Valuation

faster_new

How do you value an early stage company?

It might sound overly simplistic, but I tend to think that this is something that the market decides – the valuation is whatever an investor will offer and whatever a founder will stomach, and hopefully there is some overlap!

For what it’s worth, these are my rules of thumb for founders, when I’m asked about valuation (hopefully publishing these doesn’t come back to bite):

  • Expect to dilute between 20-30% per round (there are lots of recent data points which support this: all of the rounds we’ve done at Vend, and all but the most recent Xero round have been in that range, for e.g.)
  • Plan to raise enough to cover 12-18 months worth of expenses (and there should be a good plan which estimates what these are likely to be!)

Solving the equation given those two constraints gives a valuation range to start a conversation with.

Then the softer, but ultimately much more important questions:

  • Choose the larger investors you want to work with, and work with them to agree terms that you’re both happy with, then fill in whatever is left with smaller investors (nearly everybody does this in the reverse order, which is a mistake)
  • Make sure that the bigger investors are putting enough cash in, and getting enough of a percentage in return, such that they care about the venture and will invest their time and energy and networks into making a success in the future

It gets more complicated if you already have customers and revenue and a growth trajectory, since that gives some basis to start to be valued on fundamentals (e.g. 15-20x annualised revenue are numbers which get thrown around for SaaS businesses), but at an early-stage when the numbers are small that often ends up being in the range I mentioned above anyway. Be aware that numbers can easily mess up a good story!

The other thing which can influence all of this is FOMO, if you’re growing really fast and/or there are external factors motivating the investor to do the deal, you possibly get away with a much smaller dilution (e.g. the most recent Xero round in 2013 was ~8%). The risk with this is you get an investor who needs you to continue to grow very fast to justify their price, which can create some pressures which are not useful.

Finally, try not to get bogged down in this, whether you’re an investor or a founder. At the end of the day neither side wins because they eked the last percentage point of dilution out of a funding round negotiation, they win by working together to build a fast-growing ass-kicking name-taking business. In the not too distant future whatever valuation you agree now is likely to look way too high (because the company is dead and therefor worthless) or way too low (because it became a big success).

So, don’t pretend too hard to be something you’re not and don’t die in the ditch.

Say Something!

Dilbert - Honesty 3

The best sign I have that a company I’ve invested in is dead, or near death, is the silence.

This is why I encourage all of the founders I work with to send regular and detailed updates to all of their investors at least once per quarter, ideally once per month.

Even if you don’t have investors yet, the process of taking a step back and asking yourself what’s going well, what’s not going well, and what you could do differently is hugely valuable.

It doesn’t have to be complex.

In the simplest case just start by sending out basic financial details: how many new customers you have, how much cash you earned in the last month and how much cash you spent in the last month and how much cash you have left in the bank.

Then, later, as you grow, include some commentary about your current constraints – i.e. why aren’t you growing faster?, an update on your team – new hires?, open roles?, how you’re feeling about the culture?, and maybe point to some of your key numbers – how much are you spending to acquire each new customer? how much does it cost to support each customer each month? how many customers cancel (or “churn”) each month?

For bonus points, ask other people in the team to contribute a short paragraph about their area – e.g. the product/engineering teams might want to list the things they’ve recently released and the things they are working on next; the customer support team might like to highlight their Net Promotor Score; the sales and marketing team might want to talk about recent promotions they’ve run and the effects of those.

It shouldn’t take long as these are all details you should have at your fingertips anyway (and if not, then you have bigger problems than not keeping shareholders informed!)

Make sure you talk about both the good stuff and the bad stuff. Investors are smart enough to realise that startups are not a smooth curve up and to the right, and will appreciate the honesty. More than likely they will want to try and help you solve the problems, when you’re up-front about them, rather than stressing about the fact that there are problems.

The real payback on doing this will come when the time comes to raise more investment in the future. There is nothing worse for an investor than an email from out of the blue asking for more money. If you’ve taken the time to keep everybody informed of the progress then you’ll spend much less time telling them where you’ve been, so you can focus on where you want to go next, and you’ll likely find them much more enthusiastic about continuing to be part of it.

