Lighter Capital – Driving Enterprise Value for Your Startup
This seminar was for Lighter Capital on June 30, 2021
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Zach Hoene: has been a founder and investor advisory board member, author now, which relates to our current content.
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Dave Parker: You bet thanks zach hey welcome everybody thanks for taking some time this this afternoon day and to hang out and talk about how to drive valuations for your startup both for fundraising and for exits i’m gonna go ahead and share my screen since we’re already recording here.
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Dave Parker: and
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Dave Parker: super excited to be here with you so.
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Dave Parker: Quick walkthrough here you’ll find.
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Dave Parker: will send out a link where all of these information are available, I should just posted up here real quick right now.
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Dave Parker: And, and the follow on to the to the event will send out.
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Dave Parker: A link to those information that information as well, so thanks for joining and we’ll get going so topic today from an agenda perspective, you have a little bit about me super brief.
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Dave Parker: Market valuation drivers, the big picture components I get asked a lot when a founders approach and say hey Dave what’s my company worth and the answer is.
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Dave Parker: That depends and it’s very futuristic driven not calculus driven so i’m trying to get you as close to.
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Dave Parker: calculus today, as we can versus just just heuristics and i’ll give you some of the mechanics for that.
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Dave Parker: we’ll talk about the company drivers and talking about their revenue models and how the revenue models impact that and i’ll compare the public company comparables for you to give you an idea of why it’s important to be.
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Dave Parker: To map what you’re doing to your public company comps and who ultimately end up into being you’re likely upmarket buyers unless you’re planning on going public.
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Dave Parker: Which is RAD to i’ve never done that yet so I have done a lot of things in the startup world but.
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Dave Parker: I have not taken a company public which it’s still be I would still put that on lists like it’s still in my checkbox list of stuff to do.
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Dave Parker: it’s just crazy hard so unless you these days you could do a spec I guess and every everybody can everybody does this back now so um so let me hit this and i’ll send you the link.
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Dave Parker: So if you want to follow along in the slides you can definitely do that, and here it is for.
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Dave Parker: You.
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Dave Parker: Sorry it’s panelists and attendees That was the one i’m looking for, so they got so how the master public company console get you.
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Dave Parker: So first about me so five time founders accent.
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Dave Parker: sold three of those companies close to, so I raised a total of 12 million in venture and exit 85 so all singles so no unicorns but i’ll tell you some of the secret components to unicorns here in a little bit.
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Dave Parker: I used to work for a company that was called up global, which was the parent company of startup weekend and startup America.
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Dave Parker: We sold that company to techstars in 2015 so super quirky when it was actually the only time I ever sold a nonprofit to a for profit.
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Dave Parker: Usually, when you sell a company at the end you get a wire transfer and you’re like ooh and when you sell a nonprofit you actually get a check and then you get to distribute that money to other nonprofits so it’s kind of a whoo.
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Dave Parker: So, but no, no much who so author of trajectory startup which is now available on Amazon so we’ve got some pretty good traction going without that’s been fun.
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Dave Parker: And couple time vc doesn’t seem to stick I tend to be very founder friendly sadly as a couple time investor as an angel a year in Seattle, that makes me a super active Seattle angel investor.
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Dave Parker: And i’ve done a total of 14 transactions, which is where I spend most of my time these days with next path advisor is helping founders actually land the exit on their company.
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Dave Parker: or my 20% time is giving back to Community stuff and early stage startup stuff and doing events and things like these so so that’s me.
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Dave Parker: Resources here geeky parker’s the my blog and website you’ll see information there about the content there’s a free excerpt for the 14 revenue models to talk about and it’s there you just.
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Dave Parker: click on that link and you’ll be able to get access to that the free excerpt or in order the book on Amazon.
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Dave Parker: So um is what happens frequently as we talked this startup founders like what’s my company where it’s what’s, the most important thing for me to do, and my first advice is ignore the means.
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Dave Parker: So the products, the most important in the market, the most important the team’s, the most important that you know all of these things are the most important so that, ultimately, at the end of the day.
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Dave Parker: In a mean driven mean driven society on Twitter and other social medias, the answer is kind of all these things really matter as it relates to driving your enterprise value in your valuation.
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Dave Parker: So, only the top drivers they happen to be the things that most venture capitalists look at as they evaluate a company so market tends to be number one.
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Dave Parker: So the analogy here is, though, you would hear from some folks team matters most I would tell you, as it relates to the enterprise value of your company.
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Dave Parker: Market actually is the biggest impact driver for your valuation so which market you’re in who’s the market buyer is it new and nascent like airbnb.
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Dave Parker: Or is it incremental right so new and nascent market give you the biggest up market opportunity and I will tell you most if not all of the unicorns if you look at the CB insights list.
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Dave Parker: Are all companies that got launched three 510 years ago in markets that didn’t exist at the time that are now multibillion dollar markets today.
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Dave Parker: So, new and nascent markets is the biggest driver, as it relates to unicorns for many of you you’ve already chosen your market and it’s not new or nascent which means.
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Dave Parker: How do I value my company when it’s not a brand new market like that and we’ll get to that too so team product things like stickiness.
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Dave Parker: Timing is your timing good covered was a great detail of like tailwinds and headwinds so and there was there, looked to be kind of knowing between it was either that create a massive headwinds or massive tailwinds.
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Dave Parker: Competition, so the big component here is has your competition raise so much money that they’ve suck the oxygen out of the room or not.
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Dave Parker: So, because that’s that’s a driver on the impact of the business as well.
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Dave Parker: So traction really as early indication of proof from an investor perspective that you can get to something bigger.
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Dave Parker: And it’s it can either come in the form of users or income in the form of revenue so think users if you’re B2C revenue, if your B2B for things like letters of intent and point their proof of concept documents.
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Dave Parker: unit economics is the next big one, which is really how do we scale, the company from spending $1,000 a month on marketing spend to spending $10,000 a month on marketing spend.
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Dave Parker: And what’s predictable and forecasting all about that revenue and the last piece is really efficient capital right so there’s a big difference between snap and tesla.
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Dave Parker: And I know vc that invested in tesla in the early days, and when it went public it was still a great exit for them, but usually they own 10 or 15% of a company.
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Dave Parker: By the time I went public in this case they’re taking so many rounds of funding that they’re 10 or 15% became a point and a half.
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Dave Parker: So, still a great return for sure, but efficient and not efficient capital will get you to a different investor group or a different buyer group based on WHO.
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Dave Parker: The type of company is and what types of deals they like so there’s the top rated components of your market drivers from a market perspective.
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Dave Parker: So in that case, I just want to put the pieces together in a calculus here for you is that a great team and allows the market is going to get him a result.
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Dave Parker: An okie team and a great market could produce a blockbuster return, so you know you look at some of the teams you’re like wow that team doesn’t seem super strong but they hit the market really, really well.
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Dave Parker: So a great product with no path to revenue is a bummer right so likely going to fail and ultimately the one at the bottom is a great market great team great product solid monetization great execution.
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Dave Parker: that’s that’s magic from an investor and a and a buyer perspective so ideally you have those all of those things sometimes you have some sometimes you don’t so but that’s where the components of all the the big picture market factors matter.
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Dave Parker: Also category matters a bunch too, so are you selling B2B are you selling B2C.
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Dave Parker: And, as I mentioned, for most of you you’re an existing business, some of you may be a startup, but most of you have an existing business, you have a target market.
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Dave Parker: And you have probably revenue model already, and most of those things you can’t change, but if you’re early you can still change your revenue model.
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Dave Parker: you’re probably not going to change B2B or B2C you’re probably gonna keep selling who you’re selling to.
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Dave Parker: And i’m actually just need to make any changes today i’m just going to give you some data of if you can change your revenue model what might you want to change it to right based on the data.
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Dave Parker: So business model break down real quick, just as a background perspective.
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Dave Parker: When I talked to founders about the business model there’s things that are in your control so there’s, how do you create values that very top circle.
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Dave Parker: that’s your product how much it costs to build the product it’s your market and it’s your team, and those are all the expenses associated with building the product.
