The Five Internet Mega-brands of 2000

Here are a couple of updates from the Global Internet Primer for today.  This one is a keeper: The Five Internet Mega Brands:

It’s interesting that, really, only Amazon is still innovating and would qualify as a serious “brand.”  And of course, this is before Amazon could spell PUBLIC CLOUD.  Also interesting that I don’t ever think of a company as a Internet or non-Internet brand these days.  If I recall correctly, Netscape is already part of Yahoo! at this point in time (June 2000) so we’re talking about a 4 companies…3 of which are largely in decline these days.

Here’s another fun chart:  Global Internet User Growth:

The chart below shows the actual Global Internet user growth (blue) compared to the predictions (red) in the chart above.  It great that, despite being very bullish, the MS forecast was low by about 36% by the end of 2004.  …so let’s see: in (more or less) one decade, the dominant companies crumble or are in serious decline and adoption far outpaces the most bullish projections.  Even if we guessed that the big players of 2000 would wane, could we have predicted Google or Facebook?  What would have been done differently if we all knew that more than 2 billion folks would be online in a dozen years?  thoughts?

Global Internet Primer – from June 2000

Full disclosure: I tend to save too much “stuff.”  Old start-up T-shirts, BYTE magazines from the late 80’s, the exterior signage from past start-ups (true: BroadJump) and other relatively priceless memorabilia. 😉  I recently realized that part of my collection includes this 725 page collection of research and presentations from Morgan Stanley, published in June of 2000:

725 pages of fun A couple obvious things worth pointing out: first, this was only 12 years ago.  A little more than the average life span of a typical VC fund; basically just a decade ago; really, the blink of an eye.  Second, this was really interesting timing relative to what was about to happen to the tech industry and stock market. One of the main analysts was Mary Meeker (now at VC firm  Kleiner Perkins).

The chart below shows the NASDAQ run-up leading to March of 2000 where we hit an all-time high of just over 5000. Today, of course, we’re trading about 2700 up from a low in October of 2002 of 1139.  So, really, this report was published just before the crash of 2000-2002 (everyone tends to remember it as just 2001).

great timing...









If nothing else, it’s amazing how quickly things can change. That’s a great lesson for start-ups (and large companies).

so…in the spirit of learning from the (recent) past and in the spirit of having some fun, I’m going to pull some choice bits out of this research over a few posts in the coming weeks.  I might even scan some of this stuff in and post it if there is interest.


  • this was before Google
  • this was before broadband was ubiquitous
  • this was when AOL and Yahoo! were kings

fun stuff to follow… see?  good thing I didn’t throw it away.

Adding experience to a founding team

A version of this article originally appeared in the Austin Business Journal. by Kip McClanahan and Morgan Flager.

Adding Outside Experience

Knowing when to bring experienced management talent into a young company is a subtle, yet critical decision point that almost all successful companies will pass through in their lifetimes.

In the early days, with little or no revenue traction from their products, start-ups can benefit from having a scrappy culture and a flat organization obsessively focused on delivering a compelling value proposition to their customers.  At Silverton Partners, we work with early-stage companies and tend to favor entrepreneurs who have a “lean start-up” mentality.  We believe the discipline of having to make hard decisions about where and when to allocate resources builds better, more capital efficient companies.

Maintaining an overly lean mentality as the company scales up can, however, have drawbacks.  As early-stage start-ups execute well, their success brings added complexity to the business.  If these new challenges are not adequately addressed, the company’s ability to continue to grow can be seriously inhibited.  It is around this time, when the founding team may need to consider bringing on an experienced executive to help take the business to the next level.

What sort of help executive help do I need?

The answer to this is different for each business.  Complexity arises in a number of forms, including the need to hire an increasing number of people, build out the required infrastructure and business processes, supporting and on-boarding larger numbers of new customers, generating more detailed financial reports and forecasts, as well as other issues.  In our experience, many of the new challenges that arise within a growing start-up, including those listed above, fall into the finance and operations area.

When is the right time to invest in such expertise?

All too often, management teams wait until issues surface and things start to break before they seek help. And when a hire is finally made, it is often too junior.  This can happen because the company is hiring for its current needs and existing budget instead of making a hire to address where in company will be in 12-18 months.  In a rapidly growing company, that can mean disaster or, at the very least, it means the company is not as well prepared as it could have been.

Here are a few scenarios that suggest your start-up might need to bring an experienced executive on board.

Your company must scale multiple business processes simultaneously

The company’s customer traction has caused an implementation and support backlog that must be scaled simultaneously with limited budget to avoid jeopardizing the company’s credibility and reputation with customers. The company is bringing additional products or services to market that require different sales motions or have different support requirements. The company is acquiring a technology or another business which must be integrated and operate without disrupting every-day operations.

