As a growing Minnesota business bank, we’re working to grow our technology lending practice in the market. I couldn’t think of any better way to learn more than hearing current thoughts and challenges at the well regarded Enterprise Rising conference: Tech only, Startups only, Enterprise only. We sponsored five attendees and I was glad to attend. The first day did not disappoint with great insights from a number of great speakers:
- Scott Burns, Founder of Structural
- Paul Singh, VC, Results Junkies
- Garrett Moon, Founder of CoSchedule
- Priscilla Koeckeritz, Cofounder of Energy Print
- Samara Mejia Hernandez, VC, MATH Venture Partners
- Guy Turner, VC, Hyde Park Venture Partners
- Chris Carlisle, startup attorney, Gray Plant Mooty
- Peter Johnson, VC, Jump Capital
The format was a mix of presentations, Q&A, and fireside chats between the presenters. Although targeted to enterprise software businesses, the discussions were beneficial to any business or startup leader. I found it a great mental exercise to overlap the perspective of a technology startup with our bank’s growth trajectory and strategy. You may as well.
How I’m doing it smarter the second time around by Scott Burns
Scott Burns started the day off when a number of excellent stories. Scott recently started a company called Structural that simplifies access to employee data, helping organizations communicate more effectively, strengthen teams, and drive performance. Businesses that invest in the employee experience are 4X more profitable than those who don’t according to the Harvard Business Review. We’ve all heard that you need to make sure the right people are in the right job; his tool works to make this more effective. He has a wealth of experience in the startup space after successfully founding and ultimately selling GovDelivery in 2016 for $153 million.
He had a number of great nuggets that are worth sharing.
- Product is the shadow of the problem. It’s not enough to know the product is working. Measure if your clients are achieving success with the product and how. Not just if they are satisfied.
- User experience is a key success factor for new businesses today. More data driven, automated.
- He’ll take hustle over a rolodex any day.
- If you claim experience, what are you an expert at? If a conference called you to do the keynote, what would it be on?
- How do you learn? You should know how you consume new ideas and adapt to market changes because in today’s market your experience becomes dated quickly.
On raising capital & communication with investors:
- People who were critical factors in raising capital in his first business were those that had a stake in the business and wanted to see it succeed. They provided the introductions to raise the additional capital the business needed.
- Take your investors on the journey with you. His experience is that Minnesota startups could do a better job of communicating the status of the business and where it is going to its investors. Great communication ultimately builds trust.
- Partnered with a number of business leaders to re-position the former Ecolab headquarters building into Osborn370 by presenting a modern work space and community. St. Paul has been hindered by lack of investment by many landlords and the group has proven with the new project that success can be achieved. The 225,000 SF building under the new design and initiatives is on pace to be completely filled.
- Coworking space is not at capacity. Have you been to a Como coffee shop lately? Growth potential still exists.
The Rise of Everywhere Else by Paul Singh
Paul brought more insights to thinking about entrepreneurs and startups not only in Minnesota but across the United States. His entertaining commentary and jabs at the audience made him enjoyable to listen to. A former founder and now investor. He founded a company that processed 50% of the internet traffic before its sale in 2004 and has made more than 2400 investments totaling over $300 million in capital over the past decade. He doesn’t sit in an office, he travels with his wife and kid in an Airstream across the United States and blogs on his website Result Junkies.
“Don’t compete on credibility. Be more interesting.” Paul Singh
A great quote, he stated this in reference to a business strategy but on a personal level I think he also has accomplished it. He definitely left me interested and I will be reading more on his travels and perspective. For me, his story was one about hustling and focusing on growth. Even more so, focusing on the second derivative of growth, acceleration. How much is the business accelerating? If it is accelerating faster than its growth, the business will be even more attractive to potential acquirers, investors and strategic partners.
Another message was that we need more entrepreneurs. Not more angels, venture capitalists, or even, dare I say it, bankers. I agree with him and certainly a reason Flagship Bank has been an active supporter of 1millioncups Eden Prairie. We need to foster an environment of encouragement, community and access to resources.
How to Grow Your Business 10X by Garrett Moon
If you have any interest in content marketing or managing social media accounts, you have heard of CoSchedule. Garrett Moon is the Co-founder & CEO and has grown an amazing organization in North Dakota. Using superior lead generation activities and marketing, their team has supported the development of a great content calendar software.
