Category Archives: Q&A

Q&A: Valuing a SaaS Business

Q&A, Weblogs, , , , ,

This question was posted on my “ask me” page on my timberry.com site. I can’t promise to answer all the questions I get, but I try, and I’m particularly happy when I get one whose answer might be useful to other people. So here’s a question:

Do you have any idea how to value a SaaS business? Do we use our users, growth in users, revenues, margins, or what? What do investors like to see?

My answer: I’m probably a bit biased on this one because of my position in Palo Alto Software, which publishes our LivePlan SaaS offering for online business planning. But I can’t say I haven’t thought about it. Here’s what I can do to help:

  1. I really like How should you value a SaaS company, posted a few months ago by Robin Vessey and then edited by Joel Spolsky on OnStartups. Joel knows software. You’ll see there that it’s about a variety of factors, usually done on a case-by-case basis. It’s a combination of baseline revenue multiple, market potential, value of the technology, and what’s needed to take it to the next level. This is a good discussion.
  2. Notice that Robin and Joel don’t even mention profits or margins. High-tech companies are almost always valued on growth and revenues, not profits. I explained why in profits are overrated here on this blog.
  3. I read recently that publicly traded SaaS companies are valued at 5-20 times revenues. Publicly traded means that their stock appears for sale to anybody on a major stock exchange, which makes them inherently different from the smaller startups. And, unfortunately for you and me, we smaller private companies take a discount on the numbers of the big companies because we aren’t big and our stock isn’t liquid and we don’t have to publish financial information. Even there, however, it’s still more about growth and revenues than profits. A SaaS company showing strong growth and breaking even or losing a bit does better than a SaaS company with profits and stable.
  4. Investors vary on revenue vs. growth in users. I’d say that revenue is much better than just growth in free users, but then look at Twitter and Facebook and the like, which got huge valuations first for huge user bases and then only later for revenue models. So that’s debatable. When I read a business plan I mistrust user numbers that aren’t tied to revenues, because that’s too easy.

What really matters is the future. Valuation isn’t what something is worth, but rather what somebody will pay for it. So what really sells, in SaaS, is its future. There’s nothing better for valuation than indicators of growth in paying users, stories that tell about market need, and a team that can push it. And it’s magic. There’s no MBA algorithm that applies.

 

Q&A: The Perfect Letter to Potential Private Lenders

Angel investment, Business Mistakes, Q&A

This is another question received in my ask-me form on my timberry.com website:

I’m hoping you might be able to help direct me in finding the perfect letter that I need to send out to potential private (mainly friends) lenders for a start-up I’m involved.  I need this letter to spell out the details of the lending terms, conversion, etc.  I’m a numbers person (CPA) not a writer but I need this letter to be very appealing to convince them to lend us the start-up capital we are seeking.

My answer:

You’re focusing on the wrong thing. People don’t invest or not because of the perfect letter. Get the details right and the letter will follow. If you’re a CPA you’ve got an education and you can write the facts in correct English. Or, if you have money you don’t know what to do with, pay somebody to write a perfect three-paragraph letter.

The best a letter can do is communicate facts quickly and easily. The facts sell your deal, not the letter. what matters isn’t the letter but the startup, the team in charge, the product-market fit, the deal itself, and of course (as you suggest) the details of the lending terms, conversion, etc.

Start with a conversation, not a letter. Don’t ever think you can find startup investors by sending some letter out to a lot of people. You need to pinpoint the right people, and communicate well. A letter might be useful for following up, but think of it as a cover letter to a legal document. It should be no more than three paragraphs, hit the highlights legally, and that’s it. Then you have all the legal documentation your people will have to read and understand and, eventually, sign.

What you do need, by the way, is to check with an attorney about anything you say, or write. There are a lot of banking and fraud rules related to these deals. It’s pretty easy to break the law if you don’t know it. And the wrong terms on a letter to potential lenders can screw up your chance for angel investment or venture capital later. Now there’s an expertise you might really need for the letter, and, more important, the loan documents.

Q&A: How Do I Sell My Idea to A Big Company?

