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LEO POLOVETS
GENERAL PARTNER AT SUSA VENTURES
#saastrannual
De-Risking Your Startup
De-Risking Your Startup
#saastrannual
Background
Me: software engineer turned VC.
• LinkedIn ’03-’05, Google ’05-’09, Fact...
De-Risking Your Startup
#saastrannual
Common Misconception
“If I hit $2m ARR, I'll be able to
raise a nice Series A.”
De-Risking Your Startup
#saastrannual
SORRY,
NO.
De-Risking Your Startup
#saastrannual
Reality
Early-stage VCs invest based on
ideal outcome potential and odds
of success ...
De-Risking Your Startup
#saastrannual
The Value of Your Company
Value ∝IdealOutcome x ChanceToWin
De-Risking Your Startup
#saastrannual
Example
• Ideal outcome: If you win, company will be worth $1b.
• Your team + idea =...
De-Risking Your Startup
#saastrannual
Example (cont.)
Today
Next year
ARR Chance to win Expected company value
$0m 10% $10...
De-Risking Your Startup
#saastrannual
How VCs Estimate Your Chance of Winning
De-Risking Your Startup
#saastrannual
Chance of Winning is Based on Key Risks
• Can you hire a great exec team?
• Can you ...
De-Risking Your Startup
#saastrannual
Each Risk Area is Ranked along a Spectrum
Product/Market Fit Risk
Risk Level Example...
De-Risking Your Startup
#saastrannual
Each Risk Area is Ranked along a Spectrum
Short-Term Competition Risk
Risk Level Exa...
De-Risking Your Startup
#saastrannual
Risk Levels → Probabilities
Risk Level Probability of Success
Very High 20%
High 35%...
De-Risking Your Startup
#saastrannual
Value of Your Company
Market Size
x Probability of Success (product/market fit)
x Pro...
De-Risking Your Startup
#saastrannual
Seed Stage Valuation Example
$1b (valuation if company is successful)
x 0.35 (high p...
De-Risking Your Startup
#saastrannual
Startup Mistake #1: Focusing on Wrong Risks
Before:
$1b (valuation if successful)
x ...
De-Risking Your Startup
#saastrannual
Startup Mistake #1: Focusing on Wrong Risks
Before:
$1b (valuation if successful)
x ...
De-Risking Your Startup
#saastrannual
Startup Mistake #1: Focusing on Wrong Risks
Before:
$1b (valuation if successful)
x ...
De-Risking Your Startup
#saastrannual
Startup Mistake #1: Focusing on Wrong Risks
Real-world examples:
• Strong technical ...
De-Risking Your Startup
#saastrannual
Seed Mistake #2: Regressing in an Area
Before:
$1b (valuation if successful)
x 0.35 ...
De-Risking Your Startup
#saastrannual
Seed Mistake #2: Regressing in an Area
Before:
$1b (valuation if successful)
x 0.35 ...
De-Risking Your Startup
#saastrannual
Seed Mistake #2: Regressing in an Area
Before:
$1b (valuation if successful)
x 0.35 ...
De-Risking Your Startup
#saastrannual
Seed Mistake #2: Regressing in an Area
Real-world examples:
• Original pricing model...
De-Risking Your Startup
#saastrannual
Best Practice: Focus on Biggest Risks
Before:
$1b (valuation if successful)
x 0.35 (...
De-Risking Your Startup
#saastrannual
Best Practice: Focus on Biggest Risks
Before:
$1b (valuation if successful)
x 0.35 (...
De-Risking Your Startup
#saastrannual
Best Practice: Focus on Biggest Risks
Before:
$1b (valuation if successful)
x 0.35 (...
De-Risking Your Startup
#saastrannual
An Aside: Series A Revenue Targets
If revenue doesn’t matter, why
do most Series A i...
De-Risking Your Startup
#saastrannual
An Aside: Series A Revenue Targets
$1m-$2m ARR is interesting because it
usually ind...
De-Risking Your Startup
#saastrannual
Homework: Identify Your Key Risks
1. Carefully reflect on every imaginable risk area:...
De-Risking Your Startup
#saastrannual
Homework: Focus on the Right Risk Areas
1. Ignore risks that don’t apply to your sta...
De-Risking Your Startup
#saastrannual
Startups are Like Triathlons
Triathlon = Swim, Bike, Run.
It doesn’t matter how grea...
De-Risking Your Startup
#saastrannual
Thank You
Leo Polovets
https://codingvc.com/saastr-2017
leo@susaventures.com
@lpolov...
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De-Risking Your Startup -- SaaStr 2017 Talk

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SaaStr 2017 talk on how to prioritize risk at early stage startups.