He provided some great insight on what companies should be considering when trying to grow their business quickly. Unlike most companies, they started blogging about the product before it was built. This allowed them to bring potential customers along for the journey. After a while, it pivoted to also providing helpful content to marketing teams on how to best plan and coordinate their content calendars. Regular posts provide value, keep the brand active, drive traffic and hopefully drive email address acquisition. In today's world, a business needs to own its audience. He listed six keys to their blog:
- Invest in Design (original photographs, clean design)
- Actionable & Unique (consider looking a top posts in key search topics, provide better, more actionable content)
- 10X or 10% (focus on the ideas that will drive 10X growth vs 10% growth)
- Free content upgrades (provide downloadable content which also drives email address acquisition)
- SEO keyword
- Content types that can be executed on well
From here, it’s mastering lead generation and measuring how many new email addresses, how many unique visitors and how you will use this information to build your follower base with each new post. In the end, every founder needs to be an audience builder who knows how to measure results.
Raising Money: Working with Advisers, Term Sheets and Venture Capital Investors
It’s no surprise that a good portion of the day was around how to manage your business to attract capital and how to best negotiate with advisers, angel investors and venture capital investors.
Priscilla shared her local story of working through the recession at EnergyPrint and how the poor choice in advisers and partners really hampered her growth in the early years. Distraction from your core vision and mission is a real tax on the business. Don’t surround yourself with too much expertise as it can damper your ability to maneuver forward and most definitely don’t use stock as a payment unless tangible value or strategic partnerships can be established. This was later corroborated by Chris Carlisle. If stock is needed, be sure to keep it to less than 5% ownership as a gross pool for these advisers.
Chis Carlisle from the Entrepreneurial Services practice at Gray Plant Mooty shared a lot of detail on fundraising term sheets and structural considerations in a discussion with Casey Allen. A couple of resources mentioned in the discussion are must haves for any entrepreneur heading into a capital raise:
- Venture Deals by Brad Feld & Jason Mendelson. A book dedicated to discussing term sheets and raising money.
- Safe (simple agreement for future equity) Financing & Documents resources at Y Combinator. Their discussed in detail on what are they and how do they work.
As you raise money, there is a method to the madness and working with a knowledgeable attorney can be helpful in missing any potential landmines. Some common items to keep in mind:
- Never give up too much equity in a seed round. It limits flexibility for future rounds of investment and if outside investors own more than 50%, new investors may think incentives are not aligned between investors and founder/management.
- Corporate investment partners are indifferent from other investors from a pure investment standpoint but considerations are important in regard to potential intellectual property. One solution can be carve outs on information rights. Moreover, the higher proportionate ownership of a corporate partner may also make it less attractive to a venture capital round.
- Corporate investment partners with a right of first refusal is a fire alarm for any future investor. It limits outside acquisition interest and limits company flexibility.
Samara, Guy and Peter all provided great and different insight as entrepreneurs are looking to raise venture capital for their growing business. The lack of transparency in the business leads many to get frustrated but I thought these three were both open and honest about how to approach a potential investment partner. Consider their investment thesis, their background and how your business fits into their business just as much as how you need their capital to grow yours. In short:
- Do your research
- Build relationships
- Have materials and financials in order
- Ask for a reasonable amount
Venture capitalists turn down 95% or more of the businesses that make application. I found it instructive that Samara and Guy discussed a proper reaction to a “no.” Samara referenced cases whereby follow up and communication is important. It opens up a potential opportunity for future investment if the story changes. In other words, take the long game. Recall the conversation and the reason for a no. Once a quarter, follow up with specifics on how your business has met/exceeded plan and is addressing any voiced concerns. This gets back to Scott’s point. Transparent communication builds trust and doing this with a backdrop of a prior conversation can show strength in execution and bring the investor along on the journey.
Another comment that is important is that venture capital comes into the picture before the business has built tangible value. An accounting value may easily result in a zero valuation but the entrepreneur and the venture capitalists are using their best estimates for growth and market opportunity to value the future of the company. Be flexible and get several term sheets to best confirm your view of the value of the company and ultimate lead to a satisfactory acceptance of a term sheet.
Peter added some key metrics to own in the Enterprise software space. These are the focal points that if done well will resolve many other metrics investors will monitor. They are:
Efficiency Score = Net New ARR / Net Cash Burn
An expected score for a seed round would be between 0.5X to 1.0X
Churn Rates = Churned MRR / Starting MRR
Net Churn Rates = (Churned MRR – Expansion MRR to Existing Customers) / Starting MRR
How much are your customers turning over. The lower the number the better.
CAC Payback = Total Sales & Marketing Expenses / New MRR added * Gross Margin
Calculated in Months.
Overall, Peter indicated that the dollar amount of early stage investments and the number of early stage investments is shrinking. Each deal is becoming larger so keep that in consideration as you look to raise capital to grow. The business case will likely need to be further developed than in the past. On a positive note, the market for enterprise software values are around seven times revenue. This is is high by historical standard.