Lesson #337: The 14 Characteristics of a Fundable Startup CEO

I recently stumbled on this great article below from my good colleague, David Gardner (pictured), the founder and General Partner at Co-Founders Capital, one of the most active early-stage venture capital firms in the Southeast, based in the Raleigh-Durham area.  David was kind enough to let me share this article with all of you startup CEO readers.

What I liked about this article was it was a clear way to score your performance, which isn't easy to do as a CEO, typically with no boss to help critique you.  Whether you are doing it with the lens of what an investor is looking for, as detailed below, or whether you are doing it for yourself, just to see if you are doing a good job, everyone needs to be accountable for their actions, including the CEO!!

If you scored perfectly on the below categories, you would earn a total score of 70.  If you were average in each of these categories, you would earn a score of 42.  And, since nobody is perfect and you want to be materially better than average, I would say shooting for a score of 56 or better is where you want to end up.

So, after reading the article, score yourself, in an honest and self-reflective way, and see how you are doing.  If you are doing well, congrats, keep up the good work and you should have no problem fund raising.  But, if you are not, it's time to sharpen your skills, especially if you plan on raising venture capital.  

Thanks again, David, for sharing your wisdom with our readers.

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Being a CEO is a tough job especially the first time someone has to wear that hat.  Constructive and actionable feedback can be hard to come by.  It can also be difficult to know how well you are doing and what areas you might need to improve upon when you don’t have a boss observing you firsthand. You can only improve what you measure and CEO performance is no exception to that rule. 

To help our portfolio CEOs, we have developed the following evaluation criteria.  It covers some of the things we look for in a solid operator and leader.  This annual evaluation is meant to be completed by the CEO, their direct reports and the board members in an anonymous 360 aggregated review.  It’s purpose is honest feedback to facilitate awareness and constructive discussion. We ask each reviewer to rate the CEO being reviewed in each of the following 14 categories, on scale from 1 to 5 scale, as defined below:

1. Very deficient and detrimental to the organization
2. Needs a lot of improvement
3. Base level of competency
4. Meeting or exceeding expectations
5. An exceptional strength

1. Transparency: Our CEO is genuine and forthcoming with all information significant to the success of the business.  Bad news is delivered as is and not sugar coated.  Good news is not exaggerated.  Facts are presented dispassionately for what they are.  Our CEO shares more key metrics and data trend lines than anecdotal stories.  Board members are provided with the timely and accurate information they need to asset the business and help the CEO make informed and balanced decisions.

2. Leadership:  Our CEO is trusted by the team and other stakeholders to make the informed and necessary decisions required to keep the company moving forward.  Staff members know what is required of them at all times and how their efforts and performance metrics contribute to overall company goals and objectives.  Our CEO is demanding but fair.  Team members, investors and advisors feel listened to and that their opinions and ideas are heard and help to shape our CEO’s final decisions and policies. Team members trust their CEO to do what he or she says.  Our CEO respects the chain of command and does not circumvent his or her managers.  Our CEO is building a positive company culture that people want to be a part of.   Our CEO is always bringing organization to chaos as our venture grows.

3. Communication:  Our CEO can articulate the company’s mission, differentiations, and value props to all stakeholders and potential shareholders including employees, customers, prospects and investors.  Our CEO’s communication is clear, concise and convincing.  Our CEO can see things from an audience’s perspective and handles objections in a non-offensive manner.  Our CEO can speak in terms of value propositions that are relevant to his or her audience.  Our CEO can walk a person logically from where they are (point A) to point B when explaining complex matters.

4. Management:  Our CEO is a good manager.  Team members know what is expected of them, how they are doing and how they are evaluated.  Direct reports are never surprised when promoted or fired.  Objectives are clearly defined as are job descriptions, best practices and procedures.  Direct reports feel confident that their CEO is striving for their individual success as well as company success.  Our CEO meets regularly with the management team as a group and each direct report individually to review progress, lend assistance and address concerns.  Our CEO does not have excessive employee turnover.  Our CEO is a good trainer who takes the time required with new team members to make sure they can do all aspects of their jobs.  Our CEO holds direct reports accountable and will decisively terminate consistently poor performers.

5. Judgement:  Our CEO demonstrates good judgement.  Our CEO is calculating and practical gathering all of the information and opinions available before making important decisions. Our CEO does not make rash uninformed decisions or chase every shiny object.  Our CEO will take calculated risk using appropriate risk/reward analysis.  Our CEO always has a contingency plan in mind.  Our CEO sets reasonable timelines and goals.  Our CEO is data driven and not afraid to pivot when necessary.  Our CEO is thoughtful and dispassionate in decision making testing hypotheses and tactics before committing major resources or time to projects.

6. Time Management:   Our CEO manages his or her time wisely and efficiently.   Daily tasks and projects get appropriate amounts of time based on their importance.  Our CEO projects a consistent and contagious sense of urgency.  Our CEO does not waste time but treats it as his or her most precious resource.  Our CEO alots his or her time in a manner always mindful of the opportunity costs that may be involved.  Our CEO is not a perfectionist and knows when 80% is good enough.  Our CEO does not avoid or short-change tasks that he or she doesn’t like to do.  Our CEO keeps a written personal task list and is constantly reprioritizing it.  Our CEO knows when to go slow and when to go fast.

7. Fundraising:  Our CEO ensures that our company does not run out of money and stays well ahead of any cash shortfalls in full realization of the time it can take to raise capital.  Our CEO is the chief fundraiser for the company and always mindful of our runway, burn and cash-out date.  Our CEO keeps investors and prospective investors informed.  Our CEO understands which types of investors and fund managers are a good fit for our company based on their check size, investment thesis, expertise and geographic preferences.  Our CEO maintains and can defend a reasonable forecast and key assumptions.  Our CEO can deliver a convincing investor pitch deck and plan.  Our CEO inspires confidence.

8. Recruiting:  Our CEO is good at sourcing and recruiting the talent needed to grow our company.  Our CEO makes recruiting a regular priority each week and does not wait until the company is desperate for help before starting the recruiting process.  Our CEO conducts detailed interviews and reference checking.  Our CEO can communicate a vibrant company vision and culture where new hires want to work.  Our CEO is not afraid to hire those more talented than himself or herself in any given area.

9. Strategist:  Our CEO possesses a deep understanding of our chosen industry and market sector.  Our CEO has a full appreciation of the subtleties of our space, competitors and how to position our solution to fit into each customer type and business partner’s perspective.  Our CEO knows when to partner, when to buy and when to compete head on.  Our CEO is always looking for business development opportunities and partnerships leveraging the technology, customer  base or salesforce of others.