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Dave Parker: The next component on the on the right hand side is how do you deliver value, and that is your revenue model your pricing.
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Dave Parker: Your marketing and sales and business development, so those are all of your things associated with your cost of selling, including pricing and revenue models.
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Dave Parker: Those are variables that are kind of in your control because in most cases you’re already spent the money to build the product Now the question is what’s my cost of sales and do I have efficient cost of sales.
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Dave Parker: And, in some cases, big companies look at your digital marketing strategy and say we just don’t get this and you guys do and we frankly would acquire you.
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Dave Parker: Because you so get digital marketing and we so don’t so know that that is actually an asset that increases the value of the company.
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Dave Parker: But think about this is breaking down the components of the business model, and then the last piece of the van is what’s left over.
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Dave Parker: Which is really how you capture value for the value created in the in the value delivered, and that is your top line sales and your net margin.
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Dave Parker: So, in some cases, your buyers going to look at a multiple Eva da but in most cases, because you’re a late stage startup or a middle stage startup they’re gonna look at a multiple of revenues.
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Dave Parker: Right and so your top line revenue growth and putting more money into the growth of the company will matter a lot.
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Dave Parker: In the early stage and if you’re taking money off the table today three bit done congratulations that’s a good thing.
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Dave Parker: Free cash is an indication of success venture raising venture capital is never.
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Dave Parker: An indication of success, so you want to make sure that you, you know that you’re you’re spending money on the right things so that’s the quick business model breakdown.
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Dave Parker: So, and so creating value mentioned team engineering design hosting delivering value is your revenue model choice your pricing and your unit economics.
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Dave Parker: And what’s left over is your top line revenue gross margins and net profit so just a way to break down the revenue, the business model.
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Dave Parker: Alright So how do you monetize, which is the revenue model component of this and then we’ll get to the public company comps options.
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Dave Parker: So keep in mind this isn’t a calculus again, this is a heuristic so where the data came from was in prep for the book, I went back to crunchbase and the CEO crunchbase of the time and said hey.
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Dave Parker: Can you run a list for me of every seed funded company over the last 18 months and the problem I was solving was a founder to come to me and said hey can I have your financial model.
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Dave Parker: And like I can give it to you, but mine’s a B2B subscription business and yours is a B to C marketplace business, and those are just different.
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Dave Parker: And the question was that I was trying to solve for at the time now easily enough was hey.
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Dave Parker: How many revenue model templates financial model templates would you need to do to cover kind of 80% of the founders, so the thesis was look at these 2600 funded companies and then figure out what the revenue models were in each of the categories, but B2B B2C etc.
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Dave Parker: Because it took me so long to write the book and because I was CEO often on have a couple different companies, I was getting prepped to sell.
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Dave Parker: We ended up with a five years watch students study unintentionally right, but what we found was there’s 14 revenue models that addressed all the revenue models in tech and fundamentally there were two changes in that five year span so anyway remember groupon.
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Dave Parker: So groupon was one of those examples of like it was a super new revenue model at the time, but ultimately it became.
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Dave Parker: Commerce and lead gen so remember having people copied groupon so one of the things about revenue models that’s interesting is they’re not defensible.
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Dave Parker: So, even though you think it may be defensible of time they’re just not defensible and there’s thousands and thousands of groupon copies.
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Dave Parker: And we’ll get to what groupon is worth today here at the end of the end of the update so so one thing was that the other one was a new revenue model.
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Dave Parker: Well, there was one that was that wasn’t really a revenue model called coins and tokens.
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Dave Parker: So, if you remember when those kicked off the answer was like this is this new thing called coins and tokens.
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Dave Parker: It wasn’t actually a revenue model because there were no unit economics and no metrics you could track, it was a funny mechanic for sure.
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Dave Parker: And the SEC ultimately said, you know we don’t really think it’s a funny mechanic either and we’ll see where it ends up but, at the end of the day it wasn’t a revenue model, it was simply a.
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Dave Parker: Funding mechanic the other one that did mature during that five year window was this concept of metered services, so if you think back to your early cell phone plan, where you.
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Dave Parker: As you use more you paid more or you use too many text messages for your kids and they got this outrageous bill that’s a pay as you go or a metered service revenue model.
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Dave Parker: And that’s really fairly new in the last five years in tech, at least with aws azure companies like twilio.
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Dave Parker: Right, so the boom of metered services businesses have really boomed a lot over the last five to 10 years but five years they become super popular and we’ve seen a lot of subscription businesses.
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Dave Parker: move from originally like Microsoft licenses and when it’s a subscription and now subscriptions are morphing into metered services or combination of subscription plus metered service and i’ll break down what those things are for you to.
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Dave Parker: We also went back and looked at the the companies that failed we looked on the wayback machine which is the Internet archive and we looked at the last cash pages.
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Dave Parker: and looked at, why do we think they failed so we actually broke down the the the data about what those companies were.
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Dave Parker: Some things that were consistent there, and this may fly in the face of some how some of you are doing your pricing page today consistently they had a college for more information about price, so they didn’t have any pricing published on their side.
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Dave Parker: So there was a value proposition may have been good may not have been but it wasn’t really a product page and there wasn’t really a price page.
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Dave Parker: So one of the hollering is there is, if you were to air in a direction.
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Dave Parker: So we have to assume, as in the later stage startup or pricing is always going to be a little bit wrong, but we want to move towards getting it right.
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Dave Parker: Even having the wrong pricing provides a level of transparency to your customer that can help them take action versus call us for price is something that probably doesn’t happen very much.
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Dave Parker: The other Aha was that most of those companies didn’t have a call to action on most of the pages and one of the things you should have on all those pages, including product and price etc is.
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Dave Parker: You know book a DEMO get the White Paper some sort of cta that is easy for your customer to react to but consistently 85% of the companies that fail didn’t have a price page at all.
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Dave Parker: So I can’t tell you that’s the reason they fail to could have ran into capital like he got squashed by a competitor but consistently, it was an interesting observation that 85% or more that one.
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Dave Parker: So that was the data set we tracked how did they map, so the thing we tracked here was, from the time they did seed from.
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Dave Parker: Seed funding to a funding and from a round funding to be around funding we track the number of days, because what crunchbase would give us is.
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Dave Parker: The dates of the fundraising round and what it called the name of the round.
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Dave Parker: it’s a little squishy on the data because crunchbase is crowd sourced data so not everybody called around the same thing, so one of the big Aha was was.
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Dave Parker: Seed rounds went from seed one to 10.
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Dave Parker: And when I raised my first round that would have been a series J right so, but a lot of early companies were doing differences in the seed rounds, so it was what made it a little squishy but the point of this slide is there’s a couple of outliers one is from seed.
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Dave Parker: or from a funding to be funding you’ll see here gaming was super fast, so if you had a gaming revenue model.
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Dave Parker: which typically means selling virtual goods right to level up so think candy crush introduced frustration, so the customer will buy an upgrade.
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Dave Parker: Those companies averaged about 600 days just under 600 days to get their seed funding, but a couple hundred days to get there a from there from there a funding to be funding.
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Dave Parker: So, again bottom line is seed to a and the other axes this from a round to be around so they were super fast to get that funding The other thing up here which are super interesting is that combination companies so think.
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Dave Parker: subscription companies with services professional services or non recurring engineering those companies went from.
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Dave Parker: They got funded very quickly from seed to a but about average from A to B so.
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Dave Parker: Early validation in the form of revenue in the form of professional services, so in this model think of like smart sheet and Seattle.
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Dave Parker: Has 25% of their revenue they’re publicly traded and 25% of their revenue is actually professional services because either the enterprise customer has to get trained.
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Dave Parker: On the product first before they can deploy it or they can deploy professional services and ramp up the product and then train the customer so in their case.
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Dave Parker: publicly traded the market doesn’t hammer them for being in the services business, even though it’s not great margin compared to subscription, but it was early validation in the form of revenue.
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Dave Parker: And then you have things like big data transaction fee businesses product as a service no big surprises in any of these other than.
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Dave Parker: Some of the ones you think would take longer to mature definitely take longer to mature advertising in search is there right.
