Action Today for CFO’s

Jeff Epstein is on the board of Shutterstock, Twilio, Kaiser Permanente, and was the CFO of Oracle, DoubleClick, Nielsen and King World and is an operating partner at Bessemer Venture Partners. He teaches the Lean LaunchPad class at Stanford with me. And the minute he talks about financing I shut up and take notes.

He sent this message to the CFOs of his companies yesterday.
(Read it along with yesterdays survival strategy advice to CEOs.)

I thought it was important enough to share it with all of you.


Action This Day
Our first priority is the health and safety of our families, employees, customers and communities.

As CFOs, our next key priority is preserving cash.

For immediate action:
1. Evaluate your liquidity and likely cash out date under your worst-case scenario.
2. Objective: minimum of 18 months of cash. 24 months is better.

If you have more than 24 months, congratulations.

If not, take action now.

  1. Draw down all debt commitments. It’s like buying insurance. There’s a cost, but it’s worth it if things get worse. Ask existing and new lenders for additional funding.
  2. Make a list of all vendors, by $ spend amount. Call all large vendors and ask for lower prices. If appropriate, offer to sign a longer agreement in exchange for lower cash payments in 2020 and 2021.
  3. Review all marketing programs. Cut marketing by x%.
  4. Payroll costs are probably your largest cost item. If necessary, you may need to take action. Choices include:
    • Hiring freeze
    • Layoffs.
    • Cut all salaries by 20%. Cut CXO salaries by 30%. Award equity to employees equal to the value of their reduced salaries.
  5. Some of your customers will delay paying you; some will default. Credit card customers will dispute charges leading to chargebacks to you. Monitor collections and chargebacks frequently. Develop a playbook for mitigation.
  6. If you own bonds or other investments, review them for risk. Some companies, and perhaps some governments, may default.
  7. Because events are changing so quickly, have your CEO consider sending a short weekly email to your Board with any updates.
  8. Call if you’d like a sounding board to discuss the decisions you’re considering.

Most of all, stay safe.

Jeff

The Virus Survival Strategy For Your Startup

“Winter is coming.”

This is the one blog post that I hope I’m completely wrong about.

With the Covid-19 virus a worldwide pandemic, if you’re leading any startup or small business, you have to be asking yourself, “What’s Plan B? And what’s in my lifeboat?”

Here are a few thoughts about operating in uncertainty in a pandemic.


Impact
Social isolation and a declared national emergency have had an immediate impact on industries that cluster people; conferences, trade shows, airlines/cruise ships and all types of travel, the hospitability industry, sporting events, theater and movies, restaurants and schools. Large companies are sending employees to work at home. Large retail chains are shutting down their stores. While the impact on small businesses and workers in the “gig-economy” hasn’t made the news, it will be worse for them. They have fewer cash reserves and less margin of error for managing sudden downturns. The ripple and feedback effect of all of these closures will have a major impact on our economy, as each industry that gets impacted puts people out of work, and those laid off workers don’t buy products and services.

It’s no longer business as usual for the rest of the economy. In fact, shutting down the economy for a pandemic has never happened. Millions of jobs may be lost in the next few months, as entire industries get devastated, something not seen since the Great Depression of 1929-39. I hope that I’m very wrong, but the impact of this virus social and economic effects are likely to be profound, and will change how we shop, travel and work for years.

If you’re running a startup or small business, your first priority (after your family) is keeping your employees and customers safe. But next the question is, ‘What happens to my business?”

The questions every startup or small business CEO needs to ask now are:

  • What’s my Burn Rate and Runway?
  • What does your new business model look like?
  • Is this a three-month, one-year or a three-year problem?
  • What will my investors do?

Burn Rate and Runway
To answer the first question, take stock of your current gross burn rate i.e. how much cash are you spending each month. How much are fixed expenses (those you can’t change, i.e. rent?) And how much are variable expenses (salaries, consultants, commission, travel, AWS/Azure charges, supplies, etc.?)

Next, take a look at your actual revenue each month – not forecast, but real revenue coming in each month. If you’re an early stage company, that number may be zero.

Subtract your monthly gross burn rate from your monthly revenue to get your net burn rate. If you’re making more money than you’re spending, you have positive cash flow. If you’re a startup and have less revenue than your expenses, that number is negative and represents the amount of money your company loses (“burns”) each month. Now take a look at your bank account. See how many months your company can survive burning that amount of cash each month. This is your runway –  the amount of time your company has before it runs out of money. This math works in a normal market…

The World Turned Upside Down
Unfortunately, it’s no longer a normal market.

  • All your assumptions about customers, sales cycle and most importantly, revenue, burn rate and runway are no longer true.
  • If you’re a startup, you’ve likely calculated your runway to last until you raise your next round of funding. Assuming there was going to be a next round. That may be no longer true.

What does my business model look like now?
Since the world today is no longer the same as it was a month ago, and likely will be worse a month from now, if your business model today looks the same as it did at the beginning of the month, you’re in denial – and possibly out of business.

