As featured in TechCrunch.
Stanford-born and Seattle-based Tableau Software (ticker symbol: DATA) enjoyed a tremendous debut on the public markets on Friday, closing on its first day of trading at over $50/share, up over 60% from its $31/share IPO price. The company raised over $250M through the sale of approximately 14% of the company, and its enterprise value now sits at approximately $2.5 billion.
For the pundits who’ve been arguing that the tech IPO landscape is in crisis, deals like Tableau serve as a powerful reminder that the public market is eager for certain tech companies. In fact, over the past year or so, there have been several other high profile tech IPO winners such as Workday, Splunk, Palo Alto Networks and ServiceNow.
What lessons can aspiring tech entrepreneurs learn from Tableau and these other Wall Street success stories? Here are few.
Stand Out in the Crowd. Tableau has built a highly attractive business. Growth has been very strong – March quarter revenue growth was over 60%, to $40M. The company is operating in a huge and proven market – the data analytics and visualization space has produced big winners across several software generations and remains interesting as big data pushes the limits of existing solutions. Finally, Tableau has been able to show profits, albeit modest, as the company has grown rapidly. For all these reasons, public investors flocked to Tableau.
If you’re considering an IPO for your company in the future, recognize that public fund managers have MANY companies from which to choose. More specifically, small-cap growth managers have between 500-1,000 companies in their universe. Given the enormity of this number, a typical manager will only follow 50-100 companies closely and, depending on strategy, will likely only invest in 25-50 of these in any one year. Tableau stands out in this sea of stock tickers. Does your company stand out? If not, what investments do you need to make to help you rise above the noise?
Price Your Company Right. Cynics will suggest that Tableau left money on the table. Since the stock popped over 60% on the first day of trading, the company clearly could have set its IPO price higher and raised more money. This misses the point. Tableau smartly recognized its IPO is a chance to establish a new shareholder base. By pricing the IPO at $31, the company surely had its pick of new investors since most everyone, seeing the obvious good deal, wanted to get in. I’m sure Tableau’s management team spent time evaluating who was most likely to hold their IPO stock and add to their ownership over time. If the company has done its job well, Tableau has stacked its shareholder list with the best, long-term oriented fund managers. This will serve the company well for years to come.
Similarly, you should spend time getting to know potential VC investors before you take money into your company. Consider prioritizing things like alignment of outlook and ability to help add value ahead of price. Taking the highest price limits dilution in the short-term, but if you add a VC who either can’t help or has a different vision that you for your company, you’ll likely regret the decision down the road.
Patience is an IPO Virtue. Tableau deferred its IPO for several quarters. In fact, had Tableau used $100M in revenue run rate as a threshold for IPO timing, as many others do, the company would have now been public for over a year. Because Tableau waited longer, the company was able to continue to invest in its business. With more time and investment likely came increased visibility and predictability, which is critical to performing as a public company. Also, Tableau has become more valuable during the past year as it has grown and solidified its leadership position in the market. With a higher valuation, Tableau’s IPO brought in more money and established a larger public float than would have been possible a year ago. Public fund managers dislike small, or “thin,” float deals; such thin float IPOs often lead to more stock volatility, which is difficult to manage.
As you build your company for IPO readiness, consider waiting until you have predictability well under control and your valuation allows you to sell a larger amount of stock without taking more than 15-20% of dilution.
Clearly Tableau is a remarkable company. Emulating these three traits will help you succeed as well.
May 19, 2013
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As featured in Fortune Term Sheet.
Over the past 4 months I’ve written 8 posts in the “Going Long” series. As those of you who’ve been reading this material on GoingLongBlog.com and/or Fortune Term Sheet know, I’ve focused on advice for the growth stage entrepreneur who wants to build a big company. This has been a very rewarding experience – I’ve learned a ton and engaged in very rich dialog with many great company leaders, executives and investors. The journey isn’t over by any means. I plan to continue to publish, blog and speak on this topic and look forward to getting together with a core group of like-minded company leaders at an event in the near future to continue to explore the challenges and opportunities of going long.
As planned, however, I’m wrapping up the first segment of the “Going Long” series and my collaboration with Dan Primack from Fortune with this post (thanks Dan for your support). Below are some of the key insights I’ve gleaned from this process.
