As a startup founder, there will be three scenarios in which you’ll need to understand how to properly do a quality of earnings (QofE) if you want to maximize value.

The first scenario will be when you decide to raise a Series A and subsequent VC rounds, followed by when you do a strategic acquisition, and lastly, when you sell your company.

This post is a framework for how to think and organize your QofE and go through the most common items that you’ll want to keep top of mind for every M&A and private equity transaction you may be part of.

Why perform a QofE?

The goal of a QofE is to adjust the reported EBITDA to calculate a restated EBITDA that best reflects the current state of the company on an ongoing basis. It also presents a historical adjusted EBITDA that is comparable throughout the last two or three years.

QofE can have a significant impact on a company valuation for three main reasons:

The adjusted EBITDA will be used by a buyer/investor as the basis for valuation (for companies valued based on an EBITDA multiple).The adjusted revenue will be used to recalculate the effective growth rate.The adjusted revenue and EBITDA will form the basis of forecasts.

With that in mind, every entrepreneur must understand how to properly form a view of what is the proper adjusted EBITDA and adjusted revenue of your company. It is common for founders in an M&A process to be unfamiliar with the notion of QofE and leave value on the table.

This breakdown aims to ensure that you won’t be that founder and that you’ll be armed to negotiate your company valuation on equal ground with your investors. If you are in the seller’s shoes, you will get the advantage of understanding how an experienced investor or buyer thinks. If you’re in the buyer’s shoes, you’ll benefit from understanding and valuing your acquisitions better.

How is a QofE professionally performed?

When performed by a professional transaction service advisory team, the quality of earnings is a result of a thorough review of all the documents generally available in a data room. These include, but are not limited to: Legal documentation, financial statements (P&L, balance sheet, cash flow), audit reports, management presentation and contracts.

When doing a QofE analysis, it’s key to consistently ask yourself: “Can or should this information translate into an adjustment of revenue or EBITDA, net working capital (NWC) or net debt?”

Why did we include NWC and net debt? That is because they often have an indirect impact on adjusted EBITDA. Think of an adjustment to the historical level of inventory. Less inventory likely means fewer storage costs. So if you adjust historical inventory, you’ll want to also impact your adjusted EBITDA.

On top of reviewing all the aforementioned documents, your QofE analysis will heavily rely on interviewing management. No matter how long you look at the financials, if you can’t have management confirm information or explain trends, you won’t be able to draw proper conclusions and understand the numbers.

Principles for efficiently building your QofE

Automatically link everything you read and hear to potential QofE adjustments. This has to become second nature during the engagement.Always think about all the ways an event or item that qualifies for an adjustment impacts the financial statements overall. For instance, if the event impacted revenue, did it impact costs in some way as well?Make sure that the cost you are adjusting was not already offset by another accounting entry (i.e., had no impact on EBITDA).Make sure that the cost you adjust for was classified above EBITDA in the first place.Make sure that you can quantify each adjustment in the most objective and rational way. This is sometimes not possible and you may have to come up with a range.

Traditional MBA programs can be costly, lengthy and often lack the application of real-world skills. Meanwhile, big global brands and companies who need product managers to grow their businesses can’t sit around waiting for people to graduate. And the edtech space hasn’t traditionally catered to this sector.

This is perhaps why Product School says it has secured $25 million in growth equity investment from growth fund Leeds Illuminate (subject to regulatory approval) to accelerate its product and partnerships with client companies.

The growth funding for the company comes after bootstrapping since 2014, in large part because product managers (PMs) are no longer needed just inside tech companies but have become sought after across almost virtually all industries.

Product School provides certificates for individuals as well as team training, and says it has experienced an upwelling of business since COVID switched so many companies into digital ones. It also now counts Google, Facebook, Netflix, Airbnb, PayPal, Uber and Amazon amongst its customers.

“Product managers have an outsized role in driving digital transformation and innovation across all sectors,” said Susan Cates, managing partner of Leeds Illuminate. “Having built the largest community of PMs in the world validates Product School’s certification as the industry standard for the market and positions the company at the forefront of upskilling top-notch talent for global organizations.”