It’s the nature of startup CEOs to be optimistic, however you need to quickly test your assumptions about customers and revenue. If you are selling to businesses (a B-to-B market) have your customers’ sales dropped? Are your customers closing for the next few weeks? Laying off people? If so, whatever revenue forecast and sales cycle estimates you had are no longer valid. If you’re selling directly to consumers (a B-to-C market,) were you in a multi-sided market (consumers use the product, but others pay you for their eyeballs/data?) Are those assumptions about payers still correct? How do you know?

What are the new financial metrics? Receivables – get on top of them. Days of cash left?

You need to figure out your actual burn rate and runway in this new environment now.

Is this a three-month, one-year, or a three-year problem?
Next, you need to take a deep breath and ask, Is this a three-month problem, a one-year problem or a three-year problem? Are the shutdowns of businesses going to be a temporary blip in the economy or will they drive the U.S. and Europe into a long recession?

If it’s just three-months, (looking more unlikely by the day) then an immediate freeze on variable spending (hires, marketing, travel, etc.) is in order. But if the effects are going to reverberate in the economy longer, you need to start reconfiguring your business. You need a lifeboat strategy. That’s a fancy phrase for figuring out what are minimal things you need to keep your company alive and what to leave behind.

A one-year problem means taking a knife to your burn rate (layoffs and elimination of perks and programs to reduce your variable expenses,) renegotiating what previously seemed liked fixed expenses (rent, equipment lease payments, etc.) and putting only the essential elements for survival in the lifeboat.

[Update: Read the detailed financial advice to CFO’s here.]

If you were selling online versus in-person, you may have an advantage (assuming your customers are still there.) Or you change sales strategy.

Whatever your product/market fit was last month it’s no longer true and needs to change to meet the new normal. Does this open new value propositions or kill others? Alter the product?

And if it’s a three-year problem? Then not only do you need to jettison everything that isn’t essential for survival, it probably requires a new business model. In the short term, explore if some part of your business model can be oriented around the new rules of social isolation. Can your product be sold, delivered or produced online? Does it have some benefits if delivered that way? (See the advice from Sequoia Capital here.) If not, can your product/service be positioned as a lifeboat for others to ride out the downturn?

Leadership – Plan, Communicate and Act with Compassion
Revise your sales revenue goals, product timelines and create a new business model and operating plan – and communicate them clearly to your investors and then to your employees. Keep people focused on an achievable plan that they clearly understand. From the perspective of having lived through the last three crashes, I’ve observed the biggest mistake CEO’s made was not making draconian cuts to expenses quickly enough. They dripped out layoffs and cuts holding on to favored projects with magical thinking that somehow this was just something that would pass.  You need to act now.

If you’re in a large company considering layoffs, the first option should be to cut the salaries of the higher paid exec/employees to try to keep the people who can least afford it, employed. (Good things will come to CEOs who first try to save everyone on the ship before they jump in the lifeboat.) If/when people need to be laid off, do it with compassion. Offer extra compensation. If in the worst case you see you’re running out of cash, under no circumstances run it down to zero. Do the right thing and have enough cash on hand to offer everyone at least two weeks or more of pay.

Your Investors
One of the key elements of survival is access to capital. As a startup or small business you should realize your investors are also asking themselves how this pandemic will affect their business model. The cold hard truth is that in a crash VC’s are running their own “What do I save in the lifeboat?” exercise. They triage their deals –  first worrying about liquidity of their late stage deals which have the highest valuations. These startups typically have very high burn rates and funding for those could fall off a cliff. You and the survival of your startup may no longer be their priority and your interests are no longer aligned. (VC’s who tell you otherwise are either naïve, lying through their teeth, or not serving the interests of their investors.) In every major downturn inflated valuations disappear and the few VC’s still writing new checks find it’s a buyer’s market. (Hence the term “Vulture Capitalists.”)

Some investors have only lived in a booming market when valuations only went up and investment capital was plentiful. But investors with grey hair can remember the nuclear winter after the past recessions of 2000 and 2008 and can offer some historical patterns of crashes and recovery to CEOs running early stage startups – some who weren’t born when the crash of 1987 hit, were 10 years old in the crash of 2000 and 18 in the last crash of 2008. Keep in mind, that today’s circumstances are different. This isn’t a bear stock market. This is a conscious shutdown of most of our economy, trading jobs for saving hundreds of thousands of lives, that’s causing a bear market and a likely recession.

Data from the last large crash in 2008 had seed rounds recovering early, but later stage funding cratered and took years to recover. (see the figure below showing quarterly VC investments before and after this crash – part of this post from Tomasz Tunguz.)

This time around, the health of the venture business may depend on what hedge funds, investment banks, private equity firms, sovereign wealth funds, and large secondary market groups do. If they pull back, there will be a liquidity crunch for later stage startups (Series B, C…). For all startups in the short term, the deal terms and valuations will get worse, and there will be fewer investors looking at your deal.

As a startup CEO you need to know if your board is going to be screaming at you for not radically cutting burn rate and coming up with a new business model or, will they be yelling at you to stop being distracted and stay the course?

And if the latter, I’d want to know what skin in the game they have, if they’re wrong. It’s pretty easy for VC’s to tell you that they’ll be right behind you when you’ll need a next round, until they’re not. Unless your investors are matching their orders for “full speed ahead” with a deposit into your bank, now is not the time to be railroaded into a burn rate that is unrecoverable.

