How to Accelerate Valuation Growth in Services Businesses

Private Equity firms that own professional services businesses have a challenge with growing valuations. In a services-based business it is hard to increase revenue without increasing headcount. Margins shrink as hiring, training, and retaining talent becomes progressively more difficult. Meanwhile, all of the company’s intellectual property is locked in the heads of employees, meaning that when the employees leave the building, so do the company’s assets. These factors keep exit multiples for service businesses low, often ten times lower than comparably-sized software companies.

Digital Transformation allows you to increase exit multiples.

  • Launch customer-facing products that grow revenue and margins
    • Create a premium product that increases the value of core services
    • Offer new value to remain competitive or even leap ahead of competitors
    • Generate high-margin revenue with exit multiples ten times higher than service revenue
  • Digitally enable employees to increase productivity and performance 
    • Embed the employees’ expertise in applications to ensure continuity
    • Make repetitive tasks faster and more accurate
    • Standardize and facilitate processes

But how? Some companies create innovation divisions… only to discover that the high-risk approach needed there is incompatible with the company’s failure-averse culture. Other companies buy into an enterprise platform just to learn they are costly, take years to generate results, and disrupt the core business.

The right answer for most services businesses is targeted digital solutions that solve pressing problems now. This approach lets you get wins on the board quickly, building momentum to effect larger and larger culture change to facilitate ever greater innovation & impact.

If you or someone you know is struggling with these issues, PixelEdge can help. Learn more.

Operationalize Your Startup

About The Workshop

Startups don’t die from laziness. They die from working really hard… on the wrong things.

You’ve launched your venture… now what? The financial lives of your team depends on you. When do you raise money? From who? On what terms? Is it time to hire or keep your burn low? Should you pivot to a new market or stay the course? The pressure to make the right decisions is intense. But you don’t have to do it alone. In this workshop you’ll learn and use practical tools that will give you confidence and guide you to better decisions as you build your company. This workshop is great for entrepreneurs who have generated revenue and are ready to expand their operations!

Prework (Due Before The Session)

  1. Read this article to learn about the VIRAL framework.
  2. Create a free entrepreneur account on the Abaca website.
  3. Do an initial VIRAL assessment of your company using Abaca’s tool. When you do it, pretend you are a cynical investor who demands extensive proof before they consider any milestone complete.
  4. Write down what the lowest-scoring, incomplete milestones are for your venture. If you are willing and time allows, we’ll talk about those milestones and what it will take for you to achieve them during the workshop.
Paul G. Silva Profile Picture (headshot) 2021.JPG

Your Instructor

Originally a computational physicist who spent many long nights at a particle accelerator, since 2000 Paul inspired thousands of people to innovate, help hundreds of startups launch, overseen investments in 50+ startups and held leadership positions in the national angel investor community.

Co-Founding Corporate Innovation Division

I am delighted to announce that I have joined forces with Ali Usman and the incredible team at PixelEdge. Ali and I have been friends for over a decade, mentoring countless entrepreneurs together. I’ve personally watched PixelEdge launch incredible products for startups and big companies alike. They launch on time, build right, and achieve product-market fit! 

My role is co-founder of the new Corporate Innovation division where we help mature, services-based businesses increase their valuations and impact by 5x through digital innovation. Our recent client is a billion-dollar sustainability consultancy where, in six months, we’ve launched four products to save lives, fight modern slavery, and mitigate global climate change. 

I mean… wow. This is the kind of impact you can have when you have a product studio like PixelEdge and a large company client with the resources and commitment to innovate to solve problems that matter. I am excited and honored by the opportunity to build out this new division of PixelEdge and help more companies embrace the power of innovation.

If you’d like to know more about our new corporate innovation offerings and this sounds at all interesting to you or someone you know, drop me a line and we’ll catch up.

A KPI for Corporate Innovation: The Valuation Index

Leaders of larger companies are under intense pressure to grow their valuation by hitting aggressive revenue, margin, and EBITDA targets. Acquirers pay a valuation premium on recurring, high-margin, and high-growth product revenue. However, the metrics most companies use (ROI) fail to capture the impact on valuation, causing leaders to make choices that slow their valuation growth. That’s where the Valuation Index can help.

A Quick Primer On Valuation

Valuation in this context is the dollar value an acquirer would pay to purchase a company. A simple approximation of valuation is a Multiple (M) of either Revenue (R) or EBITDA (E). M is a market-driven number determined by the “flavor” of the company’s income. Run-of-the-mill consultancies in stagnant sectors tend to get low multiples. Rapidly growing Software-as-a-Service (SaaS) startups have high multiples.

Valuation = R*M OR R*E

A better approximation of Valuation appreciates that a larger companies have many different Revenue (R) streams. For instance, a modern consultancy might have: SaaS (S), one-time fees for use of a software Tool (T), and Consulting (C). Each of these has their own Multiple (M).

Valuation = (RS*MS) + (RT*MT) + (RC*MC)

The Limitations of Standard ROI

Math formula: return/investment

Most Return On Investment (ROI) metrics are excellent for measuring an initiative’s impact on a company’s operations. Example: if a salesperson is expected to generate $1 million/year in sales and cost $100k in salary & benefits, the ROI would look to be about $1 million/$100k or 10x.

