When public companies have shareholder meetings for than 50 miles away from an airport or more than 1000 miles from HQ, it’s a signal of bad things to come. These companies underperform by 3.7% on average.
ht Eugene Wei
Hey founders, want to hear something incredibly frustrating about seed financing? I don’t believe the forecast you show me. You know the one that inevitably has you at $100 million in revenue by Year Three? Yeah, that one. It’s a great discussion point to understand how you think of your business’ potential but as an operating plan? Throw it away post-funding. What??? Well, if you’re pre-product/market fit, over-optimizing for “hitting your numbers” can be a false positive if it creates an “up and to the right” graph that actually builds upon the wrong learnings, or masks leaky bucket of customer attrition.
Not everyone may agree – there’s a strong “growth solves all problems” camp – but in those formative days, you want to find the healthy, sustainable path forward. *Just* committing to grow customers or revenue or usage can still create a hollow company. Of course figuring out when you have product/market fit is an art as well, but here’s a great Marc Andreessen post.
Ok, so far I’ve told you the forecast I’m looking at during fundraising is a lie and the one you’re using during initial iteration is a trap. So when is the right time for a startup to build a forecast that actually starts measuring the health of the company?
The earliest a company should “manage by forecast” is post product/market fit and the absolute latest is at Series A fundraise.
Moving from managing via rearview mirror (“we’re up 10% over last week”) to prioritizing a roadmap and resources that will deliver against planned growth (“we’re up 11% week over week vs 10% forecast”) is a big maturation milestone. But how to set a forecast? A combination of Bottom Up and Top Down modeling.
Bottom Up Forecasting
Bottom Up Forecasting uses your trailing data and the “naive” assumption that tomorrow will be the same as today. So if you’ve been growing 25% month over month, just draw that out over the next year. Sanity check this by asking yourselves (and your team) what has to happen to maintain this pace. Do they believe it’s sustainable? What have been the main drivers of your growth to date and are they likely to continue into the future? If you’ve been spending to acquire customers (profitably hopefully!), what sort of budget will be required to support the ongoing acquisition? Are there areas of variable cost or support that need to be scaled alongside the growth? Important to make sure your forecast and your operating plan match up!
Top Down Forecasting
Top Down Forecasting sets a goal for a point in the future and works backwards to calculate what monthly growth is required to hit the target. What are some typical goals? Profitability. Revenue runrate that you believe is required to raise additional financing. A monthly manufacturing number that starts to see economies of scale take effect. Top down is interesting because it essentially ignores today’s reality and says “look, to be a viable company we need to get to X milestone by Y date. Let’s go!”
Since most of Homebrew’s investments are in early stage companies, we get to experience “first forecast” with almost all of them. In most cases we try to shift focus to a Top Down Forecasting model as it’s more milestone-based, which we think is appropriate for early stage startups. But even a Bottom Up Forecast is better than no forecast. Reviewing actuals against plan is a great conversation starter for seed stage Board meetings as Series A investors increasingly expect to see mature, well-managed companies that will know how to productively spend the additional funding. Fear not the forecast for it will show the way!
I’ve been searching online for good forecasting discussions/resources which are applicable to tech startups. If you see any, throw the URLs in the comments and I’ll add them here.
So the average American gives 3.1% of their pre-tax income to charity annually. Thinking about my own giving over the past decade, there have been several times at or above this percentage, but more often under (largely based on not sufficiently increasing giving during windfall years). There are three products which, if they existed, could help me in being more charitable:
1. “Tripit for Charities”
Nearly all my giving occurs online and is thus accompanied by an email receipt which I save for tax purposes (usually by printing out and throwing in a pile until next year’s tax season). I’d like the ability to forward these receipts to a product which aggregates and tracks my giving so that I can more easily take my deductions but also be reminded of organizations I’ve given in the past, what I gave and how to give in the future. All the email receipts include the tax ID number of the charity so the data here is readily available for parsing. This product can also give me relevant alerts and summaries about activities from the charities I support, since I don’t find their individual mailings to be very effective (nor is following a charity on social media the best way for me to stay connected).
2. Small Group Subscription Giving
I like to give. I like my friends. I like learning. Combine the three and you could do something where a group of friends sign up to commit $100/mth to charitable giving. Selection of the charity each month could take place from a small list of vetted charities all with the same theme (eg “Environment”) or where the service selects a charity from the interests the group has pre-selected. If 10 friends commit, it feels like you’re making a meaningful contribution each month ($1000) and getting educated about an organization that you might not have known about. All the while creating more positive interactions with the people you care about. I *think* something like this must already exist but have had trouble finding one.
3. Matching Dollars
Matching dollars can be a strong incentive to give. When I was at Google their generous corporate matching program definitely caused me to give more – I wanted to “max out” the match allocation each year. Why can’t there be a version of this which isn’t aligned with one’s employer? Here’s how I imagine it would work:
Basically, trying to use various repositioning of how corporate donations are used to help get addition dollars from smaller givers. I’m sure the best behavioral economics could do a redesign of charitable giving checkout flows that would be quite effective!
I first “met” entrepreneur Marc Barros via his blog One Entrepreneur’s Perspective which contained a solid string of posts analyzing why GoPro succeeded while his action camera startup Contour struggled. As we got to know each other IRL, I was excited to hear about his next project, the phone camera lens Moment. Marc agreed to answer a few questions for me here.
Hunter: Your blog “One Entrepreneur’s Perspective” has some really great lessons learned from building Contour, what led you to start documenting the experience and sharing publicly?
