few more calories than usual.

You can find the episode on Spotify and Apple podcasts.  Thanks again to Dan for having me and I hope you enjoy the episode.

Slides and Video Link for Emerging Stronger from the Downturn Webinar

Here are the slides from the Balderton Capital webinar I did today with Michael Lavner, entitled How to Emerge Stronger from the Downturn than You Went In.  For people who can’t use Slideshare, they are also available here.

Balderton has posted a video of the Zoom recording of the event, available here.

We discuss:

  • The importance of how founders/CEOs frame challenges to the organization.
  • What we mean by “stronger.”
  • Focus, how to do fewer things, better — including reading The Crux by Richard Rumelt.
  • M&A, from either the buy or sell side.
  • Reorientation of use-cases and messaging, how to adapt your point of sail to the changing winds.
  • Playing into SaaS rationalization, how to try and take an ostensibly negative trend and turn it to your advantage.
  • Upgrading your talent.

Thanks to everyone who attended.  See you next month (Feb 9th) for a same-time, same-place, same-format webinar on the Balderton Founder’s Guide to B2B Sales.  I’ll drop a link to the event in here, once available.

Emerging Stronger from the Downturn Than You Went In — A Balderton Webinar

I’m writing this post to promote an upcoming webinar entitled How To Emerge From The Downturn Stronger Than You Went In.  The webinar will be held on Tuesday, January 24th and is hosted by Balderton Capital, where I work as an EIR.  The webinar will start at 3:00 pm UK time, 10:00 am Eastern, and 7:00 am Pacific (lucky me), and will last one hour.

While Balderton invests in European (broadly defined) companies, the webinar is nevertheless open to all.  Some Balderton content necessarily takes the European angle on issues (e.g., my USA expansion mistakes series), but for this webinar the material should be 95%+ equally applicable worldwide.  So please join us if you’re interested, regardless of where you work or your fundraising plans.

I’ll be rejoined with Balderton’s Michael Lavner, who partnered with me on the Balderton Founder’s Guide to B2B Sales.  The format will be as follows:

  • I’ll do a 30-minute presentation.
  • Michael will run a 30-minute Q&A session that pulls from questions submitted by the audience (and/or that pop into his head).

I love live Q&A so there should be a lot of interaction and it should be a lot of fun.

Here’s a preview of the five ways to Emerge Stronger that we’ll be discussing at the event.

  1. Sharpen focus.  As they saying goes, “never waste a good crisis.”  Use the downturn to force yourself to answer some hard questions about your strategy.  Are we focused enough?  Do we remember our Latin teacher who taught us that focus was singular?  Are we putting all our executive energy into The Crux of our strategic challenge?  Are we “throwing bones” to board or team members?  Can we afford to?
  2. M&A.  Depending on your situation, you’re either a buyer or seller —  but, either way, companies will be trying to broaden their product lines to get more leverage from their clostly go-to-market machines.  (Think:  “we need put more things in sales’ bag.”)  Multiples are down, so it’s a good time to buy.  And if you lack the cash or strategic position to ride out the storm, it’s not necessarily a bad time to sell — especially when you compare the expected value of your equity between a potentially dirty term sheet and a solid, clean M&A offer.
  3. Play into SaaS rationalization.  To quote Jim Lovell, “there are people who make things happen, there are people who watch things happen, and there are people who wonder what happened.”  Be the the first type.  SaaS spend rationalization is going to happen, whether we like it or not.  How can you position your company to be on the right side of that trend?  How can we turn this threat into an opportunity?
  4. Re-orient your use-cases and messaging.  Can you grow faster than the competiton by tapping into the new concerns of your buyers?  How have their priorities changed?  How does that map to the various use-cases of your product?  If you’re selling conversation intelligence, should you switch campaigns from “onboard faster” to “drive increased productivity?”
  5. Upgrade talent.  The labor market was pretty brutal during the past 5 years.  How can you exploit the easier labor market to upgrade key members of your team?  How do you balance this upgrade opportunity with a dance with who brung ya ethos of employee loyalty?  How can you build a culture that lets you do both?

It should be a great event and both Michael and I look forward to seeing you there.  You can register here.

How to Present an Operating Plan to your Board

I’ve been CEO of two startups and on the board of about ten.  That means I’ve presented a lot of operating plans to boards.  It also means I’ve had a lot of operating plans presented to me.  Frankly, most of the time, I don’t love how they’re presented.  Common problems include:

  • Lack of strategic context: management shows up with a budget more than a plan, and without explaining the strategic thinking (one wonders, if any) behind it.  For a primer, see here.
  • Lack of organizational design: management fails to show the proposed high-level organizational structure and how it supports the strategy.  They fail to show the alternative designs considered and why they settled on the one they’re proposing.
  • A laundry list of goals. OKRs are great.  But you should have a fairly small set – no more than 5 to 7 – and, again, management needs to show how they’re linked to the strategy.

Finance types on the board might view these as simple canapes served before the meal.  I view them as critical strategic context.  But, either way, the one thing on which everyone can agree is that the numbers are always the main course. Thus, in this post, I’m going to focus on how to best present the numbers in an annual operating plan.