Business Ideas, Business Mistakes, Q&A, Starting a Business, ,

This is another email question I received via my ask-me-a-question form on my timberry.com site. I’ve edited it slightly:

I recently read your article protect your ideas and I have an idea that I want to protect and want to pitch to a company. I don’t know if I can turn my idea into a business without the business I created it for. I have an idea for a new revenue model for Facebook that uses their current model but gets more advertising and more potential … But my model would only work on Facebook; I don’t think I could start up a social networking site and get the same results. So my questions is do I try to patent the idea then go to them or what? How do I approach a successful company and tell them “hey you could be making way more money and revolutionize social networking!

And my answer:

  1. Find out about patents and whether or not your idea has a good chance of being patentable. I seriously doubt that your idea is patentable, but I don’t know what it is. Patents are for inventions, not ideas. There have been some business model patents issued, but to build a business around it you’d have to be able to not just have a patent but defend it. And you should worry that the patent system is no longer working, caught in a deluge of technology.
  2. If there’s a reasonable chance of a good strong patent that would be defensible against Facebook, explore that option. Plan to spend tens of thousands of dollars, so be honest with yourself. Start by spending a thousand or so dollars with a patent attorney really good, and really honest, who can tell you what the odds are, and be prepared to end the project there.
  3. If — my guess — the patent option isn’t realistic, then forget it. You’re wasting your time. Give it up. The following points are just so you understand why.
  4. Jump into the shoes of Facebook for a few seconds. They live and breathe their business model. How likely is it that they’re going to invite you to tell them what they haven’t thought of? How likely is it that you’ve got something related to some direction they’re already studying? And how much to they want to deal with some stranger saying what they’re doing is an idea they copied.
  5. To help you think of it this way, I’ll share that during the years I built Palo Alto Software I learned not to even respond to people who wanted to sell me an idea for my business. I learned it the hard way: every single time I listened, it was something we’d thought about, often something we tried, but didn’t work. In a couple of rare occasions it was something we were already working on, which led to “oh dear, now this guy’s going to think we did it because he suggested.”
  6. And then, to make matters worse, there’s the problem of ownership: even if you did think up that great idea, originally, you don’t own it. You can’t legally own an idea. Patents protect inventions, not ideas (see points 1 and 2 above); copyright protects creative works; and trademark protects commercial communications. You can’t sell something you don’t own. Tell it to Facebook and they can run with it for free. They pay you only if they want to, out of the well-known goodness of their huge corporate heart.
  7. Just to explain an apparent contradiction between points 4 and 6: legally the big company can take anybody’s idea and run with it, because nobody owns an idea; but big companies don’t want to deal with the accusation or even the bad karma of actually doing that. Who wants the negative press? It’s way better to just not ever respond to you.

So there you have it. Not what you wanted to hear, I’m sure, but if I save you a lot of wasted effort, then I’ve done you a favor.

Q&A: How Do I Find Investment For My Dream Business?

Entrepreneurship, Q&A, Starting a Business

Question (edited for grammar and spelling):

I want to open a new business related to export and import, but I’m confused … how can I get investment money without having any experience of import and export?

Answer:

Yes, you are confused, but no need: Forget it. Of course you can’t get investment money without having experience with what you want to do. Nobody in their right mind is going to spend their money to invest it in your business.

If you’re serious about starting an import-export business, don’t waste time wondering about getting investment money. Aim for getting knowledge and experience. Find a job related to import and expert, or trade, or distribution channels that might relate to import-export. Find information sources, books, classes, blogs, etc. Find somebody you can partner with.

And change your expectations. Look for how to eventually start your own import-export business as small, focused, and manageable, something you can do with your own resources, without requiring anybody else. Start reading about bootstrapping.

Comment: Dreamsqueezers

Questions as far off base as this one mean that somebody has been taken in by all the half truths, exaggerations, and outright lies slung across the web by sleazy marketers who promise people completely impossible results from their product or services. They exploit people’s dreams. Dreamsqueezers? What this questioner needs to know is readily available all over the web, but often surrounded by all the sleazy stuff that preys on ignorance.

The process from dream to reality deserves more respect.

What Kind of Advertising for a Startup

Marketing, Q&A,

I revised my timberry.com website a couple of months ago and one of the additions was the ask me page where I offering to answer questions people ask. This question came to me from that page and I think it might be a useful answer for this blog.