10. Negotiating:  Our CEO understands and utilizes basic negotiating techniques.  Our CEO is not afraid to push back on or walk away from a one-sided deal.  Our CEO takes the time to understand another’s position, constraints and goals so that he or she can propose creative solutions.   Our CEO rarely pays full price.  Our CEO is always willing to lose a battle if it means winning a war.

11. Maturity:  Our CEO is always the adult in the room.  Our CEO is not intimidated by those with skills and ideas that are not his or her own.  Our CEO is assertive but not overbearing.   Our CEO is comfortable admitting when he or she has made a mistake.  Our CEO takes into account the human element and emotions in every situation.  Our CEO is always professional.  Once a decision has been made our CEO expects full compliance and will not tolerate insubordination in any form.  Our CEO is not given to emotional outbursts or knee-jerk reactions.   Our CEO cares about more than just the success of the business.   Our CEO encourages the team to take risks and try things. Our CEO does not penalize team members who try creative things that don’t end up working out.

12. Resourcefulness:  Our CEO seeks out and utilizes available resources.  From advisors, key customers, grants, publications and reports to competitive sales collateral and market analysis, our CEO stays abreast of that which might be useful in accomplishing the mission at hand.  Our CEO is coachable.  Before starting a new initiative or implementing a key strategy, our CEO taps available contributors and data.  Our CEO avoids an echo chamber and solicits outside opinions.  Our CEO does not shoot from the hip, make decisions in a vacuum or simply buy his or her way out of a problem or into a quick solution.

13. Financial Management:  Our CEO has a complete understanding of the business model and which assumptions and key metric as most important to the business.   Our CEO can spot trend lines and how they impact the business.  Our CEO is constantly discussing key assumptions with those involved and tweaking them to produce the most accurate forecast possible.  Our CEO understands the impact of debt and increasing the burn rate and never waits too long to right-size the business.  Our CEO knows when to grow faster and when to slow down and proceed more cautiously.  Our forecast is continuously becoming more accurate.

14. Administrative:  Our CEO consistently ensures that required administrative tasks such as submitting monthly financial statements and updated forecasts are submitted to board members.  Our CEO fulfills written and legal obligations to maintain D&O and key-man insurance.  Our CEO schedules and conducts all board meetings and annual shareholder’s meetings on the required cadence.   Our CEO schedules required meetings well in advance and sends board decks, option grant proposals, legal and other documents for board member review well in advance of board meetings.

For future posts, please follow George on Twitter at @georgedeeb and follow David at @StartUpHats. 

How Artificial Intelligence is Changing Marketing

I have been an avid reader of the Marketing Insider Group blog for a while now, and read this great post on 6 Examples of AI Marketing by Michael Brenner, a CMO influencer whose work has been featured in many national business publications.  The topic of artificial intelligence and how it is changing human workflows has been interesting to me.  And, this specific post speaks to how artificial intelligence is changing the marketing world, a topic that is directly related to our day-to-day marketing roles.  I asked Michael if I could republish this post on the Red Rocket Blog as a guest post, and he was kind enough to let me share it with all of you.  Thanks, Michael!  I hope you all enjoy this great piece on how technology is taking marketing to the next level.

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Technology is evolving and the world of online marketing is evolving along with it. Artificial intelligence and machine learning now make a wide variety of marketing tasks easy; even those which would have been impossible only a few years ago.

We’re still in the very early stages of using AI in marketing but even so, there are some impressive applications that are already available and in use today.

Here are just a few examples of how AI is currently being used in digital marketing.

PERSONALISED RECOMMENDATIONS

Most people will already be familiar with the tailored recommendations that are offered when you log into a site like Amazon or Netflix.

These recommendation engines have become increasingly sophisticated over the years, and can be startlingly accurate, particularly for users who have had an account for several years so the service has been able to collect lots of data.

For example, Amazon has a record of:

• Every purchase you’ve ever made
• Your product browsing history
• The addresses you’ve lived and worked at
• Items you’ve wished for
• TV shows and music you’ve played
• Apps you’ve downloaded
• Product ratings you’ve made and reviews you’ve left
• Devices you’ve used to watch movies or download ebooks
• Everything you’ve asked Alexa if you have an Echo

It can use this information to deliver product recommendations based on your interests, past purchases, and what other people have purchased who also bought the same items as you.

For example, if you’ve previously bought a printer then Amazon is quite likely to recommend you print cartridges and paper. If you’re expecting a baby and you’ve ordered stretch mark cream and pre-natal vitamins, don’t be surprised if baby clothes and toys start popping up in your recommended products.

All this is powered by an AI framework called DSSTNE that has been released as open source software to improve its deep learning capabilities.

DYNAMIC PRICING

Providing discounts is a surefire way to increase sales, but some customers will buy with a smaller discount, or if there is no discount at all.

AI can be used to set the price of products dynamically depending on demand, availability, customer profiles, and other factors to maximize both sales and profits.

You can see dynamic pricing in action using the website camelcamelcamel.com, which tracks the price of Amazon products over time. Each product has a graph showing just how much the pricing fluctuates depending on season, popularity, and other factors.

If you’ve ever searched for a flight and then gone back to buy it a couple of days later only to find it’s gone up a few hundred dollars, this is also a good example of dynamic pricing at work.

CUSTOMER SERVICE CHATBOTS

Facebook Messenger, Whatsapp, and other messaging apps have become a popular and convenient way for customers to contact companies, but ensuring the accounts are constantly staffed with customer service agents can be expensive.

To reduce the workload and provide a faster response to customers, some organizations are now using chatbots to deal with common customer queries and provide instant replies at any time of the day or night.

With virtual assistants like Siri, Google Assistant, Alexa, and Cortana, we’re getting more comfortable with chatbots and in some cases even preferring them to a real person.

Chatbots can be programmed to provide set replies to frequently asked questions and to direct the conversation to a human agent if the question is too complex. This means that customer service time is reduced and the workload lifted, leaving the agents free to deal with conversations that need a more personal response.

CONTENT GENERATION

Machine generated content has been around for quite a while but the first unsophisticated attempts were pretty unreadable – they may have fooled the search engines (temporarily) but not humans.

AI for content creation has now become incredibly sophisticated to the point where Stylist magazine published three automatically generated articles created by Articoolo in its special “Robots” edition.

Automated content software is now able to generate news stories and reports in a matter of seconds that would take a human writer hours or days to create.

Even if you don’t trust machines to take over your content creation process entirely, they’re still useful for smaller tasks like generating your social media posts. The Washington Post uses in-house reporting technology called Heliograf to write basic social media posts and news stories.

Computers are also pretty good at coming up with formulaic headlines, particularly those that can be classed as “clickbait”.

SEARCH

Search algorithms are improving all the time in every aspect from small database product searches on ecommerce sites to search engines like Google that are used by millions of people every day.

Integrating AI into search can pick up misspellings and suggesting alternatives (“did you mean…”) and may be influenced by your past browsing or shopping behavior.