Prepare for a long cold winter.

But remember no winter lasts forever and in it smart founders and VCs will be planting the seeds for the next generation of startups.

Lessons Learned

  • This is a conscious shutdown of our economy, trading jobs for saving hundreds of thousands of lives
  • It’s likely going to cause a recession
  • The Covid-19 virus will change how we shop, travel and work for at least a year and likely three
  • It’s inconceivable that you can have the same business model today as you did 30-days ago
  • Put in place lifeboat plans for three-month, one- year and three year downturns
  • Recognize that your investors will act in their interests, which may no longer be yours
  • Take action now
  • But act with compassion

You’re Not Important to Me but I Want To Meet With You

If you’re a busy startup founder, you’re likely delegating the task of scheduling key meetings about things you want/need to your admin. This is a mistake.

That’s because the dialog you have in setting up the meeting is actually the first part of your meeting, not some clerical task. Treat it this way and you’re much more likely to achieve the objective you’re hoping to. Here’s why:


A few weeks ago I got an email from a VC friend asking me to talk to a founder at one of his startups. The founder had sent him a note, “We’d love to partner with Steve on getting his frameworks and templates from his books – The Four Steps and The Startup Owner’s Manual – onto our product. Can you connect us to him?”

I told the VC, of course, and sent an email to the founder suggesting a couple of dates.

In response I got an email from him telling me how busy he was, but his admin would coordinate some dates for us…

If this doesn’t strike you as a red flag of a relationship that was broken before it started, and an opportunity wasted, let me point out what went wrong.

Who’s Doing the Ask?
Outside of a company there are two types of meetings; 1) When you want something from someone, 2) When they need something from you.  This meeting fell into the second category – a founder wanted something from me and wanted my time to convince me to give it to him. Turning the scheduling over to an admin might seem like an efficient move, but it isn’t.

What Message Are You Sending?
A startup CEO handing me off to an admin sent a few signals.

First, that whatever his ask was really wasn’t that urgent or important to him. Second, that he didn’t think there was any value in forming a relationship before we met.  And finally, that he hadn’t figured out that gathering data in premeeting dialog could help him achieve his objective.

Instead, skipping the one-on-one dialog of personally setting up the meeting signaled to me that our meeting was simply going to be a transactional ask that wasn’t worth any upfront investment of his time.

Why, then, would meeting be worth my time?

What Gets Missed
When I was in startup, I treated every pre-meeting email/phone call as an opportunity for customer discovery. If I wanted something from someone – an order, financing, partnership, etc., I worked hard to do my homework and prepare for the meeting.  And that preparation went beyond just finding mutually agreeable meeting times.

 Early on in my career I realized that I could I learn lots of information from the premeeting dialog. That initial email dialog formed the basis of opening the conversation and establishing a minimum of social connectivitywhen we did meet.

I always managed to interject a casual set of questions when I was setting up a meeting. “What type of food do you like? Do you have a favorite restaurant/location?” If they were going be out of town for a while, ask if are they traveling on vacation? If so, ask “where?” And talk about the vacation.  And most importantly, it allowed me to confirm the agenda, “I’d like to talk about what our company is up to…” and telegraph some or all of the ask, “and what to see if I can get ….” Sometimes this back and forth allowed both of us to skip the meeting completely and I got what I wanted with a simple email ask. Other times it laid the foundation for an ongoing business relationship.

The key difference with this approach is in understanding that the dialog in setting up the meeting is actually the first part of your meeting.

Of course, in a company with 1,000s of people, it’s possible that the CEO is too busy to get on email or to call someone whose time he wants for every meeting. However, CEOs of major corporations who are winners will get on the phone or send a personal email when there’s something that they want to make happen.

Lessons Learned

  • The dialog in setting up the meeting is actually the first part of your meeting
  • Don’t miss the opportunity
  • If you want something from someone, don’t outsource scheduling your meeting

How to Raise Money – It’s a Journey Not An Event

Every year I teach classrooms full of students who leave class understanding the basics of how to search for product/market fit—and thinking their next goal is to “get funded.”

That’s a mistake.

There are two reasons to raise money:

  1. You have a killer idea that is only partially validated, that you think can get to $50M+ of revenue in 5 years with 80%+ gross margins (if margins are lower, you need a lot more revenue)and you need money to get to product-market fit, or
  2. You (think) you have product-market fit with real customers and real revenue and need money to grow and expand.

Not all startups need outside investment to grow.

What most founders don’t realize is:

  • Every stage of a startup requires a different set of metrics and milestones and founder skills. Knowing these will help a founder position her pitch to get investors’ attention.
  • Founders need to keep their eye on the prize — not just the next funding round

Luckily, I teach with two great VCs, Mar Hershenson of Pear Ventures and Jeff Epstein of Bessemer Venture Partners who both put together presentations unraveling the mysteries of how and why startups raise money. Jeff’s presentation is from the point of a view of “What Investors Want” (see resources here) while Mar’s takes it from a founder trying to figure out the funding landscape. And thanks to Ann Miura-Ko of Floodgate (my first Lean LaunchPad co-instructor) for her suggestions.