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Dave Parker: Here in the middle of the upper upper quadrants and advertising and search basically requires a certain number of.
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Dave Parker: unique users to visit your site every month before you can actually monetize that way.
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Dave Parker: So that’s kind of how the data broke down, let me break down the models for you now, and some of you again you’ve already picked your model.
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Dave Parker: But i’ll give you the list of the 14 at the end, and my encouragement is think about is should we consider additional or different revenue models than we’re currently doing today as a way to extend our revenue multiples.
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Dave Parker: So fee for services, the first one is the obvious one it’s the we we have we have a pay rate, we have a bill rate days our contractor or employee he’s delivering a service for a fee or customer pays us.
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Dave Parker: bill rate we paid a the pay rate and what’s left over, is the gross margin usually 35 to 50% and it’s really all about people.
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Dave Parker: So the thing here is that, even though this is a model successfully used in tech it doesn’t scale, so no big surprise services businesses don’t sell for a great multiple.
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Dave Parker: So know that that’s part of the the challenge of being in the services business, especially now, where you’re recruiting more people so revenue model number one is services.
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Dave Parker: number two is called product as a service which is we, we have people in the back end delivering the service but.
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Dave Parker: we’ve product ties it, so the customer is actually buying a skew so here, if you think about Southwest airlines there in the services business.
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Dave Parker: But when I buy a ticket i’m buying this, the end result I hope of getting to a particular location right or company i’m on the board of in bellevue.
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Dave Parker: Is a kind of called guiding financial and guidance as a service, where you can take money and invest your 401k into a self directed IRA.
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Dave Parker: without paying the taxes and fees of taking the money out so they’re basically you know form an llc do the conversion put your money in there, and for that cost.
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Dave Parker: You basically it’s the product is the service there’s people involved in doing that work filing your llc and doing that stuff to stay level.
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Dave Parker: But from the consumer perspective it’s a it’s a it’s a skew it’s a price point they buy a thing versus buying you know, a lawyers time at six minute increments.
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Dave Parker: So this is a product eyes service IBM is also in the services business a lot and, if you remember Xerox.
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Dave Parker: A lot of services so there’s still you know they can still product eyes that service from a customer standpoint i’m paying a fixed price but i’m getting a combination of people in product on the back end so these offerings.
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Dave Parker: apply for both B2B and B2C MAS or seo Maas, if you remember them in Seattle, a recently sold.
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Dave Parker: They started off as a services company and they built tools and when they got to be in a tools business and subscription business.
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Dave Parker: Then what they did was they sold off the services business and just went into the product business so that can be difficult, as a founder, because the gross margins that are associated with.
00:25:01.110 –> 00:25:07.590
Dave Parker: Making say resellers actually good gross margins right, so the probably the easiest model in this one to bootstrap other than the services business.
00:25:08.850 –> 00:25:14.700
Dave Parker: going the wrong direction three is commerce you guys all know commerce It ranges from you know Amazon at one ends to.
00:25:15.030 –> 00:25:22.590
Dave Parker: way, fair and lulu lemon I picked wafer and little lemon and away fair trades at a multiple of revenue this much smaller because they’re selling other people’s products.
00:25:22.920 –> 00:25:29.850
Dave Parker: And lulu lemon trades in a much more of a premium so there’s they’re selling physical goods in one case products they warehouse.
00:25:30.390 –> 00:25:38.430
Dave Parker: And inventory, but not products they make a little lemons case products that are actually branded for them so commerce works in both B2B and B2C.
00:25:39.150 –> 00:25:50.190
Dave Parker: So if you’re doing commerce today, you know your key metrics are wholesale cost of goods sold average percentage margin average basket size and number of baskets per month that gives you your your key unit economic data.
00:25:51.690 –> 00:25:55.560
Dave Parker: This can work in both physical and virtual goods both work.
00:25:56.010 –> 00:26:03.300
Dave Parker: And it can mature into a marketplace, if you want it to and there’s there’s there’s still a question of whether you want it to or not, but there’s opportunity to create a marketplace with.
00:26:03.630 –> 00:26:07.590
Dave Parker: Additional sellers, if you think about how Amazon did so that’s number three that’s commerce.
00:26:08.490 –> 00:26:18.030
Dave Parker: For a subscription super excited about this model these days there’s subscription for everything you can go to Amazon and get a subscription for lacroix water delivered to your House every week.
00:26:19.080 –> 00:26:26.760
Dave Parker: Personally, I prefer to Chico but that’s just my own preference, so this one works in both B2B and B2C so think spotify.
00:26:27.240 –> 00:26:35.730
Dave Parker: And salesforce so key metrics here average revenue per user conversion ratios from trial to paid and churn.
00:26:36.180 –> 00:26:46.860
Dave Parker: or, in some cases, the positive equivalent, which is net negative churn so we think about annual contract value and what’s my annual contract value going up on an annual basis for those enterprise type customers.
00:26:47.490 –> 00:26:52.620
Dave Parker: So tiered pricing here is a really important as far as a way to optimize pricing.
00:26:53.070 –> 00:27:00.870
Dave Parker: And again we’ll we’ll pull us to the public company comps and i’ll tell you kind of how they map out as far as from a buyer perspective here at the end.
00:27:01.680 –> 00:27:15.090
Dave Parker: So high multiples on this one investors like SAS businesses or subscription businesses, I can think of SAS as a hosting mechanic and a subscription is a monetization mechanic but that’s me parsing details.
00:27:15.900 –> 00:27:24.510
Dave Parker: So number four subscription number five is metered service, this is one of the new ones, and I would call it the API economy, so if you know off the zero as an example, or ui path.
00:27:25.260 –> 00:27:37.950
Dave Parker: off zero recently got bought by okta so they’re basically the API economy business, so you sign up for a subscription and then, as your usage goes up you pay more for many of you that’s like aws and azure.
00:27:38.370 –> 00:27:47.670
Dave Parker: Right, so my my rental server time is definitely there, so my key metrics are very similar to subscription, but when i’m looking at in addition to subscription is what’s my monthly usage pattern.
00:27:48.030 –> 00:27:55.620
Dave Parker: By customer profile or by cohort so what’s that what i’m after here is how is the business growing relative to usage.
00:27:56.190 –> 00:28:06.990
Dave Parker: So this is a highest multiple category so there’s a few wacky outliers in the 207 companies i’ll show you later, but consistently speaking metered services has the highest multiple.
00:28:07.410 –> 00:28:19.740
Dave Parker: of sales in the in the buyers who are in this space are going to be the buyers pay the most for revenue so just know that that’s it’s this is definitely aspirational if you can add metered service to your business, I would encourage you to do so.
00:28:21.180 –> 00:28:28.890
Dave Parker: As action fees Rentals stripe is a great example here and check check is in the rental of academic books for colleges.
00:28:29.280 –> 00:28:37.200
Dave Parker: So they basically buy the book the super expensive rent it to the student for the term recycle that book back in and rent it back out again so they’re in the rental business.
00:28:37.950 –> 00:28:42.960
Dave Parker: group these together, because the mechanics are the same, of how you monetize so transaction fee business.
00:28:43.590 –> 00:28:51.060
Dave Parker: stripe makes a transaction fee on every single transaction check makes a transaction fee once a rental wants a transaction fee the mechanics are the same.
00:28:51.480 –> 00:29:03.240
Dave Parker: Their key metrics are average transaction revenue your percentage fee on that transaction, and the number of transactions per month, so that gives you your base level metrics on key key key metrics and kpis.
00:29:04.290 –> 00:29:12.900
Dave Parker: That challenge here if you’re launching a new business and the transaction fee business think up work or fiber is not to start the price too low.
00:29:13.980 –> 00:29:20.820
Dave Parker: I realized that both those examples I gave you were marketplaces but i’ll get to marketplaces next So the idea here is don’t start your transaction fee too low.
00:29:21.150 –> 00:29:27.870
Dave Parker: If you’re doing hundreds of thousands of transactions like stripe there was a market rate, people will pay for that it will be way less than 15%.
00:29:28.350 –> 00:29:37.920
Dave Parker: But any any business that stops in the bits or basis points is super hard business to make money on unless you’re doing thousands and thousands and thousands of transactions, a month, so.
