David Cummings on Startups

Author: David Cummings

  • Venture Fund Cash Flow Considerations

    Continuing with yesterday’s post on the insider view into the venture world, there’s another element of venture funds that I didn’t understand and that’s around cash flow. At first, it seems like if a venture fund is $50 million, then they have $50 million to put to work immediately. In reality, it’s much more complicated.

    Here are a few nuances around cash flow in a venture fund:

    • Capital is committed by investors and then called as needed (e.g. a limited partner makes a commitment of $1 million and each call might be for roughly 10% of the commitment, so an investor would have to wire $100,000 within 10 days).
    • Funds work hard to minimize the number of capital calls to keep things simple for limited partners and often use a line of credit to smooth things over (e.g. shoot for 2-3 capital calls per year, but if there’s additional investment activity between the calls, use the line to move quickly and make another investment).
    • If the fund has some early exits, there’s a real chance that the limited partners don’t have to invest their full commitment because the proceeds from the exits will cover some of the capital (e.g. with some wins, a commitment of $1 million might only result in $700,000 in money invested by the limited partner).
    • Since capital is called over the course of the investment period, typically 3-5 years, and done in a piecemeal fashion, investing $1 million in a venture fund doesn’t require having $1 million in cash, but rather ~$200,000 per year for five years.

    Commitments, capital calls, a line of credit, and exit proceeds make cash flow in a venture fund more challenging than expected. The next time you read about financing from a venture fund, think about everything that went into it.

    What else? What are some more thoughts on cash flow considerations in a venture fund?

  • Viewing the Venture World as an LP

    After we sold Pardot, I decided to invest in a few venture funds as a limited partner. While I want to receive great returns (e.g. 3x cash on cash), I’m even more interested in understanding how venture works and what it looks like from the inside. After a number of conversations, quarterly updates, and annual meetings, I have a few thoughts on the venture world as it operates in Atlanta:

    • Making good returns is much more difficult than it seems. While there isn’t much venture capital locally, it’s still difficult to find investable opportunities.
    • Most of the Atlanta-based venture firms do a substantial number of deals outside of Georgia.
    • Even investing in startups with a minimum of a million in revenue and great growth rates doesn’t guarantee success. In fact, several investments in companies that met that criteria became worthless.
    • Investments in startups and entrepreneurs that are a dud take substantially more time and energy than the ones that do well, so picking correctly at the onset is more critical than expected.
    • Valuations are a major topic, with a heavy focus on getting good deals (read: low valuations), as the goal is to swing for singles and doubles.

    Being a limited partner in several venture funds has given me a greater appreciation for the difficulty of being an institutional investor. I’m looking forward to learning more as the funds progress through their lifecycle.

    What else? What are some more thoughts on the venture world from the inside?

  • Winning Startup Pitch Competitions

    Several years ago I was at a startup pitch event where over a dozen startups presented. Some were OK and some were good. At the end, when it was time to announce the winner, everyone knew exactly which one was going to win. Great idea? Check. Awesome pitch? Check. Believable team? Check. After winning the pitch competition, the startup shutdown a couple weeks later.

    Here are a few thoughts on winning startup pitch competitions:

    • Public praise from a random group of judges doesn’t equal success
    • Pitch competitions are great for networking, but winning one shouldn’t be construed as progress
    • Pay attention to startup theatre and ensure it’s a good use of time
    • Parlay the win into meetings, especially as another reason to get together (dear potential investor, we just won award x and would love to get back together to provide an update on the business)

    Too often, startup pitch competition winners think that an award is validation for their business. Validation comes from customers and growth. Awards are good for social proof, but shouldn’t be a substitute for real progress.

    What else? What are some other thoughts on winning startup pitch competitions?

  • Challenges with Heavy Startups

    The Lean Startup methodology has been popular for several years now and promotes a simple, iterative process to find customer demand and build a product around it in a customer-centric manner. Now, the opposite of a lean startup is a heavy startup where the entrepreneurs think they know what the market wants, raises a ton of money immediately, hires a large team, and then builds a product with some customer input.

    Personally, I’ve invested in three heavy startups, and all didn’t work. Here are a few lessons learned:

    • Struggling to make the business work in a cash-strapped manner is actually healthy for the founding team
    • Overcoming shared challenges and intense experiences results in a more cohesive, stronger team
    • Similar to the Mythical Man Month, more people added to a startup doesn’t result in faster finding of product/market fit
    • Additional engineering and product resources, before product/market fit, results in features, documentation, etc. that are never adopted and slow down future work (similar to technical debt)
    • Larger teams take more time to achieve buy-in and move in the same direction

    While many entrepreneurs want the resources to hire 10 extra people before the market has validated the product, most of the time this doesn’t work and brings more problems than benefits.

