A series of appalling terrorist attacks. The UK vote to leave the EU. And the ongoing pantomime of American politics. The summer quiet season has been slow arriving this year. That has not stopped a regular supply of reading lists to fill the holiday hours. This list from Y Combinator is but one recent example.
Reading is one of life’s great pleasures. The act of losing oneself in a good book is a joy unto itself. The benefits of broadening the mind and engaging the soul accrue long after the covers have closed. Books can be a great way to learn new skills. Or educate yourself about any number of business topics. But those that live longest in the memory? The works where the writing raises questions and opens the mind to boundless possibilities.
So I offer a small selection of my own choices. It reflects my personal bias. More fact than fiction. A love of Africa. A fascination with the lessons of history. And a total absence of the 'how to' manual or the consultant led business theory. I hope you find something to enjoy.
Breathtaking simplicity. The most beautiful, advanced and complex ideas in science explained in 7 essays. Just 83 pages in total. Reading Rovelli’s book I felt as if the mysteries of space and time were within my grasp. General relativity, quantum mechanics and more. I wish I could describe and clarify any set of ideas in such elegant and concise prose.
And now I cheat. My second choice is two books. Heart of Darkness is the classic novel of the destruction evil wreaks on the mind and soul of man. Francis Ford Coppola adapted the idea for the brilliant movie Apocalypse now. In it he exposes the brutality of the Vietnam war using Conrad’s story and characters as the allegory.
I grew up with the idea of Vietnam as some sort of hell on earth. That example grossly underestimates the depths to which man’s inhumanity can sink. The true arena for Conrad was the Congo under the rule of the Belgian King Leopold. The business of extracting rubber from this vast, intractable jungle was a study in evil. The extreme point of colonialism, slavery and racism. The worst inflicted by Europeans on the African continent. King Leopold’s Ghost is an excoriating work of history. Detailing the circumstances and methods of this crime against humanity.
Read either of these books. They are both brilliant and illuminating in their own right. Strange but each author’s exposition of evil leaves you with an uplifting view of the human spirit.
Of all my selections, this is the book found most on other lists this year. It is as ambitious as Seven Brief Lessons On Physics. Its aim is to cover nothing less than the entire history of the human species. In the case of this book, history means natural history. The author has taken a naturalist’s view of human behaviour and development. The result raises more questions and insights than any book I have read for a long time. How can you not be inspired to think differently by questions like: “Did man domesticate wheat or did the crop tame man?"
At the end, the book feels a little unfinished but I guess the end of this story has not yet been told. I would not read this book for message. But for education and enlightenment it is hard to beat.
We are in the middle of a long period of memorialising the centenary of the First World War. Remembering the sacrifice of those who died at the Somme, Verdun and the rest is a solemn duty. Yet we dishonour those millions of the mouthless dead if we forget the lessons from that traumatic conflict.
Nothing brings those learnings into sharper focus than the peace treaties. The multiple diplomatic documents that brought the Great War to a formal end. It is well known that the seeds of World War 2 were sown in the great hall at Versailles. But do you realise the extent to which the troubles of the Middle East today were designed in the treaties of Sevres and Lausanne?
Make no mistake, this is a work of serious and heavyweight history. It recounts the politics and pressures of the peacemaking process in 1919. And illuminates many of the historic challenges the world has faced since. The author brings the characters of the conference and the important circumstances of the time to life in a brilliant and readable way. If you take the time and trouble, you will see the world in a different way by the end.
Despite the title this book is not really much to do with Africa. The Serengeti in the title is a bit of clickbait to draw the reader in. The purpose of the book is to explain the rules that govern the balance of ecosystems. Whether those be on the African plain or in a rockpool in the Pacific North West.
I have to make a further admission. This is not that well written. The prose is a bit tabloid journalist. The conclusions are drawn through lazy logic. Without proper explanation of the weaknesses in the propositions the author puts forward. Yet it does make you think. Since I read it early this year, I have been mulling over the application of these concepts to the world of business. Not everything works but that’s fine. It passes the test of raising interesting questions so worth a look.