00:29:38.730 –> 00:29:44.610
Dave Parker: So that’s number six the transaction fee business i’ll pick up pace here, by the way we get into more obscure models here as we get past marketplaces.
00:29:45.360 –> 00:29:54.690
Dave Parker: marketplaces are folks like etsy eBay Ali Baba they’re both B2B and B2C some or B to B to C, but marketplaces marketplace, it has its own unique dynamic.
00:29:55.290 –> 00:30:06.510
Dave Parker: Your key metrics are average transaction amount, the number of transactions per month, and the Commission per transaction so unlike commerce I don’t own the product.
00:30:07.080 –> 00:30:16.830
Dave Parker: So we’re unlike transaction fee where it’s i’m taking a Commission percentage but i’m not actually owning the top line revenue, so I would argue that groupon.
00:30:17.160 –> 00:30:23.520
Dave Parker: never took ownership of the things they sold, and they should have just booked the revenue on their Commission but that’s just me and.
00:30:23.970 –> 00:30:32.820
Dave Parker: gap so just a different business so marketplaces though have two funnels for marketing, I have to have a sell side funnel and I have to have the buy side funnel.
00:30:33.270 –> 00:30:37.200
Dave Parker: So i’m making that transaction fee on the transactions that happen between those two things.
00:30:38.010 –> 00:30:45.690
Dave Parker: Or if you’re Amazon you create high margin products and the high volume traffic so like batteries right but they’re fundamentally in the marketplace business.
00:30:46.230 –> 00:30:55.680
Dave Parker: As well as others they’re more of a conglomerate but we’ll get to that later combinations are number eight, as I mentioned, smart sheet is an example we do services we do subscriptions.
00:30:56.310 –> 00:31:02.790
Dave Parker: marketplaces we’re seeing a trend in marketplaces they’re starting to mature into in addition to marketplace they’re adding a subscription component.
00:31:03.300 –> 00:31:10.020
Dave Parker: Where the people who paid a post get a slightly better deal if they do a subscription what that means for you as a company.
00:31:10.320 –> 00:31:16.620
Dave Parker: Is my predictable form of revenue goes up every month, because I have an additional subscription revenue plus transaction revenue on top.
00:31:17.070 –> 00:31:32.640
Dave Parker: So that’s a good example of a combination business in metered services, I may have a subscription plus metered service that goes up as you pay as you go or services, plus transaction fee so typically Those are some of the combinations that we see.
00:31:33.720 –> 00:31:41.700
Dave Parker: So, giving the example hardware and so iot devices and big data to manage it in the back end so the iot devices a hardware sale.
00:31:42.150 –> 00:31:47.460
Dave Parker: The software you manage this is a subscription sale so that’s typically an example of combination.
00:31:47.970 –> 00:31:55.020
Dave Parker: So combinations do mature faster, because you have early validation in in revenue, so not necessarily a bad thing, by the way.
00:31:55.980 –> 00:32:03.930
Dave Parker: starting to publish this data fairly broadly vcs will still tell you pick one revenue model and stick with it because they’ve never looked at the data.
00:32:04.320 –> 00:32:12.600
Dave Parker: And somebody told him that made us believe it so don’t argue with them and say Dave said, otherwise it’s not worth it’s not worth the argument you got better things to do.
00:32:13.860 –> 00:32:20.820
Dave Parker: gaming, as I said, we started get more secure if you’re in the gaming business and you sell virtual swords I love the margins on virtual swords.
00:32:21.660 –> 00:32:31.620
Dave Parker: there’s it only works, be to see your key metrics are number of downloads percentage of people who play an average in APP purchase most of you don’t do that, but the margins are amazing.
00:32:32.310 –> 00:32:38.160
Dave Parker: Number 10 is advertising, the reason is number 10 is you need to have a million unique users, a month.
00:32:38.700 –> 00:32:45.420
Dave Parker: Before you can monetize in a meaningful way, let me give you an example, so my blog posts thanks for for hitting it today.
00:32:45.840 –> 00:33:03.120
Dave Parker: i’m not using advertising I get between three and 5000 readers a month, a great cpm rate cost per thousand rate would be $35, which would mean that we make between 100 and $150 a month, if I sold ads on my site to interrupt you, as you read a blog post.
00:33:04.380 –> 00:33:17.190
Dave Parker: Not very exciting, so the question with this model becomes, how do we how much money does it cost us to get to a million unique right because either we have to raise money for that or we have to do things like viral coefficients and create viral loops.
00:33:18.480 –> 00:33:28.680
Dave Parker: Which is new media, which is a good transition, so I think snapchat clubhouse clubhouse and snapchat are great examples of kind of the non revenue models like if you’re growing customers this fast.
00:33:29.160 –> 00:33:33.480
Dave Parker: Ultimately, we know at this point that your revenue model you going to choose, is going to be advertising.
00:33:34.320 –> 00:33:43.140
Dave Parker: But investors don’t really care as long as you keep the growth up your growth is this one of the worst B2C only your growth at here is calculated on what’s called.
00:33:44.130 –> 00:33:55.890
Dave Parker: A viral coefficient which used to be hard to explain before a pandemic and what’s called the K factor so which is for every customer I buy do I get more than two additional paid customers for every customer by.
00:33:56.400 –> 00:34:02.670
Dave Parker: In the case of clubhouse they’re not monetizing yet, but okay so tick tock there’s now videos that are interjected.
00:34:03.510 –> 00:34:13.950
Dave Parker: That come between the videos is use, you know scroll up to look at additional videos where they lead with a video so that pre roll video has a fee associated with it is all about advertising.
00:34:14.940 –> 00:34:23.010
Dave Parker: So if you’re doing this, if you have a B2B business you think is going viral definitely reach out you would be the first one i’ve ever seen, I will probably become an investor.
00:34:24.030 –> 00:34:34.440
Dave Parker: Number 12 is big data and the reason, this is towards the end of the list is, you have to have the big data before you can monetize the data so think patients, like me, is a great example where they have a lot of patient anonymized data.
00:34:35.010 –> 00:34:45.750
Dave Parker: where you can run a query if you’re big pharma against a particular data set, but you have to have the data before you can monetize it so consequently it’s a tougher revenue model to do because it only works at scale.
00:34:47.130 –> 00:34:55.830
Dave Parker: Number 13 is lead generation, so if you know China china’s the latest version of mint which is you can or, if you have credit Karma on your APP.
00:34:56.280 –> 00:35:03.060
Dave Parker: Those businesses are in the lead generation business and they’re just better at creating leads for credit card companies and the credit card companies themselves.
00:35:03.420 –> 00:35:11.730
Dave Parker: or life insurance or Homeowners insurance or whatever, so those businesses are basically marketing firms who are better capturing leads.
00:35:12.330 –> 00:35:20.250
Dave Parker: Taking that lead form information Dave Parker dave’s email and dave’s phone number and then turn around and selling that lead to somebody else, so if you’re doing a.
00:35:21.420 –> 00:35:27.360
Dave Parker: home equity line of credit there’s a lot of people playing in that space for lead gen X number 13.
00:35:28.470 –> 00:35:35.010
Dave Parker: Last, but certainly not least, is licensing my first company was in the licensing space we did software licensing with Microsoft where their.
00:35:35.490 –> 00:35:40.620
Dave Parker: First, new distributor in 15 years grew that company from zero to 32 million in sales and for years.
00:35:41.130 –> 00:35:49.470
Dave Parker: I remember 15 plus years ago there was lots of writing in the trade publications like well Microsoft makes a move between licensing to subscription and there’s tons of anxiety.
00:35:50.070 –> 00:35:57.180
Dave Parker: And the answer was yeah ultimately kind of a dumb question, it was a great decision on their part, so here’s your 14.
00:35:57.930 –> 00:36:09.690
Dave Parker: If you’re using what i’m today, and you think you can add one like you can you’re doing subscription you think you might be able to add me to your service, I would encourage you to write that as an alternative, one and i’m going to get to your why here in just a SEC so there’s your 14.