Google is becoming increasingly sophisticated at working out searcher “intent” For example if someone searches for “Apple” are they looking for information about the fruit, the technology company, or the record label?

Most search engines know if a user is on their mobile phone and searching for “coffee shops” they’re looking for a coffee shop within a few miles, rather than researching coffee shops in general.

Special results such as shopping and Google My Business results are also providing a better user experience for searchers, and voice search is becoming more commonplace as the number of AI-powered devices and assistants continues to grow.

AD OPTIMISATION

A/B testing is the traditional approach to optimizing marketing messages and display ads, but it’s a painstaking process with an infinite number of variables to try out, and therefore takes up a lot of time and resources.

With AI algorithms you can continually and automatically optimize your ads depending on conversions and interactions.

AI ad optimization is already in use on social networks such as Instagram. Algorithms analyze the accounts that a particular user is following and will show the ads most likely to be relevant to this user. This provides a better experience to the user and a better ROI for the advertiser as fewer ads are shown to people who aren’t interested in them.

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For future posts, please follow me on Twitter at @georgedeeb and Michael at @brennermichael.

Lesson #285: How to Recruit & Retain Rockstar Talent

You have heard me preach over and over again how great teams build great businesses.  That I would rather invest in an A+ team with a B+ idea, than a B+ team with an A+ idea.  Well now, you can learn exactly how to recruit and retain rockstar talent for your business.  My close colleague Jeff Hyman, the Chief Talent Officer at Strong Suit a Chicago-based executive recruiter than specializes in VC and PE backed companies, just published a new best selling book called Recruit Rockstars--The 10 Step Playbook to Find The Winners and Ignite Your Business.  It was like everything that was in my head on this topic, just magically found itself in print in Jeff's must read book.  Jeff was kind enough to let me share some of his wisdom with you in this Red Rocket post.

THE 10 STEP PLAYBOOK

First of all, here is a good summary of the book, featuring the 10 Step Playbook for hiring rockstars.  It compares what most recruiters do, and what rockstar recruiters do.  Notice the key steps from starting with setting up an upfront scorecard for what will make a great candidate, focusing on the candidates with the right DNA, taking candidates for a test drive, paying special attention during onboarding and pruning mis-hires within the first 60 days, to name a few.

APPROACH RECRUITING LIKE A MARKETER, NOT A RECRUITER

I especially liked the section that said recruiters need to entirely change their mindset in terms of how they approach recruiting.  Recruiting talent for your business should be no different than the marketing tactics you would use to attract new customers for your business.  So, put on your marketing hats and figure out how you are going to build a great "employer brand" in attracting the best talent for your business.

RETAINING ROCKSTARS IS JUST AS IMPORTANT IS HIRING THEM

Here is a quick excerpt from Jeff's book on the importance of retaining your rock stars once hired, and how exactly to do that:
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THE ALL-IMPORTANT FIVE CS

"After hiring a Rockstar, the real work begins—getting the most out of them. I’ve studied and tried countless leadership styles. I’m convinced that authenticity wins—be yourself. But ensure that you provide what I call the five Cs to your Rockstars. They value these more than treadmills, ping pong tables, and notoriety.

CHALLENGE

First and foremost, provide them with interesting work. Give them customer problems to solve and a variety of people to deal with. Ask them to figure out how to make things faster, cheaper, and better within the organization. Countless studies show that challenge is the most important factor to job satisfaction for Rockstars, ranking even higher than money.

CAREER PATH

Rockstars are not only interested in their current role, but in their next one. They want to understand their likely career advancement and progression. That doesn’t necessarily mean an annual promotion. It can include lateral moves to broaden skill sets or working in a different geography. You can also say, “Here are some potential options for what might come next. I can’t promise them to you today, but if you do an outstanding job in this role, in a year, here are the kinds of things we see someone like you doing.”

The average new hire will work with at least fifteen companies during their career. The average tenure at a company is two years. So, if you can keep a Rockstar aboard your “train” for longer than that, you’re doing well. Go ahead and tell them, “My hope is to make this the best job of your life. If I do that, you’ll likely stay with us for a sustained amount of time. My expectations are high, but they’re realistic. My job is to get the best from you and provide the most fulfilling
job you’ve ever had.”

There’s no need to have the career discussion more than every six months, but you need to understand their aspirations and how they evolve over time. That way, you can begin to think about their advancement and what other roles might make sense for them. Provide it before some headhunter does.

Part of career progression entails succession planning, so that when you experience a departure, you have a potential successor identified. The best companies in the world often have a successor in mind for every role; that way, if someone leaves, they have a replacement named by the end of the day. The injury-riddled occupation of football has addressed this issue with the motto, “Next man up.” Be prepared because you never know when a role will need to be refilled.

Bear in mind this will sometimes mean promoting a Rockstar who’s not quite ready for the next step—you can do so on an interim basis. This is often better than taking the chance with an outside recruit, who would come with risk and could be the reason your Rockstar departs when passed over for the role. Always search inside first; at the very least, when considering outside candidates, run all viable internal candidates in parallel through the same fair and objective process.

CANDID COACHING

Most Rockstars respond well to candor, because they have an insatiable need to improve their performance. They recognize the path to promotion, to taking your job, and the CEO role perhaps one day, is to continually improve. To get better, they need and crave your feedback. So, provide it frequently. Ban the annual review; your Rockstars hate it as much as you detest cramming to write those missives over Christmas week. Instead, implement a monthly or quarterly coaching cycle. Find just two or three messages—not the laundry list given by most managers—that you want to reinforce, give specific examples, and then watch for improvement. When you catch them doing something right, reinforce it by letting them know you noticed and by recognizing them publicly if possible. Your two or three things should be tied to the skills they need for their next career move.

A powerful yet underused tool to help you give candid feedback is the Socratic method. Ask a few simple questions. “How do you think the (meeting/product launch/etc.) went? What could you have done differently? What could have gone better?” Rockstars are often their own toughest critic. Often, they are aware of what could have gone better or what they could have done differently. You can say, “What can I, as your manager, do next time to make sure your performance is better?”

Rockstars appreciate a work environment where candor, or a debate-and-align structure, is valued. This structure supports productive disagreements focused on the idea, not the person. Once a decision is reached, regardless of whether the group agreed or the leader reached a decision, everyone agrees to align behind that decision.

CONTACTS

Open your personal network—including your LinkedIn network—to your team. Introduce them to mentors outside the organization. This is especially important if yours is a small company where there just aren’t many people for them to learn from. You might know people who would be great role models for your Rockstars. Some managers won’t do this because they want to keep their Rockstar a secret, but when you introduce them to people who can broaden their knowledge, they will be grateful. And that increases loyalty.

