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Even startups on tight budgets can maximize their marketing impact
Search engine optimization, PR, paid marketing, emails, social — marketing and communications is crowded with techniques, channels, solutions and acronyms. It’s little wonder that many startups strapped for time and money find defining and executing a sustainable marketing campaign a daunting prospect.
The sheer number of options makes it difficult to determine an effective approach, and my view is that this complexity often obscures the obvious answer: A startup’s best marketing asset is its story. The knowledge and expertise of its team, together with the why and the how of its offering provides the most compelling content.
Leveraging this material with best practice techniques enables any startup, no matter how limited its budget, to run an effective marketing campaign.
Many startups make the mistake of choosing systems and employing procedures to solve the immediate needs of the department that requires them.
I know this approach works, because this is exactly what I did with my co-founder Alex Feiglstorfer when we set up Storyblok. To be clear, we are developers not marketers. However, our previous experience building CMS systems taught us that the main driver of organic engagement for most businesses was customer conversations around content.
Specifically, sharing experiences, expertise and what we learned. We had committed nearly all of our available cash to developing our product, so we knew that the only way to market Storyblok was to do it all ourselves.
As a result, we focused solely on problem-solving content. This took the form of tutorials on web development and opinion pieces on headless CMS and other topics within our areas of expertise. The trick was that what we published wasn’t made just for marketing, it was based on our own internal documentation of problems we encountered as we developed our product. In essence, we were “learning in public.” Through this approach we were able to acquire thousands of customers in our first year.
Retelling this story isn’t to blow my own trumpet, it’s to make clear that you don’t have to be a marketer by training or commit a huge amount of time and resources to successfully market your startup. So, how do you get started?
Getting your structure and technology right
Although there’s no one-size-fits-all approach to how you organize your startup’s marketing function, there are some basic principles that apply in nearly every situation. A recent survey of 400+ executives from CMS Wire helpfully identified the following factors as the “top digital customer experience challenges” for businesses:
- Limited budget/resources.
- Siloed systems and fragmented customer data.
- Limited cross-department alignment/collaboration.
- Outdated/limited technology, operations or processes.
- Lack of in-house expertise/skills.
Challenges two to four are the pitfalls that we can focus on avoiding. They are directly related to how a startup produces, organizes and distributes its content.
With regard to the siloing of systems and fragmentation of customer data, the overriding goal is to ensure all your systems are integrated and speak to one another. In practice, this means that the data gathered in different departments — whether its feedback from sales, engagement on your website, customer service responses or product development information — is collected in a uniform and methodical manner and is readily accessible across the business.
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Advanced tax strategies for startup founders
As an entrepreneur, you started your business to create value, both in what you deliver to your customers and what you build for yourself. You have a lot going on, but if building personal wealth matters to you, the assets you’re creating deserve your attention.
You can implement numerous advanced planning strategies to minimize capital gains tax, reduce future estate tax and increase asset protection from creditors and lawsuits. Capital gains tax can reduce your gains by up to 35%, and estate taxes can cost up to 50% on assets you leave to your heirs. Careful planning can minimize your exposure and actually save you millions.
Smart founders and early employees should closely examine their equity ownership, even in the early stages of their company’s life cycle. Different strategies should be used at different times and for different reasons. The following are a few key considerations when determining what, if any, advanced strategies you might consider:
- Your company’s life cycle — early, mid or late stage.
- The value of your shares — what they are worth now, what you expect them to be worth in the future and when.
- Your own circumstances and goals — what you need now, and what you may need in the future.
Some additional items to consider include issues related to qualified small business stock (QSBS), gift and estate taxes, state and local income taxes, liquidity, asset protection, and whether you and your family will retain control and manage the assets over time.
Smart founders and early employees should closely examine their equity ownership, even in the early stages of their company’s life cycle.
Here are some advanced equity planning strategies that you can implement at different stages of your company life cycle to reduce tax and optimize wealth for you and your family.
Irrevocable nongrantor trust
QSBS allows you to exclude tax on $10 million of capital gains (tax of up to 35%) upon an exit/sale. This is a benefit every individual and some trusts have. There is significant opportunity to multiply the QSBS tax exclusion well beyond $10 million.
