Written by Jay Turo on Wednesday, July 15, 2015
As any venture capitalist worth his salt will tell you, there is a chasm of difference between the mostly grounded-in-reality financial forecasts offered by public companies, and the almost never to come true "rosy scenario" projections offered as a matter of course by startups and small businesses.
And while large public company CEOs and CFOs are judged as a matter of the highest honor on their ability to deliver on projections, exceedingly rare is the entrepreneurial executive that comes anywhere close to meeting forecasted results.
For a sense of the extent of how bad this problem is, a partner I know at a prominent venture capital firm estimates that of the 30+ companies that his firm has invested in, only two have consistently met or exceeded their financial projections.
And let me add that it isn’t like the inmates are running the asylum at my friend’s fund - as a prerequisite of having them as an investor, each of their portfolio company CEOs are required to undertake and report on a vigorous, quarterly budgeting and forecasting cycle.
And also let’s not assume that my friend is just a lousy investor. Lack of consistent financial performance is pretty much par for the course for startups and small businesses.
So what is going on?
Are the entrepreneurs just not ready for prime time? Are their managerial skill levels that many levels below their big company brethren?
I’ll say this - it is certainly not for lack of trying.
Most small technology company executives work longer hours than businesspeople have at any time in history.
If you doubt this, pick up Ron Chernow’s masterful biography of John Rockefeller.
In it, we read enviously of Mr. Rockefeller's daily 9:15am visits to his barber, his afternoon naps, and his unwavering commitment to always leave the office each day, no matter the season, so he could be home before dark.
And it is not for a lack of know how.
Modern entrepreneurs - with their always-on, “click of a button” best practice knowledge and connections base - are a better informed and more globally networked lot than at any time in history.
So if they aren’t the problem, is it modern business itself?
Has it just become - with all of its technological bells and whistles, all its globalization and pricing pressures, all of its customer unpredictability and fickleness - just too unwieldy a beast for any small company to ever consistently ride?
And concurrently, has accurate financial forecasting become equivalent to throwing dice?
Or more disturbingly - is it not even worth doing as even when they do turn out to be accurate it just falls into the category of the blind mouse getting some cheese every now and then?
For better or for worse, modern business demands that we take a more “Balanced Scorecard” approach in judging managerial effectiveness and entrepreneurial progress.
Factors like intellectual property development speed, organizational design, and client satisfaction as measured by a companies’ Net Promoter Score are proving to be just as important predictors of a business’ value creation as is its forecasted-to-plan accuracy.
Please let me clear: On their own these factors do NOT make a business valuable.
Rather, the right matrix of them, properly prioritized, IS highly correlated with businesses that attain high profit exit and investment outcomes.
As an added bonus, these non-financial key performance indicators (KPIs) can be designed to be far more consistently predictable than traditional projections.
As such, they are usually far better measures of executive effectiveness than budgeting and forecasting “gap analysis.”
You just have to have the guts to forget about the numbers for a quarter or two.
Or, if you are really get good at defining, tracking, and accomplishing the right non-financial KPIs, to forget about them permanently as they will just take care of themselves.
To Your Success,
Written by Jay Turo on Wednesday, July 8, 2015
Why - once we have met our basic needs for food, warmth, and safety - do we work?
There are the usual, default answers.
For Status. Power. In response to a "fight or flight" instinct, hardwired deep in us.
Because when we were young, we saw our parents do it and when we grew up, we wanted to be like them.
What a bunch of hamster on a wheel mumbo-jumbo that makes folks at the end of their life look back and say why did I waste so much of my precious life on that?
Instead, how about this?
Let’s be heroes.
Wikipedia defines a hero as one “who, in the face of danger and adversity or from a position of weakness, displays courage and the will for self-sacrifice…for some greater good of all humanity.”
Now that’s good.
It touches the various dimensions of our being.
Heroism in action is a strong, hard effort - a pushing to the limits of one’s physical endurance.
Heroes are intellectually wise. They are fair, sober, and big, and rarely let anger and fear get the best of them.
And when we are in the presence of a hero, we are spiritually risen up, are we not?
And you know what goes hand-in-hand with heroism?
Hard, honest work - taking great, exquisite care to do things right – is at heroism’s heart.
As is teamwork. And creative work, toward an idealistic end.