People overvalue knowing. The Internet turns knowledge into a commodity. Most - market size, a Stack Overflow question, detailed Wikipedia page – are readily available via a Google search or two. At Homebrew we have the chance to meet a good number of teams each month. In the 1000+ we’ve discussed since 2013, I can’t really think of many that I wouldn’t consider to be knowledgable. They had lots of information about their industry, both learned and experienced. They possessed facts that were pretty much indisputable. But when I think about the founders we’ve backed, the teams we got most excited by, it wasn’t the depth of their knowledge, it was the uniqueness of their insights.
Facts are largely statements about the past and present, but startups are about the future. They’re bets about what is going to happen next – informed by knowledge but not limited by it. And while a fact is a truth, an insight is a hypothesis. It could be wrong. That’s the scary part. Running into the fog and assuming the ground is there beneath your feet.
When I see people pitch investors or interview for jobs, the difference between solid and exceptional is often the presence or lack of a POV. Sometimes it’s because they’re playing it safe. Sometimes it’s because they never were coached or challenged to embrace critical thinking. Sometimes it’s because there’s no passion there. “I want to work at a startup and you’re a hot company.”
So before you raise funding, apply for a job, tell a reporter about your startup, make sure you’ve got your insights ready to go. Not just the facts.
“I’m one of those people who thought Airbnb would never work.” That’s the provocative opening line in David Brooks’ recent op-ed about trust and the emerging peer economy. Brooks finishes by theorizing “we’re probably entering a world in which some sectors, like energy, retain top-down regulatory regimes. Other sectors, like bake sales, are unregulated. But more sectors, like peer-to-peer, exist in a gray zone in between.”
At Homebrew we’ve also spent time looking at what comes after top-down industrial capitalism. Our conviction is so strong that we’ve coined our interest the Bottom Up Economy, which focuses on how individuals, teams and small-medium enterprises leverage tech for new marketplaces, revenue streams and efficiency. For example, Layer brings a communication API to developers, Shyp is the easiest way to ship anything and UpCounsel is building the world’s largest law firm out of high quality, independent lawyers.
Anyway, check out the Brooks editorial.
New York Times gives some love to startups helping small businesses leverage tech. We’re into this area pretty substantially via our Bottom Up Economy thesis at Homebrew (how tech can help the middle and longtail). Here’s one of my favorite quotes from the article:
Simplifying the nuts and bolts of selling can free up small business owners to focus on expanding their business or communicating with their customers, he said. “Some of the only people who can expand now are the Starbucks of the world,” Mr. Richelson [ShopKeep founder] said. “What we’re doing is taking back Main Street for small businesses.”
So with the year halfway gone, I’m taking a look at how I schedule my time. Semi-related, was charting some of my daily “workflows.” Here’s the first 15 work minutes of my day, which usually occurs ~6:30am PT. What do your first 15 minutes of work look like?
Get up and grab my phone:
1. Check Techmeme site to see read new headlines.
3. Open Twitter app and look through “Mentions” tab from whilst I slept. Respond/fav.
4. Open Mailbox app for email.
First pass - archive everything new that’s not important.
Second pass - open & respond to anything which can’t wait until I kiss my daughter (she’s either still sleeping or with my wife by this time). Usually it’s < 5 messages.
Third pass – read The Skimm newsletter to catch me up on top news stories from the past day.
5. While I’m on home wifi, update Reeder for my RSS feeds.
Disclosure: I’m an investor in Nuzzel and The Skimm via my venture fund Homebrew
How would someone compete with LinkedIn? At Homebrew we see a number of startups that are directly or indirectly competing with LinkedIn by trying to carve away part of their user base/functionality or driving towards a vision of the future faster than LNKD can. Our focus on the Bottom Up Economy means we’re very interested in marketplaces, platforms and products which empower individual professionals, so we’ve had the chance to engage with these founders over the past year.
Charles Hudson of SoftTech VC wrote recently about competing with LinkedIn – it’s a great post. I agree with Charles’ basic statement that you don’t compete by trying to unbundle their feature set. In general beating an incumbent in a network-effect business is difficult if you’re doing just a piece of their feature set (unless it’s an area the LargeCo has interpreted dramatically differently and incorrect). You also rarely win by taking them on in their battleground – ie who will be LinkedIn 2.0? Probably LinkedIn. You need to be your own 1.0 first or there’s no way I’m going to rebuild my professional graph somewhere else.
There are three types of startups in this area where I’ve had trouble getting religion:
That said, what are the areas of professional network/identity which interest me and where I think LinkedIn could be more vulnerable to competition?
Anyway, Charles’ post got me thinking especially with regards to the LinkedIn API, which seems today to be giving away more than it gets them. Homebrew’s interested in entrepreneurs thinking about these opportunities or commenters who want to go deeper on discussing whether LinkedIn is assailable in the near future.
(disclosure: I’m in the LinkedIn Influencer program so I blog via their site often, including likely this blog post #ironic)
How early do you want a founder thinking about exit path? During a recent email exchange I advised a founder to remove the “potential exits” slide from the main section of his deck. He thanked me for the feedback but also noted I was the only investor to recommend that change and in fact, at least one other had suggested its addition. [For clarity, I'm not an investor in this company, nor is Homebrew evaluating for investment].
Why don’t I like to see “exit” slides in seed decks:
What are some of the potential reasons to include this type of slide? The only one I can think of is Pragmatism: Shows founders want to build something of value and will be a good investment.
Now, I DO want founders to tell me about their ideas for a business model (if it’s not clear from Day One), but I want hypotheses they think they’ll test during the seed phase, NOT a laundry list of various ways to monetize. I sometimes come across slides that just list 10 or so bullets with things like “Ad Monetization,” “Per User Charges,” “Sell Data,” etc. That means nothing to me. It’s lazy.
Am I missing reasons why exit landscape should be a thoughtful piece of seed stage funding decks?