Tag Archives: SaaS

Business, Technology

From Seed to $10M ARR

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I hadn’t heard from one of my companies in over a year. I was starting to get worried. Turns out, they were busy.

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When I heard from the founder yesterday, I was stunned. The little seed stage SaaS company I backed in the summer of 2021 was now doing $10 million a year in revenue.

Wow!

When you see one of your companies go from a fledgling startup to a significant business, it’s an incredible feeling. Here are a few things I learned along the way:

Have a Clear Value Prop

I can’t get into specifics on what the company does. But its value proposition to customers was very clear.

Customer after customer dramatically increased revenue with their software. It pays for itself many times over.

When you have a clear value proposition, sales gets a lot easier. And as that sales team cranks, your company grows fast.

Metrics Matter

On any conceivable SaaS metric, these guys were crushing it when I invested. Revenue was growing 25% month over month, LTV was 50 times CAC, and the company was already at breakeven.

The companies that were most successful before you invested continue to be the most successful afterward.

Don’t let anyone tell you the numbers don’t matter. They matter a lot.

Did I Help?

Honestly, I’ve probably added less value to this company than practically any other in my portfolio.

Why? Because they never need any help!

I introduced them to a few engineers early on. But by and large, I’ve just sat tight.

My most successful companies usually have few if any asks for investors. That said, I’m there for them if things ever turn tough.

No Distractions

I’ve never seen this founder on Twitter. He has yet to turn up at a networking event.

Sometimes the most vocal people aren’t the ones who are really crushing it.

The team also never got distracted.

They built a relatively simple but very useful product. Then they relentlessly scaled it.

They didn’t have a metaverse strategy. They never released an NFT.

They just stuck to their knitting and signed up more customers.

This is Repeatable

What struck me more than anything is how repeatable this investment is. I wish I could tell you I had a “Eureka!” moment and saw the future clearly.

I just reviewed the product, looked at the traction, and met with the founder. The product seemed very useful, traction was great, and the founder impressed me.

So I gave them some money. Simple as that.

I don’t see any reason why I or another investor couldn’t find 3 more of these. In fact, I intend to!

What have you seen in highly successful startups? Leave a comment and let us know!

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Business, Technology

Bear Market Hits Climate Tech

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Raising money is hard these days. Even climate startups, a VC darling, are starting to feel the pinch.

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From a Pitchbook report:

In Q1, climate tech startups raised $5.7 billion across 279 VC deals, according to PitchBook data. That’s a 36% decline in deal value and a 31% decline in deal count from the previous quarter. From its peak in Q3 2021, quarterly deal value has fallen more than 50%. 

Overall US venture funding fell only slightly in the last quarter. But it too is down over 50% from the peak in 2021.

The bear market hit most startups hard in 2022. But climate tech held up better — until now.

Bad practices purged from the market in 2022 continued in climate tech until recently.

In February, I saw an uncapped note in a climate company. Even generative AI startups don’t seem to be getting away with that.

These notes are a terrible deal for investors. You don’t even know what you’re paying for your shares!

Running a financing like this will attract poor quality investors.

Savvy founders wouldn’t do it, even if they could. They want the best people around the table, period.

In a hot market, loosey goosey business practices proliferate. That sloppiness kills companies once the downturn hits.

I expect to see numerous climate companies go bust soon. That said, they’ll have plenty of company.

Long term, the outlook for climate tech is bright.

The US wants our own energy, produced here, cleanly. That’s true regardless of the business cycle.

Businesses and individuals also want to reduce their energy use. Energy costs money!

If you can produce clean energy or save energy, you can find customers.

I’m still excited about investing in climate tech. I’m mostly looking for SaaS products that can track and reduce energy use.

That product should be easy to sell.

The customer doesn’t believe in climate change? No problem.

You believe in saving money, right? If you don’t believe in saving money, you’re not a businessman.

I encourage climate founders to keep at it! Don’t worry about the macro environment — just build something great.

What do you think of climate tech? Leave a comment and let me know!

Have a great weekend everyone!

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Books, Technology

Consumer Startups: What Works and What Doesn’t

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Selling to consumers is hard. They can be fickle, hard to pin down, and just plain cheap.

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As an investor, I’ve seen some business models work better than others. Let’s break down what works and what doesn’t in consumer:

Marketplaces

Marketplaces have been my biggest consumer success stories. What’s great about marketplaces is that they’re pretty easy to monetize.