As is work on the behalf of the powerless, for and with the young and the old.
As is winning the right way - with grace and with recognition of those that aided in your journey.
And as is trying your absolute hardest and most honest best, and sometimes coming up just a bit short.
Heroic work, in all its forms, is work worth doing.
You know it when you see it. And unfortunately, also when you don’t.
Let’s look for the heroes in our lives - those right around us and those in their blessed multitude in this wide and inter-connected world of ours.
Let’s celebrate them and let’s strive to be like them.
Written by Jay Turo on Saturday, July 4, 2015
On this great day when we celebrate America, its freedoms and way of life, please enjoy (and as you are moved share with the hashtag #SpiritofAmerica) this list of thirty of why this is the greatest country in the history of the world:
#30. Gettysburg. Guadalcanal. Bunker Hill. Heroes lived here.
#29. Contract Rights. Judges. Juries of One’s Peers. Redress for grievances - practiced here.
#28. Yosemite. The Grand Canyon. Yellowstone. Natural Wonders - in abundance here.
#27. The Interstates. State Highways. County Parkways. The Open Road - Great to be on it here.
#26. Uber. AirBnB. Lending Club. The Economy – Shared Here.
#25. Lexington. Concord. Saratoga. Yorktown – Life, Liberty, and the Pursuit of Happiness. Fought for here.
#24. The Bill of Rights. The Supreme Court. The Rule of Law. Justice served here.
#23. The Stock Market. Home Ownership. Low Inflation. Assets built here.
#22. Driverless Cars (and Electric too!). Wearable Devices (the iWatch!). The Internet of Things. Tomorrow’s Technologies – Imagined Here.
#21. Diamandis. Kurzweil. Saffo. The future - abundant here.
#20. Hollywood. Disney. Broadway. Entertainment happens here.
#19. The World Series, The Super Bowl, The Masters. Sports are spectacle here.
#18. Jesus. Moses. Mohammed. The Buddha. Religion gets along here.
#17. Gates. Jobs. Page. Zuckerberg. BIG stuff - invented here.
#16. Murphy. Martin. Seinfeld. Rock. Life is a laugh here.
#15. Madonna. Mariah. Whitney. Elvis. Michael. Frank. Songs are sung here.
#14. Faulkner. Hemmingway. Roth. Franzen. Stories are told here.
#13. Kaiser. Pfizer. Genentech. Merck. Healing happens here.
#12. Boeing. Caterpiillar. Deere. UPS. FedEx. Stuff gets built here and gets there.
#11. Amazon. eBay. Ecommerce - transacted here.
#10. Facebook, Twitter, LinkedIn. Networks - connected here.
#9. Google. Yahoo. Bing. Information - organized and accessible here.
#8. Kleiner. Sequoia. Mayfield. Ideas - backed here.
#7. The Inc. 500. The Fast Company 50. Entrepreneurs - inspired here.
#6. Alaska. Montana. Wyoming. Space - open here.
#5. Chicago. Boston. San Francisco. NYC. Cities pulse here.
#4. Jefferson, Lincoln, and Roosevelt walked the Earth here.
#3. The first guy in charge here voluntarily gave up power, when he could easily have been named ruler for life. Character stands here.
#2. The current guy in charge was born to an immigrant father and a teenage mother who was so poor that she received government assistance in raising her only child. Possibility abounds here.
#1. The Greatest Generation was born here, fought and won there. And then they came home, put their heads down, and built a new America. Civil rights, cities, suburbs, highways, schools, and more.
So on this day especially, we say THANK YOU!
Written by Jay Turo on Wednesday, June 24, 2015
The saddest lament of entrepreneurs and owners of private companies seeking to sell and exit their companies is that they want their businesses to be valued on their future potential, and not its CURRENT profitability.
Given that the typical, offered purchase multiples for smaller businesses – as in those with less than $5 million in EBITDA – can be as low as 1 or 2 times last year’s tax return profits, this is understandable.
In fact, we often see purchase offers based on multiples of MONTHLY earnings – not exactly the “happily ever after” exit dreamed of when these businesses were founded!
Yes, getting a business valued and sold based on factors other than its earnings while by no means impossible nor uncommon, is HARD.