Question:

I just started a small business in [a US medium-sized town] home improvement contractor. My question too you is what kind of advertising do you prefer when just getting started

Answer:

First answer, specific to a home improvement contractor: I think you should immediately buy John Jantsch’ book Duct Tape Marketing and read it cover to cover. That’s one of the best ever books on marketing for small business in general, and John uses home improvement contracting for a lot of his examples. It’s as if one of the best minds in marketing had answered your specific question with a brilliant book tailored to you. And that might lead you to his more recent book, the Referral Engine, which will also apply very well to home remodeling.

Second answer, more general, for all small business startups: the question isn’t what kind of advertising, but rather, what kind of marketing strategy. John Jantsch defines marketing as getting people to know, like, and trust you. What works best for you depends entirely on the specifics of you and your business and your target customer. It might be advertising and advertising alone, but I doubt it. I think it’s probably a mix of website marketing, social media, yellow page marketing, and mainly referrals. You need to think first about your business focus, your key target customers, what your message is, and from there, one to best get those key target people to know, like, and trust you.

I did a column a couple of months ago outlining how to do a marketing plan. That might help too.

Q&A: Two Many Owners in the Kitchen

Q&A, Starting a Business, ,

Here’s the question:

Our company has multiple founders – any advice on how to best run a company with so many chefs in the kitchen?

And here’s my answer:

Establish roles and responsibilities before you grow and get money in. Talk it out, write it down, sign it, save it.

And if it’s too late, you’ve already grown and have money, then it’s harder but you still have to do it. You can’t have everybody owning everything. There’s a need for structural and functional expertise.

You’ve heard the quote about democracy being a terrible form of government, but nobody’s found anything better? Well democracy is an even worse way to run a growing company, and structure, dividing roles and responsibilities, and setting definitions, is much better.

This question and answer appeared earlier this week as part of the Nerd Business Blog’s selection of Best of Sprouter: 25 high impact startup answers to remember.

I’m sad to see Sprouter is leaving the web. It was a nice collection of questions and answers about startups. I answered several dozen questions there. It’s not (quite) dead yet, and here’s hoping they pull it out of near death.

At least I did my part.

Q & A: My Advice For Starting Your First Website

Q&A, Web/Tech, , , , , ,

I received this question yesterday from the ask-a-question form on my website at timberry.com:

I would like to create website design for my company. What do I need to do?

To start you could search in Google for how to create a website. The good news is that you’ll get good results. The bad news is how many: 89.1 million hits.

So I’m going to add one more? Yes, because you asked me too. And I have a step-by-step suggestion that takes work but not money, and not too much work. In my opinion. And with this you’re forewarned: there are millions of good answers. All of this is just my opinion.

  1. Go to WordPress.com* and sign up as a free user with a new blog. And don’t worry, I’m did understand the question – I’m recommending this as a way to make your first company website, not a blog. But WordPress calls it a blog, regardless; so I use that term here.
  2. Choose a unique name for your blog. Try your company name or something useful for marketing. The WordPress site will give you any unique name you choose followed by “wordpress.com.” For example, Sabrina Parson’s Mommy CEO blog is at mommyceo.wordpress.com.
  3. Choose a theme for your new blog.  WordPress will help you. There are thousands of themes, each of which gives you an already-designed format related to fonts, colors, placement of links and buttons, and so on.  For our purposes, make sure it’s a theme that shows buttons for pages. For an example, just look at the blog you’re reading. The buttons along the top of this blog are related to pages, not posts. Try them. See what I mean.
  4. Now do some pages: if you don’t feel competent writing about yourself or your company, find somebody else you trust to do it. You’ll probably start with an “About” page, and then maybe a general contact page showing your address, phone, and email addresses. You can get wordpress plugins to customize a contact form, but for now, list your email address in text with the @ written out as “at” so web crawlers won’t pick up your email address.
  5. Now, if you’ve followed these steps, you have a company website, having spent maybe two or three hours.

From here, in the now-immortal words of Buzz Lightyear, it’s “infinity and beyond.” You might want your own domain name (like my timberry.com, for example), and you’ll find ways to do that as a WordPress installation too. (timberry.com is hosted at MediaTemple for a little over $200 per year). You’ll be amazed at the variety of WordPress plugins for additional features and functions.