If you sell a car, everyone expects you to take a percentage of the sale. And the price is high enough that even one sale generates significant revenue.

But transactions don’t have to be big.

Food delivery is another model I’ve had success with. The transactions are small but frequent, and everyone expects to pay a fee.

It’s no coincidence that the biggest successes in consumer, like Uber and Airbnb, are usually marketplaces.

Consumer Subscriptions

In my experience, these companies have not been that successful.

It’s tough to get consumers to pay for software. Even when they do, they’re likely to cancel quickly.

The price of most consumer subscriptions is fairly low, maybe $10 or $20 a month. This makes it hard to afford customer acquisition.

I recently met with a startup that had a Customer Acquisition Cost (CAC) and Lifetime Value (LTV) that were equal. This means every penny customers give them goes out the door to get another customer.

A business model like that can’t work.

That said, some consumer subscriptions take off. Calm is a huge success, with a valuation in the billions.

But most successful consumer subscriptions, like Netflix or Disney Plus, are streaming services.

Those take huge amounts of money to run. Few startups can compete.

Consumer Social

This is generally even harder than subscriptions.

Given the low value of each customer, advertising is usually out of the question. This means you have to go viral.

But how?

Unlike building a B2B sales team, there’s no readily repeatable way to go viral. Or if there is, only Nikita Bier seems to know it. 🙂

Monetization is tough. People usually won’t pay for a social app, and ads don’t pay much either.

And don’t forget the incumbents! It’s pretty hard to get people to use your little app instead of Instagram or Tik Tok.

D2C

D2C is the most difficult type of consumer business.

These startups involve physical products. That means messy, hard to scale, low-margin “stuff.”

Supply chains get tangled. Cut-rate imitators pop up daily.

You also face the same problem with customer acquisition as consumer subscription companies. The only difference — your margins are even lower, making it harder to afford ads.

Even the biggest outcomes in D2C are modest compared to pure software companies. Two of the most iconic D2C brands, Warby Parker and Allbirds, are valued at $1.7 billion and $400 million respectively.

Compare that to $70 billion for Uber and $69 billion for Airbnb.

Wrap-Up

Today, SaaS is the darling of investors. Indeed, the vast majority of my investments are SaaS companies.

But it’s important to distinguish between consumer business models.

Look for marketplaces that can transact tons of value, either in big transactions (Airbnb) or numerous small ones (Uber).

What do you think of consumer today? Leave a comment and let me know!

Have a great weekend everyone!

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Business, Technology

I Like Big TAM’s and I Cannot Lie!

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I just passed on a company growing 80% month over month. Instead, I chose one growing more slowly. Have I lost my mind?

Not yet.

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These two companies illustrate one of the most important principles in venture capital: market size matters. Without a large enough Total Addressable Market (TAM), a startup can only grow so big.

Company A

Company A is a fantastic consumer subscription company. It has an awesome product and growth rates you rarely see anywhere.

So they’re scaling like crazy — but for how long? To answer that question, I did a little back of the envelope math.

They have about 25 million potential customers, according to my research. At their average revenue per user of $10/mo, that’s $3 billion a year in potential revenue.

And unfortunately, like many consumer companies, churn is heavy. So the company has to be rebuilt every year or two.

Company B

Company B handles international corporate money flows. And while A has a substantial market, the potential for B is staggering.

Corporations move $23.5 trillion across borders every year. At B’s take rate, that alone is a $60 billion a year revenue opportunity.

Better yet, B also charges SaaS fees! That expands the TAM to around $70 billion.

If B takes even a small slice of the market, it could exceed $1 billion in revenue. At a typical 10x multiple, that means a $10 billion company.

And just because B isn’t growing as fast as A doesn’t mean it’s not growing! Revenues jumped 10x year over year, an amazing performance.

Why We Hunt Elephants

VC’s and angels are obsessed with big markets because the largest outcomes matter most. In venture capital, they drive almost all of our returns.

Let’s look at 3 examples: a company that’s acquired for $100 million, a startup that IPO’s for $1 billion, and another that IPO’s for $10 billion.

Assuming 50% dilution from the time we invest until exit, here’s what our returns look like:

That $100 million outcome, as big as it sounds, accounts for less than 1% of our returns! Meanwhile, the $10 billion Big Kahuna makes up fully 90% of all our gains.