- The Power of Segmentation – Despite years of preaching to companies I’ve been involved with that they must focus and define their customer, I didn’t realize how important similar focus would be when producing publicly available content. I credit my good friend Semil Shah with encouraging me to define my customer – the growth stage entrepreneur – and making sure this constituency knew the content was geared specifically for them. People engage more deeply and respond more frequently when they recognize they’re being catered to.
- Going Long is a Popular Concept – I saw a very strong response to the series from my target audience – entrepreneurs from series B, C & D funded companies that are successfully emerging. Interestingly, however, as the series has gained in popularity, more and more series A entrepreneurs have been reaching out to ask me about the content. This is very healthy trend in my opinion – it’s never too early to plant seeds to prepare to go long.
- The Hardest Topics are the Best to Cover – The most difficult post in the series for me to write was “The Long March: Transitioning from a Start-Up to a Growth Stage Company with Big Ambition.” There are so many issues the start-up entrepreneur must deal with as she transitions to the growth stage, and it was hard to crystallize some broadly applicable suggestions. It was probably the post I felt least good about when published. Sure enough, it was the most popular post and people really liked the cartoon (reprinted above). As I go forward, I’ll seek tough topics; it’s a good gauge for likely engagement with the post.
- The Invisibility of Word of Mouth Marketing – As an investor in some companies that benefit mightily from word of mouth marketing, via social and real world channels, such as Pandora, Square and Zendesk, I figured I generally understood this topic. I underestimated how powerful word of mouth can be but also failed to predict how difficult it would be to measure and see. While I was somewhat disappointed I didn’t see more visible word of mouth activity on some of the posts (such as retweets, LinkedIn shares, etc), I’ve been gratified to hear about entrepreneurs, executives and bankers who have begun to share the posts widely. The bottom line – word of mouth takes time. This is a critical lesson I’ve learned from penning this blog. I’ll be more sensitive to this point at my portfolio companies from now on.
- Good Conversations Keep Building – Writing this series proved to me this is an important topic for many folks and as a result I plan to produce more on this topic. I will continue to curate and bring more content forward. I’ll keep readers apprised on GoingLongBlog.com so if you’re interested to continue the journey with me, please subscribe to the email distribution service.
Having just returned from a trip to NY where I had the opportunity to sit down with 10+ public fund managers (both long only and hedge fund managers), I’m now more convinced than ever that growth stage entrepreneurs who want to go long need to build into their companies public-company ready elements early in the process. I’ll plan to explore some of these topics shortly on GoingLongBlog.com.
May 06, 2013
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As featured in Fortune Term Sheet.
Life for newly public and soon-to-be public venture-backed tech companies Marin Software, Marketo and Tableau is about to get much tougher. When these companies go public, their shareholder base will begin to shift from VCs to public funds. Even for strong companies such as these, this shift can be punishing for those who don’t manage the transition well. If you’re a growth stage entrepreneur looking to go long, you’ll have a similar challenge when you go public. New analysts and fund managers will want your time. The types of questions you’ll field from these folks will often be very different than those from your VCs – they’ll get very specific about competitors, customers, and suppliers and also ask open ended, big picture questions. It can be unclear what they’re getting at. Knowledge of who is buying, selling, holding and/or shorting can be sporadic. Meanwhile, your stock price can vacillate up and down on unrelated and seemingly unimportant news.
The suggestions below aim to help you navigate the bumpy terrain you’ll confront as a newly public company:
Dos
Focus on fundamentals; don’t forget what got you public in the first place. If you’ve gotten public, you’re doing a lot right. Your recipe for success as a public company shouldn’t change. If you’ve built your culture to focus on the customer, this should remain consistent even after you’re public. Similarly, if you’ve rallied your company around an audacious goal, don’t be afraid to share it with public investors (but expect them to hold you to this goal over time). IPOs and the inevitable increased media attention can be very distracting to your employees and a drag on performance. It’s critical you keep your team focused on business as usual to maintain success.
Be long term greedy, not short term greedy. It can feel euphoric to let future expectations run wild, but it can cause big headaches down the road when you’re held to these lofty projections. Instead, keep expectations tamped down wherever possible. This runs counter to typical private company behavior, where VCs push you to think big, make bold projections and reward the achievement of 80-90% of your plan. When you’re public, missing numbers by 10% can have disastrous effects. Keeping expectations low may depress your stock price, but if you make money for institutional investors and establish credibility with them by achieving or beating numbers consistently, you’ll earn their support.