* WordPress is probably the most popular of the blog platforms, and it’s free if you do it like I’ve suggested. But there are many others, several with similar offerings regarded already-designed themes. I’ve also used Blogger (free) and Typepad (for an annual fee) and I like them both.

Disclaimer: Just in case you’re wondering: No, I have no relationship with WordPress, no commissions, no paid endorsements. I use it and I like it. This is free advice. Sad commentary, that these days a recommendation is suspect of ulterior motives. That happens so often that I don’t blame you for wondering.

How to Protect Your Business From Customers

Business Mistakes, Business Stories, Q&A

What? You say, reading my title here. Why would I want to? Here’s a question I received in the www.bplans.com Ask the Experts forum today:

My business sells window coverings and recently got taken by a client who decided to forgo paying for the balance due for product that was installed in his home. We often deal in large-value custom orders and need to protect ourselves in the future. What kind of agreement or contract can we use, and were can we find an example of something that will hold up in court? Should we use a lien agreement?

Ok wait. Let’s talk about this. Have you considered the impact on your business of asking all your customers to sign something like that? You’re selling window coverings. You have competition.

You just reminded me of my post last month The Heat, the Kitchen, and Credit Cards. I was mad at a customer who stole from us, and customer service for the credit card helped me out.

The active point in that was about the heat and the kitchen. You’re in business. You’re dealing with customers. You have to decide whether the occasional bad apple is worth baking all of the apples as they come in.

Here’s a good exercise:

  1. Estimate your average monthly sales.
  2. Estimate your average monthly sales after you impose safeguards to protect your business from your customers.
  3. Subtract the number in point 2 above from the number in point 1.
  4. Is the result more or less than what your bad customers cost you in an average month?

Here it is in practice. An actual case, from something that happened in Palo Alto Software in 1999. Some of our non-US customers were making orders and then not accepting shipment, costing us money. Our accounting goddess wanted to make all non-US customers sign a form and fax it back so we could charge them anyhow. Without a signature, we were stuck.

  1. The average non-US sales per month at the time were about $35,000.
  2. We estimated that if we had every non-US customer sign a form and fax it back before shipping, our sales would go to about half of that, $17,500.
  3. The problem we were solving was costing us about $350 per month.

Hmmm. That’s a real case, with real numbers, from back then. Think about margin for error, too. Perhaps we estimated wrong, and our sales would have dropped only, say, 10 percent instead of 50 percent. Even in that case, the cost would have been $3,500 per month to correct a $350 per month problem.

So, getting back to the question, you asked: if you really want to protect yourself from your customers, that’s a question for an attorney. And good luck. First, think it through.

Don’t Kid Yourself About Education

Family Business, Q&A

This is another question from the entrepreneur.com ask the experts section, and another one that comes up a lot, so I want to post my answer here too.

Question: I’m 17 years old and my parents own a successful restaurant. I feel I need to be well-educated to take over the business, but I didn’t get the best grades in high school. Would a 2-year school prepare me better since I’m not looking to get a job after college? How do I prepare myself to take over my parents’ business?

You might be interested in seeing what I wrote recently — before I got your question — on this from the parents’ point of view. That’s 6 Tips for Involving Your Kids in Your Business on this blog. I’ve actually managed to build a business (Palo Alto Software) that absorbed several of my five children as I got older.

You’ll see there that I believe education is the priority when you’re young. You’ll get so much experience with time that you’ll be sick of it, but now is the time of your life when you have the luxury of getting education. Don’t think you won’t need it because you have a built in job, you will need it and want it that much more. Furthermore, never assume you know the future.

If you don’t have good enough grades to get into your favorite or most desired college, get into whichever college you can and apply yourself. Or do the two-year thing and get your grades up so you can transfer to a four-year college. You’ll never regret it.

By the way, as you get further into your education you’ll probably figure out what you like studying. Concentrate on that, and your grades will improve. And you’ll enjoy it instead of dreading it. Give yourself a break, keep an open mind on this, and keep trying before you give up.

Having an automatic job in a family business is going to work for you only if you do that job well, the company prospers, and you’re glad you’re there. It’s not a reason not to apply yourself in school.