Friday, May 22, 2015

Startup KPIs: Words From The Wise

Startup KPIs: Words From The Wise

I recently attended a great panel discussion on Startup Key Performance Indicators (KPIs) run by The CFO Leadership Council. Chris Hering from Netsuite moderated and the speakers were Melissa Stepanis from Silicon Valley BankChristina Calvanesco from Eyeview and Kim Armor from Comcast Ventures.
These were my four key takeaways:
  • Keep your list of KPIs short and relevant
  • For the growing number of SaaS models KPIs are clear
  • Investors and lenders focus on the key growth drivers a startup reports to its Board
  • Data quality is key

  1. Keep your list of KPIs short and relevant. So three to five that the leadership team and the whole organization can focus on. Any more and there is no focus. Relevant means making them part of a firm’s culture. This means they need to be visible. (So reiterate them face to face in a weekly standup … not via emails.) One suggestion form Kim Armor that I particularly liked was rebranding “KPIs” (= buzzword and meaningless) to “Measures of Success” (= direct and meaningful). Chris Hering noted that Netsuite has “Company Musts” and, another neat idea, has them printed on t-shirts!
  2. For the growing number of SaaS models KPIs are clear = Monthly/Annual Recurring Revenue (MRR/ARR); Churn (which comes in many forms) ; Customer Acquisition Cost (CAC); Customer Life time Value (CLTV or just LTV) but as the business evolves so do they. Specifically you need to look at KPIs in more sophisticated ways - so churn by revenue and by logo; cohort analysis etc. Also they change in importance. So as a SaaS business grows churn becomes important (so once trends become more established) and upsell/cross sell metrics come in to play too. As to the importance of metrics is SaaS the panel agreed: “MRR trumps everything.” Also that some metrics are more trustworthy than others. Specifically LTV should be “taken with a pinch of salt” give so many definitions and multiple subjective inputs (future churn rate, discount rate)
  3. Investors and lenders focus on the key growth drivers a startup reports to its Board. So keep it simple - what you use internally to run the business, to keep the Board happy and to inform outside stakeholders should be pretty much the same. Outsiders, especially those with large portfolios to track will definitely apply the KISS (Keep It Simple Stupid) principle - at the top of the list revenue/revenue growth; cash and cash burn. Although Christina Calvanesco pointed out that there are some internal “health metrics” that a CFO needs to keep a close eye on that are less relevant for the Board, leadership, for example collections (which feed cash flow).
  4. Data quality is key. Christina noted that the CFO needs to partner closely with operational folks to make sure data is appropriate, so pulled from the right places in the right manner.
And the bonus take away was from Kim Armor who provided a list of 11 “investment metrics” Comcast Ventures uses to assess the merit of potential investees. The top ten are generic and can be applied by any thoughtful investor
  • Product market/fit
  • Market size
  • Team
  • Defensibility
  • Competition
  • Capital required
  • Business model
  • Exit opportunities
  • Deal terms
  • Risk/reward payoff
  • Strategic fit to Comcast/NBC (obviously unique to them)
Finally a shout out for David Skok, a General Partner at Matrix Ventures. David provides a great list of SaaS metric definitions HERE.
For more details on the CFO Leadership Council contact Becky Blackler

And you can also find me @adamquinton

Friday, May 15, 2015

Startup Convertible Notes – Enough Already

Startup Convertible Notes – Enough Already

I have been thinking a lot about convertible notes recently. They may be a primary vehicle to fund early stage startups but they are less straightforward than they appear and contain nasty traps for the unwary – both founders and investors.
Bottom line – notes are not what they seem and can harm a startup's longer term fund raising goals. So Caveat Emptor. And, if you are the Emptor, maybe you should advocate for startups to issue priced equity (i.e. preferred stock) more often. And do so both in your personal interests and frankly in your investee's interests too.
In this post I will cover the big picture of the anti note thesis then cover more specific things to look out for as an investor and then things to be mindful of as a founder.

