- Consumer startups often (not always) need enormous scale in order to become profitable. This is particularly true for advertising-supported businesses where the ARPU (average revenue per user) is very low. That means that you need to raise a large amount of capital, and because it's usually a winner-takes-it-all model, you have to expect a "digital" outcome – either it becomes a big hit or you lose. There's nothing inherently wrong with that, but for me the threshold for making an investment like this is much higher than it is in a case where you can follow a lean startup approach and where the downside is more limited.
- Most of the large, old software players are focused on, and in some cases trapped into, the classic enterprise software sales model of selling complex, on-premise software for extremely high prices using large sales forces. Neither the products nor the distribution strategy work well for SMBs, which creates huge opportunities for startups to fill the needs of the Fortune 5,000,000 with easy-to-use, on-demand, pay-as-you go SaaS applications. Examples from my portfolio: FreeAgent (online accounting for freelancers in the UK), inFakt (online accounting for SMBs in Poland), samedi (resource planning for doctors in Germany), Vend (Web-based POS system) and many others.
- Over the last decade, the Internet entered almost every area of life and chances are that if you're looking for anything – ANYTHING – you'll do it online. It doesn't matter if you need a doctor, a haircut, a pizza, a taxi or a mechanic – either you're looking (and booking) online already or you will in a few years. More and more SMBs understand this, they know that being online is or will soon be critical to their business. This leads to huge opportunities for companies that help SMBs go and be found online. Portfolio examples: Lieferheld (restaurant delivery), DigitaleSeiten (online directories, e.g. for roofers), StyleSeat (platform for beauty professionales) and several others.
Saturday, November 12, 2011
Tuesday, November 01, 2011
BTW, I feel bad about leaving a two months blogging hiatus with a self-serving post...but anyway. ;-) . A lot of the nominees are rallying people to vote for them, and the award is of course self-serving even for the organizer, TechCrunch Europe, which is encouraging all nominees to add banners and backlinks to their websites. So I'm in good company. But all joking aside, The Europas is a great event which features some of the best startups in Europe and celebrates entrepreneurship, something we can't do too much in Europe.
Now without further ado, here are the categories that we're nominated in:
Best European Startup Accelerator (Team Europe)
Best VC of the Year 2011 (Point Nine Capital)
Best exit 2011 (Brands4Friends acquired by eBay)
Best Angel or Seed Investor of the Year (Yours truly)
Here's the link to the voting page.
Bonus tip: In the Best Service Provider to Startups category my vote goes to the law firm Brown Rudnick for helping create the Seed Summit legal docs and for doing great work for European startups and investors in general.
Sunday, August 21, 2011
Wednesday, August 10, 2011
To put it as simple as possible, the health of a SaaS business is mainly determined by two factors: Customer lifetime value (CLTV) and customer acquisition costs (CAC). One could almost say that CAC and CLTV are for a SaaS company what wholesale price and sales price are for a retailer. Just like a merchant needs to buy products and sell them at a higher price, a SaaS business needs to acquire customers at costs that are lower than the customers' lifetime value. Costs of goods sold are minimal for a company selling software over the Web, and costs like product development decrease as a percentage of revenue when you get to bigger scale. So for a bigger SaaS player, sales and marketing costs are the driver of profitability.
There are of course lots of other metrics and factors that you can look at in a SaaS company: How good is the product, how big is the market, how strong is the competition, what's the churn rate, is the company growing organically, how good is the team, to name just a few. But the interesting thing is that most of these other aspects are factored into CLTV and CAC already: If CAC are low, the product has to be good, otherwise it wouldn't be that easy to sell (exceptions apply). If CTLV is high, churn can't be that big. Similarly, if there are stronger competitors in the market, aggressively marketing a better product, it's unlikely that the company's CAC will be low. And if a company has a great CAC/CLTV ratio, the team almost has to be great because you have to execute well in all areas in order to achieve that.
