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The Power of Compound Decision Making – Part 2

January 7, 2021 by Megan Esposito Leave a Comment

CEOs of private, mostly venture-backed growth companies know all too well the burden of high expectations, both in the milestones and scale they are trying to achieve.  Quality decision making is at a premium. In, Part 2 of “The Power of Compound Decision-Making” (PDF) we examine how to push high-velocity decision making deeper into your organization.

You can download Part 1 here (PDF).

Filed Under: Finance Tagged With: Business Model, Business Planning for Startups, CFO

Thoughts and Takeaways from SaaStr 2018

December 1, 2020 by Megan Esposito Leave a Comment

Last week I attended the annual SaaStr conference, where thousands of people in the SaaS community – Founder CEOs, VC & PE investors, operators and service providers of all stripes – descend upon San Francisco’s Hilton Union Square to learn, hear from and network with some of the most exciting upstart software companies in the world. This year, juxtaposed against the conference was the backdrop of a major stock market correction, where the DJIA dropped over 2,000 points in a single week amid concerns over rising interest rates. Having professionally invested through the 1999-2001 tech wreck and now as a CFO operator to my SaaS clients, the question running through my mind was what were the implications for an industry that has seen non-stop growth over the past decade?

Original article appeared February 2018. See notes from 2019 SaaStr conference, too.

Of course, a well-built business will survive, and oftentimes thrive – no matter the macro volatility. After attending about 20 sessions over 3 days, and hearing from many inspirational and battle-hardened entrepreneurs, there were several common themes that emerged from the conference. Below are my 3 big
takeaways:

Viraj Parikh TechCXO

Viraj Parikh is TechCXO’s Managing Partner in Nashville

  1. Software penetration is still very low – it is still early innings: Don’t let stock market volatility distract from this fundamental revolution. Tomasz Tunguz, a well-followed VC blogger, believes SaaS M&A will be very strong in 2018, after a weak 2017. Big cap tech companies flush with cash need to continue fueling their growth engines, and they are competing with PE funds that raised over $343 billion in 2017. That money will be put to work to continuously penetrate every corner of the global economy with cloud-based software. The median multiple is 7x forward ARR…growth is alive and well.
  1. A SaaS company’s journey to relevance is an exercise in de-risking the company To acquire a VC investment or become an attractive acquisition target, your company must begin with relevance. There are 3 stages in every start-up’s journey to a relevant state: a) product-market fit, b) search for a repeatable, scalable and profitable growth model, and c) scaling the model.

A. How does a CEO know whether they have achieved a Product-Market fit? They must meet two criteria:

    1. The company has a number of referenceable customer who have purchased the product
    2. Customers are happy, as evidenced by:
      • Product usage
      • A reluctance to give it up
      • Expanded usage
      • Low churn

B. After product-market fit is established, the startup must quickly transition to the search for a repeatable, scalable and profitable growth model:

    • Don’t try to boil the ocean – pick one target market with a single use case and benefit
    • Quickly close your early access sales
    • Invest in customer success to ensure your customers are accomplishing their goals
    • Build a buyer personae – what do they buy and what do they care about? – find a predictable and repeatable motion, and then begin scaling that process. For example, predictable sales bookings can be simplified to the number of sales reps times sales productivity
    • Understand your unit economics, and make it profitable.

C. Scaling the model through proper management of the sales and marketing function to achieve maximum sales bookings velocity, including:

    • Hire enough sales people, and pay up for great ones. Too many companies make the mistake of underspending here to conserve cash…that can be a big mistake
      • Set ambitious but achievable sales quotas that inform and roll up to the company’s revenue
      objectives
      • Regularly track the productivity of each sales rep, e.g. what % is achieving > 70% of their quota,
      and > 100% of their quota
      Accomplishing a, b & c will undoubtedly result in a terrific story, but in the eyes of an investor, it is
      fundamentally about risk mitigation. The lower the risk, the more likely you will attract capital.
    1. Run your company around Annual Recurring Revenue (ARR) This may seem like an obvious point to longtime observers of SaaS companies, but plenty of entrepreneurs still fail this basic test when pitching to venture capitalists. The first slide of every investor deck should include ending ARR (and its trajectory over time), which is the single most important valuation metric.
      • Break down ARR into its component parts:
        • Starting ARR
        • New ARR bookings
        • Expansion ARR
        • Churn ARR
        • Ending ARR – if this does not continually grow, it is a red flag that sales have stalled
      • Growing Bookings is the key sign that you are making it as a company. For SaaS companies, bookings are defined as Net New ARR (New + Expansion – Churned). Never count bookings if it does not convert to cash within 90 days

