When I was in Boston a while ago (it was very cold, so it must have been January), I had a wide-ranging conversation with Eric Paley. This was before the IPO Summer of 2019 when all conventional valuation metrics have entered the land of “suspension of disbelief” which is short-term good and long-term well-we-will-see-…-eventually
One of our conversational threads was about how to value companies. We ended up talking about using Gross Profit, instead of Revenue, to do valuation analysis.
We’ve been doing this for a long time at Foundry Group. Since we invest across a number of different themes, we’ve had to deal with very different revenue and gross margin profiles since the beginning, whether we realized it or not.
For the purpose of clarity, in my world GP (gross profit) is a dollar amount while GM (gross margin) is a percentage.
Revenue is often equated with Net Sales, which is true in many cases, but Net Sales is actually more precise a measure than Revenue in situations where you have Gross Sales or Gross Merchandise Value as the “top level” revenue number. Also, I often see GM listed as GM%, which is fine. Some people also refer to GM as Gross Profit Margin.
This is regularly confused, even in accounting texts, so depending on which business class you took, you are going to call it a different thing. Oh, and if you use Quickbooks, you’ll probably refer to Revenue as Income, unless you have the current version of Quickbooks where this has finally been fixed. Isn’t accounting fun?
Even if a lot of people realize that SaaS companies have a different gross margin profile than hardware companies, many don’t acknowledge it when playing the valuation game. And, this logic – or lack thereof – applies to marketplaces where GMV is different than Net Revenue which is different from Gross Profit, or Adtech companies which have yet a different “Top Number to Gross Profit” calculation. And, it gets really exciting when a company has multiple revenue streams that include services and derivative transaction-based revenue (say, BPS in a fintech company.)
Today, I’m seeing almost all entrepreneurs and investors in growth companies talk primarily about revenue and growth rate. They tend to adjust the multiples to try to align with a group of comparison companies, but these comps rarely have a similar supply/demand economic associated with the equity of the company in question. And, when the comps are mature cash flow positive public companies, the multiple math diverges even more from anything particularly rational.
I’ve started encouraging the companies I’m involved in to focus on Gross Profit and the growth rate associated with their Gross Profit, rather than Revenue. Try the exercise and see how you compare to the companies you think you should compare to. And think about how much more value you could be creating with the same Revenue number but a higher Gross Margin percentage …
I spent the day yesterday in Grand Junction at Techstars Startup Week West Slope. After a full day of meetings, events, and talks, I ended up at dinner with a half-dozen CEOs of startups in the area (Grand Junction, Carbondale, Eagle, and Telluride.) I was pretty wiped out from the day and general bail out of dinners between 7:30pm and 8:00pm but we ended up going extremely deep on a bunch of personal and emotional stuff so when I got back to my hotel around 10:00pm I was pleasantly surprised with the tenor of the evening.
While there is endless writing about what to do to build your business, how awesome things are going, and why startups are so magnificent, I experience over and over and over again the intense personal struggle for founders and leaders around creating a business where nothing previously existed.
I wish more entrepreneurs would write extensively about their failure experiences in detail.
Michael Natkin at Glowforge recently wrote a great post titled Strong Opinions Loosely Held Might be the Worst Idea in Tech.
I have never liked this entrepreneurial cliche. While I have a large personality, I don’t have a temper and I’m not argumentative. I try hard to listen (although I’m not always great at it), try to express my thoughts as “data” rather than “opinions”, and try to evolve my thinking based on the inputs that I get.
I’ve always felt that people who had “strong opinions loosely held” (SOLH) were simply being bombastic. Sometimes I could see that they were being provocative. Occasionally I’d give them credit for changing their mind about something based on new data. But usually, I discount their first opinion (or assertion) since I knew they didn’t have much conviction around it.
Michael’s post opened up an entirely new way for me to think about this, and to continue to dislike SOLH. He has two magic paragraphs in the post. The first is the setup:
“The idea of strong opinions, loosely held is that you can make bombastic statements, and everyone should implicitly assume that you’ll happily change your mind in a heartbeat if new data suggests you are wrong. It is supposed to lead to a collegial, competitive environment in which ideas get a vigorous defense, the best of them survive, and no-one gets their feelings hurt in the process.“
There’s that word bombastic again. Hang on it to it while we get to the punchline of Michael’s post.
“What really happens? The loudest, most bombastic engineer states their case with certainty, and that shuts down discussion. Other people either assume the loudmouth knows best, or don’t want to stick out their neck and risk criticism and shame. This is especially true if the loudmouth is senior, or there is any other power differential.“
Unless the other people in the room are also bombastic, the discussion shuts down and the strong opinion loosely held is accepted, or at least reinforced. Power dynamics amplify this – if the leader is bombastic, head nodding ensues. If you are an underrepresented minority in the room, challenging the SOLH can be even more difficult.
Even if, as a leader, you have tried to establish a culture of challenging everyone’s’ opinions, the loudest, most forceful, and most assertive person in the room will often have the leading opinion. It’s exhausting, at least for some of us, to have to fight against that.