Context is King
Strategic context isn’t the only context that’s typically missing.  A good operating plan should present financial context as well.  Your typical VC board member might sit on 8-10 boards, a typical independent on 2 (if they’re still in an operating role), and a professional independent might sit on 3-5.  While these people are generally pretty quantitative, that’s nevertheless a lot of numbers to memorize.  So, present context.  Specifically:

  • One year of history. This year that’s 2021.
  • One year of forecast. This year that’s your 2022 forecast, which is your first through third quarter actuals combined with your fourth-quarter forecast.
  • The proposed operating plan (2023).
  • The trajectory on which the proposed operating plan puts you for the next two years after that (i.e., 2024 and 2025).

The last point is critical for several reasons:

  • The oldest trick in the book is to hit 2023 financial goals (e.g., burn) by failing to invest in the second half of 2023 for growth in 2024.
  • The best way to prevent that is to show the 2024 model teed up by the proposed 2023 plan. That model doesn’t need to be made at the same granularity (e.g., months vs. quarters) or detail (e.g., mapping to GL accounts) as the proposed plan – but it can’t be pure fiction either.  Building this basically requires dovetailing a driver-based model to your proposed operating plan.
  • Showing the model for the out years helps generate board consensus on trajectory. While technically the board is only approving the proposed 2023 operating plan, that plan has a 2024 and 2025 model attached to it.  Thus, it’s pretty hard for the board to say they’re shocked when you begin the 2024 planning discussion using the 2024 model (that’s been shown for two years) as the starting point.

Presenting the Plan in Two Slides
To steal a line from Name That Tune, I think I can present an operating plan in two slides.  Well, as they say on the show:  “Dave, then present that plan!”

  • The first slide is focused on the ARR leaky bucket, metrics derived from ARR, and ARR-related productivity measures
  • The second slide is focused on the P&L and related measures.

There are subjective distinctions in play here.  For example, CAC ratio (the S&M cost of a dollar of new ARR) is certainly ARR-related, but it’s also P&L-driven because the S&M cost comes from the P&L.  I did my best to split things in a way that I think is logical and, more importantly, between the two slides I include all of the major things I want to see in an operating plan presentation and, even more importantly, none of the things that I don’t.

Slide 1: The Leaky Bucket of ARR and Related Metrics

Let’s review the lines, starting with the first block, the leaky bucket itself:

  • Starting ARR is the ARR level at the start of a period. The starting water level of the bucket.
  • New ARR is the sum of new logo (aka, new customer) ARR and expansion ARR (i.e., new ARR from existing customers). That amount of “water” the company poured into the bucket.
  • Churn ARR is the sum of ARR lost due to shrinking customers (aka, downsell) and lost customers. The amount of water that leaked out of the bucket.
  • Ending ARR is starting ARR + new ARR – churn ARR. (It’s + churn ARR if you assign a negative sign to churn, which I usually do.)  The ending water level of the bucket.
  • YoY growth % is the year-over-year growth of ending ARR. How fast the water level is changing in the bucket.  If I had to value a SaaS company with only two numbers, they would be ARR and YoY ARR growth rate.  Monthly SaaS companies often have a strong focus on sequential (QoQ) growth, so you can add a row for that too, if desired.

The next block has two rows focused on change in the ARR bucket:

  • Net new ARR = new ARR – churn ARR. The change in water level of the bucket.  Note that some people use “net new” to mean “net new customer” (i.e., new logo) which I find confusing.
  • Burn ratio = cashflow from operations / net new ARR. How much cash you consume to increase the water level of the bucket by $1.  Not to be confused with cash conversion score which is defined as an inception-to-date metric, not a period metric.  This ratio is similar to the CAC ratio, but done on a net-new ARR basis and for all cash consumption, not just S&M expense.

The next block looks at new vs. churn ARR growth as well as the mix within new ARR:

  • YoY growth in new ARR. The rate of growth in water added to the bucket.
  • YoY growth in churn ARR. The rate of growth in water leaking from the bucket.  I like putting them next to each other to see if one is growing faster than the other.
  • Expansion ARR as % of new ARR. Percent of new ARR that comes from existing customers.  The simplest metric to determine if you’re putting correct focus on the existing customer base.  Too low (e.g., 10%) and you’re likely ignoring them.  Too high (e.g., 40%) and people start to wonder why you’re not acquiring more new customers. (In a small-initial-land and big-expand model, this may run much higher than 30-40%, but that also depends on the definition of land – i.e., is the “land” just the first order or the total value of subscriptions acquired in the first 6 or 12 months.)