1. The Big Picture

Standardized? In your dreams! This is what got me started: I have seen a slew of convertible note term sheets recently both ones I have been looking at on my own account and ones I have been asked opinions on by other angel investors. As I compared more and more I was stuck by something I didn’t expect – but shouldn’t have been surprised by really. Namely how very different they all are. Which is odd because “we” the investors (well, this investor anyway) usually say that notes might have disadvantages but “at least they are easy, quick and standardized and hence cheap relative to a priced round.” Mmmm - I take that back!
The more I looked the more I realized each and every note has its own quirks. OK - so I did actually read notes before now. But still, when you review a lot of them back to back, it’s more obvious: tweaks on the various scenarios at note expiry (in some cases unclear and ambiguous); on follow on rights or most favored nation (MFN) provisions (although not enough have either of those); interest rates; and also around the fundamental issue of pricing via the cap – so caps, no caps, varieties of discount and indeed maybe a scaling discount.
Besides these complexities (memo to self - note terms need very careful attention) notes have more fundamental problems. Smart and active investors like Mark Suster and Brian Cohen have written about (see Marks’s BLOG) and talked about (see Brian on SCREEN) the delusions and risks that surround convertible notes. Most obvious is that investors in a note have minimal rights. Duh - It is a debt instrument after all so not too surprising but can still be shocking when the reality hits. Less obvious that on conversion you do not get adequately compensated for the risk you took. (The most extreme is the case with a no cap note when the business takes off and the Qualified Financing is struck at a much higher pre-money than the investor thought going in.)
Notes can also have an adverse impact on future financings too. As Nnamdi Okike from 645 Ventures notes seed stage companies need to aim for a "competitive Series A" given the low (and declining) conversion rate from A to follow on B rounds. As Nnamdi points out an obstacle to that competitive A can include an overhang of too many notes or a over priced seed round (which would include, in my book, a note with an overly aggressive cap).
Another issue is the fact that notes typically don't impose any governance framework on founders. Good for them in a sense that they maintain full freedom of action but also bad because it can a) mean there is no accountability, no one holding the founder's feet to the fire and also b) no period of "training wheels" with say a three person Board before they get hit with a full on Board that will inevitably accompany a larger priced round. As Brian Cohen points out this is about being professional - and professional early stage investors want to see and be engaged with professional investees. Good governance is a key part of that.
Now some more specific things to watch for, first on the investor side. then the founder side:

2. Look out below - Investors

Vincent Jacobs at Kima Ventures lists seven issues that can arise to confound investors and thoughtfully provides steps that note investors can try and take to remove or mitigate them. The concerns Vincent dissects are set out below … investors please do READ his post because he offers suggested remedies in each case:
1)    Receiving worse terms than other investors
2)    Converting into preferred stock without the desired rights
3)    Not receiving the same rights as other investors when the debt converts
4)    Converting into common stock instead of preferred stock
5)    Having the loan repaid despite a successful exit
6)    Having the loan repaid despite the company doing well
7)    Having other investors force an unfavorable decision
On the subject of not receiving the same rights as other investors, I would add look out for for side notes. (Or rather ask for them, the point is you can't "see" them.) Coming from a career in the public markets my going in assumption in startupland was that my term sheet is your term sheet is her term sheet. i.e. all investors in a note have the same terms good or bad. The point being that in the public markets investor rights are simple and highly transparent. Not so, I discovered in private markets.
One thing I have learnt to ask founders is: "Have you agreed any "side notes". In other words made specific contractual commitments to one investor that are not given to, or made transparent to, other investors. A common example would be giving one specific investor some form of follow on investment right into the next round. There is nothing "wrong" (legally) with this although the transparency/Reg FD bone in my body doesn't really like it - and I do like to know what others are getting that I am not. 

