StartupCFO : Mark MacLeod

Opportunity Cost

mark — Thu, 10 May 2012 13:03:01 +0000

What’s the difference between founders and professional managers? While they differ in many ways from experience to risk tolerance, etc, you can boil them all down to one element – opportunity cost.

According to Wikipedia, opportunity cost is “the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen)“. As a founder, you probably have no opportunity cost. It’s not that your time is not valuable. It’s not that you couldn’t get a job. But if you are truly on a path to building something of value, then it’s a personal mission and you would not dream of doing something else.

It’s a totally different story for the management team that you build around you. Yes, early management additions should have a founder mentality and in many cases it makes sense to make them co-founders or quasi founders (ie. with a large equity grant). But anyone you bring in at the top levels of your company will by definition be a rock star. And rock stars have choices.

When it comes to building, and more importantly, retaining your all star team you need to explicitly consider and manage for their opportunity cost. This means i.) truly understanding their passions and career / life goals *before* you hire them; and ii.) having regular frank dialogues regarding the continued alignment between your rock star and your company.

I am fond of counseling people never to bet against human nature. If someone is truly passionate about something unrelated to your startup, it’s only a matter of time before they focus some or all of their attention on that passion. Often, they will do this when things are not going so well with your startup. The time when you need them most laser focused on you.

This is true not only for the management team, but any of your hires. Many startups allow developers to work on side projects. I have mixed feelings about this. On the one hand, if you love them set them free. On the other, especially given that, like Starbucks, there’s an accelerator on practically every street corner and essentially no barriers to launching a startup, it encourages people to abandon ship to start their own projects.

Understanding your key hires before bringing them on goes beyond understanding their passions. You also need to know their true natures. This goes beyond technical interviews and reference checks and gets down to their fundamental traits and values. You need to know that these are aligned with you and the culture you are trying to build.

Hiring for this involves spending a lot of time with potential hires, in different settings. And while there are a battery of tests and techniques in this area, ultimately it comes down to trusting your gut.

Implicit in all of this is the need to build a transparent and open culture. This starts from the first interview and starts with you. You need to be open and transparent. Without that, you won’t build the rapport and trust that is needed to truly understand your team. And thus, you will be totally blindsided when the opportunity cost equation has them handing in their resignation.

I was speaking with the co-founder and CEO of one of Canada’s most successful startups last week. He likened management teams to mercenaries. It’s not that they are bad people. It’s not they lack commitment. But they are a startup of 1. Manager Inc. And sometimes you need to do whatever it takes to keep them on board.

It’s not enough to focus on vision and mission. If things are taking off then your team might stick around while the times are good. But if things go bad (and let’s face it, they always do), your team will only stick around if you have aligned their passions and values with yours. In so doing, the opportunity cost equation will have them sticking around and making things right as part of your team vs. heading for the exits.

Remember, times are good (too good?). The best team members can go almost anywhere. Be focused on alignment and opportunity cost to keep your management team intact.

Getting Investor Ready

mark — Thu, 03 May 2012 17:47:09 +0000

This morning I gave a talk to the Founderfuel teams on how to get investor ready and more importantly – how to get funded. Demo day is May 23rd, so everyone is gearing up for fundraising.

Here are the slides:

Getting investor ready

View more presentations from Mark MacLeod

Hacking Legal Fees

mark — Sat, 28 Apr 2012 17:48:14 +0000

Startup life often boils down to a few key moments. From incorporation to first hires, securing investments, key partnerships and hopefully a big pay day down the road. What all these moments have in common is that they involve lawyers.

I have worked with some great lawyers over the years but I have never once enjoyed paying a legal bill, even reasonable ones. Since legal bills are unavoidable here are some tips for hacking them down to size:

Choose the right lawyers: while your cousin Vinny might have a small practice and charge a low hourly rate, he’s not the person you want as legal counsel. Only work with firms that have a specialty in technology (especially VC-backed) businesses. Only work with firms known in the industry. Ones that have lots of recent deal experience.

Often these firms are not the smallest or cheapest in terms of hourly rates but they will save you boatloads vs more generalist firms because they know how things work and they know the people on the other side of whatever deal you are trying to close.

Set yourself up properly: while you can incorporate yourself, don’t. Get it done right. You’ll save fees in the long run since your structure and minute books will be subject to diligence in any financing or sale transaction.