    What else? What are some other challenges that come with heavy startups?

  • Where Do Entrepreneurs Need Help?

    Last week, I was asked if I knew of entrepreneurs in town that had already raised some money and were having difficultly raising a second round of financing. The idea was to try and focus on this subset of entrepreneurs since they had already been vetted by investors and should have something to show. My response: I don’t have anyone to recommend at this time. After thinking about it more, this is a good way to assess the progress funded entrepreneurs are making locally, specifically ones that are trying to raise more money. One idea was to work on introducing these entrepreneurs to local businesses that might have a need for their product or service with the hope of generating cash from customers, which is often the best form of funding.

    Entrepreneurs need help in a number of areas. Here are a few ideas:

    Entrepreneurs always need help with something. More communication and collaboration in the community around these areas will make for a stronger and more vibrant ecosystem.

    What else? What are some other areas entrepreneurs need help?

  • 2015 Mercer University Commencement Address

    Earlier today I had one of the highest honors I can imagine: I had the opportunity to give the commencement address at Mercer University.

    Here’s a transcript of the speech:

    I’m humbled and honored to stand here before you today at your graduation.

    Two and a half years ago I was sitting at Fogo de Chao in Buckhead with my co-founder Adam. We had just closed the chapter on the most exciting adventure of our career. Earlier that day, October 11th, 2012, we had sold our company, Pardot, for almost $100 million and now it was time to figure out our next journey. It was a bittersweet moment. As entrepreneurs, we had always hoped, and dreamed, of being successful, but didn’t really know what form it would take. One of the most surreal parts of the experience occurred when we sold the company on a Tuesday morning but couldn’t tell anyone until Thursday afternoon. It was a great time to reflect, knowing something new comes next. Only, we didn’t know what was next.

    In five-and-a-half years, we built the company from an idea to over 100 employees, and in the process learned five life lessons.

    Lesson number one. Find mentors.

    Five years earlier we’d started Pardot to help generate sales leads on the internet. Pardot is the Latvian verb “to market or to sell”. Now, that’s Latvian, not Latin — we couldn’t afford the Latin word, so we paid $8 for the domain name and were on our way.

    With a name and a dream, I scheduled lunch with one of my mentors Bill, a technology CEO whose opinion I valued. It was a nice Spring day so we sat outside near the Chattahoochee River. I shared with him our new business idea and all the reasons why it was going to be successful. Patiently, he asked a number of excellent questions. After 30 minutes, he looked at me and said something I’ll never forget: David, have you heard of marketing automation. Like most of you, I had never heard of marketing automation. He then shared how it’s the future of marketing and something we should look into. Put simply, it’s next generation marketing software. I didn’t realize it at the time, but that lunch with a mentor, and the advice he gave, proved to be one of the most important conversations of our journey, and it wouldn’t have happened if I hadn’t asked him to lunch.

    Mentors are critical. As much as we like to believe we know it all, or can figure it out, the truth is we’ll go further, faster with strong mentors.

    Lesson number two. Invest wisely.

    It was late 2007 and we headed to our first tradeshow in Las Vegas. We arrived at the Sahara Hotel on the old Vegas strip, not to be confused with the Vegas Strip where people actually want to stay. We went to the front desk, and said we were checking in. The clerk pulled up our reservation, looked at the dates, and exclaimed, “Wow, four nights! No one ever stays here for four nights.” Not only were we staying for four nights, we were sharing a small, old room. Every business trip we went on for five-and-a-half years, we shared a room in order to save money, so that we could invest in more important areas of the business.

    Save money, delay gratification, and invest wisely — it makes a difference. Too often, we chase the next shiny object, only to realize too little, too late that it doesn’t bring us happiness. Figure out what brings you happiness and invest wisely.

    Lesson number three. Seek a place where you can grow.

