The Market Leader Play: How to Run It, How to Respond

Business-to-business (B2B) high technology markets are all about the market and only less so about the technology.  This is primarily driven by corporate buyer conservatism — corporate buyers hate to make mistakes in purchasing technology and, if you’re going to make one, it’s far better to be in the herd with everyone else, collectively fooled, than to be out on your own having picked a runner-up or obscure vendor because you thought they were “better.”  Hence, high-technology markets have strong increasing returns on market leadership.  I learned this live, in the trenches, way back in the day at Ingres.

Uh, Dave, please stop for a second.  Thank you.  Thanks so much for coming out to visit us here at BigCo today.  Before you begin your presentation, we wanted you to know that if you simply convince us that Ingres is as good as Oracle that we’re going to chose Oracle.  In fact, I think you’re going to need to convince us that Ingres is 30% to 40% better than Oracle before we’d realistically consider buying from your company.  You may now go ahead with your presentation.

Much as I hated it on that day, what a great position for Oracle to be in!  Somehow, before the product evaluation cage-fight had even begun, Oracle walked into the cage with a 40% advantage — brought to them by their corporate marketing department, and which was all about market leadership.

Why do corporate buyers care so much about buying from market leaders?

  • Less project risk.  If everyone else is buying X, it must be good enough, certainly, to get the job done.
  • Less embarrassment risk.  If the project does fail and you’re using the leading vendor, it’s much less embarrassing than if you’re on an obscure runner-up.  (“Well, I guess they fooled us all.”) [1]
  • Bigger technology ecosystem.  In theory, market leaders have the most connectors to other systems and the most pre-integrated complementary technologies.
  • Bigger skillset ecosystem.  Trying to find someone with 2+ years of experience with, e.g., Host Analytics or Adaptive Insights is way easier than trying to find someone with 2+ years of experience with Budgeta or Jedox.  More market share means more users means you can find more skilled employees and more skilled partners.
  • Potential to go faster.  Particularly for systems with low purchase and low switching costs, there’s a temptation to bypass an evaluation altogether and just get going.  Think:  “it’s the leader, it’s $35K/year, and it’s not that hard to change — heck, let’s just try it.”

Thus, relatively small differences in perceived or actual market leadership early on can generate a series of increasing returns through which the leading vendor wins more deals because it’s the leader, becomes relatively larger and thus an even more clear leader, then wins yet a higher percentage of deals, and so on.  Life for the leader is good, as the rich get richer.  For the others, life is a series of deals fighting from behind and, as they said in Glenngarry Glenn Ross, second prize really is a set of steak knives.

This is why smart vendors in greenfield markets fight for the market leadership position as if their corporate lives depended on it.  Sometimes, in this game of high-stakes, winner-takes-all poker companies cross boundaries to create a perception of success and leadership that isn’t there. [2]

When run correctly — and legally — the goal of the market leader play (MLP) is to create a halo effect around the company.  So how do you run the market leader play?  It comes down to four areas:

  • Fundraising.  Get the biggest name investors [3], raise the most capital, make the most noise about the capital you’ve raised, and use the money to make a few big-name hires, all in an effort to make it clear that Sand Hill Road has thoroughly evaluated the company and its technology and chosen you to be the leader.
  • Public relations and corporate awareness. Spend a nice chunk of that capital on public relations [4].  Have the CEO speak at the conferences and be quoted or by-line articles in the right tech blogs.  Better yet, hire a ghost-writer to author a book for the CEO as part of positioning him/her as a thought leader in the space.  If applicable, market your company’s culture (which is hopefully already documented in a one-hundred slide deck).  Spend big bucks to hold the biggest user conference in the space (which of course cannot be labeled as a user conferenced but instead an industry event with its own branding).  Use billboards to make sure the Digerati and other, lesser denizens of Silicon Valley know your company’s name.  Think:  shock and awe for any lesser competitor.
  • Growth.  Spend a ton of that capital to hire the biggest sales force, wisely first building out a world-class onboarding and enablement program, and then scaling as aggressively as you can.  In enterprise software new sales = number of reps * some-constant, so let’s make sure the number of reps is growing as fast, and perhaps a little faster, than it wisely should be.  Build out channels to increase the reach of your fast-growing sales force and don’t be cheap, during a market-share grab, about how you pay them.  In the end, Rule of 40 aside, hotness in Silicon Valley is really about one thing:  growth.  So get hot by buying the most customers most quickly. [5]
  • Strategic relationships.  Develop strategic relationships with other leading and/or cool companies on the theory that leaders work with leaders.  These relationships can vary from a simple co-marketing arrangement (e.g., Host Analytics and Floqast) to strategic investments (e.g., Salesforce Ventures invests in Alation) to white label re-sale deals (e.g., NetSuite’s resales of Adaptive Insights as NetSuite Planning), and many others.  But the key is to have the most and best strategic relationships in the category.
  • Denial of differentiation.  While you should always look forward [6] when it comes to external communications, when it comes to competitive analysis keep a keen eye looking backward at your smaller competitors.  When they see you running the market leader play, they will try various moves to differentiate themselves and you must immediately deny all such attempts at differentiation by immediately blocking them.  Back in the day, Oracle did this spectacularly well — Ingres would exhaust itself pumping out new/differentiated product (e.g., Ingres/Star) only to have Oracle immediately announce a blocking product either as a pure futures announcement (e.g., Oracle 8 object handling) or a current product launch with only the thinnest technical support (e.g., Oracle/Star).  Either way, the goal is for the mind of the buyer to think “well the leading vendor now does that (or shortly will), too.”  Denying differentiation gives the customer no compelling reason to buy from a non-leader and exhausts the runners-up in increasing futile and esoteric attempts at differentiation.

So that, in a nutshell, is how creating a leader is done.  But what if, in a five-vendor race, you’re not teed up to be the leader.  You haven’t raised the most capital.  You’re not the biggest or growing the fastest.  Then what are you supposed to do to combat this seemingly air-tight play?

Responding to the Market Leadership Play
I think there are three primary strategic responses to the market leadership play.

  • Out-do.  If you are in the position to simply out-do the flashy competitor, then do it.  Enter the VC arms raise — but like any arms race you must play to win. [7]  Raise more capital than they do, build your sales force faster, get even better strategic relationships and simply out-do them.  Think:  “yes, they were on a roll for a while but we are clearly the leader now.”  Cloudera did this to Hortonworks.
  • Two-horse race.  If you can’t win via out-do, but have a strong ability to keep up [8], then reframe the situation into a two-horse race.  Think:  “no, vendor X is not the leader, this market is clearly a two-horse race.”  While most B2B technology markets converge to one leader, sometimes they converge to two (e.g., Business Objects and Cognos).  Much as in a two-rider breakaway from the peloton, number 1 and 2 can actually work together to distance themselves from the rest.  It requires a certain cooperation (or acceptance) from both vendors to do this strategy, but if you’re chasing someone playing the leadership play you can exhaust their attempts to exhaust you by keeping up at every breakaway attempt.
  • Segment leadership.  If you can’t out-do and you can’t keep up (making the market a two-horse race) then have two options:  be a runner-up in the mainstream market or a be a leader in a segment of it.  If you stay a runner-up in the mainstream market you have the chance of being acquired if the leader rebuffs acquisition attempts.  However, more often than not, when it comes to strategic M&A leaders like to acquire leaders — so a runner-up-but-get-acquired strategy is likely to backfire as you watch the leader, after rebuffing a few takeover attempts, get acquired at a 10x+ multiple.  You might argue that the acquisition of the leader creates a hole in the market which you can then fill (as acquired companies certainly do often disappear within larger acquirers), but (unless you get lucky) that process is likely to take years to unfold.  The other choice is to do an audit of your customers, your product usage, and your skills and focus back on a product or vertical segment to build sustainable leadership there.  While this doesn’t preserve horizontal M&A optionality as well as being a runner-up, it does allow you to build sustained differentiation against the leader in your wheelhouse.