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De-Risking Your Startup -- SaaStr 2017 Talk

  1. 1. LEO POLOVETS GENERAL PARTNER AT SUSA VENTURES #saastrannual De-Risking Your Startup
  2. 2. De-Risking Your Startup #saastrannual Background Me: software engineer turned VC. • LinkedIn ’03-’05, Google ’05-’09, Factual ’09-’12. General Partner at Susa Ventures since late 2012. • $75m under management. • ~50 investments. • Seed investing in (mostly) B2B startups. Our focus is on strong long-term competitive advantages like network effects, proprietary data, and/or economies of scale.
  3. 3. De-Risking Your Startup #saastrannual Common Misconception “If I hit $2m ARR, I'll be able to raise a nice Series A.”
  4. 4. De-Risking Your Startup #saastrannual SORRY, NO.
  5. 5. De-Risking Your Startup #saastrannual Reality Early-stage VCs invest based on ideal outcome potential and odds of success — not revenue multiples.
  6. 6. De-Risking Your Startup #saastrannual The Value of Your Company Value ∝IdealOutcome x ChanceToWin
  7. 7. De-Risking Your Startup #saastrannual Example • Ideal outcome: If you win, company will be worth $1b. • Your team + idea = 1% chance to win. • Expected value of company = $1b x 1% = $10m. • Seed valuation = $3m (time discounted).
  8. 8. De-Risking Your Startup #saastrannual Example (cont.) Today Next year ARR Chance to win Expected company value $0m 10% $100m $1m 10% $100m $2m 10% $100m $2m 4% $40m ARR Chance to win Expected company value $0m 1% $10m
  9. 9. De-Risking Your Startup #saastrannual How VCs Estimate Your Chance of Winning
  10. 10. De-Risking Your Startup #saastrannual Chance of Winning is Based on Key Risks • Can you hire a great exec team? • Can you find product/market fit? • Can you differentiate enough from the competition? • etc…
  11. 11. De-Risking Your Startup #saastrannual Each Risk Area is Ranked along a Spectrum Product/Market Fit Risk Risk Level Example Very High You think/hope/believe people will want to use your product. High You have verbal interest or LOIs from potential customers. Medium You have unpaid pilots. Low You have multiple paid pilots. Very Low You have multiple prepaid annual contracts.
  12. 12. De-Risking Your Startup #saastrannual Each Risk Area is Ranked along a Spectrum Short-Term Competition Risk Risk Level Example Very High Tons of strong competition. High Tons of weak competition. Medium Some competition, and you’re weakly differentiated Low Some competition, but you’re strongly differentiated Very Low No competition + high barrier to entry (which you have crossed).
  13. 13. De-Risking Your Startup #saastrannual Risk Levels → Probabilities Risk Level Probability of Success Very High 20% High 35% Medium 50% Low 65% Very Low 80%
  14. 14. De-Risking Your Startup #saastrannual Value of Your Company Market Size x Probability of Success (product/market fit) x Probability of Success (short-term competition) x Probability of Success (hiring great exec team) x …
  15. 15. De-Risking Your Startup #saastrannual Seed Stage Valuation Example $1b (valuation if company is successful) x 0.35 (high product/market fit risk) x 0.50 (med short-term competition risk) x 0.80 (very low exec team risk) x … = $10m
  16. 16. De-Risking Your Startup #saastrannual Startup Mistake #1: Focusing on Wrong Risks Before: $1b (valuation if successful) x 0.35 (high product/market fit risk) x 0.50 (med short-term competition risk) x 0.80 (very low exec team risk) x … = $10m
  17. 17. De-Risking Your Startup #saastrannual Startup Mistake #1: Focusing on Wrong Risks Before: $1b (valuation if successful) x 0.35 (high product/market fit risk) x 0.50 (med short-term competition risk) x 0.80 (very low exec team risk) x … = $10m Mistake: Spend most of your seed round on adding more great execs to the team
  18. 18. De-Risking Your Startup #saastrannual Startup Mistake #1: Focusing on Wrong Risks Before: $1b (valuation if successful) x 0.35 (high product/market fit risk) x 0.50 (med short-term competition risk) x 0.80 (very low exec team risk) x … = $10m After: $1b (valuation if successful) x 0.35 (high product/market fit risk) x 0.50 (med short-term competition risk) x 0.80 (very low exec team risk) x … = $10m (valuation unchanged) Mistake: Spend most of your seed round on adding more great execs to the team
  19. 19. De-Risking Your Startup #saastrannual Startup Mistake #1: Focusing on Wrong Risks Real-world examples: • Strong technical team spends seed round on building product instead of proving they can sell. • Company that’s in a crowded market makes no effort at establishing differentiation. • Founders with zero management and hiring experience make progress by themselves, without expanding the team or showing they can be leaders.