Of course I'm not saying that everything is captured in those two metrics, and because they are based on present and historic data they won't reveal future developments of the industry that you're looking at. But at the minimum, looking at these two metrics is a great start when you as an investor evaluate a SaaS company.
Provided that there is some data on these two metrics, that is.
But early-stage SaaS companies which are still in public beta or just went live don't have this data yet. Getting meaningful data on your CLTV takes time, since calculating it based on the monthly churn rate of your first few customer cohorts isn't reliable. And it takes even more time until you get an idea of your CAC because you have to set up marketing programs, try various things, recruit and train sales people and so on, and of course improve the product, the on-boarding experience etc. along the way. I'd say it'll take you at least 6-12 months following your product's launch until you may have reasonably reliable data on CAC and CLTV if everything goes well – and much longer if you've got hiccups along the way.
As early-stage investors, we aim to invest in a company earlier than that so we have to look for other things – leading indicators for great CAC/CLTV ratios in the future, so to speak:
- Visitor-to-trial conversion rate. If it's high, it indicates that your target audience is interested in your product. It also says a lot about your ability to communicate the value of your product clearly and with few words, which is essential for products that are sold online. And obviously, the higher your visitor-to-trial conversion rate is, the lower is your CAC, all other things being equal.
- Trial-to-paying-account conversion rate. An extremely important metric, for obvious reasons. If people pay for your product, that's the best sign that you're delivering real value to them. And again, higher conversion means lower CAC.
- Engagement and retention of your early users. It's hard to get meaningful churn data within just a few months because companies often don't terminate their accounts right away when they stop using a SaaS product, especially if your product has a low price point. Therefore we have to look at usage metrics such as daily or weekly logins and various application-specific metrics to find out if a product is really used by its customers, which of course is the basis for a viable business and high CLTV in the future.
- Enthusiasm of your early users. Having a number of early users who are absolutely in love with your product is extremely valuable, even if it's a small number in the beginning. Those users will recommend your product to everyone they know, give you great testimonials, help you get your first case studies, get the word out on Facebook and Twitter and maybe even help other customers in your support forums. And for us, these VIP users are a strong signal that you're solving a real pain and hence a strong indicator of product/market fit (which is the basis for low CAC and high CLTV).
- Your team. Last but not least and at the risk of stating the obvious, we only invest when we're extremely confident in the founder team. That doesn't mean that you have to be a serial entrepreneur or that we expect decades of experience (as much as we appreciate that!). As early-stage investors we're happy to work with young entrepreneurs who are smart, dedicated, talented and results-driven. We're happy to help you complete your team and coach you in areas like sales & marketing, SaaS metrics or fundraising which you may have limited expertise in. The one area where we think you do have to excel is your product. You have to be able to create an awesome product and a beautiful website that sells your product. You also have to "get" modern SaaS – that whole idea around consumerized business applications that are powerful yet easy-to-use and can be sold online using a low-touch sales model. We strongly believe that this need to be in the DNA of the founder team.
There are other factors that we look at, such as market size and competition, but the ones described above are among the most important ones. I hope this helps a bit – if you have any questions please leave a comment or email me.
Monday, August 01, 2011
One of the things that Rory talks about is the surprisingly large size of a surprisingly large number of niches in business software:
"A phrase that stuck in my mind from a 1994 software report, was the description of the business software market as a 'land of a thousand niches'. [...]
Business software, unlike either the consumer internet business, or the technology infrastructure business, is not a monolithic market, but instead is a series of separate vertical and horizontal opportunities. [...]
As a result there will be many medium sized, ie $1.0 Bn plus, SaaS technology companies built over the next five years to satisfy these various needs."
As an investor in Propertybase (CRM for the real estate industry), Clio (practice management for lawyers), samedi (practice management for doctors), FreeAgent Central (accounting for freelancers) and other SaaS startups targeting vertical niches, I wholeheartedly agree. Each of these companies operates in a niche, but these niches are so large that each of these companies has the potential to become worth several hundred million dollars.