I’m not even sure that a “strong opinion loosely held” qualifies as something useful. I’m fine with “strong opinions supported by data and experience.” I’m less good with “strong opinions supported by belief” as I don’t really know what underlies “belief” for many people. But it’s the loosely held part that I struggle with.
Basically, a SOLH is simply a hypothesis. If someone says to me, “I have a hypothesis”, I assume they are asking me my view about their hypothesis. So – when someone presents me with a SOLH, you’ll often hear me ask “do you think that is the truth or is that a hypothesis?” I’ve found this pretty effective for breaking through the LH part.
Michael’s article has a gem in at the end about how to interact with the SOHL person that he goes through in the final section called This (Actually) Won’t Hurt A Bit. I won’t spoil it for you – go read it.
I recently recorded two free courses with LinkedIn Learning. They are each under an hour long and broken up into a bunch of small segments.
The first one is on Raising Venture Capital and is based on content from the book Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist that I wrote with Jason Mendelson. Amy tells me that this is her favorite shirt from my current rotation of Robert Graham shirts.
The second one is on Validating Your Startup Idea which based on the book Startup Opportunities: Know When to Quit Your Day Job which I wrote with Sean Wise. Same recording studio (an Airbnb in Rancho Santa Fe) but a different shirt.
The team I worked with at LinkedIn Learning was dynamite. They reached out to me about this and I was happy to give them a day of my time to see how it worked. My goal was that in the worst case I’d give them some useful content to do something with.
Kim and Eric Norlin, who run Gluecon, have had a simple goal around diversity at the Gluecon for many years.
The goal is quite simple: to create as diverse and welcoming a conference environment as we can.
The diversity scholarships are one approach to this. The Gluecon code of conduct is another. Kim and Eric have always been deliberate about inviting a diverse set of speakers and panelists and Gluecon has always been a favorite conference of mine when I’ve been around for it.
If you are interested in applying for a diversity scholarship, send an email to
- a quick biography
- a short paragraph explaining why you’d like to attend, and how you feel you’ll contribute to
And, if you are interested in Gluecon separate from this, reach out to Eric or sign up online. It’s May 22nd and May 23rd in Boulder. The topics include things like APIs, DevOps, Serverless, Edge Computing, Containers, Microservices, Blockchain-driven applications, and the newest tools and platforms driving technology.
While there have been many words written about gender bias in the context of entrepreneurship and funding, I thought the following TED Talk from Dana Kanze presented one of the best frames of references, supported by a real research study, that I’ve seen to date. In addition, she has some clear, actionable suggestions at the end of the talk to help eliminate the bias.
Her research emerges from her own exploration of a social psychological theory originated by Professor Tory Higgins called “regulatory focus.” This theory explores the different motivational orientations of promotion and prevention.
While listening to Dana’s explanation and examples in the video, I had a deep insight – around how to ask questions of an entrepreneur – that hadn’t occurred to me before. Here are her direct definitions of promotion focus and prevention focus.
“A promotion focus is concerned with gains and emphasizes hopes, accomplishments and advancement needs, while a prevention focus is concerned with losses and emphasizes safety, responsibility and security needs. Since the best-case scenario for a prevention focus is to simply maintain the status quo, this has us treading water just to stay afloat, while a promotion focus instead has us swimming in the right direction. It’s just a matter of how far we can advance.”
Dana’s punchline is that investors approach female entrepreneurs with a prevention focus and male entrepreneurs with a promotion focus. Interestingly, she finds this is consistent regardless of the gender of the investor!
The talk has a clear recommendation for female entrepreneurs in it. Basically, if you get a prevention question, reframe the answer in a promotion context.
“So what this means is that if you’re asked a question about defending your start-up’s market share, you’d be better served to frame your response around the size and growth potential of the overall pie as opposed to how you merely plan to protect your sliver of that pie.”
Dana also has a suggestion for how investors (both female and male) can help eliminate this implicit bias.
“So to my investors out there, I would offer that you have an opportunity here to approach Q&A sessions more even-handedly, not just so that you could do the right thing, but so that you can improve the quality of your decision making. By flashing the same light on every start-up’s potential for gains and losses, you enable all deserving start-ups to shine and you maximize returns in the process.”
Her talk is only 15 minutes long and well worth it. Or, if you are a fast reader, take a look at the transcript.
It’s the second week of December, which is about the time that all of the predictions for 2019 start occurring. Last week’s announcements of the confidential S-1 filing of Lyft, Uber, and Slack helped prime the pump for some of these. By the way, did anyone other than me think it was a strange turn of events that companies are now announcing their confidential S-1 filing?
