a vc view on startups - matt abrams

Copyright © 2016 Seven Peaks Ventures

Seven Peaks VenturesA VC View on Startups

Matt Abrams, Investment Partner


Special Thanks

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• Bruce Cleveland at Wildcat Venture Partners who authored “The Traction Gap Phenomenon”


The Journey So Far…

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• Lumber town • Northwestern University • Washington, DC • Arbor Software / Hyperion • XMLA • Oracle • Seven Peaks Ventures

”there and back again…”


“The Watney Rule”

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“At some point, everything's gonna go south on you... everything's going to go south and you're going to say, this is it. This is how I end. Now you can either accept that, or you can get to work. That's all it is. You just begin. You do the math. You solve one problem... and you solve the next one... and then the next. And If you solve enough problems, you get to come home. All right, questions?”

The Watney Rule for startups: Survival depends on achieving self-sufficiency. —Mitch Kapor


Some Core Principles

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“The first responsibility of a leader is to define reality. The last is to say thank you. In between the two the leader must become a servant and a debtor” —Max de Pree

Max De Pree -Founder of Herman Miller

“Bad news doesn’t get better with age…” —Matt Abrams / Johnny Hill

“Every investment we make needs to have a positive impact” —Matt Abrams


ExerciseSpend 5 minutes writing about the single most impactful event (or period) in your life that significantly defines you today

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“The Traction Gap”*

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Viewing companies and teams through a lens other than “rounds”

*Bruce Cleveland at Wildcat Venture Partners and author of “The Traction Gap Phenomenon”


Overview

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• Early stage startups that fail to achieve traction are subject to lower valuations, significant financing risks and sub-optimal outcomes.

• Startups must successfully achieve a series of increasing value inflection points in their path along the Traction Gap. These points include: Initial Product Release (IPR), Minimum Viable Product (MVP), Minimum Viable Repeatability (MVR), and Minimum Viable Traction (MVT).

• IPR is where the startup first makes its product generally available to the public. At this stage, the team is seeking customer validation metrics to prove it has developed an MVP.

• MVP is the most pared down version of a product that will still be purchased or used by customers.

• We define MVR as the smallest amount of repeatability a startup can execute to demonstrate its business model feasibility and product/market fit.

• MVT is defined as a level of revenue growth, engagement, downloads, usage or the like that demonstrates market validation and signal positive growth trajectory.


Characteristics

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CHARACTERISTICS OF THE GAP: • Incomplete team • Incomplete product/market fit • Incomplete revenue construct • Incomplete systems • Insufficient funds

ADDRESSING THE GAP REQUIRES A TEAM WITH... • Deep networks • Subject matter expertise • Go-to-market expertise • Operational experience

To achieve MVR, the startup must develop core competencies in: • product architecture • revenue architecture • team architecture • systems architecture

To go on and reach MVT, it must continue to measure, revenue and optimize each of these areas.


Product Architecture (Product)

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A startup’s product architecture includes the set of technologies, applications and features that comprise its offerings. A well-thought-out product architecture enables startups to achieve rapid product/market fit through customer validation as well as garner the partners needed to complete the whole product offering.

Key questions to ask yourself: • Do you have technical debt or are you incurring technical debt that will become a problem? • Do you have the right instrumentation in place to understand deficiencies or problem areas? • Are you reliant upon a technology that - if it disappears or is acquired - will significantly impact your company stability? • Do you have a secret sauce that is hard to duplicate or is your “disruptive” technology easily “disrupted” • Are you outsourcing all of your up-front development? • What technical (team or product) bottlenecks do you have / where are the friction points? • Can you create breakthrough technology instead of incremental improvements? • How durable is your product?

Don’t hire, be, or operate as a “Sandy”


Revenue Architecture

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A startup’s revenue architecture is defined by its business model and its ability to secure awareness, engagement, sustained usage, and ultimately convert that into monetization. When a startup reaches a Minimum Viable Product (MVP), it has validated a set of value propositions, but it will likely still be experimenting with business models, programs, and processes that generate awareness/interest and convert into engagement and/or revenue.

For B2C (or B2B2C) startups, this normally translates into testing techniques that: 1. Optimize Lifetime Value (LTV), Cost of Cancellations (COC), and Customer Acquisition Cost (CAC) ratios (including organic as well as paid

acquisition); 2. Create efficient supply side acquisition in the case of marketplaces; 3. Experiment with margin on transaction fees, subscriptions, etc., building towards positive unit economics and contribution margins; 4. Increase engagement of Monthly Active Users (MAU) and Daily Active Users (DAU); and 5. Build repeatable and scalable geographical or market segment roll-out strategies for multiple consumer marketplaces and services.

