Beyond the First 100 Days – Finding Your Cadence

In our last post, we discussed the importance of the First 100 Days after a growth financing. Above all else, it’s a rare opportunity to systematically reset the Company’s operational priorities, trajectory and pace in order to meet its long term objectives.

Armed with a cohesive plan and a clear set of course headings, you and the team are ready for growth.

So what’s next?

The focus for the balance of the first year should be to enhance the team’s results-oriented culture in the face of more aggressive growth objectives. Businesses experience new stress points as the rate of their growth increases. These weak spots or “2nd harmonics” can show up anywhere in the operational four P’s; people, process, product or partners.

Up until now, you’ve overachieved as a bootstrapper with a combination of grit, brainpower, agility and endless hard work. Looking ahead to the next 6 – 12 months, the “tried and true” approach that got you to this point most likely won’t scale. As you invest in growing the top-line, the business must quickly find its cadence in order to consistently achieve these new operational goals.

Simply put, the Company’s growth phase is all about maximizing the return of every dollar invested with confidence and with the highest degree of predictability. A synchronized cadence is the elastic band that connects these growth investments with the desired results.

So how does a team find its new cadence? It begins with understanding the link between high-performance execution and productivity. That, of course, is easier said than done.

Let’s break team execution and productivity and down into it’s three fundamental and sequential elements:

Part 1: Establishing Organizational Alignment

During the First 100 Days, the biggest challenge is to refocus the team’s attention away from the 10, 15, even 20 number one priorities on the  “We definitely should…” list to the 3 key operational tasks and goals required to ensure long-term organizational alignment:

  • Developing an institutional discipline around team communications at every level of your organization
  • Committing to the Annual Business Plan as a team – bottom to top
  • Aligning every team member’s individual role and their personal definition of success with this Plan

Alignment up and down the organization – particularly as the team grows – is a critical success factor with respect to high-performance execution.

 Part 2: Measuring the Results of Every Action

Even if you already consider your business to be a data-driven operation, you will need to become maniacal about measuring the results associated with every growth-related action. These actions can be traced to assumptions in the annual business plan and, whether they’re implied or explicit, their impact can and must be measured.

Establishing an objective frame of reference is an operational imperative. At Workhorse, we’ve developed a comprehensive Company Dashboard and a set of SaaS Metrics that CEO’s and their teams use to maintain a real-time pulse on the business as well as to identify issues and any related corrective actions. If you don’t already have a dashboard or something comparable, insist on putting one in place before you begin spending one additional dollar on growth.

Given your bootstrapped roots, cash has always been at the top of the daily, weekly and monthly operational metrics. Just because you now have a fully-funded plan and a healthy balance sheet doesn’t mean you should focus on cash any less. It is the most strategic resource in Company, and as such, needs to be managed accordingly. Make cash management and cash reporting a distinct and regular part of your monthly routine.

Part 3: Having the Courage to Make the Necessary Course Corrections

For businesses that are operating at or near breakeven at the time of the growth financing, it is often necessary to take the operation cash negative for a period of 18 to 24 months in order to maximize the top-line revenue growth. This “cash trough” is carefully designed to exit this value creation phase at the desired growth rate and EBITDA metrics in line with something we call the “Rule of 40s Compass” – it’s part of the company-building value creation process and a topic we’ll discuss in more detail in future posts.

The growth/trough model should include definitive revenue/cash targets and thresholds to help the team manage the day-to-day financial operations. For example, if the revenue growth meet or exceeds the plan for the assumed level of invested cash, fantastic! You should consider increasing the pace of investing to capitalize on the market pull and the team’s higher than expected productivity. Conversely, if the growth for any period is below expectations – that is, the business is burning more cash and has less to show for it – a timely pull back on spending is not only warranted but necessary until the root cause and flawed assumptions are clearly understood.

Finding the business’ new cadence is a function of team alignment, a data-driven mindset and confidence to course-correct. Companies that understand this and make it a priority – everything else being equal – put themselves in a position to win. It’s also an iterative process. Maintaining this alignment, mindset and sense of urgency will be a constant challenge the team grows and diversifies. Nevertheless, this is the phase where the Company’s potential and intrinsic value begin to converge.

