Another Transaction for the Blockchain

Today, Emergence Capital is thrilled to announce an investment in Xapo, an early leader in the emerging bitcoin ecosystem.  CEO Wences Casares has decades of experience in building successful global finance companies. My partners and I have known him for over fifteen years, and we can’t think of a better leader to navigate this exciting new platform.

On a personal level, I have been tracking bitcoin startups for nearly two years.  When I first canvased the ecosystem, I came across less than 100 startups, mostly focused on wallets, exchanges and merchant services.  I’m now working on an updated version of this landscape with nearly 1,000 companies, which I plan to publish in the next few weeks.

The more time I spend with bitcoin entrepreneurs, the more obsessed I become. It’s so much more than a financial instrument – it’s a protocol that allows efficient and secure fixing, storing and transfer of value. That value can be much more than a currency, we are thinking about use cases in real estate, tickets, email addresses and more. While we have started to see early companies focused on the consumer elements of bitcoin, at Emergence, we are particularly excited about the emerging B2B opportunities around security, identity, financial tracking, merchant services, analytics and others.

Just over 10 years ago we invested in which became the defining company in the SaaS world. Today, we are announcing our first investment in a bitcoin company, and we are excited to partner with Wences and the company that’s going to help define one of the most exciting developments for the next decade.   

SaaS Entrepreneurs: Show Me the Money

When Presenting Financials, Don’t Forget the Basics

Much has been written about the key metrics that cloud companies should track, and most SaaS entrepreneurs are well-schooled in calculating CAC (customer acquisition costs), MRR (monthly recurring revenue), and CLV (customer lifetime value).  It is surprising, however, how few SaaS companies now present a traditional P&L (profit & loss statement) with basic financial data.  At Emergence Capital, we have noted this trend, and we thought it might be helpful to point out a few of the key financial metrics that can help investors really understand the cash inflows and outflows.

For most young SaaS companies, bookings are the most important financial metric to track.  Bookings represent the dollar value of the contracts signed within a time period.  We look at the absolute numbers as well as the growth rates to determine the health and prospects for a company.   We have found, however, that there are a few critical nuances to consider when tracking bookings, and it is important to understand the following distinctions:
  • ACV Bookings vs TCV Bookings: ACV (Annual Contract Value) counts the expected revenue within the first year, even though some contracts may be multi-year. In order to account for those multi-year contracts we have the TCV (Total Contract Value) metric. We look at both, but care primarily about ACV Bookings.
  • Recurring Bookings vs Non-Recurring Bookings: Not all bookings are equal. In SaaS businesses, recurring revenue is the gold-standard. However, many companies charge small (and sometimes not that small) implementation, training and other professional services fees. SaaS-savvy investors typically focus on the recurring bookings, and they may discount the non-recurring component of bookings. 
  • New Bookings vs Renewal Bookings: When companies are just starting to sign contracts, this distinction is useless, but it is great to have the framework to account for both new and renewal bookings as renewals start to kick in. Given that churn for SaaS businesses is critical, understanding the renewal layer as a separate bucket is extremely helpful to assess the value customers are getting from your solution.
  • Upsells: We like to see negative dollar churn in every cohort. What does that mean? Of course you might lose some customers along the way, but the best SaaS businesses deliver so much value to those customers that stick, that the ACVs increase over time and these upsells more than compensate for those customers that churn out. We are ok with companies that have some customer churn, but we are more excited with those that have negative dollar churn (see charts below). For example, we can tell something happened with Cohort A, as the company lost a bunch of those users the month after they signed up (wrong targeting?). We can also tell that cohort B was not a good one, as MRR declined over time, however, cohort C was a great one as upsells were off the charts. Spending time trying to understand the underlying drivers for these behaviors is critical.

Gross Margins
Most people think gross margins are pretty straight forward.  Start with revenues, then deduct the costs of goods sold (COGS), and you get the gross margin.  Sounds simple, right?  You would be surprised to see how companies take radically different approaches to calculating what should be included in COGS. For example, in a freemium business, we believe the costs of supporting free users should be included in COGS, thus lowering gross margins. We like to see fully loaded COGS to reveal the real Gross Margins of a company.

Operating Expenses & Operating Income
The easiest way for us to rapidly calculate ratios and compare those ratios with our own indexes (ratios for companies that are doing great and ratios for those that are not doing great) is to bucket operating expense (OPEX) in 3 categories:

  • Sales and Marketing 
  • Research and Development  
  • General and Administrative

After deducting these expenses from the gross margin, you will arrive at an Operating Income (Loss). This number will help investors figure out how much money you are projecting the company will need over the next year or so.

