Idea in brief: when pursuing Series A rounds during the fall of 2015 in/from Austin, consider four key points.
As summer 2015 creeps to a close, several recently seeded companies are getting ready to pursue their first significant Series A institutional investment round. Things have changed dramatically in the 18 years I've lived in Austin and have been part of three Series A+ backed companies (ichat, Motive, Pluck). And the landscape for Series A raises is very different from the days when many folks pursued a bit of an "Austin Ventures and everyone else" strategy.
Yesterday (July 19, 2015), Semil Shah published an excellent post on Series A raise guidance in general. I wholeheartedly agree with his perspectives on timing initiation (September), precision (targets), vision (big), teams and more. If you haven't already read it, check it out here.
While Shah's take holds true broadly, there are also a few Austin specifics that are worth drawing attention to and considering, especially for SaaS/enterprise software firms getting ready to raise. These include:
Hit Your MRR Cliff: while not a hard and fast rule (and sometimes addressable via high growth), $100K+ in current MRR along with a clear pathway to $1M+ in MRR is often tablestakes for Series A dialogues. If you're not at least at $100K MRR yet, make sure you understand the competition you'll have for investors' deal cycles.
Consider Starting Outside of Austin: while my local institutional friends would prefer an alternative path (see below for my shout outs to them), I've seen several examples of Austin companies that bring in a lead investor from outside of town (and then often line up a local partner for a club/group deal). Examples of great non-Austin based Series A investors who have invested in town include:
* Mike Maples, Floodgate
* Anthony Lee, Altos Ventures
* Jeff Hinck, Rally Ventures
* Blair Garrou, Mercury Fund
* Seth Levine, Foundry Group
Note that the list above is non-exhaustive and is based on personal and friends' experiences. There are certainly other significant firms that are active in Austin, including Battery Ventures, Charles River, and Mohr Davidow. And doubly note that raising money in Silicon Valley is arguably harder in many ways than raising elsewhere, including Austin. But that might be a good topic for another post!
Ponder Medium-Sized Austin Funds: maybe not surprisingly, my primary list above is mainly made up of $100M - $200M funds. In my experience, many funds look to return 20% of the fund (reasonably) with each investment. So, a $100M fund that makes a $4M Series A bet can look at a 5x return without requiring a public offering (for simple math, a 20% position in a $100M acquisition can reasonably drive 5x on $4M (=$20M = 20%); of course funds would like 10x+ returns but 5x in a reasonable time period is generally viewed favorably in my experience). On the contrary, $1B+ funds sometimes struggle with the need to return $200M per investment (10x the formula above). Accordingly, three compelling Austin Series A-oriented investors (in my experience) are:
* Krishna Srinivassan, LiveOak
* Morgan Flager, Silverton
* Jason Seats, Techstars
Note that while Jason is in Austin, Techstars is technically a distributed fund with partners in Boise and Boulder. Other notable Austin funds generally tend to be seed oriented (e.g. ATX Seed) or Series B+ focused (S3, Vista, etc.). Several Austin Ventures partners have been great friends to startup teams historically and may be in a position to help as their partnership continues to morph. Don't rule them out.
Have Your Support Network Ready: as Austin SaaS/enterprise software is still a pretty small community, having influential folks in your camp really helps during due diligence (i.e. back channeling). Executives who know your business (advisors, angel investors, etc.) and who have produced hits via portfolio companies like Vignette, Tivoli, Motive, Pluck, BlackLocus, Bazaarvoice, HomeAway, Waveset, Convio, Adometry, SolarWinds, and RetailMeNot are key for startup teams.
Of course, there are lots of nuances around your pitch desk (Kip McClanahan of Silverton has a 2012 series of tips that still hold true here) , ham-and-egging your approach, pondering a single investor versus a club/group round, determining valuations, and navigating the myriad of complexities inherent in term sheets. But if you can start with a wise approach, and find your way through good execution + a little luck on the four points above, you are well on your way.
One final point: there are lots of people (myself included) who are absolutely inclined to "root local" and who love to see Austin companies raise capital from great partners. So, lean on us to help!
Idea in Brief: marketing and integration software partnerships are often hard to quantify. Tracking and measuring revenue influenced is a viable solution.
As software firms grow, partnerships become more and more important (see posts Categorized as Inorganic Growth for other perspectives). But as CEOs and boards invest in alliances, partnership marketing, leveraged sales and more, the question is often: how do we measure success?
In my experience, both as a former alliances/business development functional leader, as well as across a myriad of advisory and investor positions, influenced revenue can be the magic metric.
So what is influenced revenue? Simply put, it's revenue that was initiated and/or accelerated by partnership efforts. Examples include:
* A friendly account executive calls with a tip on a prospect.
* A services lead endorses a partner solution within an account.
* A product manager highlights an integration in a roadmap session.