In future posts, we’ll expand our discussion of the Company-Building Value Creation Process in preparation of ”The Rule of 40s Compass” segment. This includes the importance of focusing on the right meetings up and down the organizations as well as finding an optimal meeting cadence. From town halls, to weekly commitments, to daily stand-ups to one-on-ones and cross-functional roundtables – meetings can either spark or stall team productivity. In the meantime, you can find more resources and growth perspectives for your business at The Growth Equity Blog and the Workhorse Capital Blog.

The First 100 Days – The Map Room

Congratulations! Your thriving, bootstrapped business just closed its first and possibly last round of growth equity financing. Although the process might have taken a little longer than you expected, it’s all about the outcome; you now have a fully-funded growth plan with a company-building partner to help you and the team achieve your long-term objectives.

So now what?

As it turns out, having enough cash to fund the Company’s value creation plan is actually just a table stake. What you do with it and how effectively it’s deployed separates the highly valued businesses from the rest. The first 100 days post investment are critical.

Up to this point, you’ve built a disciplined operation with a healthy respect for capital. At the same time – and as far back as you can remember – the Company has needed more people, more lead generation, more product features, more space, more software tools, more brand awareness, and maybe even a new financial system to move from the endless pursuit of aspirational goals to achieving predictable and repeatable growth. This is your “We definitely should…” list.

Immediately after the financing, the team’s instinct will likely be to address the entire list leaving everyone drowning in 10, 15, even 20 number one priorities.

Don’t go there, you’re bound to end up in a mile-wide and an inch deep sea of chaos.

Instead, step back and take stock with what’s working well, and what’s not with one objective in mind; high-performance execution – which, simply translated, means consistently meeting or exceeding the plan. Armed with this self-assessment, the team’s focus can be narrowed down to 3 (and only 3) priorities during the First 100 days:

  • Develop an institutional discipline around team communications at every level of your organization
  • Commit to the Annual Business Plan as a team – bottom to top
  • Align every team member’s individual role and their personal definition of success with this Plan

Why these 3 priorities?

The First 100 Days provide the rarest of opportunities to reset the Company’s priorities, psyche, and cadence in order to meet its long-term objectives. You are drawing the map that will enable your team to maximize the return of every invested dollar with confidence and with the highest degree of predictability. Good communication, the courage to commit to the mission and connecting everyone to the same definition of success (your ultimate destination) are all part of building the map.  These sound like three simple priorities. Simple yes, but imperative. Taken together, they bolster the foundation for high-performance execution and can energize an entire team to tackle the most critical growth challenges that lie between them and their end goals.

“Getting the first 100 days right” requires a combination of trust, intellectual honesty, rigor, patience and resolve. It has very little to do with anything on the “We definitely should…” list and almost everything to do with organizational alignment around the few things that will have the most impact on the long-term value of the business. An investment partner that is patient enough to encourage you to re-align and re-calibrate before you starting trying to do too much is also useful.

In future posts, we’ll expand our discussion of the First 100 Days in preparation for Finding Your Cadence. In the meantime, you can find more resources and growth perspectives for your business at The Growth Equity Blog and the Workhorse Capital Blog.

Workhorse Capital Invests in Traackr

TraackrDave and I are delighted to share that we’ve made an investment in Traackr, the leading provider of influencer relationship management (“IRM”) solutions for brand marketers.

Our investment in Traackr highlights our emerging growth-equity investment focus. By all measures, the company is an already-successful SaaS business. The company serves well over 100 enterprise-class customers, having established itself as the category leader in the influencer relationship management space. Traackr’s results show all of the hallmarks of a successful SaaS business; rapid growth, high gross margins, and negative net-churn. Further, having essentially bootstrapped the business on a small amount of non-institutional equity capital, the management team is battle-tested and has shown itself to be fiscally disciplined.

What Dave and I admire most about Traackr’s leadership is the disciplined manner in which they have gotten the value-creation flywheel turning. Traackr isn’t leading the league in the vanity metrics category (capital raised, FTEs or burn rate). Rather, this workmanlike team is focused on the hard financial and operational indicators of success around demand generation, product innovation, customer satisfaction and cash.

