Lesson #275: Lessons From the Best VC Ever (John Doerr)

This last week, I attended the CED Tech Venture Conference in Raleigh, the leading technology and venture capital conference in the Southeast.  The conference opened with a fireside chat with Silicon Valley legend investor, John Doerr of Kleiner Perkins.  John was the initial institutional investor in powerhouses like Google, Amazon, Uber, Twitter and Slack before they became the household names we all know to today.  It was safe to say, the room was silent in anticipation to hear what wisdom this "best of the best" investor would share with his venture capital industry peers. Luckily, for all of you, my pen was scribbling as fast as it could to share all of those learnings with you.

HIS SECRET SAUCE:  IT'S ALL ABOUT THE PEOPLE

Invest in great teams, as the execution is materially more important than the idea.  A good idea with poor execution, is simply "an hallucination".  What he looks for in his teams:  integrity, team first attitude, resilience to get through the bad times, smart, tenacious, an effective recruiter, with a big vision.  In that exact order, which was interesting as the big vision was the last thing he mentioned, normally one of the first things mentioned by others.  He looks for leaders that aspire to be "Level 5 Leaders" as defined in his favorite book, "Good to Great" by Jim Collins: leaders that are driven by "the triumph of humility and fierce resolve", like Sam Walton was at Walmart.

ARE INVESTMENT OUTCOMES PREDICTABLE?

Sometimes, you meet a guy like Jeff Bezos at Amazon, and you know his energy and vision are going to knock the doors down towards achieving his goal, clearly presenting themselves as someone you want to get involved with.  Other times you meet guys like Larry Page and Sergey Brin at Google, that "frankly, were cynical about business building", but you knew they were on to something big and would figure it out over time.

WHAT IS THE FUTURE OF TECHNOLOGY--HIS CURRENT INVESTMENT FOCUS?

He is a big fan of "AI with IA"--artificial intelligence with intelligent agents, as that is going to revolutionalize the way decisions are made and things get done.  He is also a big fan of the healthcare space overall.  He said companies like Google and Facebook are fighting over an $85BN online advertising industry, but the healthcare industry is a $3TN industry, 50x bigger, that is ripe for disruption and much bigger financial outcomes.  Even his portfolio companies, Google and Amazon, are trying to figure out how to play in healthcare related data, artificial intelligence and logistics.

LESSONS FROM GOOGLE AND AMAZON

The two companies were similar in that they both "imagined a world ahead of us".  They were both "moonshots" with 10x return goals.  Amazon was driven by a much more extrovert culture and customer-focused obsession.  Google was driven with a technology and data science first focus.  Two completely difference ways of eventually turning into multi-billion dollar companies.

HIS FAVORITE ENTREPRENEUR:  STEVE JOBS

There was a point in the presentation that John Doerr visibly got choked up, and that was when he pulled out the original iPhone that had been signed by Steve Jobs, who obviously meant a lot to John.  John said that Steve Jobs once told him that "this iPhone nearly killed our company", with the drive to really change the world of mobile computing from the palm of your hand, forever. And, with over 700MM iPhones sold to date, what a testament to that drive and success.

John referred to Steve Jobs as the best entrepreneur he had ever known.  Sound familiar?  He shared stories about Steve being ruthlessly honest in his opinions, with a clear and crisp vision around the product.  But, he kept his "blinders open" to be flexible over time, as Steve originally didn't want third party apps on the iPhone, and we all know where that ended up, millions of apps later.

CLOSING WORDS OF WISDOM

Embrace technology, don't be scared by it.  Stay well-grounded, and close to your family.  And, let's aspire to a technology and venture community that embraces diversity and creates equal opportunities for women.

Wow, what a ton of learnings, in a very short period of time.  Thanks John for sharing your life's lessons with us.  And, thanks to the CED for adding him to the roster of speakers.  It really was the highlight of the event, for me.


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Lesson #274: Do You Need a RE-Founder for Your Business?

