The Return of Capital Efficiency

Capital efficiency has long been a desirable trait in early/growth stage businesses. But over the last few years, an abundance of capital combined with a “growth at all cost” mindset, allowed founders to deprioritize efficiency. Ignoring efficiency, however, can lead to making cardinal mistakes like misreading true product-market-fit, over-hiring for the stage you are in and burning through too much money too quickly. Furthermore, growth rate and top-line progress are a function of how much capital a business has consumed to get to that point (i.e. getting to $10M in revenue is less impressive if you spent $50M to get there vs spending $5M to get there.)

In a post-covid world, capital efficiency has returned as king. This is especially true in SaaS (which, as a category, has outperformed almost every other category.) Many of the companies that have outperformed during this time frame have been very efficient businesses (e.g. Twilio, Zoom, Shopify, Datadog, etc.) As the fundraising markets dry up a bit and sales cycles lengthen, founders will increasingly be forced to think more about efficiency and investors will pay a premium for efficient businesses.

But how should SaaS founders think about efficiency? Several years ago, Bessemer put out a simple, but helpful rule-of-thumb called the BVP efficiency score. The efficiency score shows a “good-better-best” framework for thinking about capital efficiency (defined as Net New ARR / Net Burn.) They advised founders (under $30M ARR) to think about good-better-best using the table below:

1

While this is a great high-level framework, efficiency among SaaS businesses is a bit more nuanced depending on stage. In the formative days, finding product-market-fit can take time and money. In the early days of growth, building a scalable and repeatable playbook can require significant up-front investment. As the company moves into expansion-mode, the business benefits from clear economies of scale and an improved gtm playbook. In the later stages, the business should be humming and efficiency ought to be at an all-time high.

The point is: benchmarking efficiency in a meaningful way requires looking more closely at stage/ revenue profile. What we really need is an efficiency score for each stage. Or, put differently, a rubric showing how much capital ought to be consumed (and, yes, there is a difference between “raised” and “consumed”) to achieve various ARR milestones along the journey from $0M to $100M in ARR.

Below are two frameworks for founders to use to help answer this question. These tables were developed based on what I’ve seen in the field over the years and have been triangulated with what several other SaaS investors have also seen. The first table is simply a good-better-best framework for total capital consumed to get to different ARR thresholds. The second is a “stage-adjusted” efficiency score. These two tables are, of course, two sides of the same coin.

2

3

Bear in mind these are simple guidelines / “rules of thumb” and anecdotal in nature. Every business has its own set of nuances and unique circumstances. And there is definitely more variability earlier on depending on the nature of the product (i.e. some companies have to invest a lot more in R&D to get the product to market.) Where you land on the grid is less important than what the trend-line looks like and whether you have managed cash wisely (i.e. been a “good steward of capital.”)

To bring this to life a bit, here are a few “hall-of-fame” worthy examples of companies that scaled past 100M in ARR with record breaking efficiency. Note that we are listing capital raised here as a close proxy in the absence of public data on capital consumed:

  • Veeva raised a total of $7M pre-IPO. Current market cap: $33B
  • Appfolio raised a total of $30M pre-IPO. Current market cap: $5B
  • Ringcentral raised a total of $44M pre-IPO. Current market cap: $24B
  • Wix raised a total of $59M pre-IPO. Current market cap: $11B
  • Salesforce raised a total of $65M pre-IPO. Current market cap: $162B
  • Zendesk raised a total of $86M pre-IPO. Current market cap: $9B
  • Realpage raised a total of $86M pre-IPO. Current market cap: $7B

It is no surprise that almost all of the above examples got going in the “good old days” of the 2000s, when capital was less plentiful, and efficiency much more in vogue. Much of this changed in the 2010s, but I suspect we will see the pendulum swing back to some degree in the decade ahead. Hopefully, this helps provide some useful data points in this return-to-efficiency world we now find ourselves in!

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I’d like to thank Alex Kurland (@atkurland), Brian Murray (@murr), Chetan Puttagunta (@chetanp), Logan Barlett (@loganbartlett), Murat Bicer (@itsbeecher) and Parsa Saljoughian (@parsa_s) for their feedback and help in triangulating the numbers here.