The founder can gift QSBS eligible stock to an irrevocable nongrantor trust, let’s say for the benefit of a child, so that the trust will qualify for its own $10 million exclusion. The founder owning the shares would be the grantor in this case. Typically, these trusts are set up for children or unborn children. It is important to note that the founder/grantor will have to gift the shares to accomplish this, because gifted shares will retain the QSBS eligibility. If the shares are sold into the trust, the shares lose QSBS status.
Image Credits: Peyton Carr
In addition to the savings on federal taxes, founders may also save on state taxes. State tax can be avoided if the trust is structured properly and set up in a tax-exempt state like Delaware or Nevada. Otherwise, even if the trust is subject to state tax, some states, like New York, conform and follow the federal tax treatment of the QSBS rules, while others, like California, do not. For example, if you are a New York state resident, you will also avoid the 8.82% state tax, which amounts to another $2.6 million in tax savings if applied to the example above.
This brings the total tax savings to almost $10 million, which is material in the context of a $40 million gain. Notably, California does not conform, but California residents can still capture the state tax savings if their trust is structured properly and in a state like Delaware or Nevada.
Currently, each person has a limited lifetime gift tax exemption, and any gifted amount beyond this will generate up to a 40% gift tax that has to be paid. Because of this, there is a trade-off between gifting the shares early while the company valuation is low and using less of your gift tax exemption versus gifting the shares later and using more of the lifetime gift exemption.
The reason to wait is that it takes time, energy and money to set up these trusts, so ideally, you are using your lifetime gift exemption and trust creation costs to capture a benefit that will be realized. However, not every company has a successful exit, so it is sometimes better to wait until there is a certain degree of confidence that the benefit will be realized.
Parent-seeded trust
One way for the founder to plan for future generations while minimizing estate taxes and high state taxes is through a parent-seeded trust. This trust is created by the founder’s parents, with the founder as the beneficiary. Then the founder can sell the shares to this trust — it doesn’t involve the use of any lifetime gift exemption and eliminates any gift tax, but it also disqualifies the ability to claim QSBS.
The benefit is that all the future appreciation of the asset is transferred out of the founder’s and the parent’s estate and is not subject to potential estate taxes in the future. The trust can be located in a tax-exempt state such as Delaware or Nevada to also eliminate home state-level taxes. This can translate up to 10% in state-level tax savings. The trustee, an individual selected by the founder, can make distributions to the founder as a beneficiary if desired.
Further, this trust can be used for the benefit of multiple generations. Distributions can be made at the discretion of the trustee, and this skips the estate tax liability as assets are passed from generation to generation.
Grantor retained annuity trust (GRAT)
This strategy enables the founder to minimize their estate tax exposure by transferring wealth outside of their estate, specifically without using any lifetime gift exemption or being subject to gift tax. It’s particularly helpful when an individual has used up all their lifetime gift tax exemption. This is a powerful strategy for very large “unicorn” positions to reduce a founder’s future gift/estate tax exposure.
For the GRAT, the founder (grantor) transfers assets into the GRAT and gets back a stream of annuity payments. The IRS 7520 rate, currently very low, is a factor in calculating these annuity payments. If the assets transferred into the trust grow faster than the IRS 7520 rate, there will be an excess remainder amount in GRAT after all the annuity payments are paid back to the founder (grantor).
This remainder amount will be excluded from the founder’s estate and can transfer to beneficiaries or remain in the trust estate tax-free. Over time, this remainder amount can be multiples of the initial contributed value. If you have company stock that you expect will pop in value, it can be very beneficial to transfer those shares into a GRAT and have the pop occur inside the trust.
This way, you can transfer all the upside gift and estate tax-free out of your estate and to your beneficiaries. Additionally, because this trust is structured as a grantor trust, the founder can pay the taxes incurred by the trust, making the strategy even more powerful.
One thing to note is that the grantor must survive the GRAT’s term for the strategy to work. If the grantor dies before the end of the term, the strategy unravels and some or all the assets remain in his estate as if the strategy never existed.
Intentionally defective grantor trust (IDGT)
This is similar to the GRAT in that it also enables the founder to minimize their estate tax exposure by transferring wealth outside of their estate, but has some key differences. The grantor must “seed” the trust by gifting 10% of the asset value intended to be transferred, so this approach requires the use of some lifetime gift exemption or gift tax.