Your company requires a more mature financial function

The company’s product traction is driving increased revenue and your revenue recognition policy is undefined or unclear; implementing the wrong policy today becomes increasingly difficult to correct as time goes on and the company continues to execute.  The company must perform a financial audit without disrupting the business. The company must develop an operational plan that extends further into the future than you have planned for in the past; here, any forecasting error has material impact on the businesses’ decision making and, in some cases, viability.

Your company’s audience expands

At their start, companies only have employees to manage. Then investors are added to the mix and eventually a few customers are won.  As the company grows, its audience will likely expand to new board members, new investors, investment banks, commercial banks, formal Fortune 1000 customers, channel partners, potential acquirers and others.  Who should get what information?  What is the proper messaging and presentation of information to demonstrate that the company is a professionally operated business?

The company wants to “future-proof” certain operational scenarios

Is an acquisition is likely in the next 18 months?  Who will be interfacing with the legal teams? Are you fully prepared to go through due diligence?  If so, is the company going to have IRC Section 280g / 4999 / golden parachute issues as a result of an acquisition?  Not sure what that means?  Well, that’s the point.

Is the company selling to a Fortune 1000 customer that requires financial due diligence to be completed prior to allowing business to be done?  In order to look credible, what is the right amount of information and in what format? How do you handle confidential information? How do you negotiate the contract that is they have said is non-negotiable?

Does the company’s sales compensation model not only incent the proper behavior today but scale well in the case of unexpected success?  Are there scenarios that create business-limiting liabilities or revenue recognition issues?  Does the compensation model pay out at the right time such there are no working capital issues and customers have accepted the product?

Why senior is better

An experienced executive knows many of the traps and pitfalls that young companies get into and can help prevent them proactively.  Employing more junior talent may help solve today’s problems at a bargain price, but could create larger problems in the future that must be solved in a reactive and more costly manner.

In the end, the exact right time to bring in financial and operational expertise depends on the company and its particular circumstance.  Without question, it’s hard for a young company to see around corners that it doesn’t know exist.  However, what remains universally true is that by the time it becomes obvious that an experienced CFO/COO’s expertise is necessary, it may already be too late.

The Start-up Sprint to $25m in Annual Revenue

Entrepreneurs should have a framework for thinking about how to achieve the sort of scale that justifies a $100m+ exit – and that’s what this post is about.  It’s also a result of a number of recent discussions and other posts:

  • active planning cycles in many of Silverton’s portfolio companies
  • growth targets and revenue scale discussions in those same companies
  • reading Fred Wilson’s post on the dearth of start-up exits above $100m
  • thinking about the details & drivers of past acquisitions of my companies (for example).

We need more companies that have a vision for building real businesses that scale to produce more $100m+ exits (not just $100m+ valuations).  As an investor, I’m generally less interested in the sort of pre-product or talent-based acquisitions that have become popular at places like Google, Twitter and Facebook because it takes the team out of the game and keeps their vision — the one that I invested in — from being realized. I believe that a $25m-$30m annual run-rate means that the company has a long-term perspective and executed well enough to have options:  stay independent and (likely) profitable, be an attractive acquisition target or even consider an IPO.

But let’s talk about acquisitions. For acquisition targets with revenue, acquirers tend to value acquisitions as a multiple of revenue that increases based on how strategic the business is to the acquirer and the potential leverage of the business model for the acquirer.

For example, for a business with lower strategic value to the acquirer, multiples tend to be 1x – 3x forward 12-month revenue.  For businesses that have less business model leverage (such as low-margin, services-based company that requires a significant human component to scale), the multiple could even be less than 1x forward 12-month revenue or, where possible, simply valued as a multiple of EBITDA.

For businesses that are highly strategic to the acquirer, multiples go up significantly.  3Com paid an ~11x multiple when they acquired TippingPoint because they wanted to get back into the large-enterprise IT space and wanted to do that via a high-margin security product.  TippingPoint’s cutomers were exclusively in the global 2000 and we had a world-class security product. TippingPoint was at a ~$38m annual run rate and therefore had sufficient traction to prove that customers were repeat buyers and referenceable.  BroadJump achieved around $50m in revenue in three years with about as much in backlog.

Once your company clears the $25m+ annual revenue bar and an acquirer has assessed the strategic value of your business, the following criteria will drive that acquirer’s valuation analysis:

  1. revenue concentration risk.  if you company achieves revenue scale through (to be extreme) a single, $6.25 million dollar deal each quarter (aka “elephant hunting”), the revenue concentration risk will discount your multiple.  More transactional businesses where many smaller deals make up your revenue drives a higher multiple because losing any one deal won’t de-rail your quarter.
  2. revenue consistency.  Hitting your revenue target one quarter and missing the next will obviously discount your appeal (and multiple) to acquirers.
  3. time to scale.  As a general guideline, if a company achieves $25m in revenue in less than 4 years, it’s a defacto a high-growth company with good execution. Conversely, if your company has been around 8 years and has yet to achieve such critical mass, both investors and acquirers will (at least) wonder what’s wrong with the business.