Join an accelerator: many accelerators have arrangements with law firms to offer free or cheap legal services. We have this at Founderfuel. Many others do too. Dine out on this to find the right lawyers and get some free services.

Don’t reinvent the wheel: pre-financing shareholder agreements, employment agreement templates, terms of services, NDAs, etc, etc are all fairly standard. Beg, borrow and steal the basic templates you need to get you started.

Use Series Seed docs for your first external funding: This is structured mainly for US companies but I recently used them for a Canadian deal and it was the fastest, cheapest deal I have done.

Delay the clock: don’t get lawyers on the clock until you have a business deal worked out. Yes, it is often advisable to have a pre discussion with lawyers to get their input before making a deal. After all they see so many of them. But here’s the thing: lawyers are there mainly to manage and allocate risk, not make business deals. That’s your job!

Adult supervision: on any complex transaction never allow your lawyers to speak with the other side’s lawyers without you being present. If business decisions and trade offs need to be made, a party to the actual transaction needs to be the one making them.

No parties: on a similar note, lawyers have this strange habit of showing up in groups. I regularly get on calls that have two or more lawyers per side where the bulk of the lawyers are doing no talking, yet still billing.

The partner on the file will defend this saying the associate is the one doing the work. While that may be true make it clear you don’t like party calls and want this reflected in the bill.

I guarantee if the associate is senior enough to be doing the talking then it’s a good bet the partner will be clearing email while billing you (and billing whoever he or she is responding to).

Get quotes: self explanatory. Get quotes from your counsel and investor counsel.

Be organized: this goes back to my earlier point about getting set up properly in the first place. If you have your s#*t together and all your docs are organized you can get reasonable quotes. If not, well you reap what you sow.

Approve research: ironically the most expensive (and experienced) lawyers can be cheaper because they have seen everything. If your lawyer needs to research something make sure they clear it with you. It may be appropriate for that research to be on their dime, not yours.

Team up: on small, straightforward deals consider using the same counsel as the VCs. Yes, some folks don’t like this. But we have done it a few times at Real. It works well when the company is organized (yes, that keeps coming up). It does not when you’re not as investors, especially VCs, tend to use more expensive lawyers than you do.

Also on the team up topic, financing rounds these days tend to have more investors. Don’t enable each of them to retain counsel (unless it’s them paying for it, even then you should discourage it).

Stop turning: Every new draft of an agreement is called a turn. When I was less experienced (before my hair started turning grey), I used to push my lawyers to bang out drafts every time we had feedback from the other side. I thought this would make things move quicker.

All this does is hike the fees. Every turn generates more hours on both sides. Instead, after a first draft is issued get all comments and business issues sorted before doing another turn.

Give up control: I also used to get my counsel to lead drafting thinking since I was driving the process I would keep fees lower. The fact is, all VCs have a standard set of docs. Better to let their lawyer lead the process and comment rather than the other way around.

Do business: I have a saying: good lawyers are there to do business. Bad lawyers just protect their clients. Your lawyer should be an enabler for you. Lawyers don’t make the deals, you do. Still your lawyer should be right behind you and should be focused on the key business issues not the minutiae.

Finally, since legal fees will always be high, make sure you are getting full value from your lawyers. That means more than free lunches. Make those lunches count by briefing your lawyers on company status, issues and priorities and seeing how you can tap into your lawyer’s vast network.

I’ve probably missed some hacks, but if you follow these you will be in good shape, though likely still not happy with your legal bills.

Vision can come later…

mark — Fri, 13 Apr 2012 12:47:39 +0000

What do Acquisio, Freshbooks, Hootsuite and Shopify all have in common? Well, for one, they are all kick ass, high growth Canadian startups. For another, they all started out as web agencies. i.e. service companies.

Each has a different story for how they transitioned from services to product. But each one had the benefit and luxury of starting from an existing, profitable business and taking the time that was needed to develop and validate their vision.

None of them approached VCs out of the gate. And for those that did raise VC, I’m pretty sure they had a (relatively) easy time of it. Why? Well, they did not *need* it (because they had services to subsidize) and they had time to build traction, giving them funding options.

As a seed investor I meet many entrepreneurs with fresh new companies that are going to “change the World” in same way. And since we are venture fund, we do need to see big visions. But in most cases these visions are hallucinations because the founders don’t know what they don’t know yet. If they had been in market for a while, funding what they were doing with friends and family / angel money or subsidizing through services, then they would have a lot more validation to back up their grand plans.

