THE SMARTER FINANCE BLOG

 
As each new generation of entrepreneurs emerges, there is a renewed interest in how venture capital deals come together. Yet there is little reliable information focused on venture capital deals. Nobody understands this better than authors Brad Feld and Jason Mendelson. For more than twenty years, they’ve been involved in hundreds of venture capital financings, and now, with the Second Edition of Venture Deals, they continue to share their experiences in this field with you.
 

What I love about my job is getting to see teams of super-early-stage companies develop ideas that while raw have potential to make an impact on the market. I love the enthusiasm, the boundless energy and the sense of possibility that comes from having an idea that hasn’t yet been beat up in the marketplace of competing ideas, customer contracts, VC skepticism, jaded journalists or fickle consumers who are on to the (continue here)

We are often asked to list the best tools for startups to use in accounting and finance.  Until fairly recently, the only useful tools were QuickBooks on one’s computer and Excel.  There are finally now some resources that substantially improve the accounting function for startups.  Below are the main ones:
Bill.com – Hands down the best way to manage your vendors.  And, the integration with accounting systems is so great that it will dramatically decrease your bookkeeping costs.  In fact, we offer a discount on our flat monthly bookkeeping rates when bill.com is used.  Bill.com can also be used for invoicing enterprise customers directly.
Stripe – A must-use for recurring bills to customers, especially small ones.  Works very well for billing and tracking SaaS self serve and free customers.
Expensify – Expensify describes itself with the tagline “Expense Reports that Don’t Suck”.  That’s pretty true.  Expense reporting needs to happen.  This is a great tool for them.
ZenPayroll – “Delightful payroll” is ZenPayroll’s tag line and if payroll can be delightful with any provider it is with ZenPayroll.   Easy onboarding, ‘auto pilot’ payroll runs, integration with accounting systems, handling tax and other regulatory filings, affordability and excellent customer support are just of few of the reasons ZenPayroll is delightful.

Xero / QuickBooks Online – In the battle to move bookkeeping to the cloud, an excellent product from Xero prompts a revision from the incumbent Quickbooks. Both are great solutions and our heart is with the newer player, Xero.
Excel – Yes, we still use it.  Excel’s functionality and flexibility makes it a must have for our financial planning and analysis and financial modeling.  Google spreadsheets do work for very simple analyses and for a high degree of collaborating, but they don’t have the speed or functionality yet for advanced financial tasks.

Zenefits – Provides benfits and some HR support.

Bay Point Benefits – For potentially greater and more hands-on HR support.

This presentation by Burkland Associates founder, Jeff Burkland, examines key financial metrics for SaaS startups. These key metrics help ensure success, as a business as well as when raising critical funds from investors.

Guest post written by Sean Jacobsohn
Venture partner at Emergence Capital Partners.
FORBES
I regularly get asked by entrepreneurs about how valuations are derived by venture capitalists for recurring revenue businesses. While many entrepreneurs are seeking a specific formula, in reality, valuations are a mix of art and science.

Based on my experience as both an entrepreneur and investor, there are six primary components that impact the venture capital valuation of an early stage technology company: market dynamics, company metrics, future funding needs, team, comparable transactions, and VC ownership targets. I will provide some detail on each in this article, though the relative importance of each category will vary by deal.

Market dynamics: Factors that impact valuation include the size of the total addressable market (TAM) and a company’s potential to become the market leader. Industry focused solutions should be pursuing at least a $300 million market size, while horizontal solutions that solve pain points across industries, need a $1 billion market size. Investors also want to think that if the company executes well that the upside scenario in each company has the potential to return 50-100% of the entire fund. Companies get a valuation bump for market leadership: the #1 player tends to get at least a 1.5 multiple premium over the #2 player in the space.

Company Metrics: VCs like to invest in companies that have a chance to go public. Today the minimum bar for a business cloud company to go public is $50 million in revenue growing at 50% a year. In the early stages (Series A & Series B), a company should demonstrate an ability to achieve 2-3x annual growth consistently. Valuations are most generous when enterprise companies can keep churn under 10% a year, otherwise growth can be constrained by just trying to replace lost customers. In addition, VCs look for unique leverage in the sales model allowing for capital efficient customer acquisition. This will impact the need to raise more capital in the future, often leading to a higher valuation today.

Future Funding Needs: Virtually every company will need to raise another round. A key aspect of the valuation is whether it is reasonable to believe the valuation of the next round will be at least 1.5-2X the current value. Founders never want to tell their teams that all the hard work they’ve done between rounds isn’t worth a higher valuation. Thus, does the executive team have the money it needs to meet key milestones before the next round of funding? If the answer is no, then the VC will likely discount the current valuation. Although most investors allocate 50%+ of their funds for follow-on, investors need to believe the company will be relatively capital efficient so their ownership stakes aren’t diluted significantly by the time of an exit.

Team: Investors tend to pay a premium for repeat entrepreneurs or super-star entrepreneurs who are motivated for a big outcome. Most VCs expect to find holes on the executive team – the question is whether the initial team can recruit the best people in the world for this opportunity.

Comparable Transactions: In order to settle on a valuation, investors look at comparable public companies as well as the revenue multiples of recent acquisitions. Most venture investors focus on comparable transactions above $100 million as those transactions are more likely based on business fundamentals than those below $50 million. Other key data points include the revenue multiples the potential acquirers are trading at and the revenue multiples paid on prior acquisitions.

VC Ownership Targets: Series A and B investors often have a desired ownership target of 20-25% after the funding round, which can impact valuations. For example, if a Series A company wants to raise $7 million, and the VC wants to own 25%, it would be difficult to settle on a post-money valuation of more than $28 million without raising more money or reducing the percent ownership for the VC.

These six categories are meant to be a guide, but in reality there are often other factors that come into play. For example, in competitive situations, a venture firm might stretch on valuation to “win” a strategic deal. In addition, venture valuations are cyclical, and they often track behind public market valuations. Two companies with similar metrics might end up with very different valuations based on market timing.

Finally, valuation isn’t everything when selecting a venture firm. Entrepreneurs and investors are building a long term relationship, and entrepreneurs who are fortunate to have multiple term sheets may opt for a lower valuation if it means having a certain partner on board. The key is starting the relationship with a valuation that feels fair to both parties, and sets the company up for long term success.