Runway to Exit @runwaytoexit-blog - Tumblr Blog

Inside the ropes at a VC LP meeting

The venture capital game has been demystified a ton in the last decade, with a seemingly endless supply of blog posts, books, tweets and now evenSnapStorms providing an inside look at how VC works. This week I attended the LP meeting of a fund that we work closely with and realized that this experience was not as well known and had several features worth noting.

First off, what is an LP meeting (sometimes referred to as an Annual Meeting)? It’s an opportunity for venture capitalists to have a formal meeting with their investors, the limited partners (LPs) in their funds. LPs provide the pool of capital that VCs manage. In return, VCs get an annual management fee and a portion of the profits (the “carry”).

Thus, the meeting feels a little bit like a parent-teacher conference combined with a sales pitch for why the LP should strongly consider investing in all future funds.

One part of most LP meetings is the “show me the money” section, whereby the general partners run through an overview of fund performance. This is done both at a macro level — comparing the fund performance to peers in the same vintage year — and on a micro basis by providing details on the specific portfolio company investments and trends over the last year.

Two noteworthy thoughts:

Always be selling: VCs often get a reputation as money managers who sit in their cushy offices (that is, when they’re not spending the summer in an Italian villa) and decide the fates of entrepreneurs with a seemingly arbitrary whimy. What we often forget — at least for those running sub $100MM firms — is that VCs are building their own platforms and have to constantly be selling too.

You realize this at the LP meeting as the partners are running through their investment theses or opining on how the macro trends are affecting exits markets and therefore their ability to generate returns. It’s so very hard to generate top tier returns in VC, and even harder to stand out with a unique view of the world. LPs hold the strings to the pools of capital and, particularly for emerging managers, the fundraising process is incredibly stressful. But even more than the stress, it’s the fact that it’s never-ending. Some entrepreneurs feel like they’re constantly raising money, but for VCs this actually is the case. They’re always selling, and this is never more evident than at an LP meeting.

2. The Long Game: The VC asset class requires a long term view and it’s really hard to tell who the best venture capitalists are until you have the benefit of hindsight. It will be a decade before we really know the best 2016 vintage funds.

It’s typical for funds to show a chart with each investment listed on a row, with the total amount invested in that company to date and the current marked-to-market holding value. The current value to invested ratio is often shown as a multiple of invested cash — this is all important to the audience because for a firm to generate the outsized returns necessary to justify the risk and duration, a venture fund needs to return ~3x the size of the fund (whose net return will be reduced due to fees and the partner carry). The aggregate marked holding value of the portfolio is expressed via a ratio called TVPI — total value to paid in capital.

When you take a hard look at a portfolio on a deal by deal basis, one has to understand that each investment is marked in most cases to the most recent priced equity round. And that each equity round is priced based on a blackbox concoction of financial metrics, dilution art, and FOMO euphoria with a twist of future value spitballing. Then you combine that with the fact that the ultimate, realized value of the portfolio will depend on the public markets, either for IPO or the downstream valuation implications (and buyers) that the public markets provide. And that these exits are in many cases years and years away, with an endless array of unbeknownst operational variables for the companies yet to come.

Because of this, it’s almost impossible to truly predict the future value of a venture capital portfolio, which makes the job of LPs deciding on allocation difficult to say the least. Perhaps the only thing fuzzier than an early stage company’s financial model is a venture capital partner’s projections of realized returns based on current TVPI values. In both cases, then, it becomes important to bet on the people.

Which brings us back to the meeting, and what is in my opinion the highlight of every LP meeting I’ve ever been to — the presentations by a select cohort of the fund’s portfolio companies. Typically the firm will ask a few entrepreneurs who are leading current portfolio companies to come provide a brief overview of their businesses. It’s a chance to showcase some of the firm’s top performers — there is a strong correlation between TVPI or expected return and the invitation list for CEO speakers at the LP meeting.

I love this part because it highlights the rightful heroes within the venture capital ecosystem — the entrepreneurs. While VCs may ultimately be serving LPs and trying to drive returns for them, everyone in the room realizes its the operators who really make the magic happen. There is nothing better than seeing theobvious pride a VC has in showcasing “one of theirs”, and it’s so important for LPs to get a glimpse of the people who are running the businesses that they hope will generate great returns. It can be so easy for capital allocators to simplify down the venture model as part of a big math equation designed for risk adjusted yield. The CEO presentations humanizes the entire process while also providing evidence of the both the importance of the innovations being developed and the talent of the teams that are doing the work.

In summary, attending an LP meeting is kind of like getting a 30,000 ft view of a slice of the venture pie. There’s a ton of activity happening down below that, in aggregate, contributes to a complex and interesting picture. But ultimately, the outcome of all the energy and capital invested depends in large part on the decisions of the operators. It’s a sobering yet fascinating world, and one leaves the meeting feeling grateful to be a part of it.

#venture capital

Unicorns and Cycles

It’s interesting sitting here at the beginning of 2016 in the midst of what everyone is saying is another cycle for the venture space. For the first time in my career I am experiencing real time a new cycle with the benefit of having lived through a prior one. This provides a context for processing current events.

I began work in the startup world in 2004 and while there were still many wounds and PTSD from the Bubble bursting . I heard the stories of Webvan and the like but had not lived through it personally. It was different in 2008 as I was a banker working with a number of NYC-based VC-backed companies and funds. We navigated the uncertainty together — the feeling initially that the venture space was largely insulated from the broader pain and suffering to the infamous Sequoia “RIP Good Times” deck. There was worry that VCs would broadly abandon their losing bets in their portfolios and, from a bank perspective, that the shifts in the equity markets would massively impact the credit quality of the underlying portfolios of VC-backed companies. It was a cycle, but without the historical experience, personally I could only hang on and try to take in bits of data that would help me for next time.

With the benefit of hindsight, a few things are clear from the last cycle. Times were tough and in my world, credit losses did spike. Yet, VCs did not abandon their companies en masse and the most active banks were able to adequately manage the risk and we didn’t see a complete breakdown of the venture debt lending model. And, by the way, some of the most successful companies of the last 8 years were founded during the darkest days of the last cycle. As Andrew Parker pointed out, Sequoia themselves remained remarkably consistent during this time, making 31seed or Series A investments including throws into AirBnB, Greendot (IPO), Dropbox, yCombinator and OpenDNS.

It’s fairly well established now that we are in a new cycle, which I’m choosing to call the Post Unicorn Hangover Cycle. We’ve all been on one big party for the last couple years, fueled by the taste of seemingly never-ending valuation increases for fast growing businesses. The astute crew at First Round Capital eloquently recap this phenomenon in their q4 letter to LPs:

“The data shows a change in the market and calls into question the implicit bet that many founders have made over the past few years. Founders (and their investors) have assumed that their ability to access follow-on funding will remain fairly consistent and that the sole metric that matters is growth…For the last several years, these assumptions have been a fairly safe bet. Many founders have been able to raise venture capital, increase their burn rates to fuel growth, and then raise future financings at a higher valuation as a result of that growth. Over the course of the fourth quarter, we have seen signs that the core assumptions driving the late-stage funding market are starting to shift.”

This perception has been pervasive in the last couple months, and amplified by the carnage in public SaaS company stocks, the poor performance of tech IPOs, and mark downs in private portfolios by Fidelity and others.