The remaining 90% of the value to be transferred is sold to the trust in exchange for a promissory note. This sale is not taxable for income tax or QSBS purposes. The main benefits are that instead of receiving annuity payments back, which requires larger payments, the grantor transfers assets into the trust and can receive an interest-only note. The payments received are far lower because it is interest-only (rather than an annuity).
Image Credits: Peyton Carr
Another key distinction is that the IDGT strategy has more flexibility than the GRAT and can be generation-skipping.
If the goal is to avoid generation-skipping transfer tax (GSTT), the IDGT is superior to the GRAT, because assets are measured for GSTT purposes when they are contributed to the trust prior to appreciation rather than being measured at the end of the term for a GRAT after the assets have appreciated.
The bottom line
Depending on a founder’s situation and goals, we may use some combination of the above strategies or others altogether. Many of these strategies are most effective when planning in advance; waiting until after the fact will limit the benefits you can extract.
When considering strategies for protecting wealth and minimizing taxes as it relates to your company stock, there’s a lot to take into account — the above is only a summary. We recommend you seek proper counsel and choose wealth transfer and tax savings strategies based on your unique situation and individual appetite for complexity.
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Is there a creed in venture capital?
How should venture capitalists and corporate innovators assess Din Djarin, the protagonist of The Mandalorian? He’s introduced as a bounty hunter, a mercenary vocation in the Star Wars mythos that has been reserved primarily for villains.
One of the most interesting aspects of Jon Favreau’s show is how Din Djarin wrestles with the orthodoxy of his Mandalorian beliefs. His insistence on honor makes the character an appealing hero, and his character’s growth is demonstrated by when he chooses to be flexible versus when he holds fast to the rules he believes.
Although “This is the way” emerged as the show’s quotable soundbite, there is another line that’s more relevant to venture capital and corporate innovation: “You’re changing the deal.” Din Djarin uses this phrase to spar with adversaries who try to advance their objectives by disregarding clearly understood agreements.
Enforcement is so unusual in the world of startups that I consider it a mostly dead-end path.
Of course, terms change in venture capital and entrepreneurship all the time, with investors and entrepreneurs finding themselves in Din Djarin’s position.
This challenge is built into the very structure of venture capital fund raising, in which a Series A financing is usually followed by Series B, and then Series C, and each of these transactions frequently adds, subtracts, and modifies terms, changing the deal from the perspective of the startup and existing investors.
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Software subscriptions are eating the world: Solving billing and cash flow woes simultaneously
Although recurring revenue businesses have been around for a long time, the trend toward a subscription economy has escalated rapidly in the last few years. IDC expects that by 2022, 53% of all software revenue will be purchased with a subscription model. Even the car subscription market is set to grow by 71% by 2022.
Many types of businesses are looking for ways to earn recurring revenue — and it has gone beyond business-to-consumer companies like Netflix and Dollar Shave Club. Business-to-business companies are also joining in, even those with products that last a long time. For instance, elevator-maker Otis offers Otis ONE, a subscription-connected elevator solution that offers predictive maintenance insights.
Subscription billing options should make it easy to manage all types of subscriptions, including integrating analytics to provide a more complete picture of the subscriptions landscape.
Promising, but there are pitfalls
Subscription business models are attractive, but there are two major pitfalls. At the top of the list is payment. Regardless of company size, there’s an ongoing need to convince customers to sign up long term.
Companies also need to accommodate new payment methods and ensure ongoing compliance with interstate and international tax laws. As a result, the payment process can quickly become painful.
As any company with recurring revenue scales, it becomes increasingly challenging to manage subscriptions, especially with homegrown systems, changing subscription offers and the complexities of converting customers from free trials to paid subscriptions. Subscription billing options should make it easy to manage all types of subscriptions, including integrating analytics to provide a more complete picture of the subscriptions landscape.
Businesses also have to keep in mind that every time they add more product categories or expand into new geographies, they need to tack on extra software code to change their operations and stay sales-tax-compliant. As they expand globally, this can become an obstacle to rapid growth and flexibility.
To keep the company focused and maintain growth without having to expend resources, subscription businesses need a specialized billing system so they can focus on customer acquisition and revenue growth rather than staying on top of billing complexity.
The CAC payback gap constrains growth
The second issue: How do businesses cover the funding gap between when customers sign up and when they pay? In the subscription economy, companies that would previously receive a customer’s payments all at once now earn revenue spread across a monthly or quarterly subscription fee.
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Dear Sophie: Does it make sense to sponsor immigrant talent to work remotely?