Conclusion

If last week’s stock market bungee jump made you want to vomit, the SaaStr conference was the perfect antidote. The industry’s abundance of capital, intelligence, creativity, discipline (through trackable metrics), and unwavering confidence that software will rule the world, is the envy of every other sector of the economy. Entrepreneurs who are armed with the right toolkit, as outlined above, can and will be building great SaaS businesses for many years to come, irrespective of the business cycle and stock market gyrations.

Filed Under: Finance Tagged With: Business Model, Business Planning for Startups, CFO

Business Plan Advice from Yale – Dumb it Down

October 24, 2020 by Megan Esposito Leave a Comment

The best advice I ever received on writing business plans may have also been the most obvious.  The advice came from David Cromwell, a 30-year veteran at JP Morgan. For 6 of those years, he was the CEO and President of JP Morgan’s Private Equity division. He is now a professor at the Yale School of Management. Since my time at Yale, I’ve used his insights into writing business plans with great success.

He said, “Investors all have one thing in common: they invest in ideas that they understand. And, great ideas that are communicated poorly in business plans don’t get funded.” So, your success or failure hinges on how effectively and efficiently your business plan translates your idea.

Keep in mind that the sophistication of investor audiences varies greatly. The investor that loves your business plan could be a multi-billion dollar Venture Capital (VC) firm with a hundred MBA-type Analysts that pour over 30 business plans every day. But, your investor could also be an Angel investor that dropped out of high-school and made 7 million dollars over 30 years in the plumbing business.

So, remember this with every stroke of the keyboard as you create your business plan. Write the plan for every audience (the self-made Plumber Angel and the VC Analyst). If you write it such that only the VC Analyst can read it, you lose any chance of attracting the Angel. But, if you write it such that the Angel can read it, you actually make it easier for the VC Analyst to understand your plan versus the other 29 plans they read that day.

To illustrate the point, read the following two paragraphs and decide for yourself which language will appeal to the most investors.

“Given the stabilization of both the macroeconomic environment and the recent increase in the willingness of commercial lenders and financial institutions to provide capital, our conjecture can only be that pursuit of this venture not only has merit, but also is timed appropriately. Our deep operational experience and tenure in this industry provides the foundation and aptitude to assure superior returns and superlative results.”

versus

“The economy is improving. Banks are lending again. The time is right to launch our company. We are absolutely the industry experts and are certain of our success”

Here are 4 ways to make your business plan readable for every audience. It is going to sound very elementary, but I promise it will make every bit of difference in your plan. First, I’ll lay out the 4 principals and then I’ll provide you with an enormously valuable tool to help you measure the readability of your plan. When writing your plan:

  1. Use shorter words versus longer words. Stick to basic language.  Words with more than eight or ten letters slow readers down and detract from readability.
  2. Use shorter sentences versus longer sentences. Sentences should be no longer than ten, or so, words.
  3. Use fewer sentences per paragraph versus more. This makes for crisp reading and reduces monotony.
  4. Use simple, familiar words to describe your industry and product. Impressive-sounding “MBA” terminology and industry jargon greatly detracts from readability.

A very useful, but little-known tool in Microsoft Word is the Grammar and Readability statistics. You can learn how to enable and use this tool here. Once you complete spell-check, the Readability statistics are displayed and show metrics like “Average words per sentence” and “Average sentences per paragraph”, as shown below.

The most-useful indicator in the readability statistics is the Flesch-Kincaid Grade Level score. This score indicates the grade level education that a reader would need to read and understand your document. The lower the grade, the more readable the document. Believe it or not, Mr. Cromwell always pushed us to aim for a 7th grade to 9th grade level range! Any more than that, and you could lose the Angel investor. Moreover, the VC Analyst (who may have already read 29 business plans that day) could struggle to understand your plan and simply move on to the next.

Following all the advice above and using the tool won’t guarantee that your business plan will get funded. But, if you don’t follow the advice, you will artificially decrease your appeal to all possible sources of funding.

Best of luck to you with your business plan and your new venture.

P.S. The Flesch-Kincaid Grade Level score for this post is 8.8.

Filed Under: Revenue Growth Tagged With: Business Model

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