Sunday, March 15, 2015

In God we trust, all others bring references


In the last few weeks I talked to two entrepreneurs who both recently made a hire that didn't work out. In both cases I asked how the reference calls went, and in both cases the answer was that they hadn't done any before hiring the candidate. This made me almost angry, especially because the two entrepreneurs are fantastic founders who could have saved themselves from this costly mistake by following a simple rule: Don't hire people without taking references.

Bad hiring decisions are among the most expensive mistakes that you as a founder can make. According to this CareerBuilder survey, bad hires typically cost companies as much as $25,000-$50,000, but the true costs go much beyond cash. The (harder to calculate) opportunity costs – the fact that you've wasted time getting the wrong person up-to-speed and that your recruitment of the right candidate got delayed – usually weigh much stronger, not to mention the negative impact which a bad hire can have on your team, customers and partners.

Most people read test reports and customer reviews before buying a digital camera or an office printer, so how come they don't use the same level of diligence for a decision that is 100x more important? I can think of a few possible reasons:

"Based on the candidate's CV and my interviews I'm so confident that he/she is the right one, reference calls aren't necessary."

Assessing candidates in an interview is hard. Coming across as a great candidate in an interview process is one thing, being able to do the job is sometimes something different. Talking to people who have closely worked with the candidate for years gives you valuable additional data points for your decision. Even if you're a fantastic interviewer and you're right most of the time – if reference calls help you reduce the number of times you're wrong, they are worth it.

"I won't learn anything new, and the references provided by the candidate will only say great things anyway."

Even if people provided by the candidate will usually (but not always!) give a glowing reference, by asking the right questions you'll often find out, usually between the lines, if the reference-giver wants to be polite or if he really thinks that your candidate is awesome. Even more importantly, you should always try to get backdoor references, too.

"It costs so much time!"

Yes, it does. But think about the difference which the right hire vs. the wrong hire can make.

"It's awkward to ask people for references or to sniff around to get backdoor references."

Don't be afraid to ask even if it makes you feel awkward. Senior candidates expect you to ask for references anyway, and junior candidates will quickly learn that it's a standard practice. People will also understand that you need to take backdoor references. The only really problematic situation is if references from the candidate's current company are crucial for your decision and the candidate didn't give notice to his current employer yet. In that case you obviously can't simply call the candidate's boss and you need to find out carefully how you can get your references without doing harm to the candidate.

If I was able to convince you of the "why", check out this great post by Mark Suster about the "how":  "How to make better reference calls"


Wednesday, March 04, 2015

How fast is fast enough?

Growth is the single biggest determinant of startup valuations at IPO, as my fellow SaaS investor Tomasz Tunguz concluded based on an analysis of 25 IPOs in 2013. Growth (a.k.a. traction) is also the most important factor that attracts VCs and drives valuations in private financing rounds. Of course your team, product, technology, business model and market matter too, but when you’re past the seed stage the expectation is that these factors will have resulted in excellent growth. At the seed stage you can sell your story and vision. At the Series A and later stages, you have to back it up with numbers.

This isn’t surprising. Past growth tends to correlate with future growth, and since tech markets are winner-takes-all (or "winner-takes-most") markets, investors are obsessed about finding the fastest-growing player that has the biggest chance of dominating the market.

If growth is so crucial, how fast do you have to grow?

The answer depends on the market you’re in and the type of company that you want to build. If you’re in a small niche market – let’s say a business solution for a small vertical, localized to one country – maybe you don’t have aggressive, well-funded competitors. In that case it may be sufficient if you’re the fastest-growing player in that market, even if that means you’re growing only 20% year-over-year. There’s absolutely nothing wrong building a company like this, and you could end up with a highly profitable small business (or Mittelstand company). This is not the type of company VCs look for though, and the rest of this post is written based on the premise that you’re a SaaS startup that wants to grow to $100M in Annual Recurring Revenue (ARR).