Given the above, if your company is a reasonably strategic acquisition target, executing well, with at least a $25m revenue run rate should deliver an exit over the $100m mark because your multiple should be more than 4x the current annual revenue run rate.

Let’s assume we’re talking about a software product company.  Whether you price and sell your product on a monthly basis, you can certainly do the math to understand the revenue it delivers on a per-month basis.  Therefore, the very first observation is that your product’s selling price has a huge impact on how complex it will be to scale your business. A product that delivers $100 per month will require nearly 21,000 customers to achieve $25m annually; a $10,000 per month product will take (only!) 208 customers. For what it’s worth, I think the most resilient, scalable software businesses charge somewhere in between these two monthly goal posts.

May 2012 UPDATE:  recently, I came across Jason Cohen’s post that discusses “Which is better: Many customers at low price-point or few at high price?”  The discussion swirled around the merits of selling more units (i.e. maximizing reach) versus selling more expensive units (i.e. maximizing per-unit profitability).  A lot of what makes Jason’s post a good (and fun) read is that he’s discussing the issues inherent in high-growth versus life-style businesses.  Full disclosure: as an investor, I really only care about high-growth businesses.

Starting from ZERO-revenue, your start-up will progress through several phases on your way to $25m annually…which is $6.25m quarterly…which is about $2.1m per month.  As the business passes through these phases, more and more of the business is understood and infrastructure to scale is put in place.

The five phases of revenue scale & what they mean:

Phase One:  $0 — the first sale or two

  • the company starts to prove it can build a complete product
  • it proves that you can twist someone’s (mom? dad?) arm to become a “customer”
  • it proves that you’re not unrealistically priced (although you may be leaving money on the table)
  • phase one is the beginning of measuring conversion, activation and on-going activity rates

Phase Two:  getting to the first dozen sales

  • entering this phase, the the company has achieved some degree of product-market fit but it is still learning something new with each sales transaction
  • it proves the company can stick to their product and sales plan but says nothing of how good those plans will be in the long term
  • the company can to begin to characterize the cost to acquire a customer…but not yet able to characterize cost to serve this market.  cost to serve = cost to acquire + support + keep active (and therefore remain the customer)
  • in phase two, the company has yet to prove that it can really scale sales and the sales motion is most likely “brute force” with little repeatability

Phase Three:  getting to $1m per year

  • entering this phase, the company has generally proven product market fit and, consequently, the list of next “critical” features to add will be a mile long thanks to customer input
  • it proves the company has started to scale sales and characterize cost-to-serve at this level:
    • the company has a defined and repeatable “sales motion:” a fully direct sales force, lead gen + an ISR (inside sales rep) team, or touchless via leads and web-based transactions.
    • data-driven understanding of where to invest to grow sales and revenue
    • the customer or buyer is well understood… And therefore messaging should be mature at this point
    • the company should have knowledge of market trends such as seasonality and other buying behavior such as multiple decision makers and sales cycle lengths
  • it proves that the company is measuring and improving conversion, activation and on-going activity rates as part of daily business.
  • phase three is the first meaningful revenue milestone for a start-up and its investors.

Phase Four: getting to $1m quarter

  • Entering this phase, the company has reasonably proved that you have a scale-able business (versus being able to scale small sales process in Phase Three)
  • it proves that the product is differentiated enough to beat competition consistently
  • it proves that you can maintain reference-ability and keep customers (since getting here will typically take longer than a year…which is usually the maximum amount of time between customer re-commits)
  • it proves some financial discipline and that there is leverage in the business model (ie you don’t have to perpetually spend a dollar to make a dollar in revenue)
  • in phase four, the company is typically leaving the “early stage” and maturing into the “growth” phase; profitability is usually possible around Phase Four; and while profitability may be possible, maintaining it will challenge rapid, sustained growth at this level

Phase Five: getting to $6.33m per quarter

  • entering this phase…
    • the company likely has more than one product in market;
    • the company has likely expanded the opportunity in existing accounts beyond the initial “deal;”
    • the company has continued to beat the competition in competitive situations;
    • the company has continued to scale the sales team and process to an even more mature state and know what it will take to get to $100m in annual revenue
  • in phase five, the company is unquestionably a “growth-stage” business and, in general, the company should be sustainably profitable.