  20. 20. De-Risking Your Startup #saastrannual Seed Mistake #2: Regressing in an Area Before: $1b (valuation if successful) x 0.35 (high product/market fit risk) x 0.50 (med short-term competition risk) x 0.80 (very low exec team risk) x … = $10m
  21. 21. De-Risking Your Startup #saastrannual Seed Mistake #2: Regressing in an Area Before: $1b (valuation if successful) x 0.35 (high product/market fit risk) x 0.50 (med short-term competition risk) x 0.80 (very low exec team risk) x … = $10m Mistake: You find product/market fit, but it’s in a very crowded space.
  22. 22. De-Risking Your Startup #saastrannual Seed Mistake #2: Regressing in an Area Before: $1b (valuation if successful) x 0.35 (high product/market fit risk) x 0.50 (med short-term competition risk) x 0.80 (very low exec team risk) x … = $10m After: $1b (valuation if successful) x 0.80 (very low product/market fit risk) x 0.20 (very high competition risk) x 0.80 (very low exec team risk) x … = $9m (valuation drops!) Mistake: You find product/market fit, but it’s in a very crowded space.
  23. 23. De-Risking Your Startup #saastrannual Seed Mistake #2: Regressing in an Area Real-world examples: • Original pricing model is too aggressive, new pricing works but shrinks TAM by 10x. • Founders make bad hires, showing that they can hire in a competitive market, but they can’t hire well. • Pre-sales validate a strong market but team cannot fulfill customer demand, demonstrating weak execution skills.
  24. 24. De-Risking Your Startup #saastrannual Best Practice: Focus on Biggest Risks Before: $1b (valuation if successful) x 0.35 (high product/market fit risk) x 0.50 (med short-term competition risk) x 0.80 (very low exec team risk) x … = $10m
  25. 25. De-Risking Your Startup #saastrannual Best Practice: Focus on Biggest Risks Before: $1b (valuation if successful) x 0.35 (high product/market fit risk) x 0.50 (med short-term competition risk) x 0.80 (very low exec team risk) x … = $10m Ideal path: Primary focus on product/ market fit, secondary focus on higher differentiation.
  26. 26. De-Risking Your Startup #saastrannual Best Practice: Focus on Biggest Risks Before: $1b (valuation if successful) x 0.35 (high product/market fit risk) x 0.50 (med short-term competition risk) x 0.80 (very low exec team risk) x … = $10m After: $1b (valuation if successful) x 0.80 (very low product/market fit risk) x 0.65 (low competition risk) x 0.80 (very low exec team risk) x … = $30m (3x higher!) Ideal path: Primary focus on product/ market fit, secondary focus on higher differentiation.
  27. 27. De-Risking Your Startup #saastrannual An Aside: Series A Revenue Targets If revenue doesn’t matter, why do most Series A investors want to see $1m-$2m ARR?
  28. 28. De-Risking Your Startup #saastrannual An Aside: Series A Revenue Targets $1m-$2m ARR is interesting because it usually indicates you’ve figured out product/market fit and a growth channel. VCs are excited because you’ve figured out product/market fit and a growth channel, not because you have $X ARR.
  29. 29. De-Risking Your Startup #saastrannual Homework: Identify Your Key Risks 1. Carefully reflect on every imaginable risk area: product/market fit, short- and long-term competition, current team, ability to hire, ability to sell, market size, government regulation, etc. 2. Do an honest self-assessment. Which areas are you weakest in? 3. Ask investors, advisors, friends, cofounders, etc. to share what they think are your weak areas. 4. Useful thought experiment: if you fast forward 5 years into the future and find out your company failed, what would be the reasons it failed?
  30. 30. De-Risking Your Startup #saastrannual Homework: Focus on the Right Risk Areas 1. Ignore risks that don’t apply to your stage. (E.g. whether your team can scale from $10m ARR to $100m ARR is irrelevant if you’re at $100k ARR.) 2. Focus on the biggest risks first. Moving from a 20% to an 80% chance of success in some area is a 4x improvement. Moving from 65% to 80% is barely an improvement. Tip: In many areas, an easy way to reduce risk is to surround yourself with great employees, advisors, and investors.
  31. 31. De-Risking Your Startup #saastrannual Startups are Like Triathlons Triathlon = Swim, Bike, Run. It doesn’t matter how great you are at cycling and running if you can’t swim. Learn to swim before you upgrade your bike.
  32. 32. De-Risking Your Startup #saastrannual Thank You Leo Polovets https://codingvc.com/saastr-2017 leo@susaventures.com @lpolovets

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