The question on everyone’s mind is this: trends indicate change is coming but how will this cycle be characterized vs. the last two that we’ve seen? If the Tech Bubble cycle is known for hype with the absence of business model and the Financial Crisis cycle is seen as a bunch of collateral damage but survival amidst the maelstrom in the broader economy, what will the story be from the Post Unicorn Hangover cycle?

Only in retrospect will we really know, but here are a few of my observations based on what we’ve seen before and some of the factors I think will impact the cycle as it plays out.

1. There will be blood, but casualties will be less than expected.

Of the many changes in the world over the last 20 years, perhaps none is as meaningful for the overall tech startup market than the rise of the cloud/Moore’s Law and the resulting reduction in overall cost to start and grow a company. Paul Graham noted this in December 2008 at the beginning of the Financial Crisis Cycle:

“VC funding will probably dry up somewhat during the present recession, like it usually does in bad times. But this time the result may be different. This time the number of new startups may not decrease. And that could be dangerous for VCs. When VC funding dried up after the Internet Bubble, startups dried up too. There were not a lot of new startups being founded in 2003. But startups aren’t tied to VC the way they were 10 years ago.“

This trend has only continued and every day we see SaaS businesses that have been able to get to single digit millions in recurring revenue with little to no outside investment. There are operators in all corners of the country who are able to build these businesses — and often it is in these tertiary regions where capital is less available that you find these bootstrapped ventures.

There are more healthy businesses today than in either of the other cycles. However, to grow these businesses at venture scale, outside capital and cash burn is usually required, and this is why there will be blood.

Growing software businesses with $1–2MM in annual recurring revenue have, over the last couple years, been able to secure venture rounds at increasingly aggressive multiples of their ARR. This is largely tied to the froth in the top end of the market where the fastest growing unicorns are getting valued at multiples that defy reasonable explanation. The trickle down effect on valuations is real, if a bit inefficient and hard to quantify. We will likely see younger private companies raising at reduced valuations from the recent past. Again, the First Round team expects this to happen, stating:

“We believe that starting in 2016, private and public companies will (once-again) begin to be valued in an increasingly consistent fashion. This change can (and will) be painful for many private companies. Companies that need to raise additional capital will have to price-test in the capital markets — and many will raise at lower prices than they previously did. And we worry that many private companies may unfortunately find that there is no market-clearing price at which they can obtain additional investment.”

The price-testing will be painful — but ultimately I think that most of these businesses will find clearing prices. This is due to the fact that many will be able to persist through lowering burn until the cycle turns and also because of my next point: the VC overhang.

2) The VC overhang is real, and it is spectacular.

VC overhang refers to the amount of capital that has been invested into venture funds by Limited Partners but which has not yet been deployed into private companies. Pitchbook recently released year end 2015 data which shows there is more than $79B in dry powder sitting in venture capital funds. This represents the largest amount of overhang since 2010. Further, more than 65% of this VC overhang is sitting in funds with 2014 or 2015 vintages.

This is capital which needs to be, and will be, invested. General partners are paid (quite handsomely!) to allocate this capital. And these folks are smart enough to realize that many of the best bets of the last cycle were made precisely when the market was seen as the bleakest. Further, the allocation of this capital is a necessary action before the partners can go out and raise their next fund.

Given the uncertainty in the market and the large chunk of the capital which is from recent vintage years, it would be no surprise to see a 6–9 month slow down in investing activity. But the 1–2 year outlook suggests that funding levels will remain healthy, and strong companies that can post positive performance can expect to find funders who are willing to invest in their growth — for the right price of course!

3) As always, getting through the cycle requires old fashioned basics

Perhaps the great output already in this cycle is the endless stream of Medium posts and smart Tweet tips from VCs and founders about how there is a great need to focus on the basics. What this means from a financial sense is stepping back from the alluring aroma of growth at all costs to really understand concepts like cash runway vs. burn rate, unit economics, and the value of sustainable, healthy growth. These are the basic building blocks of long term enterprise value and will ultimately lead to healthier outcomes for entrepreneurs and investors. They are also concepts that every business — no matter what size — can evaluate for themselves. The reality is that running a business in a cycle that is Unicorn centric, while fun due to valuations being higher, can be demoralizing too. As I tweeted the other day:

Rather than worrying about what is going on with the unicorns, I think this cycle has the potential to produce a cohort of scrappy entrepreneurs who figure out how to persist and can build scalable business models with great unit economics. The near term valuations for these ventures may be lower than in the last year. But the opportunity exists for the successes to be meaningful businesses with large enterprise values 6–8 years from now. Because of this, VCs will fund these businesses that pass the business basics test and could end up being the characterization of the Post Unicorn Hangover cycle when we look back on it in 2025.

Startup Apprenticeship

I remember the first time I learned of the concept of an apprentice. I was in grade school and reading the children’s novel Johnny Tremain. Set in Boston at the start of the Revolutionary war, Johnny the eponymous protagonist is a 14-year old silversmith apprentice. This idea of learning a trade from a master craftsman, spending years perfecting the intricacies before setting out on your own, was fascinating but also seemed a bit ancient.

Growing up playing sports, I continued to value the concept of the savvy veteran who can take the young rookie under his wing and show the ropes. I love hearing about young NBA studs who go to Hakeem Olajuwon’s Post-Up Camp in the summers to learn from the master.

Fred Wilson had an interesting post on Labor Day about labor markets in today’s age as well as unions. Per usual, the comment section provided a great back and forth about this concept of apprenticeship, particualry in how labor unions of past did a much better job of providing the true training than today’s version. Popular commenter JLM wrote of his experience as a teenager:

There is no doubt that the history of organized labor in the US has been, up to some point in time, one of the best things to have ever happened to the United States and today is the day to celebrate just that — — the dignity of the working man, woman.

I was a union cement finisher in high school and college so I saw the unions from the inside. What nobody on this blog really gets is that the unions were, once upon a time, similar to a trade guild in that they provided training to their novitiates.

I started as a “mud mixer” — a kid who set jobs up, mixed additional concrete by hand or in a mixer to touch up big concrete placements, cleaned tools, hauled trash, and did the most basic jobs.

One day a master craftsman handed me a trowel and taught me how to “work the snot” which means how to hand trowel concrete and to finish the edges.

Then I was taught to lay out and build sidewalks.

My big break came when I was taught how to use the long float and to run a finishing machine with a single head. Then I was taught how to run the “3-headed monster” which also came with an improvement in my wages.

There is no doubt that today there is less need for apprenticeship. As desirable jobs have shifted from skilled manual trades to those dealing with digital bits, there is seemingly a sense that you can outsource apprenticeship to prepackaged training materials or the omnipresent Google machine. It is a fantastic time to be alive — the answer to literally any question you can think of is available anytime, anywhere and you can probably watch a YouTube video about it too.

And yet I’ve found in my own career there’s no better way to really learn than from an experienced mentor. There’s a lot that can be learned via osmosis as you share a room with a veteran. You learn about tone and style when you’re pitching a client. Or how to navigate internal personality issues or bureaucracy without letting it dominate your life.

