Since it’s the season to be thankful, I wanted to congratulate the team from Bluecore! Today, the company announced a fresh $21 million Series B round of funding. It is a testament to the 180 brands they’ve launched and the $200MM++ in ROI delivered in two short years. It is also another plug for the rapidly growing SaaS community in NYC.
I originally met the Bluecore founders while serving as a TechStars mentor when they were called TriggerMail. It was a classic example of a very focused product, clear ROI, and sharp tip of the spear, which several of our portfolio companies were the first to adopt. Co-founders Fayez Mohamood and Mahmoud Arram built an extremely elegant initial product that required no integrations with off the charts performance. As I dug a bit deeper, it became clear this platform was an entirely new infrastructure to support real time personalization and automation in commerce. We’ve just scratched the surface.
I’ve also been very impressed with the culture that Fayez and Mahmoud have built at Bluecore. With 64 team members, Bluecore is the largest startup in the Lower East Side of NYC. And, with their office in an old speakeasy, I must say it’s one of the coolest startup workspaces I’ve seen in NYC. It’s an amazing place to work, and, of course, they’re hiring!
We’re excited to be joined in this journey by Georgian Partners, who we got to know at Shopify. This of course is just the beginning, but I think there’s a lot to stay tuned for!
One of the great things about our Community platform at FirstMark is that it has become an amazing resource for our entrepreneurs to turn to when they’re trying to solve a problem. Recently, a CEO at one of our companies reached out for guidance on handling sales tax obligations for SaaS in certain states, which quickly led many others to chime in for additional information. We quickly pulled together leading experts and had a full house session a few days later. It was a great example of how 8 years of deliberate stoking a community has turned into a powerful network, and I thought I’d share some insights from the session.
In spite of the fact that SaaS applications will generate $49 billion in revenues this year, there’s a lot of confusion and murky regulations to follow. If you haven’t put much effort into sorting through the sales tax issue, you’re not alone. Many companies’ first priority is to prove their market and scale their revenue, not to break ground on unsettled tax items. It’s not uncommon for companies to ignore the issue and elect to throw money at it should an audit arise. An understandable position, but turns out the earlier you can prepare for the issue, the better.
Below are a few notes that came out of our roundtable on how to begin tackling the issue. While every business is different, there seem to be a few basic starting points. [Obvious disclaimer: This is not advice and consult your tax professional].
Is SaaS Taxable? – One of the trickiest parts of sales tax on SaaS is the state-by-state inconsistency in requirements. Only a few states have specifically addressed SaaS in their tax code. In some cases, digital delivery is not taxed, while some states consider all packaged software subject to sales tax regardless of delivery method. Additional levels of consideration include whether the software was delivered as a sale, lease or license, so the structure of contracts should be examined carefully.
Gathering information for each state can be tedious. One tactic is to start with the top 10 billing states, then consider some outsourced accounting help to tackle states 11-50. Some states known to tax SaaS include: New York, Texas, Pennsylvania, Massachusetts, Ohio, Utah, South Carolina, Hawaii, Connecticut, Arizona, Illinois, Indiana, New Mexico, South Dakota, West Virginia and the District of Columbia. Keep in mind that these laws are evolving and can change any day.
The software company most commonly mentioned in our roundtable to help with compliance was Avalara, a platform that automates sales tax compliance.
Nexus – Nexus is essentially an analysis of “sufficient physical presence” and the first real step in addressing sales tax on SaaS. This varies, as you guessed, state-by-state. Triggers could include channel relationships; physically locating employees or even independent agents within a state; or economic thresholds for payroll, revenue, or physical property. A little more below:
Collection, Reporting, Remitting – Every company has its own complexities, which informs the need of outside resources. A large company with a clientele in many U.S. states or worldwide may choose to work with a tax automation software provider to help with compliance. For those that choose to do all of the work in-house, our group noted that it’s important to remember city, local, transit, and county taxes are also applicable.
Voluntary Disclosure Agreements (VDA) – Companies who owe back taxes in a given state can proactively disclose this fact, and in return receive certain benefits. For example, a company’s lookback window could be three years instead of unbounded. Additionally, there could be an abatement of penalties or a reduction of interest obligation.
Be prepared for probing calls from state regulators. In some instances, these probing calls can result in a VDA denial. Again, being proactive is a better stance.