00:36:10.920 –> 00:36:13.830
Dave Parker: So, why would you want to do that are looking at a new revenue model.
00:36:14.250 –> 00:36:22.350
Dave Parker: So what we didn’t when I wrote the book and zach was a pre reader on the book because they use the examples of you know B2B and B2C and a couple examples and somebody asked me like.
00:36:22.710 –> 00:36:29.070
Dave Parker: hey have you done an analysis of public companies and what the multiples are so that led to this interesting project of like.
00:36:29.640 –> 00:36:38.820
Dave Parker: How do you compare public company buyers to private company sellers and what the company is worth, so the analysis there we took you through was.
00:36:39.300 –> 00:36:48.570
Dave Parker: We basically took all the revenue models and then made a list of all of the companies and said here’s what those companies sell for some of switch my screen here real quick.
00:36:51.630 –> 00:37:03.240
Dave Parker: And i’ll take you to the data that has the public company content as well, so what you’ll see here is that services companies like Accenture and strive for as a publicly traded company in the education space.
00:37:03.720 –> 00:37:10.440
Dave Parker: They trade between Point seven five and 1.5 times revenues, so if you’re doing if you and I are co founders and a company we’re doing a million dollars a year.
00:37:11.130 –> 00:37:24.060
Dave Parker: And we’re in a cell to somebody they’re probably not going to pay as much more than the 1.5 X, maybe two X right, because ultimately they’re going to get revenue recognition from the public markets that are Point seven five to 1.5 times revenue.
00:37:25.140 –> 00:37:33.930
Dave Parker: By contrast, if you’re in the subscription business we’re seeing those typically as a multiple of eight to 12 times revenue, so if you came to me and said hey Dave i’m gonna get my company ready to sell.
00:37:34.500 –> 00:37:39.840
Dave Parker: what’s my company going to sell, for I will look at it and say like you’re kind of looking at it from the standpoint of.
00:37:40.890 –> 00:37:46.920
Dave Parker: How much revenue you’re doing what’s the multiple on revenue, within the space right and.
00:37:47.520 –> 00:37:53.610
Dave Parker: there’s a bunch of other factors i’ll go into for a minute, but that gives you an early range like if your customer concentration is too high.
00:37:53.970 –> 00:38:03.960
Dave Parker: Or you have a distribution agreement where they’re doing all of your sales or you’re in a super niche market like those factors will be factors that push your revenue multiple down.
00:38:04.560 –> 00:38:11.670
Dave Parker: If you’re in a new and nascent market, those are being a factor is pushing revenue models up, so the other one, I want to play it to you here is metered service.
00:38:12.240 –> 00:38:21.630
Dave Parker: So you’ll see that metered service companies like twilio aws aws is obviously buried within Microsoft or buried within Amazon, just like azure is buried within Microsoft.
00:38:22.170 –> 00:38:32.370
Dave Parker: But comes like ui path actually have really blockbuster numbers, by comparison, so if you can add metered service to your revenue model I would definitely encourage you to do that.
00:38:32.820 –> 00:38:43.410
Dave Parker: If you can optimize your pricing, one of the things you’ll see here is that subscription based companies with optimized pricing have done, really, really well in the public markets, so let me take you to that data real quick.
00:38:45.000 –> 00:38:56.100
Dave Parker: So what we did here was we looked at so take marathon patent group out of the mix here for a minute as an outlier they mind bitcoin as the price of bitcoin went up as a public entity you’ll see here their sales ratio.
00:38:57.150 –> 00:39:07.500
Dave Parker: Which is their market CAP divided by trailing 12 months revenue their sales ratio is ridiculous like 233 snowflake they went public this year 113.
00:39:08.010 –> 00:39:19.050
Dave Parker: To get this to some we talked about here earlier here’s docusign docusign is trading it their market CAP divided by the trailing 12 months revenue is 30 times.
00:39:19.860 –> 00:39:28.620
Dave Parker: So if you were selling your company into a docusign and you were doing a million dollars that company could be worth up to $30 million of acquisitive revenue.
00:39:29.310 –> 00:39:36.720
Dave Parker: If docusign adds $10 million of new revenue this year they’re going to have $300 million in market cap at the current rate.
00:39:37.230 –> 00:39:43.560
Dave Parker: And you’ll see here that what we did, if we took their trailing five quarters to try to standardize around visibility of like.
00:39:44.280 –> 00:39:53.490
Dave Parker: Compared to this, and I think you’re 15.14 here represents pre covered and then you’ll see the 1936 represented covered tailwinds as well.
00:39:54.000 –> 00:40:00.930
Dave Parker: you’ll see the same thing true up here with shopify and zoom right so 4055 times 67 times.
00:40:01.440 –> 00:40:09.870
Dave Parker: But the consistent trend here is companies who have done a really good job optimizing their pricing around subscriptions are trading in the mid 30s.
00:40:10.380 –> 00:40:14.100
Dave Parker: companies that are have done a really good job optimizing around meter services.
00:40:14.880 –> 00:40:29.370
Dave Parker: Are trading in the 40s so we’re now doing the same exercise for s&p 500 index, to see if there’s consistency there, but this is what the day to kind of lead, you to a bit of an Aha around like Oh, maybe we should sell to one of those companies because we’ll get a better valuation.
00:40:30.780 –> 00:40:35.490
Dave Parker: Alright, so as I wrap up here a couple of quick notes and we’ll go to Q amp a zach.
00:40:39.090 –> 00:40:45.600
Dave Parker: So a few last side notes, so you guys you see my screen okay zach versus the public data.
00:40:46.260 –> 00:40:50.940
Dave Parker: So if you’re thinking about selling your company and you’re like hey Dave I want to sell the company what’s the company worth.
00:40:51.450 –> 00:40:57.240
Dave Parker: One of the things to think about right now is what we call the rule of 40 we didn’t invent it we’re just replicating what other people have talked about.
00:40:57.930 –> 00:41:08.520
Dave Parker: So do you have 40% growth in by the way, is kind of nudged up to the rule of 50 in the last year and a half, do I have 40% annual growth or do I have 40% 20% growth and 20% profit.
00:41:09.210 –> 00:41:15.360
Dave Parker: So, depending on the size of the revenue of the company like if the company revenue $300,000, the answer is super hard to sell.
00:41:15.810 –> 00:41:20.970
Dave Parker: But you really need to get to a million dollars in revenue and probably three or four if you want to optimize your exit price.
00:41:21.630 –> 00:41:30.510
Dave Parker: So your logical and up market buyers prefer early relationships, so if you have a business development relationship with them that’s actually a good thing.
00:41:30.870 –> 00:41:38.310
Dave Parker: So one of things, I encourage you to do is build up market partnerships early in your relationships don’t tell them secret sauce let them know what’s exactly on the website.
00:41:38.730 –> 00:41:47.640
Dave Parker: But most times big companies, the innovators have left so part of what they’re buying, in addition to revenue is they’re buying you as an innovator so keep in mind as part of it.
00:41:48.690 –> 00:41:55.200
Dave Parker: With the other thing we talked about with with founders is what’s your invested capital compared to revenue so ideally.
00:41:55.950 –> 00:42:02.880
Dave Parker: i’d like it to be under 321 right so So if you got a million dollars in have invested capital and you’re doing a million dollars great.
00:42:03.240 –> 00:42:11.250
Dave Parker: If you got a million dollars invested capital and you’re doing $3 million that’s even better right but there’s no that there’s a there’s.
00:42:12.030 –> 00:42:19.860
Dave Parker: Because you have what’s called a preference stack right so when we sell a company, we have to pay off your lighter capital debt because debt gets paid first.
00:42:20.190 –> 00:42:25.350
Dave Parker: And then the series be preferred get paid before the series a preferred, and then the series they get paid before the common.
00:42:25.770 –> 00:42:35.430
Dave Parker: Which is where you get paid that’s called a preference stack so depending on what the terms of the existing investment is will determine a lot about is this worth you selling the company or not.
00:42:36.150 –> 00:42:47.250
Dave Parker: And then creating competition between buyers ultimately is something that will help you increase your price by 40% or up to about 40% so a quick summary here’s what Dave did not say.