# # #


[1] Or, more tritely, “no one ever got fired for buying IBM” back in the day (communicated indirectly via ads like this), which might easily translate to “no one ever got fired for buying Oracle” today.

[2] Personally, I feel that companies that I’ve competed against such as MicroStrategy, FAST Search & Transfer, and Autonomy at various points in their history all pushed too hard in order to create an aura of success and leadership.  In all three cases, litigation followed and, in a few cases, C-level executives even went to jail.

[3] Who sometimes have in-house marketing departments to help you run the play.

[4] In accordance with my rule that behind every “marketing genius” is a big marketing budget.  You might argue, in fact, that allocating such a budget the first step of the genius.

[5] And build a strong customer success and professional services team to get those customers happy so they renew.  Ending ARR growth is not just about adding new sales to the bucket, it’s about keeping what’s in the bucket renewing.

[6] That is, never “look back” by mentioning the name of a smaller competitor — as with Lot’s Wife, you might well end up a pillar of salt.

[7] If you’re not committed to raising a $100M round after they raise a $75M round in response to your $50M round, then you shouldn’t be in an arms race.  Quoting The Verdict, “we’re not paid to do our best, we’re paid to win.”  So don’t a pick fight where you can’t.

[8] This could be signalled by responding to the archrival’s $50M round with a $50M round, as opposed to a $75M.

The Board View: Slides From My Presentation at Host Perform 2019

The folks at Host Analytics kindly asked me to speak at their annual conference, Host Perform 2019, today in Las Vegas and I had a wonderful time speaking about one of my favorite topics:  the board view of enterprise performance management (EPM) and, to some extent, companies and management teams in general.

Embedded below are the slides from the presentation.

Highlights from Host Perform 2019 General Session

I’m here in Vegas at the amazing Aria Hotel at Host Perform 2019, having been asked to come out and speak about one of my favorite topics – how boards see the work of finance and EPM.  That speech is tomorrow at 9:00 AM and I look forward to seeing you there.

Today started with a music video, a great re-interpretation of Joan Jett’s I Love Rock N Roll.  Here is my favorite lyric from the song:

I love EBITDA,

Who cares about stock-based compensation?

I love EBITDA,

So come and take the time and plan with me.


Ron Baden was subtly wearing a Life is Good cap (presumably as a tip of the proverbial hat to last year’s keynote, Burt Jacobs) as he did an introduction that covered his background – now 10 years with the company in almost as many different jobs, an introduction of the executive staff (along with 1980s photos of them), a history of EPM, and some discussion of Vector Capital’s acquisition of Host Analytics in December of last year.

He also discussed this year’s keynote speaker, Doc Hendley, founder of Wine to Water.

Ron discussed highlights of the go-forward plan, including:

  • International, goal to get 25% of sales from international
  • Channel development, goal to 33% of sales from channels
  • Vertical market solutions and specialist sales teams
  • Accelerated new product introduction
  • Office-of-CFO tuck-in acquisitions

He also discussed key trends that Host is seeing in EPM:

  • Digital capabilities (e.g., robotic process automation)
  • Next-wave EPM professionals
  • Mobile workforce support
  • Connected planning, getting models talking to each other
  • Integration of best-of-breed solutions
  • Hybrid cloud


Ron had some fun demonstrating the granularity and context problems via a Netflix example (“who’s watching”) and a quick demonstration of Alexa’s non-fluency in finance. On the former point, the key idea is that AI/ML, for example in sales forecasting, will benefit greatly by knowing “who’s watching” (i.e., who’s selling) because much as different people like different genres of films, different sales reps have different patterns of forecasting (e.g., Sammy sandbag, Ollie optimist).

Ron also discussed the notion of the chief performance officer, as opposed to the chief financial officer – to focus the mission on improving performance, not on finance per se.  In my humble opinion most of the time when people talk about creating a new “O” it’s about trying to get a seat at the table (e.g., chief information officer back in the day, the chief information security officer in recent times, and the chief data officer today).