Be respectful of the investment community. Once you’ve gone public, you’ll inevitably have a ton of demands on your time. You need to balance being available with the risk of losing focus on your business. Be consistent – don’t go silent if you’re in the midst of a rough patch in your operations and don’t turn off to investors or analysts who are negative on your stock. Recognize that sell-side analysts are a point of leverage – they help you keep your story out in front of investors.
Don’ts
You risk losing credibility if you’re overly optimistic about your business and its performance. There are no secrets in today’s world – err on the side of over-transparency. Savvy public investors know that no business is perfect; everyone has unhappy customers, product challenges and competitive weaknesses. Public investors are adept at digging up very granular information via surveys, channel checks and, increasingly, social media. The more you try to bury challenges you’re facing, the less control you’ll have over the storyline on these issues when they surface. This doesn’t mean you need to issue a press release every time you receive an angry tweet, but by consistently providing a balanced assessment of your performance and prospects, you’ll preserve credibility, allowing you to better navigate the tougher issues as they arise.
Performance will suffer longer term if you solely focus on optimizing quarterly results. The Wall Street treadmill will pressure you into running your business quarter to quarter. You can’t ignore this framework completely, but you won’t achieve your long term goals if you get overly consumed with hitting your targets in 90 day increments. You need to find balance internally, ensuring your best people are focused on achieving important long term objectives while you’ve also got a well oiled machine that can churn out predictable near term results.
Public investors deplore you using their money unwisely. Investors want to feel they’re partnering with management teams who run the business as if they owned the whole company. For example, paying an unreasonably high acquisition price for a start-up because it’s sexy and in vogue is a yellow flag. As an example, VMWare’s recent purchase of Nicira will be scrutinized for several years. Would management have acquired this nascent company for over $1Bn if they had to pay for it with their own cash and/or equity? This isn’t to say that all M&A is bad. For example, Priceline’s acquisition of Booking.com has driven enormous value for shareholders and made sense from the start. In M&A and all other aspects of your business, treat the capital as if it were your own and show your investors this is how you gauge every decision.
Without doubt, life as a public company will differ greatly from private company days. There is no universal blueprint for success when public, but following these recommendations will help rudder your ship as you navigate the waters.
April 22, 2013
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As featured in Fortune Term Sheet.
As a growth stage entrepreneur committed to going long and building a big company, your focus should always be on moving forward, looking down the field and thinking long term. That said, most successful companies ultimately get acquired. As an entrepreneur with investors, there’s no shame in selling your company and making a return for you, your employees and your VCs. Fact is, even if you’re ardently focused on remaining independent, you can’t control when an unexpected suitor may come calling. Although you ultimately may opt to remain independent, you need to take such advances seriously. Here are five key steps to take when that offer comes.
Have a Full Dance Card. Since you don’t know when a potential suitor may come forward, you need to expect that it may happen at any time. As soon as a serious offer comes in, you need to have a few others you can alert to the possibility you may sell. Without multiple suitors, you’ll never get an optimal price for your company. You won’t be able to gin up sufficient additional interest if you reach out to others for the first time after receiving a serious offer. Make it a priority to keep relationships with your potential suitors as you scale.
Know the People Who May Acquire You. You’ll never be acquired by a company; rather you’ll be acquired by a person or group of people at a company. As you navigate the landscape of potential acquirers to build your dance card, make sure you find the right people – folks with authority, wherewithal and gumption. At many possible suitors, the right person will be within a business unit and not necessarily a corporate development executive. Spend the time to get to know these folks and assess who is a true contender to acquire you someday.
Approach Your Board With a Plan. Should you receive a serious offer, you want to manage the process rather than letting it manage you. To ensure this, make sure you think through the alternatives carefully and approach your board with a clear recommendation. If you ask your board for advice without having developed and articulated your own point of view, you may end up disappointed with the outcome.
Keep the Group Involved Small. As a growth stage entrepreneur, you’ve undoubtedly worked hard to develop a vision and culture focused on creating long term value. You need to do everything you can to preserve this focus. The likelihood that an M&A conversation will consummate is very low, but news of a possible acquisition can be very distracting to your employees. To the extent possible, keep the group of your employees involved in the acquisition conversation as small as possible. Best case, if you don’t end up selling, your company will not miss a beat.