Yet…every month there are literally hundreds of companies that sell for very high multiples of profits, for multiples of revenue, and even companies that are in a pre-revenue stage that sell every day just on the value of their technology, their people, and their work processes.
What do they?
Well, here are six things that companies that sell for high multiples do that you can and should too.
1. They Are Technology Rich. Companies rich in proprietary technology in all its forms – patents, processes, and people – are far more likely to be valued on factors other than profitability and correspondingly attain purchase prices beyond a few times current year’s earnings.
As an example, the likelihood of a medical device company being sold or taken public is twenty times greater than that for a services - or a low-to-no proprietary technology company - doing so.
2.They Have Gold at the End of their Rainbows. Businesses that sell for high multiples communicate exciting and profitable future growth.
Their managers demonstrate understanding of the big 21st century “macros” - i.e. how technology evolutions and globalization will impact positively and negatively their industry, market, customers, and competition.
Concurrently, these managers understand the micros well too, especially how their business’ human capital will adapt and grow as change happens.
All this translates into well-developed stories that if their businesses aren’t making it now, there is gold (and a lot of it!) at the end of their rainbows.
3. They Are Great Places to Work. Businesses that sell are usually characterized by that good stuff that we all seek in our professional environments.
They are culturally cohesive. If they don’t have low employee turnover, they at least have well - defined career progression paths. And their compensation policies align and pay well with desired performance.
Quite simply, they are great places to work and are reputationally strong within their industries.
4. They are Process and NOT People Dependent. Businesses that are overly dependent on charismatic owners or a few dynamic salespeople or engineers rarely sell because the majority of their value can simply walk out the door tomorrow and never come back.
Important aside: for those entrepreneurs that harbor the desire to sell but not the ambition to build a meaningfully sized, process-based organization should then focus their exit planning almost exclusively on technology and intellectual property development.
If they are unwilling / unable to do this, then they should put the idea out of their head for now and invest this energy into more meaningful pursuits.
Like my favorite - making absolutely as much money today as one possibly can.
5. They Have Good Advisors. Businesses that do everything right but have messy financial statements because of poor accounting, messy corporate records because of poor or non-existent legal counsel, and messy “future stories” because of poor exit planning and investment banking advice, simply do not sell.
Sure, they may get offers, but invariably these deals fall apart in diligence and at closing.
And as anyone that has ever been through a substantial business sale process knows, almost nothing in business is as time and energy-draining as is getting close to a business sale and not getting it done.
6. They Get Lucky. Luck remains a fundamental and often dominant factor that separates the businesses that successfully sell from those that don’t.
The best entrepreneurs and executives don’t get philosophical nor discouraged by this but rather they embrace it.
They try new things. They follow hunches. They make connections.
They start from the pre-supposition of “accepting all offers” and work backward from there.
They and their companies can be best described as “happy warriors” – modern day action heroes ready for the fight. When they get knocked down, they smile, wipe their brow, and get right back in the fray.
And you know what? Our happy warriors, living and thinking and working like this day after day channel some mystical power and draw great luck and more to themselves and their companies.
Yes, companies that sell are the good and lucky ones.
Follow the advice above and fortune just may smile on your company and those you invest in too.
Written by Jay Turo on Wednesday, June 17, 2015
Last week, I wrote about the connection between vision, strategy, and action in a business, and how all three are made possible through and with Tough Love.
And essential to effective Tough Love is Balance. Great organizations find the balance between:
a) Making the right changes at the right time and
b) Having the discipline to “keep on keeping on” and just doing more of what is working.
Note well that b) is particularly hard to maintain when the tasks and activities that ARE working become repetitive and lack in excitement and drama.
So how do executives find this balance - between being creative and just keeping their heads down and plowing forward?
Well, luckily in the past few years a large and impressive business literature has sprung up that codifies best practices of how to find this all-important balance.
It can best be summarized by the phrase “immersion plus spaced repetition” and goes like this:
1. Everything, of course, begins with ideas, with the best ones arising from a series of introspective strategic planning and goal-setting sessions that clarify objectives and the obstacles standing in the way of their accomplishment.
This immersive process - done at least annually but at the best companies quarterly - both defines what needs to be done and inspires all to take on the hard work of getting it done.
The value of inspiration cannot be underestimated – Thomas Edison famously said that “genius was 99% perspiration and 1% inspiration” but that 1% “spark” is uber-critical in propelling an organization through the various thresholds of change.