This is a sample financial summary that we would love to see in every pitch deck:

Putting together something like this is not only necessary for raising money, but it is also extremely helpful to track the key drivers and ratios as you grow your business. For example, in the table I shared, you can tell the company was efficient early on (spent $5.5M in S&M to get $6.4M in new ACV recurring bookings ⇒ $0.86 for every dollar of new ACV recurring bookings), then became a little bit less efficient as it scaled (spent $12.7M in S&M to get $11.5 in new ACV recurring bookings ⇒ $1.10 for every dollar of new ACV recurring bookings), and ultimately controlled the S&M efficiency (spent $16.6M in S&M to get $20.7M in new ACV recurring bookings ⇒ $0.80 for every dollar of new ACV recurring bookings). As you can see, with this data you can not only benchmark your business against other companies, but you can also track performance improvements over time.

While tracking these metrics is just one piece of the puzzle, we hope this analysis and template can help shortcut the process and save you some iterations at the time of raising capital.

Content Marketing: Five Ways To Keep Feeding The Beast

The article was originally published on Content Marketing Insider (10/04/13)

In the last decade, marketers have experimented with new technologies, building the pipes to connect with their online audiences. Modern CMOs cultivate a blend of digital media, including emails, blogs, tweets, posts, and other forms of social media. While using these tools has elevated marketers to an even more central role in many organizations, it has also challenged them to keep engaging with an increasingly demanding audience. Marketers have created a beast, hungry to devour new content at a blistering pace.

Feeding the beast is where content marketing comes in. Consumers are looking for high-quality content, but it typically has a very short lifespan. (Think of a beast with a fast metabolism!) Fortunately, we are starting to see some new tools that can help marketers generate measurable ROI from their content strategies.

We have identified five key elements of an effective content marketing strategy, along with a list of applications to help marketers execute on each element:
  • Curation: There’s no shame in repurposing existing third-party content on relevant topics.  By doing so, you become the trusted channel where audiences go to find high-quality and relevant content, without all the noise. Companies such as Percolate and Trapit can help marketers identify relevant content and repurpose it for their own audiences.
  • Creation:  It’s hard to have a content marketing strategy without some original content, and marketers have become increasingly comfortable relying on a blend of internal and external writers. Original content can be long-form (multiple paragraphs or pages) or short-form (140-character tweets). New companies such as Contently and Scripted allow marketers to find great writers about topics ranging from cell phones to trampolines.
  • Workflow management: Editorial calendars are critical, particularly when multiple writers and divisions are collaborating around content. Marketers also need to manage revisions and approvals. This is where workflow management platforms such as Kapost and Zerys can help.
  • Distribution:  After the content is created, it needs to be published through multiple outlets: blogs, contributed articles, LinkedIn, Facebook, and Twitter. This distribution is not trivial, given the multiple formatting restrictions and the varying preferences for each audience. Companies such as Tapinfluence and Papershare come in here.
  • Analytics: This entire process will be repeated multiple times, so measuring effectiveness is critical. You can’t improve what you can’t measure, so having an analytics solution is the only way to close the loop and generate a self-reinforcing cycle. Companies like Simplereach and help marketers track ROI.
Content marketing is a relatively new industry, and currently we see multiple companies focusing on different pieces of the value chain. Within several years, I predict that there will be consolidation, as marketers simply can’t deal with five different vendors to manage their content marketing strategies. There will be category winners that expand into other parts of the content marketing cycle, but it’s still too early to tell which companies will emerge on top.

Bitcoin Landscape: The Who's Who in the Bitcoin Ecosystem

I’ve been spending a lot of time talking to Bitcoin companies, and I was impressed by the variety of business models people are working on. I started categorizing companies to make it easier for me to identify key trends, so I want to share my thoughts and research to get more inputs. I believe we are in the early days of a big financial disruption!

The main categories I identified are Exchanges, Wallets and Merchant Services. Exchanges are needed to get into and out of Bitcoin, they are also the gateway for Bitcoin to act like other assets, for both store of value and investment purposes. Wallets are needed to securely store your Bitcoins, and make them accessible whenever you need them for specific transactions. Finally, we have the merchant services companies, enabling merchants to easily accept Bitcoin as a form of payment.

These 3 categories are almost the pre-requisites to reach critical mass. Given the marketplace nature of Bitcoin, we need to reach that critical mass before successful applications can emerge. However, other categories are also important for the ecosystem to develop. 

Even though identity seems to be counter-intuitive for the Bitcoin protocol, it will be required to get to mass adoption. The use cases that are going to be allowed with regulation are those use cases in which identity will matter. We’ve seen it before, security always lags quite some time, however, in this ecosystem, I anticipate it will emerge much earlier given the nature of the disruption.

Other interesting use cases where I anticipate big disrupting companies will emerge are remittances and gaming. For remittances, the ease of cross-border transactions, coupled with the peer-to-peer nature of the protocol and the wide adoption of mobile phones in emerging economies, will create the petri-dish to disrupt incumbents such as Western Union. In the case of gaming, the divisibility of Bitcoin as well as lower transaction costs, will expand the opportunity by making micro-transactions a non-issue.

