Groupon Has Called Every Business In The United States
I believe this could be a true statement by the end of 2011 if it was Groupon’s intent to do so (which it may not be).
It’s very simple math. Many industry sources put the number of Groupon sales reps at 3,000+. The high end of the range is 4,000.
A typical rep using an auto-dialer will probably call 250–300 companies a day. You have to use an auto-dialer to get those kinds of numbers, which I have to presume Groupon uses.
Usually of those calls, the rep connects with a live person 40–50 times per day. Most of the calls result in a short conversation leading to a hang-up, but that’s the life of an inside sales rep.
Figure that there are 225 business days in a year when you subtract out weekends and holidays.
So the math is: 3,000 reps x 40 connects/day x 225 business days = 27 million businesses called.
According to business databases like Cortera and the US Census, there are about 27 million business establishments in the United States. This is a generous number as only about 7.4 million businesses have payroll – but either way you look at it Groupon could very well call every company in the US this year, if they wanted to.
Why Volition Capital Invested In Globaltranz
Volition Capital announced a $10M investment in Globaltranz this week. We couldn’t be more excited about the investment so I thought I’d share a little bit about why. Globaltranz enables small businesses to go online to comparison shop and procure freight capacity – most notably trucking and other modes of transport. It is somewhat analogous to how consumers use Expedia or Orbitz for airline travel, but in Globaltranz’s case, the end customers are businesses that are procuring freight. Next time you’re driving on the road, look around at the trucks on the road – Globaltranz probably had a hand in putting cargo on that truck.
The value proposition is very simple. Globaltranz offers more selection and better rates to small businesses that ship goods. In tougher economic times, the ability to save money on non-core functions like shipping is really valuable to small businesses. On the flip-side, Globaltranz offers freight carriers (e.g. trucking companies) a low cost way to reach the small business customer. It’s too expensive for carriers to sell small businesses direct, yet they certainly value additional volume given the fixed-cost nature of their business. The value is very clear to all parties which is probably why the company is growing so aggressively.
Globaltranz represents exactly the kind of company that Volition loves to invest in. They are high growth: ~100% year-over-year growth for a number of years in a row. They have a sizable and diversified revenue base. They are bootstrapped: having never raised any institutional capital throughout the company’s history. They are led by an experienced and dedicated management team. And they have aspirations for greatness: their stated goal is $1 billion in revenue which given the size of this market is attainable. They have accomplished a lot without any investment, and it is our hope that through our partnership and capital, the company will achieve even greater heights going forward.
Needless to say, we are very pleased to be the first institutional investor in Globaltranz.
Volition Capital Leads First Investment – G5 Search Marketing
I am pleased to share in today’s announcement that Volition Capital has led its first investment with a $15 million financing in G5 Search Marketing.
The investment thesis for G5 is pretty simple. 100% of mid-size businesses would love to have an online presence that consistently generates high quality, low cost leads – and 99% of mid-size businesses don’t know how to do it. To achieve the goal you need to be expert in website design, search engine optimization, search engine marketing, and multi-channel lead management. And, perhaps most importantly, you need to understand how all of these areas interrelate specifically in your industry. G5 fills that gap in certain large verticals where they have domain expertise – like self-storage, multi-family housing, and senior living. The thousands of mid-size businesses that have become G5 customers have their website and marketing efforts outsourced to and managed by G5, and they see the impact immediately in terms of low cost, high quality leads.
The wide disparity in results between using G5 and doing it yourself has led to a highly recurring, bootstrapped business which is right down the sweet spot of Volition Capital’s investment focus:
- High growth & solid revenue base: 20 consecutive quarters of record revenue.
- Capital efficient & founder-owned: They have never taken any outside capital or debt.