2. But, as anyone that attended an exciting or invigorating conference or strategic planning session can attest (and as I am sure Mr. Edison reflected on often during long nights at the lab), inspiration fades over time.
Even worse, when the inspiration is not followed through on, cynicism can set in and actually leave an organization worse off than if the planning sessions were never done in the first place!
So how to avoid this distressing fate?
3. Well, by keeping the ideas, goals, and objectives of the planning session alive through their regular review and adjustment.
Think of it this way - if a well-run strategic planning session is the essence of good leadership, then repetitive goals reviews are the essence of good management.
Great managers check in with their teams as often as daily - if only for 5 or 10 minutes - to review the day’s objectives and to keep the shorter term work flow aligned with the longer term planning and mission objectives.
The old adage that the only way to eat an elephant is one bite at a time is never more true than when is comes to these spaced and repetitive management check-ins.
When done right, they measure, acknowledge, and reward incremental progress and prevent the desire for the perfect from getting in the way of the doable and the done.
Then, the organization reconvenes and reviews progress against stated goals, assesses what worked and what didn’t, and then refines and updates the key goals and objectives.
And after this next round of strategic planning, what is done?
Well, the spaced and repetitive management check-ins begin anew.
Wood is chopped, water is carried.
Following this simple but disciplined formula, over time great ideas become great realities, businesses are built, and legacies and fortunes are made.
And for investors, far more than technology these “above the line” leadership, management, and company culture disciplines separate the well-run companies to back from the disorganized ones to avoid.
So what are you waiting for?
Written by Jay Turo on Wednesday, June 10, 2015
Every business needs a vision - a clear definition of what its leadership seeks the business to become.
And every business needs a strategy - a roadmap of how the business will reach its vision.
Once the vision and strategy are clear (and yes, this is hard), the next step is action planning – the day-by-day mapping of how all of this good but sometimes theoretical “stuff” will actually get done.
This, involves determining which projects will be completed (and as importantly, which ones will NOT be done), by whom and when, and how many resources - work hours, money, and assets - will be required.
Now, this is lovely for the whiteboard but what business more often than not looks like is this:
Unclear, Unshared Vision. With all the time most management teams spend talking to each other, it's surprising how often they have different pictures of what everyone is supposed to be doing and in what direction they are supposed to be heading.
It's the hard and repetitive job of leadership to repeatedly communicate the plan (i.e. the vision, the strategy, and the day-to-day roadmap of how to get there) until all are on the same page.
And then rinse and repeat.
Planning Once Per Year, Out Of Routine. So many of us, in January, think about our personal goals for the year ahead.
Similarly, many businesses work on their yearly plan during the same month of every year.
And then they forget about it.
The best businesses, in contrast, create, refine, and live their business plans in real time, every day.
Yes, this is hard, now more than ever because of…
The Tyranny of the Urgent. A HUGE challenge to executives and businesses attaining greatness is how difficult it is, because of technology, to not let those “urgent, but NOT important" activities dominate our days.
More than ever, we must fight for the time and attention to do the great and important work, and block out those insidious distractions everywhere and always around us.
No Process or Methodology For Strategic Planning. A best practice is to focus on vision and strategy in one set of sessions, and then on the day-to-day action planning, accountabilities, and progress measurements in another.
In discussing vision and strategy, we are in creative mode, exploring any and all options and ideas.
In contrast, figuring out action plans and accountabilities are best suited for separate, more “Tough Love” and analytical-type meetings.
With appropriate time set aside for vision, strategy, and action planning, a business can experience the collective joy that comes from knowing exactly what it is striving toward and how it will get there.
Everyone at the business will feel more grounded, balanced, and centered.
Being so all will come to work with greater purpose and passion.
And, at the end of the year, will have far more to show for their efforts.
Written by Jay Turo on Wednesday, June 3, 2015
“Success is not final, failure is not fatal: it is the courage to continue that counts.”
- Winston Churchill
At the very heart of entrepreneurship, small business, and investing sit risks, roadblocks, challenges, and delays.
The statistics are only debated to their degree but not their overall thrust - a small percentage of businesses ever become meaningfully profitable and a smaller percentage still are ever sold for a meaningful price.