Fred Wilson’s post Thinking Ahead To 2019 is worth reading. Unlike the endless stream of predictions that are about to come out, it’s an analysis of the spread between the public market and private company valuations. Fred is not predicting anything in particular but makes several useful observations, including the following:
“And yet storm clouds are on the horizon for the capital markets in 2019. Rates have risen significantly in the last eighteen months, pulling capital out of the equity markets and into the fixed income markets. There are some leading indicators that suggest a business slowdown is on the horizon, which would be the first one in the US in a decade. And, of course, the situation in DC is getting dicey and that will weigh on markets as well.”
Last week I was talking to a friend who is a growth investor. He and his firm see most of the bay area growth deals (e.g. the unicorns stampede to their front door). He made an observation that a number of deals he’s now seeing are for flat rounds with companies that need to raise more money to keep going and he’s feeling the slow down of investor interest at this level. This dynamic is reflected in the article Scooter Firm Chases Funding to Staunch Losses about the current Lime and Bird financings.
Any student of history knows that there is a linkage between the push to the public markets, demand dynamics of the public markets, and the availability and attractiveness of capital in the private markets. If you lived through the Internet-bubble between 1999 and 2002 you know this cycle well. And, you know that the companies that survived it were the ones with very strong fundamental businesses (e.g. Google), regardless of whether they were private or public at the time.
At the same time, entire categories collapsed. The web hosting business – lead by Exodus – almost entirely went bankrupt or was restructured. Out of this mess came several long-term companies and a huge number of pennies on the dollar type acquisitions. If you were on the winning side of this, it was incredibly lucrative, because even in a massive collapse there is a huge long-term opportunity. But you had to be thinking about the economics and capital structure of the business, versus just chasing growth with more equity dollars.
I have no interest in predicting anything, including how any specific category or company will perform. I also have no idea what the timing of anything is. I do know that if you are an entrepreneur or investor, you should pay attention to the context but be very focused on building a durable long-term business. And this moment in time is one that feels like you should be aware of how much capital you have, how you are spending it, and when (or if) you will need to raise more.
Remember – it can all go to zero (a post I wrote when Bitcoin was at $12,000.)
Seth and I have each attended over 27,367 board meetings. Ok, I don’t know the actual number, but it’s a lot. We’ve both been on good boards and bad boards. Boards that have helped companies and boards that have sunk companies. Boards that know how to resolve conflict and boards that have multiple passive-aggressive actors engaged in a complex dance that serves no one, especially the company.
So, I’m totally digging Seth’s new series. Not surprisingly, since Seth and I have been working together for over 17 years, there’s a lot that is the same as my board approach. But, I’m also learning something from each post which I plan to incorporate into my board world going forward.
The first four posts are up. In order:
- Designing the Ideal Board Meeting
- Designing the Ideal Board Meeting – Before the Meeting
- Designing the Ideal Board Meeting – Your Board Package
- Designing the Ideal Board Meeting – The Board Meeting
If you are a founder, CEO, investor, or outside director who is on a private company board, this is a must-read series. And, if you want to go deeper on how boards work, grab a copy of the book I wrote a few years with Mahendra Ramsinghani ago titled Startup Boards: Getting the Most Out of Your Board of Directors.
The interview ended up being two episodes and, while listening to it in the car, I felt like it was one of the better recent interviews that I’ve done. Hadley and I talked for about an hour and then he edited the discussion down into two ten minute podcasts, so he pulled out the good stuff and left all the garbage on the cutting room floor.
Episode 1 includes advice I’d give to a much younger me and discusses why I think it is important to build long-term fund strategies with conviction and consistency.
Episode 2 covers what makes an excellent board member, the biggest reasons startups fail, and the three machines that must work together in order for a company to scale.
I’ve written several times about leveling the playing field for women in tech, including our own actions at Foundry Group. I’m always keeping my ear to the ground for how to do this better.
Recently, I was connected to Kate Catlin, the Founder of Find My Flock, by my partner Jason. From the outside, it looks like Find My Flock is a tech job board that is enthusiastically open to all. What isn’t obvious is that they did 100% of their product research, design, and UX testing with developers who happen to be women and/or people of color.
This led to some very specific features:
- You can filter jobs by benefits like maternity leave, trans-inclusive healthcare, or visa sponsorship.
- You get a personal interviewing coach.
- If a company wants a premium posting, Find My Flock has an off-the-record phone call with two developers in the company to make sure they’re happy.
While mostly driven by “determined intersectional feminism,” Kate thinks more platforms should be designed this way. She’s a former IDEO CoLab Fellow, and follows IDEO’s belief that you can spur the most creativity by interviewing users at the extreme ends of the bell curve, in addition to those in the middle.
To understand this, imagine you’re designing a new sneaker. You’ll come up with very different ideas if you go interview the most blister-prone ultramarathoner instead of the average neighborhood jogger.
Find My Flock took it a step further by interviewing only at the extremes. If developers most likely to experience unconscious bias feel this process is effective, supportive, and fair, then they believe everyone else will also have an outstanding experience as well. “This is not about handouts,” Kate says. “No one I know wants a job they haven’t worked for. It’s about a level playing field.”
What are your thoughts? How would major tech platforms be different if they had designed for underrepresented people first?