- Under-served geographic area: Beautiful (and hard-to-get-to) Bend, OR
- Volition Capital investment: First and last institutional capital, active Board involvement
One attribute of G5 which is key to all of our investments is we want to see the team have an “aspiration for greatness”. Every Volition portfolio company needs to have both a proven business and breakout potential. The latter starts with the management team thinking big – which is certainly the case here. The number of mid-size businesses that could benefit from using the G5 platform is not just thousands, or tens of thousands – but potentially hundreds of thousands if not eventually millions. The first-generation “local search” vendors adjacent to this space have a narrow/weak offering and poor value proposition – which is readily obvious given their high customer churn rates and lack of profitability. G5’s intensely loyal customer base and strong financial performance demonstrates that they are doing things both differently and better. We believe G5 represents the next-generation in local marketing solutions and couldn’t be more proud to partner with them.
The Small Fund Advantage
Silicon Valley Bank came out with a report today, called Dialing Down, that puts some data around the commonly held belief that better returns come from smaller funds. In this case – conventional wisdom is clearly true. Their fundamental conclusion is that venture capital funds are getting smaller – and that’s a good thing because it’s the small funds that generate outsized returns. The most compelling statistic compared the returns of large funds versus small funds (large funds being defined as above the median size for their vintage year). The result:
- 2% of large funds returned 2.0x or better.
- 48% of small funds returned 2.0x or better.
Volition Capital is committed to a small fund model precisely for this reason. But, why is it more likely for a small fund to succeed? I think there are a number of reasons – some more obvious than others.
1. The law of large numbers. Take a typical large VC firm with a $750M fund that averages 20% ownership in each portfolio company. For that fund to return a 3x, the portfolio has to be worth over $11 billion. And that is before accounting for fees and carry. A good fund is lucky to have one billion dollar company, but 11 of them? Not likely.
2. Small fund GPs are more aligned with their LPs. It’s pretty simple really: small fund GPs make their money from carry whereas large fund GPs make their money from fees. Large fund GPs still want to generate carry, but they don’t have to in order to create wealth. Small fund GPs need to make great investments to generate wealth. Who do you think is more hungry and will work harder to find and make those great investments?
3. Small funds are more focused. When you have a small fund, you can’t make every investment under the sun. You can’t be a late stage & early stage & PE, tech & cleantech & healthcare, US & Europe & India & China… fund. You don’t have a lot of capital to deploy so you get razor focused and develop the culture, methodologies, domain knowledge, and accountability – around a specific type of deal. You get good at something – and that makes better returns more likely.
4. Small fund GPs like each other more, probably. If you could start a firm, are there 10–15 people you would be willing to call “partner”? Someone you’re willing to bet your career on, whom you trust implicitly, whom you don’t have to ask and you know they will do the right thing? Are there even 10–15 people that you’d want to spend 50–70 hours per week with every week making joint decisions? Unlikely. Since large funds have grown their partnerships – the resulting 10–15 partners are more likely to just work together rather than be true partners at the core. Small fund partnerships don’t have the pressure to grow the partnership making it easier to preserve the “partner” in partnership.
That all being said – there are some great larger funds out there and I’m fortunate to have worked at some of them. As the stats show, 2% of large funds did well. It’s harder, but it can be done. But as the stats also show, your odds are much better with a small fund.
Why Growth Equity Is The Best Risk/Reward in Private Equity
There are really three general asset classes in private equity: buyouts, growth equity, and venture capital. So why is growth equity the best risk/reward among the three in my estimation?
1. The downside protection of leveraged buyouts is exaggerated. The lure is that LBO firms are buying highly profitable companies with consistent cash flows, levering up the balance sheet, and ultimately trading the business while covering the debt for multiples on its equity. The challenge with the model is that the equity of the LBO firm is not the senior security on the cap table. Clearly, the debt is senior. Every LBO investment is a bad quarter away, a tripped covenant away, or a bad economic cycle away from being under water from an equity perspective. That’s the reason so many LBOs of all different sizes and shapes have been written off completely during this down cycle. As it turns out, despite the perceived safety in leveraged buyouts, in reality, there is little room for error. The loss ratios in LBO portfolios are higher than one might think.
