Startup or Start Over?

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Is your startup now a start over? There is nothing wrong in that, so long as you have given it your best shot and learned from it. Maybe things centered around an undefined strategy, an unclear mission, an unaligned team, a disconnection with customers, an ill-defined market or perhaps some other oversight or stroke of bad luck? In any event, an after action review and thoughtful questions from an executive coach may reveal where things went wrong. TechCXO executive coach Piers Mummery explains.

The following article originally appeared on Pierso.co.uk

If at first you don’t succeed, try, try and try again. That is the nature of entrepreneurialism. Sometimes successful entrepreneurs get lucky on the first attempt, but more often than not, a successful entrepreneur will have made many mistakes before reaching success. The trick is to learn from your mistakes. Do not be afraid of making mistakes, nor admitting them to those around you. It’s OK to fail… I promise; I know, and I have been there!

An investor in one of my businesses said once, that it is not a crime to lose money, but it is a crime to run out of money. Now I buy that sentiment to a point in the context of a one-dimensional business, but most businesses can adapt and change and flex according to their circumstances and there are times when you set out with the best of intentions, based on all of the foresight and research and knowledge you have but due to a fundamental issue (often unforeseen), you may be heading on a trajectory towards failure.

I have a personal example of this in a garden retail business that I created and eventually sold. 2 years before we sold the business, we embarked on a very expensive and what we thought at the time would be a killer e-commerce plan to extend our products to our existing customers online. We spent a small fortune on instore promotion and a fantastic e-commerce site, with all the bells and whistles, but when we launched, we found the level of sales after just 2 months, wouldn’t have even paid for a celebratory drink!!

The fundamental reason for our failure that we found out was our existing customers preferred to physically visit our stores for their shopping experience and that in trying to get them to go online as well, we risked cannibalising our existing customers experience in the store. We took a very brave decision to shut down the service after a few months, having spent over six figures on the experience and a great deal of time and internal resources. The result was that we needed to start again, which we did, but with an emphasis on driving local web visitors physically to our stores through local marketing….it worked, but it was an expensive, six figure mistake we made.

The important point here is that there are times, when you give your business the best shot possible, you throw everything that you have and know to try and be successful, but even having done your best, you may not succeed and the skill of great people is to recognise this and make conscious changes. It was Albert Einstein who said the definition of insanity is doing the same things over and over again expecting different results.

Be prepared that at some point your Start Up business may just become a Start Over business and there is nothing wrong in that, so long as you have given it your best shot and learned from it.

Think about what you have learned. Maybe things centered around an undefined strategy, an unclear mission, an unaligned team, a disconnection with customers or perhaps some other stroke of bad luck.

The Power of Compound Decision Making – Part 2

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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).

Thoughts and Takeaways from SaaStr 2018

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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.

The Power of Compound Decision Making

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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. Attached is Part 1 of “The Power of Compound Decision-Making” – a management piece that I hope will stimulate productive thoughts among aspirational business builders and leaders.

Power of Compound Decision Making (Part 1)_Viraj Parikh_TechCXO

All we need is a million dollars, and we will be unstoppable

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All we need is a million dollars, and we will be unstoppable! (A cautionary tale)

Keith Heffron is a TechCXO Partner and an innovative financial leader, business owner and transformative CFO who scales emerging companies. See his full bio

At TechCXO, we’re fond of saying that part of the CFO’s job is not to save money but to spend it. Spend it, that is, to fund the scaling and acceleration of a company in ways that increase enterprise value.

As business owners, we all fall in love with the idea of our business growing into a huge success. Thinking big is a good thing.

You also have every right to ask your CFO to model an aggressive growth plan and to help secure the capital to help that plan take flight. That’s what we’re here for.

However, the same amount of energy and forethought you put into the concept of “How fast could we grow if we had an additional $1M investment?” should be applied to asking “How fast can we grow without sacrificing quality, our reputation, or our values?” And, “What, if any, additional investment is required to achieve this level of growth?”

The best approach is to build a Marketing, Sales, and Operational plan to support the financial plan growth you are targeting. Then, consolidate these individual department plans into an integrated financial model. The resulting cash flow projection will tell you how much of an investment you might need and the timing of that need. It will also allow you to modify your plans based on constraints. The result should be an integrated financial and operational plan that the entire organization understands and is confident of achieving.

