Tag Archives: SaaS

The Startup Metrics That Make Investors Drool

Many entrepreneurs can tell an amazing story. But what about the hard numbers you need to back it up?


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Here are the type of figures that get me salivating:

1) Revenue growth. I like to see startups signing up customers at a rapid clip.

Companies I invest in usually are growing their revenue at least 20% month over month. These represent the cream of the crop of seed stage companies.

As startups mature, that benchmark goes down. For a company at Series A or later, 10% month over month growth is excellent.

You can calculate your growth using a tool like this.

Growth is critical because the best startups tend to catch on fast. Google, YouTube, PayPal and countless others grew at incredible rates shortly after launch.

2) Gross Margin. It’s not hard to grow if you’re selling a dollar for 90 cents. Knowing your Gross Margin makes sure that doesn’t happen.

Here’s how to calculate it: take the money left over from a sale after variable costs (marketing, etc.) and divide it by the revenue from the sale.

A SaaS business should shoot for a Gross Margin of at least 75%.

3) Burn Multiple. Many startups lose money to fund growth. But how do you know if you’re losing too much?

That’s where the Burn Multiple comes in. It measures how much money you burned in the prior month divided by how much new revenue you signed.

Seed stage companies should have a Burn Multiple of 3 or less. More on the burn multiple here and here.

4) Runway. This is how long you have until you run out of cash.

If you’re burning $50,000 a month and you have $300,000 in the bank, you have 6 months of runway.

I want a startup to have a bare minimum of 18 months of runway after the round closes. In today’s down market, I’d prefer to see at least 30 months runway.

This way, you have plenty of time to wait out a difficult market.

And if you’re “default alive” (break even or better), congrats! Burn Multiple and Runway don’t apply to you and you’re in an exceptionally strong position.

Is it hard to hit all these benchmarks? Absolutely!

That’s why I have to look at 150-250 companies to find a single investment. Performance at this level is rare.

But if you can hit these hurdles, you’ll find investors breaking down your door. And I’ll be one of them. 🙂

What key stats do you track as a founder or investor? Leave a comment at the bottom and let me know!

Have a great weekend everyone! 👋

More on tech:

How Startup Founders Get Scammed

The Founders: The Story of PayPal

Midas Speaks: Sequoia’s Don Valentine at Stanford GSB

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How Wordcab Will Change Business Communication Forever

Like everyone else, I get invited to a ton of Zoom calls these days. Even if the information sounds useful, I often don’t have time to attend!

But what if I could read a brief, accurate summary of every call in minutes?


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That’s what Wordcab’s API can do. This incredible new startup based in NYC can summarize Zoom meetings, customer service phone calls, sales calls, and a whole lot more.

When the co-founder, Aleks, pitched us, he even summarized his own presentation using Wordcab!

Sure enough, a perfect one sentence summary popped up.

You can even vary the length of Wordcab summaries depending on the level of detail you need.

Do you want to get the information down to a sentence or two? Or would you prefer a few paragraphs that give you more info?

Either way, Wordcab is on your side.

I was extremely impressed with Aleks’ strong customer focus. He knows exactly what his customers need and makes sure they get it, no matter what.

That’s the kind of company you want to do business with. It’s also the kind of company I want to invest in.

In time, Wordcab may be used to summarize emails, documents, and all forms of business communication. This would be a true revolution in the way we work, making us dramatically more productive.

I’m delighted to be an investor in their recent pre-seed round! I can’t wait to see this great team scale up and change the business world forever.

More on tech:

The Last Fast Food Worker in California

I Pitched a Robot VC

Mark Twain: Venture Capitalist

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This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

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Misfits Market

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Why Technical Founders Win

You have an amazing idea. But can you make it a reality?

That’s the question facing a lot of non-technical startup founders. 


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I often meet with entrepreneurs with amazing ideas. They want to raise capital to build their product.

But this isn’t how venture capital works.

A technical team can get to first base before a nontechnical team leaves the dugout. 

Investors rarely if ever want to give you money to create a product. They want to give you money to scale up an existing product that has some early traction.

That money could let you hire more engineers and salespeople. The additional staff could let you add features and find more customers.

But how are you supposed to get the product built in the first place? That’s why being a technical founder is so important.

