Bored Meetings vs. Board Meetings

One thing I've been thinking about for a while is how to make Board Meetings as effective as possible. If you want to read some great posts about the topic by people who've been to many, many more Board Meetings (and apparently Bored Meetings!) than I, check out these links:

• Brad Feld's initial post on the topic back in 2004
• Reactions by Fred Wilson (post 1, post 2, post 3)
• More recent posts by Brad Feld and Fred Wilson, as well as Mark Suster

In my opinion it's not that much about whether a Board Meeting is boring or not (but the little pun makes for a good headline so I used it too). It's easy to have a good time in a Board Meeting – you talk about a variety of business issues, you learn from other Board Members' experiences, people tell anecdotes etc. It happens rarely that I'm bored in a Board Meeting, but non-boring does not yet equal effective.

The questions that I often ask myself after a Board Meeting are: What are the real, tangible, actionable results of the meeting? Was it worth the time, usually easily 4-5 man days if you count everyone's traveling time, or could the same have been achieved in a 1-2 hour conference call? For SF Bay Area startups, holding physical Board Meetings may be a no-brainer because everyone is close by anyway. But in Europe, getting all Board Members into one room usually means that at least half of them have to spend a day traveling.

The root cause why it's often hard to give a clear, positive answer to the question above (whether the meeting was worth it) is the dramatic information asynchronity between the founders and the investors with respect to the startup's business. It's just natural that the founders know ten times more about their business, but if the information asychronity is too large, the founders have to spend too much time of the Board Meeting updating the investors. Then it becomes an update meeting. (That has its own merits, but running through numbers and current developments isn't something you need an in-person meeting for. In my experience, one-to-many as well as one-to-one conversations can just as well be done over the phone or Skype. Many-to-many discussions about complicated stuff is where the advantages of a physical meeting come into play.)

Also, if the investors aren't sufficiently in touch with the company it'll be hard for them to provide valuable input, and most of the ideas and suggestions they come up with will be things which the founders have already thought about themselves months earlier.

So the most important thing that you as a founder can do in order to enable an effective Board Meeting is to provide a detailed Board Pack before the meeting itself. The Board Pack should be sent out at least 48 hours before the meeting to give the investors a chance to get simple questions clarified prior to the meeting. The investors of course need to do their part as well, i.e. read the Board Pack carefully and clarify questions before the meeting. The idea is to get almost the entire "update part" done prior to the actual meeting so that you have the whole meeting for the strategic or tactical questions that you'd like to discuss.

80% of the meeting's time should be allocated to these 3-4 questions and the goal should be that you leave the meeting with a conclusion/decision on these questions, or at least with significant progress and clear next steps. That means you may have to politely interrupt people to refocus the discussion. If information asynchronity is the #1 enemy of effective Board Meetings, the human tendency to digress is enemy #2. You have to fight both.

Finally, if there are no important questions that you'd like to discuss with your investors, don't hold a Board Meeting. Do an update call instead. Usually there's lots of things to discuss, but don't force it.

One last point, pre-Board updates every ~ 2 months are not enough to keep investors in the loop. If you want your investors to really know what's going on (and thus enable them to be much more helpful), send out a weekly update email with KPIs (or a link to your Geckoboard :-) ) and information on last week's progress, current problems and next week's priorities. That weekly email can and should be very brief so that it doesn't cost you much time to write it, but even just a couple of bullet points can be immensely helpful if they are provided routinely once a week (as a company gets bigger, bi-weekly or monthly updates are sufficient but in the early days I think weekly works best). Just like the founders should do their best to keep the investors in the loop, the investors of course should do their best to stay up-to-date as well – follow the company on Twitter, subscribe to the company's blog, read everything that's written by and about the company and its key competitors, and participate in the discussions on the company's "Board Basecamp" (a Basecamp site set up for the company's founders and investors, something which many of my portfolio companies have done and which is very valuable).

What we look for in early-stage SaaS startups

I recently wrote that investors (myself included) should do a better job of making their investment criteria transparent to founders. Today I'd like to tell you a bit more about what we at Point Nine Capital are looking for in SaaS startups (other sectors are something for another blog post).

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.

The land of a thousand niches

I just came across a great blog which I hadn't been aware of yet: "VC Matters" (100 points if you get the pun), written by Rory O'Driscoll of Scale Venture Partners. Rory has an incredibly successful track record of SaaS investments, having invested in home-runs like Omniture, ScanSafe, Box.net, DocuSign, ExactTarget and many others. After reading through his posts I immediately added his blog to my RSS reader and to the "must-read list" of recommended resources that I maintain for the founders of the SaaS startups that I have invested in. I'd say Rory is one of the Top 3 VC bloggers about SaaS, the other two being David Skok of Matrix Partners and Philippe Botteri, who recently moved from Bessemer to Accel.

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.

Rory continues:

"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!