While VCs on average fund 1% of the companies they meet, I am sure if you dissect the data the % is way higher for those companies that walk through the door, not needing those $, but wanting them, and having the ability to say ‘no’ to a VC.

So, what am I saying? Am I suggesting you put your startup on hold and start a web agency? Not necessarily. But what I am saying is:

- Good things usually take time. Don’t feel the rush to serve up some huge vision

- Investor discussions go better when you pitch what you *know* to be true, not what you hope will be. So, starting small and/ or being in market already is powerful. Now, for sure you have to be building ahead of actual market demand, so there is some leap of faith required. But it’s better if that leap is based on actual domain experience and traction

- It all starts with one segment. Facebook dominated Harvard, then other Boston universities and grew from there

- Investors want what they cannot have. If you don’t need them, they might just want you more

- Vision without domain knowledge and actual traction can sometimes be hallucination

Sustainable Startup Pace

mark — Tue, 10 Apr 2012 12:38:47 +0000

This feels like an appropriate post to be writing coming off a long weekend…

Startups are male-dominated. Goto any VC/ startup event and its 90%+ male. Tackling that is not the aim of this post (though as an aside, I will share that I am involved in a project that is addressing this head on – more on that later…).

Whether it’s this male domination or the fact that most startups have short half lives or whether there’s just more competition so that speed becomes more important than ever, or all of the above – most startups have an intense, always on culture and ethos.

That’s all well and good, but is it sustainable? Both during the life of any given startup and over the career path of the people living it?

I am a veteran of many startups now. I have lived through lax cultures (with mediocre results) and intense, competitive, pressure-filled cultures (with great results) and everything in between. The CEO of my 3rd startup (who had no kids) liked to do strategy sessions over cocktails after work. We did these frequently. Let’s just say I did not see much of our 2nd child in his first year.

Perhaps it was that experience or maybe I’m just getting older, but I won’t make those sacrifices now. I won’t get a 2nd chance to experience my kids growing up! And I have already missed milestones that I will never see again.

I’m still obviously very involved in startups and want the CEOs that we back to be aggressive. And I do firmly believe in Mike Cassidy’s maxim that speed is the best strategy.

So, how do I reconcile my desire for balance with my desire that our CEOs be as aggressive and fast as possible? I actually don’t think these paths are mutually exclusive.

While some people do genuinely thrive on (some) stress, it is a biological fact that sustained, long term stress is very harmful to us. If we are always on, we will inevitably drain our productive capabilities.

Some of my best insights have come while walking the dogs or mowing the lawn or just sitting quietly. And since I have made family a top priority my head has become clearer and more focused.

Successful startups often have one core market or technical insight that forms the nucleus of their entire company. I would argue that you’ll find that insight faster and be able to focus on it more if you’re not totally stressed out and feeling like you’re running a rat race.

I’m clearly not alone in thinking about family and balance. Sheryl Sandberg, COO of Facebook recently shared that she leaves work at 5:30pm to have dinner with her kids. For the #2 in a company known for it’s male-dominated all night hackathons, this is a strong and brave statement. I love it!

Bryce from OATV shared his take on how he balances work and family last week too. Like Sheryl, he makes it home for dinner with his family every night.

What about me? Well, I don’t have the pressures of running one of the most successful internet companies around and I am fortunate to be part of a great and understanding partnership. So, I have the autonomy to craft a work-life balance that is truly sustainable. I take the kids to school most days. I help out in the morning routine. I don’t get to eat dinner with them most nights, but I am there for stories, bath, shut down.

I also work from home on Fridays. My partners like to joke that I work 4 days/ week. But I find it’s a great way to end the week. I end Fridays organized, thoughtful and ready for the following week. Yes, like you, I am checking in on weekends. But I try and turn email off entirely on Sundays.

My recipe won’t necessarily work for you. But nothing is more important than family and health. So I strongly encourage you to craft a personal routine that enables you to deliver your best in every aspect of your life not just for a short term sprint but for the whole marathon of life!

Saas Math: Customer vs. Revenue Churn

mark — Wed, 04 Apr 2012 12:46:00 +0000

As I’ve mentioned many times before: churn (the rate at which customers cancel their subscription) is the most important metric for any recurring revenue business. This should make sense. The longer a customer keeps paying you, the more valuable that customer is.