Keep in mind that there is no “one way” to raise money Different investors will almost certainly have different models, and different regions may have different math. Still, there are some benchmarks to keep in mind.

Here’s the first 2½ years of a startup journey.


The Startup Investment Landscape

For startups the early stage funding landscape looks like this:

  • Step 1: The Pre-seed round – you raise $500K-$2.5M
  • Step 2: The Seed round – you raise $2.5-$7.5M
  • Step 3: The Series A – you raise $7.5-$25M
  • Step 4: Series B – you raise $15-$65M
  • Step 5: Series, C, D….

(Btw, the definition of each startup financing stage has changed in the last decade.  What was a Series A round in 2005 is now a pre-seed or seed round. And what used to be a seed round a decade ago is now a pre-seed round. Lots of reasons for this shift, but it basically boils down to there’s a lot more money that wants to invest in startups, and all of it is racing to get in early.)

This is a journey that can be planned and measured. In a pre-seed round you are focused on building minimal viable products, testing your insights and searching for product/market fit.  In the seed round you have an early product and by the end you’ve found product/market fit and understand the scale of what you’re building and the levers that you can pull to accelerate growth. For a Series A round you want to prove you have built a repeatable and scalable sales/revenue model and understand all parts of the business model. Series B is about proving your net revenue model (can you be profitable?). Series C onwards funds growing your company to $100M in gross profit.

(At the end of this post, we’ll discuss the valuation at each step (how much the investors value your company and therefore how much of it you need to give up to get this money) and how much revenue you should generate at each step.)

Pitch
By the way, If your pitch is not going to knock investors’ socks off, if you cannot communicate a big vision and a unique insight about the 10x advantages which customers and users will care deeply about, then even if you build out the smartest, most thoughtful process of chasing fundraising, you will fail.

Team, Product, Traction, Business Model and Market
In each step of funding there are five questions you (and potential investors) will be asking: Tell me about your team, your product, your traction, your business model and the market.

Team is just what it sounds like. Tell me why you’re the right person to lead this company (bad answer “Because it’s my idea.” Better answer, “Because I’m the customer.”) Tell me about the group of people you’ve surrounded yourself with – your cofounders and then your key executives. Each stage of funding and company growth requires additional expertise and new skills, and you’ll want to demonstrate that you have these with potential investors.

Product (sometimes called the “value proposition”) is the product or service you’re building. One of the tough things for a startup is to figure out how much of the “product” has to be real and working at each stage of funding.

Traction is a fancy investor word for “Show me you’re making progress.” It’s sometimes called “product/market fit.” In a startup’s early days – pre-seed and seed – this is not about how much revenue you’ve made but more about how much customer passion your product is creating and how many more are loving it each week/month.  (Read Ann Miura-Ko’s article on product/market fit here.)

Business Model
Founders tend to fixate on the product. Now that product/market fit is part of the lexicon most understand that the product also needs passionate customers. But great product and eager customers are just part of what makes a great business. The rest that makes up a company is called its business model. These elements of the business model– revenue (pricing, pricing strategy), distribution channel, How to Get/Keep/Grow customers, Key Activities, Resources and Costs – are other, critical parts your start up needs to understand and have in place.

Market is a euphemism for “How big can your company grow?” Investors want to put their money to work in a startup that can be worth billions or tens of billions of dollars. What are your unique insights about technology, economics, change in market, etc. What evidence do you have that you can grow this big? How will you do it?

The big idea about all of this is that at each step of funding, the order and priority of team, product, traction and market changes.

Pre-seed Round of Funding
In the pre-seed stage, a startup is searching for product/market fit. There are no customers and no product, just a series of minimal viable products.

Funding:  Startups typically raise anywhere from $500K to $2,500,000 in pre-seed. At the low-end this might come from friends, family or angel investors. At the high-end pre-seed angel funds might invest. (Yes, there are venture funds that look for and invest in startups this early.)

  • Team: As you’re raising money from friends, family or angels, investors in this round are betting mostly about you and your team. Have you or your team members achieved anything important in the past? Any wins to date in your startup? Do you have co-founders who complement your skills? (Warning signs are “We were in the dorm together” or “It’s my team from the class I took.”)
  • Traction: Tell investors about your search for product/market fit and what you’ve learned from potential customers to date. Show them the evolution of your minimal viable product and its current state. You need to begin to “instrument” your customer acquisition process with analytics.

(Product/market fit means that you’ve found the match between your potential customers’ pains, gains and jobs to be done and the features of your minimal viable product. I.e. your product fits the needs of your target customers.)

  • Product: At this stage you are building a series of low-fidelity products (sometimes called a minimal viable product or MVP.) It might be a wire-frame, PowerPoint demo or prototype. The goal of the product at this stage is not a sale, but to test hypotheses about customer product/market fit. (Along with the MVP you share your three-year product vision to see if your product vision engages a passionate customer response.
  • Market: Tell us why this is going to be a huge market. Even better, start with a unique insight – what have people missed, what’s changed, what’s now possible? (Warning signs are, “No one has thought of this/is doing this/we have the exclusive patents.”)
  • Business Model: List all the parts of your business model. What are your assumptions about each part? What is some of the critical metrics that matter? Number of customers? Revenue per customer? Number of employees? Revenue, Gross Margin? Expenses? How do you plan to test them.

