Some Free Resources for SaaS Valuation Algebra

TechCrunch: Determining the worth of your SaaS company

First, a warning.  Valuation is in the eyes of the payer.

But at some point, all entrepreneurs need to tell investors, their board, or maybe their recruits that will be getting equity what the valuation of the company is going to be.  The correct answer is, “I have no idea” but you will need to put something on your pitch deck, your prospectus, and your financials (don’t forget to do a Reverse Income Statement).

A few resources that I have found valuable:

  • The BVP Cloud Computing Index [ ] This is the prospectus page for an index fund that is a great collection of SaaS company stocks and their basic financials – great data for your business plan. The listing is also sortable (though is handles the text fields incorrectly – poor form, my friends – but you can also download the XLS.  The range in multiples should give you both pause and hope.
  • Determining the worth of your SaaS company by Todd Gardner for TechCrunch [ ]  This includes the great visual below to help all your stakeholders understand the factors that contribute to valuation.
TechCrunch: Determining the worth of your SaaS company

3 Reasons You Should Love the Reverse Income Statement (RIS)

Reverse Income Statement Template
Even if you get vision, culture, and brand right, success is still measured by the things you can capture in a spreadsheet. My favorite spreadsheet, though, are the ones that tie all those things together.
This past summer, the students in my MBA class took special note of my, perhaps, overwrought appreciation of the Reverse Income Statement (RIS) as a tool for developing strategy.  Admittedly, it is not sexy or flashy and will not offer any sort of output you can use in a Powerpoint.  It is a solid tool for rationalizing your assumptions and keeping track of all those “testable theories” that accumulate when you are business planning.
First, let’s accept that the RIS is like Pad Thai – there are endless variations on the basic premise.  I have a version that I rely on often enough that I have it as a template in 4 different apps: Excel, G-suite, Numbers and Calc.  I offer the Microsoft Excel version here:

Creative Commons License
The Official BizDevGuy Reverse Income Statement Template by Jim Haviland aka BizDevGuy is licensed under a Creative Commons Attribution 4.0 International License

My advocacy for this particular instrument is less important than reasons why I think it is so valuable for strategy development and business planning. I will offer details on using it below but first, the reasons I think business planners and strategists should love it as much as I do.

  1. Focus on the outcome: The very top of your RIS is your business goal and it is a number.  Yes, you need to know your WHY and have a mission and other organizing thoughts but you also have to be able to communicate to yourself and your stakeholders what success looks like in concrete, measurable ways that convey value.  It doesn’t have to be a currency figure but it has to be a number that you can use as the basis for the rest of your calculations. Even if you are guessing, you start with an outcome.
  2. Catalog your “testable theories”: The best and worst part of Entrepreneurs is their optimism.  Over time, optimism can turn reasonable assumptions into unimpeachable myths and false hopes unless they are informed by new insights or challenged by data.  I have noticed that business plan assumptions and press release logic can quickly become common knowledge unless you have tactics and disciplines in place to check them and keep exuberance in check.  In the RIS, everything you input to the calculations are listed as assumptions. On my version you also include sources and how frequently you should recalibrate.
  3. Know your numbers:  One of my favorite modern fictional characters is fake President Josiah Bartlett.  He had Mrs Linninham to ask “what’s Next?” but the rest of us need guidance, day by day, hour by hour, to determine what’s the next best thing for us to work on.  Business strategy can become complex math pretty quickly but we shouldn’t use that as an excuse not to know the numbers that best align with our predictions and the intended future. In my version of the RIS, you are asked to capture when and how you validate your assumptions and assign a member of the team to do the validating.  The more you share ownership of your numbers, the more everyone on the team can see, in very real terms, how their contribution in action or measurement impacts the overall outcome. The RIS wont relieve you of having the usual financial statements, but it is easier for everyone to look at a determine whether the effort is headed in the right direction.
The hardest part of working from a template like this is getting started.
In my template, I offer a sample of a RIS for a pizza restaurant.  It includes financial calculations as well as operational considerations.  For me, the operational metrics are the most important part of the power of this tool as it allows clear linkage between operations and the front office.  Many parts of an organization of any size can struggle to feel their connectivity to the financial performance of the organization.  
For smaller organizations, marketing offers an even bigger problem than operations.  Many of the business leaders I have worked with ask the age old “attribution” question: “How do I know my marketing dollars are growing the bottom line?”  The RIS doesn’t make the absolute causality of sales or profitability any easier to track but it does offer a pretty easy way to look for correlation, which is almost as good and sometimes better.
When I start a new RIS, I like to start small, capturing a few dozen assumptions and then using them a number of ways to calculate some things that will be easy to track like daily activities or outcomes.  In my example in the template, you should be able to get to the end of a day and, from the number of pizzas sold, decide on ordering for the next day and whether you are on track for the week or month.  After a week, you could add a new marketing campaign to the mix.  Your assumption would be number of emails sent or ads purchased.   The impact on sales could be seen even though you wouldn’t want to pretend that you know it is causal because lots of factors that you haven’t captured yet could be at play.  I like to keep adding Assumptions as time goes on and I realize what I am assuming and what can make a difference.
The really power of my version comes from using it to validate results and allow everyone to contribute to the numbers.  Weekly or monthly sessions reviewing the document will expose differences in opinions that can be very meaningful to catching problems before they grow to tragedies.
Over time, some of your assumptions will “lock in” and become pretty reliable facts – understandings that all your team can own and use to make decisions everyday, fully bought-in on their meaning and impact.
That level of alignment is something, I think, everyone can love.