Hybrid B2B Revenue Models…and How to Value Them

Summary:

  • While the 2000s and 2010s gave birth to many B2B SaaS greats, the 2020s will usher in a new wave of winners that have far more heterogenous business models.

0. Josh Kopelman

As we begin to reach a certain level of maturity among cloud applications, it has become increasingly clear that we are now moving beyond the first wave of pure SaaS players that came to define the 2000s and 2010s and produced big B2B wins like Salesforce, Atlassian, Zoom, Hubspot and many others. In more recent times, we’ve migrated from this homogenous SaaS world to a more complex world of hybrid businesses, which generate different types of revenue in their quest to build enduring value. This, of course, has played out in many industries beyond software. Costco, for example, was one of the OGs here with its membership subscription fee + item price revenue model.

In some cases, hybrid models are an evolution over time: an early stage company starts with a wedge software product that customers love and then evolves in the growth stages to include additional features that drive new sources of revenue like lead gen fees, payment transaction revenue, lending revenue, etc. This is the story of Shopify, which originally generated subscription revenue for access to its ecommerce software tools before evolving to include additional revenue sources like payments, transaction fees from apps in its app marketplace and other “store-front fees” like domain registration.

In other cases, mixed revenue streams can happen right from the get-go. Our portfolio company, Sendoso, has operated as a SaaS + Transaction revenue-model from Day 1. Customers pay a subscription fee for access to the platform and a set of integrations into the sales, marketing and customer success stack. Additionally, they then pay a separate transaction fee for physical or virtual items sent through the platform to current customers or prospects.

Shopify and Sendoso are certainly not the first businesses with a hybrid model, nor will they be the last. As we enter a world where mixed-models become more common, the two questions then become:

(1) What will these mixed-models look like?

(2) How do founders think about valuation in the absence of less established rules of thumb?

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SaaS: Established Rules of Thumb

But before we get to answering these two questions, it’s helpful to review the basics behind the most successful B2B business model of the last 2 decades: pure SaaS. It is well understood that the two most important financial drivers impacting the valuations of public SaaS companies are, first and foremost, growth rate and second, to a lesser extent, gross margin (though the latter may increase in importance given the recent times.) Below is a view from a basket of SaaS businesses. For illustrative purposes, this is a snapshot taken from February, before the market volatility caused by coronavirus.

1. Growth Rate

2. Gross Margin

To sum: most public SaaS businesses north of 100M ARR that are growing 30–40% with 70–80% gross margins can command a multiple of ~10–12x on the public markets (or at least they could pre-coronavirus; we will know over the coming months whether the current deflation is temporary or here to stay.)

In the “earlier” venture to growth-stage world, this translates into a number of operating levers that are well understood. This post is not meant to be a review of the literature on SaaS metrics but there are some great resources for further reading on these topics, which I’ve included in an appendix at the end.

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Mixed Revenue Models: Forging into Newer Territory

In today’s world, we are seeing a notable uptick in mixed revenue models. B2B companies chasing additional growth opportunities are realizing that once they have achieved clear customer lock-in with one product, maintaining a high growth rate and expanding their TAM, can often be accomplished by cross selling other ancillary products — many times with different types of revenue. This has taken the shape and form of at least four playbooks:

(1) Software + Services

Selling services in addition to software is of course nothing new. In the on-prem/ perpetual license world, professional services were essential to the delivery and implementation of enterprise software. In the cloud application world, professional services typically play a similar role when selling to large enterprises (e.g. the customer base has a lot of F500 customers.) These customers typically require broad integrations, time-consuming security audits and a white-glove experience. While necessary and incremental to top line, services revenue is broadly viewed as less valuable than SaaS revenue.

Workday and Veeva are two great examples of companies that have continued to excel at growing both SaaS and Services revenue. To this day both companies still have a very significant (and growing) services revenue stream (i.e. hundreds of millions of revenues annually) in addition to the SaaS revenue.

3. WDAY and VEEV

(2) Bundled Financial Services

A common theme we are seeing, especially within FinTech is the bundling of financial services. Typically, a business will find initial PMF around a single product with a single source of revenue — for example payments. Overtime, the business will offer its customers additional financial products generating additional revenue from things like lending, referrals to 3rd parties, % of AUM, interchange and a range of other revenue models.