Other resources – Unfortunately, there doesn’t seem to be a regularly updated resource for understanding different states’ approach to SaaS tax. However, this map – published by the Tax Foundation in January 2013 – is a good starting place for a snapshot view of policies.
This is a complex topic that continues to evolve in spite of the relative maturity of the SaaS market. If you have additional resources, please pass them along or add them into the comments!
There was a great discussion started by Mark Suster and Brad Feld around convertible notes and the many issues associated with a round in which they convert. This includes a hidden potential for a “multiple liquidation preference” if not adjusted for in the Series A and how the mechanics of the conversion could lead to differences in ownership than a new investor is expecting. Mark and Brad did a fantastic job walking through how the problem arises and the math that drives it.
I’d like to take a crack as to why, in theory, the treatment of the Notes in the pre-money valuation makes sense as the starting point. Of course everything can be a function of negotiation, as Brad points out, but it’s nice when positions have some grounding in principles, and I find many times entrepreneurs and investors can get frustrated by the advice “because that’s the way it is done”.
Let’s start with a discussion of valuation theory. In a perfect world, the value of a company is the sum of the FUTURE discounted cash flows that the business will generate over it’s life, discounted back to today. That discounted cash flow includes all expenses associated with operating the business in the future. The one assumption most Finance classes make is that the shareholding is FIXED for that analysis; however, in venture backed businesses, significant equity cost (dilution) is also required to build to those cash flows. If your share of an ownership is expected to decline over time, obviously you’d need to build in that dilution to your present value calculations. This is a subtle point but I’ll come back to it later. [Never mind whether we actually build models like these in VC or use shorthand methods, as this is a discussion of the principles.]
Convertible notes are used by a Company during its Seed to build to the current Series A valuation. The cash resources associated with them have been exhausted and any remainder is assumed in the current valuation. As such, they should be treated as part of the pre-money valuation — as part of the historical cost and cash flows that were sunk to get to a given set of assets and therefore valuation. Said differently, the expenses that the convertible notes would be funding have already occurred in the past and therefore no longer part of the future cash flows used to get to the current period valuation. New investors are investing on top of, and building off of, that valuation.
If that’s too esoteric, here’s another way to think about it. If you were to have raised equity financing for your Seed, you would not add that invested dollar into the amount raised of the current round. Convertible notes are useful, so they say, because they are expedient and more efficient than an equity round, and are generally intended by investors to act in a similar manner (particularly where there are valuation caps). In any of these rounds, I have not heard seed investors negotiating for a more efficient way to get a multiple liquidation preference or asking future unknown investors to pay for their dilution. The treatment of convertible notes in the pre-money valuation would make it consistent with a round done as equity, which in the vast majority of times is the “spirit” of the creation.
The other way to look at convertible notes relates to my point above about how dilution must be accounted for in any valuation framework. The pre-money valuation has always, from the beginning of venture time, assumed the fully diluted share count. This is so the valuation captures any and all historical equity “cost” associated with building the company to this point when getting to a per share value (common stock, warrants, options, and … convertible notes). A convertible note clearly is an example of issuable shares that should form a part of the fully diluted share count, and therefore part of the pre-money valuation. New prospective shareholders set an “all-in” valuation so that they can clearly know the ownership they are buying in a company for a given dollar amount; everything from the past is not their burden to bear and should be resolved prior to their money coming in. This is exactly why many investors are clarifying the post money valuation and their ownership.
As an aside, I’ve sometimes been asked why is the Option Pool for future employees included in a pre-money valuation. Well, for the same reasons above, just as any valuation is assumed to be the present value of FUTURE cash flows (theoretically), it should also include FUTURE dilution. The future cash flows are generated by a certain set of employees, who require equity compensation as well as cash. The cash expense of those employees has already been incorporated by the future cash flows of the business (as expenses); similarly, the equity “cost” by way of dilution has to be be built in somewhere. This is where the Option Pool in the pre-money comes in. The market has settled out that 18 to 24 months is the reasonable range for the “options cost”, as that usually ties to the next milestone or round.
Hopefully the above offers some conceptual underpinnings to commonly discussed items. Practically speaking like anything else, everything is a matter of negotiation. The challenge is that the unintended consequences of convertible notes sometimes pit the un-informed against the ambiguous, leading to confusion. Sometimes it is helpful to understand the WHY to find a way out.
