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I have recently met with a variety of startups that have business models that are entirely dependant on hyper user acquisition, activation, and retention. Dave Mcclure’s Pirate Math (AARRR) remains the text book to follow http://500hats.typepad.com/500blogs/2007/09/startup-metrics.html. In these discussions I was drawn into a discussion about valuation, which turned into an email I have paraphrased below for your feedback.

First a qualifier, I don’t imagine I am the best person to discuss valuation from any angle. In my role making funding decisions, I am lucky to not have to price rounds, so valuation isn’t something I have done professionally. Similar on the pricing (revenue) side (solution value) to the market, my experience is all value (ROI) or market based (competitive) pricing in enterprise B2B, so not well aligned to the B2C startups.

To give you my 2cents, my view is that all the companies I encounter that work on user dependant models are way to early to have any concern about valuation. On the pricing front, most are not even ready to start testing, as they need to build a value proposition that is coherent. Note a problem – solution statement and a value proposition are very different though related things. Those that have a value prop and a MVP should be running pricing experiments at as high a volume as possible; inability to do so illuminates other issues (CAC & Value).

My experience with companies that are pre-funding and typically pre-revenue is that there is nothing to price in order to derive a valuation. In the seed round my view is to do a convertible note. The only logical pricing mechanism at this early phase is the value of the team’s time. Two founders who could reasonably earn $100k/ year each working for the man have a company that is worth no more than $200k pre-traction (NPV). Generally speaking investors set the price, the only say the entrepreneur has is their ability to create a market for the equity and negotiate a deal. Your company, in the early stages, is only worth what someone is willing to pay.

Most teams do not have anywhere near enough evidence to establish comps for their valuation. This makes hunting for investment a very dangerous use of time. Money goes to teams with traction, spend nearly all your energy on activity that demonstrates traction (signups, downloads, revenue, etc). Investors will not make your business work, customers will.

Here is an easy example to think about B2C valuation. A Facebook user is worth $100 (roughly) and provides the peak market comparable for every other Ad driven social consumer platform in the market. Every other company with a similar business model has a user value less than $100 per account and the drop of is extremely steep. FB has dominant market position, continued up and to the right growth, proven revenue, extreme stickiness etc. Tomorrow’s hot startup only has user acquisition on its side with no sustained track record of activating, retaining and converting those users to VALUE. Pre-value users occur at a negative run-rate (basic costs of the business, dev ops, and user acquisition costs). The amount of traction to overcome the disadvantage is huge, and to my knowledge no one in Canada has pulled anything like that off (Wattpad is working on it).

This is driving 10m users as the benchmark for a startup to become a candidate for a priced round (see http://cdixon.org/2012/08/03/ten-million-is-the-new-one-million/). If you can get that many users without spending a tonne of money you likely have some foundational value to build on. Before that you are pissing in the wind trying to raise money IMHO. Metrics change based on models but the mountain is just as daunting if you are SaaS b2b etc. The reason i dislike user models so much is that I don’t believe Canada has any sherpas that have been up that mountain, we have plenty of folks who have climbed b2b peaks.

This rant has come out of on going discussions about Canada’s accelerators and their propensity towards B2C startups. Generally speaking; asking for investment is a waste of time on Demo Day. The only route to funding is through traction. I want to see these companies make asks that drive against traction milestones, ie help the startup get on a growth curve to 10 million users. Make asks against milestones ❤ months out from demo day, ones that generate momentum and move the needle on the key performance metrics of the model. “SIGN UP for the APP now! please;) but seriously the bar will not open until you have downloaded the app”. Boom 300 users at zero hard cost, not a bad 30 minutes.

Part of the challenge is the accelerators are serving a segment of entrepreneurs that are drawn to b2c, but that is another post. What I want to see is better understanding & demonstration of growth hacking and better asks from b2c founders, because cash ain’t it.

“Real glory is being knocked to your knees and then coming back. That’s real glory.” Vince Lombardi

First, pursue your dream, your passion, your goals no matter what. The advise given to all, which usually generates focus and conversation on the potential positive outcomes, the ‘I gonna build an amazing product, and awesome company’ moment. This post is not about that. This post is about the near soul destroying assault that being an entrepreneur is going to launch on your self-worth.