Goal/Time: By the end of the pre-seed stage the company ought to have evidence that it has found product/market fit. You should be thinking about an end-to-end pipeline of how to Get/Keep/Grow customers. This pre-seed stage typically takes 6-12 months.

Pre-Seed Round Paperwork: Smart investors will typically give you minimal paperwork – either a convertible note or a SAFE (Simple Agreement for Future Equity) or a KISS (Keep It Simple Securities).

Seed Round of Funding
By the end of the pre-seed stage (about a year into your startup), your startup has evidence that they’ve found product/market fit. (One sign is that you are no longer changing your website/sales PowerPoint/product/app every time you need to acquire a customer.) Now it’s time to raise money to acquire paying customers.

Funding:  Startups typically raise anywhere from $1.5 million– $7.5 million in a seed round. At the low-end this might come from angel investors and pre-seed funds. At the high-end, funds specializing in Seed rounds and Series A funds might invest.

  • Traction: For a seed round investors want to focus on traction. You need to provide proof that customers love and can’t live without your product. This means you have evidence that you’ve found product/market fit and have fanatic customers who are reference accounts. You’ve built detailed analytics tracking into your product and you should be seeing organic and viral growth; and can provide Daily/Weekly/Monthly Active Users, 30d/90d/120d retention. Retention and low attrition are good signs of customer validation.

(Note that each market – web/SAAS/physical products – and channel – online/direct sales –  has different metrics and a different funnel steps.)For example, this should translate to revenue ~$0-200K/Annual Recurring Revenue with a clear plan to reach $1.5M-2M in 18 months. The goal is to iterate on building a repeatable engine for growth that makes the economics work. This is different than focusing solely on the gross revenue number.

(Your ARR and revenue milestones will depend on what business you’re in.  For example, not all revenue is recurring and even in a subscription model for a consumer goods company, your recurring revenue will not be valued the same as if you’re selling enterprise software and operating costs are so vastly different.  As an example, $1 of revenue for a direct to consumer company is worth ~$1 in valuation at scale (Zappos was sold for $1B when they had $1B in sales).  On the other hand, in a SaaS business $1 in recurring annual revenue equals ~10x in valuation.)

  • Product: At this stage you have a high-fidelity product, one that earlyvangelists (early passionate customers) can use and pay for. Enough of the product is demonstrable enough that you can gauge customers’ price sensitivity, depth of engagement, etc. The three-year product roadmap gets earlyvangelists engaged.
  • Team: Do you have a core team that can build the first product and get early sales? The culture needs to be hypothesis > experiment > data > insight > validate/invalidate/modify hypotheses.
  • Business Model: In seed you often discover that your business has more moving parts than you originally thought. You may be in a multi-sided market with other customer segments/partners that are critical to your business. You should be testing all parts of your business model; revenue models/pricing, resources, activities and partners.
  • Market: Tell us why the data validates that this is going to be a huge market. At first the founders do the first sale, then they prove your first salespeople can repeat that sale.

Goal/Time: By the end of the seed stage, the company ought to have evidence that repeatable sales can be made by the founding team.  This typically takes 12-18 months.

Seed Round Paperwork: While founders will still want minimal paperwork – either a convertible note or a SAFE or a KISS– professional investors at this round often want an equity round with a more formal set of documents for their investments. You’ll see a Term Sheet, Stock Purchase Agreement, Amended and Restated Certificate of Incorporation, Investors’ Rights Agreement, Right of First Refusal and Co-Sale Agreement and a Voting Agreement.

Series A Round of Funding
By the end of the seed stage–about 2½ years into your startup– your startup has a repeatable and scalable sales model and a provable case that there can be a multi-billion dollar valuation.

Funding:  Startups typically raise anywhere from $7.5 million – $25 million in a Series A round. This size round typically comes from a venture fund or a corporate VC.

  • Market: You need to convince investors that this is at least a $1B+ company.
  • Product: At this stage you have a fully-featured first version of the product needed to scale sales. And you are working to the three-year product vision, iterating and course correcting based on customer feedback.
  • Traction: For a Series A round investors want to focus on a repeatable and scalable sales model with efficient growth. That means you need metrics that prove you have it. Repeatable sales means if you hire an account exec, you know that they will close $1M Annual Recurring Revenue in a year. Or if you spend $100K in ad spend, you can get 100,000 new users.Startups raising an A round typically have $ ½M-$4M Annual Recurring Revenue. Note that the focus should not just be on growth month-to-month but also on efficient growth.

For example, other metrics include achieving net retention of 80-150%, getting a Lifetime Value/Customer Acquisition Cost ratio greater than 3, getting to two times Customer Acquisition Cost Payback Period in less than 18 Months. You should have a realistic plan to grow revenue 3-5x in 12 to 18 months.

These numbers differ dramatically for e-commerce versus consumer, versus SAAS, etc. You should know what the right success metrics are for your industry. (The best VC’s will actually tell you what metrics they are looking for.)

