This is a summary of my presentation at SaaStock on Tour, London, 15th March, 2017.
The goal for Notion is simple – to be recognised as the definitive European enterprise software investor; attracting the very best enterprise entrepreneurs from around the world, investing in the very best opportunities, inculcating radical success in our investees (and the wider SaaS ecosystem) and of course delivering exceptional returns to our investors.
While what will make each of our companies extraordinarily successful and hugely valuable is always different, there are many things they have in common. They are all cloud delivered software companies building recurring revenues and selling to enterprise. And this allows us to do two things many VCs are unable (or unwilling) to do:-
- Support our companies individually and programmatically on the challenges they all face
- Learn from the interactions we have with those companies to be able to support them better;
- And to make better investment decisions.
Within this context, I want to take our investment journeys back to the initial thought process;
- The fundamental belief that the people sitting in front of us are exceptional;
- the pain they are addressing is acute and extremely valuable to solve;
- that pain is endemic to the market they plan to serve;
- and that market is more than large enough to take two to three very large businesses.
We also believe this team has the unique combination of entrepreneurialism, leadership, hunger, domain expertise, experience, capability and resilience to be the category leader; and to do so in a very short period of time. To go from 0 to 100 in 7. From $0m to $100m annualised revenues in 7, 8 or 9 years.
And we also believe that our equity stake when they have a liquidity event will be sufficient to pay back our fund.
Why such specific periods of time?
Two reasons – that type of growth attracts large multiples AND our funds are ten year terms, so for us its got to be less than nine years, preferably seven or eight which is world class. Which means more than doubling revenue every year.
That’s what we believe.
However, what we know is quite different. We know this is very unlikely to happen. The odds are stacked against us. The probability of Seed to Series A across Europe is 6%, from Series A to B 23%, from Series B to C is 33%. Less than 0.5% probability of success.
We know how few break out enterprise SaaS companies have emerged from Europe in the last ten years.
I would point to one company that has emerged from Europe, become a true category leader, powered through IPO on NYSE at $100m and is now $300m plus. Zendesk. We know MessageLabs grew from $0 to $150m revenues in eight years.
From the Bessemer Cloud Index we know the top 25% of SaaS companies reach $100m in five years, 50% in seven years, and the bottom quartile in just over ten years.
So our ambition is simple. $100m in annualised revenues within seven years from company inception.
The successes are few and far between. The risks of failure are high, but the rewards for success are enormous. And so we invest.
This cognitive dissonance – holding two opposite things to be true – is at the heart of every technology business and their investor at the beginning of their journey. So we invest and work with our companies with unbounded optimism, but also deep rooted pragmatism and maybe even cynicism.
Because we believe. We believe in you, the problem you are solving, your fundamental reason for being, your ability to make a large dent on the planet…
As an investor with an exclusive focus on enterprise SaaS, we are well positioned to attract the best entrepreneurs, invest in the best opportunities and privileged to work with extraordinary people. And to continuously learn. So that we can make better investment decisions and help our companies grow faster. And learn from those investments to make better investment decisions and offer better support. So we think we can buck those odds.
It’s worth bearing in mind that of course as time goes on, post investment, our sense of what constitutes success changes, and we adjust our capital strategy and can still have good outcomes, even when the majority will come nowhere near our original hypothesis.
NB something few companies consider is that we continue to assess each of these companies every quarter, ranking each against the other on the same criteria and making decisions about what capital and time we will allocate.
So how does success happen?
This is a difficult question. When we believed something to be true and it was, did we realise that by luck or by chance? Which of our views were and are erroneous?
I don’t believe there is a template to copy. Yes, there is plenty of incredible, valuable and insightful content, but in reality there are no rules, no steps to follow from A to Z. Start here. Do this. Then that. Follow steps 1 to 100 and bingo, $100m in revenue. While there is much that makes SaaS companies the same, what will make them extraordinarily successful and valuable is always different. And the very best entrepreneurs don’t believe the rules apply to them, anyway.