The best startup mentors, advisers, gurus, typically at least acknowledge that building a business is ‘wicked hard’; however, I think there is little attention to the sources and nature of the hard. Yes raising capital, hiring talent, building culture, selling your solution, etc are really, really hard, but there is no lack of good insight and direction on those Rational, Tacit, Process problems. I believe the real hard, the real barrier to success, the stuff that keeps entrepreneurs up at night, is the emotional challenges that happen in the dips in your startup roller-coaster ride. I don’t think we spend enough time as a community helping each other cope with the unique life event that building a company is.

Starting, building, and growing a business is an immersive experience, it becomes the core of your life. When the business is not going well, you are not going well. This affects every other aspect of your life. We (the Startup Community) readily endorse, training, coaching, mentorship, etc to assist each other with the rigors of the day to day of a startup, including taking care of your health through, diet, exercise, family time, down time, etc. I don’t think we talk enough about the emotional work that it takes to empower the success of you and your business.

Here is some stark reality for aspiring entrepreneur. Getting money, whether it be revenue, investment, grants, etc, into your startup will take twice as long as your conservative estimate. Unless you have serious credentials (you had a SR Exec job at a big time company, you did something amazing at an amazing company, you were a key player in a previous successful startup, you achieved an exit as a founder) no one other than friends, family, and fools (the FFF round) will fund your business plan. First timers and the unproven must achieve traction prior to getting investment, traction should first be interpreted as steady MoM revenue growth, second MoM user growth, third you have built an AMAZING prototype. Please do not plan on being the exception to these rules. Yes this produces a catch22, this is the dip, the chasm, the obstacle between you and success.

These periods are IMHO what it really is to be an entrepreneur, and the difference between success and failure here is intensely dependent on your emotional talents. How do you stay confident, fully engaged, calm, cool, and collected in the 1 step forward 2 steps backwards loop? You are 30 days from bankrupt, your friends & family are anxious, your life-partner is stressed, your co-founder is off the rails, your team are looking for jobs, the ship is sinking. Successful entrepreneurs find a way to survive.

Breaking through to the next phase doesn’t happen because the anchor client finally signed, your user acquisition hit a tipping point, you got featured on TechCrunch; it happened because you persevered the emotional turmoil of the period prior to those outcomes enough to do the work that allow those things to happen. Failure to execute is rarely due to a lack of know how (plenty of blogs, books, and people), or skills (possible, but where there is a will there is a way), the failure happens inside you, the Will gives out. You need to train, plan, and actively manage your emotional well being as well as be engaged helping your team do so as well; that my friends is HARD.

Watch http://thisweekin.com/thisweekin-startups/ episode #161 at the very end, after an amazing chat about the block and tackle of startup success, both Jason Calcanis and Fred Wilson finish with the statement “it really is just about perseverance isn’t it.” Two of the biggest icons in the industry truly connect on the pain of their failures and the ability to overcome them that has produced their successes. Gary V and Kevin Rose hit it even harder, its sacrifice, ‘its always hard’, and ‘working your faceoff!’ here. What Gary V hits particularly well and consistently in most of is his content, is the raw straight at you position that building a business is going to absolutely everything you have; your success will be achieved by your passion, guts, and relentless hard work. This is beautifully simple truth. I want to outline a few ways that might help you activate, build and maintain those attributes of passion, guts, and hard work, because I know I struggle nearly every day to so.

I will start with some hard, non-emotional things that will help pave the rocky road out of or away from the hard times that will come in a startup.

  1. Save One Year’s worth of living expenses (at least six months) if you can. Money pressure is visceral and very hard to ignore; its hard to focus on building your business if you are not sure how you are going to pay the bills. Remember revenue and investment capital always take longer than planned and rarely happen in a startup in a sustainable way in year 1.
  2. Align those closest to you, specifically your life partner. No matter, how strong and positive your relationship, a startup is going to put it to the test. Never take your private relationship for granted, for good or ill it is going to impact your business life. Your partner is a part of your team, communicate your needs open and honestly and reciprocate. Two front wars are really hard to win, keep your war at work.
  3. You and your co-founder(s) are married, all the same rules apply. This is an unique business relationship, normal rules do not apply. You need to support each other emotionally not just professionally. Your co-founder’s issues at home are going to affect your business, they will resent not getting sympathy / support when the server crashes at 2am, losing a deal hurts bad talk about how it feels and wait to talk about why you lost. Your startup is your baby, you better have alignment on how you are going to parent it.

In my experience and observation, the truly critical takeaway entrepreneurs have from their failures are the emotional scars. Failure tests your resolve, it trains your reaction to adversity, it exposes you character. Failure informs you mental and emotional models for the next startup. From them you learn how to position yourself, your venture, and your team for better outcomes. I have failed twice in companies that I have founded. Those lessons inform my entrepreneurship everyday, and I am much stronger, effective, and valuable for those failures.

