After any large acquisition, “bubble talk” begins immediately. The skepticism generally centers on why a certain company was acquired at such a high revenue or earnings multiple. However, what I find most interesting about this acquisition is not digging into the financial metrics but rather the story the acquisition price per employee tells about the tech startup ecosystem.
Popular wisdom says that when too much money goes after too few ideas, there is a bubble in startup land (the Silicon Valley version of Mo Money, Mo Problems). But capital being flowing into the tech sector in itself does not cause a bubble. Instead, I believe that crashes are caused by a dilution of talent. When a team scales, it becomes difficult to attract great people because there are only so many SUPER interesting roles, and so much equity to go around. Why should a great person take a less than amazing role at a pay cut with limited equity, instead of starting their own company or getting a brand name company on their resume? This only becomes exacerbated when there is an investment boon. As more startup capital becomes available, more companies are started. Talent is scarce, but companies are mandated to grow and have to put B players in A roles. This is also why so many great companies are started during a downturn (facebook, YouTube, etc.). Less capital means there are fewer startups which means talent is more concentrated. Money is definitely flowing into startups at the moment. So why do I believe this “bubble” is different?
My answer: each team member can have a larger impact on a company. WhatsApp had 55 employees and was bought for $19B. Instagram had 16 employees and was bought for $1B. SnapChat had less than 30 (approx.) employees and had a $3B offer. In each of these companies, founders and key early employees were not diluted in a greater pool of workers and they were able to maintain influence in a more nimble organization. Leadership is able to focus less on organizational design, HR, finance, sales, and other issues and more on forming an immensely scalable, powerful product. The following factors allow companies to have a greater impact per employee:
- Distribution: Getting your product in the hands of millions billions of users has never been easier. The App Store, Google Play, Social Media, and other channels are accelerating the impact quality has on customer acquisition. The cost of releasing your product to a very small number of people was astronomical just 10 years ago, let alone when Steve Case at AOL needed to print millions of CDs to get AOL and AIM messaging off the ground. In addition to the size of the network, the connectedness of the internet further reinforces tracking, optimization, and virality of services. Build a great product and get it noticed and it can really take off. Each and every day the market grows as more people come online. And to summarize an Essay by Paul Graham with the language of Gordon Gecko: “Growth is good.”
- Advent of the API: The proliferation of the API web services enabled the WhatsApp team to punch above their weight to achieve scale. These services created an effective network of engineers at other companies that were at WhatsApp’s command. Take payment processing as an example. WhatsApp was able to leverage the thousands of engineers at Google Wallet and Paypal to handle their payments infrastructure. Or look at Snapchat. Instead of building their own server infrastructure, they have built their service on top of Google App Engine. Thousands of other companies use AWS, Microsoft Azure, or other web infrastructure services. Hundreds of other APIs can be tapped into to accelerate development, but more importantly, they allow teams to stay small, nimble, and exceptional.
The WhatsApp acquisition highlights an extremely exciting trend in the startup ecosystem: more capital in the market means more companies are being started, but a stretched talent pool will not limit the creation of great companies like it has in the past. The API and distribution mechanics now enable great people to do more with less. I am in Marc Andreesen’s camp, software is eating the world, and I believe it is still only on its first course.
 much more data, albeit stale, on acquisition price to employees available courtesy of Wired.com here: http://www.wired.com/business/2012/04/opinion-baio-instagram-trend/
Board meetings can range from extremely productive, where strategic issues are addressed, to a free for all. Mark Suster, a leading VC at Upfront Ventures, has a recent post on how to control chaotic Board discussions. He discusses a number of ways Board Directors can derail meetings and prescribes methods to avoid common pitfalls. I recommend that you read the post as well as his previous post on how to prepare for board meetings and how to set the agenda.
In addition to the issues that Suster highlights, the structure of the presentation is a key determinant in the success of the meetings. Clear communication aligns the entire Board on your vision and the chosen path to achieve your goals. Based on my experience, the most successful Board meetings start with a single framework that Cue Ball Partner, @AnthonyTjan, created. The framework is a simple 5×5 matrix with the 5 priorities spelled out on the left side of the page. Alongside each priority, you should provide a quantifiable measure of success, target date of completion, commentary on progress that was made, and proposed next steps. An example of a company’s top priorities is below:
The power of the slide comes from its simplicity and clarity. A quick glance will explain an awful lot about your company. After presenting the slide, you will immediately accomplish a few things:
- Build Alignment on Priorities: Codifying and presenting these priorities ensures that each member is in agreement on how the business should move forward, which empowers the CEO to execute. Additionally, by stating the company’s priorities so clearly, Directors will not be caught off guard by the direction of the business. This clarity promotes a collaborative dynamic between the CEO and the Board rather than a tenuous, “Board vs. CEO” relationship. A good litmus test for whether you have established alignment among your Board members is whether each member can accurately recite the five priorities of the business
- Foster Agreement on Quantified Measures of Success: Not only will Directors be able to recite the top priorities, but they will also be in agreement on how success is measured. Often Board members have different styles and different motivations e.g. some may want hyper growth; others may prefer slow or more profitable growth. Balancing conflicting opinions can be challenging, and it will be impossible if you don’t define success upfront. Working with the Board to quantify success will ensure that every one is on the same page on whether the goals were achieved.
- Update on Progress and Provide Clarity on Next Steps: Stating progress and next steps will help you contextualize past and future investments at the company. By frontloading the debate on establishing the top priorities and framing initiatives in context, you will preempt any discussion on why an investment is being made, and shift them to short conversations on what you are doing and how you are getting there. For example, if you proposed an expansion of your product to a different vertical, the dialogue would be much more effective if you could frame it within a strategic priority such as distribution to establish network effect. The positioning would focus the conversation on whether the new vertical was the most impactful tactic for expansion rather than revisiting the strategy.
- Establish Focus: The framework provides more benefit than simply being a reporting mechanism to your Board. The exercise of codifying the top five priorities will help you step back from the day to day grind to define what is most important. Dick Harrington, Cue Ball Chairman, constantly reminds me and the CEOs of our portfolio companies, that “it is better to move 5 things a mile than 25 things an inch.” While there is often so much to do at a startup, ensuring that you are laser focused on only five things at a time will make you most effective.
I recommend that this slide should be used very early in each Board presentation as well as serve as a structure for the rest of the content. In fact, if the body of the presentation is not aligned with at least one of the five priorities, then the objectives are likely poorly defined and should be revisited. After defining these priorities and whipping up a presentation, you will now be able to spend more time building your business rather than managing your Board.
You can download a template of the slide here: Priorities Slide.pptx