An entrepreneur with coding skills can build it herself! 

Many great founders create a product in their spare time. As it gains momentum after launch, they can quit their job and focus on it 100%.

As they start to bring in customers, they’re in a strong position to raise capital. 

The non-technical team can’t build it themselves. They must hire costly engineers or pay a fortune to a development shop.

A technical team can get to first base before a nontechnical team leaves the dugout. 

No wonder Y Combinator Managing Director Michael Seibel looks for teams that are at least 50% technical.

Being able to build in house cheaply or free is especially important when capital is scarce. No one wants to fund a company that burns cash like crazy in today’s market.

What’s more, a technical team can quickly improve their product.

Let’s say the sign-in flow is difficult and users are giving up. If you have to contact a dev shop, who knows how long it will take to get fixed?

But if you know how to fix it yourself, you could have a better product today.

And those dev shops that seem so appealing can screw you over big time. Some refuse to give you the source code or take a huge slice of your company’s equity.

This makes it hard to ever leave the dev shop. That’s no accident. 

What’s more, giving an agency a huge slice of your cap table makes you unfundable by venture capitalists. There’s simply not enough equity left for the founders, employees and investors!

It’s hard to create a software company if you don’t know how to build software. Be sure you have at least one builder on your founding team.

And if you don’t have the skills to build your dream, go get them! 

It’s never been easier to learn to build software. There are numerous online courses available, many of them free.

Even if you never reach the Stanford Comp Sci level, being able to poke around in your product is a huge advantage for any leader! 

So let’s build skills, keep the burn down, and make something awesome!

How do you view technical vs. non-technical founders? Leave a comment at the bottom and let me know!

More on tech:  

INSIDE THE SEED FUNDING SLOWDOWN

THE TOP 5 THINGS I’VE LEARNED FROM ANGEL INVESTING

TWILIGHT OF THE QUICK DELIVERY STARTUPS

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Misfits Market

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Photo: Patrick Collison, CEO of Stripe. Collison’s strong technical background gave him an edge. “File:Patrick Collison.jpg” by JD Lasica is licensed under CC BY 2.0.

Are You a Venture Scale Business?

A nice young man contacted me recently with an investment opportunity: a nude resort in Mexico.

I declined. But not for the reason you might think.


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Are You a Venture Scale Business?

My decision wasn’t a moral one. I passed because this is not a venture scale business.

Venture scale businesses are companies that can grow at massive rates. They also have very high profit margins.

Why isn’t the nude resort a venture scale business?

Because you would have to build hotels, pools, restaurants (ew) and whatever else a nude resort has. And you’d have to do it at impossible rates.

Because it involves physical items, it cannot grow at the same rate as a software business.

A Typical Venture Scale Business

Venture scale businesses are almost always software companies.

What’s our obsession with software? You can build a software product and then make it available to as many people as you want.

Building the product costs a lot. But making it available to one more person costs very little.

Of course, it usually takes some sales and marketing dollars to land a new customer. And customer support also costs money.

But a good Software as a Service (SaaS) business generally has a gross margin of 80% or more. This means that for every new customer they get, 80% of what that customer pays them falls to the bottom line as profit.

Yum yum! 😋

But Not All Software Companies Qualify

You can have a software startup with a killer product and great margins…and still not be a venture scale business.

Why? Because in order to interest VC’s and angels, you have to do more than grow fast with high margins. You have to grow big.

Really big.

Venture investors are looking for billion dollar companies. To get there, you have to generate massive revenue.

The current valuation multiple for high-growth SaaS businesses in the public markets is about 8. This means that for every dollar you make in revenue, the markets give you 8 dollars in valuation.

So, to be a $1 billion business, you need to hit $125 million in revenue.

Let’s say you’re making software for wedding planners. No matter how good your software is, it’s unlikely to ever be a venture scale business.

Assume the most you can charge the wedding planners is $50/month. There are about 23,000 wedding planners in the US.

So even if you got every wedding planner in the entire country as your customer (impossible), your revenue would be only $13.8 million. Your valuation would be about $110 million in the public market.

Realistically, you’d probably top out around $40 million at best.

Why Do Venture Investors Need $1 Billion Companies?

I can imagine what you might be thinking.