Since the CFO already has a seat at the table, I think Ron’s more talking about reframing the role and the vision of the CFO.  I agree – particularly when it comes to being able to answer questions that help improve business performance.  And, I believe, that if the CFO can’t migrate to being the CAO (chief answers officer) then the chief data officer (CDO) might well do it instead via data science and operations teams.  To be a bit paranoid, it’s a threat — not an existential threat, but a threat nevertheless — to the power of the office of the CFO.

Ron then showed a presumably future version of MyPlan which shows how to build task- and action-oriented EPM and how that can easily fit into a mobile device.  Ron’s a big believer that while spreadsheets and grid interfaces are great, that end-users fundamentally want to accomplish tasks that are best done not via a grid, but via an end-user-optimized, task-oriented interface like MyPlan.

They then performed the usual, multi-player, slice-of-life skit-demonstration (aka, “skidemo”) which is always fun, and always a challenge to execute with so many moving parts (i.e., people, real software, prototype software, videos, scene changes, characters, and costumes).  Despite a brief early wardrobe failure, the six-person team pulled it off just fine, taking the crowd “back to the future” of finance – with easy rolling forecasts that take just a minute to run and prescriptive analytics to help drive the planning process.  My favorite line:

“Where we’re going, we don’t need spreadsheets!”

The keynote speaker (coincidentally named “Doc” given the skit), founder of Wine to Water, Doc Hendley then took the stage to tell his story.  I won’t summarize it here, but it was genuine, moving, at times funny, and deeply compelling.


Wine to Water focuses on providing clean water and sanitation to people around the world – while awareness of this is not as high as it should be, water-borne illness is the leading cause of death for children in many countries in the undeveloped world and directly and indirectly kills over 2M children a year and incapacitates another 10M people atop that. Preventing water-borne illness not only saves lives, but it also helps increase family income, reduces school absences, and generally strengthens the local developing economy.  Per the WHO, every one dollar invested yields $8 in benefits — a great cause and a great ROI.

If you’re interested in donating to Doc’s organization, Wine to Water, please go here.  If you’re at the conference, remember to stop by the Wine to Water booth and build some water filters.

It’s great to be here, I look forward to seeing everyone, and hope to see you at my speech bright and early tomorrow.

The Rule of 40 — Down, But Not Out!

Neeraj Agrawal and Logan Bartlett of Battery Ventures recently published the 2019 version of its outstanding annual software round-up report.  I highly recommend this report — it’s 78-pages chock full of great data about topics like:

  • Why Battery is long software overall
  • The four eras of software evolution
  • The five forces driving software’s accelerating growth
  • Key trends in 2018, including setting records in three areas:  (1) public company revenue multiples, (2) IPO volume (by over 2x), and (3) M&A volume (by over 2x).
  • Key trends from their 2017 report that are still alive, well, and driving software businesses.

But, most of all, it has some great charts on the Rule of 40 [1] that I want to present and discuss here.  Before doing that, I must note that I drank today’s morning coffee reading Alex Clayton’s CloudStrike IPO breakdown, a great post about a cloud security company with absolutely stunning growth at scale — 121% growth to $312M in Ending ARR in FY19.  And, despite my headline, well in compliance with the Rule of 40.  110% revenue growth + -26% free cashflow margin = 84%, one of the highest Rule of 40 scores that I’ve ever seen [2].  Keep an eye on this company, I expect it should have a strong IPO [3].

However, finding one superstar neither proves nor disproves the rule.  Let’s turn to the Battery data to do that.

When discussing the Rule of 40, most financial analysts make one of two plots.

  • They do a scatter plot with revenue growth on the X-axis and FCF margin on the Y-axis.  The Rule of 40 then becomes a line that separates the chart into two zones (compliant and non-compliant).  Note that a minority of public companies actually comply suggesting the rule of 40 is a pretty high bar [4].
  • Or, more interestingly, they do a linear regression of Rule of 40 score vs. enterprise-value/revenue (EV) multiple.  This puts focus on the question:  what’s the relationship between Rule of 40 score and company value? [5]

But that thing has always bugged me is that nobody does the linear regression against both the Rule of 40 score and revenue growth.  Nobody, until Battery.  Here’s what it shows.