* A solutions consultant coaches a partner sales person on how to navigate a tricky account.
In all cases, one can see how decisive, thoughtful action, accompanied by a sharing of the activity adds value. Generally, business development managers should be tasked with provoking, soliciting, tracking and positively rewarding influence behaviors.
And for enterprise software, pursuing ~25% of deals via partner influence has been about the right level. Note that influence requires significant communication, positive experience, product education and trust on both sides of the equation. But the steps to build to it are well worth it, especially in large deals with complex selling environments.
Idea in Brief: For B2B software companies, an intelligently crafted partnership strategy can often be the best pathway to a premium acquisition.
The old adage of "companies aren't sold, they're bought" has played out numerous times in my personal experience, both as an operator as well as an advisor and investor. For example, when we sold Pluck to Demand Media we were in hyper-growth mode and weren't looking to be acquired. Yet the team, capitalization, deal structure and growth opportunity with Demand Media made an early company sale an easy decision.
Behind the scenes, what happened with Demand Media and Pluck was that we first began a business development conversation. Pluck owned a product (BlogBurst) and Demand Media became interested in our technology and content partnerships. As we engaged in reseller/OEM conversations, it became clear that an outright acquisition made sense for both companies.
While acquisitions often have an element of serendipity (and the Pluck deal certainly felt blessed by luck at times), an intentional business development strategy can often be the best pathway to a downstream corporate development opportunity.
So, how do you approach things? Below are a variety of tips and best practices.
C + BD = W. Strategic partnerships absolutely need to be sponsored, directed and led by the CEO (C). But the possible selling company should have a business development (BD) leader (early on, this can be the VP, Sales) who is clearly focused on escalating partnerships through stages that can lead to an acquisition win (W).
Bet Big. While your company should work opportunistically with a myriad of organizations in your ecosystem, a single, big/bold bet can enable disproportionately positive returns. For example, BuildForge, a build process management software firm, realized early on that IBM was the right company to buy them. Accordingly, they developed a tight and unique partnership with IBM that fostered information exchange and trust.
Start Small. A mistake that early stage software companies often make is that they skip steps in the partnership evolution process, forgetting to start small and grow. While things aren't always 100% consistent and linear, the steps that often occur are:
- Integration: a startup invests resources to read and/or write to an API provided by big company.
- Marketing: the startup then spends money touting the integration (advertising, social media, white papers, collateral, webinars, customer events, lunch and learns, etc.).
- Sales: with a proven integration and awareness growing (along with at least a handful of joint customers), a savvy startup will move to developing sales relationships with the big company's account executives. While the AEs won't initially earn commissions via direct sales by the startup, the smart ones will want to be educated and knowledgeable. They'll both want to offer perspectives to their customers and be aware of deals happening within their accounts.
- Channel: with integration, marketing and sales humming, the business development team at the startup, with CEO and product team involvement, can begin to pursue a reseller (non-branded) or OEM (white label) channel relationship. In my experience (e.g. with Motive and eventual acquirer Alcatel), these partnerships require multiple layers of effort (product, technology, sales, BD, C-suite, etc.) and a high degree of commitment and sophistication to drive forward.
Build Trust and Show Value. With a channel partnership in place, the startup has a strong reason to invest in the enablement and success of the big company. Daily emails/activities, weekly update calls, quarterly onsite business reviews and more enable teams to get to know one another. Often, the startup will even want to tee-up and/or push over, deals. Overall, it will be important to set mutual targets and then work maniacally to overachieve, demonstrating the trustability, like-ability and revenue potential of your company.
Dance the Dance. At some point, ideally with the big company seeing significant revenue (and growth) from the startup, a conversation about a strategic financing event can organically occur. In many cases, I've seen these happen over nice dinners between CEOs. The startup may be ready to pursue Series C financing and asks the big company executive if they might recommend a new lead institutional investor. From there, the logical question is often, "what if we invested?" And from there, the strategic partnership model often can find its way to an outright acquisition conversation.
The model above is a fairly simplistic overview on what can often be a multi-year, complex, circuitous path. But if finding a major home for your startup, and a solid return for your investors and employees is a goal of yours, starting the business development to corporate development journey is well worth it.
Business is humming. You've found product-market fit. Your direct sales team is hitting their numbers quarter-over-quarter. It probably feels like it's time to pursue accelerated indirect growth via channel partnerships.
But how do you do it?
Below are 9 steps to help you get started.
Segment Your Paths to Market
Begin by brainstorming with your team on all of the different types of companies that might resell your product. Cross both industries (e.g. software firms vs industry consortiums vs services companies) and offerings (e.g. specific subcategories that you play in). Through this brainstorming exercise you might come up with 5-7 market segments that are worth exploring.