00:42:48.390 –> 00:42:57.390
Dave Parker: This is a method, I can use to calculate my current valuation know as a heuristic but it’s a pretty accurate realistic if you have enough revenue in your category.
00:42:58.050 –> 00:43:04.380
Dave Parker: If you’re a pre revenue company and you’re coming to me as an angel investor and you’re like my company’s worth $5 million, and you have no revenue, the answer is.
00:43:04.770 –> 00:43:08.190
Dave Parker: You know this isn’t this isn’t calculus, this is a heuristic right so.
00:43:08.880 –> 00:43:20.730
Dave Parker: If you have pre revenue go to the Dave Dave marcus’s blog post about the breakfast method it’s sustained 20 years around, how do you value, a company before they have revenue, by the way, it leads with market how big is the market.
00:43:21.540 –> 00:43:29.430
Dave Parker: So there’s a consistent trend there Dave is actually a season super angel who wrote about this 20 years ago I reached out to him of for.
00:43:30.540 –> 00:43:38.460
Dave Parker: Actually, he wrote a blurb for the book, which was super fun because I had been a lurker on days material on every side i’m like hey i’ve been kind of you know, a fanboy.
00:43:39.030 –> 00:43:46.560
Dave Parker: Would you read the book for me and would you like, give me a blurb and he actually wrote a blog which was awesome so So if you can pick your buyer.
00:43:47.370 –> 00:43:51.690
Dave Parker: Right The thing is, you can know that some of these public company COMP information is there.
00:43:52.140 –> 00:43:56.760
Dave Parker: We also listed like how many acquisitions have they done and how much money have they raised give you a sense of that.
00:43:57.300 –> 00:44:08.100
Dave Parker: And by the way, if you’re in the Ad business Google and Facebook trades, seven and nine times revenue because 90% plus of their revenue is advertising right, so the trend here is pretty consistent.
00:44:10.020 –> 00:44:21.000
Dave Parker: Overall, to not recognize the data is still a work in progress, so if you have questions about it, you want to reach out like love to love to do that, where we’re doing a couple things on the data analysis around the s&p 500 index right now, too.
00:44:23.100 –> 00:44:30.450
Dave Parker: So my last encouragement is there’s lots of things, it was a startup you need to be creative about your revenue model is not one of those things.
00:44:31.020 –> 00:44:46.320
Dave Parker: Like copy great revenue models, if you if you create the 16th i’m super supportive i’ll write about it but there’s enough risks associated with doing a startup you don’t need to have a risk and doing a revenue model so with that zach what do we have for questions.
00:44:47.220 –> 00:44:53.700
Zach Hoene: All right and just housekeeping in relation to Q amp a as a reminder to everybody we’d love to answer as many questions as possible, we still have about.
00:44:53.940 –> 00:45:02.520
Zach Hoene: 15 minutes left so plenty of time, please use the Q amp a function in your zoom taskbar not the chat function, because it could get lost in the chat.
00:45:02.910 –> 00:45:08.250
Zach Hoene: And then just let them up there and we’ll kind of dive into them here shortly so other than that.
00:45:09.090 –> 00:45:22.980
Zach Hoene: We will send a follow up with the recording and a link to that and then also the slides dave’s already been kind enough to share and then maybe just the first quick housekeeping question for you today, but does any of your worksheet data available anywhere, maybe truncated or or.
00:45:23.790 –> 00:45:30.630
Dave Parker: We haven’t I think we’re probably going to put it and get having make it publicly available we’re finishing some of the systematic view of it right now first.
00:45:31.140 –> 00:45:40.290
Dave Parker: But yeah we’re it’s definitely something that if you have a thesis on it and you want to weigh in on it i’d love to i’d love to talk to you about it because it’s it’s been an interesting exercise to kind of learn like.
00:45:41.400 –> 00:45:47.190
Dave Parker: This seems to be interesting is they’re actually something they’re not but we had to say, we sold a company last year.
00:45:48.030 –> 00:45:56.250
Dave Parker: To a publicly traded company in you know, in the subscription space and Sure enough, they were roughly a million dollar revenue company they sold for 12 and a half million dollars.
00:45:56.850 –> 00:46:03.000
Dave Parker: Right and there’s obviously there’s lots of variables there’s act, but you like your growth rates are variable and your markets are variable but.
00:46:03.360 –> 00:46:10.890
Dave Parker: But the numbers have been pretty true to form, in like I like to we were talking with a commerce company earlier this year, and there were niche niche commerce business.
00:46:11.790 –> 00:46:15.450
Dave Parker: And they’re like what you think you’re gonna sell for and i’m like I think you’re you know, based on.
00:46:15.990 –> 00:46:22.920
Dave Parker: niche commerce businesses look to be this multiple things like that that would be disappointing when you’re talking about where stage was and how much time would take him to double his revenue.
00:46:23.430 –> 00:46:29.910
Dave Parker: And like take the time go double the revenue, because that plus the exit multiple gets you to the number, you really want to get too.
00:46:30.270 –> 00:46:41.580
Zach Hoene: yep absolutely absolutely so just in terms of getting some of the audience questions and again a few, so let me, let me jump into those and ensure we can get to as many as possible, so.
00:46:42.510 –> 00:46:58.500
Zach Hoene: First first question Dave, how do you value, a company in itself to a unicorn and is it the same multiple of revenue, so I think, maybe just how do you value, a company selling to a strategic market kind of you know.
00:46:59.610 –> 00:47:02.790
Zach Hoene: versus like a company that might be trying to go public or.
00:47:02.880 –> 00:47:13.530
Dave Parker: yeah I think the big thing to be aware of there is customer concentration so it’s like 80% of your revenue is going to that unicorn that’s going to be like me like that’ll that’ll negatively impact.
00:47:14.400 –> 00:47:17.670
Dave Parker: We also think of it what’s called a swipe of the pen option right so.
00:47:17.940 –> 00:47:25.530
Dave Parker: People are you could you know Government gave us official ability to do blah and i’m like I don’t know that that’s actually a good thing, because they can take that official ability to go away, too.
00:47:25.860 –> 00:47:31.470
Dave Parker: So, if your customer concentration is a lot of new unicorn I would view that as a negative thing.
00:47:31.860 –> 00:47:36.690
Dave Parker: If it’s if your product is uniquely defensible I would make the case that that’s a positive thing.
00:47:37.080 –> 00:47:43.470
Dave Parker: A lot of this is about positioning as we go out to sell your company to the up market buyers, but the trend here that’s really important is.
00:47:44.190 –> 00:47:53.700
Dave Parker: forecast double and predictable revenue is really important, because then I can make the case zach that i’m going to try to sell you on a future 12 value, instead of a trailing 12 value.
00:47:54.180 –> 00:48:00.570
Dave Parker: Because you’re forecasted predictable revenue so consistent like you’re just like nailing it like that’s a that’s a big deal.
00:48:01.530 –> 00:48:04.440
Zach Hoene: Okay, and I apologize, well, we had a addition to that.
00:48:04.680 –> 00:48:05.070
Zach Hoene: question.
00:48:05.100 –> 00:48:15.810
Zach Hoene: just answered so i’m there clarifying that if, if you have existing investment from a unicorn Does that mean like you’ve got to start up in google’s put money into you how does it does that.
00:48:15.960 –> 00:48:24.570
Dave Parker: Is that it depends on the depends on the valuation right strategic so typically vcs or nickel and diamond you to get the lowest valuation they can strategically tend to be.
00:48:24.840 –> 00:48:29.850
Dave Parker: Less valuation sensitive because it’s all about the strategic relationship they mean by you at so.
00:48:30.390 –> 00:48:36.840
Dave Parker: So know that there’s just a question evaluation sensitivity, so when you go raise the next round of funding as an example.
00:48:37.230 –> 00:48:42.210
Dave Parker: Did the last round of funding come in at a reasonable price point where i’m like ooh that’s that was pretty high.
00:48:42.660 –> 00:48:47.820
Dave Parker: Right and optically as a CEO the thing to be concerned about there as we took a round of funding a.