If one type of company gives you 90% of your gains, that’s where you have to focus.

Expanding Your TAM

Let’s say your market is small. But you love your business and you don’t want to shut it down!

Think about how you can sell your product to more customers! Can a product that’s useful for auto garages also work for cleaning services?

There’s nothing wrong with focusing on a small market in the beginning. You have to start somewhere.

But if you want to build a venture scale business, you also have to think big!

Best of luck to all startups, big and small!

How do you think about market size? Leave a comment at the bottom and let me know!

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Business, Technology

What I Don’t Invest In

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Being an angel investor is never boring. I see everything from spacecraft to nude resorts.

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But I can’t invest in everything!

I focus on the areas I know best. And I want to back companies building the type of world I want to live in.

Here are some areas I don’t touch:

1) Gambling. I don’t believe in it, simple as that.

To me, gambling startups are tech at its most predatory. Many people struggled to stop gambling even when the casino was hundreds of miles away.

What happens when it’s in their pocket?

In a free society, I don’t have a problem with adults making the decision to gamble. But I don’t have to fund it.

Gambling is also a tough business. You’re offering a commodity product – the ability to take a bet.

It’s a race to the bottom and margins are razor thin.

2) Drugs. There may be incredible applications of illegal drugs like psilocybin and ketamine for conditions like depression.

But I don’t have the scientific background to evaluate these claims. What’s more, in our enthusiasm, I’m concerned we may be glossing over the risks that come along with some compounds.

3) Space. Who doesn’t love spaceships?

I look forward to a world with lightning fast satellite internet for everyone and resorts on Mars.

But I don’t have a scientific background. How would I know a good space company from a bad one?

Better leave it to Elon.

4) Biotech. I would love to invest in biotech.

I find it fascinating. And its potential to improve our lives is limitless.

But my background is in software, not medicine. How will I know if a company is good or bad, or what a fair price is?

Instead, I stick to what I know. And when I see the occasional biotech startup that gets me excited, I pass it along to investors I know who are experts in the field.

5) D2C. Selling physical goods direct to consumers online used to be a great business model.

Not anymore.

Apple stopping ad tracking has caused customer acquisition costs to triple for many companies. Supply chain issues crush margins and make filling orders difficult.

Even the biggest successes, like Peloton, have been crushed. Its stock is down 90% from the highs.

I’m better off in a pure software business without the messy “stuff”.

It’s hard to succeed if we don’t focus. And in startupland, it’s easy to lose a fortune investing in exciting things you don’t understand.

I stick to my knitting and invest in pure software companies. Most sell software to businesses (SaaS), the area I worked in before becoming an investor.

This gives me the best shot at identifying a great company, since I know what great looks like in my field. It’s also easier to add value in an industry I know well.

What areas do you invest in? What areas do you avoid?

Leave a comment at the bottom and let me know!

There will be no blog tomorrow. I have an acting gig.

See you on Wednesday!

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Business, Technology

Why I Just Invested in ProsperStack

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You work hard to get new customers. So why let them slip away?

ProsperStack lets you provide custom offers when a customer tries to cancel. They can even segment your customers and give the best offers to your top customers.

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You can also A/B test different offers to see what works best. And you can do all this in a beautiful, no-code interface!

Only the largest companies, like Netflix, have special programs to stop churn. But why shouldn’t your company have it, even if you’re not a giant?

ProsperStack can also help you understand why customers leave. They can tell you “you lost $10,000 in monthly recurring revenue because you don’t have a Salesforce integration.”

That gives your company amazing direction. It’s time to put that Salesforce integration at the top of the list!

But the thing I like most about ProsperStack is that you can easily see how much revenue ProsperStack stopped from churning. This makes their value proposition crystal clear.

I’m delighted to be an investor in ProsperStack’s recent seed round! Book yourself a demo and crush your churn today!

What issues do you see with subscription churn? Leave a comment at the bottom and let me know!

There will be no blog on Monday. I have an acting gig!

See you on Tuesday. Have a great weekend, everyone! 👋

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Business, Technology

The Startup Metrics That Make Investors Drool

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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! 👋

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Business, Technology

How Wordcab Will Change Business Communication Forever

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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.

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Business, Technology

Why Technical Founders Win

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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!

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Business, Technology

Are You a Venture Scale Business?

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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.