3. Look out below - Entrepreneurs

Coming from entrepreneur's direction James Geshwiler MD at CommonAngels Ventures has offered seven surprises on convertible notes that founders should know about. (Am guessing the number seven on both sides of the table here is just a coincidence!) Again founders read James's post for the full details but the seven are things that could hit you unawares or could deny you benefits that might accrue from a priced round in his view are:
1)    Little Value Add from Investors
2)    Reduced Incentives to Help
3)    More Preference
4)    Less Discipline
5)    Two Words: “Full Ratchet” 
6)    Deceptive Dilution
7)    Lost Allies

Sunday, May 10, 2015

Q. Why Invest In Women Entrepreneurs? A. To Make Money

Q. Why Invest In Women Entrepreneurs? A. To Make Money

I did an interview with Anne Ravanona recently and we covered a lot of early stage investing ground. Towards the end of the discussion she asked the simple question: "So, why do you invest in women entrepreneurs?" and I gave the simple answer: "I am an investor. I invest to make money. That's why." So she pressed me on the logic. I launched into some more detailed thoughts around diversity, pattern recognition and thought processes as follows (roughly!):
1. To benefit from the power of diversity 
Early stage investing is very much a numbers game. So anything that can tilt the odds in your favor seems to me worth pursuing and diversity is one such factor. The a priori chances of success in any individual angel investment are very low ... the vast majority of returns come from no more than 10% of your investments. Hence, I explained to Anne, angel investors look for businesses that can offer say 30X returns not because they are greedy but because unless their 1 of 10 winners wins big they are really just philanthropists! So angels need to grasp that volume/diversification is essential as pointed out in "Angel Investing by the Numbers" for example. Any they, me included, need to do what they can to beat the long odds.
When it comes to trying to pick the winners, and beating those odds, for me the compelling evidence that gender diverse teams make better decisions is a very important tilt factor. (See for example the 2011 HBR Article: "What Makes Teams Smarter?") When it comes to gender diversity - of my 14 current startup investees 12 have at least one female founder.
2. To invest in an under appreciated opportunity
As I noted to Anne, Warren Buffett and other successful investors seek invest in things other people aren't investing in. Early money manager (and economist!) John Maynard Keynes put it this way:
"My central principle of investment is to go contrary to general opinion, on the ground that, if everyone is agreed about its merits, the investment is inevitably too dear and therefore unattractive."
In an early stage context the contrarian investor can surely see that women entrepreneurs, more specifically women CEOs, are often under appreciated when it comes to the investment process. For example when pitching (more below on that). To my mind there is what economists could call a "market failure" here. So a situation where capital is not appropriately allocated to set of investment opportunities based on non rational criteria, in the sense that the level of interest in those opportunities is not appropriately correlated with the chances and degree of success. There are (sadly) plenty of examples of women CEOs describing the differentially tougher challenges they faced when raising early stage capital. See for example the stories of Erika TrautmanKathryn MinshewJules Pieri andElizabeth Yin. The male dominated nature (80% of angels, 94% of VC partners) of early stage capital providers is an obvious issue here.
We politely describe the hurdles non majority group entrepreneurs face when being assessed by majority group investors as due to "unconscious bias". Put another way non majority group entrepreneurs don't fit the "pattern". StartUp land loves to talk about "pattern recognition" but this is where it can #FAIL in my view. Summarizing how pattern recognition impacts diverse founders (aka non young straight white male techies) Dave McClure has succinctly framed the issue as follows: 
“There’s a soft bias toward doing things that are familiar. That's white male nerds.”
At a deeper level, and in the context of women entrepreneurs, the gendered nature of behaviors (which can encompass all of verbal and non verbal communication as well as appearance) come in to play in my view.Characteristics gendered masculine  ("assertive", "decisive" etc) are more commonly associated by both men and women ... with leadership. In their HBR article and book: "Women and the Labyrinth of Leadership" Alice Eagely and Linda Carli summarize this finding, and the so called "double bind", as follows:
Study after study has affirmed that people associate women and men with different traits and link men with more of the traits that connote leadership. 
3. To benefit from Hedgehog vs Fox thinking 
While I might be connecting too many dots here, I noted to Anne that some of the issues female founders face remind me of the decision making paradigms laid out by Philip Tetlock in his brilliant book: "Expert Political Judgement".He classifies thinking styles using Isaiah Berlin's prototypes of the fox and the hedgehog with his years of study indicating that the fox (the thinker who knows many things) is more successful at predicting the future than the hedgehog (who knows one big thing).
When it comes to the specifics of women start up CEOs pitching their companies, as I mentioned to Anne, I have repeatedly heard "the way wepitch" cited as a particular fund raising challenge. While individual comments aren't a good basis for generalization the common observations I have personally come across include:
a) Lacking the scale of vision i.e. not being as bold as the guys: Many women CEOs I have spoken say that they feel were disadvantaged by the way they made the case for their company. ie not emphatically calling out the inevitability of their soon to be $1bn business and
b) Leading with too many problems and giving overly detailed answers: Women entrepreneurs (again some not all) report that they feel they tend to balance positives with more negatives and, perhaps as a result, feel they can give too detailed answers in a pitch context. Result: they deemed less compelling (and hence less likely to get the second meeting) compared to the other six guys the investor saw that day who were all oozing conviction and who hit any question succinctly out of the park! 
In what seems to me to be a parallel with the world of what "works" when pitching vs what works for pundits and the media Tetlock notes the perverse inverse relationship between the best indicators of good judgment and the qualities that the media most prize in pundits. i.e. the media loves hedgehogs for their conviction ... but they are actually the worst people to have making an expert judgement. And startup founders make multiple expert judgements every day. So maybe women CEOs are the foxes of the pitching world and men disproportionately the hedgehogs!? Hence, just as you are more likely to get an accurate prediction in most any domain from a fox as opposed to a hedgehog, seems to me that CEO foxes are worth extra consideration too.
PS Note that in answer to Anne I did not say it makes sense to invest in female founders either because: a) with women making 80% of purchasing decisions in the economy having a woman on the founding team ups the chances of bringing relevant expertise/experiences to bear that will enhance product development and sales/market decisions (which it likely will) or b) it's an issue of "fairness" (which it is). The point being, the investment thesis makes total sense just framed in clinical investment process and organizational decision making terms. Add these further two considerations and the case is even more powerful.
You can also find me at: @adamquinton