When I first started at Square 1 I was teamed with one of the best bankers we had and found I was learning a ton in this way. But I knew that it would be optimal if I could ask more direct questions. So I sent him a note one day and asked if we could set up some standing time every other week for me to ask specific questions related to our line of business. For a few months we did that and spent 15–30 minutes in dedicated mentorship.

One week we focused on business development, how he built out his network, and his structure for driving new opportunities. The next week we talked about personal development and things I could do outside of the purview of my “day job”. Another time we talked about the specifics of how to construct a term sheet.

The time was super valuable and after a few months our apprentice / mentor meetings became less explicit and more impromptu. When I moved to NYC I worked alongside him and received the benefit of more of the osmosis training.

Now that I’m a bit further on in my career, it’s been a pleasure to help train up some of the younger folks who are taking an interest in learning the inner workings of our business. I think there is tremendous organizational value in this approach and highlight the following from my experience in order to make the most of the process:

Make it explicit: while it’s possible to learn from the fringes every day, it’s best to find someone who you would like to learn under and make an explicit ask. This helps align expectations which will enable better results. In my case I asked for 15–30 minutes of dedicated time every other week. I found that the explicit ask also helps on the mentor side — everyone loves being seen as an expert and most derive a lot of utility and enjoyment from being able to give back.

There are no dumb questions: part of the process of apprenticeship is being about to learn while making mistakes. The best environments are those where there are no dumb questions and any topic is fair game. Like most things in life, transparency is a lever for success, and the more open you’re willing to be, the more upside possibility there is.

Be Available: this one is for the mentors or potential mentors out there. There’s a tendency today to rip on millenials in a “get off my lawn…kids these days” sort of way. Johnny Tremain was willing to burn his hand in a freak melting accident and I can’t get kids these days off their phones!

But the reality is most up and coming entrants in the workforce are dying for mentorship and personal connection. In fact, most studies of millenials show that helping them connect to the purpose (the why) of their work is the best way to help them achieve their optimal performance. A big part of this is having the availability and foresight to create spaces and times where you can mentor and help apprentice the next generation. Speaking at conferences and serving as a public figure is sexy, but investing in individual co-workers and people in the start up community can have a huge impact.

Startups and Luck

I was having lunch with a friend recently who is running a new venture. He is what you would call a serial entrepreneur in that this isn’t his first company. But everyone who’s in the startup world knows that there are different types of serial entrepreneurs: those with exits, those with Exits (with a capital “E”), and those who have ridden the wave before but crashed prior to riding the pipeline.

Startups — and by this I mean Startups in the Paul Graham sense — are inherently yoked to the power law distribution. The unicorns get all the headlines, drive all the returns, and generally skew the way we all think about the world. But by definition these unicorns are rare (even today!) and thus the power law. Unicorns are the capital “E” exits that fuel the fantasies of entrepreneurs and investors alike.

Yet when you live and work amidst startups — especially when you live and work in communities that are not SF, NYC or Boston — there is an appreciation for the little “e” exits. They don’t drive industry returns on the whole, but these exits do drive micro-activities which impact over the long run the startup communities as a whole. I’m talking about everything on the spectrum from acqui-hires to multiples of capital invested which can be life-changing to individual entrepreneurs. Little “e” exits create new angels and create new cohorts of employees who have gained the experience of riding the wave through to completion and realize how much they like the taste. It provides the ammunition to go back out and try and catch another (or bigger!) wave. In terms of sheer number of outcomes, there are far more little “e” exits than “E”; and far more outcomes on the long tail of the power law distribution which contain no exit at all.

This reality brings me back to my friend and lunch and the discussion about what part luck plays in all this. When running his first business, this entrepreneur had a very real opportunity to experience a little “e” exit that would have likely been personally rewarding both financially and experientially. In the moment, the choice was a difficult one as the company was growing and the market opportunity seemed to suggest a Big “E” exit may have been possible. Alas, the deal wasn’t sealed, the company ended up continuing to operate and ended up with an outcome that was decidedly smaller “e” in nature.

It’s impossible for my friend not to play the “what if” game regarding the decisions he and his team made. Would he now be a Serial Entrepreneur instead of a serial entrepreneur? Would fundraising for his new venture be a cinch with a bigger exit under his belt? Probably. Would that mean he was smarter? Or luckier?

And what to make of the experience of not making it all the way through the pipeline and instead find the wave crashing down on top of you mid ride? I told my friend that in watching him very closely as he’s started both of his ventures, I can tell how different he is this time. He’s more mature, more thoughtful, more efficient. He’s better. I’d even say he’s lucky that he had the experience he did with his first ride.

The reality is that Startups are a long ride in a long game (even for the unicorns). I was reminded of this while reading this fantastic post from my friend Will Haughey upon his startup Tegu’s 6th birthday. Will admirably opens up about how hard it’s been at times during that time — his description of the business as a “hornet’s nest of problems” is both apropos and agonizing at the same time. Hornets nests suck.

But somehow startups don’t suck, and it’s not just because of the promise of exits or Exits or anything like that. It’s not about proving you’re good enough or lucky enough or simply want to run your own show.

For entrepreneurs, even when you’re not driving the power law, startups are worth it.

When you feel the thrust of the wave moving you forward, sense that you may have figured it out this time, that you might just make it through to see the end of the wave. In that moment, all the other moments don’t matter — the endless times you didn’t catch the wave, the never-ending questions of whether there’s a bigger wave to ride, the hornet’s nest of problems which sit in a scattered heap in the past— all those thoughts go away.

You just ride, free.

And luck or skill or circumstances you can’t imagine may dictate what happens next. But in the end you ride, this wave and the next.

Writing the Check

Entrepreneurs love to give VCs a hard time. Often it's over beverages with their peers and the standard lines are about how so and so VC isn't willing to take any risk or how investors want to get rich by taking as big a piece of a company as they can. There's a lot of complaining about how VCs will drag conversations on forever without committing (true) and how they all claim to add value but few really do (maybe true too). Ironically, there's also a lot of complaining about how there's not enough of these VCs in the areas outside Silicon Valley and the greater Northeast.

It's easy to pick on VCs. Many of them are very handsomely compensated with management fees for managing portfolios whose expected returns are opaque at best and downright horrific at worst. And we all think we could do the job - like the everyday Joe who’s convinced he could hang in Vegas if he just had the right bankroll.

I'll confess that I've had the same thoughts before too. And then in recent years I've had the great experience of an unpaid advisor role with a small fund. I'm a part of a small investment committee that helps look at deals and, ultimately, help decide whether to make investments in early stage and growth companies.

And I'll tell you - the funniest thing happens when it comes time to put a stake in the ground and actually write a check. The bravado and hubris vanishes and is replaced by a ping pong battle of pro vs. con in your brain that vacillates between whether this company could be a fund maker or whether there's a chance it could be an absolutely zero. With early stage deals its often easy to make a case either way.

When you factor in a limited number of overall bets in a portfolio and no liquidity during the hold period (which can last 7 years or more) it takes real conviction for an investor to actually write the check. Not to turn VCs into heroes (the best VCs realize the entrepreneurs are the real heroes) but it's worth remembering this when pitching to the money crowd. For all the talk of bubbles and sky high valuations, every financing round is at some level a marriage of this conviction and the promise of an unknown future. It's a beautiful thing when the two come together, but it's not always easy getting there.