In other words, the vast majority of businesses - by objective, financial measures - do not achieve their desired and sought after objectives..
Even worse, a lot them do so badly - never achieving even one dollar in revenue and / or go so deeply in the hole that they have significant and negative financial spillover effects.
Like business and personal bankruptcies and investors losing all of their money.
In a word, the trials and tribulations of business are and can be traumatic.
Now it is not the kind of trauma that survivors of war and natural disasters experience, but in the world of work it can be about as bad as it gets.
Yet both domestically and around the world entrepreneurs are starting and growing businesses at a greater rate than at any time in the last 15 years…3% of the U.S. adult population annually start one, and a multiple of that contemplate doing so.
And investors make more money investing in startups and small businesses than in any other asset class.
So what gives?
Well, there is the financial view, namely that the rewards of a business sale are so great and life-changing that having any probability of its occurrence make the grave financial risks of business - building more than worth taking.
But this at best only explains half of the story.
No, there is something else going on here, and research regarding of all things - Post Traumatic Stress Syndrome - points to what it is.
Research done by among others Dr. Richard Tedeschi of the University of North Carolina shows that strong, negative experiences like war and natural disasters are NOT as scarring as once thought.
In fact, the opposite is true.
Statistically, most survivors of traumatic experiences - like prisoners-of-war and victims of natural disasters - come out of them stronger and on most measures, out-perform those in their peer groups unaffected by the awful events.
Now everyday all of us should count our blessings dozens of times as “there but for fortune go I’ and offer nothing but great compassion and empathy for those suffering trauma, especially when it comes through no fault of their own.
But we also should take significant solace and inspiration from the rest of the story.
Life, as it does, goes on.
And according to the latest research, the old adage is true of that which does not kill you REALLY does make you stronger.
Now it would not be proper to equate a business failure with the physical and emotional traumas experienced by survivors of war and disaster, but entrepreneurs and executives can and should draw important wisdom from them.
Such as if you “fail” at this particular business, you won’t be broken and scarred forever.
And that professional and entrepreneurial growth is a participatory sport – learned only by doing and trying and striving and not by watching and fretting and waiting.
And then there are the related ideas of diversification and iteration.
Such as, in business, it is almost always far better to have two business “failures” and ONE success than it is to go zero for zero.
For the entrepreneur this does not necessarily mean running multiple businesses concurrently, but it does mean that the business strategy should be iterative and testing based.
Successful Internet companies get this intuitively - see Amazon and eBay and thousands of others - and you should too.
As for investors, they should take advantage of the incredible opportunity that the modern financial system offers to back multiple entrepreneurial companies, and not just one or a handful.
With the average return of the startup company asset class being 2.5X in a mean time of about four years, the odds are strongly in your favor if you both invest right and diversify properly.
So entrepreneurs and investors get in the game!
Failure is no way near as bad as advertised and if approached with the right spirit and strategy, it can truly be the ultimate blessing in disguise.
To Your Success,
Written by Jay Turo on Wednesday, May 27, 2015
The power of business intelligence tools and technologies (BI) to provide managers and leaders accurate, real time visibility to the performance of all aspects of their companies - marketing, sales, operational financial - along with "automated" insight as to how to improve them has made BI one of the highest ROI arenas of business management in the world today.
This is evidenced by both the huge sums of money companies are investing in BI (forecast by IDC to grow to over $52B in 2016) and by the research that show "BI Best in Class" companies enjoy double the revenue growth and triple the profit growth relative to their “BI Average” competitors (Gartner Group).
Yet…for the executive looking to put the power of BI to work in their companies it can be a very noisy and confusing (see terms like predictive analytics, Internet of Things, Hadoop, Executive Management Platforms, etc.) buying marketplace to navigate.
So here is a short-hand primer on how to start putting BI to work in any company in just a few short days…I call it being BI H.A.P.P.Y and it goes like this:
High ROI is Everything. When it comes to BI, the first place to look is at it should be - cutting through all the noise and clutter and asking any BI provider a simple question: Show me how your tools will generate high ROI and make my business money right away.
This should of course be the first question asked for any business investment, but especially so in a burgeoning arena like BI, where a lot of the providers are new companies themselves and when you cut through their marketing veneers don’t really have documented proof for their stated value propositions.