Don’t Be in a Hurry. As an entrepreneur, you’ve likely been rewarded for decisiveness – picking a path and moving forward expeditiously helps keep you out in front. This approach will hurt you in an M&A context however. Acquisition negotiations are complex and the potential buyer usually has a lot more experience than you getting deals done. Good advisors will help you approach the process methodically and ultimately get to the best outcome.
Although there are plenty of quantitative factors to consider in an acquisition context, the decision to sell your company is deeply personal as well. Your investors, employees and partners have entrusted you with their capital, time and reputation. There’s a lot of responsibility riding on your shoulders. Following the steps above will help you think clearly and make right decision.
April 08, 2013
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As featured in Fortune Term Sheet
Founders are the best start-up CEOs. The same passion, focus and audacity required to get a company off the ground enables founders to be successful start-up leaders. After all, when a start-up company is trying to emerge, there is nothing more important than focus and drive.
In the growth stage, the job of company leader changes. The imperative moves from inception to execution, from development to scale. Scaling presents challenges that are difficult to navigate. Great growth stage CEOs require unique skills to complement the attributes that contributed to their success as early stage leaders. Below are five common traits among the best growth stage CEOs with whom I’ve worked.
Relentless Pursuit of the Right Team. Successful recruiting in the early stage is more about finding super talented folks with tight cultural alignment. In the growth stage, the best leaders recognize when to bring in skill players with functional expertise and capacity to scale. You can never take a risk on a complete cultural misfit, but as the skill sets you seek become rarer, not every position player you bring in will be a strong steward of your company culture. Continually upping the capacity and quality of your team may hurt feelings, especially if some of the early employees are unable to keep up, but surrounding yourself with the very best as you’re scaling is critical.
Focus with Aptitude for “Side Bets”. Effective growth stage leaders keep their teams hyper focused on the key drivers of success. This type of singular focus, necessary to get through the start-up phase, can leave flanks open in the growth stage however. Clever competitors will seek to grab opportunities that otherwise would have been yours, weakening your overall franchise. While keeping their companies extremely focused, the best growth stage CEOs are also able to identify and prioritize the right “side bets” – projects that start as skunk works, involve a limited number of people and disruption, never seem justified in the short run, but can grow to become important compliments to the base business over time. Side bets need the right oversight, should be limited in number and need to be killed quickly if they’re not working. Those that do work can have great impact and protect your franchise.
Commitment to Learning. As a growth stage company CEO, you’ll need to become competent, even great, in multiple aspects and dimensions of your business including sales, marketing, product, finance. No one starts as a master of all. The best CEOs make learning an active part of their day – seeking out experts, encouraging the same of their team and build this into their culture. This commitment helps companies stay agile and improve as they scale.
Building a Self-Reliant Organization. While a start up, you encounter a limited number of very large problems (does the technology work? is there product market fit?). When you graduate to the growth stage, you’re more likely to encounter a longer list of medium sized problems (unhappy customers, key employees thinking about leaving, sales compensation structures, etc) The list quickly gets too long for any one person to manage. The best CEOs build an organization prepared to tackle these medium sized issues consistently. How? By empowering their teams, giving them the cultural rudders to help direct good decision-making and trusting them to get the job done without micro-managing.
Empathy for the Customer. No business can succeed without customers. The happier your customers, the more likely they’ll stay, grow and refer others. While founder-led, evangelical selling and support work in the start-up phase, as your company scales, you can’t be there for every sales call and support issue. You’ll need to find ways to inculcate customer empathy into your culture, aligning your employees with your customers. Great growth stage CEOs build customer focus into their process. GGV portfolio company Zendesk, a leader in cloud-based customer support, has all new employees sit on the support desk as part of their training. Promising growth stage SEO platform BrightEdge has all new salespeople build a website and use its tool for SEO as part of their training. Similarly, you need to find ways to ensure your team understands and cares deeply about the plight of your customers.
As you move your company into the growth stage, recruit the best team possible, carefully manage a few side bets while remaining focused, build an organization that is dedicated to the success of your customers, committed to learning and able to operate exceptionally without your daily oversight. If you do these things, you will become a great growth stage CEO.