The story of Traackr is unconventional if compared to the path taken by venture-backed businesses. But their story is par for the course for bootstrappers. Two founders, Pierre-Loic Assayag and David Chancogne started Traackr to solve a problem; they wanted to organize the web’s content around people, rather than around pages, keywords and context. Ultimately, they found application for the technology they had built when influencer marketing (a people-driven process) started to become mainstream. But rather than trying to go full-unicorn with Traackr (which probably would have killed the business), PL and David have taken a pragmatic, disciplined approach to establishing Traackr as a category leader. The Traackr team wrote a great post on their “unconventional path”. Unconventional, people-driven and wonderful…

Now, having established a market-leadership position, Traackr has the opportunity to accelerate its growth by raising its first institutional round of capital. We’re pleased to have the opportunity to work with Pierre-Loic and the entire Traackr team as the company embarks on the next phase of its value-creation journey.

At a recent all-hands event, Dave and I had the honor to participate by handing out rewards to key members of the team. Many of the team members received well-earned recognition throughout the event. I had the honor of announcing the winner of the MVP award which is given to the team member who most represents the company’s values through their contributions to the company. Although only one employee could receive this particular honor, I was struck by the sense that the award could legitimately have been awarded to any one of the 50 team members who attended.

Congrats to the entire Traackr team for completing your first institutional financing! Dave and I are delighted to be your partners.

 

Stage Expertise is as Important at Sector Expertise

The Workhorse Capital team believes that successful investors differentiate themselves by contributing to the value creation process at each portfolio company. In order to do so, we keep close to our roots – focusing our investments in technology-enabled service businesses which leverage recurring revenue business models. We believe in sector expertise. Likewise, we believe in stage expertise. We’ve chosen to become growth stage experts. We believe that growth equity offers investors an asymmetric risk-return profile; the opportunity to derive venturesome return potential with much lower loss rates than venture. In our view Growth Equity investments exhibit the following return characteristics:

Proven Product-Market Fit and Economic Model

Candidates for Growth Equity investment typically operate in a quantifiably large market with a proven value proposition and economic model. These businesses know how to sell their product/service, how to identify their target customer and understand the economics of customer acquisition. With this foundation in place, growth-stage businesses can deploy investment capital at the use(s) of proceeds that generate the highest return on investment.

This cannot always be said of venture investments, which often wander in the woods and often must “pivot” before discovering a market, or leveraged buyouts, which must focus on repayment of debt to create equity value.

Attractive Risk-Adjusted Upside Potential

Growth and value are concepts that are inextricably linked in the financial markets. It is a well-known axiom that – all else equal – the faster a company is growing, the higher the multiple it commands, and vice versa. It is obvious but worth emphasizing that growth-stage businesses create incremental value by growing revenue and profitability. In a sufficiently large market segment, growth stage investments have the opportunity to drive meaningful growth and profitability.

The same can be said of venture investments, although the failure rate of venture-financed companies remains very high. While it is easy to recall high-profile acquisitions of venture-backed companies with unproven economic models, these exits are very much the exception to the rule. Growth Equity returns are more predictable because base exit value is tied explicitly to growth and financial performance, with the added upside potential of strategic value. Buyouts on the other hand often create value through cost-cutting and by reducing debt. As a result, traditional buyout returns are often bounded, as there is only so much cost cutting and debt repayment available to a given company.

Limited Risk of Capital Loss

We make Growth Equity investments in companies that have created a baseline of value and are typically un-levered, so that the preferred equity is not subordinate to debt. If the investment is priced right, the investment need only maintain its value in order to return capital to preferred shareholders.

This is distinct from both the venture capital asset class and the buyout asset class. In buyouts, the equity is typically subordinate to debt, creating a default risk that could wipe out equity. One need look no further than the 2007/’08 business cycle to see how leverage cuts both ways. In venture, the company must typically grow into its valuation by hitting development and/or performance milestones, which if not achieved can render the equity worthless. Venture is about harnessing home-run potential, but with that upside comes higher loss rates.

Being a stage expert (as well as a sector expert) enables us to better understand the challenges faced by growth stage businesses and to design our business around helping the entrepreneurs we partner with to stay ahead of those challenges. With a combination of sector and stage expertise, we are purpose built to execute on the promise of growth equity.