Press them on it, and if they just keep coming back with platitudes versus ROI proof then move on.
Agnostic is Best. A key distinction when it comes to BI tools and approaches is whether they are agnostic / open-source or closed / focused on a specific business process / industry application.
My strong recommendation is at this early BI juncture is to take the agnostic / open-source approach, because no matter what BI tool one chooses, in just a few months there will be a next generation option that will be cleaner (i.e. less riddled with bugs), probably less expensive, and more naturally business intuitive than the current crop.
This does not mean that one should wait to get started until these next generation tools arrive, only that the systems and platforms that one commits to now should be easy to upgrade / port over to / connect with the next generation systems as they become available.
As importantly, agnostic / open-source BI systems also allow for a standardized, company-wide “Manage by Data” look and feel unavailable in industry / process specific systems.
The Best BI is Prescriptive AND Predictive. BI at its best should be both Prescriptive - interpreting for us the meaning and importance of historical results and how to improve them and Predictive –performing the regression analyses for us as to what the future is mostly like to hold.
Is the technology to do this fully there yet? No, but it is getting close, and the smart executive recognizes the value of building these prescriptive and predictive BI muscles now because when the technology does gets there, the companies that can’t run this “analytics race” will be lapped by those that can.
DFY. A fundamental BI dimension is the Done-For-You (DFY) to Do-It-Yourself (DIY) spectrum.
While it is important to develop strong DIY BI competencies, we also should recognize that because BI tools and technologies are so new and because so much of the value of them is found "On the Margin," that working with a BI skills-specific service provider is almost always a necessary best practice.
A skilled BI service provider helps us:
• Decide which BI analytics and dashboard tools and technologies are most appropriate for our business
• Finds the data in our organizations - on our desktops, in our spreadsheets, and through the various SaaS programs and platforms on which our companies run
• Visualize and parse the data in ways that work for us as managers and leaders
• Interpret what the data means and what to do about it
• Make sure that all of the above doesn't “break” and that the “BI muscles” within our organization are built and remain strong
H is for High ROI
A is for Agnostic / Open-Sourced
P is for Prescriptive
P is for Predictive
Y is for DFY (Done-for-You)
Follow this simple meme and watch the results from your BI Investments and for your company soar.
Written by Jay Turo on Friday, May 22, 2015
Last month, data management and dashboard start up Domo announced it had raised an additional $200 million in growth capital, bringing its total haul over the past four years to a truly remarkable $450 million.
Now given that the company has yet to even come close to breaking even, this can be viewed as either a great validation of Domo's business model, or as more evidence of the “Bubble Mania” of the current technology financing landscape and a screaming signal to get out while you still can.
For those in the bubble camp, Domo is a “Tech Unicorn,” a recent start-up worth, either through a financing, an acquisition or IPO, more than $1 billion usually without any meaningful profits to speak of and thus instead valued via reasonings and justifications far outside of the pale of traditional finance and accounting.
On the other hand, while financings for companies at Domo's stage of development have never been as large and audacious as they are now, do remember that valuing technology companies on a combination of their future earnings promise, the intonations of their charismatic founders, and just the out and out coolness of their technology is nothing new, and that much more money has been earned than lost on these kinds of bets.
From this perspective, Domo is just another in a long line of American software companies - like Uber, Palantir, Airbnb, Dropbox, and Slack - with the ability and promise to transform and disrupt “Business as Usual” for core life and work processes across markets and industries.
And investors just can't enough of them.
On a macro level, this has a lot to do with simple supply and demand. Globally, most investors only feel comfortable putting money to work in places with stable political systems, stable currencies, liquid exit markets, and ones that have protections against expropriations of wealth once earned. So both crossed off are domains where 80%+ of the world’s population’s live and work, and characteristics that the U.S. in general and California in particular have in unique abundance.
On a micro level, most investors prefer to deploy capital without taking Technology Risk (as would be typical in say - a biotech start up).
So easy to understand and believe in are Software-as-Services Models like Domo's, with business models often boiling down to a simple cost of customer acquisition cost divided by lifetime customer value metric (in Domo's case, over $50,000 per customer!).
And most importantly, investors have and will always love to back Disruptive Technologies - which, to be clear, is different from Technology Risk.