What do you do when your world shakes?

This post also was posted on Medium.

There we were on Friday morning in Durham, NC, the members of the Board of Directors of CloudFactory, immersed in the types of things boards of VC-backed companies talk about. It was all sales pipelines and strategy about the best way to think about a next round of funding. It was the excitement of real traction with brand name clients, the challenges that this growth inevitably brings and a desire to do more, faster, with all of it. The three hours flew by as we sat looking at the horizon with its seemingly unlimited opportunity but aware of the true distance between here and this horizon. There is tension in this knowledge of the “we’re there, but not yet” — but it’s a tension that makes you feel alive.

Less than 24 hours later, as the tweets and pictures began rolling in from Nepal, a different set of feelings came like a tidal wave; the one-two punch of fear and the unknown, crashing with thunderous force.

What do you do when your world shakes?

As it turns out, you run. That’s what I learned from John Snowden, CloudFactory’s VP of Solutions who was at Kathmandu’s famous Patan Durbar Square with his young family when the earthquake hit. As he recounted on a series of Facebook posts, the first sign that something was awry was the dozens of birds that flew off a few seconds before the ground started shaking.

Then the rumbling. The scream to his young sons to run to him. The clouds of dust. Buildings crumbling.

Then there’s realization that you’re safe and immediately thoughts turn to the more than 100 full time staff of CloudFactory who work in the Kathmandu office. Over the course of the next several days you use every means possible to simply find people. Power is gone, cell phones work sometimes, if they still have power.

Amazingly, you look up two days post quake and 109 of 110 full time CloudFactory staff are safe and accounted for. More than 50% of the 1200+ active cloud workers are accounted for, and massive outreach teams and plans from co-workers are ongoing. There is a shift from the immediate response of flight to survive to the ominous reality of a new normal — a new Nepal that is unlike the one that existed a mere days ago.

The focus, of course, is on making sure everyone is safe. There are workers’ homes that have been destroyed and dozens sleeping in makeshift tents for fear of spending a night inside when there may be aftershocks. As power and connectivity return, the localized relief efforts need organization and process in order to be effective. And there is, deep in the back of your mind, the knowledge that someday — not today, but someday — the company has to get back to work. Not for the company’s sake, but for everyone’s sake. The work needs to be done for the customers, sure, but for Nepal too.

But today the office becomes ground zero for the rebuild. The same work spaces where the platform was built which allows the cloud workers to complete microtasks for some of the world’s most innovative companies is being used today for different tasks. There is an assembly line of people in need packing relief bags for other people in need.

It’s beautiful beyond description, the juxtaposition of the pain and destruction with the simple display of a company’s mission playing out in real time:

“CloudFactory exists to connect 1 Million people in developing countries to computer work while raising them up as leaders to address poverty in their own communities.”

CloudFactory exists for such a time as this.

It is now that the power of the small teams of cloud workers who have worked together over the last couple years will be seen. These are teams that have performed thousands of community service projects together already.

The seeds of leadership and impact were planted over many months, long ago; it is today, and in the days ahead, that the fruits of this labor will be seen.

There is a new Nepal, one that is quite different from a few days ago. She is blossoming through the labor of her people, like the people of CloudFactory, who care deeply about each other and will see it through to completion. And part of this process will be the continued growth of the company itself, which will provide meaningful jobs and community at a time when it’s needed most.

It is a privilege to serve from afar alongside these brave people, and I hope you will join me in prayer for them as they rebuild. To follow along with their journey, you can visit the CloudFactory blog, donate to their fund for employees or support an aid organization which is helping in the efforts.

Thoughts on the Automated Insights Acquisition

Today it was announced that Durham-based Automated Insights was acquired by Vista Equity Partners. The terms of the deal were not disclosed but it doesn’t take a rocket scientist to figure that if their Series B investors who just put money in 9 months ago thought it was a good deal, then the price must have been pretty healthy. I couldn’t be more proud and happy for the entire team.

As one who works with startups, this kind of exit event is always in the back of your mind - it’s the title of this blog for crying out loud - Runway to Exit. When you’re building a company you’re always thinking about what the exit might be. But you’re always focused on the runway that it will take to get you there. At times it can feel like a circuitous route to get to an exit. But man, does it feel good to lift off!

I’ve had the privilege to see a lot more of the behind the scenes action with Automated Insights than with almost any other company I’ve ever advised. Robbie, Adam & co. were kind enough to allow me into the fold to provide feedback and help with strategy as they grew from a bunch of cute sports websites into a massively powerful natural language automation platform that has almost unthinkable scaling potential.

A few thoughts on this big day:

I am really, really proud of Robbie Allen, who has led the vision with aplomb and conviction. Robbie had, by all accounts, an incredibly good job at Cisco before deciding to start StatSheet. I’m not sure what a “Distinguished Engineer” is exactly at Cisco but apparently there’s not many of them and Robbie was one of the not many. But he had a burning desire to start something and build it. Robbie has always been a massively talented technical founder, but I’ve seen him grow as a leader and CEO over the last few years. He’s built a fantastic culture, successfully navigated the treacherous waters of fundraising, and got the company to a scale both on the tech side and revenue side where it was attractive as an exit target. The best part is that the company will remain in Durham and continue to grow, and Robbie can continue to evolve as a leader. He has proven that you can not only build a great company in Durham, but you can do it as a first time founder.

As happy as I am for the whole team, I’m most excited for my good friend Adam Smith. When I got my first job out of college, Adam was my boss. He has been a loyal friend & confidant for the last decade. We worked together at CED and then Square 1 from 2004-2011. The whole time, I knew Adam had a passion to “make the leap” and get into an operating role with a company. By early 2011 he was already deep in the weeds as an advisor to Robbie on StatSheet and was thinking through his decision to jump. I can distinctly remember sitting in his office at Square 1 as we tinkered with the build out of the StatSheet financial model in an attempt to get ready to pitch for a Series A round (this should also give you an insight into how much of a guess the Series A financial model was...but I digress). As we modeled out different funding and potential exit scenarios, we tried to predict what different outcomes would mean for him upon an exit. But then we both kind of realized that it didn’t really matter what sort of financial impact he would have some time down the road - Adam had to do it.

And so he did. Over the last 4 years I’ve watched him tackle almost every problem (short of coding) that could be tackled for Automated Insights. He’s pitched in on product, marketing, the drudgery of finance and, most recently, has proven to be a very capable sales leader. Adam and I share a very close personal relationship but I can say very objectively, there’s no professional I would rather have on my team than him.

I could go on and on to congratulate Joe who somehow figured out how to both lead the entrepreneurial community in the Triangle while also teaching those robots how to write; or Scott, who left the world of VC for an operating role and has crushed it on large, strategic deals; or Glen, who has been a 10x lawyer and advisor for many years; or the many awesome members of the team who saw that the vision wasn’t just about ping-pong and FatHeads, and were willing to do whatever is necessary to make it work; or Lister and the Idea Fund team who had the guts to put the early investment dollars to work in AI.

I have no financial interest in the Automated Insights outcome. But I do have the memory of sites like http://dailyhilltopper.com. Of judging the internal hackathon. Of flying close to the ground before raising that next round of funding. Of sitting at a Starbucks the Tuesday you went live with Yahoo fantasy and holding my breath while refreshing Twitter hoping it would work. I know how fondly I cherish these small moments - I can’t imagine how much greater the feeling must be for the rest of the team, who have thousands more remembrances of the runway which led to this lift off.