March 25, 2013
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Kokkari in SF played host tonight to GGV Capital’s Spring CEO Dinner. Tonight’s event focused on “Going Long.” We had an incredible set of entrepreneurs join us to hear advice from Ted Wang, the Fenwick partner who advises Facebook, Dropbox and Square, among others, Barry McCarthy, former CFO of Netflix and current Pandora board member, and Ned Segal, 17 year Goldman Sachs banker veteran recently turned public company CFO (RPX). The conversation was lively and fruitful. Below are some of the highlights:
- As a founder/first-time CEO, in hindsight you’ll always feel that you waited too long to hire and fire. Surround yourself with folks who can take stuff off your plate, and make sure to “build the system that can build your system”
- As a founder, its hard to be a master of all functional areas. You need to hire great folks in areas where you need help, but its hard to gauge who is great in disciplines about which you know very little. Find experienced folks to advise you and help you vet candidates in their areas of functional expertise. (eg, have a formerly successful CFO help you interview CFO candidates, etc)
- The best companies lean into risk as they grow and aren’t afraid to continually make “bet the company” decisions, otherwise they get out-innovated by more nimble competitors. The capacity to learn really quickly when you make mistakes is key. Leaders must model risk taking and build an organization that embraces and accepts taking risks, even when failure is the result.
- Its hard to distinguish between a “right place/right time/right idea” success and a “great execution” success. Don’t assume someone is great just because they were part of a success.
- When building your board, look for people with relevant experience that others on your board don’t have in areas in which you’ll need to be successful. These people will help advise you and also help educate your other board members on why you’re doing what you’re doing.
- Boards waste a lot of time. Board meetings should be shorter and focus on a few key things including comparing actual results to plan and discussing 1-2 strategic issues, where you can get the multiple perspectives from your board. See Ted’s great post on this.
- If you plan to go long and are derailed by a potential acquisition offer, the decision is intensely personal. Be realistic, both personally and professionally, about what you want to do. Remember, an IPO is like getting called up to the major leagues from triple A – you’re going to face an amazing pitcher every night and you need to be ready for many years of challenges.
Thanks again to all who attended. We look forward to more fruitful dialog going forward!
March 22, 2013
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Today Domo, the leader in the provision of cloud-based executive management and intelligence platforms, announced a $60M financing led by GGV Capital, with participation from Greylock, IVP, Jeff Bezos and others. We’re very excited to be leading this round, and I’m personally looking forward to joining Domo’s board as an observer.
When Josh James, Domo’s CEO, let us know that he was planning to raise a round of financing, we jumped on the chance to invest. Our excitement is driven by:
- Team. The team is led by Josh James, the founder and CEO of Omniture, which Josh successfully took public and eventually sold to Adobe for $1.8Bn. We’ve admired Josh from afar for many years and are big fans. Josh possesses the rare combination of people-focused leadership skill and true product and company vision. At GGV, we’ve been fortunate to back some incredible cloud CEOs such as Lars Dalgaard of Successfactors, Mike Lazerow of BuddyMedia and Jonathan Bush of athenahealth. We’re excited to add Josh to this esteemed list. He’s also assembled an extremely strong team around him, a team that can take the company to many multiples the size it is today.
- Huge Market. Domo provides an executive management platform. Moving well past traditional BI, Domo is delivering on the promise of being easy to use and enabling executives to save time and make better decisions. The customers with whom we’ve spoken are devoted to the value they’re getting from the platform. There isn’t a company on the planet where the executives don’t want more visibility and real-time knowledge for decision-making. Domo’s market opportunity is huge.
- Momentum. Despite not having yet formally launched the product and having been selling for only six months, Domo just passed the 100 customer mark. The company has been doubling month over month and the future looks very bright.
We look forward to great things from our partnership with Josh and his team at Domo!
March 11, 2013
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As featured on Fortune Term Sheet
These days, for the typical ventured-backed tech company, the duration from founding to IPO is a full 8-10 years. There are no overnight success stories. It’s a serious accomplishment representing a ton of work to get a company to the precipice of an IPO. The stakes are high to get your IPO right, and you should be highly confident that you’re ready. To be ready you need predictability and visibility, huge growth potential and no single points of failure. Even if your company has all of these attributes, your IPO is not a sure thing. To make sure your IPO is a success, consider this 10 point plan.