Carlos Gonzalez de Villaumbrosia, CEO and founder of Product School, who started the company after moving from Spain, said: “There has never been a better time in history to build digital products and Product School is excited to unlock value for product teams across the globe to help define the future. Our company was founded on the basis that traditional degrees and MBA programs simply don’t equip PMs with the real-world skills they require on the job.”

Product School has also produced the The Product Book, The Proddy Awards and ProductCon.

Its main competitor is MindTheProduct, a community and training platform, which has also boostrapped.

I worked at Google for six years. Internally, you have no choice — you must use Kubernetes if you are deploying microservices and containers (it’s actually not called Kubernetes inside of Google; it’s called Borg). But what was once solely an internal project at Google has since been open-sourced and has become one of the most talked about technologies in software development and operations.

For good reason. One person with a laptop can now accomplish what used to take a large team of engineers. At times, Kubernetes can feel like a superpower, but with all of the benefits of scalability and agility comes immense complexity. The truth is, very few software developers truly understand how Kubernetes works under the hood.

I like to use the analogy of a watch. From the user’s perspective, it’s very straightforward until it breaks. To actually fix a broken watch requires expertise most people simply do not have — and I promise you, Kubernetes is much more complex than your watch.

How are most teams solving this problem? The truth is, many of them aren’t. They often adopt Kubernetes as part of their digital transformation only to find out it’s much more complex than they expected. Then they have to hire more engineers and experts to manage it, which in a way defeats its purpose.

All of this means there is a great opportunity for DevOps startups to come in and address the different pain points within the Kubernetes ecosystem. This technology isn’t going anywhere, so any platform or tooling that helps make it more secure, simple to use and easy to troubleshoot will be well appreciated by the software development community.

In that sense, there’s never been a better time for VCs to invest in this ecosystem. It’s my belief that Kubernetes is becoming the new Linux: 96.4% of the top million web servers’ operating systems are Linux. Similarly, Kubernetes is trending to become the de facto operating system for modern, cloud-native applications. It is already the most popular open-source project within the Cloud Native Computing Foundation (CNCF), with 91% of respondents using it — a steady increase from 78% in 2019 and 58% in 2018.

While the technology is proven and adoption is skyrocketing, there are still some fundamental challenges that will undoubtedly be solved by third-party solutions. Let’s go deeper and look at five reasons why we’ll see a surge of startups in this space.

 

Containers are the go-to method for building modern apps

Docker revolutionized how developers build and ship applications. Container technology has made it easier to move applications and workloads between clouds. It also provides as much resource isolation as a traditional hypervisor, but with considerable opportunities to improve agility, efficiency and speed.

Reducing global greenhouse gas emissions is an important goal, but another challenge awaits: lowering the levels of CO2 and other substances already in the atmosphere. One promising approach turns the gas into an ordinary mineral through entirely natural processes; 44.01 hopes to perform this process at scale using vast deposits of precursor materials and a $5 million seed round to get the ball rolling.

The process of mineralizing CO2 is well known among geologists and climate scientists. A naturally occurring stone called peridotite reacts with the gas and water to produce calcite, another common and harmless mineral. In fact this has occurred at enormous scales throughout history, as witnessed by large streaks of calcite piercing peridotite deposits.

Peridotite is normally found miles below sea level, but on the easternmost tip of the Arabian peninsula, specifically the northern coast of Oman, tectonic action has raised hundreds of square miles of the stuff to the surface.

Talal Hasan was working in Oman’s sovereign investment arm when he read about the country’s coast having the largest “dead zone” in the world, a major contributor to which was CO2 emissions being absorbed by the sea and gathering there. Hasan, born into a family of environmentalists, looked into it and found that, amazingly, the problem and the solution were literally right next to each other: the country’s mountains of peridotite, which theoretically could hold billions of tons of CO2.

