David Cummings on Startups

Author: David Cummings

  • Solving One Problem Magnifies Another

    Things are going well but there’s this nagging issue that won’t go away. If we could only solve this one problem, everything else would be great. Only, once the problem is solved, the next most important problem is magnified. And, it never stops.

    Solving one problem magnifies another.

    Here are a few thoughts to keep in mind:

    As an entrepreneur, it’s easy to get overwhelmed with all the on-going problems and challenges. Find a good cadence knowing that solving one problem magnifies another, and figure out how to grind it out.

    What else? What are some more thoughts on the idea that solving one problem magnifies another?

  • Tranche Investments in Startups

    Over the past year I’ve seen a little-used investment strategy come up a few times: the tranche. With a tranche, money is typically invested over two or three milestones based on the progress of the company (often at the will of the investor, and sometimes contingent on the entrepreneur’s approval). As an example, $250,000 might be put in immediately, and within the next six months, the investor has the option to put in an additional $250,000 at the same terms.

    Clearly, this is a nice benefit for the investor as they can see how the company performs before putting in the additional money, and if the company does well, the second part of the tranche investment is a better deal because the company is worth more as the investor is buying the equity at the previous valuation. Only, there are a few more nuances at play as well. Here are some thoughts on tranche investments:

    • Entrepreneurs almost always operate, and spend, as if the later round(s) of the tranche are going to come in, creating challenges if the business doesn’t perform as expected
    • Tranches often make the entrepreneur more beholden to the investor (possibly filtering the news to make things sound more promising) as they want to ensure that the next round of money comes in, and this can distract from growing the business
    • Tranches can be more distracting as they usually have a shorter timeframe – say three or six months – between milestones as opposed to the typical 12-24 months between financings
    • From a valuation perspective, tranches can be thought of as the average of the current valuation and the projected valuation(s) at the later milestones, such that the investor gets a bonus if the company does better than expected

    Entrepreneurs typically want to avoid tranches and focus on negotiating a fixed investment amount upfront, so that they know how much money and runway they have to grow the business before raising another round.

    What else? What are some more thoughts on tranche investments in startups?

  • What Wasn’t Said in the Response

    Last year, when talking to an entrepreneur about his startup, I asked him why he started the company. He responded that he wanted to build a big company and do well financially. Probing a bit deeper, he explained how he owned a certain percentage of the company and that there were several key financial goals he was hoping to achieve. What wasn’t said in the answer was more telling than the actual answer. Where was the excitement about changing the world? Where was the enthusiasm for solving a hard problem?

    Here are a few thoughts about what wasn’t said in the response:

    • Certain questions have certain expected responses, and they aren’t meant to be trick questions
    • When responding, the first idea in the explanation is always the most important, and most telling
    • Body language and nonverbal communication is a key part of the response

    Whether it’s an entrepreneur talking about their startup, or a potential employee sharing thoughts on their last job, what wasn’t said in the response can be even more important than what was said.

    What else? What are some more thoughts on the idea that what’s left unsaid in an answer can be critically important?

  • SaaS at 3x Revenue – Xactly Follow-up

    As a follow-up to last week’s post Notes from the Xactly S-1 IPO Filing, it’s useful to see how things played out for a newly public Software-as-a-Service (SaaS) company. With so much media and analysis around SaaS companies trading at large multiples (e.g. 8x or greater revenue), Xactly paints a much more realistic picture of a cloud computing company growing at a modest pace.

    Here are a few notes from the outcome of the Xactly IPO (NYSE:XTLY):

    • Market cap: $241M
    • Last quarter’s revenue annualized: $71M (last quarter’s revenue times four)
    • $241M / $71M = 3.3x (ignoring cash on hand, liabilities, etc)
    • Q1 2014 to Q1 2015 quarterly revenue growth: 16%

    So, for a SaaS company growing less than 20% per year, the revenue multiple here is roughly in the 3x range. This is a big difference from the huge premiums much faster growing companies earn (see Quantifying the SaaS Growth Rate Multiplier). For Xactly, it’ll be interesting to see if they can use the new cash on their balance sheet to increase their growth rate and command a much higher premium.

    What else? What are some more thoughts on SaaS at 3x revenue?

  • Video of the Week: Make Meaning in Your Company

    One of my all-time favorite entrepreneurial authors is Guy Kawasaki. His book Art of the Start is on my list of recommendations for entrepreneurs everywhere. One of his ideas that really resonates with me is the importance of making meaning in your company.

    Here is Guy Kawasaki talking on the topic as the video of the week:

    For more videos, take a look at Guy Kawasaki’s talk on Stanford’s Entrepreneurship Corner.

    Side note: one of my goals is to incorporate more videos into this blog, so look for them more regularly.

  • Talent Recombination in a Startup Community

    One of the ideas with the Atlanta Tech Village is that is would help increase talent recombination in startups. Meaning, more people in startups, especially ones that fail, would join other startups that are succeeding, such that the ones that are doing well would do even better (finding great talent is always one of the biggest challenges). Over the past year at the Village, I’ve seen the talent recombination idea play out several times. Here are a few observations about it:

    • Programs and events, like the weekly Startup Chowdown, truly help people connect and develop stronger rapport, making for faster recombinations
    • Shared community spaces, kitchens, conference rooms, game rooms, and coffee shop facilitate serendipitous interactions, helping keep different people top-of-mind
    • Interconnectedness, as well as frequency of communication, provide for more chances to know about potential opportunities for recombination
    • Stories of recombination spread quickly giving more people peace-of-mind that great people find new gigs quickly if things don’t work out

    Talent recombination is a real benefit of high-density startup communities. Team members in startups that fail find new jobs faster and startups that are doing well hire proven people faster.