Remember when you got your first 10 customers? Everyone was all over them! Everyone knew what was going on, hand-offs were well communicated, and you had your arms around all of it. Things didn’t go perfectly but you were able to react quickly and course-correct well. But then 10 became 20 and you experienced your first growing pains. Everyone was in everything, ownership and hand-offs weren’t clear, and the cost of breakage wasn’t something you had planned for.

Time to assign positions, ownership, metrics, and invest in hiring and systems. While these are all good and necessary things, each requires its own plan and considerations. I further suggest to you that this process of re-evaluating as you grow should be a non-stop process that you should dedicate time to every month with your team.

If you are making plans to solve your many current problems, you are already behind. Are you considering the impact of growth on all areas and are you prepared to pull the necessary levers when that growth comes? Does every person in your organization know how their job will be impacted if customer volume doubles? Let’s work through an illustration to clarify.

Bob is in customer service. He has amazing rapport on the phones and customers love him! He can handle any problem and knows how to make customers feel appreciated. Sure, he has to work a bit of overtime on heavy days but he always keeps customers happy. He’s the kind of employee you can build a company around.

Now imagine that customer volume doubles. Bob can’t keep up and each call is taking longer. He is spending too much time apologizing for delays, he is tired and his quality is slipping. Complaints are getting back to you from others in the organization and you need to get Bob some help. You can quickly hire someone and count on Bob to get them up to speed but it will be another month before the new person is proficient. You hope you can survive until then and not lose any more customers…

Fast forward three months. The new guy is OK but he and Bob aren’t getting along well. Bob is a perfectionist that doesn’t want to let go of control and the new guy is frustrated. You think he may quit. You are still getting customer complaints. Wasn’t this hire going to solve the problem? And why is this happening in other departments as well? Will this cycle never end?

What if……three months before this became a problem, you sat down with Bob and a couple of other key employees for just an hour and asked the question, “What would break down if we doubled in volume?”

Questions you might ask include:

1. What should the customer service organization look like with the increased volume?
2. Do we need a Supervisor for this group?
3. Is Bob capable of being the Supervisor and does he even want that role?
4. How can we identify candidates now?
5. At what point will we need to make the hires?
6. What key skills does the hire need to have?
7. What does the training and on-boarding process need to be?
8. How do we make sure this is not felt by our customers?
9. Can our paper tracking system handle the volume or should we look into a CRM?

This kind of planning for growth is critical to the near-term success of the company and the process is also key to building a long-term successful, evolving enterprise. Further, it suggests a different order to your growth decisions.

There are few things as exciting as growing your business, but you must take some time and understand the cost of that growth. I’m not just talking about dollars, although all roads ultimately lead back to that. There are massive impacts to your people, your ability to execute the additional volume, and an opportunity cost to everything you choose. To start down this road without a clear plan risks all that you have built so far.

Using that $1 million investment to fuel manageable growth is far better than throwing money at problems caused by inadequate planning. Now you have a plan for success.

Thoughts and Takeways from SaaStr 2019

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For a second straight year, I attended the annual SaaStr conference in the Bay Area.  SaaStr is a community of thousands of people – Founder CEOs, VC & PE investors, operators, and service providers of all stripes – that focus their business efforts around the proliferation of software-as-a-service, which is arguably the dominant business model of our day, penetrating all corners of the economy.  There are so many rich takeaways from the conference that it’s impossible to do it justice in a short narrative — but three key learnings come to mind and are summarized below:

Viraj Parikh TechCXO

Viraj Parikh is TechCXO’s Managing Partner in Nashville

  1. Do not underestimate the value of a Business Operations leader: One of my favorite sessions was with the Co-Founder/CEO of Glassdoor, Robert Hohman, and Neeraj Agrawal of Battery Ventures, a leading Silicon Valley VC firm. Robert spoke about how critical it was to fill various ops roles, including sales ops and, most notably, “biz ops.”  Robert spoke about a conversation he had with one of his board members from Google about how critical this position was in Google’s early days; hiring for it ultimately transformed Glassdoor.  The Biz Ops leader’s function is to understand the key drivers of the business at a deep level, and work horizontally across every part of the business to answer questions.  Allowing this position to go unfilled will come back to haunt you.  It is not an obvious hire because there is often not an immediate payback.  When this position was filled at Glassdoor, about two years late according to Robert, it was not one big thing wrong with the company, but 50 medium things – and it took three months just to unpack it all.  Those 50 things can add up to be an existential threat to the company, since you know something major in the company is going to break, but it is impossible to even identify the break point.  Once identified, it  takes courage to make the necessary decisions to fix it, but the only way to make these decisions is to have a business operations leader who understands how everything in the business is tied together.
  1. The biggest challenge founders face in scaling up their organizations: Many of the sessions at SaaStr were devoted to the intricacies and hiring path necessary to scale businesses. Of course “scaling” means different things at different stages ($5mm ARR, $20mm ARR, $50mm ARR, etc.), but from a founder’s perspective, Hubspot CEO Brian Halligan’s paraphrase of Aaron Levie, CEO of Box, made the point perfectly: “Your success in the early days of your startup is largely a function of you getting very good at doing all the jobs that must be done, while the success factors in a founder’s scale-up is to get really good at doing none of those jobs.  You must get out of everyone’s way and allow people to specialize at doing their respective jobs really well.  Your superhero strengths in startup mode – being a control freak – becomes kryptonite at scale.  You must find a way to back out of the day-to-day, and find other things to do to add value.”  Your greatest strengths as a founder can often become your greatest weaknesses in the scale-up process of your company.
  1. Is your SaaS startup growing fast enough to attract venture capital?: Rory O’Driscoll from Scale Venture Partners gave a compelling argument that a “Mendoza” line exists for startups – essentially a curve plotted against various ARR and growth rates – above which a company makes for an interesting venture capital investment, while below it would imperil the chances for a VC investment and eventual IPO. This is not a hard and fast rule, but rather a handy rule-of-thumb as well as an aspirational goal:

 

A corollary to this rule is that best-in-class SaaS companies, after reaching $10 million in ARR, exhibit growth rates that decline at a fairly predictable rate: roughly 80%-85% of the prior year’s growth rate. Rory’s term for this rule is “growth persistence” – the above table uses a growth persistence of 82%. Although the vast majority of successful SaaS companies lie above this curve, faltering below it does not spell doom – it is possible to reaccelerate again, but recovery and maintaining at a high level is never easy once altitude has been lost. Rory’s blog post can be found here.

Conclusion
Software penetration into the economy remains in the early innings. As much as technology has been weaved into our everyday life, there is still a long way to go. One of the gratifying things about this year’s SaaStr conference was seeing the large number of non-Silicon Valley CEO founders and companies – not just getting funded, but prospering. World class business models and cutting-edge business practices are proliferating in mini tech hubs across the country and world. The abundance of capital will continue to fund countless new products and services, and the number of fortunes to be made will not abate for the foreseeable future.

Viraj Parikh TechCXO

Viraj Parikh is TechCXO’s Managing Partner in Nashville

SaaS Company’s Journey to Relevance

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Recently, 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 – descended 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 Dow Jones Industrial Average (DJIA) dropped over 2,000 points in a single week amid concerns over rising interest rates. Having professionally invested through the 1999-2002 tech wreck and now as a CFO operator to my SaaS clients, the question running through my mind was “What are the implications for an industry that has seen non-stop growth over the past decade?”

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 three (3) big takeaways:

1. Software penetration is still very low — it is in the 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.

2. 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 three 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. Consider:

a) How does a CEO know whether they have achieved Product-Market fit?

The company must meet two criteria:
◦ The company has a number of referenceable customers who have purchased the product
◦ 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 persona — 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 the 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.

3. 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

The SaaStr conference affirmed the industry’s abundance of capital, intelligence, creativity, discipline (through trackable metrics), and unwavering confidence that software will rule the world. Software remains 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.

Viraj Parikh TechCXOViraj Parikh
TechCXO, Managing Partner 
Nashville
TN
viraj.parikh@techcxo.com
(917) 523-6940

See Viraj’s full bio