Here’s another edition of “Dear Sophie,” the advice column that answers immigration-related questions about working at technology companies.
“Your questions are vital to the spread of knowledge that allows people all over the world to rise above borders and pursue their dreams,” says Sophie Alcorn, a Silicon Valley immigration attorney. “Whether you’re in people ops, a founder or seeking a job in Silicon Valley, I would love to answer your questions in my next column.”
Extra Crunch members receive access to weekly “Dear Sophie” columns; use promo code ALCORN to purchase a one- or two-year subscription for 50% off.
Dear Sophie,
My startup is in big-time hiring mode. All of our employees are currently working remotely and will likely continue to do so for the foreseeable future — even after the pandemic ends. We are considering individuals who are living outside of the U.S. for a few of the positions we are looking to fill.
Does it make sense to sponsor them for a visa to work remotely from somewhere in the United States?
— Selective in Silicon Valley
Dear Selective,
Thanks for reaching out — I’m always happy to hear about another fast-growing startup! If some of your leadership team is also abroad, check out the recent announcement about the new International Entrepreneur Parole program for founders.
It can make great business sense to sponsor international talent for a visa even if the position involves working remotely from a location inside the U.S. With the right legal setup, your team can work from home in Silicon Valley, nearby in California, or in another state where the cost of living is not quite as high. We’ve received this question from many employers, and many of our clients are proceeding with sponsoring international talent with visas and green cards for work-from-home positions.
I discussed this and other issues related to recruiting and work trends with Katie Lampert for my podcast. Lampert leads the talent acquisition and infrastructure group at General Catalyst, a VC firm that invests in seed to growth-stage startups in the U.S. and abroad. She advises companies in the General Catalyst portfolio on all things talent-related, including establishing company culture, creating a company’s infrastructure for recruiting and retaining talent, and planning for the future.
“Recruiting is going to be more global, which is exciting,” Lampert said during our discussion. “This will have a really positive effect on cultural diversity in the workforce. Studies show that a more diverse workforce leads to greater financial success.”
In fact, the latest McKinsey & Co. report on diversity, “Diversity wins: How inclusion matters,” found that companies with ethnically and culturally diverse executive teams are 36% more likely to achieve above-average profitability than companies with less diverse teams. McKinsey has issued three reports on diversity, and with each subsequent report, the business case for ethnic and cultural diversity and gender diversity in corporate leadership has grown stronger.
In addition to boosting profitability, bringing international talent to the United States to join your startup offers a host of other benefits as well.
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The truth about SDK integrations and their impact on developers
The digital media industry often talks about how much influence, dominance and power entities like Google and Facebook have. Generally, the focus is on the vast troves of data and audience reach these companies tout. However, there’s more beneath the surface that strengthens the grip these companies have on both app developers and publishers alike.
In reality, software development kit (SDK) integrations are a critical component of why these monolith companies have such a prominent presence. For reference, an SDK is a set of software development tools, libraries, code samples, processes and guides that help developers create or enhance the apps they’re building.
Through a digital marketing lens, SDKs provide in-app analytics, insights on campaign testing, attribution information, location details, monetization capabilities and more.
Through a digital marketing lens, SDKs provide in-app analytics, insights on campaign testing, attribution information, location details, monetization capabilities and more. In the case of companies like Google and Facebook, their ability to provide these insights dovetails with their data and reach.
While that does deliver useful capabilities to developers and publishers alike, it also perpetuates the factors contributing to their perceived monopolistic status — and the detriments a lack of competition fosters.
Almost all (90%) ad-monetized Android apps have Google’s Admob SDK integrated, data from Statista showed. Additionally, the Facebook Audience Network SDK is present in 19% of all global Android apps utilizing mobile ads. It’s worth noting that the large majority of alternative “leading” advertising SDKs outside these two players are used less than 13% of the time in Android apps.
As the app ecosystem rapidly expands beyond the borders of mobile, app developers and publishers would benefit immensely from identifying economical and secure ways of adopting more SDKs.
The state of SDK adoption
While there are many SDKs available in the market today, a few key factors contribute to Google and Facebook’s overall dominance. The most basic is around the respective organizations’ reach and industry notoriety. However, a larger component here is the lack of resources and time app developers have.