My final choice, although little known outside of South Africa, is a genuine classic in my opinion. Through a series of stories, Rian Malan examines the character of the rainbow nation. He looks at the full spectrum of people and lives that make up the rainbow nation. The rational and explicable is in here. But much more is the unexplained. The way desperate circumstances, twisted traditions and the fragile working of human minds combine to create unexpected results.
Whether savage or tender, the author peers through multiple layers. The most successful war tribe in Africa. Intermingled with a huge nation of peaceful pastoralists. Together replacing an ancient hunter gatherer culture that reaches back to the earliest days of our race. All filtered through the experience of colonialism and apartheid. It is no wonder that the results defy the obvious. It takes a wonderful writer to bring such deep insights to life. And leave the reader wondering and wanting for more.
Whatever you choose to read, listen, learn and keep questioning.
A serial mega entrepreneur who overcame a tough start in life to become one of the world’s richest men bought a world leader in the highest of technology last week. You may have missed this story because it was painted in the red, white and blue of Brexit. Or cloaked in the fog and fudge of a nationalist industrial strategy.
Multi billion dollar deals for unique companies are like America’s Cup yachts. SoftBank's bid for ARM is a great example. It is a one off. A product of its time and circumstances for sure. But at the cutting edge. An example to learn from and a template for the future. Not a symbol of the present.
The mindset of a startup not a global corporation
Masayoshi Son is a second generation Korean immigrant to Japan. He grew up dirt poor in the distant South West of Japan. A background that is the definition of social and economic exclusion. And the antithesis of the conservative, corporate Samurai we typically associate with Japanese business. He built Softbank through his own entrepreneurial talent. If Son San was American or Chinese he would be one of the heroes of the startup world.
He has made his name and his fortune through a series of high profile investments in the internet and mobile sectors. His hallmark is a combination of Warren Buffet long termism, Steve Jobs vision and venture capital willingness to make big bets for great returns. SoftBank is an investment vehicle not a trading multi-national. The loose technology theme links together holdings in Sprint and Alibaba with Yahoo and Vodafone in Japan.
How does ARM enrich and invigorate this empire?
ARM is the leading designer and developer of microchips for smartphones and mobile devices. This is huge global business. The Cambridge group’s leads in both intellectual property and market position. These advantages will ensure strong revenues for many years. Attractive for sure. But the era of explosive growth in mobile device markets is over. Is the annuity enough to satisfy a risk taker and 30 year thinker like Mr Son?
This deal only adds up if we think about the future. IOT, virtual and augmented reality and artificial intelligence will all drive demand for microprocessors and storage chips. Buying ARM is a bet that the company can be a leader in these new markets.
Entrepreneurial logic not industrial strategy
And that means a wager on brain power. ARM does not make semiconductors. All its past, present and future value is wrapped up in research and development talent. Like any creative or service based firm, ARM’s assets walk out of the door at the end of every working day.
Seen in this light, SoftBank’s strategy to double the number of UK jobs becomes clearer. ARM can only maintain its lead by continuing investment in the best people carrying out the best research. Smart people are sensitive to the culture and support environment in which they operate. So doubling down on Cambridge as a science base makes complete sense.
This is my kind of protectionism. An overseas investor with a compelling strategic motive. Committed to keeping the UK at the bleeding edge of a vital technology. If you want to reference a recent deal, the Tata acquisition of Jaguar Land Rover is much more relevant than HP’s ill fated purchase of Autonomy. With the bonus that the ARM deal also gives a bunch of investment funds a big exit. And the opportunity to recycle some of that cash into exciting future opportunities.
An example for startups and entrepreneurs
That money will make no difference to the UK economy or the global technology industry. Unless the recipients raise their game in response to the ARM acquisition. One final unusual aspect of this transaction. Both parties offer inspirational lessons for entrepreneurs.
Rather than striving to fit the deal to today’s agenda, learn from these examples to build a better business for the future.