For B2B, revenue architecture involves strategies to lower Customer Acquisition Costs (CAC) and Cost of Cancellations (COC), identify up-sell opportunities, increase usage rates, and optimize Top of the Funnel (TOTF), Middle of the Funnel (MOTF), and Bottom of the Funnel (BOTF) conversion rates.

Do you have a way to not just create but deliver your product?


Key Metrics & Terminology

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• Lifetime Value (LTV): • Lifetime value is the present value of the future net profit from the customer over the duration of the relationship. It helps determine the long-term value of the

customer and how much net value you generate per customer after accounting for customer acquisition costs (CAC).

• Cost of Cancellation (COC): • COC= ((CAC/MRR)*c, where c = cancellation %). The COC especially can be a slap in the face to folks as to how much revenue they need to make up in MRR to

simply break-even for churn at the end of the day. • For example: “If your cancellation rate is 2%/mo (c=0.02), and your marketing pay-back period is 6 months (p=6) — typical for a healthy SaaS business — then

12% of your revenue every month will be spent just keeping revenues”

• Customer Acquisition Cost (CAC) • Customer acquisition cost or CAC should be the full cost of acquiring users, stated on a per user basis.

• Quick Ratio: there are four numbers that go into calculating your SaaS Quick Ratio: • New MRR—how much new revenue you’ve added in your time window. • Expansion MRR—the amount of existing revenue that has expanded, through upsells or upgrades, in your time window. • Churned MRR—revenue lost from customers abandoning your product in your time window. • Contraction MRR—revenue lost from downgrading customers in your time window

• Here is a rough rule of thumb to go by: • Quick Ratio < 1: You’re dead. You could sustain a Quick Ratio of less than 1 for a month or two if you already have a good customer base, but anything

longer and your churn is going to kill your company. • 1 < Quick Ratio < 4: You’re growing, and the growth might look good, but you are making it more difficult for yourself as you have to constantly keep up

high levels of customer acquisition to replace lost revenues. You will grow, but slowly, and less efficiently. • Quick Ratio > 4: You’re growing at a good rate, and doing it efficiently. Hamid won’t invest in a SaaS company with a Quick Ratio below 4. This means that a

SaaS company has to be adding $4 of revenue for every $1 it’s losing for investors to even start looking favorably upon it

http://www.insightsquared.com/2015/02/quick-ratio-saas-revenue-growth/


Customer Architecture (Market)

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A startup’s customer architecture is defined by the customer persona’s it needs to target to successfully monetize the business. It is closely tied to Revenue Architecture, but I call it out here as it is so critical to understand. Startups are all to often confronted with the challenge in identifying the appropriate target customers and specific customer personas.

For startups, this translates into: 1. Identifying and understanding the target vertical to attack 2. The buyer, partner, and user persona’s 3. Understanding if there are two immediate customers (marketplace) 4. Determining whether the product is targeted towards developers vs. analysts, SaaS startups vs. Enterprise, or a combination

thereof 5. Determining the Revenue Architecture aligned with each persona / market 6. Building a team and culture to focus relentlessly on the customer…but it doesn’t mean the customer is always right!!!

Are you starting with a big share of a small market?


Team Architecture (People)

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Early stage startups often have small product-oriented teams and have not yet hired a complete management team or other personnel they need to scale the company. Competition for A-level employees is fierce, further compromising a startup’s ability to scale. Many times, the wrong people are hired for the wrong role or early team members are unable to scale with the startup. Other times, the founding team may pull together a good core management team, but they lack a comprehensive strategy to address the extended team of the board of directors, customer advisory board, products council, employee advisory group, etc.

Key questions to ask yourself as you build out your team: • Do you have the right mentors (people surrounding you) to build out your company? • How do you get a group of people to work together to common goals? • How do you give people the right amount of responsibility? • How do you make sure the job gets done? • How do you do all this with respect for others? • Do you have a culture of excellence? • Do you hire A players or do you fear others being smarter than yourself? • Have you personally experienced the pain you’re trying to solve?


Characteristics of Top Performers

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• Authentic • Humble • Intelligent • Curious • Intense • Ethical / honesty / integrity • Inspirational • Resilient • Empathetic • Tenacious / Relentless


Systems Architecture

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The systems and processes of a startup can either help it accelerate growth or hold it back. These systems and processes must integrate both front and back offices, establish transparent performance metrics, and cultivate the progressive cultures needed to succeed. Many early stage startups are using only Excel and maybe QuickBooks for accounting, Act or the like for CRM, maybe Wix or a simple eCommerce platform for the web, and perhaps ZenDesk for support. By the time they reach MVT, they need to be on far more sophisticated platforms using much more refined business processes. In addition to operational systems, startups must ensure they have a well-designed development stack. Very real make/break choices are often made with respect to the engineering management infrastructure that can negatively impact margins and prevent the company from scaling later on.