Don’t Die Trying… Be a Workhorse.

For those of you who have followed my personal blog, you know I don’t think the mythical Unicorn is a very good role-model for entrepreneurs. It isn’t that I’m anti-Unicorn. Quite the contrary, I’m a huge fan of building companies that are worth billions of dollars. My objection, rather, is to the tech-media inspired horn-envy that came along with the Unicorn phenomenon and the subsequent risk-taking craze that ensued. Left in the wake are Unicorn wannabes that died trying and some one-time Unicorns that ultimately fell from grace.

An alternative role-model to the Unicorn is the sturdy Workhorse. Think of the workhorse as a unicorn that has evolved. The unicorn is of mythical value. The horn was useless and the magic isn’t real. Workhorses are are evolved in that they are producers of fundamental value. They shed the horn, solve real problems and create fundamental value.

We believe so strongly in the Workhorse as a role model for entrepreneurs that when my new partner, Dave McLean, and I named our firm, we chose Workhorse Capital.

Workhorse Capital Invests in Datavail

DatavailWorkhorse Capital is pleased to announce the completion of its first investment; a $7.2 million investment in Datavail Corporation. Datavail is the largest independent provider of remote database administration managed services in North America. Workhorse’s investment in Datavail is part of a $47.0 million growth recapitalization led by new investor, Catalyst Investors. New investor, Lumerity Capital and existing investors, Meritage Funds and Boulder Ventures also participated in the financing.

My relationship with Datavail started through my work at Meritage Funds. Meritage led Datavail’s Series C financing in 2011. I became more deeply involved with the company in 2013 upon my return to Meritage after having run a portfolio company for 16 months. At the time, Datavail had executed several acquisitions of smaller database managed services providers. The working thesis at the time had been to scale the business primarily through acquisition based growth. The acquisitions that the company made were certainly worthwhile, particularly in helping the business to achieve minimum efficient scale. However, it was clear that acquisition based growth strategy would ultimately become limiting and expensive and that the company would have to execute on other growth vectors if it was to achieve its highest potential.

Early in my involvement, it became apparent that Datavail had developed an under-appreciated core competency, the ability to predictably and profitably acquire enterprise class database administration customers at low cost. Datavail has always excelled in customer satisfaction and delivery. Adding a repeatable and scaleable organic customer acquisition capability to the core operating and delivery platform had the potential to create significant value. Through Mark Perlsetein (CEO) and the team’s superb execution, the Company proved its organic growth capabilities, and was able to garner additional internal financing to invest more aggressively in organic growth initiatives. The results is that the company has grown meaningfully over the past two years and with an attractive LTV/CAC ratio.

My relationship with Mark Perlstein, Datavail’s very capable Chief Executive Officer was cemented during our work on the organic growth strategy. We worked together to put the metrics, measurements and decision-tools in place to support the company’s organic growth aspirations. Getting the building blocks right on the front end has helped the business to direct its organic growth investments toward the most productive channels. It is great to see that work proving its worth.

As exited as I am about Datavail’s recent performance, I’m even more excited about the company’s prospect going forward. There are a number of reasons to be optimistic.

  • World-class Team: Mark Perlstein (CEO), Datavail’s CEO has put together an A-quality team across the board. Mark, Keenan Phelan (COO), and Andrew Evans (CEO) do a fantastic job making the business strategically relevant while also making sure the trains run on time. Robin Caputo (CMO) and David Boyle (SVP Sales) constantly improve the customer acquisition process and drive the revenue generation machine with a high degree of precision.
  • High Quality Scaleable Service Delivery Platform: Datavail has built a world-class service delivery operation and infrastructure. With 24×7, global delivery, the Company can meet its customers needs in any location and in any time zone. The company has really differentiated itself in the marketplace in its ability to serve a broad array of needs of mid-market and large enterprise customers.
  • Repeatable and Scaleable Organic Customer Acquisition: Datavail has not only built a world class service delivery platform but also a machine-like customer acquisition engine. With an LTV to CAC in excess of 5.0x, Datavail is poised to continue to grow as it enhances its investments in organic growth.
  • Great Partners: I’ve known the team at Catalyst Investors for many years. Tyler Newton, who led the financing on behalf of Catalyst is a capable and thoughtful investor. Matt Kim of Lumerity is also a long-time friend and colleague in the business. I’m pleased to have Tyler, the entire Catalyst team and Matt as a partners in this investment. I’m also looking forward to continuing to work with Jack Tankersley of Meritage Funds and Peter Roshko of Boulder Ventures. The investor group shares a common purpose to support this management team in taking Datavail to the next level.

