StartupCFO : Mark MacLeod

The B2B Backdoor Strategy

mark — Tue, 21 Feb 2012 22:28:37 +0000

My first startup was a B2B Enterprise software vendor. In those days enterprise software companies went to market by building a really expensive direct sales force with sales reps and sales engineers out in the field in key cities. We had little visibility into which deals would close when. And we routinely had to replace sales reps and start over again in a sales territory.

One of the reasons why we took such an expensive approach was that it was the only way to sell to major enterprise accounts. You had to be where your customers were. And you needed relationship building reps on the ground to continually work an account and work through all the hoops needed to get to a purchase order.

Things have changed. Yes, enterprise software is alive and well. Just ask Larry Ellison from Oracle. But increasingly, enterprise software is deployed over the web (either public web or internal) and this opens up more entry points to an account. You could target departments or subsidiaries vs. going to corporate IT. Yammer has done an amazing job of this getting into some major accounts by letting anyone with a company email address create an account.

In Toronto last week, I met with a few founders who were going to market by targeting the Canadian subsidiaries of some major Fortune 1000 companies. In many cases, success in the Canadian sub has quickly led to intros to the key decision makers in the U.S. Intros that would have been hard to get directly without that expensive sales force on the ground.

There is no better referral for a head office decision maker than that of an internal executive or employee that has had success with your product. So, I say rather than trying to get into head office, go after an office that is closer to home. It will be easier to get introduced to them and you’ll be closer to them in order to help them deploy and be successful with your product.

Saas Math: Why are you NOT spending on marketing?

mark — Tue, 14 Feb 2012 15:59:21 +0000

Often when I meet new SaaS startups they tell me proudly that they have grown their user base without “spending a dime on marketing”. While that is a great accomplishment and a testament to the quality of the product (product = marketing for great web services), it does lead me to ask why! Did the entrepreneurs not want to grow faster? Do they not want to own the market?

Fast growth and market leadership are key criteria for any potential investor, especially a VC. And from my perspective as an investor you cannot optimize for growth and scale without investing in customer acquisition. As soon as you have a reliable churn number (so you know how long a subscriber will stay), you should start investing heavily in customer acquisition.

With known lifetime revenue, why would you not invest in growth? Say, a user generates $200 in lifetime revenue and costs you $ 90 to acquire. Would you not want as many of these profitable users as possible? Even if that meant increasing your burn and raising sooner?

This brings up a related thought: often entrepreneurs talk about one round of financing getting them to cashflow break even. Again, I ask why you would want that? If your business is profitable then it is not growing as fast as it could be. It is far more important to me anyway that per user economics are profitable than that the business as a whole be profitable.

Also, bear in mind that valuation is heavily influenced by the pace and scale of your revenue growth. So, if you want to raise $ or sell your company, your value will be higher if you are spending on acquisition in order to generate more revenue growth.

So, if you want to approach VCs, by definition you should be going after a big opportunity and market leadership. If that is indeed your ambition, then please invest as much as you can in growth *before* approaching said VCs. It will give you valuable data on customer acquisition cost (a key part of the investors’ decision) and will give you more of that ever elusive traction that all VCs seek!

Functions over Titles

mark — Fri, 10 Feb 2012 14:57:40 +0000

I’m sure this post has been written by someone before, but here goes.

A few weeks back we had an intense speed-dating week at the fund interviewing the finalist candidates for the next Founderfuel cohort. We met some great people and out of all those interviews selected a group of amazing teams that begin their Founderfuel journey at the end of this month.

Like most seed investors, we focus a lot on the people. We want to know who’s on the team, what they have done before and why they are the perfect people to go after the opportunity they are presenting to us. So, often our interviews begin with just that: tell us about the team.

More often than not, the responses would start with something like: “Well, I am the CEO, he’s the CTO and he’s the CMO…”.

Ummm.. #lame

Isn’t it a bit crazy to be running around touting these fancy C level titles when you have a 3 or 5 person company?

I often tell the teams that we back that we don’t even have a company yet. It’s a project that becomes a product as we get validation and achieve product/ market fit. It only becomes a company as we begin to commercialize and grow the team and know that we have built something that an identifiable market wants.

The thing with these fancy titles is they can be damaging. First, they lead to title inflation internally. Maybe your 1st few hires want to be VPs or Directors. Maybe you accidentally end up with these different levels in your org chart, when you really want to be as flat as possible.

Also, as that “CEO”, you leave yourself one place to move in the org chart: down. It’s a cold, hard fact that a large number of founding CEOs don’t remain CEOs as their companies grow. Also, it is very unlikely that the CMO you have on day 1 has “been there, done it, got the t-shirt” like the CMO you could get after raising a big fat series A round.