So how fast do you have to grow in order to become a $100M company? Again using data compiled by Tomasz “Mr. SaaS Benchmarking” Tunguz we can see that the 18 publicly traded SaaS companies that were founded within the last ten years took five to eight years to reach $50M in revenues, with 14 out of the 18 being in the six to seven years range. (1) Add another one or two years for getting from $50M to $100M, and we can assume that most of these companies took seven to nine years to get to $100M.

$1M, T2D3, 50%?

If you want to get from 0 to $100M in revenues in seven years, your growth curve will likely look very roughly like this: Get to $1M in ARR by the end of the first year, triple to $3M in the next year, followed by another triple to $9M by the end of year three. Double your revenues in the next three years, so that you’ll reach $18M, $36M and $72M by the end of year four, five and six, respectively. Grow by another 50% in the next year and reach $108M in ARR by the end of year seven:



This is very much in line with the “T2D3” formula described by Battery Ventures in this TechCrunch post. If you want to give yourself nine years to get to $100M, your numbers will probably look roughly like this:





Could you also take the slow track?

The big question is now if this strong pattern is merely the result of investment bankers’ and public market investors’ preference for fast-growing companies or if something more fundamental is going on here. If there was a “law” which said that if you haven’t reached something close to $5M after three years, $10M after four years, and so on, you’ll likely never get to $100M, this would obviously have important implications for founders as well as investors.

My opinion is that there’s no hard law – in business you’ll find exceptions for every rule, and I think it’s definitely possible that software companies that grow slowly and eventually reach $100M exist. But I do think that the probability of ever getting to $100M does go down very significantly if you’re growing much slower than pictured above. This is because:

  • As companies get bigger, growth rates tend to go down, not up. So if your growth rate in year three is only, say, 50%, it’s unlikely that it will be 200% in the following year. It can happen and does happen, of course, but only if there’s a dramatic improvement in the business - a new product, a new distribution channel, a new business model or the like.
  • It’s hard for a slow-growing company to attract the best people. It’s not only about being “hot” as an employer (although that’s part of it, too). If you’re not growing fast, you’ll also have a hard time making compensation packages competitive with those of fast-growing companies. The positive feedback loop that is taking place here is very powerful: Momentum attracts talent and money, which you can turn into more momentum, and so on.
  • Not so many founders have the stamina and patience to stick to their company for 10, 12, 15 years - after so many years, many people understandably need a change. And while a company can of course survive its founders, it’s still a loss that doesn’t make things easier in the future.
  • Lastly, but maybe most importantly, if you can’t figure out a way to grow fast and you’re in a large market, chances are that someone else will. It also increases the chance of a new, innovative, fast-growing startup entering and possibly disrupting the market before you’ve reached significant scale.

Coming back to the original question, how fast is fast enough? If your goal is to eventually get to $100M in ARR, I think you should try to get there as fast as possible, and getting there by the end of year seven after public launch feels about right to me. This may seem like a very ambitious goal, but it would be boring if it was easy, wouldn’t it?

___________________

(1) Note that there’s somewhat of an outcome bias in these results, as companies that were founded in the last ten years but take more than ten years to go public haven’t been included. So it’s possible that a few companies with slower growth will be added in the future, but that’s unlikely to change the picture significantly, especially if you keep in mind the trend which Tomasz has described in his post: SaaS startups are growing faster than ever before, and it’s taking them less and less time to get to $50M.


Sunday, February 22, 2015

Why (most) SaaS startups should aim for negative MRR churn

If you've followed my blog for a while, you know that I have a bit of an obsession with churn. Having significant account churn doesn't necessarily have to be a big problem and can't be avoided completely anyway. MRR churn sucks the blood out of your business though. That's why I think that SaaS companies should work very hard to get MRR churn down, as close to zero as possible, or even better achieve negative MRR churn.

Before I continue, here's a quick refresher on the terms that I'm using. If you're a SaaS metrics pro you can skip the next two paragraphs.