The challenge is this doesn’t take into account the desirability of that particular flavor of revenue to acquirers. If they sold $1 million of…

  • Widgets with a 10% profit margin, that would mean the salesperson was basically just paying for themselves. An acquirer would likely not value this at all.
  • Widgets with a high profit margin, but low revenue growth would have some value.
  • Widgets with high margin and rapid growth in sales would be of medium interest.
  • Subscriptions to a rapidly-growing software platform would be valued very highly indeed because they are high-margin and relatively predictable.

The Valuation Index

growth in valuation/cost to develop

The Valuation Index measures the impact on a company’s valuation for every dollar of investment. The formula applies market-driven Multiples (M) by the different types of Revenue (R).

  • SaaS (S): Recurring subscriptions for access to an application that are high-margin, require minimal labor, and generate predictable future income. Multiples tend to be high.
  • Tool Use (T): One-time payments for access to software during a project. This is also high-margin and requires low-labor. Multiples tend to be moderate.
  • Consulting (C): This is a catch-all for labor-intensive service revenue. Such revenue is low-margin and can only scale with increased headcount. This is hard, expensive, and offers diminishing returns. Multiples tend to be low.

Once you start applying this metric to competing initiatives, it can make decisions clearer.

  • Growing consulting/services, while often the thing a consultancy is most comfortable doing, generates the lowest score because it requires scaling up expensive, hard-to-recruit & retain talent.
  • Adding one-time payments for use of software during projects scores moderately well because the software requires little labor.
  • Creating subscription offerings that clients use before, during, and after a consulting engagement scores by far the highest because the company keeps on making money 24/7/365, usually for years with relatively little cost of sales or support.

Credits

The concepts outlined here were co-developed with Jeremie Spitzer.

Gratitude for Baer Tierkel, a mentor to many, now at rest

Baer Tierkel

The world lost Baer Tierkel last week at the age of 61. About 20 years ago I was a kid running my first startup and Baer was one of the early people to join our Board of Advisors. He came to every board meeting with deep insights and deeper belly laughs. I learned a great deal from that man that proved pivotal. The company eventually failed, but not before helping thousands of blind people around the world reconnect with friends and family in ways many had not thought possible. We couldn’t have done that without Baer’s help. He went on to help every student I sent his way, and continued mentoring me on each of my ventures.

I am deeply grateful that this wonderful man shared some of his life with me and my students.

He led a generous and joyful life. May we all live so.

He passed quietly in his bed, with his family close.

Rest in peace Baer.

Love,

-Your old mentee

A Canvas That Tells a Story: KISS Canvas (v4.0)

[This is part of a series on the KISS Canvas]

Why

30-page business plans are great for established businesses and terrible for startups that need to iterate quickly. 15+ years ago the Business Model Canvas (BMC) changed everything by giving us a 1-pager (or 4×3 foot poster) to help you quickly document and test the key hypothesis behind your business model. The BMC was a quantum leap forward.

However, my students and I often struggled with the structure of the canvas. While it was superior to a business plan it was relatively hard to read & use. You literally needed a map to show you how to read it – start here, jump to there, then jump down to here…

In a Nutshell

And so was born the KISS (Keep It Super Simple) Canvas. Each key stakeholder (payers, users, channel partners, etc.) gets their own row. Read the columns in each row from left to right and you’ll find the facts of the business model layed out in a logical narrative structure. In fact, it tells the story of your business, as you would in a good pitch. No map required.

At the highest level, this KISS canvas tells the following story just by reading from left to right: We help [key stakeholders] by providing [value proposition]. We find, earn, and retain their trust by [relationships]. This is economically sustainable because of [financials].

Example:

We help the blind and visually impaired by empowering them to connect with their fully sighted friends and family as equals. We find, earn, and retain their trust through word-of-mouth and strategic partnerships with nonprofits that serve the blind. This is economically sustainable because customers pay us an $8 monthly subscription.

And today, after 4 years of field testing, I’m proud to roll out version 4!

KISS Canvas v4.0

KISS Canvas (Lite)
  • Key Stakeholders – Who do you serve? Each stakeholder gets their own row to keep their information clear.
    • Type – Stakeholders tend to fall into predictable categories: the one who pays you, the one who uses the product, the one who connects you to the customer, etc. It is important to know each type’s needs.
    • PersonaDescribe the archetype that represents the key traits of this the stakeholder.
    • Pains – What problems do they have?
  • Value Proposition – What do you offer?
    • Benefits – What promises are you making to your customers?
    • Competitors – Who else is solving the problem?
    • Advantages – How are you superior at solving the problem?
  • Relationships – What kind of relationships will you have with each segment?
    • Find – How will you make people aware of your solution? This is often called marketing or promotion.
    • Convert – Once aware of you, what process will they go through to use/pay for your solution? This is often called sales.
    • Retain – Once someone is using your solution, how will you retain their loyalty?
  • Financials – How does the money (and value) flow?
    • Value Model – What value does each segment provide you in return for your product (money, attention, referrals, etc.)?
    • Pricing – How much do you charge?
    • Cost Structure –  What are the costs associated with running your venture?