Around that time, in fact, The New York Times ran a photo essay about Oman’s potential miracle mineral, highlighting the research of Peter Kelemen and Juerg Matter into its potential. As the Times’ Henry Fountain wrote at the time:

If this natural process, called carbon mineralization, could be harnessed, accelerated and applied inexpensively on a huge scale — admittedly some very big “ifs” — it could help fight climate change.

That’s broadly speaking the plan proposed by Hasan and, actually, both Kelemen and Matter, who make up the startup’s “scientific committee.” 44.01 (the molecular weight of carbon dioxide, if you were wondering) aims to accomplish mineralization economically and safely with a few novel ideas.

First is the basic process of accelerating the natural reaction of the materials. It normally occurs over years as CO2 and water vapor interact with the rock — no energy needs to be applied to make the change, since the reaction actually results in a lower energy state.

“We’re speeding it up by injecting a higher CO2 content than you would get in the atmosphere,” said Hasan. “We have to drill an engineered borehole that’s targeted for mineralization and injection.”

The holes would maximize surface area, and highly carbonated water would be pumped in cyclically until the drilled peridotite is saturated. Importantly, there’s no catalyst or toxic additive, it’s just fizzy water, and if some were to leak or escape, it’s just a puff of CO2, like what you get when you open a bottle of soda.

Second is achieving this without negating the entire endeavor by having giant trucks and heavy machinery pumping out new CO2 as fast as they can pump in the old stuff. To that end Hasan said the company is working hard at the logistics side to create a biodiesel-based supply line (with Wakud) to truck in the raw material and power the machines at night, while solar would offset that fuel cost at night.

It sounds like a lot to build up, but Hasan points out that a lot of this is already done by the oil industry, which as you might guess is fairly ubiquitous in the region. “It’s similar to how they drill and explore, so there’s a lot of existing infrastructure for this,” he said, “but rather than pulling the hydrocarbon out, we’re pumping it back in.” Other mineralization efforts have broken ground on the concept, so to speak, such as a basalt-injection scheme up in Iceland, so it isn’t without precedent.

Third is sourcing the CO2 itself. The atmosphere is full of it, sure, but it’s not trivial to capture and compress enough to mineralize at industrial scales. So 44.01 is partnering with Climeworks and other carbon capture companies to provide an end point for their CO2 sequestration efforts.

Plenty of companies are working on direct capture of emissions, be they at the point of emission or elsewhere, but once they have a couple million tons of CO2, it’s not obvious what to do next. “We want to facilitate carbon capture companies, so we’re building the CO2 sinks here and operating a plug and play model. They come to our site, plug in, and using power on site, we can start taking it,” said Hasan.

How it would be paid for is a bit of an open question in the exact particulars, but what’s clear is a global corporate appetite for carbon offsetting. There’s a large voluntary market for carbon credits beyond the traditional and rather outdated carbon credits. 44.01 can sell large quantities of verified carbon removal, which is a step up from temporary sequestration or capture — though the financial instruments to do so are still being worked out. (DroneSeed is another company offering a service beyond offsets that hopes to take advantage of a new generation of emissions futures and other systems. It’s an evolving and highly complex overlapping area of international regulations, taxes and corporate policy.)

For now, however, the goal is simply to prove that the system works as expected at the scales hoped for. The seed money is nowhere near what would be needed to build the operation necessary, just a step in that direction to get the permits, studies and equipment necessary to properly perform demonstrations.

“We tried to get like-minded investors on board, people genuinely doing this for climate change,” said Hasan. “It makes things a lot easier on us when we’re measured on impact rather than financials.” (No doubt all startups hope for such understanding backers.)

Apollo Projects, a early-stage investment fund from Max and Sam Altman, led the round, and Breakthrough Energy Ventures participated. (Not listed in the press release but important to note, Hasan said, were small investments from families in Oman and environmental organizations in Europe.)

Oman may be the starting point, but Hasan hinted that another location would host the first commercial operations. While he declined to be specific, one glance at a map shows that the peridotite deposits spill over the northern border of Oman and into the eastern tip of the UAE, which no doubt is also interested in this budding industry and, of course, has more than enough money to finance it. We’ll know more once 44.01 completes its pilot work.