Oftentimes, startup entrepreneurs are simply too close to their businesses to get a clear, non-biased look at what may be holding them back from ultimate success.  Maybe they lack the required skills or business experience required to identify or correct problems inside their product, process or team.  And, more often that not, as a new entrepreneur  “you just don’t know, what you don’t know”.  And, when the problems become material enough that it could potentially put the company out of business, maybe it is time to hire what I call a RE-founder for your company, to help put it back on the right course.

WHAT IS A RE-FOUNDER?

Everyone knows what a founder or co-founder of a company is; it is the person or persons who formed the business in the very beginning of the company.  It was often their business idea that they birthed from a piece of paper, into an up-and-running product and business.  Think what Mark Zuckerberg is to Facebook or Jeff Bezos is to Amazon or Bill Gates is to Microsoft.

But, nine times out of ten, a startup is not successful in achieving mass customer adoption of their product or service.  And, then, they have to make some important decisions?  Is the problem so bad they need to close up shop?  Or, they need to reset their sights from building a big venture-backed company, to only building a small lifestyle business?  Or, they potentially need to get a new strategy and leadership to pivot the company into a different direction that has a higher odds of seeing scalable success.

It is this last route where I am suggesting you need to hire a RE-founder of the company.  The RE-founder will be responsible for doing a critically-needed and non-biased strategic planning process, to thoroughly understand the company’s core strengths, weaknesses, opportunities and threats.  And, then they will produce a 3-5 year long term vision and action plan for which the company to follow in hopefully pivoting the business to new heights.

WHERE TO FIND A RE-FOUNDER

In terms of how best to find a RE-Founder for your business, the process is quite similar to the Where to Find a Co-Founder process I wrote in the past.  The only differences this time around: (1) you are looking for more of a turnaround expert to help you solve your known pain points; and (2) you are looking to reinvent an existing business, including any or all of the people, product or process.  So, instead of starting with a clean piece of paper, you have to rework what you have.  Which is more like building a foundation and framing for a new 4,000 square foot two-story single family home, and having to re-architect it to a 4,000 square foot four-family apartment building.  You need someone that is good with implementing change within the organization.

HOW TO WORK WITH THE RE-FOUNDER

As the company’s founder, taking on a RE-Founder will require a material shift in the way you have been operating to date.  Now, you need to be prepared to get in the “back seat” and go along for the ride.  Don’t weigh down the newcomer with legacy thinking or sacred cows—let them do the job you are engaging them to do, to fix the business.  This will be a really hard, but necessary, process for most entrepreneurs who like to control every aspect of their business.  But, you need to be honest with yourself—there is a reason the business is struggling, and you will most likely have a better outcome (and equity value) if you simply get out of the way of the new expert.

CLOSING THOUGHTS

I have previously written about the importance of failing fast as a startup, so you don’t waste a lot of unnecessary capital.  I guess what I am suggesting in this post is once you have hit that fail point on your own, you now have a second option to consider.  Instead of simply shuttering the doors, maybe it is as simple as handing the keys off to a different proven executive to take a crack at fixing your business before you close it down.  You can never underestimate the importance of leveraging a fresh set of eyes, as the potentially perfect prescription to your woes.

So, after a critical assessment of your business, do you think you need a RE-Founder for your business?  If so, let’s do this thing, as time is clearly of the essence.


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

Don't Start Marketing Until You Are Ready

A solid marketing plan is crucial to support growth as you're scaling a company. But how do you know when you should flip the marketing switch and go live?  The answer is pretty intuitive: not until you're ready. The secret is knowing what that means for your business model, internal processes and external branding. Read on.

Read the rest of this post in Entrepreneur, which I guest authored this week.

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

The 9 Types of Leadership

I recently read a great book called The 9 Types of Leadership, written by Beatrice Chestnut, an authority on the topic of leadership.  Below is a summary of those 9 leadership styles, including some thoughts thereon.  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 own 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.  Why type are you?

Read the rest of this post here.

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.


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