Get Your Own (free!)

If you would like to use the KISS Canvas, you may do so completely for free as they are licensed under creative commons :).

Check out more KISS Canvas Content.

Deal Breakers for Investors

Caya and his team at Slidebean kindly interviewed me about often-invisible deal-killer for startup raising money: the investment-culture differences between varying groups of investors. Did you know if you are using a SAFE note that 2/3rds of angels in New England angel groups will categorically decline you? Learn more about this and about how to suss out the cultural norms of your investment community.

And full credit for my background art goes to my daughters :).

If you enjoy the video ad want more content like this, listen to the longer & more detailed podcast version of the interview.

A Tool for Consistent and Sustainable Startup Growth

This is a repost from the Launch413 blog

Effective Tools Used By Launch413: A Case Study

When we created Launch413 in 2018, we had no idea what was just around the corner. We already knew entrepreneurs were one of the best ways to create prosperity in our communities and we knew how to help them. We also knew entrepreneurs were one of the most powerful forces for good in the world. Three years later, we still consider ourselves privileged and honored to help other entrepreneurs create jobs, innovations, and prosperity.

Startups need tools and advisors to help them stay on track, do the right things at the right time, and maintain momentum. At Launch413, we deeply believe our tools should be sustainable and our advisors should be impactful.

ApprentiScope, a Launch413 Portfolio Company

ApprentiScope is a software company with a vision to revolutionize the world of apprenticeship programs. In May of 2019, Founder Will Lippolis took the leap to begin running the company full time, and four months later had two paying customers and a robust customer feedback loop — a good start. He was measuring revenue, customer success and product market fit. Things were going well, but his ambition was to make millions of people’s lives easier. To scale his company, he understood that he would need more partners and tools.

The VIRAL Scorecard – A Roadmap

Humble by nature, Will began looking for experienced coaches that would be a good fit for him and for ApprentiScope. He discovered Launch413 and two of its advisors, Paul Silva and Rick Plaut, introduced him to one of their favorite tools, the VIRAL Scorecard, originally developed by Village Capital. Simply put, the VIRAL Scorecard identifies where a company is situated in specific categories key to its future success, including the strength of its team, its market penetration, and scaling. Working together, Will, Paul, and Rick determined where ApprentiScope fell in each of the eight Scorecard categories. The exercise produced clarity about the areas Will needed to focus on. “Having a baseline of what needed to be worked on from a holistic point of view was of immediate value,” said Will.

Their analysis of the VIRAL Scorecard indicated that ApprentiScope needed to work on the business model and scale categories first. To move forward the company needed a consistent and repeatable pricing structure and enough customers to prove it. Will met with Jim Geisman and Chris Fraser, two of Launch413’s domain expert advisors. “We talked and then I accomplished meaningful tasks that allowed our business to level up. Every month we’ve seen growth across the business. The core benefit of the VIRAL Scorecard is the ability to point out the weak (and strong) points of the business, on many different fronts, all at the same time, in a way that is really easy to digest. It’s very helpful for goal setting. If you want to be a level seven business by the end of the year, you can see that you have to do all these things. It’s a really powerful methodology.”

The VIRAL Scorecard is not just a tool to be used in a quarterly review. “I use it on a very regular basis because I can get a comprehensive look at the business quickly. We have other core business documents and they have their place, but they’re not super useful day to day.”

Value of the VIRAL Scorecard and Launch413 Advisors

“If you’re an early stage company, you want to actually know where you are as a business and not just live in your mind’s positivity realm somewhere,” says Will. “I really like the way we’re using the Scorecard with the Launch413 team. It’s a super helpful way of bringing in advisors and investors when working on specific areas and extracting people’s experience and expertise. And, they can ensure you’re filling this in accurately, because it’s only helpful if you do it truthfully.”

Launch413 co-founders, Paul Silva and Rick Plaut, summarize both the value of using the VIRAL Scorecard structure and working with their team of advisors. “We know that successful entrepreneurs are committed and revenue centered. We also know that to cross from early-stage to being a sustainable company entrepreneurs need to maintain momentum, and recognize and fill knowledge gaps. The VIRAL Scorecard provides the roadmap to scale and Launch413 domain experts work within that framework to partner with entrepreneurs to provide the consistent coaching and support needed for successful scaling.”

About Launch413

We are a community of entrepreneurs helping each other beat the odds, accelerate growth, access funding, and survive company-killing mistakes. It that sounds interesting to you, learn more here.

Get Your Own VIRAL Scorecard

You can learn more about, and get your own, VIRAL scorecard tool here.

4 Questions to Find Your Price

This long, detailed, and excellent article is chock full of valuable advice on pricing. One part that particularly stood out for sharing are the four questions to ask a potential customer to help you determine where to price your product.

At what point is this way too expensive that you would never consider purchasing it?

At what point is this starting to get expensive, but you’d still consider purchasing it?

At what point is this a really good deal? (You’d buy it right away.)

At what point is this way too cheap that you’d question the quality of it?