Stripe is a great example of a company that has executed very well on this playbook. In “Act One,” Stripe created tremendous lock-in around it’s payments platform by enabling companies to process card charges on a 2.9% + $0.30 per transaction basis. But as the company evolved over time they built new products with different revenue models (see here for more info):

(3) Software + Bundled Financial Services

But FinTechs are not the only players to bundle financial services. We have begun to see a number of SaaS businesses use application software as an entry point, create lock-in with recurring revenue and then embed a host of other financial services directly into the platform. In doing so, these businesses can generate incredible momentum, widen their TAMs while also maintaining a broad base of stable recurring revenue.

No one has executed better on this playbook than Shopify, which has grown to over $70B in market cap (accelerating through covid-19 no less) and has commanded a revenue multiple of over 30x at certain times. Shopify’s SaaS business gives merchants access to its ecommerce platform + tools to build storefronts; while it’s Merchant Solutions business (i.e. bundled financial services) generates revenue from customers via lending, payments, shipping and referral fees. In the early days, software was the main driver of revenue growth, but over time the financial services have accelerated in a very impressive way.

4. Shopify

(4) Software + Bundled Financial Services + Hardware

The final hybrid model we have seen is effectively #3 above with the addition of hardware. Hardware stand-alone businesses, of course, are notoriously difficult and very hard to operate successfully at scale. But hardware combined with the margins of SaaS and the extended reach of bundled financial services can be a very powerful business. Toast is a great example of a company that has successfully leveraged all three revenue sources to build a very effective business in the restaurant vertical (see here for more info):

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Hybrids: A Weighted Average Approach to Valuation

Mix-model business are thriving and clearly here to say. But valuing high-growth hybrids is more challenging in the absence of the simple heuristics developed for the SaaS world. My suggestion on how to value these companies in the early/growth stages (~$2-$20M in revenue) is to use a weighted average revenue multiple approach. In other words:

1. Break down the business into its various components based on where it is today from a net revenue perspective

2. Apply specific multiples to each of the distinct parts of the business based on general heuristics associated with underlying characteristics like growth rate, margin profile, usage frequency, etc

3. Add in a “boost” or “mute” for external factors like TAM, LTV, retention, depth of competition, customer profile, how the revenue mix may shift over time, etc. This is a big part of the “magic”

4. Use a Sum-Product function across revenue and revenue multiple

Below is a table that illustrates the valuation equation and some general “rules of thumb” as guidance:

5. Valuation

Example One

SMB SaaS business that helps its customers make payments to vendors and also generates a lead gen fee for referring its customers to new vendors. On the SaaS side (SMB so self-serve and no services), the business seems to be in the early innings of a strong growth trajectory (3x.3x.2x.2x.2x) having grown from 2M ARR to 6M ARR in the last year ($4M in revenue associated with the SaaS ARR.) The business did an additional $4M in payments revenue and $2M in lead gen revenue; for a total of $10M in revenue. The company operates in a large, mostly greenfield TAM and, over time, the payments revenue will grow to be the clear leading driver of revenue while the lead gen revenue becomes less relevant.

1_MoweVX8lmWhnLZriKsYzOw

As illustrated above, this is a SaaS + Bundled Financial Services model consisting of subscription revenue, payments revenue and lead-gen revenue. In addition, we applied a relatively high Boost of 0.75 to account for the strong growth profile and large/greenfield TAM; somewhat muted by the lower-multiple payments revenue being the predominant driver of long-term growth. The weighted multiple is ~9x.

Example Two

The second example, a POS terminal business that operates in corporate cafeterias, is also doing $10M in revenue. In addition to charging for the terminals, the company charges an installation fee for set up, generates payments revenue from processed transactions and takes a cut of revenue from any 3rd party apps installed on its devices. However, this business is slower growth due to longer sales cycles (grew < 40% last year.) The company also faces fierce competitors like Square, Toast and Revel.

2

As noted above, this is a Software + Bundled Financial Services + Hardware company. In addition to being comprised of different components than the company in example 1, this is also a lower growth business with 2–3 dominant competitors in market. As such, we added a lower boost scale and the weighted multiple ends up being ~4x.

Template: If you’d like to access these examples, and maybe run a few scenarios yourself, I’ve included a google sheet (here) where you can give it a try. Always open to suggestions on how to improve this so feel free to send my way.