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The energy ecosystem should move to make the ‘energy internet’ a reality
As vice president of Innovation at National Grid Partners, I’m responsible for developing initiatives that not only benefit National Grid’s current business but also have the potential to become stand-alone businesses. So I obviously have strong views about the future of the energy industry.
But I don’t have a crystal ball; no one does. To be a good steward of our innovation portfolio, my job isn’t to guess what the right “basket” is for our “eggs.” It’s to optimally allocate our finite eggs across multiple baskets with the greatest collective upside.
Put another way, global and regional trends make it clear that the Next Big Thing isn’t any single thing at all. Instead, the future is about open innovation and integration of elements across the entire energy supply chain. Only with such an open energy ecosystem can we adapt to the highly volatile — some might even say unpredictable — market conditions we face in the energy industry.
Just as the digital internet rewards innovation wherever it serves the market — whether you build a better app or design a cooler smartphone — so too will the energy internet offer greater opportunities across the energy supply chain.
I like to think of this open, innovation-enabling approach as the “energy internet,” and I believe it represents the most important opportunity in the energy sector today.
The internet analogy
Here’s why I find the concept of the energy internet helpful. Before the digital internet (a term I’m using here to encompass all the hardware, software and standards that comprise it), we had multiple silos of technology such as mainframes, PCs, databases, desktop applications and private networks.
As the digital internet evolved, however, the walls between these silos disappeared. You can now utilize any platform on the back end of your digital services, including mainframes, commodity server hardware and virtual machines in the cloud.
You can transport digital payloads across networks that connect to any customer, supplier or partner on the planet with whatever combination of speed, security, capacity and cost you deem most appropriate. That payload can be data, sound or video, and your endpoint can be a desktop browser, smartphone, IoT sensor, security camera or retail kiosk.
This mix-and-match internet created an open digital supply chain that has driven an epochal boom in online innovation. Entrepreneurs and inventors can focus on specific value propositions anywhere across that supply chain rather than having to continually reinvent the supply chain itself.
The energy sector must move in the same direction. We need to be able to treat our various generation modalities like server platforms. We need our transmission grids to be as accessible as our data networks, and we need to be able to deliver energy to any consumption endpoint just as flexibly. We need to encourage innovation at those endpoints, too — just as the tech sector did.
Just as the digital internet rewards innovation wherever it serves the market — whether you build a better app or design a cooler smartphone — so too will the energy internet offer greater opportunities across the energy supply chain.
The 5D future
So what is the energy internet? As a foundation, let’s start with a model that takes the existing industry talk of digitalization, decentralization and decarbonization a few steps further:
Digitalization: Innovation depends on information about demand, supply, efficiency, trends and events. That data must be accurate, complete, timely and sharable. Digitalization efforts such as IoE, open energy, and what many refer to as the “smart grid” are instrumental because they ensure innovators have the insights they need to continuously improve the physics, logistics and economics of energy delivery.
Decentralization: The internet changed the world in part because it took the power of computing out of a few centralized data centers and distributed it wherever it made sense. The energy internet will do likewise. Digitalization supports decentralization by letting assets be integrated into an open energy supply chain. But decentralization is much more than just the integration of existing assets — it’s the proliferation of new assets wherever they’re needed.
Decarbonization: Decarbonization is, of course, the whole point of the exercise. We must move to greener supply chains built on decentralized infrastructure that leverage energy supply everywhere to meet energy demand anywhere. The market is demanding it and regulators are requiring it. The energy internet is therefore more than just an investment opportunity — it’s an existential imperative.
Democratization: Much of the innovation associated with the internet arose from the fact that, in addition to decentralizing technology physically, it also democratized technology demographically. Democratization is about putting power (literally, in this case) into the hands of the people. Vastly increasing the number of minds and hands tackling the energy industry’s challenges will also accelerate innovation and enhance our ability to respond to market dynamics.
Diversity: As I asserted above, no one has a crystal ball. So anyone investing in innovation at scale should diversify — not just to mitigate risk and optimize returns, but as an enablement strategy. After all, if we truly believe the energy internet (or Grid 2.0, if you prefer that term) will require that all the elements of the energy supply chain work together, we must diversify our innovation initiatives across those elements to promote interoperability and integration.
That’s how the digital internet was built. Standards bodies played an important role, but those standards and their implementations were driven by industry players like Microsoft and Cisco — as well as top VCs — who ensured the ecosystem’s success by driving integration across the supply chain.