- Have a CFO who understands both the business and how Wall Street works. If you don’t yet have this person on board and need to make a hire, be sure to do so at least a year before your planned IPO. Your CFO will play a central role in marketing your IPO and should have several quarters to learn the business and ensure she has necessary visibility. Your CFO will also need time to build out her team and systems to support public company demands.
- Get to know the relevant investment banks beforehand. Choosing the right banking syndicate is critical to the success of your IPO. Typically companies hold a “bake-off,” a beauty pageant of sorts, where each invited bank presents their qualifications and views on IPO positioning to the board. If you spend time in the year prior to kicking off your IPO process getting to know the relevant banks, you can consider nixing the bake-off or holding meetings with a more limited set of players. Instead, you can select banks based on what you’ve learned. Make sure, however, that the banks compete for your business; your leverage to ensure you get their best people and flexibility on how they’ll split the economics on your deal is at its peak before you make your selections.
- Select your banking syndicate based on appropriate criteria. Choose your lead book-runner(s) based on their syndication capabilities, understanding of your business and how Wall Street will value your company. Choose your co-managers based on the quality and interest of their research analysts. Although the reputation and influence of sell-side research has eroded over the past several years, it’s still very helpful to have knowledgeable and highly regarded analysts following your company closely once you’re public.
- Use your pending IPO as a tool for attracting top talent to your company and board. Although it will get tougher to hire top start-up talent once you’re public with options priced in accordance with your stock price, news of a pending IPO serves as a powerful motivator for talented players who may want to join your company. Padding your expense base pre-IPO can also help keep profit expectations low in your first few quarters as a public company. Similarly, recruiting board members will be easier when you’re private, before your IPO.
- Meet with public investors and sell side research analysts in the 6-12 months prior to filing your S-1 registration document. Use these meetings to hone your story and practice responding to the types of questions public investors will ask. Remember, however, you’ll begin to build a reputation during these encounters. It’s critical to establish a track record of meeting or exceeding the objectives you lay out during these meetings.
- Boost your balance sheet prior to your IPO. Since you’ll raise significant capital in your IPO, it may seem counter-intuitive to seek cash beforehand as well. It’s critical that you not have any obvious “single points” of possible failure however. Public investors are unaccustomed to funding operating losses. If you need the cash you propose raising in your IPO, public investors are prone to either shy away or seek a very aggressive valuation. Commencing your IPO with full coffers will give you a position of strength as you approach public investors and most will be more comfortable knowing the cash they’re investing isn’t critical to fund near term operations.
- Don’t invent any metrics as you market your IPO. As Groupon famously learned when it tried to popularize Adjusted Consolidated Segment Operating Income (or ACSOI, which proposed “adjusting” out online marketing expenses), public investors tend to assume the worst when they see new metrics. Investors will only buy your stock if they understand how to forecast your performance, so let the key drivers that help you forecast internally guide what metrics you disclose. Keep it simple; don’t overwhelm investors with metrics that aren’t telling, even if they’re sexy.
- Make sure your financial projections are sufficiently haircut. To be successful as a public company and create value over the long term, you’ll need to continually meet or exceed expectations. Set yourself up to beat numbers and raise guidance for several quarters after your IPO by keeping a lid on expectations. It’s not uncommon to see companies haircut their internal models by 25% when providing pre-IPO guidance to analysts. Conversely, if you beat guidance numbers by too wide a margin every quarter, you’ll teach investors to ignore your guidance and expectations will run wild. Earning a reputation as a management team that delivers and understands how to manage Wall Street is critical.
- Be prepared to devote lots of time to investor relations. I’ve polled many newly public companies, and I routinely hear that their CEOs and CFOs spend 20-30% of their time during the first year as a public company on IR. To be prepared to devote this kind of time, you’ll need to have a strong team internally who can step in for you while you’re out educating investors.
- Price your deal to move. If your stock price closes on its first day of trading up 25-50% from IPO price, you will have clearly left some money on the table. The price you’ll pay in raising slightly less money than you would have otherwise will be more than compensated by building the right investor base however. Seek to attract serious, long term investors who have done their homework and understand your business. You can’t keep short-term traders from trafficking in your stock once you’re public, but the more long-term oriented your investor base, the better.
There you have it. Keep this list in mind as you build toward your IPO!