The Profitwell blog from Price Intelligence is often an interesting read. Rather than focus on outright promotion of their product, the team share the lessons learned from their customers. This bodes well for the future of that business. Listening to customers is a clear strong point. It also offers some genuine and surprising insights.
A couple of weeks ago Patrick turned his attention to SaaS benchmarks. The industry has developed accepted norms for certain numbers. Such as churn, expansion revenue and growth rate. These often quoted as essential thresholds to success for aspiring SaaS businesses to cross. Profit well also shows that they are all wrong. By big margins.
This is the first of a series so you may want to sign up for future updates. You might also want to pause for a second and think about the purpose and value of benchmarks as a species.
Who wants to be average?
By definition, benchmarks are an average of performance. Summed from a group of companies in an industry. Even the industry is defined by someone else. It may not be that close to the group of peers or competitors that you would choose.
This makes an interesting comparison but a terrible goal. Your ambition is to be a leader. The best product or business out there. Striving for average doesn’t cut it.
Best practice v innovation and disruption
Benchmarks are a window into the past. They are a report of historic performance. And the individual definitions are also relics. Reflections of existing business customs, methods and practices. SaaS startups are out to disrupt these worlds. To use innovation to challenge and overturn the established order. The very stuff of benchmarks is irrelevant to this agenda.
Are these the best things for your business to measure?
In a fast growing SaaS company there is no shortage of potential metrics. The leadership challenge is selecting and focusing on the most important numbers for your business. Benchmarks chosen and defined by an external agency are unlikely to be the top of this list.
External numbers of this type pose another risk. The right metrics are the voice of your customer turned into data. Benchmarks are the amalgam of the voice of other people’s customers. I know which set of numbers I would rather listen to.
How meaningful is SaaS benchmark data?
When you start out, benchmarks can be a useful to work out whether you idea is viable. You can use them as a rule of thumb estimate of profit potential for example.
Once you get beyond the back of an envelope stage, you need real data. It seems obvious that benchmarks can only be of value if they provide a reliable barometer. Profitwell shows that this is not the case for some common SaaS performance benchmarks. My experience tells me that more established data sources suffer the same problems.
Remember that public benchmarking companies like Gartner, Forrester and IDC depend on the companies benchmarked as a source of revenue. When I have worked with these companies, they aim to be impartial and act with integrity. Yet they are still vulnerable. It reminds me of a conversation I once had with the sales director of a big insurance company. “If you want to know how independent our resellers are” he said to me “watch what happens if we double the sales commission on a product."
In reality public benchmarking data is best used as a prop for sales pitches. Some people like that sort of thing I guess. As an operational tool, I am a serious sceptic. I recognise that estimating future performance or evaluating past performance is hard. More so in a startup.
That is because of deep inherent uncertainty. Risk is both the worst and the best aspect of making business decisions. Don’t be fooled into trying to mitigate it through false and irrelevant numbers. And well done to Profitwell for challenging the consensus.
Negative churn is a bird in the hand that is worth less than two in the bush. It has emerged as a preferred and even promoted SaaS metric over the past couple of years. Yet by offsetting two (or even three) numbers against each other it obscures rather than illuminates business performance. Why would a goal that offsets two conflicting numbers be the right metric for your SaaS business?
To be clear, negative churn arises from two things 1. On the plus side, the increase in revenue from existing customers. 2. On the other side the loss of revenue from customers who stop using your SaaS (or churn for short). Thus “Negative churn” is the result of a sum, not a number or phenomenon in its own right.
Setting this as a goal or celebrating it as an achievement creates an inherent conflict. Let’s start by examining the two faces of strife in turn.
Customer or revenue churn?
The trigger for writing this blog was a post by one of my favourite SaaS companies, ChartMogul. How do I calculate LTV when I have negative churn? digs into the exact problems that this “accomplishment” generates. And the first issue centres around that single word churn.
Churn arises when a customer stops paying for your SaaS. At this point you are already losing two things: a customer and a monthly or annual revenue receipt. For an SMB SaaS these two numbers may give a similar message. The flat pricing structure and similar base limit dependence on key customers. But if you are winning larger customers? Then the monetary value of the revenue lost may not be an accurate reflection of the number that churn.