COMPENSATION

Compensation isn’t everything, but it’s something. I’ve found that more important than the fixed base salary, however, is the variable upside. Rockstars respond well to a challenge, and they respond well to currency tied to upside performance. Lay out specifically how they earn it. Be clear with what percentage they can earn and when it will be paid out. And don’t change the rules halfway through the game.

Rockstars don’t respond well to black-box, or subjective, variable compensation. No matter how well they do, they don’t know what they’ll earn. That’s not motivating, and so you’re wasting your money and frustrating your top performers. Avoid capping your variable compensation. If they can deliver three times what you expect them to deliver, they should receive a meaningful variable compensation payout.

Perhaps my greatest frustration with regard to compensation is that so many leaders apply the “peanut butter” approach. They spread money around, approximately the same to all employees, in an effort to keep the peace. Instead, use differentiation, the concept of not treating everyone equally, to separate Rockstars from B- and C-Players. It means promotions, titles, and public recognition for great performances. It means fair compensation tied to performance. So rather than giving everyone 2 to 5 percent raises, give 20 percent raises to the ones who deserve it. And yes, that means you’ll fund it by giving no raise this year to many. And those C-Players may choose to leave because of it. And that’s okay."

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So, as you can see, there is a lot of terrific wisdom in Jeff's new book.  It is a must-read if you going to build really great teams for your business, as there are a lot more how-to details in the book than are shared in summary in this post (here is the link to the book on Amazon).  Thanks, Jeff, for allowing us to share this gem with our Red Rocket blog readers.

For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #273: Benchmarking SaaS Financial Metrics

My colleagues at River Cities Capital Funds, a Cincinnati and Raleigh based growth-stage venture capital fund with deep expertise in the SaaS technology industry, has recently published a terrific new report with a treasure trove of operating and valuation benchmarking data in the SaaS space.  The report was based on studying the financial reports of 92 publicly-traded SaaS companies, to see how those companies grew over time.  For purposes of this blog post, I focused on the operating metrics only, to help give earlier stage entrepreneurs a blueprint on how to grow their businesses.

THE KEY DATA

To simplify reading the full 30 page report, I curated the most-relevant median financial metrics for the 92 companies studied into the below chart.

Now, you have a better understanding of what it takes to plan and budget for your own SaaS business, along every step of the revenue curve.  Especially, if you are venture capital backed, or plan to go head-to-head against other venture capital backed companies (and the deep pockets they will have in shooting bullets in your direction).

LEARNINGS FROM THE DATA

Growth:  Buckle your seat belts, and get ready for a wild ride.  These companies were averaging some pretty fast 40-50% growth rates, over time.  It only took these 92 companies an average of 6 years to grow from under $5MM in revenues to over $100MM in revenues. And, while growth is exciting, it sure brings a lot of headaches when trying to scale your business and processes along the way.  So, plan ahead.

Gross Margin:  I was surprised the 60-70% gross margins were as low as they were here.  You hear about how much venture capitalists like the SaaS space because of their high margins, but that is much harder to see in the above chart.  So, if you were planning to strike it rich with 80-90% margins, think again, as it looks like prices are coming down.

Sales & Marketing Investment:  In order to get to their first $1MM in revenues, they needed to invest $1.5MM in sales and marketing, on average.  To get to their first $1MM in gross profit, they needed to invest $2.4MM in sales and marketing, on average.  Hopefully, you have raised enough capital to put enough sales and marketing muscle behind your business, and fund these startup losses.  The investment here is material in the 40-50% range, and maintains itself at very high levels over time, resulting in almost a two year payback period!!  Don't forget to read this post on metrics specifically related to SaaS sales team metrics, for deeper-level benchmarks.

R&D and Capex:  Don't think you build a product and you are done with it.  These companies are plowing in tons of monies into improving their products over time.  Think 25% of revenues long term, and that takes a lot of capital backing in the absence of material profits.

EBITDA:  I understand that investing in long term growth requires a material investment, often resulting in near term losses.  But, I was surprised how long the losses continue, over many years.  These companies didn't really break even until they got to $75MM in revenues, on average.  And, even then, the bottom line profits were not all that exciting, at 4% of sales.  Yes, I know, the numbers will look a lot better at $200MM in revenues, than they do at $100MM in revenues, but that is a really a long time to have investors wait for a meaningful return on their investment.

Valuation:  Think about this--a $100MM revenue SaaS business is worth $380MM at the 3.8x average multiplier cited in the report, which means it is trading at a whopping 95x cash flow.  I'm sorry, I just don't see the logic in that.  There are tons of other cash-generating businesses you can buy for a lot less money, and actually have a lot more to show for it. So, buyer beware!

Thanks again to the River Cities team to putting all that hard work into their research report.  Now we all can benefit from it, in terms of modeling our own SaaS businesses.


For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #270: Benchmarking SaaS Sales Team Metrics

I recently read this terrific blog post by David Skok, an expert on SaaS businesses and a General Partner at Matrix Partners, an early-stage venture capital firm based in Boston.  This post included a lot of terrific sales-related benchmarking metrics for SaaS businesses collected by David and The Bridge Group.  David was kind enough to allow me to share his learnings with all of you.  So, here it goes.

Sample Studied:  The study interviewed 384 SaaS executives.  89% in North America, $20MM median revenues, $25K median contract value, 60 day median sales cycle.

Territories:  Companies keep it simple as long as they can; 61% of companies under $5MM have no territories--which falls to 10% for companies over $250MM in sales.  Companies under $50MM that do create territories, do so: 63% by geography, 23% by named accounts and 9% by industry vertical.

Outside Sales Reps:  Outside salespeople are expensive, especially for lower ticket products where you can't make the lifetime value of revenues exceed the cost of acquisition.  So, no surprise that only 9% of the sales pipeline of a company under $5MM was generated by outside salespeople (leaning on marketing or inside salespeople instead), which jumps to 38% of the pipeline for companies between $50-$100MM in revenues, where they can better afford the costs.

Specialized Roles:  Every client can have up to three people covering them--a sales development rep that close the first sale, an account executive that manages the long term relationship and future sales and a customer success person that manages operational fulfillment.  Only 22% of companies under $5MM have all three roles, which increases to 44% for companies between $20-$50MM.  And, the higher the average order value, the higher odds you get multiple roles filled (8% fill all three roles with under $5K ticket, which jumps to 56% with $100K+ ticket given the higher complexity of the sale).

Location:  24% of companies under $5MM have sales reps in multiple locations, which jumps to 95% for companies over $500MM.  Surprisingly, the cost of that person is largely the same as the home office team, regardless of which market they are operating from.