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Final Thoughts

We’re moving into a more heterogenous world, where mixed-model revenue businesses will continue to emerge and thrive. As this new class of companies grow and thrive, founders and investors will need to better understand how to operate, grow and (ultimately) value these businesses. In some cases, it may make a lot of sense to start by valuing a company with one approach (e.g. SaaS) and then layer in other approaches over time as the company evolves. But taking a weighted average approach to valuation in conjunction with a bit of good judgement is a great way to understand valuation for these hybrids.

Appendix: Further Resources on SaaS

Overall SaaS Frameworks:

Growth Rate:

Retention

Sales Productivity / Efficiency

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If you have a different approach, I’d love to hear about it (@MrAllenMiller!) I’d also like to thank Kris (@rudeegraap), Dimitri (@dadiomov), Ian (@iankar_) and Sheel (@pitdesi) for their contributions to this piece.

Navigating the tough times ahead

It’s pretty clear at this point that things are going to get a lot worse in the weeks and months to come before they get any better. The number of COVID-19 cases is accelerating worldwide. Travel restrictions have gone into effect as countries around the world close their borders to curb the spread of the virus. The S&P 500 is down 30% from its peak a month ago and the Dow plunged 3,000 points on Monday alone. Morgan Stanley is now viewing a global recession as their “base case” with an implied $360B loss to US GDP.

As if all that wasn’t enough, some of the yoy OpenTable data coming in is absolutely terrifying with respect to the broader implications we will soon see in the macro economic data. The downturn ahead of us will impact many sectors and millions of households in the US.

OpenTable

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Restructuring & Transformation in a Recession

As I’ve spent much of the past week discussing what this all means with founders in and outside of our portfolio, I find myself thinking a lot about my time in the consulting world. During that time, I had the fortune (or misfortune!) of working on a handful of projects involving companies that had fallen into hard times and required what we called “Restructuring and Transformation Services (RTS).” Regardless of the specific situation, in all of these cases, we would follow a very basic framework designed to diagnose and then triage the (mostly) cost-cutting work from “least painful” to “most painful.”

If you are a founder/CEO finding yourself in a situation in the months ahead where you need to go through a restructuring/ transformation exercise, hopefully this basic framework can help you think through what to do and how to do it.

1. Establish dedicated owners: The first thing to understand about any transformation effort is that you have to have clear ownership. In my consulting years, we would always start by working with the client to set up a “Transformation Office” led by a Chief Transformation Officer. The “TO” would lead the effort, create urgency and drive action. As a startup CEO, the buck stops with you. But it’s a good idea to create a small, cross-functional task-force to serve as an advisory council and to drive change within the organization. These people will be working on the transformation while also doing their full-time job so important to pick people who have the capacity and commitment to the company to wear multiple hats through a difficult patch.

2. Diagnose the problem: The next step is to figure out where you stand, particularly from a cash perspective. Some basic questions to ask and get clear on before you jump into problem solving:

3. Establish the target: After you have diagnosed the problem, determined your cash position/ runway and understand at a high level what levers you have to pull, you now have a “Baseline” to work from. It’s now time to establish the “Target” for cost-take-out. This is the total cost you need to remove from the business to get to a certain “cash-inflection” point (i.e. a new injection of cash via fund raise or getting to break-even.) This target now forms the basis for all actions you put into motion. The target should be a specific number with very clear milestones (ie. mini-targets) that you can work towards achieving.

4. Create a cadence and review process: It is important that the transformation task force you meet with gets into a regular cadence (this means meeting weekly and if the situation is dire enough, daily.) Get in the habit of tracking all transformation initiatives using a project management tool. During my consulting days, we used Wave. But you can use AsanaTrelloMonday or another project-management tool of your choice. The important thing is to ensure that the tool can track initiatives, owners, progress and tie to real outcomes in the P&L. The transformation task force should regularly review progress using the tool’s dashboards and elevate the most important decisions to you, as the founder/CEO, to ultimately make.