Your account churn rate, also called "customer churn rate" or "logo churn rate", measures the rate at which your customers are canceling their subscriptions. If you have, say, 1,000 customers on February 1st and by the end of the month 30 of them have canceled, your account churn rate is 3% p.m. in Feburary. Note that this assumes that all 1,000 customers are on monthly plans and can cancel that month – if some of your customers are on annual plans, you need to calculate the churn rate of that customer segment separately.

Your MRR churn rate, sometimes also referred to as "dollar churn rate", is the rate at which you are losing MRR through downgrades and cancelations. If you have, for example, $100,000 in MRR on February 1st, and by February 28 you've lost $4,000 of these $100,000 due to downgrades and cancelations, your gross MRR churn rate is 4% in February. Assuming you have $6,000 in expansion MRR in the same month – i.e. an increase in MRR of existing customers, e.g. due to upgrades to more expensive plans or additions of seats – your net MRR churn is minus $2,000 and your net MRR churn rate is minus 2% in that month. For more details on these and other SaaS metrics, check out ChartMogul's SaaS Metrics Cheat Sheet.

Thanks for your attention, SaaS metrics newbies, and welcome back pros. The following two charts show the disastrous effect of MRR churn, using an imaginary SaaS startup (let's call it Zombie.com) with $100,000 in MRR that has a net MRR churn rate of 3% p.m. and is adding $10,000 in MRR from new customers each month:

MRR development of Zombie.com - click for a larger version

MRR development of Zombie.com - click for a larger version

The first chart shows how much new MRR from new customers Zombie.com is adding (light green), how much MRR it's losing due to churn (red) and what the net change is (dark green). The second chart shows the resulting MRR (blue) and the ratio between new and lost MRR (orange), inspired by Mamoon Hamid's great "Quick ratio" of (Added MRR / Lost MRR), which I recently learned about.

As you can see in these two charts, not only does the net new MRR of Zombie.com go down every month. It actually asymptotes to zero, which means that the company is hitting a wall at around $350,000, at which it stops growing.

The math behind this is of course trivial, since the assumption was that the company is adding a constant dollar amount of MRR every month, while churn MRR, being a constant percentage of total MRR, is growing. So what happens if instead of acquiring new customers linearly, you manage to add new MRR from new customers at an ever increasing rate?

Here's another imaginary SaaS startup, let's call this one Treadmill.io. Like Zombie.com, Treadmill.io has $100,000 in MRR in the beginning of the timeframe that I'm looking at and has a net MRR churn rate of 3% p.m. Unlike Zombie.com, Treadmill.io is adding new MRR from customers at an accelerating rate, though: In the first year it's adding $10,000 per month, in the second year $15,000 per month, then $20,000 per month, and so on. Let's look at the charts for Treadmill.io:

MRR development of Treadmill.io - click for a larger version

MRR development of Treadmill.io - click for a larger version

The MRR development of this company looks much less depressing, and after ten years it reaches close to $1.5M in MRR. However, as you can see in the first chart, as well as in the declining orange line in the second chart, churn is eating up an ever increasing part of the new MRR coming in from new customers. If Treadmill.io doesn't manage to decrease churn, it will have to acquire more and more new customers just to offset churn, and keeping net new MRR growth up might become increasingly difficult.

OK, but what if you're acquiring new customers at an exponential growth rate? Let's look at a third imaginary company called Weed, Inc. Like Zombie.com and Treadmill.io, Weed starts with $100,000 in MRR and has a net MRR churn rate of 3% p.m. The big difference is that Weed is adding new MRR from new customers at an exponential rate. Starting with $10,000 in the first month, the company is growing new MRR from new customers 10% m/m in the first year; 8% m/m in the second year; 6% m/m in year three; 4%, 3% and 2% in year four, five and six, respectively; and 1.5% from year seven onwards. 