I’m really pleased that Datavail is the first investment for Workhorse Capital. I’d go so far as to say I’m proud of it. The investment nicely fits Workhorse’s core focus of investing in growth-stage technology-enabled services businesses. Less than six months after Workhorse Capital’s launch, I’m grateful for the opportunity to be an investor in such a high-caliber company and with the quality management and investment partners around the table.

Congratulations to the entire Datavail team!

A Pedestal for Bootstrappers

There are many ways to capitalize a tech-enabled service business in its formative stages. Angel capital and venture capital are frequently sought after, but sometimes difficult to come by sources of capital. Angel capital and venture capital are appropriate for many early-stage businesses, particularly in winner-takes all markets where an early product, user base or other competitive advantage can compound over time leading to a disproportionate market share.

As a growth-stage investor, we see a large number of previously venture backed businesses whose performance ranges from floundering to crushing it.  It is admittedly difficult for us to structure an investment in a previously venture backed company that “works” for the management team and the prior investors. In the case of a floundering venture backed businesses, the existing investors are more likely than not “under-water” on their investment, but reticent to recapitalize by converting preferred stock with liquidating preferences to common stock.  In the case of a venture backed business that is crushing it, the investors may have valuation expectations that are odds with ours.

It is no surprise that, over time, these dynamics have naturally shifted our investment efforts toward entrepreneurs that have – either by choice or lack of access to venture capital – chosen to bootstrap their business. We have tremendous admiration for all entrepreneurs, but bootstrappers have a special place on the pedestal we’ve reserved for entrepreneurs.

There are so many attributes of bootstrappers that we admire. A short list follows:

  • Engagement in Customer Success: I have consistently seen that bootstrapped businesses are engaged in the success of their customers at a very high level. After all, when your only source of capital is your customers, you will do anything and everything in your power to make sure that source of capital is well-served.
  • Focus: Bootstrappers typically have a maniacal focus on the small number of things that matter most to their business. Bootstrappers don’t have the time or money to do frills. But they get the basics that matter to their business really right.
  • Humility: Bootstrappers aren’t in it for the notoriety or glory. They are in it to build a fundamentally sound business. I’ve consistently seen high-levels of humility from entrepreneurs who have bootstrapped.
  • Respect for Capital: Well covered by Jack and David’s thoughts but worth repeating.

Many entrepreneurs exhibit these characteristics, whether they access venture backing or decide to bootstrap, so this isn’t an indictment of venture backed companies or entrepreneurs. However, when we engage with an entrepreneur that has bootstrapped their business, we find we spend less time qualifying the entrepreneur’s motivations and objectives than we would otherwise.

The other dynamic we like about bootstrapped businesses is that they don’t need to take capital. As a result, when an entrepreneur running a bootstrapped business considers taking growth capital, there is a wonderful built-in self-selection process at work. A bootstrapped entrepreneur will only take growth capital if they believe that the access to capital will help them create more value for themselves than if they pass-over the opportunity. A bootstrap entrepreneur who takes growth capital is saying:

I can create more value for myself with this capital than I could otherwise create.

Conversely, an entrepreneur who chooses not to take growth capital is saying:

I cannot create more value for myself with this capital than I can otherwise create.

These built-in “gut-checks” make our job evaluating investment opportunities a little bit easier.

A sidebar: The guys at Basecamp (formerly 37 signals) have been long-time proponents of bootstrapping, despite their proximity to the epicenter of the venture capital world, silicon valley. They even have a list of bootstrapped businesses that are Bootstrapped, Profitable and Proud.

Cheers to all entrepreneurs. And to you bootstrapers, you have a special place on our pedestal.