First, let’s look at the classic Rule of 40 regression.  Recall that R-squared is a statistical measure that explains the dependence of the dependent variable (in this case, EV multiple) on the independent variable (Rule of 40 score).  Here you can see that about 58% of the variation in enterprise value multiple is explained by Rule of 40 score.  You can intuit that by looking at the dots relative to the line — while there is clearly some linear correlation between the data, it’s a long way from perfect (i.e., lots of dots are pretty far from the line).  [6]

rule of 40-4

Now, the fun part.  Let’s see the same regression against revenue growth alone.  R-squared here is 51%.  So the explanatory power of the Rule of 40 is only 7% higher than revenue growth alone.  Probably still worth looking at, but it sure gets a lot of PR for explaining only an incremental 7%.  It could be worse, I suppose.  Rule of 40 could have a lower R-squared than revenue growth alone — in fact, it did back in 2008 and in 2012.

rule of 40-3

In the vein, for some real fun let’s look at how this relationship has changed over time.  The first thing you’ll notice is that pre-2012 both last twelve month (LTM) revenue growth and the Rule of 40 had far weaker explanatory power, I suspect because profitability played a more important role in the equation.  In 2012, the explanatory power of both metrics doubled.  In 2015 and 2016 the Rule of 40 explained nearly 20% more than revenue growth alone.  In 2017 and 2018, however, that’s dropped to 7 to 8%.

rule of 40-2

I still think the Rule of 40 is a nice way to think about balancing growth vs. profit and Rule of 40 compliant companies still command a disproportionate share of market value.  But remember, its explanatory power has dropped in recent years and, if you’re running an early or mid-stage startup, there is very little comparative data available on the Rule of 40 scores of today’s giants when they were at early- or mid-stage scale.  That’s why I think early- and mid-stage startups need to think about the Rule of 40 in terms of glideslope planning.

Thanks to the folks at Battery for producing and sharing this great report. [7]

# # #

[1] Rule of 40 score = typically calculated as revenue growth + free cashflow (FCF) margin.  When FCF margin is not available, I typically use operating margin.   Using GAAP operating margin here would result in 110% + -55% = 55%, much lower, but still in rule of 40 compliance.

[2] If calculated using subscription revenue growth, it’s 137% + -26% = 111%, even more amazing.  One thing I don’t like about the fluidity of Rule of 40 calculations, as you can see here, is that depending what might seem small nuances in calculations, you can produce a very broad range of scores.   Here, from 55% to 137%.

[3] To me, this means ending day 1 with a strong valuation.  The degree to which that is up or down from the opening price is really about how the bankers priced the offer.  I am not a financial analyst and do not make buy or sell recommendations.  See my disclaimers, here.

[4] In fact, it’s actually a double bar — first you need to have been successful enough to go public, and second you need to clear the Rule of 40.  Despite a minority of public companies actually clearing this bar, financial analysts are quick to point out the minority who do command a disproportionate share of market cap.

[5] And via the resultant R-squared score, to what extent does the Rule of 40 score explain (or drive) the EV/R multiple?

[6] If R-squared were 1.0 all the dots would fall on the least-squares fit line.

[7] Which continues with further analysis, breaking the Rule of 40 into 4 zones.

Speaking at Host Perform 2019


Just a quick post to plug the fact that the kind folks at Host Analytics have invited me to speak at Host Perform 2019 in Las Vegas on May 20-22nd, and I’ll be looking forward to seeing many old friends, colleagues, customers, and partners on my trip out.

I’ll be speaking on the “mega-track” on Wednesday, May 22nd at 9:00 AM on one of my favorite topics:  how EPM, planning, and metrics all look from the board and C-level perspectives.  My official session description follows:


The Perform 2019 conference website is here and the overall conference agenda is here.  If you’re interested in coming and you’ve not yet registered yet, it’s not too late!  You can do so here.