I haven’t seen companies in the lending or insurance spaces, but I anticipate people are already thinking about these opportunities and I look forward to hearing about them!

We are in the very early days of Bitcoin, so I’m convinced the landscape will continue to evolve. I’ve already seen companies completely change their business models, and that will continue to happen as we explore the frontiers of this disruptive opportunity. I also realize that I have likely missed some great companies, so please let me know if I missed you, or if you are thinking about other ways to categorize the companies (to add new companies click on this link: It would be great to hear your thoughts!

Why We Booked Restorando

I’m seeing more and more enterpreneurs from Latin America creating bridges with Silicon Valley. Given that I’m one of the few venture capitalists from Latin America, I have the pleasure of talking to most of these entrepreneurs, and a recurring question I get asked is why Emergence invested in Restorando.

Emergence Capital invested in Restorando in 2012, leading their Series A round. It was an interesting investment for us, as we had never invested in Latin America before. I get asked this question a lot: were you guys looking to invest specifically in Latin America? The answer is “no.”  We invested in Restorando because it was an awesome SaaS company, and it happened to be in Latin America.  In addition, we knew we would really be able to help this company succeed.

I was born and raised in Argentina, so that gives me not only an understanding of Latin America, but also an interest in supporting entrepreneurs from the region. I’m also one of the few Silicon Valley investors who speak the language, so I get to see almost every company in the region. Every now and then I connect with a group and help them out, primarily with strategy and fundraising tips. That’s how I met Frank and Franco of Restorando.

They were planning to raise their Series A in Silicon Valley, so I helped them refine their pitch. I also set up a meeting with my Emergence Capital colleagues to give Frank and Franco a sense of what a partners meeting could look like. After the presentation, we gave them some feedback and pointers.  As our team was debriefing, we realized that Restorando could be an interesting investment for Emergence.  We liked their model, we were impressed with the team, the product looked great, and we felt we could help them build a successful company. Like the old saying goes, ask for money and you’ll get advice, ask for advice and you’ll get money…

Restorando just raised its Series B financing, and it gave me a chance to reflect on what got us hooked back in 2012.  Here are some of the themes that Frank and Franco were able to communicate in their pitch:

  • Think big: this is probably the pre-requisite, and without the “think big” mindset, nothing else matters. Most of the entrepreneurs I talk to from Latin America, get caught up by the restrictions and the resources they don’t control. They are missing the point. You need to start with the big vision and then figure out how to get those resources. If you expect to build a company and sell it for $10M, then that might be a great outcome for you, but don’t waste time talking to VCs, who are looking for multi-billion dollar outcomes!
  • Build all-star team: this is very much in line with thinking big. Don’t hire the people you can afford, strive for the people you want to have on your team. If your idea is big enough, you should be able to convince them to join. Don’t get caught up in the “how to slice the pie” dilemma and focus on the “how to grow the pie” opportunity. Hire and partner with the best people: it will pay-off!
  • Partner with locals: it is hard for Silicon Valley investors without a local presence in Latin America to get a full picture. It is also hard to provide the day-to-day value required on the early days. With this in mind, it will be much easier to raise money in the US when you have a strong local investor. Unfortunately there are not that many, but if you have a great company, you should be able to get them.
  • Move fast: if you have a great idea, you can assume other people have not only thought about it but are probably executing as well. Don’t downplay competitors and be complacent. Build the best product, regardless of the fact that a “good enough” product might be better than what competitors currently have. 
  • Understand your unit economics: you need to understand your idea is not just a great idea, but it is also a great business. Sounds obvious, but you would  be surprised to see many of the companies I talk to with negative unit economics, even in the out years! If you don’t understand your numbers, and the key underlying drivers, it will be hard to scale and build a successful business.
  • Build a moat: when you are starting a business, think carefully about the defensibility you are building as you scale. This is particularly true for Latin American startups, as there a lot of me-too models, some of them without any defensible asset. It makes no sense to build the “Dropbox” for Latin America. Even though Dropbox might not be focusing on Latin America, when they decide to focus, they can take the entire market, so Dropbox will be the “Dropbox” for Latin America. Other businesses that require local relationships (i.e. Opentable) or involve local regulation (i.e. Intuit) will enable local players to build a big enough moat.

Working with Frank, Franco and the rest of the Restorando team has been a pleasure. The Board is also an all-star team. The company has made tremendous progress in these last 18 months, and now with a new partner with deep understanding of the business, the opportunity for the company is even bigger.  It’s hard not to get excited when a portfolio company shares a chart like the one below:

I expect great things from this company and team, and I look forward to having lots of fun helping build one of the most successful companies in Latin America. I also expect to see more “think big” entrepreneurs coming out of Latin America. There’s always capital available for top-notch companies, even for those based outside of Silicon Valley!