Tenure:  The average tenure of a salesperson is 2.4 years with the company.  But, that increases with the average order value of the product:  only 8% of salespeople stay with the company over four years in companies under $5K ticket, but jump to 31% with over $100K ticket.  That speaks to more complex sales and the need to retain those selling experts--and, the higher compensation those salespeople are making with no need to look elsewhere for a new job.

Turnover:  The average employee turnover in the sales team was a whopping 30%, half of which from involuntary terminations and half of which from voluntary resignations.  The old adage bears true:  never stop recruiting.  And, what a painful process for your sales managers, having to retrain a third of their sales team every year, and the negative impact that has on sales productivity.

Compensation:  The average compensation was $126K, comprised of a $62K base salary and a $64K commission for on-target sales.  Understanding there is a wide range here, based on average ticket of the product.  But, compensation is steadily rising; the amount of salespeople making more than $120K has increased from 18% to 51% in the last five years.

Quotas:  The average quota was $770K, or 5.3x their total compensation for on-target sales. But, quotas increase with average ticket, from $578K for $5K ticket to $1.3MM for $100K+ ticket.  That assumes selling low ticket products is easy and you should close 115 transactions a year (10 a month) and selling high ticket products is hard, selling only 13 transactions a year (one a month).  Quotas have been increasing about 8% over the last two years, faster than inflation, as companies are asking their salespeople to do more production.

Commission Plan:  On average, 37% of companies offer a flat compensation plan (regardless of sales production), 24% offer a gradually increasing commission plan, 28% offer a sharply increasing commission plan (that accelerates with achievement over plan) and 11% offer a steeply increasing commission plan (often with a sales cliff before material commissions kick in).  I am surprised a third of companies don't tie compensation to performance--please fix that!!

Demos:  The number of demos is dependent on average ticket.  Companies with an averge ticket under $5K do 11.3 demos a week (closing around 25% of them) and companies with a ticket over $100K do 3.6 demos a week (closing about 7% of them, on average).  I am surprised the close rate was not higher than 10% in all cases, which I typically shoot for.  That is the difference of 43% more sales!!

Tech Spend:  Excluding the base CRM costs, the average salesperson spends around $477 on additional software to help them with their jobs.  That typically gets you email automation, contact data appending, contract e-signatures and LinkedIn's Sales Navigator tools.  The more sophisticated companies spend an additional $500 to get call recordings and conversion analytics tools.  The below chart shows even more advanced technologies which are early in their adoption curve.

Titles:  Titles materially vary by size of company--a VP in a small company may be the equivalent experience of a Director in a medium company or a Manager in a big company.  The most senior person in a company under $20MM is typically a VP or CXO, 45% of the time.  Where the most senior person in a company over $100MM, may have the Manager title, 71% of the time.  So, be careful how your craft your job postings and ask smart questions during interviews to make sure you are not comparing apples with oranges.  As a rule of thumb:  Directors are great strategists/leaders, Managers are great coaches and Team Leaders are great role models in a hybrid contributor/manager role.  Team leaders typically manage a team of 7.2 account executives, excluding themselves.

Struggles:  I am guessing you are all in good company here.  49% of companies struggle with team productivity/performance; 30% with recruiting/hiring; 26% with onboarding/training and 19% with forecast accuracy.  Numbers which have not materially improved over the years, despite all the advancements in technology.  Driving sales is never easy.


Hopefully, you agree that are some great sales benchmarking metrics herein, which can help you in managing your own SaaS sales organizations.  Thanks again, David, for allowing me to share some of your insights with our Red Rocket readers.  Be sure to read the full blog post for more details and you can follow David on Twitter at: @bostonvc.  Happy hunting!

For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #257: The 9 Types of Leadership

I recently read a great book called The 9 Types of Leadership, written by Beatrice Chestnut ,a licensed psychotherapist, executive coach, and business consultant, and an authority on the topic of leadership.  Beatrice was kind enough to let me share a summary of the nine types of leadership styles with you below.  After you are done reading this list, figure out what type of leader you are, and what strengths and weaknesses that brings to your business.  I can see elements of each of these nine types in my leadership style, so it is not necessarily "one size fits all".  But, if I was forced to pick only one, I am a Type Seven.

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According to the Enneagram System of Personality, a typology akin to the Myers-Briggs Type Indicator but more textured and multi-dimensional, there are actually nine styles of leadership. Understanding the strengths and blind spots of the nine types of leaders can improve the effectiveness of the leadership within an organization by helping individual leaders become more aware of their gifts and weaknesses—or opportunities for development.  The following is a description of the nine types of leaders in terms of their core characteristics, their key strengths, and the challenges connected to their strengths when they are overused or not leveraged consciously and intentionally.

Type 1: Doing the Right Thing is the Right Thing

Summary:  Leaders who have a Type One style tend to be responsible, honest, reliable, diligent, and ethical. Their main focus of attention is on maintaining a high level of integrity and meeting high standards of quality or correctness in whatever they do. Type One leaders naturally address the “process level,” as structure, rules, and routine help them feel grounded in the basic processes required to create a quality product. Naturally detail-oriented, hard-working and responsible, their central motivation is to strive for excellence and virtue in everything they do. 

Strengths:  Type One leaders specific superpowers include a sincere desire to do the right thing, a strong focus on improvement and ethics, a commitment to clarifying processes to structure work and maintain high standards of quality in the things they do. 

Weaknesses:  While Type One leaders excel at being responsible, reliable, and hard-working, they can also become rigid and critical when they believe others’ aren’t doing a good enough job. While they try hard to behave correctly, they can be overly self-critical and may get controlling of others when they believe their way is they only right way. And, though they aim for high-quality, they may push for unrealistic ideals of perfection and judge or micro-manage people they believe are not working hard enough or producing good enough results. Fortunately, Type Ones’ sincere interest in self-improvement can mean they are open to seeing the downside of some of their personality tendencies. They will often make good use of constructive feedback to correct themselves, especially when the criticism isn’t overly harsh, even when the needed course correction means recognizing that their problem is being too focused on what is correct.

Type 2: The Power of Pleasing People

Summary:  Leaders who have a Type Two style will tend to be empathetic, concerned about the human or “people” aspect of work, and sensitive to people’s needs, preferences, and feelings. They specialize in being charming and kind, powerful and competent, or attractive and exciting. They combine a focus on people with an ability to be productive in the service of the what is needed most by the team, the organization, or society. They seek to impact tasks, work products, and teams through supporting others, cultivating relationships, empowering people they like, and inspiring co-workers through flattery, warmth, and positive regard. 

Strengths: Type Two leaders energetically support others, empathize with others’ feelings, have a natural orientation toward being of service, tend to be upbeat and friendly, and appreciate the good in others. Their superpowers consist of paying attention to delivering on what employees and customers need and creating positive working relationships. 