5. Focus first on non-personnel costs: When hunting for cost-take-out, the easiest place to start with is non-personnel costs. Here are a few areas to look into — remember any savings here could well mean one less RIF:

6. Be thoughtful about personnel costs: For obvious reasons, things get tricky once you start tapping the personnel-cost bucket; exploring RIFs should be a “last resort.” Once it becomes clear lay-offs are coming, morale tends to slip as does productivity. This is particularly difficult at a startup where things tend to be smaller and feel more personal. Some general tips:

7. Remember the good times will come back: Keep in mind that recessions are temporary and your short-term goal as founder/CEO right now is to “just survive.” But eventually things will pick back up. Customers will return and the momentum will swing back in your favor. When this happens, you will want to be in a position to seize the moment and bounce back in full strength. Having a bit of foresight to “see around the corner” and prepare for that moment will help you return in full force.

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Additional Resources by Topic

In the last few weeks, there have been some really great resources that have come out on topics related to the coronavirus, navigating the pending recession and how to move forward during these difficult times as a founder. Below is an aggregated list of resources worth reading by topic.

General Coronavirus (COVID-19)Information

HR & People Management Resources

General Advice on Downturns

Tools for Planning in a Downturn

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Here’s to hoping that this downturn is as short-lived as possible and the roaring ‘20s come back in full force quickly! If you have additional resources I should add to the list above, send them my way and I will make every attempt to keep this list current.

Announcing our new Podcast Series ‘Focus on the Founder’ with our first guest – Ryan Williams of Cadre

Over the years, we’ve heard from our founders here at Matrix that some of the best learning opportunities they’ve had has come from 1:1 conversations with other entrepreneurs. And while there is no shortage of resources for entrepreneurs (including content we have built at Viewpoints and forEntrepreneurs), there are very few public forums where successful founders and operators speak candidly about their career journeys and discuss what has/ has not worked for them as they’ve scaled their businesses.

That is why we are excited to announce ‘Focus on the Founder’ – a podcast series that will do exactly what it sounds like—bring the focus back on the founder. In the coming months, we will be releasing a series of episodes where we ask successful founders and operators questions about their journey into entrepreneurship, how they’ve gone about making critical decisions (e.g. hiring, fundraising, etc.) and what they would do differently looking back.

The initial focus will be on founders and senior execs in FinTech—though this may evolve over time. We will keep the episodes short, informal and frank. The very first episode is with Ryan Williams the CEO and co-founder of Cadre. You can find the podcast episode on SoundCloud, iTunes & Google Play.

In this episode you will learn about…

  • How Ryan went from selling headbands at age 13 to flipping houses in college to launching Cadre. Or as he puts it “Headbands to Houses to High Rises”
  • When the real “Aha” moment came for Ryan that led him to believe that there was a big opportunity in real estate technology
  • What Ryan believes is the single most important characteristic behind the success of companies like Amazon, Airbnb and Fidelity and how Cadre has embraced that characteristic
  • How Ryan works with his investors and the value they have provided to him beyond the obvious capital injection
  • The crucial metrics and KPIs that Cadre tracks and measures
  • What other areas Ryan is excited about and would explore if he were not building Cadre…hint some of them are pretty controversial in the venture world today

Core & Emerging Platforms as we Move into 2017

Innovation at the platform level (whether it be improved hardware, changes in infrastructure or new ecosystems) has always led to new opportunity at the application level for both entrepreneurs and the investors that back them. As 2016 winds down and we look ahead to 2017, it’s as good a time as any to take stock of the innovation we’ve seen at the platform level in the last few years and the trends in tech that will drive new opportunity in application software.

More specifically, I see four core and emerging trends that will continue to dictate opportunity in B2B software: (1) continued dominance of cloud, (2) acceleration of mobile enterprise, (3) increased attention to AI (more specifically machine learning) and (4) the rise of AR & VR – particularly AR in the B2B setting. The figure below provides an overview that will be explained in further detail below:

tech-platforms

(1) Continued dominance of cloud

This is an “old” one but a good one. Of the four platform trends this is the most established one and has produced the most opportunity to-date.

From a horizontal perspective, the cloud has penetrated (though not yet dominated) every function within the enterprise. Salesforce is the prevalent choice for most in the sales / CRM functions. Companies like Workday, Cornerstone and SuccessFactors have gained real traction within HR. Eloqua, ExactTarget and Marketo are widely used marketing tools. NetSuite has a strong presence in ERP while Zendesk is a strong force in customer success. And there are many other more recent horizontal SaaS companies that have made big waves: Slack, Stripe, DocuSign and DropBox are just a few of many that had big years in 2016. And there are many more opportunities remaining in relatively untouched areas like: sales ops, SMB-focused HR tools, inventory management, market intelligence and customer care analytics.