In a previous post, we looked in depth at churn. Most companies when they look at churn look at customer counts: how many customers did we start the month with? How many of those did we lose? Divide the lost customers by the beginning customers and you have a basic measure of churn.

While it’s important to understand this and to look at these patterns over time on a cohort basis (i.e. for customers who joined in a given month, from a common source, or linking them via any other common attribute to find patterns), you need to also look at revenue churn.

Customer churn then is a count of customers who cancel their accounts. Revenue churn is revenue you lost from those customers.

Here is a simple example:

This example looks at changes in customer count per month. It then breaks out Monthly Recurring Revenue (MRR) based on:

- How much MRR the company had at the beginning of each month;

- How much new MRR it gained (from converting new customers and from upgrades by existing customers); and

- How much MRR it lost from customers that canceled their accounts.

From these stats, we can calculate both customer and revenue churn.

What you should always see is that customer churn is > revenue churn.

Why? Well, most (all?) SaaS companies offer a variety of price plans for their offerings. Everyone seems to have that 37 Signals‘ style price plan with 5 options where the middle one is magically the most popular (this is almost always not true). Sorry, I digress…

As I was saying, if you have multiple price points for your offering, chances are very good that most of the customers you are losing are on the lowest price point. This is because most churn occurs in the first 30 – 60 days. And these newer customers tend to be on your lowest price plan. So, even though they count the same as any other customer in terms of customer churn, they are worth a lot less than your customers that have been with you for a while.

When you break down your revenue churn you should see much lower churn on your higher price plans and in terms of customer tenure you should be seeing much higher churn for newer customers. If these patterns are not evident every month, then there is either an issue with your data or your product.

Churn by Price Plan

You can take your analysis further and look at churn per price plan. When you do this, you might come to some startling conclusions.

For example, when you look at per user economics by price plan (looking at revenue from users on each price plan less hosting & service costs less customer acquisition costs), you might find that your entry level pricing plan does not give you profitable customers. Yes, it adds to customer count and revenues, but these customers might not be contributing to your bottom line. These customers also tend to chew up more support, further reducing their profitability.

Conversely, higher price point customers may be so valuable (because they are more established and stick around more) + lower maintenance that you decide to launch a program to get customers to upgrade or go after higher value customers.

These are patterns I have seen before, but they not apply to your business.

The point is: slice and dice your data every way possible to get the insights you need to optimize your business.

It’s “yes” day at Real Ventures

mark — Sun, 01 Apr 2012 13:00:03 +0000

VCs say “no” a lot. In fact, on average, we invest in one out of every one hundred deals we see. The is a little higher for us thus far at Real Ventures, but still, the overwhelming majority of entrepreneurs who come to us leave empty handed.

As someone who has spent the last 12 years trying to help entrepreneurs get funded this is tough for me. The rest of the team feels the same way. You never know who’s going to make it. So we should probably just say ‘yes’ a lot more often.

So, to restore our karmic balance, we have decided to make today “yes” day. If you’re looking for funding and fit our criteria (outlined below), get in touch. Today only, we’re funding you!

Criteria:

Software (web, mobile)

Stage: Pre-market validation

Capital needs: < $500K for a seed round

Ambitions: Big!

Three Steps to Getting Funded

mark — Tue, 27 Mar 2012 00:51:36 +0000

Lots of people, myself included, have written lots of posts on how to get funded. In fact, a whole section of this blog is devoted to that topic. While all those details are great, it struck me recently that there are three keys to getting funded:

Team: A founding team (being a sole founder is tough for investors) consisting of one product / UX person and one well-rounded developer. At least one of you needs to be completely consumed by this idea.

Later stage teams are different of course. There, investors are looking for deep industry expertise and relationships and management team members that know what scale looks like.

Vision / opportunity: A clear problem or opportunity for a large market. A unique technology or market insight that no one has exploited yet. One that can be rolled out into a very large company.

Traction: Nothing gets investors moving faster than traction. If you’re acquiring users at a furious pace expect investors to be knocking your door down.

It only takes two…

While the three keys are each very important, in my experience it only takes 2 out of 3 to get your funding:

If team is missing, this is very tough for sure. After all, we invest in people. But if you have a crazy big vision and already have results, we can recruit in heavy hitters to round out the team.