“Why are venture capitalists so greedy? What’s wrong with a $40 million business? That’s a lot of money!”

It is! To understand why VC’s are so insistent on getting big, you have to understand how they make returns.

Most of the investments they make will go to 0. Meanwhile, the few survivors have to become Godzillas in order to make up for all the losers.

This is the only way they could avoid losing all their money. And if they lose everything, there will be no venture capital for anybody.

Becoming Godzilla

Since I usually invest at seed stage, let’s take that as an example. At seed stage, you’re usually 7-10 years from an exit by acquisition or IPO.

Let’s say the seed stage company has $250,000 of revenue a year. To reach that $125 million of revenue in 10 years, the startup has to grow at about 5.3% monthly.

That means you nearly double every single year for a decade, on average. In reality, you probably grow even faster than that early on, then taper off.

Can you imagine the nude resort doubling its business every year? First year 1 resort, next year 2, and 1,024 resorts by 2032?

Not really.

Wrap-Up

I hope this helps explain some of the reasons you get a no from investors.

It may be frustrating. But they have their own people to answer to: their investors!

Venture capitalists won’t be able to keep raising funds if their returns are bad. So they have to make sure they pick only the best bets.

For more on this subject, check out this excellent segment of the This Week in Startups podcast with Jason Calacanis and Molly Wood:

What questions do you have about venture scale businesses and what venture investors look for? Leave a comment at the bottom and I’ll try to answer!

Have a wonderful weekend everyone! 👋

More on tech:

Talking About Today’s Startup Market on The Accelerator Podcast

The Power Law (Part One)

Managing a Crisis the Sequoia Way

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Photo: “Godzilla ゴジラ” by kirainet is licensed under CC BY-NC-SA 2.0.

The Burn Multiple: What Is It, and What Can It Do for You?

Today, I want to talk to you about a startup metric you don’t hear much about: the burn multiple. The burn multiple measures how efficiently you’re using your cash to drive growth.

This number is more important now than it’s been in many years. We are in a more difficult fundraising environment and investors are heavily scrutinizing how companies use cash.

In the boom times we’ve had for the last couple years, high growth startups could get funded no matter how inefficiently they spent. Shoot, even startups with no revenue or product often raised big rounds!

Those days are over.

The NASDAQ is in a bear market, late stage funding is down, and investors are asking themselves not just “Who will thrive?” but “Who will survive?”

The startups that make it will be those who know how to use money to efficiently drive growth.

So now that you know why the burn multiple matters, how do you actually calculate it?

It’s pretty simple. For any period (usually a quarter or a year), divide burn (losses) by new revenue added in that period.

Burn Multiple:

Net Burn / Net New Annual Recurring Revenue (ARR)

Your burn multiple calculation should account for the length of your sales cycle.

If it takes you around 2-3 months to close a new customer, it’s appropriate to compare burn in Q4 2021 to new ARR in Q1 2022, for example. If your sales cycle is 6 months, compare Q3 2021 to Q1 2022.


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Now you know what your burn multiple is. But how can you tell if it’s good or bad?

Use these benchmarks from a superb post by David Sacks, one of the leading SaaS entrepreneurs and investors:

Burn multiple is especially relevant for SaaS companies with their sticky revenue. Burning cash to get lots of revenue that sticks around makes sense.

But the burn multiple is still quite relevant for all startups. It helps you understand if the cash you’re burning is actually building your business.

I recently saw a deal memo for a company that had burned about $1.1 million in a quarter to add just $80,000 of new ARR. That’s a burn multiple of 14.

A burn multiple like that is an emergency!

So let’s say you’re that company. What should you do?

Get that burn down right away! If you can’t show cash efficient growth, it’s going to be hard to raise money right now.

You’ll want to extend your runway (time before you run out of money) as much as possible. This gives you time to figure out the issues in your business before the cash runs out.

Another advantage of knowing your burn multiple is that you can share it proactively with prospective investors. Especially if you’re a seed stage company, your awareness of this important metric alone will impress investors.

Of course, you’ll impress them even more if you can show a good burn multiple!

I’m writing this because I want to see your company survive and even flourish! But we won’t get there with happy talk alone.

Calculate your burn multiple regularly and act when it gets out of line.

What issues are you seeing in today’s fundraising environment? Leave a comment at the bottom and let me know!