"A great example to me of a vertical is that has massively exceeded what I would have guessed as its potential is Real Pages. The company focuses on automating the process of managing residential apartment buildings. My gut would have been “niche vertical, not that interesting”. Turns out I was wrong. Real Pages has a$1.8Bn market capitalization and $200 MM in trailing revenue! I believe this is indicative of what will be a multi-year wave of SaaS based application software companies in specific verticals or functional areas, generating $1Bn valuations."That reminds me of StyleSeat, a startup that provides business tools and lead generation for the wellness & beauty industry and which Point Nine Capital has invested in. Correct me if I'm wrong, Pawel, but I think neither of us has a particular affinity with the wellness & beauty industry (I usually let my hair grow until my wife (thankfully) makes it clear to me that my look is absolutely unacceptable, and Pawel doesn't have a particularly maintenance-intensive hairstyle either). So initially we were a little skeptical about the market – until we learned that wellness & beauty is a $40B industry in the US, with about 250,000 beauty salons and employing about 850,000 people. Gotta love "niches" like this!
Monday, July 18, 2011
So in other words, after more than a decade in entrepreneur-land and three years in angel-heaven I'm now going to the dark side of VC-underworld. That's bullshit, of course, but I needed an excuse to make that "went to the dark side" joke (which is starting to get trite, sorry) and post that picture which I found googling for "the dark side". And in fact, I'm not leaving angel-land completely, since our goal at Point Nine Capital is to be "The Angel VC", as the tagline below our logo says.
What that means is that although we are a (small) VC fund, we're acting more like your friendly angel investor – no large committees, faster decision-making and importantly, simple and founder-friendly terms. At the same time, entrepreneurs partnering with Point Nine Capital will benefit not only from my personal expertise and network but also from the vast experience of my partners and colleagues.
More information about Point Nine Capital is available on our website, and feel free to email me if you have any questions!
Wednesday, June 01, 2011
There’s one thing that sucks though. You have to say “no” all the time. Whether you’re a private investor who invests his own money or a VC managing a fund, chances are that for every investment you make you’ll have to say “no” at least 20-50 times. If you make a couple of investments per year, that’s a lot of “no”s.
In fact, if you don’t see something like 20-50 startups for every investment that you make I think it’s unlikely that you’re doing a good job and that you’ll make money. It either means that you have poor deal flow (investor lingo for investment opportunities that you have access to), that you don’t have prudent investment criteria, or both. The best VCs see hundreds of deals for every investment because they have the best deal flow and invest extremely selectively. That’s even more “no”s.
Now, I don’t have an issue saying “no” to a founder after having taken the time to evaluate his startup carefully. Whether I’m not convinced of the product, think the market is too small or feel there’s too much competition – there are all kinds of possible reasons why I don’t want to invest in a company, they are legitimate, and I can share them with the founders. That kind of candid and competent feedback is almost always appreciated by the entrepreneur and will often help them focus more strongly on specific weaknesses of their business.
The problem comes in when there’s no specific reason for the rejection and the startup just didn’t excite you enough to make it into those maybe 10% of startups which you decide to give a full evaluation. In most of these cases most investors will say to the entrepreneur something along the lines of “We really like your concept but it’s a bit too early for us. We’d love to take another look when you have a little more traction”. Which is not untrue, but in many cases is just another way of saying “I don’t know the market well enough to form a real opinion. Somehow your product or your team doesn’t get me sufficiently excited relative to all the other deals that I have on the table. Or maybe I just don’t have enough expertise in what you’re doing. Whatever. Please come back when you can prove with real data that there’s a market for your product and that you’re able to sell it (and I hope that by that time you’re still interested in my money)”.
For the founder, answers like these are of course useless and can be quite frustrating, especially if he talks to dozens of investors and keeps getting similar feedback. That’s actually quite sad if you think about it – smart, young, passionate people who leave secure jobs to work 70+ hours a week to turn their vision into a reality get rejections and more or less useless feedback on what they may have to do differently.