2. The upside potential of venture capital is exaggerated. By venture capital, I mean traditional early stage venture capital. Firstly, the large venture funds run into the law of large numbers – no matter how good you are, turning a good multiple on a large fund is hard especially when you have modest ownership levels in your portfolio. Secondly, traditional venture models justify their investments based on upside scenarios (i.e. swinging for the fences). The reality is the vast preponderance of venture-backed exits are at modest outcomes so often times the investment case is divorced from the reality of where exits tend to take place. That’s why venture capital has become more dependent on bubbles to make the math work. Thirdly, venture-backed companies often take multiple rounds of financing thereby diluting both the ownership and governance of the early investors. Finally, venture investments are often done at the very early stages of a business’ lifecycle where the risks are high and little is proven. It’s a high risk asset class with moderate reward potential at the fund level.
3. So, why is growth equity such a great risk/reward in comparison? Growth equity doesn’t run into the problem that LBOs have being junior on the cap table to the debt. These are mostly non-levered equity only investments thereby making sure the investment is senior on the cap table. Growth equity investments are traditionally done in companies that haven’t taken prior institutional investment and don’t require future institutional investment. Therefore, the problem traditional venture firms have of diluted ownership and governance generally does not apply. In addition, growth investments are traditionally made at a point in time when strong financial growth is proven in the business – this removes much of the early stage concept risk. Finally, growth equity investments are, to state the obvious, growth companies. So, they have tremendous upside potential, but the investment case is not dependent on the upside scenario happening like is often the case in venture.
There will be winners in all three asset classes for sure. And for full disclosure, Volition Capital is building its franchise in growth equity. Nonetheless, I’ve seen winners and losers in my career in all three asset classes, and in my opinion, the best risk-adjusted asset class of the bunch is growth equity.
The Tension Between An Optimistic CEO And A Conservative CFO
From what I can tell, in nearly every Volition portfolio company, the CEO is more optimistic than the CFO – and usually by a wide margin. Certainly, part of this structure is by design. But in reality, you just don’t find a lot of optimistic CFOs to hire, and a conservative CEO probably doesn’t inspire investment. So, there is some self selection far before we get involved.
But, there is a natural and necessary tension that exists when the CEO and CFO, with completely different risk orientations, have to report to a single board of directors.
- What if the CFO thinks the CEO is being way too optimistic on the budget?
- What if the CEO thinks the CFO isn’t selling enough to get investors interested?
- What if the Board is holding the CFO accountable for spending, but the CEO is pushing hard on the accelerator?
- What if the CFO disagrees with the CEO in front of the Board, is that considered disloyal and a career limiting move?
- What if the CFO drags down the energy inside the company by always focusing on the downside?
- What if the CEO’s financing plan presumes everything is going to go right, when the CFO doesn’t think that will take place?
These types of questions and dynamics take place in many of the companies we’re involved with. There aren’t easy answers, but there are some principles involved to help make things work.
1. There has to be mutual respect between the CEO and CFO.
Young companies need optimistic CEOs. Every young company will have its dark days when you wonder if things will work. Every young company has to believe it can defy the odds, and build something great from nothing. Employees who work at young companies trade off cash compensation for equity – they only do this if they believe their equity is worth something. Someone needs to inspire them with the vision of the company – with the upside. In fact, in many ways, the optimism of the CEO for a young company is the spirit of the company. It’s absolutely necessary. You never do great things if you don’t believe you are great.
Good businesses need conservative CFOs. Optimism doesn’t meet payroll. Optimism doesn’t make the financial covenants on debt. Weak balance sheets aren’t made up by optimism. Every company has a downside scenario, and someone needs to think about it to prevent it from happening. Someone needs to point out the warts, so they can be fixed. If great ideas don’t translate into numbers, then it’s a great idea that doesn’t work. A CFOs conservatism is critical to a success of the business. Good CEO/CFO combinations appreciate the different perspectives that are brought to the table. Not only do they appreciate it, they insist on it.