Nevertheless I do believe there is value in challenging our assumptions, creating frameworks and common vernacular for the journeys others have taken; the challenges they have or are facing; the lessons they have learned along the way and the risks they have mitigated. So we are creating those frameworks to be able to understand and help people and teams:
- to understand their journey from founder to leader to CEO
- how they build a leadership team and how teams work well
- how they achieved product market fit,
- their route to scale,
- how they aligned a large and fast growing organisation around a common purpose
- their ability to demonstrate strong underpinning economics and so on.
I’ve been with Notion for about 15 months now and work every day with the 35 exceptional enterprise software founders and their teams, as they push the boundaries of what is possible, learn and grow. I believe there are four factors common to the very best companies in our portfolio.
What we’ve learned?
- Pain – the best are obsessed about the pain they solve.
- Purpose – they have a deep rooted sense of why they exist.
- People – they recognise that the only thing that really matters and they can control is employing exceptional people and building high performing teams who build exceptional products, sell those products and love their customers.
- And they have a relentless focus on execution and learning.
Why pain? Solve the most important problem first and solve it fast
Understanding and obsessing about the existential pain you solve is the be all and end all. How acute is this pain? How valuable is it to solve? How endemic is it to the customers or market you are serving? We see too many early stage companies spending their precious time and resources trying to prove an original pain hypothesis, rather than focusing their time and energies on isolating the industry-defining pain.
There is a simple narrative we use. What pain do you solve? Who do you solve it for? How much value do you create? Is that value at least 10X the cost? Is it the most critical problem you can solve, are these the best customers to solve it for, are you creating sufficient value?
Look for pain, but don’t be greedy. The gap between the pain you solve and the value you deliver has the potential to drive massive demand.
While critical at the early stage, this obsession with pain remains true throughout the start up, grow up and scale up journey.
Why solve it fast? There are few barriers to entry to create a SaaS business, so when you have identified a pain and on the back of that moved rapidly to product market fit, then it’s as if you are creating a vacuum that pulls you in. You need to move fast to to meet that demand, and if that market exists on a significant basis you have the opportunity to define, and dominate a new category. But make no mistake, if you don’t fill that gap as you ride the wave, surfers appear behind and alongside.
People? Never skimp on people, hire the best you can.
One of our founders, Stan Boland puts it best. “Never skimp on people, hire the best you can.”
At the earliest stage – the 0 to $1m in revenues – the team is flat, fluid and fast moving. The founders are leading by example and aligning the organisation.
But as the business hits its stride, post initial traction and scales from $1-5m, then building the leadership team is critical and you may well be spending up to 50% of your time on this.
Don’t just think about organisational competencies, think also about your own strengths and weaknesses and look to build a team that is balanced and diverse. Look to recruit senior teams who have strengths where you have weaknesses and are strong team players: hungry, humble and smart.
Foster a positive and healthy team dynamic built around trust and open conflict. Good teams are able to challenge each other because of the implicit trust and then commit to action. Great teams hold each other accountable and focus on results.
Purpose? Why do you exist and why should anyone care?
The pain typically derives from some form of inequality or imbalance in a market and sets out to solve it. That obsession with pain translates in the sense of purpose.
At SaaStr 17 Peter Gassner, CEO of Veeva, was asked what his mission was when the business started out. NB he built over $500m in annualised revenues in less than ten years. He looked blankly at the interviewer and said, “not to go bust”.
In the short term your purpose is survival. Reach the next milestone whether that be revenue or funding. But as time goes by the sense of purpose, that immutable sense of why, is critical. Not as a marketing device but as a rallying cry for your organisation and your clients. Why do we exist, how do we behave and why should you care?
That sense of purpose elevates your position in the market and with your customers and gives sense to the bigger vision that exists within a narrow focus at the early stage.
- Why do we exist?
- How do we behave?
- What do we do?
- How will we win?
As the business grows this clarity of thinking is critical as you introduce middle management layers and grow the organisation.
Lastly, the Playbook
In the world of B2B SaaS we get hung up about the playbooks. They are important and extremely valuable points of reference – how you achieve product market fit, how you mitigate product and commercial risk, how you scale tech, sales, marketing, success etc. But what this is really about is execution, relentless focus on learning, improving and growing.
At the end of the day, it really is execution that matters most. It is enduring. It is what separates you from the rest.
Posted by Stephen Millard, Chief Platform Officer at Notion Capital.