Thursday, May 7, 2015

Diversity in Venture Capital – A National Conversation

Diversity in Venture Capital – A National Conversation



Kate Mitchell from Scale Venture Partners, co-chair of the National Venture Capital Associations Diversity Task Force, recently published a post on the task force its objectives and her own role. 

The stats here are well know - the most recent fulsome study was done by Babson. Indeed any many words have been written on the subject. (For example by me two years ago when the Midas list came out.) In general I think that by this point you either get it or you don't so "leaning in is fine but kicking ass is better."

In any in her post event Kate invited comments and suggestions "in this effort to change our industry for the better."

This is how I responded to her request:

It really isn’t hard. It just requires an open mind and commitment. 
A few suggestions:
1. Extend your network beyond your comfort zone – for deal sourcing and talent
2. Learn how unconcious bias affects everyone – inc you – and apply that learning
3. Set goals around diversity and stick to them
4. In running a fund make sure you operate in an inclusive manner – don’t run a boys club
5. Have zero tolerance for, and call out, sexist behaviors in your own organization, your investees and LPs
6. For men: NEVER EVER appear at a conference on a single sex panel

Sunday, May 3, 2015

Startup Updates That Get You Noticed

Startup Updates That Get You Noticed





Two startup founders, Stacey Ferreira and Scott Ferreira from AdMoar, recently asked me what format I thought worked well when it comes to regular communications with investors. That got me thinking. I get a wide variety of update messages in my inbox from startups that I am invested in. And from others where I have talked to the entrepreneurs at some point or otherwise got connected.