We must take the same approach with the energy internet. Those with the power and influence to do so must help ensure we aggressively advance integration across the energy supply chain as a whole, even as we improve the individual elements. To this end, National Grid last year kicked off a new industry group called the NextGrid Alliance, which includes senior executives from more than 60 utilities across the world.
Finally, we believe it’s essential to diversify thinking within the energy ecosystem as well. National Grid has sounded alarms about the serious underrepresentation of women in the energy industry and of female undergraduates in STEM programs. On the flip side, research by Deloitte has found diverse teams are 20% more innovative. More than 60% of my own team at NGP are women, and that breadth of perspective has helped National Grid capture powerful insights into companywide innovation efforts.
More winning, less predicting
The concept of the energy internet isn’t some abstract future ideal. We’re already seeing specific examples of how it will transform the market:
Green transnationalism: The energy internet is on its way to becoming as global as the digital internet. The U.K., for instance, is now receiving wind-generated power from Norway and Denmark. This ability to leverage decentralized energy supply across borders will have significant benefits for national economies and create new opportunities for energy arbitrage.
EV charging models: Pumping electricity isn’t like pumping gas, nor should it be. With the right combination of innovation in smart metering and fast-charging end-point design, the energy internet will create new opportunities at office buildings, residential complexes and other places where cars plus convenience can equal cash.
Disaster mitigation: Recent events in Texas have highlighted the negative consequences of not having an energy internet. Responsible utilities and government agencies must embrace digitization and interoperability to more effectively troubleshoot infrastructure and better safeguard communities.
These are just a few of the myriad ways in which an open, any-to-any energy internet will promote innovation, stimulate competition and generate big wins. No one can predict exactly what those big wins will be, but there will surely be many, and they will accrue to the benefit of all.
That’s why even without a crystal ball, we should all commit ourselves to digitalization, decentralization, decarbonization, democratization and diversity. In so doing, we’ll build the energy internet together, and enable a fair, affordable and clean energy future.
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SaaS companies can grow to $20M+ ARR by selling exclusively to developers
With more than 200,000 customers, a market cap of nearly $56 billion, and the recent acquisition of Segment for $3.2 billion, Twilio is a SaaS behemoth.
It’s hard to imagine companies like Twilio as anything but a giant. But everybody starts out small, and you can usually trace success back to key decisions made in the early days.
First, you need to have a product that developers can actually sign up for. This means ditching demos for real-time free trials or freemium tools.
For Twilio, a big differentiator was being one of the first technology-focused SaaS organizations that focused on empowering and building for the end user (which in their case is developers) with a self-service function. Another differentiator was, the executive team designed the organization to create tight feedback loops between sales and product with national roadshows, during which CEO Jeff Lawson frequently met with users.
Moreover, Twilio’s “secret sauce” per their S-1 is a developer-focused model and a strong belief in the future of software. They encourage developers to explore and innovate with Twilio’s flexible offering, which led to an incredible 155% net-dollar expansion rate at the time of the IPO.
Most importantly, Twilio put the product in the hands of teams before the sale happened, standing by to answer hard questions about how Twilio would fit into their infrastructure. This was pretty rare at the time — sales engineering resources aren’t cheap — and it was a strong differentiating factor. So much so that when the company went public, they were growing at 106% annually.
Twilio sells to developers at large enterprises by solving a problem that developers come up against regularly: Getting in touch with customers.
But as more successful public software companies emerge, it’s clear that Twilio’s secret sauce can and will be replicated.
Why traditional marketing doesn’t work on developers
Before I started looking at successful developer-focused businesses, I understood the developer-focused playbook to look a little like this:
- Don’t hire marketing (or sales, either). If you do, hire someone super experienced from an enterprise sales background. And then fire them within three to six months.
- Just hire someone who’s passionate about the product to “manage the community.” What is community management? Lots of swag. Cool meetups. Publish 1–2 articles as a stab at content (bonus points if they’re listicles). Oh, wait. How can we show the ROI here? Make the community manager do that until she quits. Repeat.
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To buy time for a failing startup, recreate the engineering process
In non-aerobatic fixed-wing aviation, spins are an emergency. If you don’t have spin recovery training, you can easily make things worse, dramatically increasing your chances of crashing. Despite the life-and-death consequences, licensed amateur pilots in the United States are not required to train for this. Uncontrolled spins don’t happen often enough to warrant the training.