  • Team: The core product team is working efficiently and the sales team for scale is in place and 75% are meeting quota.
  • Business Model: By the end of Series A, all parts of the business model have been tested and they add up to a scalable, repeatable and profitable business.

Goal: By the end of the Series A, the company ought to prove that you’re a business not a hobby. You need to show > $5M in gross profit.  Just to put your journey in perspective, if you want to achieve Unicorn status or go public, you ultimately need to deliver $100 million annual gross profit in Years 6 – 8.

Series A Paperwork: You’ll be seeing a Term Sheet, Stock Purchase Agreement, Amended and Restated Certificate of Incorporation, Investors’ Rights Agreement, Right of First Refusal and Co-Sale Agreement and a Voting Agreement.

Revenue Growth
Some investors think of the ideal startup revenue growth with a shorthand of “triple, triple, double, double, double.”

Years 1-3: $0-$2M in revenue
Year 4: Triple the revenue to $2-$6M
Year 5: Triple the revenue again to $6-$18M
Year 6: Double the revenue to $12-$36M
Year 7: Double the revenue again to: $24-$72M
Year 8: Double the revenue again to: $48-$144M

Valuations
Fair or not, not all startups are equal in the eye of their potential investors. Some startups may be considered “hotter” than others and get much higher valuations. A hot startup may be even able to skip the pre-seed round and go directly to a seed round – meaning more money raised at a higher valuation. The criteria for a “hot” startup include:

  • The background of the founders
    • attended a top university i.e. Stanford, MIT, Harvard
    • had previous experience at a high-growth company, ie Facebook, Google, etc.
    • serial entrepreneur
  • A “hot” market
    • It depends on the month or year – is it AI? Big Data? AR/VR, Cyber, Robotics
  • Hype
    • Do you have a big investor leading the round?
    • Have you gone through Y-Combinator?
    • Are you famous?
  • Location
    • Silicon Valley
    • Other innovation clusters
  • FOMO
    • A startup with a huge vision and story can create FOMO (fear of missing out) in investors – one of the strongest forces for accelerating your fundraising process.
    • At the same time VCs worry about FOLS: Fear of looking stupid
    • FOMO> FOLS

Lessons Learned

  • Every stage of a startup requires a different set of metrics and milestones and founder skills.
  • Knowing what investors want at each stage provides founders with guideposts
  • Founders need to keep their eye on the prize not just the next funding round

Clayton Christensen

Say not in grief he is no more – but live in thankfulness that he was

If you’re reading my blog, odds are you know who Clayton Christensen was. He passed away this week and it was a loss to us all.

Everyone who writes about innovation stood on his shoulders.

His insights transformed the language and the practice of innovation.

Christensen changed the trajectory of my career and was the guide star for my work on innovation. I never got to say thank you.

Eye Opening
I remember the first time I read the Innovator’s Dilemma in 1997. Christensen, writing for a corporate audience, explained that there were two classes of products – sustaining and disruptive. His message was that existing companies are great at sustaining technologies and products but were ignoring the threat of disruption.

He explained that companies have a penchant for continually improving sustaining products by adding more features to solve existing customer problems, and while this maximized profit, it was a trap. Often, the sustaining product features exceed the needs of some segments and ignore the needs of others. The focus on sustaining products leaves an opening for new startups with “good enough” products (and willing to initially take lower profits) to enter underserved or unserved markets. These new entrants were the disruptors.

By targeting these overlooked segments, the new entrants could attract a broader base of customers, iterate rapidly, and adopt new improvements faster (because they have less invested infrastructure at risk). They eventually crossed a threshold where they were not only cheaper but also better or faster than the incumbent. And then they’d move upmarket into the incumbents’ markets. At that tipping point the legacy industry collapses. (See Kodak, Blockbuster, Nokia, etc.)

Christensen explained it wasn’t that existing companies didn’t see the new technologies/ products/ markets. They operated this way because their existing business models didn’t allow them to initially profit from those opportunities – so they ignored them – and continued to chase higher profitability in more-demanding segments.

Reading The Innovator’s Dilemma was a revelation. In essence, Christensen was explaining how disruptors with few resources could eat the lunch of incumbents. When I finished, I must have had 25 pages of notes. I had never read something so clear, and more importantly, so immediately applicable to what we were about to undertake.

We had just started an enterprise software company, Epiphany, and we were one of those disruptors. I remember looking at my notes and I realized I held a step-by-step playbook to run rings around incumbents. All I had to do is to exploit all the gaps and weaknesses that were inherent in incumbent companies.

We did.

Thank you, Clay for opening my eyes.

Inspiration
Christensen’s impact didn’t end there. For the last 20 years he inspired me to think differently about innovation and teaching.

Building better startups
After retiring I began to think about the nature of startup innovation and entrepreneurship. It dawned on me that the implicit assumption startups had operated under was that startups were simply smaller versions of large companies.  Over time, I realized that was wrong – large companies executed known business models, while startups searched for them.

I went back and reread the Innovator’s Dilemma and then a ton of the literature on corporate innovation. My goal was to figure out how to crack the code for startups like Christensen did for corporations. My first book The Four Steps to Epiphany was a pale shadow of his work, but it did the job. Customer Development became one of the three parts of the Lean Startup as Eric Ries and Alexander Osterwalder provided the other two components (Agile Engineering and the business model canvas.) Today, the pile of books on startup innovation and entrepreneurship likely equals the literature on corporate innovation.