From vaccine distribution plans to fire trackers to bar crawls for your best friend’s birthday, maps help people visualize space and express impact. And Felt, a new Oakland-based startup co-founded by Sam Hashemi and Can Duruk, is on a mission to make the medium more mainstream.

Felt is a collaborative software company that wants to make it easier for people to build maps on the internet. It announced today that it has raised $4.5 million led by Bain Capital Ventures, with participation from Designer Fund, Allison Pickens, Akshay Kothari (COO of Notion), Dylan Field (CEO of Figma) John Lily (former CEO of Firefox), Julia and Kevin Hartz, and Keval Desai.

The millions will be used to help Felt grow its fully distributed six-person team to bring on more front-end, back-end and product engineers, as well as product and brand designers. Along with the financing, the company announced it is launching a private beta to better understand what early adopters it attracts, and how those users engage with the platform.

Felt allows users to build a map with data sets integrated into it. A user can open a map of California, for example, and then turn to Felt’s data library to add information about bits like wildfires and smoke patterns. The map’s power grows as more integrations are used to build out its background; using the prior anecdote, for example, the wildfire map integrated with census data could allow decision makers to see how many businesses could be impacted by incoming smoke.

Over time, Felt users will be able to see other user-generated maps and team projects on the interface — which they can then copy to add their own flair, or leave comments to support the community.

While consumers will eventually be able to access a free tier, the big test for Felt is if it can find a customer base that is willing to pay, and consistently use mapping software in meaningful ways. The company is in a unique spot. It’s not a GPS service, so it won’t serve the consumer who only turns to maps for directions. Instead, its build-a-map service is better suited for companies that already use it in their day-to-day.

Felt is meant to be a continuation of the collaborative software movement underscored by everyday tools like Google Docs and top companies like Notion and Figma, as well as a sequel to Hashemi’s previous company, Remix. Recently bought by Via for $100 million, Remix is a city transportation planning startup born out of Code for America Hackathon. As Hashemi spent nearly seven years building Remix, he was introduced to the inadequacies of map-making, namely that there are many use cases for maps but not many people who have the skill set to create a professional product. He hopes Felt will take mapping beyond city planning and into a variety of industries, from education to science to media.

“We really want to be much more aspirational in what we’re trying to accomplish and go much more broader [so it] results in a totally different kind of company,” Hashemi said. Perhaps its biggest competitor is ESRI’s GIS, a mapping software tool founded in 1969 and still used by hundreds of thousands of companies today.

Climate change could be a catalyst that brings more customers into the collaborative mapping space. Duruk, who built products at Uber and VGS, spoke about the importance of crisis response after last year’s wildfires and the resulting eerie orange sky in the Bay Area.

“Everyone in the Bay Area would wake up, go to the air quality map, weather map and the fire map,” Duruk said. “Everyone was trying to do something with maps, but only a few companies in the world had the resources to build something….it was broken.” Felt wants to go broad in its integrations, but did confirm that climate data will be a priority.

The challenge with building a powerful, creative tool is that there is a chance for people to misuse maps for abuse or targeting, Duruk said. Felt is thinking about ways to build in accountability and systematic processes to limit bad actors from using mapping information in the wrong way.

In the meantime, though, the early-stage startup is focusing on expression as a key way to understand its own product’s bounds. With millions more, Felt is aiming at increasing the capability of people by growing the map-ability of the world.

Although he’s coming from a numbers-driven background, growth expert Julian Shapiro focuses on the emotional power of storytelling these days.

“I like to think of successful brand-building as creating a company that customers would be upset to separate from their identity,” he says in an interview below. “For example, they’d cease to be the man with Slack stickers all over his laptop. Or the woman who no longer wears Nike shoes every day. And that bugs them.”

A prolific Twitter user, writer and now podcaster, he advises startups to “just blow your own mind” to best explain the value of what you are offering. Don’t overthink it. Your own excitement will take your audience on a journey with you in ways that paid acquisition can’t.