Here are the charts for Weed, Inc:

MRR development of Weed, Inc. – click for a larger version

MRR development of Weed, Inc. - click for a larger version

Not much to complain about: After ten years, Weed, Inc. has more than $19M in MRR. The big question, though, is if a development like this is realistic. In order to offset ever increasing churn amounts, Weed needs to acquire new MRR from new customers at an extremely ambitious pace. In the last month of the ten year model that I'm looking at, Weed adds about $870,000 in new MRR from new customers, almost 5% of the company's total MRR at the beginning of that month. To acquire so many new customers, Weed needs either a viral product (very rare in B2B SaaS) or extremely scalable lead acquisition channels.

I'm not saying that it's impossible, but I believe the much more likely path to a SaaS unicorn is by getting MRR churn to zero or below – which means you have to make your product more and more valuable for your customers and acquire larger and larger customers over time.


Thursday, January 15, 2015

Announcing our investment in ChartMogul

The big guy who's lifting Nick is Michael Hansen,
Zendesk's first employee and a co-investor in ChartMogul
As reported by TechCrunch, we’ve led a seed round in ChartMogul. We’re thrilled about the investment. The decision to invest in ChartMogul, which has developed an analytics solution for subscription businesses, was a very easy one. Here’s why:

1) ChartMogul was founded by Nick Franklin, an early Zendesk employee. As employee #6, Nick has headed Zendesk’s activities in the EMEA region for two years before leading the company’s expansion into Asia for another (almost) three years. I knew that Nick has done a fantastic job at Zendesk and knew that he was an extremely entrepreneurial, hard-working, well-rounded, smart and nice guy. So when Nick told me a few months ago that he’s leaving Zendesk to start his own startup, I was sad for Zendesk but also very keen on learning more about his new gig.

2) ChartMogul is solving a problem which we at Point Nine know very well. We talk to SaaS startups on a daily basis, and almost all of them either have significant trouble getting comprehensive, accurate and consistent metrics or they had to make huge investments (especially into developer man-months) to get reasonably solid data.

When I put together my SaaS metrics dashboard almost two years ago, I drastically underestimated how difficult it is for companies to retrieve all of the relevant data. It sounds very easy in theory, but as we (and many SaaS founders) have painfully learned over the last years, in practice it’s very hard. I’ve heard from several SaaS founders that when they’ve found my SaaS dashboard template, they loved me for creating and open-sourcing the dashboard. But that love turned into hate when they found out, often over months, how hard it is to fill the template with real data. :-) The difficulties include getting and consistently matching data from multiple sources, dealing with complicated billing scenarios, addressing all kinds of exceptions and many more – I’ll let Nick follow-up with an in-depth post on that topic.

ChartMogul is solving that pain. You connect ChartMogul with your billing system (Stripe, Braintree, Chargify or Recurly) and at the click of a button, the product will show you almost any SaaS metric that you want to see, including the SaaS KPIs from my dashboard. But ChartMogul is not only a productized version my dashboard template. Since you can slice and dice all the data that you see on the screen, ChartMogul allows you to get many more insights. If you’re a SaaS company, go check it out!

3) We’re convinced that SaaS will continue to grow very fast throughout the decade and beyond, so the company is addressing a large and growing market. What’s more, while ChartMogul is initially focused on B2B SaaS companies, the solution is equally relevant for any kind of business with subscription revenue, which expands the company’s TAM even further.

So if you happen to provide a subscription service for “authentic T-shirts from the best bars”, curated items for nerds, emergency supplies or, well, dope, ChartMogul’s got you covered. ;-) (seriously - these services all exist, and many more)


What's table stakes in SaaS, anno 2015

Yesterday I shot off a Tweetstorm about some important developments that I'm observing in the SaaS world as we're entering 2015. While a Tweetstorm is a nice way of gently breaking the 140 character limit, I thought it would make sense to follow-up with a blog post.

The point that I made was that most of the tactics which smart SaaS entrepreneurs developed around 2007-2009 – inbound marketing, conversion optimization, lifecycle marketing, etc. – and which gave them a competitive edge at that time can no longer be used to gain a competitive advantage. This doesn't mean that you should ignore these strategies. It's exactly the contrary – you have to do all of this, and you have to do it excellently. But it doesn't mean you'll win, it's necessary just for having a seat at the table.