Teaching a different kind of innovator
Unlike corporate executives, founders are closer to artists than executives – they see things others don’t, and they spend their careers passionately trying to bring that vision to life. That passion powers them through the inevitable ups and downs of success and failures. Therefore, for founders, entrepreneurship wasn’t a job, but a calling.

Understanding the students Clay was teaching gave me the confidence that we needed to do something different. The result was the Lean LaunchPad, I-Corps and Hacking for Defense — classes for a different type of student that emulated the startup experience.

Dropping the curtain on Innovation Theater
The next phase of my career was trying to understand why the tools we built for startups ended up as failing (i.e. Innovation Theater) in companies and government organizations, rather than creating actual innovation.

Here again I referred to Christensen’s work not only in the Innovators Dilemma, but the Innovators Solution. He had introduced the idea that customers don’t buy a product, rather than they hire it for a “job to be done.” And offered a set of heuristics for launching disruptive businesses.

I realized what he and other management thinkers had long figured out. That if you don’t engage the other parts of the organization in allowing innovation to occur, existing processes and procedures will strangle innovation in its crib. In the end companies and government agencies need an innovation doctrine – a shared body of beliefs of how innovation is practiced – and an innovation pipeline – an end to end process for delivery and deployment of innovation.

Thank you, Clay for all the inspiration to see further as an educator.

How to Measure your Life
For me, Clay’s most important lesson, one that put his life’s work in context, was his book How to Measure Your Life.

In it, Christensen reminded all of us to put the purpose of our lives front and center as we decide how to spend our time, talents, and energy. And in the end the measure of a life is not time. It’s the impact you make serving God, your family, community, and country. Your report-card is whether the world is a better place.

He touched all of us and made us better.

Thank you, Clay for reminding us what is important.

You left us way too early.

Getting Schooled – Lessons from an Adjunct

This post previously appeared in Poets and Quants

I’ve been an adjunct professor for nearly two decades. Here’s what I’ve learned.


Colleges and universities that offer entrepreneurs the opportunity to teach innovation and entrepreneurship classes may benefit from a more formal onboarding process.

The goal would be six-fold:

  1. Integrate adjuncts as partners with their entrepreneurship centers 
  2. Create repeatable and scalable processes for onboarding adjuncts
  3. Expose adjuncts to the breadth and depth of academic research in the field
  4. Expose faculty to current industry practices
  5. Create a stream of translational entrepreneurship literature for practitioners (founders and VC’s.) 
  6. Create fruitful and mutually beneficial relationships between traditional research faculty and adjunct faculty.

In my experience as both an adjunct and a guest speaker at a number of universities, I’ve observed the often-missed opportunity to build links between faculty research and practitioner experience. Entrepreneurial centers have recognized the benefits of both, but a more thoughtful effort to build stronger relationships between research and practice—and the faculty and adjuncts who are teaching – can result in better classes, strengthen connections between research and practice, build the Center’s knowledge base and enhance the reputation of the Center and its program.  (See here for what that would look like.)

An adjunct is a non-tenure track, part-time employee. Innovation and entrepreneurship programs in most schools use experienced business practitioners as lecturers or adjunct faculty to teach some or all of their classes. In research universities with entrepreneurship programs adjuncts are typically founders, VC’s or business executives. Tenure track faculty focus on research in innovation and entrepreneurship while the adjuncts teach the “practice” of entrepreneurship.

It’s Been A Trip
I’ve been an adjunct for almost 18 years, and I still remember the onboarding process at the Haas School of Business at the University of California, Berkeley. I started as a guest lecturer, essentially walk-on entertainment, where the minimal entry was proving that I could form complete sentences and tell engaging stories from my eight startups that illustrated key lessons in entrepreneurship.

Feeling like I had passed some test (which I later learned really was a test), I then graduated to co-teaching a class with Jerry Engel, the Founding Executive Director of the Lester Center for Entrepreneurship at Haas. Here I had to master someone else’s curriculum, hold the attention of the class and impart maximum knowledge with minimum damage to the students. While I didn’t realize it, I was passing another test.  

I knew I wanted to write a book about a (then) radically new entrepreneurship idea called Customer Development (later the foundation of the Lean Startup movement). Concurrently, Jerry needed an entrepreneurial marketing course, and suggested that if I first created my class, a book would emerge from it. He was right. The Four Steps to the Epiphany, the book that launched the Lean Startup movement, was based on the course material from my first class. I don’t know who was more surprised – Jerry hearing that an adjunct wanted to create a course or me hearing Jerry say, “Sure, go ahead. We’ll get it approved.”  

And here’s where the story gets interesting. John Freeman, the Faculty Director of the Lester Center for Entrepreneurship at Haas, began to mentor me as I started teaching my class. While I expected John to drop in to monitor how and what I was teaching, I was pleasantly surprised when he suggested we grab coffee once a week. Each week, over the course of the semester, John gently pointed (prodded) me to read specific papers from the academic literature that existed on customer discovery in the enterprise and adjacent topics. In exchange, I shared with him my feedback on whether the theory matched the practice and what theory was missing. And herein lies the tale.