Key questions to ask yourself: • Do you have the right metrics in place from the beginning while not become paralyzed by the data? • Do you have a single metric which everyone in the company understands is the most important metric to monitor the performance of the

organizations? • Do you have technical debt or are you incurring technical debt that will become a problem? • Can you quickly efficiently and effectively present your company data to investors, advisors, and most importantly yourself? • Are you managing through Excel and your own macro hell or do you have something that others can follow? • Are you disciplined?


Timing

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Entrepreneurs often forget to understand their customers and their market well enough as to whether now is the right time to do the business / solve the problem they’re addressing. More specifically: • Is the idea too early and the world’s not ready for it? (Larry Ellison and the Network Computer) • Is the idea early and you need to educate the market / customers as to the value? (What will that cost you?) • Is it too late and their are already too many competitors? • Is it late, but the competitors suck?

“The number one thing was timing. Timing accounted for 42 percent of the difference between success and failure. Team and execution came in second, and the idea, the differentiability of the idea, the uniqueness of the idea, that actually came in third.” —Bill Gross, Ted 2015, “The single biggest reason why startups succeed"

Key questions to ask yourself: • Are you prepared / what about your own mental and monetary timing? • Are you experienced enough in the problem that you’re solving and addressing / have you felt the pain? • What does the customer discovery tell you? • Do you have enough reserves to pivot / change course if the timing and solution you are going after doesn’t succeed? And, if not, adjust

your burn, course correct…figure it out!


Never A Better Time

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• We are in a digital period during which many of the basics work / life through which we have previously interacted “mechanically” is being digitized (i.e., printed photos to digital, manufactured parts to digitally printed, genetics)

• Digitization of industries = exponential advances

• But…we don’t notice at first, because doubling of small numbers produces tiny changes • Kodak’s first digital camera had 0.01 megapixels doubling to 0.02, 0.02 to 0.04, 0.04 to 0.08 (effectively zero) • Once these doublings break the whole-number barrier (become 1, 2, 4, 8, etc.), they are only twenty doublings away

from a millionfold improvement, and only thirty doublings away from a billion-fold improvement.

=Exponential Growth and Disruption

Reference: Diamandis, Peter H.; Kotler, Steven (2015-02-03). Bold: How to Go Big, Create Wealth and Impact the World. Simon & Schuster.


The World We Live In: Exponentials

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Are These Next?Quantum Computing

D-Wave Systems

Nano BioTechnology / DNA-based computing

Ray Kurzweil: “The Law of Accelerating Returns”, according to which the rate of change in a wide variety of evolutionary systems tends to increase exponentially.


Closing Thoughts

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• Go big…you’re going to spend the same effort and sleepless nights solving a big problem as you are a smaller problem

• Don’t do it for the money…do it because you passionately believe in solving the problem and having an impact

• Don’t feel that you need to move to Silicon Valley…it’s a bubble and you’ll waste a lot of money “keeping up with the Jones’s”

• Read, listen, research, repeat

• Don’t network…build relationships…ask people what you can do to help them and the rest will come…karma

• Never ever quit!

• Lead, follow, or get the hell out of the way…

• Do it better than the next person…work harder than the next person

• Learn to deliver bad / hard / tough news well…most people suck at it and it’s a critical skill that is lacking across all industries

• You’re only good as your last at bat

• Pay it forward

• There are a lot of people that work a lot harder and get a lot less and a lot of people that work a lot less and get a lot more…life isn’t fair and be thankful for what you have and the opportunity you’ve been given


You will tell them yes!

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“All your life you are told the things you cannot do. All your life they will say you’re not good enough or strong enough or talented enough. They’ll say you’re the wrong height or the wrong weight or the wrong type to play this or be this or achieve this. THEY WILL TELL YOU NO. A thousand times NO until all the NO’s become meaningless. All your life they will tell you NO, quite firmly and very quickly. They will tell you NO and YOU WILL TELL THEM YES.”

—Nike


Contact Information

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• Matt Abrams • [email protected] / [email protected] • +1.503.568.9339 (Mobile) • +1.541.255.1516 (Google Voice)

mailto:[email protected]

mailto:[email protected]


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a vc view on startups - matt abrams

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