So, even when you think you have nothing interesting to say, say something.

It could make all the difference.

Quick Tap

It’s 75 minutes into the match. The score is 15-all. The team hasn’t been playing that well, truth be told.

Awarded a kickable penalty, Aaron Cruden (25 – currently starting first-five, but really second choice behind Dan Carter who is currently on sabbatical) along with Beauden Barrett (23 – up-and-coming, but on the night a replacement fullback) and Victor Vito (27, another reserve, back for his first game after last year being told he wasn’t up to the standard expected of an All Black) together spot an opportunity and decide, without even consulting Richie McCaw (33 – the captain on the field), to instead take the quick tap and go. It leads, a few minutes later, to the match winning try.

This is what Richie had to say afterwards:

“You’ve got to back the guys to have a crack. If they’re always looking to me they’ll never take an opportunity. I was ready to point at the posts but he thought better of it, and it paid off.”

And, the coach, Steve Hansen (55, for consistency):

“It was one of those games where someone had to take it by the scruff of the neck.”

We can only speculate about what might have been said all around if that decision hadn’t lead to a try and the match had ended a draw, or a loss. As it was the headline was “All Blacks lucky against inspired England” (really, that was luck?)

There is a massive organisation that exists to support the All Blacks – the NZRU board, CEO and high performance staff, the All Blacks selectors, coaching and management teams, including specialist coaches, media liaison, medical support staff etc, not to mention the many stakeholders (including all of us as fans).

But, I’m fascinated by how accountability and responsibility is delegated down to the youngest and least experienced, and the culture that is created within the team as a result. We would consider it remarkable for a 25 year old team member or 33 year old executive to be making big decisions in a large company, where the leaders tend to be much older and tenured. But, in the All Blacks, by the time you’re over 30 you’re as experienced as they get, and certainly considered old enough to handle the pressure of making decisions in the moment on the field.

How about In the organisation where you work? Do your junior staff have the freedom to respond to opportunities when they spot them? Or, do they do as they are told until they’ve done their time?

Reality Distortion Field

I found this fantastic rant by Dave Grohl, of Nirvana and Foo Fighters, describing his documentary Sound City:

“This movie wasn’t made for cynical middle-aged music critics, it was made for my daughter, or for the teenager down the street who’s trying to figure out how to start a band. When I think about kids watching a TV show like American Idol or The Voice, then they think, ‘Oh, OK, that’s how you become a musician, you stand in line for eight fucking hours with 800 people at a convention center and then you sing your heart out for someone and then they tell you it’s not fucking good enough.’ Can you imagine? It’s destroying the next generation of musicians! Musicians should go to a yard sale and buy an old fucking drum set and get in their garage and just suck. And get their friends to come in and they’ll suck, too. And then they’ll fucking start playing and they’ll have the best time they’ve ever had in their lives and then all of a sudden they’ll become Nirvana. Because that’s exactly what happened with Nirvana. Just a bunch of guys that had some shitty old instruments and they got together and started playing some noisy-ass shit, and they became the biggest band in the world. That can happen again! You don’t need a fucking computer or the Internet or The Voice or American Idol.”
Rock n Roll Jedi, Delta Sky Mag

I wonder if people in other vocations feel the same about how reality television distorts their experience?

Do chefs love MasterChef? Do property developers love The Block or Property Ladder? Do people who work with troubled kids love Super Nanny? Do architects love Grand Designs? Does anybody love The Beauty & The Geek?

I doubt it.

Because if you substitute musicians for start-up founders, what Dave Grohl described is exactly how I feel about Dragons Den and the like.

All of these shows are entertainment, which is fine. No harm, no foul. Very little reality, despite the name. Except that it seems that many people often fail to make that distinction.

Despite all of the evidence to the contrary, people do believe that entering a talent show is the path to a career as a singer, and they keep lining up every time there is a call for auditions. These train wreck shows seemingly have no problem finding folks who think that inviting cameras in to film their wedding planning or their house build or their blind date with a stranger is a normal and constructive thing, without appreciating that the only possible winner from that equation is the person selling advertising around the eventual show when it screens. Even the viewer, as entertained as they might be at the time, is a loser by any reasonable measure of opportunity cost.