He’s informed by years working with hundreds of startups as the co-founder of Demand Curve (growth training courses) and Bell Curve (a growth agency), but also as a repeat startup founder, angel investor and open-source web developer (Velocity.js).

In the discussion below, he tells us more about the path he’s taken through the startup world, how companies are changing their public communication and what he’s most excited about.

 

What has led you from web development and startups to growth marketing in recent years, and most recently to your own personal writing for the public on Twitter, etc.? Many people in your position would be more comfortable just founding new tech companies, or investing in crypto or what have you.

I try to avoid being contained by momentum. If something’s going well in one field (engineering) but I’ve found something more fulfilling (like growth strategy), then I’ll switch. I don’t switch for the sake of switching, but I will keep switching until I find something I love. That eventually brought me to writing, which I will never stop doing.

Trying a little bit of a lot of things gives you exposure to learn what else you could (and should) be doing. To break out of a local maximum, you need to always remain curious: What else don’t I know about?

What I ultimately stick with is whatever process I enjoy (not just enjoy the outcome). This usually means the process is fun, educational, adventurous and helps me meet like-minded people. Writing is a Bat-Signal for like-minded people.

You’re focused on the art of storytelling right now — what are the key things that the startups you work with continue to get wrong here?

The story of a startup is essentially their (1) investor pitch and (2) customer-facing brand.

I like to think of successful brand-building as creating a company that customers would be upset to separate from their identity. For example, they’d cease to be the man with Slack stickers all over his laptop. Or the woman who no longer wears Nike shoes every day. And that bugs them.

To get to that point, you need a mix of goodwill, what-we-stand-for ideology, social prestige and customer delight—among other affinity-building ingredients.

How do you see companies changing the way they talk about themselves to the public in the future, given larger societal trends? Fewer press releases full of canned legalese, more public engagement on social media from the CEO?

Employees with audiences who broadcast corporate messages on a human-to-human level. Plus company social media accounts gaining personality and acting more like their employees.

It’s really hard to grab attention otherwise, especially with the explosion of content creators who are very good at hogging attention and optimizing content for the platforms. Corporate blogs haven’t been competing with them. I’m not sure they could. So much of this is personality-driven, to my point in the previous paragraph.

I’m also hoping, but not expecting, companies to dial back frequency of content production and increase quality of content production. Signal is more important than frequency in an era where we’re overloaded with content.

Given how many startups you work with across YC, etc., and since you are also an angel investor, what are key industry trends that have you most excited?

I’m interested in businesses with product-led growth, brand affinity moats and who get harder to compete with the larger they get. In other words, customers do the selling, customers fall in love and defensibility is in their design.

This is in part a reaction to not wanting startups to be so reliant on paid acquisition. And it’s also a reflection of how I want startups to be thinking more about not just providing transactional value to customers but also making customers truly delighted.

Just months after raising $28 million, Jerry announced today that it has raised $75 million in a Series C round that values the company at $450 million.

Existing backer Goodwater Capital doubled down on its investment in Jerry, leading the “oversubscribed” round. Bow Capital, Kamerra, Highland Capital Partners and Park West Asset Management also participated in the financing, which brings Jerry’s total raised to $132 million since its 2017 inception. Goodwater Capital also led the startup’s Series B earlier this year. Jerry’s new valuation is about “4x” that of the company at its Series B round, according to co-founder and CEO Art Agrawal. 

“What factored into the current valuation is our annual recurring revenue, growing customer base and total addressable market,” he told TechCrunch, declining to be more specific about ARR other than to say it is growing “at a very fast rate.” He also said the company “continues to meet and exceed growth and revenue targets” with its first product, a service for comparing and buying car insurance. At the time of the company’s last raise, Agrawal said Jerry saw its revenue surge by “10x” in 2020 compared to 2019.

Jerry, which says it has evolved its model to a mobile-first car ownership “super app,” aims to save its customers time and money on car expenses. The Palo Alto-based startup launched its car insurance comparison service using artificial intelligence and machine learning in January 2019. It has quietly since amassed nearly 1 million customers across the United States as a licensed insurance broker.