I look forward to another great Perform conference this year and should be both tweeting (hashtag #HostPerform) and blogging from the conference.  I look forward to seeing everyone there.  And attend my session if you want to get more insight into how boards and C-level executives view reporting, planning, EPM, KPIs, benchmarks, and metrics.

What’s the “Cause of Death” in Your Churn Reporting?

In looking at this issue across several companies, I’ve noticed a disturbing trend / missed opportunity in how many SaaS companies classify the reason for customer churn.  Roughly speaking, if companies were hospitals, they’d too frequently be reporting the cause of death as “stopped breathing.”

Yes, the patient who died stopped breathing; the question is why did they stop breathing.  In churn-speak, “yes, the customer who churned issued a churn notice and chose not to renew.”  The question is why did they choose not to renew?

Many people have written great posts on reasons customers churn and how to prevent them.  These reasons often look like hierarchies:


  • Got acquired
  • Went bankrupt
  • Corporate edict
  • New sponsor


  • Failed implementation
  • Product functionality
  • Product ease of use
  • Oversold  / poor fit

These hierarchies aren’t a bad start, but they aren’t good enough, either.  A new sponsor isn’t an automatic death sentence for a SaaS product.  He or she might be, however, if the team using it had a rough implementation and was only half-satisfied with the product.  Similarly, a failed implementation will certainly reduce the odds of renewal, but sometimes people do have the will to start over — and why did the implementation fail in the first place?

Physicians have been in the “churn” business much longer than SaaS companies and I think they’ve arrived at a superior system.  Here’s an excerpt from the CDC’s Physicians’ Handbook on Medical Certification of Death — not a publication, I’d add, linked to by most SaaS bloggers:

chain of death

For example, when my dear father passed away from a stroke several years ago, I remember the form said:

example cod

(And, at the time, literally observing that it was a better way to classify churn.)

The rule above spells it out quite clearly  — “DO NOT enter terminal events such as respiratory arrest […] without showing the etiology.”  That is, “stopped breathing” by itself isn’t good enough.  Just like “sent churn notice” or “decided not to renew.”

I have not built out a full taxonomy here; classifying churn in this way remained a future item on my to-do list at the time we sold my last company.  Nevertheless, while I know it’s not easy, I believe that companies should start trying to find a way to richly encode churn reasons using this “chain” concept so as to not lose critical information in encoding their data.  Otherwise, we risk believing that all our customers churned because they sent us a churn notice (or some easily blamed “uncontrollable” event).

As one example:

  • Churned, due to
  • New sponsor, due to
  • Failed implementation, due to
  • Partner problem, due to
  • Partner training

Or, another:

  • Churned, due to
  • Corporate edict, due to
  • M&A, due to
  • Product dissatisfaction, due to
  • Oversold, due to
  • Sales training

These aren’t perfect, but I’m trying quickly demonstrate the real complexity behind why customers churn.  For example, happy customers might challenge a corporate edict issued after an acquisition — so you can’t just blame the edict.  You have to look more deeply.  If you knew that the customer fought the edict and failed, you might stop the chain there.  But if you knew they were never terribly happy with the system because they were overpromised capabilities at the start, then you should code that into the chain, too.

# # #

For more information on the warning signs and symptoms of a stroke, go here.


Highlights from the 1Q19 Fenwick & West Venture Capital Survey

(Revised 5/9/19, 3:30 PM to add chart from SVVCCI survey at the bottom.)

Every so often I post highlights from the quarterly Fenwick & West Venture Capital Survey, as much to share knowledge about the existence of the survey [1] as to share its current-quarter data.

This survey is important for two reasons.  First, it shows trends in price changes over time across various VC rounds.  This is useful information to see what’s happening in the market, and I suppose semi-useful information in perhaps timing your venture rounds (subject to Kellblog Rules 1 and 2 of Financing [2]).