    What else? What are some more thoughts on talent recombination in a startup community?

  • Atlanta Tech Village Prioritizing Local Startups

    When we started the Atlanta Tech Village, the thinking was that 80% of the building would be for tech startups (defined as having a proprietary tech product) and no more than 20% for tech related service providers. Quickly, we realized there was more demand than expected from tech startups, thus we limited the number of tech related service providers even further (e.g. only one staffing agency, etc.). Then, we noticed another challenge: a number of startups headquartered in other cities were opening their Atlanta office at the Tech Village, which is great, but with so many of them, it was crowding out local startups.

    The Atlanta Tech Village now prioritizes startups headquartered in Atlanta. We’re still working out what that means, but here are some ideas:

    • CEO and core team based in metro Atlanta
    • Fewer than 50 employees (we want to focus on seed and early stage startups)
    • Company incorporated in Georgia or Delaware (common place of incorporation)
    • Credit given for amount of time already in the Village

    Prioritizing local startups means helping those that aren’t in the Village yet as well as helping those that are already in the Village expand (there’s a good bit of expansion and contraction of startups in the building). As with anything, we’re iterating and working hard to help grow the Atlanta startup ecosystem.

    What else? What are some more thoughts on the Atlanta Tech Village prioritizing local startups?

  • The Power of Long-Term Compounded Growth

    Recently I was reading about Liquid Web and their new CEO from Atlanta, Jim Geiger (founder of Cbeyond). Liquid Web is a well known web hosting company with over 400 employees and many thousands of customers. Now, when thinking about web hosting, it’s often viewed as a commodity and a low growth industry. Only, Liquid Web was on the Inc. 5000 last year with 79% three year growth. Founded in 1997, Liquid Web has well over $50 million in revenue (probably much higher) and shows the power of long-term compounded growth.

    Here are a few thoughts on long-term compounded growth:

    • Starting with $1 million in revenue, at the end of 20 years of 20% per year growth, the company would have over $38 million in revenue
    • Recurring revenue businesses are among the easiest to grow every year because of the existing base of business to build from (that’s one of the reasons why Software-as-a-Service is so desirable)
    • Ralph Roberts bought a little cable company with 1,200 subscribers in 1963 and now the company, Comcast, has 27.2 million subscribers and $68.8 billion in revenue last year (source)
    • Many multi-generation family businesses with substantial scale are great examples of decades of compounded growth (see the Mittelstand model in Germany)
    • Einstein has the famous quote: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” (source)

    Much like the Stanford marshmallow experiment, entrepreneurs that can delay gratification and continue to put more money back into the business to grow it faster, and do so for a long period of time, have the opportunity to build large companies due to the power of long-term compounded growth.

    What else? What are some other thoughts on the power of long-term compounded growth?

  • The Continous Product Management Process

    We already know that the product manager is one of the most difficult positions to fill in a startup. Often, one of the co-founders or the CEO acts as the product manager until the startup is large enough to warrant a dedicated person (or there’s an opportunistic hire). Regardless of having a full-time product manager, there’s a continuous product management process. Here’s what the process looks like for many startups:

    • Daily – Customer feedback via a GetSatisfaction-powered idea exchange, team member feedback in a product planning spreadsheet, and new features as well as bugs in the issue tracker (e.g. JIRA, Pivotal Tracker, or GitHub Issues)
    • Weekly – Direct customer and prospect conversations, update key stakeholders, look for trends, document new functionality, and start/review the sprint (assuming two week product sprints)
    • Monthly – Review the roadmap, evaluate the product metrics/KPIs, demo upcoming features to the team, and one-on-one meetings with stakeholders (sales, marketing, services, support, and engineering)
    • Quarterly – Update the roadmap, call/web meeting with the customer advisory council, and revise components of the Simplified One Page Strategic Plan

    Now, this doesn’t include aspects like sales demos, evangelism, strategy, positioning, and more that is often associated with product management. Rather, this is continuous product management process that is a core part of a successful startup.

    What else? What are some more components of the continuous product management process?

  • 24 Months to Get the Startup Going

    When first-time entrepreneurs set out on a new startup, there’s a desire for immediate results and expectations for quick success. Only after a few set-backs – everything takes twice as long and costs twice as much – does reality start to take hold. Then, it feels like this thing is never going to make it, often called the trough of sorrow, where it even gets worse. Finally, things start to pick back up (hopefully!) and there’s nice steady growth.

    Here’s what the first 24 months might look like:

    • 6 months – Tons of conversations, administrative work, product exploration, and a few beta customers
    • 6 months – Product and messaging refinement, more customers signed, and stronger focus (or, things aren’t working and you start back over from scratch a.k.a. the pivot)
    • 6 months – Approaching product/market fit, more confidence, and more customers
    • 6 months – Product/market fit and the start of a repeatable customer acquisition process

    So, if everything goes well, the business will feel like it’s starting to hit its stride, albeit with modest revenues, after 24 months (see SaaStr on the 24 months timeframe as well). Even with more money and more team members, it still takes 24 months to really get the startup going.

    What else? What are some more thoughts on the idea that it takes 24 months to get the startup going?