Weaknesses: When they are not very self-aware, Type Two leaders may do too much for others (at the expense of their own needs) and end up feeling exhausted and resentful. They may focus more on others problems than their own, and they can be so focused on the positive in others that they have a difficult time delivering tough feedback when necessary.  Fortunately, Twos’ sincere interest in the people they work with means that at some point they will realize that in order to really connect with others, they will need to connect more with themselves. When this happens, they balance out their natural inclination to focus on others with a healthy focus on their own experience as a way of creating an even stronger alignment and rapport with others.

Type 3: The Compulsively Productive Professional, or Getting to the Goal and Looking Good Doing It

Summary:  Leaders who have a Type Three style tend to be work-focused, task-oriented, goal-driven achievers. You will find them (in copious amounts) at the highest levels of most organizations, as climbing the corporate ladder or being the best at whatever they are doing is exactly what motivates them. In fact, America itself is a Type Three country, so it’s not surprising that Type Threes do well in the business culture of America. The ideals of success, making a profit, working hard to get things done, and competing to win (and being able to buy things that reflect a winner’s status) is what America—and the Type Three style—is all about.

Strengths:  Type Three leaders excel at setting and meeting goals, executing a plan and getting results, and working non-stop (and actually enjoying it). Three leaders’ superpowers are knowing how to sell themselves and whatever plan or product they are backing and working hard to succeed at attaining whatever goal they set. They also know how to project an image of success and craft the right image for whatever context they find themselves in. They have a sincere interest in collaborating with others to accomplish tasks which motivates them to evaluate how they are doing. 

Weaknesses:  Type Three leaders may also become overly aggressive and insensitive in the process of doing whatever it takes to reach their goals, fail to listen to work colleagues input, work obsessively to the point of breakdown, or stretch the truth in their drive to achieve success. Their talent for creating an image may lead them to value style over substance or a slick presentation over deeper emotional truth.  When they can slow down and check in with their colleagues, they can combine effectiveness with a more reasoned and broad-minded assessment of how things are really going. By learning to moderate their desire for success with an openness to the lessons of failure (or at least some healthy self-doubt or self-examination), Type Threes can put their natural focus on getting the job done to work in support of achieving a worthwhile personal or organizational vision.

Type 4: The Power of Authentic Self-Expression

Summary:  Leaders who have a Type Four style tend to be attuned to people’s emotions, passionate about the things they do, and dedicated to providing an environment where people feel welcome to express themselves authentically. They can be hard-working humanitarians, soulful artists, or passionate visionaries. But, whether they inspire others through their dedication to important human causes or their romantic and idealistic temperament, they combine a sensitivity to emotional experience with a drive to make an impact through the depth, creativity, and meaning they create and promote in the world.

Strengths:  Type Four leaders often display a keen aesthetic sensibility in that they easily see and value the beauty and poetry in everyday life.  Type Four leaders’ superpowers are the ability to automatically sense how others are feeling and readily intuit the invisible emotional connections that exist between people. They tend to be in touch with a wide range of emotions, which means they naturally empathize with the feelings of others and value authentic communication—even if that means talking about feelings at work, which many people would rather avoid doing. 

Weaknesses:  Type Four leaders can become frustrated when others don’t share their comfort with feeling and expressing emotions. They may also prioritize addressing the status of relationships or calling people out as inauthentic over work tasks and pay too much attention to what is missing in a situation and whether or not they are understood and heard fully. Fortunately, Type Fours’ sincere interest in people and forging meaningful connections means that they can often learn that in order to work well together, they may need to temper their requirements for mutual emotional understanding. When they can balance their own needs and feelings with a realistic understanding of what's possible in their work setting, they are able to offer their gifts and talents in a way others can appreciate.

Type 5: The Knowledgeable Observer, or the Quiet Authority

Summary:  Type Five leaders can be the true “thought leaders” of the Enneagram—they enjoy gathering and assessing data and mastering the knowledge related to the work they do. However, when it comes to the human and emotional side of leadership, they may feel more challenged. Often self-deprecating and shy, Type Fives typically avoid the spotlight and are happier with the intrinsic rewards of leadership than the recognition that comes from it. They may be leading experts in their field, or make innovative contributions to new technology, or combine deep knowledge with an original vision of life. Whatever their focus, Type Five leaders readily dedicate themselves to drawing on intellectual insights to help themselves and others understand the world.

Strengths:  Type Five leaders are particularly good at gathering and evaluating information, objective analysis and intellectual understanding, maintaining and respecting boundaries, and working independently. Their superpowers are connected to becoming content experts and locating and assessing the data to support the work they do. 

Weaknesses:  Type Five leaders’ preference for self-sufficiency may serve to isolate them from their peers and workmates. It may be difficult for them to work inter-dependently and have to communicate regularly with others to get work done. They may overdevelop their intellect and underdevelop their emotional intelligence, as they can feel awkward and uncomfortable when they have to deal with other people’s emotions. While they are humble and self-deprecating, they may have a hard time getting out in front and leading in a bold, strong way, when that requires a show of emotion or force.  Fortunately, Type Fives’ sincere interest in drawing on their knowledge and objective vision to have a positive impact on the work often motivates them to overcome some of the obstacles they experience in forming easy and effective working relationships. When they feel valued for the insights they bring and invited to communicate about what they are thinking, they can be active contributors despite their need for personal space and independence.

Type 6: The Skeptical, Vigilant Trouble-Shooter

Summary:  Leaders who have a Type Six style tend to be attuned to assessing threats and risks, solving problems, and analyzing what’s happening with an eye toward planning for the different scenarios that might unfold. Type Six leaders think strategically in terms of all the issues that could arise, and how those issues might be addressed such that goals, plans, projects, and people can be protected. They can be warm and sensitive questioners, intellectual analysts, or assertive contrarians. But, whether they help to solve problems through doubting and questioning, support solid planning through precision and analysis, or rebel against bad authorities with strength, they combine keen insight with a passion for supporting the underdog and so can bring courage and a revolutionary spirit to all their endeavors.

Strengths:  Type Six leaders’ special superpowers include accurately assessing risks and threats, forecasting and troubleshooting potential problems in a plan or project, and performing insightful analyses of work processes. 

Weaknesses:  Type Six leaders can be so good at problem-solving that they become excessively problem-seeking. They can be so focused on what might go wrong that the people around them begin to view them as pessimistic, when they regard themselves as realistic. Type Six leaders can also be slow to take action and make decisions when necessary, as they can tend to get caught up in over-analysis to the point of analysis-paralysis. And, although they are loyal and reliable, they may have a hard time trusting others and having faith in positive outcomes.  Fortunately, Type Sixes’ sincere interest in finding security means they will often do the work it takes to learn to trust people and engage with their team in productive ways, even if this means maintaining a certain level of vigilance for a while. When they can focus on proactively dealing with risks and solving interesting problems, they can usually develop good working relationships where they can put their analytical skills to good use and learn to have faith that things will turn out all right.