March 11, 2013
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As featured on Fortune Term Sheet
As a junior banker at Goldman Sachs in the early ‘90s I was weaned on the conventional wisdom that growth companies were ready to go public when they reached $100M in annualized revenue (ie, a $25M quarter) and had at least 2 quarters of profitability under their belts. The “$100M Revenue” theory was based on the idea that a company must be large enough to both (i) withstand competitive pressures and (ii) earn a large enough market value to enable the company to sell enough stock to institutional buyers in its IPO without suffering massive dilution in the process.
This theory makes no sense and, despite the fact that many bankers and VCs still cling to it like religion, there are multiple counter examples debunking the theory. Growth stage entrepreneurs who want to build long term winners need to take heed. Going public is by no means the final step to going long. But, it’s a big step in the process. Completing an IPO too early can have disastrous effects on the long term health of your business. Conversely, waiting too long to do your IPO might allow a competitor to steal your thunder.
In my experience, there are three key attributes you must have to consider an IPO. You’re take major risks if you’re not strong on these three:
- Predictability & Visibility. If your business is $50M in revenue but you know with high precision what next quarter, or even next year, is going to look like, you pass the test. On the other hand, even if your business is $200M in revenue, if you can’t reliably predict what’s around the corner, watch out. Your VCs may have been happy when you hit 97% of plan last quarter. If you miss guidance or analyst expectations by 3% once you’re public, your stock will likely plummet, often causing employee morale to suffer and competitors to be emboldened. The stakes are high – take the time you need to ensure you’ve built predictability into your company before your IPO.
- Underlying Growth Potential. When CEOs fall into the trap of thinking the $100M revenue plateau is sufficient to “get out” in an IPO, I like to ask them about their plan to get to $300M or more in revenue. The IPO is not an end game. A better analogy – going public is more like moving from college sports to the pros. You need to ratchet up your game and be ready. If you’re growing fast and have a large market in front of you, $300M or more will seem like a breeze and public investors will reward you. If, on the other hand, you eke out growth to $100M without much more potential and go IPO, don’t expect to have a fun run as a public company. The best teams have several tricks up their sleeve for future growth. You may not know all the growth vectors you plan to open up in the future, but you should have a game plan before your IPO. The best teams are always investing in several experiments that could augment growth. You should be encouraged enough by the early results of such experiments before considering an IPO.
- Vulnerability Assessment. The best companies have no single points of failure. Do you have a very large customer or two? a dominant supplier or distributor? a huge competitor? Or, are you beholden to a single platform, technology or regulatory regime? Any of these concentrations may be fine as you’re building up your business privately, but once you’re public, expect these facts to be scrutinized. Public investors hate this type of risk. They’ve been burned many times before. This shouldn’t be unexpected – when another company realizes you need them, they’ll often extract a lot of value (for example, Facebook and Zynga). Before considering an IPO, remove single points of failure. Even if this means growing more slowly for periods of time, the tradeoff will be worth it.
So there you have it, the “Big Three,” an alternative set of requirements to the $100M Revenue Milestone. If you nail these three, you won’t just get to an IPO, you’ll have a chance to go long as a public company.
February 25, 2013
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Congratulations Ms. Entrepreneur. After years of toiling and challenging insurmountable odds, you’ve finally moved through the gates of start-up hell. You’ve established product/ market fit, you’re 10x better that your competition and you’ve begun to scale customers and revenues. You’ve also assembled a talented and passionate team who is bought into your culture. Take a breath. Take a bow. Now, come to the frightening realization… if you want to build a big company, you’ve got much more work ahead.
The moves you make at the growth stage are increasingly important. Different challenges emerge and the bets become bigger, the stakes higher. Below are four keys you’ll need on the journey as you transition from start up to growth stage mastery. This isn’t an exhaustive list but these four are a good place to start.
Hidden Gems
Hugely successful companies have a few guys or women who are 10x better than everyone else. These people are often not executives, but rather individual contributors with special gifts. Typically they’re not easy to spot in interviews, and they come in many shapes and sizes – different execs have told me about their “secret weapon” being a sales person, a product designer, a developer.