2. The CEO needs to support the CFO having a direct and structured line to the Board.
It’s presumed that the CEO has a direct and regular line to the Board. But, that does not negate the need for CFOs to have a structured channel to the Board. Why? The CFO has a unique and personal fiduciary obligation to the shareholders. The CFO uniquely reports to the CEO and to the Board. I often think of the CFO as the “CEO of the finances” – and to execute that responsibility, board access is necessary – and expected by the Board. For some CEOs, they are comfortable with the CFO talking with the Board on an as-needed basis. Certain CEOs find this threatening. If that’s the case, a structured email or call, on a predetermined interval, is appropriate. I often receive an email directly from the CFOs of my companies after the month-end to report financials. This should be used to raise any issues worth noting. The structure of it should give the CEO confidence that the CFO is not lurking behind his/her back talking to the Board, which is counterproductive.
3. The CFO needs to be loyal to the CEO.
Loyalty doesn’t mean agreement. Loyalty doesn’t mean blindly following every course – e.g. a loyal friend doesn’t let their friend drive their car 100 mph off a cliff. Loyalty, in this case, simply means openness and honesty in all circumstances. Loyalty means always trying to make the company and the CEO successful.
The dynamic between a CEO and CFO is a delicate balance between people often with very different DNA. It’s a necessary balance that if managed well is often the basis for very successful companies. I’d appreciate other ideas on how others have made this work as it’s clearly an art, not a science.
Single Unit Value Is More Important Than Growth
The pressure for revenue growth has hurt a lot of young companies. It starts with an entrepreneur representing a growth story to an investor. Then the investor represents the growth story to his firm to gain support for the investment. And then the investment happens. Then the company takes the investment, invests in sales and marketing, and the company grows. Everyone is committed to growth, gets used to growth, and expects more growth in the future.
This is all well and good – if and only if – the single unit value is there, especially in mass market companies that service consumers or small/medium size businesses. There are two aspects to single unit value: (1) single unit satisfaction and (2) single unit economics.
Single Unit Satisfaction
The fundamental question is if you take a single customer, do they derive sufficient value from using your product or service?
- For a consumer social web service, maybe the key value measure is whether a user will tell two friends about it.
- For a SAAS company, the key value measure might be renewal.
- For a transactional company, the key value measure might be a repeat transaction rate.
This is not intended to be rocket science. Companies need to focus on a single customer, that is in their target market, and make sure they can deliver sufficient value to that customer to drive the right behaviors (referral, renewal, repeat usage). It goes without saying, trying to build a great business on the backs of customers that don’t perceive sufficient value in your product or service is impossible.
Single Unit Economics
The fundamental question now is if you now take that satisfied customer, can you make money based on your business model? Companies need to fully burden the cost of servicing a single customer to understand single unit profitability. This includes marketing, sales, cost of goods, capex, servicing, overhead, etc. The question therein is whether that single satisfied customer is profitable given all that it costs to acquire and service them?
- Many online video sites excelled at single unit satisfaction, but they got hammered on the economics because they didn’t generate enough ad revenue to cover a single cost component such as bandwidth to deliver the videos.
- Some mass market companies that can cover sales and marketing costs, get caught up in the cost to service customers on the back-end. The old local food delivery service, Kozmo.com had this issue.
- Infrastructure oriented companies, like wireless service providers, that have up front capex to deploy new customers, need to be crystal clear on lifetime value of customers – to cover capex. Otherwise growth is in fact detrimental.
- It goes without saying that if your selling your product for less than what it costs you – some of the early online retailers like MotherNature.com faced this. You can’t make up negative gross margins with volume.
Sometimes the pressure for growth obscures the importance of single unit value. In reality, there is no reason to invest for growth if the single unit value is not there. It’s more prudent to wait, get customer satisfaction and economics nailed right, and then push for growth. Pushing for growth prematurely at best will waste money unnecessarily, and at worst, will accelerate the demise of the company. On the flip side, if the economics and value are there, rather than tiptoe forward on the growth plans, it’s prudent to invest aggressively for growth. That’s when great companies are built, but it often requires patience in the early days.
Volition Capital And Cue Ball Capital Lead Stylesight Financing
We are very pleased to partner with Cue Ball Capital on a $10 million investment in Stylesight which was announced yesterday. Stylesight is the leading style information service and SAAS platform for the global design ecosystem. Thousands of retailers, brands and manufacturers are using the subscription service to be inspired by real-time design images from around the world and leverage that content into a web-based design process.