Vertical software, is still very much in its infancy. There have certainly been some early winners like Veeva (life sciences), RealPage (real estate) and Fleetmatics (fleet management), but there are many more industry cloud winners to come. Industries like manufacturing, construction, logistics, agriculture, oil and gas and others have slowly begun moving to the cloud after remaining cloud-allergic for many years. 2017 will be a big year for many of these industries and the vertical-focused, category-winners that reshape them.

(2) Acceleration of mobile enterprise

Aggregate mobile enterprise revenue in 2016 was just under $100B –pretty solid for a platform that didn’t exist 10 years ago. However, this one is also just getting started. Forecasts show this number doubling by 2020 (and I wouldn’t be surprised if the growth rate is higher than that). Part of this growth is fueled by increased vertical software opportunities. Procore is a great example of a company delivering a vertical specific solution (in construction) via mobile enterprise. Industries like education, insurance and real-estate will soon follow.

(3) Increased attention to AI  

2016 really marked THE year when AI (or more accurately, machine learning) really came into focus in the startup and venture community. As seen in the figure above, deals done and investment dollars poured into the sector have grown exponentially in the last 2-3 years. In that time, AI has done a few interesting things:

  • It has re-opened the door in a real way to more horizontal software opportunities giving rise to the “disruption of the disruptors.” Suddenly, machine intelligence has allowed for greater insights and better products and services that opened the door to new entrants looking to enter horizontal spaces.
  • It has allowed for more focused solutions that really benefit from machine learning applied to large data sets to flourish. Little Bird (a market intelligence and data analytics company based out of Oregon) that was recently acquired by Sprinklr is a good example. AI powered point solutions like Little Bird, once bolted onto larger platforms (like Sprinklr’s social media management platform) can exponentially increase the utility to their enterprise customers.
  • It has brought back IBM’s relevance among innovators and early stage companies. Ironically, rightly or wrongly, IBM’s Watson is the most common machine associated with machine learning. Whether IBM is able to harness the potential of AI remains to be seen, but the company attempts to be mounting a bigger challenge to be a dominant presence in the space rather than giving way to the big four (Apple, Facebook, Amazon and Google) as it did with consumer devices, social, ecommerce and search.

Expect AI to be a powerful trend in 2017 and beyond, with both startups and established players getting involved, especially as the technological innovation becomes more advanced.

(4) The rise of AR & VR

AR and VR are the furthest off in terms of real platform potential and 2016 was largely a pretty big disappointment for these platforms. The biggest thing in AR/VR in 2016 was Pokémon Go, which was an entirely consumer play (and appears to largely have been a fad). I expect VR to still be a few years away from going mainstream –and even when it does, it will continue to be a consumer play.

That being said, I do think in 2017 we will see the start of some AR-based software applications that will gain traction among enterprises. And by 2020 forecasted revenues in AR will near $120B. Some of the important early verticals AR will start with will be healthcare, manufacturing, defense and architecture among others. Some of the early startups playing in these spaces, that I’ll be following in 2017 include: CrowdOptics, APX Labs and Pristine.

Venture Debt: An Alternative form of Financing

In the tech ecosystem, we often associate entrepreneurial financing almost exclusively with venture capital. As a result, most of the fundraising resources for entrepreneurs are geared around venture capital. Likewise much of the media attention in the startup financing world is focused on venture capital investments.

The reality, however, is that there are many different forms of financing beyond traditional venture capital financing. And the type of fundraising instrument used is as important as the quantity being raised and who it is raised from. There is quite a bit of information out there about raising from friends and family, angel investors, crowd funding platforms and several of the other more common sources of financing outside of venture capital. But there is very little information about financing a startup through debt.

As such, Brian Feinstein of Bessemer Venture Partners, Craig Netterfield of Columbia Lake Partners and I put together a white paper on venture debt, which was released last week. It’s meant to be a fairly comprehensive guide for entrepreneurs who are interested in exploring venture debt as a viable option. Feel free to check it out here and send us any questions as they arise.

