Posts Tagged ‘start ups’

What Investors Expect in Milestones

By Eleanor Haas

A company’s milestones are turning points in a company’s development that mark stages of growth and wash out a measure of the risk of failure.  Investor criteria for these are excellent metrics for shareholder value.  Investors think about six major milestones for an emerging  B-to-B technology company –  they look for this road map:

  1. Product Market Fit

You know it’s happening when your non- or little-paying beta customers stay with you and tell their colleagues about you. Retention above 90 percent.  High word-of-mouth growth.  It’s proof you’ve met a need – at least for the moment – but you’re far from home free.  You can lose product market fit at any time.  Customers discover alternatives you had overlooked, your performance slips or something new and better pops up – and you’re back to Square 1.

  1. Paying Customers

Once you get, say, five customers to make the leap from free or token payment to paid, you know you’ve started creating value for your business as well as your customers.  You won’t have much market penetration, and that’s your next goal.  If you could get five, you can get 50!  Sell-sell-sell!

  1. Statistical Viability

The next bottom-up goal is sufficient recurring revenue to achieve something like an annual run rate of $1 million – i.e., $83,000 per month.  For this, you’ll need solid pricing and market segment data to achieve a reasonably accurate estimate of market size – plus the marketing, sales, customer support and technology to make it happen.

What’s the return per customer?  How many customers do you need per month?  Per day?  Are there enough customers in your segment for you to land that many?  Do you have a market segment than can support your pricing?  No?  Then, what segment should you target?  What would it take to hit the run rate in a year?

  1. Cash Flow Positive

When:  12-18 months from startup for a technology business

Net income is still negative but your cash balance seems to keep pace with expenses.  This is a major coup – proof of economic viability and an investor requirement for further investment.  It’s a precarious time because the balance shifts dynamically.  You have to keep selling, closing deals making deposits, with just enough of a cash cushion for protection when the balance shifts downward.  Profitability still lies in the future

  1. Capital-Efficient Growth

Once you’re generating $3 million to $6 million in revenue and see that you can sustain positive cash flow, you know you’ve reached capital efficiency.  Investors like this a lot because they can expect you to generate $1 million in recurring revenue for every $1 million they invest.  Of course, your growth still depends on outside capital.

You may well  choose to stay at this stage for a long time – selling equity for cash in order to grow aggressively In a competitive market, you could do this through $100 million in revenue or even more.

  1. Profitable

When: typically, 3-5 years from startup for a growth business

Nirvana!  Net income at long last is positive.  Cash balance keeps growing.  Revenue from existing clients is sufficient to maintain it.  The net income is from new business, and it frees you from needing either investment or loans.  Right on!

 

Are There Too Many Startups?

That was a question put to Albert Wenger, Managing Partner at Union Square Ventures (USV), after his remarks last week at the BMW I Born Electric event.  Might this be a fad – like doing a band in the 70s? No, no and no, says Wenger.  We’re at the beginning of a transformation as big as the one from agriculture to industrial, he explained.  We need a lot of experimentation.  Even failures have social benefits in terms of the experience gained in taking risks, making decisions, etc.  This can benefit both large and small companies.

And today’s startups have a higher potential for life expectancy.  A lot of historical investing was binary, win-lose.  Now a small team with low capital expenditures can keep on going even if the business is not really hitting.

A significant outcome of seeing startups from the long-term perspective of sweeping transformation is USV’s “thesis-driven investing” – putting more emphasis on the principles of large-scale change than on traditional investing criteria, like market size, competitive situation, etc. No. 1 among these principles is the insight that networks will replace old hierarchies, with the unbundling of traditional services – single purpose services replacing all-in-one traditional newspapers, for example.  Classified ads went to Craig’s List.  Commentary went to blogs.  Breaking news went to Twitter.  People can find the other pieces just one click away, with no need for a single source.  All the companies in USVs investment portfolio exemplify this – among them, Lending Club, Pollenware and Edmodo, two in finance, one in education.  But no sector will escape.  Healthcare and government are just down the line..

In transportation, Wenger sees cars doing three things:  delivering transportation on demand, self-expression and fun and alone time.  Transportation, in turn, can mean delivering my body from point to point or solving an information problem.  Startups like Buzz Car and GetAround are examples of early peer networks that make it unnecessary to control your own car or where it goes.  Online shopping and delivery services can replace the need to get information by going to the grocery store.

Of course, as one audience member commented, industries under siege go to the government for help.  The hotel industry is opposing Airnb’s travel guides to staying in people’s apartments with regulations against renting out spare rooms.  The Taxi & Limousine Commission got a cease-and-desist against Uber, NYC’s on-demand car service. So then we have the inaugural peer network summit in San Francisco.  The battle is engaged:  yesterday vs. tomorrow!

First cousin to the notion of too many startups is the meme that social media are all frivolous.  But social is also becoming the enabling glue for how ideas are shared and funded. Hierarchical research journals and funding processes (NIH) are beginning to lose ground to innovations like Mendeley, a peer-network blog for sharing scientific research, and Kickstarter and others, which are extending their scope to research.  A huge flowering of research can be expected as a result.