Clarify Your Value Proposition
For each segment, think clearly about why a reseller relationship might make sense. In order for a channel partnership to take off, you need to be able to simply and firmly state, in 1-2 sentences, what's in it for three stakeholders:
Identify Specific Companies
Once you have segment clarity, create a list of your top 3-5 target companies per segment. As a rule, I'd recommend that you pursue companies that are at least 10x larger than you from a revenue standpoint. In other words, if you are doing $5M a year in revenue, only pursue resellers that are doing at least $50M a year. Also, look at companies that have already structured at least one channel deal. While you can be the first, it's a lot harder to start something than it is to build on established success, personnel and process.
Create a Target Contact List
To initial dialogue with each target company, we recommend a two-pronged approach: business development and executive/product leadership. Who you start with often depends on your ability to get a warm introduction. Of course, it's generally better to start as high as possible. But, an endorsed intro into someone who is motivated to find a solution like yours can work wonders. LinkedIn 2nd degree connections -- with a tee-up from someone credible -- are great to begin with.
Gang Tackle Your Outreach
Conversely, we've also seen strong success with a two-pronged from within your organization, generally via both your C-team and the head of business development pursuing conversations, sometimes in parallel. You'll probably need a combination of email and phone calls to connect with key prospects.
Maniacally Sell Up, Down and Across
Reseller deals require enormous patience, energy and consensus. Expect sales, marketing, services, product, finance and other stakeholders to weigh-in and want to look under the covers. Deal cycles may be 3, 6, 9 or even 12 months.
Be Clear on Reseller vs White Label
A pure reseller deal (where your product maintains its unique brand and packaging) might be the optimum starting place in many instances since it reduces friction to market. Plus, many business processes around Ts & Cs, onboarding/setup and support can be managed by your firm. Generally, reseller deals don't have minimum commitments.
OEM, or white label, deals on the other hand require more work on both sides. But the channel partner benefits through higher margins and clear brand/product ownership. White label deals usually have minimum commitments -- often running into 7 or even 8 figures per year -- given the work required by the product company. Further, it's not unusual for an OEM deal to have an element of exclusivity to it.
Whether you intend to pursue reseller or white label deals, make sure you're clear on your expectations and ability to invest.
Staff for Success
The above provides a rough sketch on how you might start to pursue a channel. Assuming you are able to navigate the process and close a channel deal, make sure that you are staffed to succeed. Large channel partnerships often have dedicated product, engineering, services, support, marketing and sales-enablement resources. These partnerships aren't cheap to staff but the payoff and accelerated growth can be significant.
While tackling a channel via an existing team is generally preferred, many companies don't have the business/channel/corporate development talent in-house at the time they're ready to begin. Further, many may want to test reaction to potential channel partnerships before hiring a full-blown team.
Firms like Alder Growth Partners can help. With experienced executives well versed in transactions and partner management, we can help you jump start a process -- and provide the appropriate flexibility to turn things over to your full-time team at the right juncture.
For more information, please contact us.
About the Author
Steve Semelsberger is the Founder of Alder Growth Partners. He has structured a myriad of alliances, reseller and OEM partnerships -- from minimally impactful co-marketing deals to $20M+ white label arrangements, both as a full-time member of high-growth software companies and via outsourced consulting arrangements.
We all love shoot-the-moon and swing-for-the-fences strategic moves in technology. But as emerging companies are pursuing early inorganic growth initiatives, we often advise them to think small to begin. Why should an emerging company pursue small acquisitions?
Capital is Expensive: for privately held firms, acquisitions are often heavily skewed to cash. Until public markets provide transparent valuations on equity, cash-centric deals are often required buy attractive targets. And cash is dear in a new and rapidly growing enterprise!
Risks are Lower: integrating a 5-10 person team is a very different exercise than integrating a 50-100 person organization. Fewer moving parts and the opportunity to build on a small, focused crew improves chances for increasing, rather than declining, momentum.
Returns Can Be Attractive: a mid-seven figure or low eight figure deal can offer dramatic returns based on revenue and/or EBITDA multiples in relatively short periods of time. While larger deals can look good on the income statement out of the gate, they often don't provide comparable paybacks.
For example, while we made several solid acquisitions at Demand Media under Shawn Colo's M&A leadership, many of us are quite proud of our CoveritLive deal. There, we first invested in CoveritLive while they were pre-revenue and early in market. This investment gave us an opportunity to get to know the team, better understand their product, and help them begin to monetize.
A year in, we bought the company at a reasonable multiple that enabled a positive outcome for the founding team and their investors. Further, Demand Media -- as a much larger company -- was able to accelerate explosive, and profitable, revenue growth while retaining the core people and customers that made the company great.
As you're pondering impact-deals for your emerging software company, don't miss out on thinking small, especially in the beginning.
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Steve Semelsberger is the Founder of Alder Growth Partners.