Lincoln Murphy has explained this challenge well in SaaS churn: Measure customer or revenue retention. Lincoln believes the focus should be on the dollar value of retention. And he makes a strong case for the importance of this measure to SMB SaaS.
I think there is value in tracking both types of churn depending on your SaaS business model. For now, think about the messages that these two measures of churn could be sending:
Make no mistake, churn is an important metric for any SaaS business. David Skok outlines the importance of churn in this classic article. And he continues by describing the growth that results from so called negative churn. But all he is saying is that increasing revenue from existing accounts is a powerful growth lever.
Growing revenue from existing customers
Both upsell and account expansion are ugly and jargonistic English so let me drop them now. We are talking about selling more to your existing customers. Either by increasing the number of users a customer pays for. Or by raising the value of the services your SaaS provides to those users. Often the revenue added will be a bit of both.
Measuring this type of revenue communicates an entirely different type of message:
Growing revenue from your existing customer is a powerful growth mechanism. Tom Tunguz argues in favour of negative churn on this basis. But recognises at the end of this intelligent article that this does not give the whole picture
Two whites offset to make a black hole
The heart of the problem with negative churn is the combination of these two factors. Offsetting one against the other loses the messages that each is trying to send. Without offering any new value in return.
Sure, if churn turns negative it proves that your growth from existing customer is more than you lose from customers who cancel. So what? At the same time you could be missing:
Contrast this with LTV which also combines two measures. Revenue per customer and customer lifetime. Here both point in the same direction. And are supported by a common goal of better customer satisfaction and loyalty.
Sound maths doesn't mean a good answer
Maybe part of the reason this metric has been promoted is that both elements affect LTV. David Skok has demonstrated in LTV - DCF provides the answer how the sums can account for both factors in your LTV calculation. He has even thrown a discount factor.
There is nothing wrong with David’s maths. But LTV is a summary measure. Once you have it, you break it down if you want to find the areas to make improvements. And in that breakdown the factors in negative churn apply in different places.
The value part of LTV is based on average revenue per user user/ account (ARPA/ARPU). If you grow the revenue earned from accounts over time, this value will increase. A good thing and well worth managing. Revenue growth from existing customers is an important part of this mix.
Lifetime is the inverse of churn (1/ Churn %). If churn is a genuine negative this is mathematically impossible. So even in the Skok formula you need to use the customer churn rate. In other words lifetime needs to be as accurate a reflection as possible of how long a customer stays with your SaaS. Building longer term relationships with customers is also a great thing to manage. And that is where the other half of negative churn comes into play.
Focus on building a great business
Negative churn is not an accomplishment. It is not a real metric at all. It reminds me of Boris Johnson’s policy on cake. 100% pro having it and 100% pro eating it. Great fun but not that useful in the real world.
Tangling two things together means you could be missing what really matters. You risk looking in the wrong direction or misallocating your resources. Your business becomes more fragile. Because you narrow and obscure the voice of your customers.
Forget artificial metrics. Focus on growing revenue from your loyal customers. And on extending loyalty by helping customers get the benefits of your SaaS. Listen to separate, clear metrics and learn from everything you hear. Use this to give your teams the right objectives. And put resources where they will add the greatest value.
In the two posts I wrote before and straight after the UK EU referendum I offered the same advice to startups and established businesses alike. Focus on your strategy and priorities. Stay calm amid the turmoil and noise. This is in line with the Lean In view expressed by 58 of the UK’s top Tech entrepreneurs this week.
Since the result was announced there has been plenty of political and market confusion. Trade, investment, talent and foreign exchange are topics of heated debate. Yet the reality remains that leaving the EU will make a marginal difference to UK business. Your team, your customers and your suppliers. All count for much more than anything the UK Government or the EU choose to do.
So I thought it would be worth sharing some perspectives. Grounding the key issues in reality. And cutting out alarmism and hype.
Most of this is written from a startup point of view. But applies equally to any business. Instead of rushing headlong into change keep these points in mind.