So what can be done? Firstly, I think, it’s important for founders to understand that because of the large volume of potential investments which all VCs see, only a small percentage of the startups can get a close look. All VCs I know are very hard-working people but there are just not enough hours in the day to take a close look at every deal. Moreover, although whether or not your startups makes it into that small percentage is largely dependent on your story, there are also outside factors at work which you can’t control at all – for example, it depends on how many other attractive deals the VC has on the table when you start talking to him.
Secondly, many investors (myself included) could do a better job of making their investment criteria transparent – those factors which determine if you take a closer look at a startup or not. On most VC websites you’ll read something like “We look for exceptional teams which have built a great product to disrupt a large market”. Pretty vague. An example of someone who does it right is Bessemer Venture Partners. In their “6Cs of Cloud Finance” article they say, referring to the Customer Acquisition Costs Ratio of SaaS companies: “Anything above one means you should invest more money immediately and step on the gas (and please call Bessemer immediately because we want to fund you!) as your customers are likely profitable within the first year". Of course there's also a lot of gut feeling involved and VCs also have to trust their instincts when deciding which deals to pursue further – but it must be possible to distill some of this into criteria which others can understand.
So – I’ll post some details about my investment criteria here shortly. Promised. Until then I will occasionally point founders to this blog post to show them that I at least take the issue seriously.
Sunday, March 20, 2011
If there’s one thing that all fast-growing technology startups have in common, it’s that they’re constantly looking for great developers. Microsoft CEO Steve Ballmer got it right:
My portfolio companies are no exception, almost all of them are looking for engineers in various roles right now. So – if you’re a great developer and you’re living in San Francisco, Edinburgh, Vancouver, Berlin, Cracow, London or Munich (or willing to relocate) and if you want to join one of the best SaaS companies in the world, check out these job postings.
Zendesk (San Francisco)
FreeAgent Central (Edinburgh)
P.S.: If you’re like me and you’re not an engineer I (probably) won’t have a job for you but I’ll buy you a brand new iPad 2 for a successful referral of a candidate for one of the positions listed above!
Friday, February 25, 2011
The conventional wisdom is that starting a web business is (at least) 10x less expensive today than it was 10-15 years ago. It’s said that a decade ago, you needed millions of venture capital in order to launch an Internet startup whereas today, thanks to open-source software, cheap hardware and new ways to acquire users for free (in particular virally via Facebook/Twitter and with SEO via Google), you can do the same with a small fraction of that. And that, while great for entrepreneurs, makes it difficult for large VC funds with many hundred million dollars under management, to deploy their capital because startups ask for less money.
I’ve heard it dozens of times, from VCs, founders, bloggers and others. It’s almost like a mantra, part of the Web 2.0 creation myth, which everyone believes without challenging it. I always wondered if that theory is true, because it didn’t cost Christopher Muenchhoff and me more than about $100 to build and launch DealPilot.com in 1997. That, approximately, was the cost of one month of shared hosting, and in the second month, revenues paid for the hosting costs already. The first “big” investment was our own server, around $3000 as far as I remember. We did raise some money to expand the business later, but that was much later – around nine months after launching the service. So it clearly was possible to launch a state-of-the-art web service back then with little to no investment. DealPilot.com wasn't the only one, of course, I'm just using it as an example.
When I say “state-of-the-art”, I mean state-of-the-art based on 1997/1998 standards, of course. That's what was needed to be competitive. We of course wouldn’t have been able to build a video streaming site à la YouTube for $100 (hardware and bandwidth was too expensive), and launching an online shop would have been more expensive too (Magento didn’t exist yet). That’s logical, but trivial, and not what the theory wants to say, right?
In other words, I think the theory surely is that “starting a web startup in 2011 that is competitive in 2011 costs 10x less than it cost to build a web startup in 1998 that was competitive by 1998 standards”, right? (If the theory was “starting a web startup in 2011 that is competitive in 2011 costs 10x less than it cost to build a web startup in 1998 that was competitive by 2011 standards” that would of course be true, but I think it wouldn’t mean anything. Being competitive by 2011 standards (often) means that you need an iPhone app. In 1998 there was no iPhone. Get the point?)