I started by noting that a fundamental issue most all startups have is that … no one knows who you are. (Which is why founders who ask for NDAs from angel investors get tagged as rookies – experienced investors know that having your idea stolen is typically the least of your problems. Rather it is getting anyone to pay any attention to it at all!)

If you accept that premise then it seems obvious to me that a startup should use all of its friends, supporters, advocates etc to magnify its voice. That way you can get an assist in solving your “who knows me” problem and specifically can use your growing ecosystem to help drive leads, add credibility, grow visibility, crowd source answers to questions you might have etc.

The smartest start ups I know combine regular investor updates with more general communications in one place. So in addition to investors they us their regular update communications to target:
a) investors they have talked to but who didn't invest - keep them warm, you never know if they might come back!
b) investors they have talked to who might invest in the future - keep them warm and hopefully impressed with your progress.
c) advisors/mentors – who have volunteered to help and who appreciate being kept in touch. (I know I do.)
d) industry/media contacts – you can’t break through their noise and get attention unless you are part of it.

Communications in this context typically means a push mail. But how often? For me and I suspect others once a month is optimal. (More often = noise//annoying; Less often = no consistency//lose mind share)

When it comes to email there are two basic options for style that I have seen work well:
a) informal email - +ve feels personal, is easy and convenient for small lists/ -ve looks unprofessional. But this is definitely a good place to start.
b) structured email (using mailchimp etc) - +ve looks professional and is much better for a longer lists especially since your audience can self subscribe/unsubscribe and you can track that/ -ve feels impersonal -.
So more appropriate as your list and reach grow and also as you want to project a different more image. Angela Campbell at Agora Fund has a very slick message in this format.

What about content? I have seen excellent concise messages that combine business updates, team updates, fund raising updates, media coverage, upcoming stuff but also with some fun included. (I always enjoy the Hitlist GIF of the month from Gillian Morris CEO of Hitlist!) All this content can be used to convey a sense of progress and momentum. (Which is vital for your “not yet but might be investors” to sense.) By the way Gillian treats her updates like a blog post … so there is a backlog out there too. And she has her own guide to what to include in an update. Check out: “How We Got to 200,000 Users With No Marketing Spend

Importantly, in my view at least, the better notes ASK for something. The conversion rate on these asks might be low but the startup community likes to feel involved and helpful so will respond when they can.

Given before you get: celebrate others! Maybe it’s just me but some of the  updates I appreciate the most and find the most “genuine” are not all about the founder/company sending them. Rather they give before they get, by which I mean they celebrate people in their ecosystem. So folks that helped them in some way. For example Erica Berger at Catchpool incorporates and “In gratitude” section.

Unless you are into full (and competitor helpful!) transparency formal “investor only” reporting with financials is a separate communication. This will typically be to preset “information rights” timetables.

BUT in your financial report outs to investors you don't want to make ANY extra work for your self: don’t reinvent the reporting wheel. For example if you have committed to quarterly financials by way of information rights in a note, but don't have a Board yet, just take the three basic financial statements out of quickbooks and sent them out each quarter. Maybe with some commentary in body text – but that’s it.

Keep It Simple (Stupid) when you do have a Board. Even if it’s a three person Board lite, you will do have to some more detailed financial on a quarterly if not monthly basis. In this scenario repurpose and send to investors a subset of that material which you have had to prepare anyway. i.e. don't create any extra busy work just to service investors. (Depending how many investors you have and how engaged they are maybe do an occasional conference call with them too.)


Assuming you get further along the growth curve and your Board reporting requirements go up … just go with that flow in terms of repurposing what you have prepared already. Obviously the later stage Board sees considerably more than you would want to share with shareholders. So in this scenario the question should always be what you cut out, never what you should add. At least from my portfolio the standout in terms of substance and usefulness are the updates Erica Trautman the CEO of Series B funded Rapt Media provides.