More on tech:

Inside Today’s Early Stage Venture Market

What the Best Founders I Know Have in Common

The Startup Pitch Checklist

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Venture Capitalists Don’t Invest in Ideas

A few months back, a very nice young lady contacted me. She had an idea for a software product and wanted me to hear it.

I had to think of a very polite way of explaining that…

Venture Capitalists Don’t Invest in Ideas.

Many people think that angels and VC’s spend their days evaluating ideas. When they find an interesting and original concept, they shake hands and write a big check.

This isn’t how it works.

There are countless ideas, but only a skilled and determined founder can turn her concept into a real product. And then it takes even more perseverance to find customers who need the product and get their money.


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Traction Over Everything

So rather than attempting to read the tea leaves and find out which idea will work, most investors look for evidence that it’s already working. That evidence is called “traction.”

If you have several thousand dollars a month in revenue coming in the door, growing 30% month over month, there is clearly a very strong demand for your product. You’ve proven its value in the market.

If you can show an investor traction like that rather than just a deck or even an MVP, your odds of getting funded skyrocket.

Why are investors so stingy? Because they know that most startups will never even get to dollar 1 of revenue.

If investors dump cash on too many companies that don’t succeed in the market, they will soon have no more money left to invest. And then, even the best startups won’t be able to raise capital.

Venture Capital Is to Help You Scale, Not to Help You Start

Venture capital is really for scaling a business, not starting one. If you clearly have strong demand for your product in the market, we can help you staff up and meet that demand.

But few investors, if any, want to give you money to build a product.

What we’re trying to avoid is a team that raises money, works on the product, but misses their launch date. The date is postponed, and they miss it again.

Soon, they’re back asking for more money with no real progress to show.

But What About Pre-Seed?

Even for pre-seed deals, most investors want to see a Minimum Viable Product (MVP) built. Without that, it’s difficult to tell what you’re even investing in.

It’s also hard to say if the founders will ever be able to deliver on their plans.

Even the Best Bring More Than an Idea

Last year, I got a deal memo in my inbox for Callin, a social audio app co-founded by David Sacks.

Sacks is part of the famed PayPal Mafia and served as the company’s COO. After that, he founded Yammer and sold it to Microsoft for $1.2 billion in 2012.

He has a stronger track record than almost anyone. But even he didn’t show up with just an idea.

Sacks and his team had a nicely functioning app in private beta available for iOS. Numerous users were already creating podcasts on the platform.

Alas, the round was massively oversubscribed and I never got my allocation. But I did come away with an interesting lesson.

Wrap-Up

If you want to raise money, show up with more than an idea. Show up with an MVP you can show investors.

Better yet, come with a couple of customers and a little money coming in the door. Nothing impresses investors like real customers and real revenue.

Building an MVP with minimal resources and finding customers on your own is very hard. But so is contacting investor after investor with little chance of success.

What misconceptions have you seen about fundraising? What still mystifies you about the process?

Leave a comment at the bottom and let me know!

Have a wonderful weekend everyone! 👋

More on tech:

Inside Today’s Early Stage Venture Market

What the Best Founders I Know Have in Common

Amp It Up

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This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

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Use this link to sign up and you’ll save $15 on your first order. 

Work For an Awesome SaaS Startup!

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Hello everyone! 👋

I just wanted to let you know that a really cool SaaS startup that I’m an investor in is hiring now.

They’re looking for senior fullstack or backend developers.

If that’s you, send me an e-mail right away!

They just raised a big seed round and are ready to 🚀.

I’ll see you later today for a full post! 🙂

Photo: “STARTUP CTO” by ceonyc is marked with CC BY-SA 2.0.

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Why I Just Invested in Capbase, The Startup in a Box

Knowing who owns your company should be easy, right? Just keep a spreadsheet with the names and percentages and you’re all set!

Unfortunately, company ownership is a lot more complicated than that. Different investors buy in at different prices and different terms over time. 

That’s where Capbase comes in. Capbase can handle your incorporation, capitalization table (list of company owners), stock options and a lot more. Capbase is so advanced that when you raise a fundraising round, it can automatically update your cap table as the wire transfers come in!

It’s basically a startup in a box. And it’s taking over the industry. 