Cap Table Modeling: Understanding the Mechanics of Equity vs. Convertible Debt

Cap tables are an important concept for entrepreneurs to grasp when taking outside financing. A cap table is a schedule that lays out the ownership stakes in an early stage company. They typically take the form of a spreadsheet that changes over time as more capital is raised and more investors become involved in the growth of a company. Cap tables can also vary based on whether the capital is raised through equity or through convertible debt (debt that converts to equity at a future point in time).

Much has been written on the merits and challenges of both equity and convertible debt. There are a number of great posts that explain each at a high level and then go on to take a stance on which method is preferred and when. A number of notable investors have weighed in on the topic through a variety of posts including: Fred Wilson, Mark Suster and Josh Kopelman. All of these posts do a great job of explaining the mechanics of each financing option and provide sound reasoning around when (and when not) to use convertible debt vs. equity.

The problem with these sources, is that rarely do they actually dive into the mechanics of building a cap table from scratch and modeling out the differences over time of equity vs. convertible debt. Of course, there are courses taught by organizations such as Wall Street Prep that do extensive training around cap table modeling. While these courses are great, they tend to be a) very expensive b) time-consuming and c) highly detailed-oriented (too detailed for what most entrepreneurs are looking for). So what do you do if you’re an entrepreneur who wants more than just a high level understanding of the pros and cons of various financing options but doesn’t want to pay a premium for a time-consuming, detail-heavy course?

I recently came across a great resource put together by my Professor at CBS and 37 Angels founder, Angela Lee. Professor Lee has built a step-by-step guide to modeling out cap tables for equity and convertible debt deals (both when the discount or cap come into play). The guide, which is posted below, provides detailed instructions on how to calculate the various components of a cap table (shares owned, share price, % owned, etc.,) across various rounds of fundraising. Although the tool is simplified, it provides an intuitive way to model various financing scenarios and their implications for your ownership over time. Hopefully this sheds a bit more light on the mechanics of how cap tables are put together. Big thanks again to Professor Lee!

37 Angels Cap Table Template

2013: Startups on the Rise

This is definitely a bit over due, but here are my thoughts on the up-and-coming start-ups to keep an eye on in 2013. Some of these have already built quite a bit of traction, others have been lurking for a while waiting for the right time and others were started less than a year ago. I’ll have to do a follow up post at the end of the year to see how they end up doing.

Uber: This mobile app takes much of the hassle out of finding a cab to get around town in. The app allows you to request a cab at any time, let’s you know how far away the cab is, texts you when your cab has arrived and then allows you to pay for the cab using the app. It’s a very convenient way of getting around. I’m hoping the Uber team can work out some of the product kinks (in NYC for example there are many restriction around the black cabs that Uber works with), so that the service can go more mainstream as it’s currently a much-needed service. Once these challenges are resolved, I think this app can have much success in most major metropolitan hubs.

MoviePass: As a movie theater subscription service, MoviePass is building something very new to the movie industry—the ability for viewers to go see an unlimited amount of movies each month for a flat fee rather than paying for each individual movie. It’s kind of like the concept of having season tickets to a sporting event. This will be particularly useful for avid moviegoers who see multiple movies each month. Many of my friends who are movie fanatics have already signed up for beta access to MoviePass.

Fab: Many thought that e-commerce was in decline but Etsy and Fab seem to be proving that theory wrong. Of particular importance Fab, with its focus on “everyday design”, has been an innovator in social commerce—seamlessly integrating with facebook and twitter. Fab also has created better mobile apps than any other e-commerce platform making it easier to make purchases regardless of location.

2U (formerly 2tor): 2U is disrupting education by providing high quality online learning environments. 2U partners with top-tier universities to deliver rigorous, and selective graduate degree and undergraduate for-credit programs online. Some of the universities currently using the 2U platform include: USC, UNC, Georgetown and Washington University in St. Louis. As a recent college grad, former teacher and soon-to-be graduate student, 2U’s approach seems to be the future of education and is already disrupting the way in which many universities think about education technology.