Enjoy the view today, it’s a nice one. But remember, the flight has just begun!

The 10x Service Provider

Hunter Walk of Homebrew put up a post in January about 10X angels - the general gist is that there are types of investors who “deliver value to the startup in ways that are notably different than the average funder.”

The examples Hunter gives in the post, as well as the comments from others, highlight many of the differences between a 10x angel and a 0x angel - one who actually erodes value even while providing capital. I think the post is spot on and worth reading again and again.

The idea of a 10x person type can also be extended to other constituents in the startup ecosystem, particularly service providers. As a banker to high growth companies, I feel this challenge on a daily basis - how can I serve companies as a 10x service provider and be seen as valuable instead of someone who is there as a fee-for-service commodity broker?

10x bankers understand the dynamics of the entire capital stack, and give appropriate guidance on how to balance equity vs. debt, bootstrapping vs. raising money, etc.

0x bankers think only about how much interest income they need to generate in a given year.

10x service providers highlight the positives of the competition.

0x service providers take opportunities to bash the competition.

10x lawyers are realistic risk mitigators who shield their clients from dangerous terms in contracts and financing docs but recognize the reality of legal issues vs. business issues.

0x lawyers leave a trail of unnecessary redlines everywhere they trod, in an effort to prove that their worth as an attorney

10x service providers build out networks of investors and other service providers that they can leverage to help their clients. They are thoughtful about how they use these avenues, though, recognizing that overutilization neuters the value.

0x service providers talk the talk about adding value through introductions but never do. Or worse, do so without a double opt-in. (I have to admit, I’ve been a 0x at times and a 10x at times in this area).

10x service providers start relationships before they can generate a fee. They believe in the long game of entrepreneurship.

0x service providers don’t do anything without a fee.

10x service providers are, at their very core, relational.

0x service providers are, at their very core, transactional.

The best service providers I know cringe at being thought of as service providers at all. They care passionately about the companies and entrepreneurs they work with. They are advisors, mentors, contributors, fans. Do you have 10x service providers on your team? What are some great stories of how a service provider has been a 10x?

Startup Hiring Advice from Lorne Michaels

Saturday Night Live is an American entertainment institution - the show is celebrating its 40th year in 2015. So it's instructive to hear stories from when the show was being put together by famed creator and producer Lorne Michaels. He was a recent guest on ESPN's BS Report podcast with Bill Simmons and recounted the process for putting together the inaugural season in 1975 - I've embedded a YouTube clip from the podcast below with 3 minutes of his description of piecing together the team. There are many valuable lessons and analogous similarities to building a startup team.

1. "No one knew what it [SNL] was, including me."

This is my favorite quote from Lorne Michaels. He had a vision for what he thought the show might be - a variety show intermixing comedy, live music and with rotating hosts. But the reality is he didn't know what it would organically grow to be. So in the earliest days he had to pitch people - the network, potential cast members - on his vision and then trust that he could get the right people in place to let vision grow into reality.

If there's a more perfect analogy for a startup, I don't know what it is. Founders typically have an idea for what they want to build but in reality they have no idea either. Embrace this ambiguity and find people who can help you shape it.

2. "I had this test of all people who I could be in a room with, because I figured I'd be spending a lot of time with them"

In light of the fact that Michaels didn't know exactly what he was building, he chose to hire people who he liked. He did all of the hiring - personally reading every writing sample and recruiting the cast - and no doubt looked for merits of talent and experience. But at the end of the day he knew the show building would be hard and he needed people he could be strapped to the mast with and with whom he would enjoy the process. The same test can be used when building your early team in a startup.

3. "This is a television show, and I can't have anyone on it who has any ambivalence whatsoever. There's way too much at stake and I need to know the people who are there are committed, completely focused on it, and want to be involved"

This was Michaels' response to John Belushi during the cast recruitment efforts when Belushi told him, "I don't do television." Michaels was willing to walk away from Belushi and his talent at first because he only wanted people who wanted to be involved with the type of project he was building.

I see this all the time with companies with both employees and investor fits. Companies will bring in a more senior executive to try and beef up it's growth efforts but it can backfire when there isn't company-employee-stage fit. Or there is a disconnect between what management and a potential investor see as the best way to grow. Startups may not know the exact path they will take, but they need to know the ethos which will guide them on the path.

Operational Literacy for Technical Founders

Last weekend my friend and CEO of Automated Insights, Robbie Allen, went on his maiden tweetstorm voyage with a barrage of thoughts related to entrepreneurs who are "solo founders" - or those without a co-founder.

The topic of solo vs. co-founder as optimal is interesting but not what I want to touch on today. As a non-technical advisor to startups I've been able to play a part in helping round out skills in other areas - something I call "operational literacy". I've seen amazing technical founders who can grow into really effective total leaders. But you also see those who are unwilling or not interested in doing so, and they often are replaced or shifted to a CTO role.

If I had to break down the simplest areas of focus for technical founders to be operationally literate, it would be the following:

Financial:

How the company's revenue model works, especially in terms of how cash comes in and out. I'm not worried about arcane issues like revenue recognition, but rather the day to day reality of cash.

Cash burn and # of months of runway before there is a need for funding or profitability. This is an absolute must at all times.

Basic proficiency with the terms related to an equity financing (pre-money valuation, liquidation preference, option pool, etc) for companies that are raising VC

Sales & Marketing

All business is simple - you have to acquire customers who want to pay you for your product or service and then it costs you something to make or service them. So how do you acquire customers (CAC), how much do you make on each sale (gross margin) and how long do you keep them / how many times do they rebuy (LTV).

As a subset of the above, what's the average sales price, # of customers, and churn (especially if you're a SaaS business)

Vision

What are the next positions that you would fill if you could hire more people

If raising capital, how will you spend the money

If you look back at the above, what I'm really talking about it understanding the interplay of Product, Sales, People & Capital. If you throw in Market and Competition, you're 90% of the way to your investor pitch deck and answering the questions that investors want to know about your business - and that you need as a framework to lead your business.

That's why it's important for founders to be operationally literate in all the areas of their business.

NC IDEA grants are huge for NC

For all the talk about how there is a lack of resident venture capital in NC (and all this talk is true, by the way), there's a truly underappreciated form of capital available: the NC IDEA grants.

In the last week, NC IDEA announced the most recent class of winners - Laura over at ExitEvent has been doing great profiles of each like this one of RevBoss. There were 5 winners this session, and each will receive up to $50,000 in grant funding.

For those who aren't familiar with the program, that's up to $50,000 in non-dilutive capital that can be used for product development, customer acquisition, and scaling of an early stage business. You don't have to give up a piece of equity in exchange and it's not a loan that you have to pay back.

It's the closest thing to free money that you will ever find. And it's incredibly valuable for the startup ecosystem here in NC. Just take a look at some of the companies that have won grants in the past - StatSheet (now Automated Insights), Valencell, Spoonflower, Physcient, and more than 70 others.