00:48:48.210 –> 00:48:55.020
Dave Parker: stair step price point but now we take more funding at kind of a mediocre increase like we didn’t double the value of the company.
00:48:55.530 –> 00:49:00.600
Dave Parker: Employees kinda look at and go like is that bad like is my stock option price didn’t really like we thought it would double it.
00:49:01.050 –> 00:49:08.400
Dave Parker: And so just know that there’s there’s signaling that goes on to other investors, because investors it’s easy to get a check into a company it’s just hard to get a check out.
00:49:09.090 –> 00:49:18.780
Dave Parker: Right so that’s always the thing we’re looking at is like what’s the signal, and so it can drive pricing, it may have a halo effect, but it really depends on what your valuation is.
00:49:19.770 –> 00:49:29.430
Zach Hoene: understandable and then Dave just think about that separately, which is kind of a different topic before and on evaluations does that play into how you should be thinking about what your company’s worth.
00:49:29.460 –> 00:49:32.700
Dave Parker: me ask for things they’re both called valuations.
00:49:32.880 –> 00:49:39.270
Dave Parker: And that’s as closest they get so a way of 409 a it’s a great question now the way of foreign and evaluation is done is.
00:49:39.600 –> 00:49:43.860
Dave Parker: Carta or an accounting firm or for an evaluation firm will look at all of your data.
00:49:44.220 –> 00:49:59.700
Dave Parker: And they’re going to give you a valuation based on what your stock option price should be so the value for nine is that it gives you some data around the stock price now keep in mind it’s around the common stock price that you use for options is not around the.
00:50:00.810 –> 00:50:06.990
Dave Parker: The preferred stock price right so since preferred gets paid first that is always going to be a premium.
00:50:07.560 –> 00:50:12.960
Dave Parker: So most often and you’re trying to do with your foreign idea is not to create a taxable event for your employees.
00:50:13.290 –> 00:50:20.550
Dave Parker: So zach of you and I are co founders or company we do it for nine a we grant somebody 10,000 shares at the 49 a price.
00:50:20.970 –> 00:50:26.220
Dave Parker: Then we know that we’re not creating a taxable event for the employees or fees and penalties for us because.
00:50:26.460 –> 00:50:41.010
Dave Parker: Some third party has said, your stock is worth X and now we can go out and grant that person the stock option grant and say the foreign a sad, this is what it’s worth now more often than not, the actual evaluation is probably 50% to 100% higher than that.
00:50:42.300 –> 00:50:50.790
Dave Parker: Then there’s two ways to look at it, if i’m doing it fundraising the investor is going to pay for a future value, so my evaluation on a fundraise will be higher.
00:50:51.210 –> 00:51:00.360
Dave Parker: If i’m going to sell the company my evaluation will be between the venture evaluation and the 49 a right, because in that case i’m accepting the company and i’m taking cash.
00:51:01.110 –> 00:51:13.770
Dave Parker: Give i’m putting the company i’m assuming that company is going to go up for extra five X and value over the next three years, so i’m willing to pay a premium as an investor because i’m going to get a premium out in three to five years.
00:51:14.670 –> 00:51:23.370
Zach Hoene: That lets you grow will link you to um and just as a reminder again to the audience keep firing away we’ll try to get through, as many as we can have got about another 10 Minutes that we can.
00:51:24.000 –> 00:51:37.560
Zach Hoene: use to get these questions answered next question for you do from the audience and this maybe is more pertinent to the content, your book as well, but how difficult, is it to get seed money before you have revenue, maybe to finance your mvp or whatever.
00:51:37.650 –> 00:51:45.660
Dave Parker: The answer is very difficult, these days, so when I did my first company, you could get you know I sold on the back of a napkin ring technically it was a.
00:51:46.680 –> 00:51:53.310
Dave Parker: White piece of paper that was on a probably it restaurant great in bellevue so we use crayons to map it out, but.
00:51:53.670 –> 00:52:01.080
Dave Parker: Those ones were earlier, and now I would say, as vcs moved up market and angel investors moved up into the later stage vc is harder to get that.
00:52:01.740 –> 00:52:07.560
Dave Parker: Pre revenue, so you really have to sell on the size of the market and definitely go back and look at that day berkus.
00:52:07.950 –> 00:52:17.070
Dave Parker: method or the breakfast method for how to value, a company pre revenue, because you really have to sell around that thesis to go find an angel investor who really believes in you.
00:52:17.460 –> 00:52:22.830
Dave Parker: But I draw the distinction between angel investor institutional investor and strategic investor.
00:52:23.250 –> 00:52:33.570
Dave Parker: The angel investor invests in you and they believe in you right it’s not really about the market and the unit economics it’s about do I believe you can go do this and do I think the idea is exciting.
00:52:34.140 –> 00:52:40.050
Dave Parker: And as an institutional investor as a vc i’m investing other people’s money so i’m going to invest on a charter.
00:52:40.500 –> 00:52:45.480
Dave Parker: That i’ve raised money from my limited partners so for that 40 plus people who are on this call there my limited partners.
00:52:46.020 –> 00:52:50.460
Dave Parker: i’m going to invest in what I told him I was gonna invest in West Coast tech companies early stage.
00:52:51.180 –> 00:52:59.370
Dave Parker: A farmer deal comes up and then like this is a great pharma deal I should invest in it no I have 40 investors who said you’re gonna invest in West Coast tech deals at early stage.
00:52:59.670 –> 00:53:04.980
Dave Parker: So if I invest in a farmer deal and I lose money guess who’s going to sue me my limited partners that’s never a good option.
00:53:06.450 –> 00:53:08.010
Zach Hoene: Those are the options, you know one right.
00:53:09.060 –> 00:53:09.450
Dave Parker: sure.
00:53:10.650 –> 00:53:11.580
Zach Hoene: awesome and then.
00:53:13.080 –> 00:53:17.460
Zach Hoene: Again, just for the audience, please feel free to add any more questions but i’m Dave you know.
00:53:18.720 –> 00:53:27.240
Zach Hoene: Just a question for me, I was reading the pitch book q1 spotlight venture spotlight report and it sounded like, at least in q1 of this year.
00:53:28.200 –> 00:53:32.730
Zach Hoene: Total deals were down year over year which may be expected with us entering coven human last year.
00:53:33.720 –> 00:53:49.800
Zach Hoene: valuations and volume or both up it looks like and series a and series B median valuations were 23 X and i’m, at least in q1 of this year, what do you think that means in terms of a longer term trend, or is this a blip from pent up demand or just from your purview.
00:53:49.800 –> 00:53:51.420
Zach Hoene: With a lot of money sit on the sidelines.
00:53:52.320 –> 00:54:00.870
Dave Parker: And I think the companies that saw so like we just did an exit for a company out of the out of Colorado but a weird one for me was actually manufacturing company, they were in that that.
00:54:01.350 –> 00:54:07.320
Dave Parker: That he mountain bike business and they sold to a big brand it was publicly traded so great exit.
00:54:08.010 –> 00:54:13.230
Dave Parker: The bikes faith is super profit right, so one of the decisions that the founders had to make as.
00:54:13.740 –> 00:54:18.840
Dave Parker: Do we take money off the table now, or do we let it ride for a year and how do we feel about the super frothy missed in the market.
00:54:19.170 –> 00:54:23.820
Dave Parker: So I think what you see right now is lots of revenue lots of capital sitting on the sidelines.
00:54:24.300 –> 00:54:32.370
Dave Parker: Making super interesting investments at probably slight premiums, so we have a financing that will close next week, that is.
00:54:32.760 –> 00:54:45.360
Dave Parker: You know the founders were thinking about should we sell the company should not sell the company, the target exit press with $30 million and they got a 20,000,020 million new cash on the 30 million pre they’re like what do we do and i’m like to take the deal.
00:54:46.470 –> 00:54:48.120
Dave Parker: Because it’s a it’s a good deal.
00:54:48.330 –> 00:54:54.300
Dave Parker: yeah right so now you’re still in for the next three to five years because private equity is looking to.
00:54:54.810 –> 00:55:01.170
Dave Parker: triple their money in three years right versus essence founders, welcome to double the size of the company every 18 months is typically that.