These hidden gems are so important because they can drive highly disproportionate value. For example, a top notch growth stage CEO confided in me that one guy, a sales engineer, drove half of the $200M exit price he achieved on his first company’s sale. When this CEO joined his second company, he brought this secret weapon with him. The CEO took this second company public and ultimately sold it for over $1.5B. He credits the same hidden gem for creating approximately 25% of the value. One sales engineer. Nearly $500M of value created across two companies. Yes, hidden gems can really move the needle.
As you move from start up to growth stage, you need to identify your hidden gems and find ways to leverage their talent as much as possible. One way to do this is via emulation. For example, if you have a sales person who sells 3-5x more than anyone else, study closely what he or she is doing. As Chip and Dan Heath encourage in “Switch,” are there any “bright spots,” or uniquely successful behaviors, you can isolate and train your other sales people to emulate?
Another way to get the most out of your hidden gems is to keep them focused on what they do best. The temptation with great performers is to promote them. If promotions take these gems away from their core competency (eg, a great sales engineer losing touch with customers as she is moved up to manage all the other sales engineers), you’re detracting from value creation. Find a way to balance career development with keeping your all-stars playing the positions they were born to play.
Find Your Flywheel
As you move from start up to growth stage, your absolute growth targets get larger. For most companies, it gets increasingly hard to scale at rapid rates as the law of larger numbers takes over. As discussed in a prior post, one key to building a really successful company is to get better as you get bigger. Just as a flywheel collects energy over time and then delivers it at rapid and increasing rates, you need to cultivate and nurture sources of potential rapid growth that you can unleash when needed to help propel expansion. How can you do this?
One source of aggressive growth for some successful companies is partners. As Google was ascending to prominence in the mobile market with Android, a symbiotic relationship developed with Samsung that has helped both companies flourish. In the early days of enterprise software, Accenture ignited explosive growth for several application companies such as Peoplesoft. Although you need to be careful – no company is in business to help your business flourish – mutually beneficial partnerships can help propel growth for periods of time.
Sometimes partnerships that drive growth are developed in the field. Other times, especially when you’re trying to get the attention of a much larger company, you may need relationships to help. Cultivating the right set of independent board members, advisors and investors is key. They can help. And, if you’re able to get a flywheel going, growth will get a lot easier.
Stay Focused
When you begin to see your core business ramp, it’s tempting to assume you’ve nailed it and start looking for expansion opportunities. Mistaking early success in your core business for an ability to succeed elsewhere can be fatal however. In a world of limited resources, you risk failing to capitalize on the opportunity you’ve created in your core business by letting your focus wander. When payroll outsourcing firm ADP first went public in the 1960s with four main business units, the big question on Wall Street was what would become the “fifth leg of the stool” to fuel future growth. Fast forward 50 years – ADP has a $30Bn market cap with only two business lines, actually shedding two of its original businesses and focusing on core payroll to grow.
Of course you need to continually re-evaluate the marketplace as it shifts and consider options for future growth. In fact, the best growth stage CEOs with whom I’ve worked have all been adept at placing several “small bets” in areas adjacent to their core business, such as international markets, alternate forms of distribution and product extensions. But, these bets are best designed to avoid distraction from the core business, made with limited resources and killed quickly if they’re not working.
Professionalize Your Processes
As a growth stage company, your success is going to be measured on things like revenue growth, operating margin expansion, market share gains and the size of your total available market opportunity. Gone are the days when getting a product out on time, hitting cash burn targets, or hiring a key executive was considered a major victory.
With this shift in expectations, you need to invest in professionalizing the process of running your company. Perhaps most important here, you need to develop of set of metrics that really helps you assess the long term health of the business. Devise these metrics to give you early indicators, or warning signs, of what’s coming up ahead for the business. You may discover that additional capital, for instance, can be invested for high return and growth. Conversely, you may recognize the formula isn’t quite solved yet and that you need to keep iterating before pushing for rapid expansion.
Although your start up culture might not have supported process professionalization, find a way to fuse your culture with the benefits of additional structure. Developing a robust budgeting process may not sound appealing, for example, but if it helps your company serve customers better and in a more timely manner, you’ll get buy in. Similarly, closing the books promptly after a reporting period will add stress on an organization, but if it helps attract new investors, you can link the arduous task to a win for the company.
Nobody said going long to build a highly successful company was easy! But, those in the growth stage who find and manage their hidden gems, nurture flywheels, stay focused and professionalize process will set themselves up for success.
February 11, 2013
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