$50,000 will probably not fully capitalize any of the businesses that receive a grant. But it can kickstart the capability to bring on an engineer full time, or help with discovery around customer acquisition methods. And the process of applying for a grant - a simple application, followed by a more formal long-form write up for semifinalists and then a final live pitch to a group of judges - can be excellent for bringing clarity to the thought process around what your early stage company is actually doing. The discipline of breaking down who you are, what you're doing, and how you would use additional capital is one which can seem a bit tedious but actually pays dividends beyond the potential for getting a little extra money. Some of the best stories of the NC IDEA grant process are those companies that don't win a grant the 1st time but continue to make progress and end up winning a prize during the next cycle.

Andrea and the team at NC IDEA do a great job of running the process and getting a number of people from the community to pitch in and help with the reviewing of applications. The next cycle will begin in early 2015 - if you have an early stage company in NC you absolutely should look into the program as it's one of the true gems of the region.

PS - If you're looking for tips on how to write a great grant application, check out this post by my friend Bill Bing.

The Amazing Impact of (appropriate) Debt in SaaS startups

Redpoint’s Tom Tunguz is one of my favorite VC bloggers for his use of data and visualizations to unlock truths about growing companies. In May of this year he wrote a piece, “A Surprisingly Powerful Mechanism For Growing A SaaS Startup”. Tom’s main point was that SaaS businesses which can bill and collect cash annually up front have a materially different working capital reality than those which are forced to bill and collect monthly or quarterly. This cash can be used to fund operations but also is important because by extending runway, a company can delay the pricing of a follow on round and reduce the dilution for existing shareholders.

Managing the cash position of a SaaS business – especially one that is experiencing significant growth – is one of the most important jobs of a CEO. There is a balance between investing in customer acquisition to fuel growth while also figuring out the ideal time to raise additional equity capital which maximizes value for existing shareholders.

As a banker to high growth companies, I’ve seen an additional strategy which can be extremely beneficial for SaaS companies looking to manage their working capital needs: the recurring revenue line of credit.

I remember 7 years ago when I was early in my career at the bank and we put together a unique structure (at the time) for a VOIP company that sold to the SMB market. Banks are traditionally very good at lending against billed receivables. It is less accepted to lend against future billings - but with rise of the SaaS model this has changed. The predictable, long-term streams of billing for SaaS businesses result in lower AR balances but more stable overall businesses that avoid the lumpiness and seasonality of the old enterprise model. Today, we are very frequently putting together structures that allow SaaS companies to leverage their diversified customer base by borrowing at a multiple of their Monthly Recurring Revenue (MRR).

I have found that the proper use of debt in a SaaS business can have the most profound overall financial impact of any form of venture debt.

To illustrate, let’s start with Tom’s original example of a company doing $50k a month in MRR with 15% month over month growth and a $300k monthly burn. This fictional company has just raised $6MM in venture financing. I will modify the example slightly by changing the growth rate to 10% MoM for months 13-24 but maintaining the $300k monthly burn which is, in my opinion, a more realistic scenario.

As you will see in the graph below (click to enlarge), without any additional debt or equity capital, this company would run out of cash in month 21. Thus, they would likely need to start raising additional equity capital in month 15 to give 6 months runway before running out of cash.

By providing a Recurring Revenue line with access to debt at 3X the prior month’s MRR, the company is able to extend its cash runway by more than 6 months. Instead of going to the equity markets somewhere around month 15, the company can delay this process until ~ month 21.

As you will note in the chart below (click to enlarge), this is precisely the time when the company gains the most leverage from their expanding MRR base and there is an increasing variance in the respective cash burn curves. If you apply a SaaS valuation multiple of 8X annualized recurring revenue, this could mean the difference of raising equity at a $60-$70MM valuation as opposed to $30-40MM in the case without the benefit of the runway extension provided by debt.

Of course, this example is somewhat of a perfect storm of rapid month over month growth rates combined with the multiplying effect of large valuation multiples for SaaS businesses. However, monthly growth and rich multiples are inherent qualities of SaaS businesses, so even at smaller scale the benefits of debt can be material for stakeholders. We’ve found that by working with a number of companies to put together structures like this, we have a fundamental understanding of the factors (CAC, LTV, churn) that drive value for SaaS businesses and can put together smart structures that help companies maximize their opportunities.

If you run a rapidly growing SaaS business, leveraging your revenue base is definitely a strategy to consider – perhaps even a (different) Surprisingly Powerful Mechanism for Growing your SaaS Startup! If you have any questions about financing for your SaaS business I’d welcome to chance to chat – please reach out to me at [email protected]

Co-Founders as "Work Spouses"

I could tell by the brief hesitation that my friend and client wasn’t sure whether to say what was on his mind or not. He is the CEO of a fast-growing company and while we had just finalized a new deal together we didn’t know each other that well. There was a pause, a quick sip of his water and a glance across the table to his co-founder before he finally blurted it out.

“One of the biggest reasons for our early success is the relationship we share as founders. He’s my work spouse.”

We chuckled and exchanged knowing nods. This was a safe place and the ice had been broken for the two founders to share more insights on their shared life of growing a company.

We hear all the time in the startup world that one of the most important things is the team. Technologies change and markets shift – but it’s people who ultimately drive companies forward. And it’s also people – and the interpersonal difficulties that creep up in intense situations – who end up accounting for many of the problems that lead to the demise of companies.

As we continued our conversation I was struck by how much of the language used around me was the same language we use to describe real marriages. There’s no ceremony and wedding bells for founders but the inherent qualities that define positive relationships are the same nonetheless. For instance:

Opposites can attract: it’s cheesy in that glorious Paula Abdul 80’s way, but the reality is that great founder relationships can often be found when individuals share different functional skill sets and even work styles. My CEO friend stated it this way: “we’re very different people and can disagree on a lot of things. But I know he’s always there for me.”

It’s all built on trust and unconditional acceptance: Furthering the “always there for me” point, my friend went on to say “just like I know my real wife will love me no matter what happens with my business, I know that when my co-founder and I disagree we’ve established that we will always come back to a basic level of unconditional support of each other as people.” Startups are hard. Things will go wrong. It’s important to have the unconditional trust and acceptance of your co-founder so you have the freedom to go out and break things in order to accomplish your bigger goals.

This trust is built through preparation and direct planning: it’s often common for couples to go through pre-marital counseling or conversations to talk through the big picture vision for their life. Founders should take the same approach. A couple simple but important topics I’ve seen pop up multiple times

Money Money Money: just like disagreements around money can drive apart a marital relationship, it’s important to decide how each founder sees the company growing. This includes agreement on the cap table, vision for what types and amounts of capital to raise, and whether you agree on whether or not to bring in outside investors. It’s ALWAYS easiest to talk through this in the earliest days vs. trying to hash it out in the heat of the moment around a financing round.

Kids: couples usually like to agree on whether or not to have kids and how they want to raise them. Similarly, founders need to be on the same page about when and how to hire and figure out what type of culture is desired. It’s also really important to decide what type of “parental roles” the founders will take as you grow the team. I’ve seen many companies struggle with this as co-founders are able to manage with loose roles when the team is small but lack an efficient structure for growing once they “have kids” and start to grow the family.

