I had lunch yesterday with two interesting entrepreneurs who are early in building out their vision for a business. They have a big idea, a big market, and a surprising level of support and they are attracting real talent to their team. This is a technology solution and a business to business network and the idea inherently makes sense – for them or for someone else depending on the ultimate competitive context. I hope they succeed as this will be a great business to get launched in Philadelphia.
I first met with this team six months ago. At the time their plan was even bigger and even more ambitious. The company vision was thoughtful but early and the real red flag for me were the financial projection that showed over $1.0B in revenue in 2016 with EBITDA margins of 50%. How many enterprise software companies have achieved $1.0B in software revenue – ever? According to the Software 500 list – 68 companies had over $1.0B in revenue in 2011. How many had Net Income of over 50%? None. What this plan said to me was that the team was early, they thought their idea was big, and they confused a business plan with a market sizing exercise and they had no idea about their ultimate business economics. Yesterday, I met with this team again. They now have three pilot customers and a product which is a POC bolt-together representing a minimally viable offering. They have learned a ton and have refined their story and their strategy. They will learn more for sure, but the progress is admirable. Their financials? $70M revenue in 2016. Their net income margin? 50% +. As the company signs more customers and continues learning and evolving, surely this figure too will be reduced to something more in-line with industry averages.
I feel better about $70M than $1B. Call me crazy but when I read for business, I prefer non-fiction.
I look forward to my next lunch with this team – and maybe to our decision to invest.