Very few corporations use any software solution to manage their cap table. In the future, I think all of them will. And Capbase is hard to beat. 

Best of luck to this awesome team!

More on tech:

Inside a Startup Accelerator Demo Day

What if Everyone on Earth Had Super Fast Internet for $1?

Why I Just Invested in Gauge, the Best Way to Sell Your Car

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Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 and returns have been good so far. More on Fundrise in this post.

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iHerb

The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.

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Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me. Every fruit and vegetable is super fresh and packed with flavor. I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy! I wrote a detailed review of Misfits here.

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Why I just invested in eyerate, the best online review tool

If you run a retail business, you know what a royal pain online review sites can be. Get one unreasonable customer, and all of a sudden their bad day is turned into your business nightmare. An angry one star screed torpedoes your average and you’re left to rebuild, bit by bit.

But what if you could capture ten times as many positive reviews from your happiest customers, cheaply and easily? And at the same time, you could motivate your employees to give the best service ever?

Well, you can. EyeRate, an innovative software startup from the Sacramento area, has created an incredible tool that both generates awesome reviews and motivates employees.

Here’s how it works:

1) Customer gets a haircut (or any other service).

2) Afterward, the customer gets a text message “You just saw Sarah. How was your experience? Rate us 1-5.” (Customer info pulls from the POS, so no need to enter anything.)

3) Customer texts back 5.

4) Customer is automatically prompted to post the review to Google, and does so with a single click.

5) Sarah gets a cash reward (usually $5-10 each time), which is automatically processed by EyeRate. The business owner doesn’t have to do anything.

By prompting happy customers to review you, EyeRate generates an average 10x increase in positive reviews for its clients. If a customer rates you less than a 4, the customer has the option to post OR share their feedback privately with the business owner and the message is forwarded to leadership to followup.

Where would you rather spend your scarce marketing dollars: expensive Google or Facebook ads with questionable usefulness? Or motivating your employees to provide great service and capture the awesome reviews, building your brand online and making your foot traffic skyrocket?

95% of consumers check online reviews before deciding which store to go to. Online reviews are also critical to your position in Google search. This is the where you will make or break your business.

I just invested in EyeRate, and the company is growing at warp speed for a reason: it produces reliable, massive increases in revenue for its customers that far exceed its modest monthly fee. Competitors like Podium and BirdEye can prompt a customer for a review and aggregate the data, but they can’t handle payments to employees, which is how you motivate them to give great service and ask for reviews.

Check out EyeRate today, before your competition does!

More on tech:

ONE OF THE HOTTEST TECH STARTUPS IN THE WORLD CALLS HOBOKEN HOME

WHY I JUST INVESTED IN GAUGE, THE BEST WAY TO SELL YOUR CAR

KEY METRICS FOR STARTUPS: CONSUMER VS. ENTERPRISE SAAS

Photo: “Symbols – Daytime, Barber Pole – Trinity Barber Shop, Storefront next to a Walton’s Restaurant, Other Stores, Pedestrians on Sidewalk” by MIT-Libraries is licensed under CC BY-NC 2.0

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This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 and returns have been good so far. More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account. I will also get a fee waiver for 90-365 days, depending on what type of account you open.

iHerb

The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.

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Use this link to sign up and you’ll save $10 on your first order. I’ll also get $10.

Palantir’s $100 Million Loss

Palantir released its earnings for the first quarter of 2021 today, and it’s not looking good. This 18 year old company that has never made a profit turned in a net loss of $123 million, versus $54 million in the first quarter of 2020.

This is actually a little better than the full year results in 2020, where losses reached nearly $100 million per month. But quarter on quarter, the picture is significantly worse. I’ll be curious to see if last year’s pattern of escalating losses through the year holds again in 2021.

Selling and general/administrative expenses held Palantir’s results down. I saw a similar picture in 2020, and one factor may be the extensive free trials they give customers. I question whether this business model can produce profits, especially given its long history of burning cash. Amazon and Google invested for the future and delayed profits, but not into nonexistence. Google was profitable in 3 years and Amazon in 7.

These poor results don’t seem to trouble CEO Alexander Karp, though. He took home $1 billion in compensation last year while the company lost a similar amount. Hey Alex, how about returning that so the shareholders can at least break even?

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