I got a lot smarter discovering an entire universe of papers and people who had researched and thought long and hard about innovation and entrepreneurship. While no one had the exact insights about startups I was exploring, the breadth and depth of what I didn’t know was staggering. More importantly, my book, customer development, and the Lean methodology were greatly influenced by all the research that had preceded me. In hindsight, I consider it a work of translational entrepreneurship. 18 years later I’m still reading new papers and drawing new insights that allow me to further refine ideas in the classroom and outside it.

The Relationship of Faculty, Staff and Adjuncts
What I had accidentally stumbled into at U.C. Berkeley was a rare event. The director of the entrepreneurship center and the faculty research director were working as a team to build a department which explored both research and practice in depth. Together, in just a few years, they used the guest speaker > to co-teacher > to teacher methodology to build a professional faculty of over a dozen instructors.

A few lessons from that experience:
A successful adjunct program starts with the mindset of the faculty research director and the team building skills of the center director. If they recognize that the role of adjuncts is to both teach students practical lessons and to keep faculty abreast of real-world best practices, the relationship will flourish. 

However, in some schools, this faculty-adjunct relationship may become problematic. Faculty may see the role of adjuncts in their department as removing the drudgework of “teaching” from the research faculty so the faculty can pursue the higher calling of entrepreneurial research, publishing and advising PhD students. In this case, adjuncts at the entrepreneurial center are treated as a source of replaceable low-cost teaching assets (somewhere above TA’s and below PhD students.) The result is a huge missed opportunity for a collaborative relationship, one that can enhance the stature and ranking of the department.

When there is support from the faculty research director, the director of the entrepreneurship center can build a stronger program that enhances the reputation of the faculty, program and school.

At U.C. Berkeley this support eventually led the entire school to change its policy toward adjuncts, giving them formal recognition – designating them ‘professional faculty,’ creating a shared office space suite, inviting adjuncts to participate in some faculty meetings, etc.

A side effect of this type of collaboration is that the faculty-adjunct relationship offers the school an opportunity to co-create translational entrepreneurship.

Translational entrepreneurship is fancy term for linking entrepreneurial research with the work of entrepreneurs. As a process, adjuncts would read an academic paper, understand it, see if and how it can be relevant to practitioners (founders, VC’s, corporate exec or employees) and then sharing it with a wide audience.

While Jerry and John built a great process, they didn’t document it. When John Freeman passed away and Jerry Engel retired, the onboarding process went with them. Linked here is my attempt to capture some of these best practices in an “Onboarding Adjuncts Handbook” for directors of entrepreneurship centers and adjuncts.

It’s worth a look.

Lessons Learned

A small investment in building repeatable and scalable processes for onboarding adjuncts would:

  • Allow entrepreneurship centers to integrate adjuncts as partners 
  • Expose adjuncts to the breadth and depth of academic research in the field
  • Potentially create a stream of translational entrepreneurship literature for practitioners (founders and VC’s.) 
  • The result would be:
    • Better adjunct-led classes
    • Deeper connections between research and practice
    • Better and more relevant academic research
    • Enhanced reputation of the center and its program
  • See here for a suggested onboarding handbook
    • Comments, suggestions and additions welcomed

We Needed a Bigger Room – The Lean Educators Summit

It’s a bit bittersweet. We used to be able to fit all the Lean Educators in my living room and have space left over. No longer.

Turns out we needed a bigger room for the Dec 4th-5th Lean Educators Summit.

The good news is that if we’ve turned you away or you were on the waiting list we moved to a bigger venue.


It’s been almost a decade since we first started teaching the Lean Methodology. It’s remade entrepreneurship education, startup practice and innovation in companies and the government. But in all that time, we haven’t gotten a large group of educators together to talk about what it’s been like to teach Lean or the impact it’s had in their classrooms and beyond. It dawned on us that with 10 years of Lessons Learned to explore, now would be a good time.

This one class launched the National Science Foundation I-Corps program, (designed to help turn our country’s best academic research into companies), the I-Corps @ the National Institute of Health, I-Corps @ the Department of Energy, I-Corps @ NSA, Hacking for Defense and Hacking for Diplomacy, Hacking for Cities and Hacking for Non-profits. Hacking for Oceans is coming next.

Educators Sharing Best Practices
So, for the first time ever, Jerry Engel, Pete Newell and Steve Weinstein and I are getting all educators from all these groups together for a “share best practices” summit – December 4th – 5th.

We’re going to cover:

  • The effectiveness of our programs [including I-Corps and Hacking for Defense]: What we have learned so far and how to make it better
  • Customer Discovery and Lean Innovation in Academic Settings vs Non-Academic Settings such as incubators and accelerators
  • Tech Commercialization: innovators vs. entrepreneurs –  motivating scientists and engineers
  • Lean Innovation in the Enterprise, Not-for-Profit and Government – what’s different
  • International: Success and Challenges of Lean Innovation and Customer Discovery in  Europe and Asia [and South America? Australia?]
  • What’s next for Lean and entrepreneurial education
  • and much more…

Agenda is below.

Register here

See you there!

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