Category Archives: Metrics

Vanity Celebrations

[Editor's Note: This is a guest post by Brydon Gilliss  founded the shared office space ThreeFortyNine in Guelph where he plays with Startupify.Me, Ontario Startup Train and 20 Skaters. A serial entrepreneur and fervent community builder, he’s also busy organizing a train-full of founders for this summer’s International Startup Festival.]

The moments we choose to celebrate say a lot about what we consider important. They’re a proxy for the metrics we value, because we’re signalling to others by their very celebration. And yet, I’ve always been of the belief that startups tend to celebrate the wrong things.

If that’s true, what signals are we sending? We celebrate product launches, government grant acceptance, fundraising, winning pitch contests, and so on. Too often, these are the vanity metrics of our startup ecosystem.

Of course, some of these events are worthy of celebration. A grant lets us live to fight another day; a winning pitch might drive sales or help us to hire a key employee. But they would be way down on my list, personally, if my goal was to build a real business. Let’s stop concentrating on celebrating events like taking on debt or winning what is often little more than a beauty contest—and focus instead on what we should celebrate but rarely do.

At ThreeFortyNine, we celebrate the achievements that matter to the business model. Consider, for example, the first time you sell something to a complete stranger. That’s worth celebrating because it’s the first sign your business might have legs of its own. In our Founder’s Club events, we celebrate selling our first train tickets to strangers; Foldigo celebrated its first-ever sale to a stranger. Our plan is to build up this list and move it into our monthly socials.

We’re building our Startupify.Me program around the concept that talented developers stepping into startup life need options. Incubators, accelerators and government grant programs funnel them into a single, traditional path thereby discouraging experimentation. We want our cohort to have the option to create a lifestyle business or a even a small, local business—if they choose. Of course, any of them can still try and swing for the fences, but they have all options in front of them.

“We didn’t get to where we are today thanks to policy makers – but thanks to the appetite for risks and errors of a certain class of people we need to encourage, protect, and respect” – Nassim Taleb

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Only in recent years have books like Lean Analytics begun to draw out the real risks of obsessing over feel-good data that does little for the business—so-called “vanity metrics”. There’s a very real danger if a young entrepreneur believes that success comes in the form of taking on debt, winning a pitch contest and launching a product. Those may be required for some businesses but they shouldn’t be misconstrued as success.

Part of the challenge here is the proliferation of what I call success turnstiles in our ecosystem. These are entities whose prime motivation is to funnel as many businesses as possible through their turnstile. It’s a pure numbers game for them as they chase their success metrics. These entities tend to be government funded and these success metrics are defined by bureaucrats and can be tracked up the organizational hierarchy to a speech-writer’s desk.

We need to lead real conversations about what success is because it comes in many shapes and forms. Advocates of this more mindful form of celebration include Jason Cohen imploring founders to get 150 customers instead of 1000 fans and Rob Walling helping startups to start, and stay, small.

Here’s an initial list of milestones and accomplishments worth celebrating to get you started.

  • Performed 30 interviews with real potential users.
  • First customer acquired.
  • First customer acquired and you have no idea where they came from.
  • Covering your monthly personal costs.
  • Identifying the first product feature a potential customer will pay cash for.

Which vanity metrics need to stop being celebrated? What do we need to celebrate more?

Aim for your next valuation

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“Ain’t no need to watch where I’m goin’; just need to know where I’ve been.” Mater in Pixar’s Cars

This is wrong. But it is the behaviour that a lot of founders execute on after raising money.

I’ve been thinking a lot about Venture Math, Valuation and Accretive Milestones and whiners. I was struck at how many entrepreneurs seem to be working towards the post-money valuation of their last round of financing. I think this is wrong. You should aim high. Higher than the post-money of your last round. You should be acting like the pre-money for your next round. That is the only way you will drive the necessary milestones for the next raise.

Skip Level

Let’s make a few assumptions.

You are raising $1MM on a $4MM pre-money valuation. This gives you a post-money valuation of $5MM. If you subscribe to 2x valuation as the floor for the next round. This means that you need to start behaving like your company is worth at a minimum $10mm. That’s right, a minimum of 2x your post valuation. You should be targeting >2.5x, so in our example you need to start acting like a company that is valued at $12.5MM.

Your behaviour and decisions need to reflect milestones necessary to raise your next round of capital. Not the round you just closed.