Who Suffers Most?

There are many versions of the old adage, “When the economy catches a cold, the poor have pneumonia.”

Who's spending and who's hurting?
Who is spending and who is hurting?

A poll on LinkedIn asking about business spending patterns shows a wide range of responses to how much the economic downturn is effecting spending patterns (self-reported) of businesses.  At last look, 100% of those in large enterprises reported that the economy had no effect on their spending, while 76% of those in small businesses report that they are scaling back or operating on necessities.

I hate to be grumpy about this, but I have to make these two points:

  1. An awful lot of money was pumped into the economy – guess where it went. Large enterprise, though it is easy to write just one large check rather than thousands of small ones, do not represent either most of the spending or most of the jobs in the economy.
  2. The small businesses are the ones that innovate, create substantial new value, and are most at risk of failure.

Healthcare socialism would benefit small business substantially. Bail-out socialism helps only those at the top.

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Sales Training for Entrepreneurs

Beating the competition

My father always told me that every job is a sales job. That’s at least a little bit true, but in my experience, most entrepreneurs are a little disconnected from their inner sales person

Harvard Business Review offered a special issue on Sales in 2006 (Vol 84, Issue 7/8) that included a number of articles that offers a number of quick reads that should at least help you purge whatever negative image you might have of sales and begin replacing it with an appropriate understanding of where it fits operationally across the life-cycle of an enterprise and as am integral part of the Sales and Marketing continuum.

Psychologist and Anthropologist G. Clotaire Rapaille is interviewed in a piece that presents a concise discription of the sales person archetype as Happy Loser, someone as motivated by the hunt as the kill.  Usually entrepreneurs need to develop rejection coping skills, but they don’t enjoy rejection. Sales people love it…according to Clotaire anyway.

For entrepreneurs, I suggest you learn a few solid basics:

  1. Focus on zebras – Even though your business plan says you are targeting a huge market, chances are your initial offerings will only really appeal to a small portion of the market in a particular place in their life-cycle (there are lots of horses, but you only want the zebras). In marketing, we might develop a persona of the most likely customer so that the sales team can ask just a few qualifying questions to can help determine if they are talking to the right people at the right time.  Remember each sales activity has a cost and spend your budget wisely. You’ll still face rejection for reasons you may not understand, but you can optimize your closure rate and minimize your funnel by maintaining focus.
  2. Mostly listen – The shape of your products and services and the way they are priced should evolve with your understanding of the customer. Listening to the way customers think about your product, what their expectations are, and what created the situation where they are considering your offering are invaluable as market research, engaging as a business development practice, and a time-tested means of closing a sale.
  3. Respond – Remember that “time kills all sales.” Respond in a timely fashion – think about the service you expect in a restaurant, except the tips you’ll get as an entrepreneur will likely be in the form of a positive referral.

It would be helpful for you to have an objective sense of where you are on your sales skills. I love the very affordable assessments available from the managment psychologists at Pradco. For $50 you get an assessment of your skills and attitudes and a prescription for improvement.

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New Products (Like the iPhone): Announce Early or Go for the Surprise Rollout?

I love when I find a resource that distills a common strategic question down to a few simple calculations. This article on doesn’t quite get to the paint-by-numbers status, but it does lay out a clear set of topics to consider when thinking about your product launch.

Vaporware or surprise attack?

So often your fortunes are dominated by things you cannot control, having a checklist of things that you can clearly make some predictions around should help minimize risks and allow you to make a decision with confidence.

“It’s not a clear-cut situation,” says Wharton marketing professor Jehoshua Eliashberg. “In pre-announcing, a company lets a competitor know what it’s up to. But what matters more is a company’s position in an industry. If a company is a dominant monopolist, it has reason to pre-announce because it doesn’t fear a competitive reaction. If the company is smaller, the negatives of announcing a product early outnumber the positives.”

Click here to see this article.

BizDevGuy’s favorite hosting service

A basic website includes both Domain Registration and Hosting. Anymore, nearly everbody offers both in one form or another.

1&1: Very large, low-cost hosting, email and other services firm. Very scalable offerings and lots of extras to make it easy to get started. This is the host for this website. Click here for more information.

Disclosure: BizDevGuy is an affiliate of 1&1 so we make a few coins when we sign-up new clients. It isn’t enough, though, to make it worth sending our clients to the wrong place.

How to write an executive summary on the west coast

Guy Kawasaki is both an exceptional entrepreneur and an exceptional supporter of entrepreneurs. Rather than the hazing that much of the VC game feels like, Garage has put together some excellent resources for people looking to pitch them. This support includes both clear guidance on how to develop documents that they can easily parse and exacting detail on what sort of deals they are looking for.

I must say, however, that their approach is quintessentially West Coast. I have worked on both coasts (and some difficult years in the middle) and, for me, the differences in expectations and approaches are dramatically different.

I will post an East Coast comp soon.

BizDevGuy’s favorite project management and collaboation site

Most BizDevGuy clients get introduced to BackPackIt, a very inexpensive collaboration utility that is free to our clients (unless they want to create their own pages.). As a central repository for to do lists, notes, files, graphics and a number of other collaboration tools, it does a lot of the heavy lifting while remaining simple to use. BackPackIt is a product of 37Signals, the makers of BaseCamp and other very inexpensive collaboration tools.

The interface is quite intuitive but not quite WYSIWYG, but for about $5/month you get a lot of functionality that continues to expand as the folks at 37signals keep getting smarter.