So, please kill the fancy titles. And when an investor asks about the team, tell her what people actually do and are responsible for. Not what their titles are.

Function over title – every time!

Burn Rate vs Runway

mark — Wed, 01 Feb 2012 15:21:11 +0000

Recently a CEO in our portfolio asked me a question that I get often:

As a startup with limited capital is it better to be cautious and stretch runway or should you be aggressive and reduce runway?

The answer of course is “it depends”.

You cannot save your way to greatness. If you don’t invest enough in your business you will likely not generate the growth and momentum needed to secure additional capital. And if you have already raised capital, you have signed yourself to a plan that depends on achieving growth and momentum. So stretching runway too much is likely not something your investors, especially if they are VCs, want.

There are times when it pays to stretch capital. Anyone who lived through the 2008 / 2009 nuclear Winter would have been well advised to cut back on spending. We did that at Tungle. We stretched our series A out for three years but as soon as markets corrected themselves we began aggressively investing in growing the business.

Also, if you don’t have product / market fit yet, there’s no point hitting the gas pedal.

I counsel the CEOs I work with to adopt an attitude of “mindful aggression”. Always be looking to move the business as fast as you can. But, be mindful of the downside risks associated with that. This assumes that the CEO and the investors are bought into a plan together. It also means that investors need to be prepared to bridge a company if they’re making progress but not quite there.

Being aggressive and increasing the probability of needing a bridge round is harder to do if you are angel-financed. Most angels don’t plan for reserves to bridge. Different story if you have VCs. Still, it’s a bit of a gamble. Will your progress be sufficient for your existing investors to double down if you don’t yet have enough proof points to attract new investors?

Speed is often the primary strategy. Companies moving the fastest and generating the most momentum are the ones that get funded and bought. I’ve posted on this before, but Mike Cassidy is 4 for 4 using this strategy.

As an investor, I don’t want to back (and especially don’t want to double down) on a cautious CEO. That does not mean I am looking for a reckless spender. I’m looking for that balancing act of mindful aggression. Predisposed to move quickly and aggressively. But mindful of the current status of the company and the means and objectives of current investors.

Do Less but do it all the way!

mark — Tue, 24 Jan 2012 15:39:05 +0000

I have long lamented my lack of coding ability and have stated that for this reason alone I will never be a founder. So, I was pretty excited when I heard about Code Academy last year. I was even more excited when they launched their Code Year program promising to teach you how to code in 2012.

Last night, I spent several hours plugging away on the 1st few lessons. It was fun. I enjoyed learning the basics of javascript. Variables, functions, strings, all good. But when I stopped last night it struck me that maybe I’m deluding and defocusing myself by spending time on this.

Some smart folks like Stephen Covey and Peter Drucker have often said “begin with the end in mind”. This is a phrase I think about often and one that came back last night to tell me I should not be coding.

I don’t believe part time training can make up for years of full time commitment to something. So, what are my objectives in coding? I don’t need a hobby, I already have one. I am not planning to quit VC to start a company. And I am fortunate to have many gifted technical people to rely on in due diligence. So why?

I took time off before the new year. Actually spent 10 days with no email. And when I plugged back into the Matrix I committed myself to stay more focused this year. Monotasking. Keep things simple. Focus on priorities, not tasks.

Entrepreneurs work way harder than investors, let’s be clear. But investors have so many demands on their time. Meetings to the power of meetings. So, if I am to maintain my commitment to my partners, founders, family and my health, I need to be doing less things, not more.

Moreover, while learning to code requires learning specific technical skills, I am still learning the art and science of being a great advisor, investor and manager. I still have so much to learn, so if I want to do any professional development, that’s the place to do it in.

I think we all could do less. We would survive if we followed fewer people online, checked social networks less, read fewer blogs (except this one of course…), and focused on fewer but key personal and professional priorities. And we would all benefit by taking the things we choose to focus on all the way!

I see too many startups tell me about their new initiatives or products when they have won 0.000001% of the potential addressable market that their existing product targeted. It’s so easy to start things. And when things are not going as planned, it’s easy to draw comfort in starting something new.

If you’re going to start something new, take time up front to think about the end state. What does this new commitment mean? What is your ultimate goal? How does that fit into everything else you are doing and want to do? How does it fit with your values, priorities, mission, etc? If you navigate all those filters and come out the other side, then it’s clearly something you should be doing. If not, kill it!

2011 in VC

mark — Wed, 18 Jan 2012 14:06:05 +0000

The smart folks at CB Insights recently published their review of US VC activity in 2011 (republished below). 2011 was definitely a good year, especially for really early stage funding. Accelerators continue to launch. Seed rounds continue to happen daily. And with Facebook set to IPO in Q2 maybe the good times are here for a while still. Who knows?