Type 7: The Innovative, Optimistic Visionary or Focusing on the Future (and Feeling Festive)

Summary:  As leaders, Type Sevens are gifted at brainstorming and envisioning what might be possible. The Type Seven mind is essentially boundary free, which is what makes them good at generating many ideas—they feel free to come up with many ideas and make connections between ideas almost without mental limits. As future-oriented idealists, they tend to be visionaries who have a talent for imagining new possibilities. They may be pleasure-loving networkers or service-oriented cheerleaders or optimistic dreamers, but whatever their characteristic emphasis, Type Seven leaders possess a free-thinking entrepreneurial spirit that motivates them to keep the mood up and expand the frontiers of usual modes of thinking.   

Strengths:  Type Seven leaders’ superpowers include maintaining a positive attitude, using their imaginations to plan creatively and innovate, and inspiring others through their enthusiasm and vision. 

Weaknesses:  While Sevens can be good at lifting people’s spirits, they may avoid difficult but necessary conversations. While they tend to be optimistic and fun-loving, they may have trouble facing limits and seeing the negative data in a situation. And while they are good at thinking outside the box, they may have trouble working within reasonable constraints and slowing down to attend to the more tedious (but important) details.  Fortunately, Type Sevens’ sincere interest in doing whatever they can to be effective and get results can often motivate them to pay attention to how their relentless positive outlook can sometimes derail things. When they can balance what’s great about their optimism and enthusiasm with an ability to slow down and consider all of the data and potential limitations, everybody wins.

Type 8: The Powerful, Decisive Activator or Moving Things Forward from a Position of Strength

Summary:  Leaders who have a Type Eight style tend to be strategic thinkers, attuned to where the power lies and how they can establish their own power base. They focus on assessing the big picture, mentoring people under them, and making significant things happen. Others may find them intimidating, though they usually find this feedback surprising as they don’t intend to frighten people. But, their energetic presence is large and powerful, even when they aren’t saying anything or explicitly expressing power or aggression. Overall, they combine real strength with a desire to get things done decisively and quickly, whether they specialize in taking control to get what is needed, defending the weak from being oppressed by the powerful, or overpowering people with their rebellious, magnetic presence. 

Strengths:  Type Eight leaders main superpower is superpower. They are good at tackling tough challenges with confidence, taking bold action, being decisive, and empowering people to do their best. 

Weaknesses:  While they are good at confronting situations and people and engaging in conflict, they may dominate others when they fail to moderate their big energy and intensity. Type Eight leaders may be so preoccupied with making a big impact that they don’t have the patience to think through the details, and they may move into action too quickly without assessing the consequences of the things they say and do. They can be so ready to confront tough situations or people they see as incompetent that they actually create unnecessary conflict. Fortunately, Type Eights’ sincere interest in furthering the work—and the best interests of their team or organization—can motivate them to learn to adjust their tendencies to exert power and control as a go-to strategy. When they focus their considerable energy on becoming more aware of the tendencies associated with their personality style, they can often temper their strength with a greater awareness of their impact on others and employ a wider range of tactics for getting things done.   

Type 9: Leading from Consensus, Modeling Inclusion, and Defusing Conflict—or the Consensus-Building Mediator

Summary:  Leaders who have a Type Nine style tend to be attuned to supporting and accommodating others, often in subtle, unassuming ways. Nine leaders typically don’t like being the center of attention, preferring to “lead from behind,” through being likable, making sure work gets done in a way that benefits everyone. They may be practical and strong contributors, hard-working but modest facilitators, or highly relational, sensitive partners. But, whether they take a strong stand for what’s best for their people, work tirelessly to support others without looking for credit, or harmonize with others to support their aspirations, they combine genuine concern for the welfare of people with a willingness to sacrifice their own interests to further their teams, organizations, and communities. 

Strengths:  Type Nine leaders’ superpowers include good-natured support of the efforts of others, making sure everyone is heard and included, diplomatically mediating between contending viewpoints, and leading by consensus. 

Weaknesses:  While Type Nines are friendly, easy-going, and egalitarian, they sometimes don’t express their own opinion forcefully enough or act decisively when it’s time to move forward. They can focus so much on furthering the agendas of others, that they don’t formulate and communicate their own idea of what needs to happen. They can avoid conflict through wanting to maintain the comfort and harmony of consensus, and they may slow the momentum of projects through waiting until everyone is on board. Fortunately, Type Nines’ sincere interest in working harmoniously with others to get things done means they will likely be motivated to be more aware of how their desire for agreement and consensus can get taken too far. When they can focus on recognizing the limits of trying to please everyone and acknowledge that conflict can’t always be avoided—and can even be useful—they can usually more effectively leverage their strengths in a way that allows for both interpersonal comfort and a thriving enterprise. 

Thanks Beatrice, for allowing me to share your wisdom with our readers.  Be sure to read the full book, for more details.

For future posts, please follow me on Twitter at:  @georgedeeb.

Lesson #256: 10 Universal Truths Every Salesperson Needs to Know

I was given early access to a good new business book by Shari Levitin called Heart and Sell: 10 Universal Truths Every Salesperson Needs to Know.  Shari is an expert in sales strategies, and is a well-known speaker and author on the topic.  I thought she did a really good job of highlighting the most important part of sales that most people forget: the emotions behind the sale, and tapping into those emotions with integrity in order to get the sale to close.  Shari was kind enough to allow me to share a summary of the 10 universal truths with our readers below.  These are truly words each salesperson should live by, in order to be closing more sales, faster.

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1. Success starts with the growth equation. 

Top salespeople share a willingness to take responsibility for their weaknesses, a deep curiosity about their customers and the world, and a desire for mastery. They commit to using what they’ve learned about their processes to continue improving. When you master this “growth equation” you will improve your sales record.

2. Emotions drive decision-making. 

The desire to be loved, to create closeness, look good, feel good, be remembered—even to belong—drives all of our decision-making. Our ability to uncover our customer’s emotional dominant motivators will dictate our success.

3. Sales thrive in structure. 

Pilots run through pre-flight checklists. Free-throw shooters develop rituals to help them hit the same shot time and again. Bakers adhere to time-tested recipes. So, why should it be different in sales? Highly successful salespeople have a process they follow and they follow that process every time. It may sound counter-intuitive, but structure creates the freedom to act authentically and to create true connection.

4. In sales, no never means no. 

Are you paralyzed by fear of failure? Good. Top salespeople know that the more fear they feel, the more important it is to tackle the fear. What you’re afraid to do, you must do. The question you’re afraid to ask, you must ask. We are talking about “getting out on the skinny branches.” Failure is inevitable. Resilience will drive success, as no never means no.