It is, to use Dave Grohl’s patter, fucking nuts!

And, it makes me sad and angry to see it happening more and more in my industry.

A contrived start-up experience has as much in common with a real start-up as being a contestant in Survivor has with living unassisted in the Amazon for three weeks.

But, there is a large and growing group of people who think that the only way to a successful start-up is via an accelerator program, where they get locked in a room for twelve weeks, inundated by mentors, pressured into customer discovery and product pivots and whatever else is the buzzword de jour, taught to pitch and then pushed on stage to pimp their pre-pubescent start-up to a room full of investors. And then… who knows what?

This is just Startup Theatre: a scripted experience that has very little in common with the things that successful startups in the wild fill their days with, in my experience. The only thing missing is the film crew, although surely that can’t be far away.

The latest “season” of Lightning Lab had their demo day in Wellington last week.

This is how I saw it promoted on Twitter:

https://twitter.com/seamusfitz/status/471411781840031744

Seriously? Did it rain? Were folk hustled?

The people who are advising founders to approach investors in this way are naive and wrong. Be aware that you’re creating a significant selection bias by doing this, because smart investors do not want to be hustled and won’t be tricked into investing in your dinguses.

Likewise, if you think this is the best way to access people who you would otherwise struggle to connect with, you’re massively underestimating how easy it is to reach smart investors in a small place like New Zealand (or a large place like San Francisco, for that matter) if you have something compelling to pitch them. But you do have to get the train in front of the tender. Otherwise you’re not really a founder.

(I keep talking about smart investors, but I realise I haven’t ever explained what I mean by this. It’s possibly a subject for a future post, but for now I’ll define it simply as those who typically contribute more value than they capture, both in terms of dollars and, more importantly, in terms of advice and support.)

So far the results from these sort of programs locally are pretty skinny. But, we only need to do this a few more times before one of these companies becomes Dropbox or Airbnb. That’s how the maths works, right?

In fact, we believe in accelerators so much that we now have a government grant programme designed to accelerate accelerators. That’s four derivatives, if my calculus is correct!

(The questions I would ask those that approve this sort of funding are: a) how will you measure the impact you have on the companies who benefit from this investment?; and b) what is the control group?)

Please, don’t hold your breath.

You may reasonably ask: if this is so wrong, why is it increasingly common and popular?

I think the explanation is simply that doing a start-up is hard. And more than likely a complete waste of time and effort. So we’re all attracted to this sort of reality television approach because we think it might be an easier route, or increase the likelihood of a successful outcome.

But, I think the short cut we hope to find in this approach is a mirage.

I tried to opt-out of this debate a while back, as I figured there was little chance that I would convince anybody who believed otherwise, and there was no shortage of better things to put my time and energy into. I still believe that. But, I’ve realised I never explained the alternative.

I think Dave Grohl has the answer: You have to enjoy the walk.

If you’re a would-be founder, don’t be impatient. Realise that the person promising you a short cut is probably trying to sell you something. Rather, find some friends to work with, and understand that for quite a while you’re going to suck. But suck in the knowledge that you’ll look back later and realise how much you enjoyed sucking, or more accurately how much you enjoyed sucking slightly less each day. Accept that it’s better to suck in relative obscurity. Don’t be tempted too soon by the glare of the spotlight. Tell your story to everybody who will listen, and if you have something that’s actually compelling word will spread. And know that after taking a few small steps forward each day you’ll look back and be staggered by how far you’ve come.

If you are a would-be investor, don’t be lazy and sit back expecting good ventures to come to you. New early-stage investors often fall into the trap of thinking their job is to pick which companies to invest in, but the smart investors realise that the best companies select their shareholders, rather than taking any money they can get. So, get out there and find the people working on interesting things and roll up your sleeves and help them out in whatever way you can. There is a huge dark net of start-ups, beyond the prominent few that make all the noise. Pick one or two, validate that they are willing to take guidance, and prove that you can contribute more than just cash. And then, when the time comes, there is a better chance they will choose to talk to you.