To summarize, starting a company is a big deal. And just like a marriage, it shouldn’t be entered into lightly. The reality is you may very well be spending more time with your co-founder than your real spouse and the pain of friction in this relationship is very real. It’s worthwhile to consider this up front and do the hard work to build the foundations for your relationship during the dating/wedding/honeymoon phase so you’re set up for success down the road.

(All of these points apply to a similar, but perhaps lesser or different extent when you enter into a relationship with an equity investor. It’s certainly worth the effort to explicitly define how you want this relationship to look as well.)

Like so many entrepreneurs before them, both had experienced the negative effects of the life spent pursuing a company together. It came out that interpersonal dynamics were the reason one of them had left his prior startup.

“The fire just quit burning in the same direction,” he said with a tone that spoke of the pain in his past. And that’s why it was so important to both of them to get the relationship right this time.

The more my friends opened up, the more it became clear that founding a company is

Looking Back and Learning

A little more than a year ago I joined the board of a private company that I had gotten to know well. The company had raised some seed financing and wanted to fill out its board with a few independent directors. Having been close to the company for many months, I jumped at the opportunity to have a completely different - and more intimate - view of the inside of a high growth tech company.

Recently I was searching for a file and stumbled across the detailed notes I took for our first Board meeting from April 2013. In re-reading my thoughts from last spring, I was struck by several things:

My notes were so incredibly detailed.

Mostly this was a function of me not having a clue what I was doing. I tried to write down everything that seemed important and then I summarized my notes for everyone on the board to read afterwards. With a year+ more experience under my belt and many more board meetings completed, I find that now I don't take nearly as many notes.

This is both encouraging and frustrating. Encouraging because I feel much more comfortable as a director and able to contribute in real time now that I'm not using training wheels. But frustrating because being able to read back over exactly how we felt in April 2013 was incredibly valuable.

Sense of Appreciation

We hear all the time about the massive pivots some startups take. But the vast majority of progress is actually achieved through daily micro pivots. These are often really hard to appreciate in real-time. There's an awareness that these micro pivots are happening and when we look back down the proverbial mountain we can see some of the switchbacks and tough climbs. Yet it's not always easy to remember exactly what we thought the climb would be like to assess our predictive competencies.

Reading my notes made me appreciate many of the small steps we've made forward over the last year. At that first board meeting, we spent a lot of time talking through corporate governance matters, key executive roles that needed to be filled, and theorizing on how the capital raising process might play out. In each case, there has been tremendous growth, and things played out in a fashion that wasn't too far off from our predictions. This leads to a great sense of appreciation of where we've come from.

As I shared my notes with the CEO last week he replied, "it all feels like a good pace. It isn't a burn and flip couple year thing but it also isn't slowly but surely. Feels like sustainable and consistent forward motion"

Stopping to recognize this forward motion is so crucial, especially since we're no where near where we hope to go yet. But we're moving forward, and that's exciting.

A Pause for Recognition

Things are usually not 100% rosy though and it was instructive to recognize that some of our biggest areas of focus today were identified a year ago. Our theories on the sales pipeline and process were not quite as prescient as in other areas. I found myself wishing I had documented in a more detailed manner the projected numbers so it would be easier to quantify some operational metrics. Moreover, I wish I had similar notes from each of the next quarterly meetings so I could more accurately track our progress - it's just too hard to remember what happened at what point without this detail. I know deep down there are patterns that would jump out if I was able to take the time to assess, but I need to get better at documenting the steps to make this analysis possible.

Best Practices

This board experience has highlighted the value of structuring processes so I can better remember the past. I'm thinking of ways to integrate this theme with my work at the bank (better salesforce.com habits!) and also interested to know how other startups play this out. The obvious answer is budgets and performance to plan. But I'm wondering if anyone has best practices for looking back over quarters or years with the lens of performance relative to expectations of how things would play out. It seems this is a core competency of any high growth entrepreneur or investor and would love to hear via comments or email or things that have worked for you.

Soccer and Startups: The Beautiful Games

Like most of the world, I've been watching with fervor the World Cup over the last couple weeks. For most Americans the World Cup is a once every four years chance to enjoy a taste of the best of sport combined with patriotism. For me, it feels like I've won the Golden Ticket and I'm spending close to a month in Wonka's chocolate factory. A self-professed soccer nut, I've been playing the game since I was two and a half and the games in Brazil give me a chance to bask in all the old memories of my playing days.

The older I've gotten, the easier it is to summarize my soccer "career" into a simple sentence. "Zack was on the National Championship soccer team at UNC," is a phrase that my business colleagues will sometimes throw around. While technically true and a great conversation starter, it's certainly not the first thing that pops into mind for me.

The things I remember are the way the freshly cut grass smelled and the feeling of the wet dew on the field at 6:00am on the first day of soccer practice my freshman year in high school. While watching Brazil's penalty kick shootout victory, I couldn't help but remember the time when I was 8 and scored the deciding kick in our rec league championship. I will never forget the pit in my stomach after losing in the state semifinals my sophomore year. Or the same gut punch the next year when we lost in the semis again, to the same team.

As I progressed in age, my goals became bigger and the odds longer. I had always dreamed of playing at UNC and had arranged a formal tryout for my freshman year. I didn't make the team and thought my dream was dead but it ended up they needed warm bodies for the spring offseason and somehow I played myself into a roster spot for the 2001 season.

The culmination of that season was confetti and the oversized tshirts and the ugly hats that said "National Champions" on them. It really couldn't have been a more storybook ending - I was a real-life Rudy with a big fat ring and one heck of a story to tell the grandkids.

What's funny is thinking back on that fall of 2001 the first image that comes to mind isn't the final scoreboard that says UNC 2, Indiana 0. Instead I see the first day of preseason and the 20+ guys who showed up with a vague perception that we had an opportunity to be really good but nothing accomplished yet. I can almost feel today the time midway through the year when my body shut down doing the fitness at the end of practice. I replay the dozens and dozens of practices - of shooting drills and small sided games and daily battles - the mundane but necessary puzzle pieces that combine together to form the full picture.

I find that startups are a lot like this. All too often we see the highlight reel in the press: Company X raises a $10 Million Series A! Company Y sells for $100 Million two years after launching. But when you talk to entrepreneurs who have really been through it, they will tell you it's all about the build up and not at all about the press release. I learned the hard way early in my career that perception and reality are often quite different with startups. Things look neat and tidy from the outside but on the inside they're inherently messy.

And yet, just like my love for soccer, there's nothing in the world that entrepreneurs would rather be doing than trying to build these messy beasts called startups. That round of funding or eventual exit is so much more satisfying when you recall the time you didn't know if you'd meet payroll or when your team worked through the night to get out a product release. There is nothing like the thrill of finding those first customers who are willing to pay money - real money! - for something you've created.

Startups are a Beautiful Game too, full of the interplay between agony and ecstasy that makes it all worth it. So take a couple hours out of your day tomorrow to cheer on America vs. the Belgians. Then get back to making that thing you're building. Because many years from now you may find that you remember the making of the thing much more than the thing itself.

Building your company culture through values

Of all the aspects of building a big company from scratch, nailing a great company culture is perhaps the hardest to quantify and thus also one of the hardest things to do. It's inherently difficult because it's all about people and there will be all different types of people in an organization and the needs of the organization will require different skills and talents at different points along the journey. Culture is not just a mission statement on a banner - we can all cringe remembering the class scene from Office Space, "Is this Good for the Company?" It's not ping pong tables or free food or a decent vacation policy. Culture is the ethos of the company in practice - the guiding views or ideals that characterize the organization.