The whole concept of the "consumerization of the enterprise" and everything that comes with it was very new a couple of years ago. As I've written before, when Mikkel told me how Zendesk was doing sales and marketing in 2008, I was intrigued but also slightly confused. Most of the terms like content marketing, inbound marketing or growth hacking didn't even exist yet or weren't widely used.

Today, an incredible amount of knowledge on how to build a SaaS company is available online. Jason M. Lemkin alone has answered more than 1100 (!) mostly SaaS-related questions on Quora, drawing from his experience in founding EchoSign and scaling it to $100M in ARR. Between his website and the blogs of David Skok, Tomasz TunguzJoel York and others you'll find great answers to almost every SaaS question that you can think of. In addition, there's a large number of excellent blogs and resources to learn about more specialized topics such as inbound marketing, landing page optimization, customer success, marketinggrowth hacking, more growth hacking, product strategy and every other imaginable topic. Processing all of that information and prioritizing and applying the learnings is of course difficult, but at least the information is there.

Besides that, companies like Totango, Gainsight and Intercom have taken some of the ideas of the first generation of consumerized SaaS entrepreneurs and turned them into great products which make it easy to analyze, segment and communicate with your users. Customer success is not the only area which saw the emergence of "SaaS for SaaS" solutions – there are now dedicated products for subscription billing and subscription analytics, too. And then there are of course great solutions for everything from multi-touch attribution to A/B testing to lead scoring.

What that means is that in 2015 there's no excuse for not understanding your metrics, for not doing great content marketing, for not being focused on customer success, for being clueless about sales and marketing or other rookie mistakes. I don't intend to sound harsh. It's the market which is harsh. All that knowledge, all those tools, it's all available to your competitors as well, and that's what's raising the table stakes.

So how can SaaS entrepreneurs get ahead of the pack in 2015? I'll leave that for another post (and I'm happy to hear about your ideas!).


Monday, January 05, 2015

The #P9Family is hiring

At the beginning of December we had the idea that it would be cool to put together a "recruiting advent calendar" with job openings from within the Point Nine Family. Each day until the 24th of December, we'd showcase one job opportunity from a portfolio company, along with a referral bonus or prize for successful referrals.

Our portfolio companies surprised us with some amazing referral prizes. Please take a look at the list below, and if you know any awesome people who might be interested in a career change in 2015, let me know!

Without further ado (and apologies for the brag), here are some of the greatest opportunities in tech in 2015:

riskmethods is hiring a Ruby on Rails Developer
Referral bonus: A trip to Oktoberfest! (everything but flight included)
Tweet it!

Kreditech is looking for a Head of Group & German Taxes
Referral bonus: One monthly salary of the new employee!
Tweet it!

Contentful needs a Technical Product Manager
Referral bonus: A weekend trip to Berlin!
Tweet it!

15Five wants a Front-End Developer
Referral bonus: A round trip flight to anywhere (up to $2,000)!
Tweet it!

Contentful has an open position for a Sales Manager
Referral bonus: A weekend trip to Berlin!
Tweet it!

15Five wants a Business Development Rep
Referral bonus: A round trip flight to anywhere (up to $2,000)!
Tweet it!

Contactually is on the hunt for a VP of Engineering
Referral bonus: $1,000 to the referrer and $1,000 to a charity of his/her choosing
Tweet it!

Vend is looking for a VP of Global Sales Operations
Referral bonus: Return economy ticket to New Zealand

Referral bonus: A trip to Paris, flight & accommodation included

Do you know a VP of Marketing for Gengo?
Referral bonus: A trip to Tokyo for 2!

Westwing is hiring a Global Head of Product Management and User Experience
Referral bonus: An iPad or iPhone 6+!