In any event, here are some of the nuggets I took out from the report as I looked back on 2011 in VC:

The big headline: 2011’s US VC deal volume: $30.6B invested in 3,051 deals which marked a 10-year high for the VC asset class on both deals and dollars. That’s over 8 VC deals every day.

Still geographically focused: Today’s web startups find and serve customers online, so they could theoretically do that from anywhere. Still, over 60% of VC$ are focused in the Valley, Boston and NYC.

Don’t count on follow-on funding: Over 1,500 seed and series A deals in 2011. Not all of those companies will get follow on $. If you don’t hit your milestones, expect some tough love from your investors. A lot of this early activity is focused on the Internet sector and is focused on the Valley which hit a 5 quarter high in terms of early stage deals.

Deal sizes getting a bit smaller: The median internet seed round was $ 900K (that’s even higher than what I see). Median series A was under $3M.

Big money in solving big pains: Our population is getting older. Healthcare costs are rising. Natural resources and energy remain finite. For these reasons and more, healthcare and green tech remained strong, healthcare especially.

The full report is below. Enjoy…

Venture Capital Report – Q4 2011

The Model Board Package

mark — Tue, 10 Jan 2012 23:56:10 +0000

One of the least favourite things about raising money from VCs is having to deal with board meetings once you’re funded. Most board meetings suck. I’ve sat through my fair share on the company side. To date, as an investor, I’ve tried to avoid them favouring regular informal interactions.

But since board meetings are inevitable companies and investors need to work better to get the most out of them. Done right, they can be of huge value.

I’ve included some readings on how to do boards right below. In addition, I have prepared a model board package. This draws VERY heavily on the amazing board packages that portfolio company Localmind puts together. The structure is simple yet comprehensive:

- Get all agenda items and objectives established up front so we know what to cover

- Get approvals and governance out of the way

- Give clear, quick updates on all aspects of the business

- Share dashboard, KPIs, roadmaps and get the board thinking as an extension of management

If it was up to me, I’d limit formal meetings to governance and a brief CEO update, then terminate the meeting, but keep everyone around for an informal advisory session to dig into the dashboard and roadmaps.

As you will see, the model board package has not been formatted. Just the outline. Feel free to try it out at your board meetings and make sure they’re not “bored” meetings!

Model board package

View more presentations from Mark MacLeod

Readings:

http://www.freddestin.com/blog/2010/06/saving-time-in-preparing-for-board-meetings.html/

http://www.bothsidesofthetable.com/2010/02/12/running-more-effective-board-meetings-at-startups/

http://www.sneakerheadvc.com/2010/07/01/effective-board-meetings-in-10-steps-my-first-quora-inspired-post/

Choosing the Right Accelerator

mark — Thu, 05 Jan 2012 14:31:23 +0000

It seems everyone is getting into the incubation/ acceleration game now. According to this list, there are hundreds (and the list is a year old). So, with so many incubators all offering something that appears to be similar, how do you choose which one is right for you?

GigaOm posted this week about history repeating itself with most incubator programs doomed to fail. I’m sure they’re right.

To me, there are three main reasons to become part of an incubator or accelerator:

Mentorship: from peers and from actual mentors

Network

Capital

That’s it!

When you apply those criteria the filtering should become very clear.

Mentoring: The best entrepreneurs want to go to the best accelerators. And a huge chunk of the actual day to day value add you get comes from the other teams that are going through the same thing. You want to be part of the best cohorts.

Network: This is tied to the quality of the teams and also to the volume of teams. Our portfolio company Rewardli graduated from 500 Startups. They graduated some time ago but continue to get huge value from being part of that community.

Network also comes from the mentors. The best accelerators attract the best mentors. Period.

Capital: At the end of the day it’s all about capital. Not the $ 25K you get for being in the program, but the follow on capital. This means that the accelerator you choose must be completely plugged in to the angel and VC World. The extent to which it is plugged in determines who applies and who will become a mentor, so once again – it’s all about the capital.

Y Combinator, Techstars, Seedcamp (in Europe) and 500 Startups are clearly the top tier. They were out of the gate early and are dedicated to running these programs. And they’re well plugged into the investor ecosystem.

Who comes after them? We think we have an amazing offering at Founderfuel. Our 1st cohort graduated Nov. 8, presenting to a packed house that included over 100 investors. In the short time since that demo day (which included US thanksgiving and Christmas breaks), 1/3 of the teams have secured follow on funding. In a few weeks over 1/2 will be funded and off to the races. One company, Playerize, raised it’s seed round and just yesterday announced it’s series A.