Of course, doing all of these things still provides no guarantee. Not every group of friends playing grunge in their garage in the 90s became Nirvana. Sorry I don’t have a better bridge to sell you. But, since you’ve read this far, I assume you’ve decided it’s all worth it, despite the odds.

What are ya?

I’m Chair of the Board of Directors at Vend.

In some ways, this is a role I stumbled into.

I was one of the original investors, back when Vend was just Vaughan. We would spend a day a month and go deep on the business model and strategy. It evolved into a “proper” board after we raised more money and we added Miki to be an independent third voice in those meetings. It has since levelled up several more times, most recently after Barry was added as a fourth director.

I have, on more than one occasion, been told that I don’t look like a chairperson.

I’d like the record to reflect that the company has done okay despite this. What was just Vaughan is now 122 people, more-or-less, working in four offices in Auckland, Melbourne, Toronto, and San Francisco. And counting. We’ve grown from a handful of brave initial customers to over 10,000 retailers who use Vend to run their businesses – selling everything from jewellery to polo geargasoline to music lessons. We’ve raised over $35m, from what would have seemed to us at the beginning to be a dream list of investors from NZ, Australia, Germany and the US. We’re trying to spend that wisely to fuel further growth.

I try not to be offended, because I doubt that was intended. But I am always tempted to ask what they think a chairperson looks like. Or what role they think would be more appropriate for me.

The thing is, I’ve never really looked like the things I was.

I didn’t look like a computer science student in 1994. I wore shoes, for a start.

I didn’t look like a management consultant in 1997. I borrowed a suit jacket for the job interview. I never really got comfortable wearing a suit and tie.

I didn’t look like a founder in 1999. I can only imagine what the property managers I was cold calling made of the sloppy kid trying to convince them to advertise on the “internet”.

I didn’t look like a manager in 2003, when I came back from London to run the growing development team at Trade Me.

I didn’t look like an angel investor in 2007, after we had sold the company and I was starting to think about what to do next.

I suppose this should give me confidence to not put too much weight on what others think I do or don’t look like today.

I figure the best thing is to show them what I am, by doing the job as well as I can, rather than waiting for their permission. Maybe doing that will cause them to change their mind about what makes a good director or chairperson. Or, maybe not. Whatever.

Who are you waiting on to tell you that you qualify?

PS I’m currently thinking about who could be the fifth person on the Vend board, and I’m determined to not limit ourselves just to people who look like directors. The ideal candidate would be somebody with a sales and marketing focus, ideally with experience in retail and/or small-medium business, who is excited to help us grow to the next level and beyond. Y’all are the closest thing I have to an old-boy network (and with the added benefit of not being all boys!), so if you know anybody who we should consider for this role please do let us know.

Full on Keynes

Here are three possible explanations for why we all feel so busy:

  1. We all spend too much precious time telling each other how busy we are, as if it were something to be proud of. (ref: this blog post)
  2. We all mistakenly believe we can have it all. And multitask. (we massively underestimate the switching costs)
  3. Men, of course! (at least according to this recent book review in the New Yorker – it’s unclear, as a man, who I should blame, but maybe I just need to lean in more, I don’t know?)

By the way, Keynes’ prediction was actually right, in my opinion: most of us struggle to do three hours of productive work per day. How else would we find the time for so much reality television otherwise?

As an experiment I’ve been trying to stop using the negative versions of the words we use to describe our activity, when we are unconsciously sympathising with each other: busy, stretched, slammed, etc. There are alternatives which are much more positive: full (as in full of interesting and awesome things), focussed, engaged.

Of course, using those words to describe your day does force you to consider how accurate they are as a description, and if not, maybe think again about how excited you are to be “busy”.

Give it a try.

Related Posts:

Remarkable Amazon Customer Support

If you make something remarkable then people will tell their friends. However, it’s sometimes overlooked that this is true for both remarkably good things and remarkably bad things.