Stamped: Stamped is already becoming popular in several of my various friend circles. Now acquired by Yahoo, Stamp is a mobile app that lets you recommend and share your favorite things like: movies, books and restaurants. One of the best features is the ability to receive recommendations from friends and other reliable sources (rather than anonymous online reviews). The ideas behind this could disrupt the way online reviews and recommendation systems currently operate.

Looking Back at 2012: The Big Winners

Looking back at 2012, there have been a number of startups that have stepped it up. This is my list of 5 big winners from 2012, many of which started off the year as obscure little companies but have since become household names.

Spotify: Music streaming service that provides access to millions of songs. Several things set Spotify apart from its competitors (like Pandora). First, the service is consistently good across a range of platforms including: computer, mobile, tablet and home entertainment system. It is even possible to download songs for when you are offline. Second, Spotify connects you with facebook friends allowing music selection and discovery to be a more social process. Third, Spotify offers different services and prices for different segments of customers allowing flexibility in the choice of a product line. Importantly, I have also found the search feature on Spotify to be far quicker and more accurate than that of its competitors.

Instagram: Since its acquisition by facebook, Instagram continues to be (in my mind) the best photo-sharing application out there. Instagram actually makes taking and sharing photos fun because it is easy to 1) take the photos 2) transform the photos into “works of art” and then 3) share the photos across a range of social platforms including facebook, twitter and tumblr. Instagram is also a case study on how to do mobile the right way.

Flipboard: Flipboard is one of my favorite news source apps because it lets me to read about things that I care about the most. The application aggregates news stories from various sources (everything from major news publications to twitter) and then provides a customized magazine-style interface from which to consume that news. I love how the app allows you to feel like you’re actually reading a physical magazine through its primary design feature—the ability to “flip” to the next page. The app also makes the internet-less subway ride to work everyday more enjoyable.

Pinterest: Pinterest is a fun way to view and share photos and videos from around the Internet in a social setting. The ability to share content via online pinboards also allows people to show their creativity and originality. I run an education-focused nonprofit on the side and while writing entries on our blog is certainly useful, I find collections of photos to be far more effective in communicating the vision behind what we’re doing.

Shazam: Shazam is a great tool for discovering new music. All you have to do is hold your phone up to the music or TV source and within seconds you’ll get more information about the song that is playing, like the name of the track and artist, streaming lyrics, videos and special offers. It’s a really great way to learn about new music, and I use the app all the time while on the go.

So You’ve Got An Idea

From speaking to friends and other students on campus, I’ve been impressed by the growing number of people who are interested in becoming entrepreneurs. The days of landing that safe and secure job at IBM are gone as more people are willing to enter the riskier but more exciting arena of entrepreneurship. Yet of all the people I’ve spoken with, only a select few have actually tinkered with starting a business. Still fewer have run a successful enterprise for a sizeable period of time.

I think that one of the hardest things for students who want to become entrepreneurs is moving from a concept or idea towards the creation of a startup. Often, students have a good idea and dream of the possibilities of that idea. But the excitement and passion behind the idea is never utilized to turn the idea into reality. While it’s true that the road to becoming an entrepreneur is generally long and narrow, I’m surprised that more people don’t give it a try.

At eClips, we have a lot of video clips devoted to educating entrepreneurs on what they can do to take that active step towards starting a business. Below is a list of 5 things you can do to get started today.

1) Figure out exactly why you want to become an entrepreneur. Do you dream of becoming rich? Do you want to have the independence of being your own boss? Do you simply enjoy innovating? Get your motives nailed down.

2) Completely map out your idea. What is your product or service? Who is your target market? How will you generate revenue? What is your business model?

3) Surround yourself with people who will add real value to your business. This includes finding a solid management team and an experienced board of advisors. This need not be very formal per say, but having others to help you out will broaden your pool of knowledge and make your chances of success higher.

4) Market your product and service to as many people as possible. This includes current clients, possible clients and even investors. You need not spend a lot of money here if you are creative and resourceful. What really matters is that you get your name out there.

5) Be persistent and take risks. It’s not always going to be easy, and you’re going to have to sacrifice a lot. But if you want to win big; you need to play big.

Hopefully, this is enough to get started. Once again eClips has tons of relevant information, so don’t hesitate to browse the site.

On a separate note, don’t forget that this weekend is Entrepreneruship @ Cornell Celebration. This is a great opportunity to network with other entrepreneurs or just learn something new.