Startups can enter the equivalent of a spin as well. My startup, Kolide, entered a dangerous spin in early 2018, only a year after our Series A fundraise. We had little traction and we were quickly burning through our sizable cash reserves. We were spinning out of control, certain to hit the ground in no time.
Kolide had a lot going for it that enabled me to recover the company, but by far the most important was that we recognized we were in a spin very early, and we had enough cash remaining (and therefore sufficient time) to execute a recovery plan.
All spins start with a stall — a reduction in lift when either the aircraft is flying too slowly or the nose is pointed too high. In Kolide’s case, we were doing both.
First, we raised too much money too fast. In order to justify the post-money valuation that came with the raise, we set unattainable goals. To make matters worse, we lacked the confidence in our product and strategy, so we developed our solution with hesitancy, underspending in critical areas. As a result, we were flying too steep and too slow. We stalled.
If a stall isn’t corrected promptly, a spin can develop. Flat spins are one of the worst. Once the flat spin starts, there are a number of techniques experienced pilots should perform to recover the aircraft. Nearly all of these techniques require a critical resource, altitude — or, put another way, time.
Just like amateur pilots, startup CEOs don’t receive spin recovery training. When Kolide was spinning out of control, the vast majority of the advice I received was to cut our losses and sell the company or return the money to the investors.
At the time, I didn’t find any promising examples of companies with these same problems successfully recovering; I found only smoldering wreckage. By February 2019, my co-founders departed.
Despite this tell-tale sign of imminent demise, I was ultimately able to recover and put us on track for a great fundraise. Here’s how I recreated the engineering process.
Buying time
Kolide had a lot going for it that enabled me to recover the company, but by far the most important was that we recognized we were in a spin very early, and we had enough cash remaining (and therefore sufficient time) to execute a recovery plan. Even waiting just a few more months would have likely changed the outcome.
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Beyond the fanfare and SEC warnings, SPACs are here to stay
The number of SPACs in the deep tech sector was skyrocketing, but a combination of increased SEC scrutiny and market forces over the past few weeks has slowed the pace of new SPAC transactions. The correction is an inevitable step on the path to mainstreaming SPACs as an alternative to IPOs, but it won’t cause them to go away. Instead, blank-check vehicles will evolve and will occupy a small and specialized — but important — part of the startup financing landscape.
I believe that SPAC financings can solve a major problem for all capital-intensive technology startups: the need for faster — and potentially cheaper — access to large amounts of capital to fund product development over multiple years.
The tsunami of SPAC financings sparked commentary from all corners of the capital markets community, from equity analysts and securities lawyers to VCs and fund managers — and even central bankers. That’s understandable, as more than $60 billion of SPAC deals have been announced since the beginning of 2020, plus $55 billion in PIPE capital, according to investment bank PJT Partners.
The views debated by finance experts often relate to the reasonableness of SPAC pricing and transaction structures, the alignment of incentives for stakeholders, and post-merger financial and stock price performance. But I’m not going to add another voice to the debate on the risk-reward calculus.
As the co-founder of a quantum computing software startup who worked in financial markets for two decades, I’d like to offer my perspective on two issues that I think my peers care more about: Can SPACs still solve the funding problem for capital-intensive, deep tech startups? And will they become a permanent financing option?
Keeping the lights on at deep tech startups
I believe that SPAC financings can solve a major problem for all capital-intensive technology startups: the need for faster — and potentially cheaper — access to large amounts of capital to fund product development over multiple years.
SPACs have created a limitless well of capital that deep tech startups are diving into. That’s because they are proving to be more attractive than other sources of financing, such as taking investments from later-stage VC funds or growth equity funds with finite fund sizes and specific investment themes.
The supply of growth capital from these vehicles has been astounding. In 2020, SPACs alone raised more than $83 billion via 248 IPOs, which is equal to a third of the total $300 billion raised by the entire global VC community. If the present rate of financings had continued, the annual amount of SPAC financings would have been on par with the total R&D expenditure of the U.S. government — roughly $130 billion to $150 billion.
This new supply of capital can let startups keep the lights on, helping them address a practical need while they develop products that may take a decade to field. Before SPACs, any startup that wanted to remain independent had to lurch from one round of VC financing to the next. That, as well as the intense IPO process, is a major time sink for management teams and distracts them from focusing on product development.
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