00:55:01.680 –> 00:55:07.710
Dave Parker: That that’s the heuristic you should use around fundraising right, so I want to raise enough money for 18 months double the enterprise value.
00:55:08.490 –> 00:55:14.910
Dave Parker: raise money again doubling enterprise value so but I think there’s there’s lots of cash sitting on the sidelines, right now, still and.
00:55:15.690 –> 00:55:23.850
Dave Parker: You know, frankly they’re paying a bit of a premium for it and big companies on exits we’re seeing that you know big companies are buying revenue, the hard ones are.
00:55:24.300 –> 00:55:27.990
Dave Parker: where you have a little bit of revenue or you have IP or you have.
00:55:28.440 –> 00:55:38.010
Dave Parker: But you’re not big enough to be acquired right and those ones are a bit painful because founders like we’ve worked really hard in seven years of pushing the ball a pill and we’re you know 600,000 in revenue, and the answer is.
00:55:38.730 –> 00:55:42.450
Dave Parker: Probably not sellable yet you really need to get to 1,000,002 million in revenue.
00:55:42.960 –> 00:55:50.730
Dave Parker: Right and I know for founders having done that side of the business is like you feel like you’re pushing the ball up Hill and it’s a slog and the answer is because it is.
00:55:51.360 –> 00:56:00.990
Dave Parker: Right, but you need to maximize your exit but for you as the founder and for for your investors is probably why we like to deal with founder controlled companies.
00:56:01.380 –> 00:56:09.510
Dave Parker: Because when when we close the transaction right the wire ends up in your account and it’s like well that’s awesome right and that all the time you spent doing that is all sudden worthwhile.
00:56:10.380 –> 00:56:14.280
Zach Hoene: awesome that’s that’s really helpful couple more quick questions before we wrap here Dave.
00:56:15.390 –> 00:56:26.910
Zach Hoene: You know there’s tam they’re saying there’s some you know, like, how do you even begin to quantify if you have an idea like what your addressable market is you know, specifically thinking about that pre revenue evaluation.
00:56:27.510 –> 00:56:33.840
Dave Parker: yeah so it’s a great one so keep in mind that whole tam Sam and Sam if you’re new to it is an academic exercise.
00:56:34.350 –> 00:56:41.490
Dave Parker: of research around the total addressable market globally, that you could sell to so let me, let me make it a little bit simpler.
00:56:41.880 –> 00:56:57.840
Dave Parker: Right, so if you think I use I use Java i’m a cyclist I had a new hip put in five years, so became my PT right so just you know if success is choosing your parents well I failed so the tam for Ostrava you people could look at and say, well, everybody in the world who owns a bicycle.
00:56:58.920 –> 00:57:09.210
Dave Parker: that’s not their tam right so it’s everybody in the world who owns a bicycle and cares about tracking their performance, so now this massive tam just shrunk down to like this big.
00:57:09.960 –> 00:57:18.780
Dave Parker: Right and then they launched only on apple so there’s their service addressable market became much smaller because half the world that cares about performance is still using android.
00:57:19.770 –> 00:57:29.010
Dave Parker: Right and then it had to be with okay now I my service obtainable market really has to do with what you have to be able to pay with a credit card, you have to be able to do it in English.
00:57:29.430 –> 00:57:34.950
Dave Parker: Now that now that circle got really small again, so the biggest thing I see founders miss early on.
00:57:35.340 –> 00:57:42.360
Dave Parker: Is they they find the research that says this is, you know we’re going to enter six multi billion dollar markets and my answer is no you’re not.
00:57:42.960 –> 00:57:50.430
Dave Parker: Because you don’t have enough money to do that, like if you if you’re going after $1 billion market or you’re going after a single half billion dollar market that’s enough.
Dave Parker: What I really care about is how do you get your first 10 customers 100 customers 1000 customers, that is not an academic exercise that is a you know at 10 it’s hand to hand combat.
Dave Parker: Right at 100 you’re starting to scale passed to you as the selling CEO.
Dave Parker: thousand you built a marketing and sales organization that really helps you get the product sold, so I would say as an investor I care more about that 10 101,000 and tam is an academic exercise keep in mind your spend hours and hours researching it.
Dave Parker: If you do it well it’ll take you about 20 seconds to explain it and the best you’re going to get as a man sounds about right.
Dave Parker: If you do it poorly it will send your entire presentation off the rails.
Dave Parker: Right so just know that this is there’s that one has mostly downside, I would rather somebody bring me a 10 101,000 story might be like.
Dave Parker: yeah kind of like that right So for me I tend to away from academic exercises, but you know different vcs at different perspectives on how they think about it.
Zach Hoene: And then maybe one more question for you wrap your Dave, what do you think of companies selling assets for an exit versus a you know, a full equity acquisition, or you know we’re an aqua aqua hire these different types of exodus.
Dave Parker: We mentioned, you mentioned the two most prominent one so an aqua hire is where we’re buying the team.
Dave Parker: And we’re basically giving you some amount of cash buyers giving you some amount of cash but they’re acquiring the team and and the assets.
Dave Parker: So and there’s a multiple there that’s pretty easy to calculate and aqua hires Evan flow right so for a while you could pretty much get 250 to 300,000 per engineer.
Dave Parker: Which is you know reasonable right because people would rather buy a team that’s worked together, sadly, if you’re a salesperson, the answer is, I get zero for you.
Dave Parker: Right so that’s just a buying an engineering team i’m not buying sales and marketing.
Dave Parker: So that’s an aqua higher so you can do a multiplier based on really the size of the team you just have to be aligned with the market buyer who’s your same technology stack something complimentary about what you’re building so.
Dave Parker: So, on an asset sale it’s a little harder because there’s this concept of a of a naked asset which is an asset i’m buying with no team.
Dave Parker: Which means i’ve lost all the tribal knowledge i’ve lost how they got the asset, so that sort of asset kind of plugs in.
Dave Parker: To somebody else’s portfolio or IP plugs into somebody else’s portfolio, but know that you’re not going to get you know you probably won’t get your invested capital back out of that deal.
Dave Parker: And my partner Mark and I work with all kinds of you know, sellers all the time, and he calls me the patron saint of have lost causes as it.
Dave Parker: relates to founders to the moms like well, you can do it yourself and here’s how you do it and it’s like it’s just it’s hard.
Dave Parker: yeah because big company buyers like the list I showed, you are they’re requiring revenue, because if they if they get 100 million in new revenue or even 10 million in new revenue.
Dave Parker: They can multiply it times that number and their enterprise value goes up if you’re 300,000 in revenue, the answer is.
Dave Parker: And by the way, the cost of doing the deal is the same right so time dilution effort cost of legal and accounting.
Zach Hoene: Because it.
Dave Parker: doesn’t really changed very much so, most of the big market buyers want to want to buy numbers that change their trajectory themselves right, which is why they’re going to focus on revenue companies first.
Zach Hoene: That was Thank you so much, and thank you to the audience it looks like we’re at about time and.
Zach Hoene: We got through most of our questions, and just as a recap, we will send out a recording later and.
Zach Hoene: The link to Dave slides as well, but I just really want to thank Dave for this highly informational and incredible session, thank you very much Dave and, of course, to the audience and everybody was able to join us and Dave any closing words.
Dave Parker: You bet thanks, so I think the only thing I would add, is just on a on a personal note, right people reach out all the time, said hey we took a call and just know that my one question i’m going to ask you is, are you mentoring somebody that doesn’t look like you.
Dave Parker: So that’s my other questions right, so, if you like, i’ll send you my my my calendar link i’m happy to take a call and do that.
Dave Parker: On just a straight coaching if you’re looking for help on exiting like we’re happy to do that to just know if you’re asking for free free time and advice my like my like I don’t care if it’s a high school student in college student.
Dave Parker: A founder that doesn’t look like you, I just want to know that you’re giving back as well, and then you know i’m happy to make some time available, obviously, if you’re looking to get ready to sell that’s what we do so happy to help out there, too, so thanks pleasure to see you.
Zach Hoene: Thanks everybody thanks for attending.