Want to know what kind of black, above knee, modern black skirts women were wearing on the streets of Sao Paolo – yesterday? Stylesight can tell you. Want to take those high resolution images, zoom in on the stitching, and create a story board for the front end of your Spring lineup design process? Stylesight can do that for you as well. In millions of different derivations, Stylesight brings the world of design to your fingertips in real-time. As their tag line goes: “Images that Inspire. Tools to Get the Job Done.”
What I love about Stylesight is when prospects see the product – there is such a huge “wow” factor. I was at a launch party for their latest release – and the expressions of amazement on prospects faces tells it all. The conversion rate to customer after seeing the demo is pretty staggering. With customers that love the service and a wide open market, Stylesight is becoming the industry standard, which is why they the grew so aggressively through a terrible economy last year. Stylesight’s ambition for global leadership are firmly in place, and we’re pleased to support them.
We are also very pleased to partner with Cue Ball Capital for the first time. It is a privilege to be working with Tony Tjan and Dick Harrington at Cue Ball. I personally view Cue Ball as a rising star in the Boston venture capital scene. They have a wealth of knowledge on recurring revenue, information services businesses – and the Cue Ball Collective is for real. There was substantial interest from different financial parties for this round, but Cue Ball stood above the rest given their expertise, value and enthusiasm.
Stylesight also happens to be the type of company we love at Volition. When we first came across Stylesight – it was and is a high growth, founder-owned, principally bootstrapped company with a strong recurring revenue base and a diversified, very satisfied customer base. Given our investment, it is no longer a bootstrapped company, but we all expect that the capital and partnership will lead to a much larger end outcome for all involved.
Exciting times for Stylesight, Cue Ball and Volition. Onwards and upwards.
The Money Behind The Money
Where does the money come from that private equity (venture capital, growth equity and buyout) firms invest? It might indirectly come from you. Key constituents include the likes of government employees, employees of large corporations, trade organizations (e.g. teachers) and wealthy families. Here’s the quick synopsis:
Wealthy Families / Foundations. The original investors in venture capital firms were wealthy families. The Phipps family was behind Bessemer. The Rockefeller family was behind Venrock. These wealthy families often invest out of vehicles like family offices or foundations. From those roots, many wealthy families have played impactful roles in backing some of the best names in private equity. As the asset class has became more known and attractive, the sources of capital grew to include more institutional sources. But, behind every institution are regular people.
Endowments. One of the most aggressive investors in venture capital has historically been school endowments. When you make that annual class gift to your college, if you designate it for the endowment, some of your gift just might be put into various venture capital and buyout firms. Typically, universities are charged to protect your endowment gift, so they invest it, and use the returns generated from the investment to fund various school initiatives. Major universities like Harvard, Yale, Stanford, MIT, etc. have been big proponents of investing some of that endowment principal into private equity firms.
Pension Funds. Another prominent investor in venture capital has been corporate and public pension plans. Pension plans (of the defined benefit variety) are just another type of retirement plan used by state governments, labor/trade unions, and large corporations. As you work at a company or state government and thereby accrue pension benefits, the company or organization funds a pension account based on actuarial models tied to its potential pension payout obligations. A portion of these funds are often allocated to the private equity asset class. Major states investing in this asset class include New York, New Jersey, California, Oregon, etc. Major corporations like AT&T, General Motors, etc. have also been active investors.
Fund of Funds. Many foundations, endowments, and pension funds lack the capacity or resources to evaluate and monitor different private equity firms. Hence, the fund of funds industry has sprung up to pool capital from these sources into funds and then invest on their behalf. Unlike the other sources of capital, fund of funds have to raise their capital from third party sources, just like the firms that they invest in.
So, if you follow the money through, your child’s college financial aid package or your pension plan – might be tied to a couple engineers working on some project in Silicon Valley or tied to the big buyout you read about in the Wall Street Journal.
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