“Today as a consumer, you have to go to multiple different places to deal with different things,” Agrawal said at the time of the company’s last raise. “Jerry is out to change that.”

The new funding round fuels the launch of the company’s “compare-and-buy” marketplaces in new verticals, including financing, repair, warranties, parking, maintenance and “additional money-saving services.” Although Jerry also offers a similar product for home insurance, its focus is on car ownership.

“Access to reliable and affordable transportation is critical to economic empowerment,” said Rafi Syed, Jerry board member and general partner at Bow Capital, which also doubled down on its investment in the company. “Jerry is helping car owners make the most of every dollar they earn. While we see Jerry as an excellent technology investment showcasing the power of data in financial services, it’s also a high-performing investment in terms of the financial inclusion it supports.” 

Goodwater Capital Partner Chi-Hua Chien said the firm’s recurring revenue model makes it stand out from lead generation-based car insurance comparison sites.

CEO Agrawal agrees, noting that Jerry’s high-performing annual recurring revenue model has made the company “attractive to investors” in addition to the fact that the startup “straddles” the auto, e-commerce, fintech and insurtech industries.

“We recognized those investment opportunities could drive our business faster and led to raising the round earlier than expected,” he told TechCrunch. “We’re eager to launch new categories to save customers time and money on auto expenses and the new investment shortens our time to market.”

Agrawal also believes Jerry is different from other auto-related marketplaces out there in that it aims to help consumers with various aspects of car ownership (from repair to maintenance to insurance to warranties), rather than just one. The company also believes it is set apart from competitors in that it doesn’t refer a consumer to an insurance carrier’s site so that they still have to do the work of signing up with them separately, for example. Rather, Jerry uses automation to give consumers customized quotes from more than 45 insurance carriers “in 45 seconds.” The consumers can then sign on to the new carrier via Jerry, which can then cancel former policies on their behalf.

Jerry makes recurring revenue from earning a percentage of the premium when a consumer purchases a policy on its site from carriers such as Progressive.

U.S. consumer investing and trading service Robinhood announced this morning that it will acquire Say Technologies in a $140 million cash deal.

Say Technologies is a venture-backed startup, having raised $8 million in 2018, per Crunchbase data. PitchBook data indicates that the company was worth $28 million on a post-money basis following the investment, implying that the company’s backers managed a roughly 5x return on their investment.

Say was backed by Point72 Ventures, among other investors.

The deal is notable because it is Robinhood’s first major purchase since going public in late July, and because it illustrates where Robinhood may look to invest some of its newly liquid equity wealth; when a company goes public, it can more easily purchase other companies thanks to recharged cash balances and a floating stock.

In a blog post, Robinhood wrote that “Say was built on the belief that everyone should have the same access to the financial markets as Wall Street insiders.” What does that mean? In practice, Say has built a communications platform that allows even smaller shareholders to pose questions to the companies in which they invest. Sure, some companies are including retail questions in their earnings calls, but what Say has in mind is broader.

You can see how Say and Robinhood might fit together. Robinhood has a huge user pool of retail investors who like to trade and invest. Say has the technology to connect retail investors to the companies that they own. With Robinhood’s database of which retail investor owns what, and Say’s communications tech, the trading platform may be able to offer a better shareholder experience than what rival platforms can offer.

By offering to its user base a service like what Say has built, Robinhood can offer a unique twist on retail investing. This feels somewhat analogous to Spotify spending heavily to procure exclusive rights to certain podcasts; such efforts differentiate Spotify from rivals despite having a commoditized core offering. Trading is now free in many places, so Robinhood layering specialized services on top of its investing service makes good sense, perhaps helping drive user loyalty and net new-user adds.

Shares of Robinhood are off around 1.2% today, despite generally higher markets. We might say that investors were selling lightly in wake of the news, but that would be a somewhat bold read of the day’s trading.

Looking for a fun activity that will loosen up the night and get you closer with your friends? Then check out these games you can play outside of the casino!

At your next party, make sure you have some great gambling themed party games. Here are the best ones!

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