And that is what I’m questioning.
Now, if the theory is wrong and it wasn’t that much more expensive to build a web business back then, why did startups raise so much VC at the end of the 1990s? One possible answer is simply “because they could” (and because everyone else did, and you didn’t want to be overtaken by better-funded, faster-growing competitors). Fuelled by a crazy IPO market, there simply was an incredible amount of venture capital available. Maybe that’s the real reason, or at least part of it, why it now appears that launching a web startup was so expensive in the 90s. What do you think?
Friday, February 04, 2011
It’s a bit like “Pageflakes for businesses” (although “Chartbeat for everything else” is probably a better analogy), which is one of the reasons why investing in Geckoboard was a pretty easy decision for me. Another reason is that Geckoboard will be provided as a web-based service, with a free trial and a pay-as-you-go subscription model. Exactly the kind of SaaS business that I’ve developed a focus on in the last two and a half years. Another reason was the huge demand for the product's beta invitations (one of my favorite requests for a beta invite is this tweet, but there are many more). And of course the fact that the company was founded by an extremely sharp guy, Paul Joyce. Yes, a lot of reasons.
I also have a strong bias for startups with websites and applications that look beautiful because I think that's crucial in a world of consumerized enterprise applications. The talent and the experiences to create software that looks and feels great is rare and probably under-rated, but Paul and his team have it. Check out how awesome Geckoboard looks, no matter if you view your dashboard on a large wall-mounted screen, a computer monitor, an iPad or an iPhone.
Tuesday, January 11, 2011
The question was:
"For web apps, is it better to ask for the credit card before their trial starts (e.g., on the signup page) or after their trial expires?"My Quora answer follows below.
* * * * *
I don't know the answer, and there probably is no general answer, but I recently put together a little model that helps to understand the determinants better:
Click here to open the Google spreadsheet
The blue values are sample (dummy) input values that you can change. The model is based on the following ideas and assumptions:
- There are two types of visitors: Those who sign up whether or not a credit card is required (let's call them Group 1) and those who sign up only if no credit card is required (Group 2). There is of course a third group, those visitors who don't sign up in neither case, but we don't need them here.
- If you require a credit card you have a certain visitor-to-signup conversion rate from the users of Group 1 (cell D8 and D32). And per definition, no signups from Group 2 users in that case (D33). If you move to a no-credit-card signup, on top of the signups from Group 1 (D9 and E32) you get a certain amount of signups from Group 2 users (E33) so your total visitor-to-signup conversion rate is higher (E34).
- Looking at the trial-to-paying conversion rate, let's assume there's a baseline conversion rate of Group 1 trial users in the CC-required case (D12 and D38). If you remove the CC requirement I would expect that rate to drop (D13 and E38), because a) trial users who have provided their CC already may feel higher 'pressure' to try the product within the trial period, they feel more 'invested' and are less prone to procrastination; and b) doing nothing is easier than actively terminating your account. Some users will forget to terminate or just don't care.
- Looking at Group 2 users, again of course no signups or customers in the CC-required case. In the no-CC case you'll be getting a certain amount of trial-to-paying conversions from those users (D15 and E39). I would expect that rate to be lower than the baseline conversion rate because Group 2 users are, on average, inherently less interested in your product than Group 1 users (more tirekickers).
So far so good. You can see the number of paying customers for each of the two cases in row 40.
The next thing to look at is churn, i.e. users who cancel after you've charged them at least once (I'm using charged-at-least-once as the definition of a 'paying customer' in the model):
- I would generally expect the churn to be higher in the first few months following conversion to paying because some users may still be in their 'extended trial period', even if they're paying already. Also, the longer your customers use your product, the more value they will hopefully derive from it so they get less and less likely to cancel (D19 vs. D 21).