These five phases are at least one swag at the “stair steps” to growing a start-up from zero to $25m in annual revenue; scaling beyond $25m up is never easy but the creative requirements and range of unknown problems have generally been addressed by the time you get to $25m.

Finally, it’s interesting to remember that a clear path (or achievement) of at least $100m in annual has been the most common lower bar for IPOs for quite awhile now (although the window has slammed shut pretty recently). If you’re able to achieve $25m, I sincerely believe that you will have executed your way to a range of options for raising future capital, running a profitable stand-alone business, being an attractive acquisition target, or even driving toward an IPO. Having those options available is the definition of success.

Operational planning done right – for startups

This article originally appeared in the Austin Business Journal.  An updated planning discussion with examples will follow this post in the next week or so.

Operational Planning for Start-up Companies

No matter what kind of startup you run, great communication is critical to success. And one of the best tools for communicating business context, risk, plans and objectives is the company’s operating plan. Done properly, an annual operating plan is as relevant for employees within the organization as it is for investors and board members who oversee the business.

Why plan?

When your business has an executive team, investors and a board of directors, it’s critically important that everyone be on the same page regarding the company’s execution: How much money will be spent, and on what and over what period of time? How many employees will be hired and into what positions? How much revenue will be generated and by what means? How much cash exists? When does cash run out, or when does the company become profitable?

Be conservative and try to under-promise and over-deliver when answering each of these questions for your operating plan.

In general, the operational plan is the quantitative how-and-when aspect of startup planning; strategic planning tends to cover the more qualitative what-and-why components of planning.

An annual operating plan is a startup’s blueprint for execution, and the company will be held accountable for executing against this plan of record. Typically, planning happens at the start of a company’s fiscal year but can be reset after any significant event such as a financing, a major customer win or loss, hiring a new CEO or other major inflection points.

Elements of an annual plan

Typically, startups communicate their annual plan using a spreadsheet and summarize the main points in few simple slides. All annual plans for startups should have these key elements:

  • A summary of previous periods — This is the context for your plan, as it represents what actually happened at the startup in the past. Including past operating history is important because previous operating trends such as revenue and expenses are typically predictive of future trends.
  • An expense forecast for future periods — Expenses are always easier to forecast than revenue. In most startups, personnel is the dominant expense at any given time. Of course, it’s also important to model cost of sales and distribution for your product, travel and entertainment, rent and other such items. For expenses, a conservative 12-month plan means loading the plan with growth in headcount and all reasonable expenses that might occur during the year so that it’s easy to beat the plan by spending less. Spending more than the plan forecast is a serious matter that concerns boards and investors because it suggests the startup is not in control of its finance, authorization and reporting functions.
  • A set of criteria or “gates” for increasing expenses — One best practice that has been used effectively for especially dynamic startups is to describe a set of criteria for increasing spending so that board approval is built into business milestones. For example, “The company will hire an additional support technician upon reaching 500 paying customers.” Typically, a salary range and revenue range will be characterized in the same discussion.
  • A revenue forecast for future periods — For very early-stage startups, a 12-month forecast may be challenging, especially if the business is pre-revenue. In such cases, the plan should span an entire year with the board of directors approving a rolling six-month subset. Any shorter period of planning is generally not sufficient for a healthy read-analyze-react cycle.
  • Goals and objectives for the planning period — Startups should choose measurable and unambiguous goals that materially advance the business along the path of execution described by the plan. A few examples include: have (x number of) registered users by (x) month; achieve profitability by Q3; or double revenue in the next six months.

Best practices for the planning process

Each company will have a different processes and unique considerations when creating its plan. Here are a few suggestions and questions for any startup to keep in mind:

  • Whoever is leading the planning effort should be inclusive whenever possible by soliciting real-time feedback from the entire team throughout the process;
  • Start building the plan and assumptions within the company and then expand out to advisers, board members and investors for feedback and suggestions;
  • Focus on “the most important” thing to achieve during the planning period given the investments the company will make. In doing so, be sure to understand the things your startup will explicitly choose not to do as well;
  • If your plan shows dramatic deviation from prior periods — expenses or revenue ramps or falls quickly — thoroughly understand the data behind the ramp and whether it seems reasonable.
  • Are you under-promising on key metrics? Are you likely to over-deliver on the plan? The converse of either is not good.
  • Are you willing to stake your reputation and career on the fact that your company will hit this plan? If not, that’s a warning sign; go back to the drawing board.

Finally, consider the plan a living document and not set in stone the moment it’s approved; something could certainly change either inside or outside the company that requires a course correction. Use board and company meetings to report progress against the plan to ensure all parties are well-informed about the startup’s operational performance.

Done properly, a well-documented and thoroughly communicated operating plan creates a transparent and accountable environment that aligns employees, board members and investors.