But the really important of this survey is it tells you about terms.  Raising $20M with a 1x, non-participating preference is very, very different from raising $20M with an 8% accumulating dividend, a multiple, participating liquidation preference that ratchets from 1.5x to 1.75x to 2.0x over three years, and includes redemption rights [3].  If you’re a CEO or founder of a startup and don’t understand the prior sentence, you need to.  A good glossary, plus the F&W Survey, will help.

Let’s look at the survey highlights, starting with pricing and moving into terms.  81% of companies had financings that were “up rounds” (i.e., the share price was higher in the round last than the previous one).   On average this runs nearly 70%.

price change history

The chart shows the Fenwick & West (F&W) Venture Capital Barometer (TM), which measures the magnitude of the price change since the prior round.  In 1Q19, prices averaged 75% up since the company’s prior round, running high, but certainly not near historical highs of well over 100%

barometer history

The report does a lot of nice segmentation.  Here is direction and magnitude price change data by sector.

by industry

Now we move onto financing terms.  For definitions, see the glossary F&W publishes along with the survey.  Better yet, read the Ultimate Guide to Liquidation Preferences by Charles Yu.

Senior liquidation preferences were used in 27% of rounds [4].

senior liquidation

Of those rounds with senior liquidation preferences, 9% had multiple liquidation preferences [5].

multiple liquidation pref

Participation means that the investor doesn’t have to choose between getting their money back and getting their pro rata share of the company.  Participating preferred shares first get their money back and then get their pro rata share of what’s remaining.  That’s why they’re sometimes called “double dip” preferred.  12% of rounds in 1Q19 had participation.  While F&W doesn’t break out the data geographically, I’ve always considered participation an “East Coast” VC term.  It’s also common in Europe as well.


One way to limit the effects of participation is to cap it.  However, 65% of time participation is used, it is uncapped.  35% of the time, it is capped, which sounds like an improvement, but has the perverse consequence of creating a zone of indifference for the investor.cap

There’s lots more in the F&W survey which you can find here.

Before signing off, let me highlight one other interesting survey, the University of San Francisco Venture Capital Confidence Index (SVVCCI), which in February 2019 fell to its lowest value in the past 10 years — 3.20 out of 5.00, down from 3.52 in the prior quarter.


Unfortunately, they no longer make the full report instantly downloadable (you need to mail someone on the survey page to get a copy of it).  Nevertheless, it’s another interesting quarterly survey and I always try to read the two together.

# # #


[1] Much as I periodically post about the Bessemer Nasdaq Emerging Cloud Index for the same reason.

[2] Kellblog Rule 1 of Financing:  the best time to raise money is now.  Kellblog Rule 2 of Financing:  the best amount of money to raise is as much as you can (provided it’s at a good price).  Why?  In my opinion, too many startups press their luck, trying to delay financing in favor of hitting a few more consecutive quarters to limit dilution.  That works great — until it doesn’t — e.g., if you miss one of those quarters or if the markets turn on you.  As an example, there were two kinds of startups in 2002:  those that raised large amounts of money at crazy valuations in 2001 and dead.

[3] Terms generally do one of three things:  (a) reallocate the pie towards the investors in bad scenarios, i.e., “downside protection,” (b) provide minimum returns before others get their money, or (c) provide other rights (e.g., the right to sell the stock back to the company after N years) that can be used as forcing functions to get liquidity or control.

[4] Note that VCs buy preferred stock which is always senior to the common typically held by founders and employees. In this case, senior means senior to the other/earlier classes of preferred.  For example, if the series C gets all of its money back before the series B, then that would be a senior liquidation preference.  If series A, B, and C all got their money back on an pari passu basis, there would be no senior liquidation preference in this context.

[5] Meaning the investor gets not only his/her money back first, but some multiple (e.g., 1.5x) of it.  You can see how an investor might yield to an investor on a certain “vanity valuation” in exchange for a multiple liquidation preference, which ends up being close to a guaranteed return — e.g., if it’s on the last round, you’re first in line behind the debt with a guaranteed multiple (and maybe even more if you have participation).