One of the most important things that we have built at FirstMark Capital is our platform and community. It is an infrastructure that connects and empowers hundreds of employees across our portfolio companies and tens of thousands of people in the NYC ecosystem to world class content, relationships, customers and expertise.
Every journey has its start, and ours began shortly after we launched FirstMark Capital in 2008 and held our inaugural Marketing Summit. The idea was simple: marketing was evolving rapidly, the channels through which customers and consumers engaged were changing, and those that moved to take advantage could build unfair scale ahead of others. If we could get the best minds talking about leading technologies and their approaches, the entire portfolio could benefit.
One of the earliest speakers at our Marketing Summit was Jon Miller, the co-founder of Marketo, who evangelized a new way of thinking about customers, content, and marketing automation. Jon and I stayed in touch over the years, becoming an advisor and friend to several of our portfolio companies. Marketo, of course, went on to become a powerhouse in marketing automation and is a $1B+ public company today.
Fast forward 6 years and I’m delighted to announce that we are leading a $10MM Series A financing for Engagio, a new company created by Jon Miller and his co-founder Brian Babcock. I have gotten to know Brian more recently, but he has a fantastic and very relevant background for what Engagio is doing from both the ad tech and big data worlds, having been an early engineer at successful companies like RocketFuel and Platfora. Jon and Brian in fact worked together at Epiphany in the 90s, which was one of the early pioneers in the world of marketing software.
Engagio is at the start of its mission but is building a new software platform focused on Account Based Marketing. Jon has written an entire post dedicated to the topic here. Said simply, Engagio provides one place for B2B marketers to understand all the campaigns, touch points, and interactions a company has with a target customer and plan the optimal ways to engage them over time.
We are excited to be joined by many of Marketo’s prior investors, including Storm Ventures and Bruce Cleveland/Doug Pepper, alongside First Round Capital and Amplify. Stay tuned for much, much more!
Having felt like I was reading about a new investment every month from Alibaba, it got me thinking about how rapidly they are expanding their reach outside of China. While many have written about this recent frenzy, I had not seen anything comparing Alibaba’s investing activities in the US to that of Google and/or Amazon in China. As the digital platforms move towards true global competition, I got curious about the data.
Thanks to the folks at CB Insights, I looked at the data of investments made in the US by Alibaba and in China by Google and Amazon as far back as the data went.
By number of deals, Alibaba has a substantial lead, but by investment value (shown below), the difference becomes staggering.
The data is fairly stark. If you look at the individual deals, Alibaba is investing in all the areas you would expect — mobile, gaming, ecommerce — and even some you would not, expanding their sphere of knowledge and influence as they chart their inevitable global push. For Google and Amazon, is the difference deliberate and due to different strategic choices or is it because China remains a more difficult and protected environment to enter and invest? If it’s the latter, does that put the leading US platforms at a structural disadvantage competing in the global stage? We are entering a new era of the digital Game of Thrones and this will be interesting to watch play out.
Some notes on the data:
1) Investment dollars reflects total round size, as a reasonable proxy for invested dollars, as well as acquisitions. Some deals did not have any announced round size and are included at $0.
2) This is solely focused on investments and does not include capital associated with local operations in country.
Thanks to my colleague David Rogg for assistance pulling this post together.
News has now spread on Aereo’s filing for bankruptcy. While folks in venture generally don’t talk about their failures, this is one I’m exceptionally proud to talk about.
We are in the business of backing innovation and taking big swings. Companies that can be change agents for their industries. Aereo is the very definition of that. Long before Aereo stood in front of the Supreme Court of the United States, the Company ignited conversations about the future of television and its delivery at a time when these services remained fixed, bundled and costly.
Since Aereo’s launch and first victory, we’ve seen cable companies introduce “TV Everywhere” strategies, networks announce over the top mobile apps and unbundled streaming options, and even the FCC take dramatic steps to define OTT players alongside cable and satellite companies. Can Aereo take credit for all of it? Probably not. But I think it’s fair to say they accelerated many of those discussions and helped re-shape an industry perspective.
While that impact may not be found financially, it is felt in the hands of consumers everywhere. For that, we at FirstMark are exceptionally proud to have partnered on this journey with Chet Kanojia and his incredible team. And as I’ve said before, we’d do it again in a heart beat.