How does that compare to the top tier? Well, Techstars Boston (demo day was April) has seen 2/3 of their cohort get funded. It takes time to raise the rounds. I am confident as we gear up for our 2nd cohort we will get even better at getting our teams ready.

Do you have what it takes?

On that note – if you’re thinking about how an accelerator could benefit you, now is the time to apply to Founderfuel. Applications are open till Saturday. We begin the next session end of Feb.

To choose the best programs follow the money! Hope to see you in February.

2011: looking back!

mark — Tue, 03 Jan 2012 15:09:29 +0000

Happy new year everyone! As I do every year, I begin the new year with a recap of the most popular posts of 2011. This was my first full year on the VC side and I was so busy meeting people that I had a lot less time to write. Not sure how Fred Wilson does it, but in 2011 I only had 81 posts. I’m sure the World is a better place with less noise anyway.

Without further ado, here’s my completely subjective list of the top posts of 2011:

Raising VC

Checklist for a Perfect VC Pitch

The VC Presentation Grader

Get Funded Faster

There’s so much content out there on raising capital and there will be more written in the coming year. In my posts I attempted to boil things down to practical take aways.

SaaS Math

Why I love SaaS Math

The ABCs of SaaS Math

SaaS Acquisition Funnel

Have to say, I had grand intentions for the SaaS Math series, but the time was not there. I’ll come back to it in 2012. There’s a lot more to say on this subject.

Boring, but essential stuff

Startup Back Office 101

When I started this blog I was a CFO and wrote about practical startup finance things that entrepreneurs could use in their own businesses. I’d like to do more of that this year.

Commentary

Will VCs block an exit?

Canadians do think big!

Incubators vs. Accelerators (Managed to get David Crow all worked up on this one)

That’s it. Here’s to a healthy and happy 2012!

Backing Founders vs. CEOs

mark — Wed, 21 Dec 2011 23:20:21 +0000

As a seed investor our fund likes to invest early: first money in between concept and validation. At that stage and for a considerable amount of time after that, the only things that matter to a startup are product and technology. As a result I have a strong bias towards technical founders. And it is for this reason that I have never been a founder since I am not technical myself.

Would you use a law firm run by non-lawyers? Would you buy a car from a company whose designers are not passionate car drivers and enthusiasts? I wouldn’t. And I also would not invest in a startup that does not have at least one strong product/ tech co-founder.

When I look at the successful startups I know or was a part of they all had technical founders that were either CEO till exit (or are still CEO) or remain on the core management team. And many (though not all) had great product/ UX DNA in the founding teams. Some added that later.

I ran into Ali from Well.ca yesterday. One of my favourite sayings of his is” everything’s an engineering problem“. At his company the development team is not sitting around waiting for instructions from business types. They are directly tasked with solving front line problems. If the site is not converting well enough, that’s an engineering problem and dev will dig into it. If email campaigns are not converting, that’s an engineering problem too.

Well’s lean, engineering-driven culture even extends to their warehouse. There they A/B test different methods of receiving, packing and shipping goods. Very few e-commerce startups do that.

The power of a strong technical leader and culture is just as strong at Shopify. Tobi, a 1st time CEO, is turning Shopify into a clear market leader. There are probably 3 startups that could be spun out just from the internal technology they have built to power their e-commerce platform. This technology gives them tremendous leverage. Rather than having to hire lots of bodies to keep up with growth, technology is helping them scale. To be clear, they’re hiring lots of people. But they’re hiring to further increase their tech and design dominance and they accomplish more with each new hire than most startups as a result of their technical strength.

When I meet new startups, no matter how great the idea is, without that core technical or product management team member, I just don’t want to dig in. Startups that have outsourced their v1 are clearly not thinking big enough. If they were, they’d have found that tech founder that is needed to scale.

Andreesen Horowitz partner Ben Horowtiz recently posted about their preference for founder CEOs. And more often than not, those founders are technical. If you’re the hottest VC (which they are) in the hottest market then you have the luxury of choosing from multiple opportunities led by technical founders that have seen scale and have had prior exits.

In smaller markets, we don’t have that luxury. So as an investor you have a tough choice to make: do you back 1st time product / tech folks who are learning what it means to be CEO of a VC-backed startup? Or do you bring in “professional” management?

I strongly believe that helping technical founders become great CEOs is the way to go. And in an ideal World that would be my exclusive investment strategy. But it’s really hard for 1st time leaders to stay ahead of the needs of their startup once it starts to take off. And as an investor, while you want to and often can help your founders, it’s hard to spend enough time with them because you’re always meeting potential new investments, other investors, strategic partners, potential recruits, your own investors, etc, etc.

As I wind down for the holidays, thinking through how I can better enable and support our founders is a key priority. If you have any thoughts, I’d love to hear them!