If the vision’s not big enough, but you have a killer team and are generating early results, then many investors will work with you to flush out just how big the idea can be.

And if you don’t have traction yet, but you’ve been there done that, got the t-shirt and are coming back for more with a new idea, you’ll always get funded!

Simple, right?

Hiring Part Time Execs

mark — Fri, 16 Mar 2012 17:13:15 +0000

In this World of seed / micro VC funded startups, round sizes are smaller than they used to be. That’s a good thing. But it can pose challenges when it comes to building out your management team. Either you can’t afford/ don’t need a full time exec or those execs won’t join because you don’t have enough cash in the bank to make them comfortable.

One way to deal with these issues to hire part time executives. I see this happening more and more.

For the two years right before joining Real Ventures, I was doing part time CFO work. Turns out there was huge demand for that. I learned some lessons along the way that I hope you can apply to your startup.

Part time execs work when:

You hire in non-core areas: Finance is super important to any company, but it is not a core aspect of the company’s mission and vision. It’s also a stand alone function. I could provide CFO services for a company without having to interact with different departments. So, finance is a perfect function to outsource to a part time CFO.

It can be more challenging for core areas. How do you deal with 1/2 a product manager or 1/2 a VP, marketing? Product definition, development and customer acquisition happen every day.

I know some marketing folks who split their time between multiple startups, but they were always juggling time and people were always disappointed. You can’t tell a startup “no, today’s not your day. I’ll get to that on your day”.

You work with people that are not just between jobs: If you’re sitting around waiting for your next startup gig, it can be tempting to hang out your shingle and say you do part time work. But, beware of people like this. They are not committed to part time work and will leave you when the right full time gig comes along.

Sean Ellis had an interesting model as an outsourced VP, Marketing. He would join full time but be focused on the initial phases. Once a product was launched and an initial user base built, he would hire his replacement and move on. I like that for core areas like product and marketing.

Some other thoughts on this:

Active advisors can play a role: Many startups put together “advisory boards” filled with people who have a sprinkle of options and provide no value. Not a surprise – you get what you pay for. A middle path between this and part time execs is paying advisors to be more active and giving them specific tasks.

You can’t be a little bit pregnant: Don’t fill your roster with part time people and expect to have a complete, dedicated management team. Don’t delude yourself. And don’t try to delude investors about it either. A part time exec is a great stop gap and can help get a company to the next level. But it’s very different from a committed, full time management team member who places a lot of value in his or her stock options in the company. As an investor, I don’t really want to spend time with the part timers. Only the full timers that are all in.

When I was doing my part time CFO work, some investors would forget this and treat me as if I was a real CFO in these companies. I would have to remind them that I was not there every day and not in the critical path of major decisions in the same as I would be if I was there.

Anyway, that’s it. Do take advantage of part time expertise. It can have a big impact on results and cash flow. But beware the pitfalls and only work with people who committed to part time work as a business and only do it in areas that won’t slow you down by having a part time body there.

The One Page Seed Stage Dashboard

mark — Thu, 08 Mar 2012 19:20:03 +0000

I recently prepared this template for one of our portfolio companies and thought I’d share it. I’m a big fan of dashboards as a quick way to get a grasp on our companies. I believe all successful startups are data driven. So having a dashboard that everyone sees regularly keeps people focused.

This dashboard works for pre-revenue startups that are focused on building that initial user base. As a seed investor when we make an investment we do so with the following goals in mind:

- Build an initial user base. One that is engaged. Prove that we have built something that a defined market wants.

- Build out the team beyond the founders.

- Manage cash and milestones so that we have enough runway to hit the proof points needed to raise more $.

This dashboard hits those key points.

This dashboard is pretty simple. It captures elements that I have proposed before in other dashboards but as an investor it gives me a view on most things that matter in one page.

Some definitions for usage:

New users: 1st time use of an application.

Existing active users: A user acquired in a previous period who is active in a subsequent period.

User quality: The levels used to stratify usage level are arbitrary. Choose ones that make sense for you, but make sure you capture single usage. In my experience with free apps, a huge number of users use the service 0 or 1 times. You need to get a handle on this.

Despite the fact that churn is the most important aspect of any recurring revenue business I don’t focus on it at the seed stage because we don’t have anywhere near enough data to measure it accurately. So for that reason it’s not included here.

Hope you find this useful…