We spend a lot of time thinking about product and markets and how much capital is needed to grow a company. But at the end of the day, a really successful company is going to need people to work together to grow it and establishing the values that are going to guide your organization early can be critical.

We made a lot of mistakes growing Square 1 over the years but the thing that I'm most proud of and that is most amazing is that we are still guided by the exact same set of core values that were outlined the day the bank opened in 2005. Every single employee is aware of the values and can recite them from memory. This is partially due to the fact that we propagandized the values in the front of notebooks, at every hands on meeting, and in every all staff email for years. Was it cheesy at times? Yes. Did it feel like overkill at times? Of course. Did the values sink into every single person at the bank and become a part of our very being? They absolutely did.

Our values are simple (which I think is the way to go with values):

Be a Partner: everything should be about developing and nurturing relationships both internally and externally, by serving others

Act Like an Entrepreneur: Don't settle for the status quo. If you see an opportunity to make something better, do it.

Be Passionate: The magic glue that drives us.

TNT (Today Not Tomorrow): Time is of the essence. We must act with a sense of urgency

Be Square: Above all else, be open, transparent and accountable.

Some of the ways that we put these values into practice include the following:

Before every single employee is hired they are presented with the values and it's made clear that these are the guidelines that we use to run the company. We have had "Values Teams" who assess the fit and set expectations for new hires.

We call the values out, even in the little things. If the coffee is empty and not refilled, an email might go out to remind everyone to "Be a Partner". When there is a client that needs to close a deal on a tight deadline, you will see and hear TNT all over the place. And then we celebrate publicly those instances when our team lives out the values.

Finally, we talked about it. ALL. THE. TIME. As I mentioned, every notebook had it plastered on the first page and every all hands meeting has the values on the last slide. Our values are everywhere. And we're still innovating - in the last few weeks we put up a new Values Wall in the middle of our headquarters to highlight top performers on a quarterly basis.

Square 1 is certainly not alone in terms of putting a focus on values. I've always been impressed with Moz over the years and their TAGFEE code. I recently saw that one of my clients Automated Insights lists their values on their careers page. Deciding on core values early on in a company's life - deciding WHO you're going to be - is one of the most important things you can do as it will define the HOW you will do it which will have a profound impact on WHAT you want to accomplish.

If you have insights into how other companies have been successful in creating a positive culture through a defined set of values, I'd love to hear about it in the comments.

How to Raise Venture Debt

Finding the right financing for your company is one of the most important jobs for a CEO. For many high growth companies, this means navigating the maze of raising equity capital via friends and family, angels, or institutional venture capital firms. As companies mature, it is often a smart idea to consider debt as an alternative source of capital to most efficiently capitalize the business. While there is quite a bit more written about raising VC money than raising venture debt, I have previously discussed many of the more theoretical aspects of the debt side of the table. In this post, I hope to lay out some very practical and actionable steps to consider as you look at debt as a financing option.

1. Figure out If you can support debt

For many pure startups, debt financing is not going to be an option. Debt providers are in the business of figuring out how they can get their money repaid. Thus, they typically look to things like operating history, a proven ability to generate positive cash flow, or hard assets as sources of repayment. The caveat to these traditional measures is high growth companies that have raised material amounts of institutional equity capital. Venture lenders will often look at the probability of a company raising additional equity as a source of repayment. It's all part of the implicit contract between lenders and VCs.

When considering whether your company can support debt and at what levels, it's important to think like a lender.

What will you be using the funds for and what will be the sources of repayment? As a general rule, debt providers are willing to provide debt up to a certain fraction of the total equity (25-50%) for companies that are still burning cash but backed by high quality investors.

If you've raised equity and want to layer in debt to extend runway to the next round, what are the milestones that you will need to accomplish to get there?

If you're hoping to manage a working capital gap, who are your vendors and what is their credit worthiness? For true working capital financing needs there will likely be many options from banks, specialty finance groups and other short term lenders but the cost and administrative overhead will be dependent upon the fundamentals of the business as well as the types of customers and contracts.

How much cash do you have in the bank and how much is your burn? What's your worst case number of months of runway (because this is how a lender has to think).

If you're generating positive cash flow, what level of comfort do you have with leverage against your annual free cash flow? Debt can be much less costly than equity but comes with certain strings attached, namely a first position security interest in the company.

As a final point, the best time to raise debt is exactly when you don't need it, particularly right after a round of equity financing. This is when you're likely to get the best terms and it usually makes sense to think about debt and get a structure in place before you absolutely need the funds.

2. Be prepared with the right materials

Different lenders will have differing needs in terms of diligence materials but below is a list of items that are fairly standard:

Annual audited financials for the 2-3 most recent years: Lenders will ask for company prepared materials if you haven't yet performed an audit (but will require an audit going forward). In addition to verifying numbers, lenders will often use the audit to understand the revenue recognition dynamics of the business as well as any notes related to the balance sheet.

A financial model for the next 12 months: Lenders love to see detail, so to the extent that you have a model which breaks out revenues and expenses by month (or quarterly) that is a plus. Experienced venture lenders are used to looking at models and hair-cutting based on our experiences (we know they are often collections of guesses) but it's imperative to understand what expectations are for the company.

Cap Table: Lenders will want to know who the equity holders are and how much skin they have in the game, especially if they are looking at additional equity as a meaningful piece of the risk equation.

A recent Accounts receivable and Accounts payable aging: Especially if you're looking for a true working capital line of credit.

A crisp powerpoint deck which highlights what the company is doing is a plus. Most likely this is the deck you used to raise equity. It can help with underwriting and with getting internal decision makers aligned with who you are - and thus able to better structure a facility which meets your needs.

3. Get feedback from multiple lenders

While I would of course love for all entrepreneurs to only come to my favorite venture lender (and employer!) Square 1 Bank, it just makes sense to get multiple looks. In particular, it's important to focus not just on price but the following:

Ablility for the lender to understand your business and structure a loan facility that makes sense. Does the borrowing availability allow you to gain real leverage?

Ask the lender for some references from other entrepreneurs who they've worked with and make a couple reference calls. If you do, ask if the reference has ever been through a situation in which they tripped a covenant and see how the lender reacted. You can also ask your venture investors of their experiences, as lenders tend to have multiple relationships with many firms.

Communicate expectations and desires up front. To the extent you can be transparent about your desires from a facility, it will allow the lender to be equally transparent and get to an efficient outcome for everyone. This is especially important when you get into docs and negotiate the finer points of the legalese - starting from a foundation of openness helps to make this much less painful.

In summary, take a holistic look at your company and it's needs and figure out if debt is appropriate. Once you do, you can go ahead and get the majority of your diligence materials together ahead of time. Then, through transparent communication with multiple lenders you can set yourself up for a easy close and capital to grow your company.

Postscript: As is inevitable in any summary such as this, there are exceptions to every rule and it goes without saying that each deal is different, both from the lender and company side. With that said, I think this represents a general framework for how to go about raising venture debt.

Trending Blogs

Recently Viewed Blogs

Runway to Exit