“The art of raising a round it to raise enough money to get to a significant milestone, and not too much money taking too much dilution too soon. So how do you define the milestones.” – David Crow

This is incredibly difficult. Because the balance is crucial to the long term success of the company, getting it wrong and you’ve raised too much money you will be diluted, but you might have enough money to change direction and try again. If you aren’t behaving like the end point has changed, the company will be executing on goals that are too small to raise the next round.

Don’t aim for the Net Present Value milestones. You’ve already raised money to achieve those. Start setting milestones for your future value. And start delivering against those.

Fundraising, Valuation and Accretive Milestones

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I keep having a similar conversation with early stage entrepreneurs about fundraising and valuation. “Do you think a $1.5MM valuation is good?” “How much should I be raising?’ Well, it depends.

I’m finding more and more, the conversation about valuation is one that resembles not being able to see the forest because of the trees. Early stage entrepreneurs tend to fixate on valuation and assume product is the biggest risk at the seed stage thus defining product launch metrics as key metrics. Often, valuation and risk mitigation are tied together. And the milestones or traction metrics required to mitigate risk can help establish valuation. 

Valuation

Fortunately, valuation is a topic that others have covered. Nivi and Naval, on VentureHacks, have provided incredible insight into early stage fundraising over the past 5 or 6 years. The advice is often summarized, “as much as possible is especially wise for founders who aren’t experienced at developing and executing operating plans”. The translation means that founders see rounds of seed stage companies raising $4.2MM at what must be a huge valuation.

 ”‘As much as possible while keeping your dilution under 20%, preferably under 15%, and, even better, under 10%.’ ” – Nivi

You can make some basic assumptions about the valuation. Most seed stage companies should be looking keep dilution in the 15-20% range. The specifics will be determined in fundraising but you can start to do some back of the napkin estimates:

You start to see a range for how much a company will raise at what valuation. The numbers aren’t set in stone but they provide a framework for estimating the amount valuation. As Nivi points out the difference between a seed round and “a Series A which might have 30%-55% dilution. (20%-40% of the dilution goes to investors and 10%-15% goes to the option pool)”. The more you raise early, the more dilution you can expect. The goal becomes managing the different risks associated with startup. You also see why raising debt early, which allows companies and entrepreneurs to delay valuation until certain accretive milestones, is attractive.

“The worst thing a seed-stage company can do is raise too little money and only reach part way to a milestone.” – Chris Dixon

So given the back of the napkin dilution terms, what are the milestones that you will need to hit in order to raise the next round.

Raising the next round

So you’ve raised a round, how much should you raise at the next round?

I like the rule of thumb that Chris Dixon uses. “I would say a successful Series A is one where good VCs invest at a pre-money that is at least twice the post-money of the seed round.” The expectation is that companies are roughly going to double their valuation at each raise. This isn’t to say that a 2x increase in value is your target, it’s the minimum, the floor. The art of raising a round it to raise enough money to get to a significant milestone, and not too much money taking too much dilution too soon. So how do you define the milestones. The milestones

“partly determined by market conditions and partly by the nature of your startup. Knowing market conditions means knowing which VCs are currently aggressively investing, at what valuations, in what sectors, and how various milestones are being perceived.” – Chris Dixon

So part of the market conditions, i.e., raising money in Canada is different than raising money than in Silicon Valley, New York , Tel Aviv. You are measured against your peers, and this might be defined by geography of the company or the VC. Being connected with other companies, advisors and investors can help provide insight in to the fundraising environment. The second part is determined by the nature of your startup, but generally expressed as measures of traction. We’ve talked a lot about getting traction and what traction looks like to a VC.

“The biggest mistake founders make is thinking that building a product by itself will be perceived as an accretive milestone. Building a product is only accretive in cases where there is significant technical risk – e.g. you are building a new search engine or semiconductor.” Chris Dixon

Entrepreneurs tend to focus on the product early. This is usually because the product is something that entrepreneurs can directly affect. But the product risk, is may not be the  biggest risk that entrepreneurs need to mitigate early. The trick is figuring out which risk you need to eliminate to satisfy potential investors. And you can try to figure this out yourself, but I like to see entrepreneurs engage investors and other founders to get their opinion. The discussion usually is a combination of what other startups are seeing in the market place as milestones from investors (yay, market place data). Then you can work backwards the necessary resources and burn rate to reach those milestones.

Thoughts?

Additional Reading