Strategy and leadership - Keep your focus and priorities
There is a predictable flood of commentary and analysis on the implications of the EU vote for business. I have seen some pieces that suggest now is the time to review your strategy. For example in an otherwise sensible article After the Referendum Steve Turner recommends a review and update of your strategy and objectives.
I can’t agree with this point of view. Too much is unknown. Gather information. Listen to different points of view. But don’t make any hard decisions you don’t have to make. A change in strategy now is as likely to be wrong as right. Be patient and don’t rush off in a new direction when the road is shrouded by fog in all directions.
In opportunity the only constant is change
Change creates opportunity for business. Even the worst circumstances (war, revolution etc) are catalysts for the entrepreneurial spirit. The best way to seize the opportunities of change is innovation.
By their nature, startups are geared to this mode. The best course for an existing business is not to second guess existing strategy. It is to improve capacity for innovation. This means looking at culture. And assessing how you open up to new ideas.
Don't let FX damage your international ambitions
The biggest shift so far has been in currency markets. The pound has hit a 30 year low against the US dollar. Many people are advising that now is the time to address FX exposure. Remember:
Trade deals, single markets and the real world
Politicians and the media here in the UK obsess over national and supra national trade deals. At a macro level this matters. For any individual business it is a marginal factor. Because:
Do not allow the noise about trade treaties that will continue for years to come to distract you. If anything for a UK based business now is the time to step up plans for international growth. The currency offers a price advantage in key markets. Win customers now in European markets. And aim to build loyalty that survives any trade barriers.
And don’t forget the optimistic case for leaving the EU. Various leave campaigners presented a vision of the UK much more active in trade. Opening up to global markets in India, Africa and beyond. Left to our politicians this will remain a fantasy. Only positive business leadership can make this happen.
Prvacy, competition and regulation
There is also a possibility that the EU will put itself at a competitive disadvantage in digital. The current commissioner for competition, Margrethe Vestager, is well known for pursuing cases against Google and others.
Without the UK as a counter balance EU action against tech giants could intensify. (Acceleration doesn’t really happen in Brussels). A similar protectionist outlook could affect data privacy. And other important areas of regulation. The UK’s days as the tech capital of Europe may not be over.
The war for talent
I am not sure how war became a preferred metaphor in recruitment. Its an odd way to describe the challenge of finding and hiring the best people for your team. Nor does it help address the challenge that businesses in the UK may face. In particular if the country takes a strong anti immigration turn post leaving the EU.
I don’t have any simple answers. To combat this risk business leaders need to think as if throwing a welcome party not fighting a battle. So two thoughts:
But the EU gives startups a lot of money?
The financial mechanisms of the EU are opaque. The basic principle is that countries contribute amounts to the budget. Based on the size and success of their economies. This is then distributed through a number of funds and subsidies. At the end the richest countries redistribute money to the poorest. So Germany and the Uk are the biggest net payers.
But lots of people and businesses in the UK still benefit from the money that is distributed. Two areas are of significant interest to business. In particular startups and innovative companies. Business support provided through the European Regional Development Fund (ERDF) and R&D funding.
Once the UK leaves the EU, it will be open to the UK Government to spend this money in any way it chooses. Including the exact same use as the present arrangements. In the short term this will be the default option. For lack of time to think up anything else as much as any other reason.
Over time the UK is bound to diverge from the EU policy. This might be good, bad or indifferent to the various interests involved.
If you run a business that uses public funds, such as investment from Scottish Investment Bank or various grants awarded by Scottish Enterprise, then you need to do 2 things. Understand if any of this money originates from ERDF funds. (Hint: Most Scottish Enterprise funding does). And keep a close watch so that you can react to any policy changes in good time.
Plus ca change
We sit in the eye of the storm right now. When the tempest is at its fiercest good strategy, leadership and decisions matter. Not the ins and outs of resolving the EU situation.
The keys to success will be calm thinking and innovation. Make decisions based on the best opportunities for your business. Don’t wait for Government to open up new opportunities. But don’t rush to change for the sake of it either.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.