Positionly is looking for an Account Executive
Referral bonus: A trip to Warsaw!

Referral bonus: A trip to Tokyo for 2!

Mambu is hiring an Account Manager
Referral bonus: Apple iWatch Sports Edition (as soon as it's released!)

Referral bonus: iPad Mini

Typeform is looking for a CMO
Referral bonus: A weekend in sunny Barcelona!

Referral bonus: A Parrot AR.Drone 2.0 Quadcopter!

15Five is searching for a Front End Growth Hacker
Referral bonus: A round trip flight to anywhere (up to $2,000)!

ServerDensity has an open position for a Technical Account Manager
Referral bonus: One year supply of English-grown Earl Grey Tea!

DocPlanner is looking for a Product Manager
Referral bonus: A party weekend in Warsaw for 2!

Referral bonus: An iPad or iPhone 6+!



Wednesday, December 24, 2014

2014 in the numbers – fun stats from the #P9Family

It's that time of the year again, the blogosphere is full of reviews of the year that is coming to a close and predictions for the coming year. When it comes to predictions, I agree with Niels Bohr (or Mark Twain or various other people who the quote got attributed to): Prediction is difficult, especially about the future. Seriously, as Paul Graham just wrote in his latest essay, change is notoriously (and tautologically) hard to predict.

So let me take the safer path, take a look back at 2014 and show you some stats from the Point Nine family of startups. Some are true KPIs, others are from the fun/vanity metrics department – but I believe all of them are impressive and inspiring. Enormous gratitude goes to all the extremely hard-working and talented people in the #P9Family. You rocked this year (and not only this year)!

(If you're reading this post in an email client or RSS reader, the infographic below might not display correctly. In that case please go to the Web version.)



Tuesday, December 16, 2014

Introducing: The One-Slide Update Deck

When we start to work with a new portfolio company, one of the things we always suggest is that in addition to (sometimes lots of) ad hoc communication via eMail, Skype, Basecamp, etc. we set up a standing meeting or call, at least during the first 9-12 months following our investment. Typically it's a one-hour monthly call, and the purpose of these calls is to get us updated and to talk through current issues. Our experience is that these calls are a very effective and efficient way to discuss things and to find out how we can help. The last thing we want to do is be a burden on the founders, and so we try to be very respectful of the their time (even if we're not as efficient as Oliver Samwer with his famous "supercalls" - 12 hours, 180 companies, or something like that).

Just like a regular Board Meeting, these monthly calls work best if the investors get an update before the call, so that the call can be spent discussing key challenges rather than spending too much time going through numbers and updates. And that brings me to the topic of this post: The One-Slide Update Deck.

Founders often ask me if I have a preferred format for updates and KPIs. And while I can point them to my SaaS metrics dashboard for KPIs, we've never had something like a template for other updates. So here's my attempt to create a super-simple deck which you can use to update your investors (or me!):




The idea is that in the beginning you create a rough roadmap for the next 12 months, broken down into key areas like Product & Tech, Sales & Marketing and Team/Hiring (see slide 1), plus a financial plan. Better yet, you already have a plan :-) and you discuss that with your investors to get everyone on the same page.

Then, every month you create one slide which shows progress and problems, as well as the original plan, in each of the three key areas, plus key metrics. I've borrowed the "Progress, plans, problems" technique from Seedcamp; the metrics are taken from my own SaaS dashboard template. So just one slide, once a month, with information you should already have anyway, and you should have a great basis for highly productive calls or meetings with your investors.

It obviously doesn't matter if you use Keynote, Google Docs or something else, and depending on the needs of your company you may want to emphasize different key areas or include other KPIs. So this isn't meant to be prescriptive but rather a suggestion or a starting point for founders who are thinking about reporting for the first time – if you are already providing more comprehensive monthly reports, don't change it!

If you want to take a closer look, here is a PDF and here is the original Keynote version.

Thanks to Nicolas, Rodrigo and Michael for providing valuable feedback on the draft of the slides!






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