- In the CC-required case I would expect that difference in early churn and later churn to be higher, maybe much higher, because many of the users who forgot to terminate within their free trial will terminate within the first months after subscription (D18 vs. D20).
Using the data on customers, churn and your revenue (or gross profit) per customer per month you can now calculate if you're better off requiring (D48) or not requiring (E48) a CC upon signup. One last factor that I've included is the cost that it takes to serve a trial user, e.g. bandwidth and time from your support team, which may or may not be significant depending on the nature of your business.
There are of course a couple of caveats:
- The sheet is completely useless until you've tested it and until can fill it with real data. The purpose of the model is NOT to replace real-life testing by making some assumptions and pretending that that lets you decide which option works better. Quite the opposite – the purpose of the model is to understand which parameters you should look at and measure.
- The model doesn't include all factors which may be relevant (their relevancy depends on your business, and I didn't want to make it too complex). For example, one question is if you consider tirekickers an asset (because even if they're not interested in buying your product yet, they may tell their friends about it or come back to you later) or a burden (because they divert resources away from the more strongly interested prospects). Another factor that I haven't included are different pricing plans – I've included just one price per customer per month.
Feedback very welcome!
Monday, January 10, 2011
samedi offers a SaaS booking and resource planning solution for doctors in Germany. In some ways, samedi is doing for physicians what Clio is doing for lawyers – provide an easy, secure way to manage your practice from any device that is connected to the Web. Using samedi, physicians and clinics can also easily offer their patients a way to conveniently make appointments online, 24 hours a day, 7 days a week. samedi also allows healthcare providers to optimize their practice workflow using a simple ERP solution and lets practices, health insurance companies and other players in the healthcare industry collaborate online.
Bringing the healthcare industry, which at least in Germany is pretty old-school and bureaucracy-ridden, into the Cloud age is a very tough nut to crack but there's a huge reward for the company that pulls that off. And if there's anyone who can do that, it's the founders of samedi, Katrin Keller and Dr. Alexander Alscher who have the relentless persistence (and the ability to do with very little sleep) that is necessary in that market. After a slow-ish start in 2008 and 2009, samedi started to take off in 2010. Having grown revenues six-fold in 2010, samedi is now used by more than 2,000 physicians and other health practitioners to manage more than one million patients. Thank you, Katrin and Alex, and on to a great 2011!
This was the last part of my little series. My other investments have not or not yet been announced, but expect to hear some exciting news pretty soon!
Tuesday, January 04, 2011
The next stop is Crakow in Poland, home of inFakt.pl. inFakt.pl was founded in 2008 by two extremely sharp students of the Cracow University of Science and Technology who wanted to build a simple, easy-to-use, web-based invoicing and billing application for small businesses in Poland. I invested in the company together with Team Europe Ventures early last year.
2010 saw the company dramatically expand its product offering to become a complete accounting solution for SMBs in Poland and grow the team from just five people at the beginning of the year to 14 today. To date, more than 80,000 companies have signed up for the software, which is marketed using a freemium model, making us the largest provider of our kind in the Polish market. Dziękuję bardzo, Wiktor and Sebastian, and congrats on a very successful year!
Another investment that I made in 2010 is Propertybase. Propertybase, based in Munich, offers a simple-to-use yet powerful software solution (do you see a pattern here?) for people in the real estate industry. It offers real estate developers, agents and brokers a complete CRM solution which allows them to capture leads, create sale and lease offers and agreements, manage listings, track payments and more. Since the software is entirely web-based, users can enjoy all the SaaS advantages that make the movement from on-premise to on-demand so irresistible: Never worry about updates, backups and security, access to your data from anywhere, easy integration with other Cloud-based offerings.
Apparently the real estate industry worldwide has been waiting longingly for a solution like this: In 2010, Propertybase won customers from more than ten countries and four continents and grew its customer base by more than threefold. And our customers really love us – so far our churn has, amazingly, been zero. Thank you, Mike and Max, supa g'machd!