5. Trust begins with empathy. 

Trust is born of empathy, integrity, reliability, and competency. You need all four traits, but without connecting on an empathetic level, you won’t have a chance to demonstrate the other three. Empathy is the first building block of trust. We can’t pretend to have empathy. Empathy is not about shifting the conversation to what you want to say or judging your customer. It’s about being fully engaged and present to someone else’s emotions.

6. Integrity matters. 

Once we cultivate true empathy, we find it impossible to lie to or cheat our customers—or anyone, for that matter, including ourselves. The word “sales” comes from the old English word for “give.” When we sell, we must give. We can only maintain trust and enjoy enduring success when we cultivate honorable traits like reliability, competency, and integrity. Eventually, they become part of our character.

7. Anything that can be told can be asked. 

When we ask the right questions, we uncover what matters most. “Discovery questions” uncover customers’ needs, direct their thinking down a path we choose, generate curiosity, and ultimately move them to action. These questions build rapport, gain commitment, and help your prospects sell themselves. Well-crafted questions help us make a point loudly, without having to raise our voice. Good questions create change. Great questions can change the world.

8. Emotional commitment precedes economic commitment.

Most salespeople incorrectly assume that they can create a sense of urgency by threatening scarcity or appealing to greed. But if people don’t want what you’re selling, they won’t care if there are only two left or whether you’re throwing something else in. (Anyone want a stagecoach? It’s on sale today only! And I’ll throw in some horseshoes for free!) Engage customers with stories and build urgency by demonstrating how your product connects to precisely what motivates them.

9. Removing resistance takes persistence. 

As soon as a prospect displays resistance, most salespeople drop the price, modify the terms, or otherwise change the offer. But the truth is: only when someone is in a receptive emotional state can you close. You need strategies for keeping customers receptive, isolating the toughest customer objections, and uncovering the real and final objection so you can close more deals more
quickly.

10. Looking for wrongs never makes you right. 

Every day, in every encounter, you have a choice. You can look for what’s right about that person or experience—what’s valuable or productive—or you can look for what’s wrong. When you’re interacting with your associates or your customers, don’t look for reasons why they won’t buy. Look instead for reasons why they will buy. Whatever you look for, be certain you’ll find it!


Thanks again, Shari, for sharing this with our readers.  And, be sure to check out more details in the book itself.  If any questions, feel free to reach out to Shari at her website and follow her on Twitter at: @sharilevitin.

For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #255: Crowdfunding Works--Monies Raised, Jobs Created

I recently read some research done by Crowdfund Capital Advisors, an authority in the regulation crowdfunding space, and co-author of the original JOBS Act in 2012.  This report summarizes the volume of activity that happened on the Title III crowdfunding portals regulated by FINRA in 2016. Regulation crowdfunding, which first made it legal for mom-and-pop non-accredited investors to invest in early stage startups, first went live on May 16, 2016, so the below research only reflects partial year results.  And, the below does not include activities happening on non-regulated crowdfunding activities operating under the Title II and Title IV platforms, which includes bigger crowdfunding platforms like Angel List, who serve accredited investors with net worths in excess of $1MM.  Nor does it include the crowd donations sites like Kickstarter and Indiegogo, where even more money is flowing.

My interpretation was, based on this small Title III sub-segment of the market, still in its infancy, which can be further extrapolated across the broader crowdfunding landscape: money is flowing, startups are growing and jobs are being created, just as originally hoped for when the JOBS Act was originally conceived.  To pound that point home, on Kickstarter alone, it has helped almost 119,000 projects raise over $2.8BN since it has launched, and claims its projects created over 300,000 new jobs in 2016 alone.

CCA's Principal Woodie Neiss is a colleague of mine, and he was kind enough to let me share CCA's learnings with all of you below.

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21 regulated platforms launch; 1 dies

During the course of the 2016, we saw 21 debt and equity Title III crowdfunding platforms launched and one, Ufunding Portal, shut down by the SEC because it seemed to be missing some of the statutory requirements required of a funding portal (like a communication channel where potential investors could ask questions to entrepreneurs raising money).

42% of campaigns succeed

186 companies launched campaigns on these Title III platforms, and 79 (42%) of them succeeded in hitting their minimum funding target (MFT) — the minimum amount a company must reach in commitments in order to be funded. Investors on the Title III platforms alone committed $19 million to the 186 campaigns and transferred $17.9 million to the 79 funded campaigns, in basically half of a year.  CCA is forecasting funds raised in 2017, to exceed $100 million on these Title III platforms (still a small sub-segment of the broader crowdfunding market). 

This money was raised in a fraction of the time that it would have taken if these entrepreneurs had gone to VCs. It was also raised by many companies that don’t qualify for VC capital because they don’t hit the sweet spot for VC investment. And, not all these investments were for equity. Both the company and the crowd seem to understand that if there isn’t a clear exit opportunity, debt financing is the way to go.

Investors invest $833 per deal, on average

Over 21,000 individual investments were recorded for 2016, on the Title III platforms only. The average investment was $833, and the average number of investors in a funded campaign was 331. Month-to-month, the number of investors coming into regulation crowdfunding grows at a healthy pace, showing that there is a growing interest in experimenting with these alternative investments.

Average funds raised per company is about $227,000

The average Title III funded campaign raised $226,578 in an average of 45 days, much faster than traditional venture financings. The average fee paid to the platform for a funded campaign was $11,329. Three companies, Beta Bionics, Hops & Grain, and LegionM raised $1 million.

But, if you are a company seeking capital, keep in mind that raising $1 million is hard to do, and you should expect to raise closer to the average. The key to success is how big your social network is and the marketing support you put behind the campaign. There is a strong correlation between the size of your social network and marketing efforts, and how much money you raise.

Valuations are in line with VC funded companies at $5.3MM

It was good to see that when we removed some of the outliers, the average valuation for funded campaigns was in the ballpark of what VCs are paying, proving the crowd isn’t being taken advantage of.  The average pre-money valuation for a funded campaign was $5.3 million.

Creating 2.2 jobs per company in first 90 days

Finally, it is apparent that Regulation Crowdfunding is a jobs engine. Together, the companies funded on Title III platforms in 2016 plan to create about 174 jobs over the next 90 days; that’s about 2.2 jobs per funding company. If the incoming administration is looking for an easy way to stimulate the economy, it would do well to promote Regulation Crowdfunding, especially since many funded campaigns are creating jobs in underserved communities and since the majority of investors in these campaigns tend to fund businesses in the communities where they live.

Thanks again, Woodie, for letting me share your research with our readers.  Be sure to re-read this old post on The Birth of Crowdfunding Agencies, to learn how to successfully launch a crowdfunding campaign of your own, and take advantage of this great channel for your fund raising needs.

For future posts, please follow me on Twitter at: @georgedeeb