This has been true from the days of Rockefeller with Oil, to Ellison, Gates, and Jobs with the computer and software, through Zuckerberg with social media to Kalanick and Chesky with Uber and Airbnb and The Sharing Economy.
And so it is potentially true with Domo and its promise: The better organization, visualization, and analysis of data, toward the end of changing the world of business done by gut and hand to one done by statistics and evidence.
And because this value when delivered to customers is so potentially significant - making their enterprises more efficient and predictably profitable - Domo's ability to both charge a lot for its services and have customers stay with them for a very long time is again...
...easy to understand and believe in.
And that's why that $2 billion valuation may not be so high after all.
Written by Jay Turo on Thursday, May 21, 2015
There were some great responses to my post last week as to the poor returns experienced by venture capital fund investors.
Some suggested that the blame for this lied more with the very difficult market and deal conditions of the past decade than with the VC investment model itself.
Typical was this comment submitted by a San Diego VC: "I agree that the VC fund industry is guilty as charged when it comes to being opaque as to real returns data, but I challenge you to revisit your analysis in 24 to 36 months, when we all will have had time to benefit from today’s strong M&A and IPO markets."
One reader reference Gust Founder David Rose’s new book - “Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups” and to Rose’s main contention that to access the 25% IRR potential of the asset class one must hold positions in not less than 20 companies.
He asked, “Is this practical advice? I mean - who really has the time to find, diligence, and invest in dozens of companies? And for those that don’t, are there really any “Warren Buffet-types” to back in this asset class?”
This is the billion dollar question, is it not?
And while of course anyone will be very hard-pressed to even approach Warren Buffett’s other-worldly track record, there are some powerful forces right now driving the timeliness of venture investing via the “Berkshire Model.”
These forces fall into three main categories – Improved Liquidity, Investment Flexibility, and what let’s call “Labor Arbitrage.”
Improved Liquidity. Illiquidity is a huge elephant in the room when it comes to startup and emerging company investing. Most startups and early stage companies that seek outside investors are years away from investor liquidity – either via sale to a strategic or financial acquirer, or far more rarely via a Public Offering of the Company’s stock.
Now Berkshire Model companies, as entities with fundamentally investment vs. operating mindsets more naturally position, language, and network their businesses in finance contexts.
While doing so by no means assures successful outcomes, it does create the far more likely possibility of secondary market liquidity alternatives for investors that “want out” in the interim before the final exit.
Investment Flexibility. Investment companies in the Berkshire mold have great flexibility to structure investments of various types: traditional straight cash-for-equity, warrants, contingent warrants, revenue certificates, convertibles, in exchange for professional services, on project-by project bases, and more.
This flexibility is a game changer, as when done right it can provide managed, diversified exposure to a portfolio of deals and opportunities inaccessible via more “traditional” means.
Labor Arbitrage. A wise man once said that all businesses fundamentally do is “bridge the gap” between markets for labor and those for products and services.
Relatedly, one of the best advantages of the Berkshire model is the ability it affords to "Mark Up" the labor involved in effecting deals and transactions.
Let’s explain this by example.
Say a finance or advisory services professional is paid a salary of $80,000 per year, plus bonuses and incentives based on deals, transaction closings, and successful exits (not atypical terms).
Let’s then utilize a 20% load factor and assume that this worker’s fully loaded cost is $100,000 per year. Let’s then assume a 2,000 hour work year (we hope they work harder than this, as this is such an opportunity filled industry!).
Then, on a hourly basis, this professional’s fixed cost is approximately $50 per hour.
Now it is neither unusual nor unreasonable for even midlevel management consultants and investment bankers to bill out at $250 an hour and more on a cash basis, and much more than this on a cash equivalent basis when services are performed in exchange for contingent and / or equity compensation pay structures.
The critical point here is that when services are performed in exchange for equity compensation , even with average deal “picking” there is a natural Deal Arbitrage Effect that can easily create positive expected value on each and every deal.
A massive advantage.
Like everything associated with startup and emerging company investing, a lot of hard and smart work is needed to do it right.
But when done so, the payoffs can be enormous.
Just ask any Early Berkshire investor for confirmation.
To Your Success,
P.S. Like to learn how to apply these principles to your portfolio? Then attend my webinar this Thursday, “What the Super Angels Know about Investing and What You Should Too.”
Click Here to learn more.