Capital efficiency on the way to IPO revisited, and a PandoDaily memo to YC's class

In December of last year, I wrote a Lucky7 post about our capital efficiency at Bazaarvoice on the way to IPO.

Quoting from my post:

As I pointed out in my "Bootstrap or VC?" post, we raised around $24 million and had around $12 million left in the bank when we went public. You can build a better culture if you are capital efficient, and also have a bigger economic ripple effect. I'll write more on that some other time, but for now I'm proud we were able to scale 75% more efficiently, on average, on our own path to IPO.

This week, PandoDaily had an in-depth memo written by Ben Sesser, a serial entrepreneur, and sent to me by a friend and new startup CEO in Silicon Valley. It was written for this year's Y Combinator class and the topic was how hot SaaS (Software as a Service) is right now (therefore attracting more entrepreneurs and capital to fund them) but also how hard it is to execute on. Ben analyzed recent SaaS IPOs, including Bazaarvoice, to make his point. As our co-founder and CEO from inception through IPO, follow-on offering, and two acquisitions (PowerReviews and Longboard Media) and now as our Vice Chairman of the Board, I was proud to see him include the stats on Bazaarvoice compared to other recent SaaS IPOs. Here are three of the charts he included:

[broken images]

What is my point here, other than I'm proud of how capital efficient we were on our path to IPO? Well, the big point is how we were capital efficient. The answer is easier than you may think but easy answers don't mean it is easy to execute against in practice (remember there are very popular books like Who Moved My Cheese?). First, we thought hard about the five critical ingredients needed to build a big company (read my Lucky7 post on that topic), and then we pre-sold our solutions prior to building them to ensure we actually had the market we believed we did. In other words, we were a mostly customer-funded business instead of an investor-funded one, which is the big point of Seth Godin's first book, The Bootstrapper's Bible(available for free here). Seth's book had a big impact on me and my co-founder, Brant Barton, and my parents were always bootstrappers from the time I was born, which helped me think about Seth's book experientially. In other words, I think we did a good job of blending the best of both worlds - capital efficiency balanced with an aggressive posture of growth. Seeing the stats in Ben's memo are a good validation of that strategy playing out the way we hoped it would. We were intent on getting to breakeven on our Series A, and I as said in my recent interview with the Austin American-Statesman, my favorite businesses to fund are those that both meet the five critical ingredients test and can get to breakeven quickly and raise capital from there to put fuel on the fire.

Experientially, I really messed this up at Coremetrics, and I was interviewed by Lori Hawkins of the Austin American-Statesman about the pain of all that in this article. So I've got the battle scars to prove it. I was absolutely determined not to make that mistake again at Bazaarvoice, and Brant and I had many conversations about this - and me also with the entire executive team.

I encourage you to read the entire PandoDaily memo if you are in or are thinking about starting a SaaS company. Get great mentors too - you are going to need them. Quoting from Ben at the end (and my point is that it doesn't have to be this way if you blend the best of both worlds as we did at Bazaarvoice on our own path from inception to IPO):

If you just spend 9.5 years raising $110 million dollars across five rounds of funding, and hire 530 employees, including a sales and marketing team of 160 people, while building a world-class product that can win in the hyper-competitive enterprise software business, to reach $70 million in annual revenue, you can create a high margin business with predictability.

Sure you don’t want to build a dating app?

Good job on this article, Ben. This type of analysis is rare and entrepreneurs will appreciate the time you took to put it together.

Have a great Memorial Day weekend, everyone. And if you would like to read more about building a sales-driven culture, which is the best type of culture for a SaaS business (look no further than giants like and Workday to confirm that), I suggest these three Lucky7 posts to start:

  1. Your first clients - start with who, and win over the 'cool kids'
  2. Your first clients - how to win over the 'cool kids'
  3. The tale of Bazaarvoice, as told through the shirts on our backs - part two