The next block focuses on retention rates:

  • Net dollar retention = current ARR from year-ago cohort / year-ago ARR from year-ago cohort. As I predicted a few years back, NRR has largely replaced LTV/CAC, because of the flaws with lifetime value (LTV) discussed in my SaaStr 2020 talk, Churn is Dead, Long Live Net Dollar Retention.
  • Gross dollar retention = current ARR from year-ago cohort excluding expansion / year-ago ARR from year-ago cohort. Excluding the offsetting effects of expansion, how much do customer cohorts shrink over a year?
  • Churn rate (ATR-based) = churn ARR/available-to-renew ARR. Percent of ARR that churns measured against only that eligible for renewal and not the entire ARR base.  An important metric for companies that do multi-year deals as putting effectively auto-renewing customers in the denominator damps out

The next block focuses on headcount:

  • Total employees, at end of period.
  • Quota-carrying reps (QCRs) = number of quota-carrying sellers at end of period. Includes those ramping, though I’ve argued that enterprise SaaS could also use a same-store sales metric.  In deeper presentations, you should also look at QCR density.
  • Customer success managers (CSMs) = the number of account managers in customer success. These organizations can explode so I’m always watching ARR/CSM and looking out for stealth CSM-like resources (e.g., customer success architects, technical account managers) that should arguably be included here or tracked in an additional row in deeper reports.
  • Code-committing developers (CCDs) = the number of developers in the company who, as Elon Musk might say, “actually write software.” Like sales, you should watch developer density to ensure organizations don’t get an imbalanced helper/doer ratio.

The final block looks at ARR-based productivity measures:

  • New ARR/ramped rep = new ARR from ramped reps / number of ramped reps. This is roughly “same-store sales [link].”  Almost no one tracks this, but it is one of several sales productivity metrics that I like which circle terminal productivity.  The rep ramp chart’s 4Q+ productivity is another way of getting at it.
  • ARR/CSM = starting ARR/number of CSMs, which measures how much ARR each CSM is managing.  Potentially include stealth CSMs in the form of support roles like technical account manager (TAM) or customer success architects (CSAs).
  • ARR/employee = ending ARR/ending employees, a gross overall measure of employee productivity.

Slide 2: The P&L and Related Metrics

This is a pretty standard, abbreviated SaaS P&L.

The first block is revenue, optionally split by subscription vs. services.

The second block is cost of goods sold.

The third block is gross margin.  It’s important to see both subscription and overall (aka, blended) gross margin for benchmarking purposes.  Subscription gross is margin, by the way, is probably the most overlooked-yet-important SaaS metric.  Bad subscription margins can kill an investment deal faster than a high churn rate.

The fourth block is operating expense (opex) by major category, which is useful for benchmarking.  It’s also useful for what I call glideslope planning, which you can use to agree with the board on a longer-term financial model and the path to get there.

The penultimate block shows a few more SaaS metrics.

  • CAC ratio = S&M cost of a $1 in new ARR
  • CAC payback period  = months of subscription gross profit to repay customer acquisition cost
  • Rule of 40 score = revenue growth rate + free cashflow margin

The last block is just one row:  ending cash.  The oxygen level for any business.  You should let this go negative (in your financial models only!) to indicate the need for future fundraising.

Scenario Comparisons
Finally, part of the planning process is discussing multiple options, often called scenarios.

While scenarios in the strategy sense are usually driven by strategic planning assumptions (e.g., “cheap oil”), in software they are often just different version of a plan optimized for different things:

  • Baseline: the default proposal that management usually thinks best meets all of the various goals and constraints.
  • Growth: an option that optimizes growth typically at the expense or hitting cash, CAC, or S&M expense goals.
  • Profit: an option that optimizes for cash runway, often at the expense of growth, innovation, or customer satisfaction.

Whatever scenarios you pick, and your reasons for picking them, are up to you.  But I want to help you present them in a way that is easy to grasp and compare.

Here’s one way to do that:

I like this hybrid format because it’s pulling only a handful of the most important rows, but laying them out with some historical context and, for each of the three proposed scenarios, showing not only the proposed 2023 plan also the 2024 model associated with it.  This is the kind of slide I want to look at while having a discussion about the relative merits of each scenario.

What’s Missing Here?
You can’t put everything on two slides.  The most important things I’m worried about missing in this format are:

  • Segment analysis: sometimes your business is a blended average of multiple different businesses (e.g., self-serve motion, enterprise motion) and thus it’s less meaningful to analyze the average than to look at its underlying components.  You’ll need to add probably one section per segment in order to address this.
  • Strategic challenges. For example, suppose that you’ve always struggled with enterprise customer CAC.  You may need to add one section focused solely on that.  “Yes, that’s the overall plan, but it’s contingent on getting cost/oppty to $X and the win rate to Y% and here’s the plan to do that.”
  • Zero-based budgeting. In tough times, this is a valuable approach to help CEOs and CFOs squeeze cost out of the business.  It takes more time, but it properly puts focus on overall spend and not simply on year-over-year increments.  In a perfect world, the board wouldn’t need to see any artifacts from the process, but only know that the expense models are tight because every expense was scrutinized using a zero-based budgeting process.

Conclusion
Hopefully this post has given you some ideas on how to better present your next operating plan to your board.  If you have questions or feedback let me know.  And I wish everyone a happy and successful completion of planning season.

You can download the spreadsheet used in this post, here.