For example…

Some time ago I was experimenting with publishing this blog to other channels, and signed up for an Amazon Kindle Publishing For Blogs account. For some reason I still don’t understand I couldn’t just use my existing Amazon account, so I created a new account using the same email address. I never took it much further than that.

Shortly after that, however, I started receiving emails from Amazon Vendor Central. Initially they were few and far between, announcing such irrelevant things as new fulfilment centres in West Columbia, SC and a new feature that allows you to download a bill of lading (BOL) for submitted routing requests. Annoying, but, infrequent enough to be ignored.

Late last year, when these morphed into regular monthly product update newsletters, I decided to unsubscribe. But, curiously, there was no “unsubscribe” link in the email footer (this was actually how it came to my attention, as I had recently swapped out my previously complicated email rules with a simple one that highlighted all emails containing the word “unsubscribe”). Instead there was this (emphasis mine!):

If you have questions, please sign in to Vendor Central at https://vendorcentral.amazon.com or Advantage Central at https://advantage.amazon.com and click Contact Us at the bottom of any page.
Please do not reply directly to this e-mail.

So, I tried to sign in to Vendor Central, but instead of a simple email preferences settings page I got this error message:

There was an error with your account
It looks like the email and password combination you used is meant for a different site. You can use this email and password combination for Kindle Publishing for Blogs, or use a different email and password combination for Vendor Central.

So, following the link to the Kindle Publishing for Blogs sub-site, I tried again:

Screenshot 2014-03-23 17.01.35

Bugger! Despite wasting more time trying to get around that road block, it was ultimately pointless, as it turns out there is no email preferences options on the account. Thou shalt be opted-in, it seems.

Next step was to use the recommend “Contact Us” option. I sent what I thought was a pretty straight forward request:

I want to unsubscribe from the newsletter emails, but there is no link provided in the messages or any obvious option on this website.

I immediately got an automated response from their ticket management system.

The following are the five (!) responses I received in reply to this request over the following weeks, in full unedited glory.

+ 1 day:

Greetings,

Thank you for writing to us.

I have contacted the appropriate team regarding the same. I will be sure to update you on the progress of these investigations as soon as I have additional information.

We appreciate your patience and understanding regarding this issue

Best regards,

Gopi Krishna
Amazon.com Vendor Services

+ 3 days:

Greetings,

I am forwarding the following case details to our department concerned. Rest assured, they will look into it and get back to you at the earliest with an update.

We appreciate your patience with us.

Best regards,

Gopi Krishna
Amazon.com Vendor Services

Poor Gopi doesn’t seem to be getting much attention from the department concerned (presumably the unsubscribe department?)

But, I was in luck, because he took it upon himself to escalate to his colleague, Manoj.

+ 4 days:

Dear Vendor,

Please note, I am working with the concerned team regarding this and will send you additional correspondence as soon as we have an update. This may take 3 days approximately.

Best regards,

Manoj Kumar
Amazon.com Vendor Services

The three day estimate, it turned out, was a little optimistic.

+ 10 days:

Dear Vendor,

Please note, I am still waiting for an update from the concerned team. I will send you additional correspondence as soon as we have an update from them.

Thank you for the patience.

Best regards,

Manoj Kumar
Amazon.com Vendor Services

Sadly the next message from Manoj was not so hopeful.

+ 17 days:

Dear Vendor,

As per the update from the concerned team, there is no way to “unsubscribe” vendors from vendor newsletters. Newsletters go out to all vendor central users as defined when the newsletter is setup. Therefore, you may report news letters to ‘Spam’ folder.

Thank you for your understanding.

If you have additional questions about your case, [number], please click [link]

If you have questions about a different issue, please review our Vendor Help
https://vendorcentral.amazon.com/gp/vendor/members/contactusapp

Please click one of the following links to let us know how we’re doing. Your input helps us improve the vendor experience.

Did we successfully answer your question?

If yes, click here:
[link]
If not, click here:
[link]

Best regards,

Manoj Kumar
Amazon.com Vendor Services

I clicked no.

Pretty remarkable.