A fair question most people are too polite to ask me. So let me answer the question that hasn’t been able to traverse your brain to mouth filter.

I have failed as a founder multiple times. The most informative, and my only true fully committed startup founder experience was Investment Ready Partners. It was professional services startup, focused on helping companies define, develop, and execute their funding strategy. We worked intimately with a broad variety of ventures, software, green energy, traditional SMB, etc. and learned a ton about the never ending challenges of growing a business. I also learned an amazing amount how business financing in Canada works, the banks, the government, PE, VC, Angels, all of it. Failure is an important element of entrepreneurship, you should not be judged by failure but by what you learned from it and your response going forward.

Five most important lessons I learned and inform most advice I give:
1. Revenue is KING, the magic bullet, a businesses reason for being, all things spring forth from revenue.
2. Entrepreneurs are Crazy, it’s a roller coaster that few have the ability to handle. Related it ain’t about the money but its all about the money; have your house in order.
3. Co-founders are the third most important relationship you will ever have after parents and spouse. Know thyself and ruthlessly evaluate your co-founder(s) and they you; be accountable.
4. Network is hugely valuable but does not directly monetize. Relationships get you opportunity, business value gets you money. Also it’s a small world, markets are tiny, even big ones are controlled by less than 50 people.
5. Timing & Positioning are critical success factors that you have limited control over. When successful entrepreneurs point to luck, typically the ‘luck’ was a function of timing and positioning. Only way to influence luck is through hard work and foresight.

So I am a failed entrepreneur, what makes me qualified to advise Startups and influence the community? Another question that likely didn’t get to your lips;).

My point of view is informed by having funded more than 70 companies with more than $2m of the Ontario government’s money in less than 3 years. We have funded projects across the software startup spectrum: academic, two kids in the basement, pre & post accelerator, growing seven figure companies, pre & post VC funded, b2c, b2b, b2b2c, in a wide variety of verticals, etc. The outcomes on those projects have formed a ‘portfolio’ of companies that have many more wins than losses; including two exits (admittedly acquihires), more than a half dozen $1m+ venture rounds, over two dozen companies that are going concerns, and a less than typical percentage of dead pool.

Between Investment Ready Partners and Coral CEA I have easily looked at over 1000 Startups. Understanding what makes a startup investment grade has been my profession for five years. That is nothing compared to guys in the Valley, but not too many folks in Toronto can say the same. For Toronto, I don’t likely rate a top 10 startup advisor, but I’d give myself top 20. Most of the folks in front of me run (real) funds or have had successful exits.

I also have some experience, 5 years in Startups is enough time to develop some scar tissue. Before that I worked in F500 IT services companies selling to F2000 companies. I learned a few things about complex solution selling, RFPs, and business cases. I also got an education on a few of Canada’s most important sectors: health care, energy utilities, and manufacturing/distribution; while learning enough to be dangerous about banking, life sciences, telcos, and insurance.

“Great, what can you do for me?” You ask.

Typically, most people come to me looking for money, which I encouraged for a couple years. That ship has sailed, the budget is spent, so that is no longer a good use of your time. I am no longer special, I am like everyone else in the community and extremely unlikely to fund you.

If you haven’t bounced, I will go on;). Where I add value is enterprise grade complex solution selling; that is the focus of the majority of my career and that is where I add the most value. If you want me to actually help you execute that is the area. I can very helpful to Startups around their strategy for business development and funding based on my last five years solving those problems. My network in the Toronto Startup Community is broad and deep, nobody is more than one degree away; I will get you to the next best person for the learning you need. Most important, I will do my very best to not Bullshit you. If your idea sucks, I will politely say so, back it up with the knowledge I have at hand, and then work with you to get to a better place.

“So what do you want”, compensation drives behaviour.

Mostly, I work for Karma (see earlier post). The remaining <10% likely have some fit to my mission with Coral CEA (my current startup), and <1% might be inclined to compensate me for making magic happen. Making money on entrepreneurs ain’t my business and its not on my agenda, but I like money so I am happy to take it ethically. Free no bullshit tip, trying to make money on entrepreneurs is sure fire way to fail.

As Coral CEA ramps and evolves as a startup my ability to be as open a member of the startup community will change; but know this, I will respond. I am hear to help. Good Luck!