    In 2010, the Atlanta Business Chronicle named Pardot the #1 fastest growing technology company in Metro Atlanta. Knowing that we were a finalist, but not knowing our ranking, I rushed over to Disco Kroger in Buckhead and bought a copy of the paper. Excitedly, I turned to the page that listed the winners. Column one had the company name and column two had the three year growth rate from 2007-2009, inclusive. There it was in big print: Pardot – 42,000% three year growth. Thankfully, the Business Chronicle didn’t have a minimum revenue amount at the time, and starting with a base of a couple thousand dollars makes it easy to grow fast.

    Pardot was well positioned for growth because of the timing, market, and technology. In the same way, position yourself in a place where you can grow. Seek out an opportunity where you’ll be challenged, where you can learn, and where you can take on greater responsibilities.

    Lesson number four. Look for people who share your values.

    One day, I walked into the office, and I had this bad feeling in my stomach. I knew I had a 10am meeting that morning with a few team members I didn’t enjoy working with. I’m the co-founder. I’m the CEO. What’s wrong with this picture? It was at that point that I did a good bit of research and self-examination. After reading the book Good to Great by Jim Collins, it finally clicked: we didn’t have a strong culture. We had a group of people that could get the job done but we didn’t have cohesive values.

    Over the course of several years, we worked hard to build a great culture focused on people that are positive, self-starting, and supportive. As part of our quarterly check-ins, we answered four simple questions: what did you accomplish last quarter? what are you going to do next quarter? how can you improve? how are you following the values? The most important question was that last one: how are you following the values? We wanted to make our values as strong as possible.

    Pardashians, as we like to call our team members, are amazing. In fact, the AJC named Pardot the #1 best place to work in Atlanta two years in a row. In the articles, some of our amazing workplace benefits were highlighted. We had benefits like four hours of housecleaning per month paid for and administered by the company, a full-time massage therapist on staff, and a simple, two word vacation policy: be reasonable. There were no sick days, no vacation days, and no flex days. Everything was centered around the belief that any team member should be able to work anytime, anywhere, and that people should be measured on results, not time spent in the office. Only, the reason we won the best place to work awards is because of the strength of our values.

    Look for people who share your same values – at work, at church, in the community – anywhere you spend time. Shared values improve communication, trust, and quality of life. In fact, strong personal and shared values are a key component of happiness.

    Lesson number five. Make an impact.

    In late 2012, we sold our company. The day after the news was public, I was driving down the Downtown Connector to see a friend in Midtown and share with him the details of the sale. Only, half way there, I looked up and saw one of our Pardot recruiting billboards near the 17th Street Bridge. Seeing the Pardot sign caused a burst of emotion and I just started crying in the car, right there, by myself. My whole identity and self worth was wrapped up in this little company, and now we had sold it. I needed to figure out what was next.

    After talking to my amazing wife, I bought a building in Buckhead, at the intersection of Piedmont and Lenox Roads, and turned it into the Atlanta Tech Village. The Village is a way to say thank you to Atlanta, and bring together hundreds of entrepreneurs. Today, we have 240 startups and 840 people, including Mercer’s own office for entrepreneurs. It’s one of the 10 largest tech entrepreneurship centers in the country and the largest in the Southeast.

    Over the next 10 years, the majority of new jobs created will come from companies that aren’t even in existence today. Here, in Atlanta, entrepreneurship is alive and well. Entrepreneurs in town have created innovative new companies like the next major social network with Yik Yak and their millions of college users. We have the next great Bitcoin payment processing platform with Bitpay and their 50,000 merchants. Today, Pardot has over 400 employees and is one of the fastest growing marketing products in the world. Right here, in Atlanta.

    My goal is to make an impact. I want to help entrepreneurs. I want to make a difference. Whatever it is you do, figure out how to make an impact in your community.

    Conclusion

    As you set out on the next phase of life’s amazing journey, remember these five simple lessons: find mentors, invest wisely, seek out growth opportunities, look for people that share your values, and, finally, make a big impact. Incorporate these five life lessons and the journey will be even more rewarding.

    Congratulations and good luck! Thank you all very much.

  • SaaS Business Model and Metrics

    David Skok has an excellent presentation over on Slideshare about the SaaS business model and metrics with the 3 Stages of a Startup. David’s blog, For Entrepreneurs, is one of the best out there for startups, especially Software-as-a-Service ones. Here are a few notes from the 85-slide SaaS business model and metrics deck:

    • Conserve cash while searching for product/market fit and a repeatable customer acquisition process. Once found, invest heavily.
    • With SaaS, the company actually loses money for some period of time (e.g. the first 12 months) with each new customer before becoming profitable. Because of this, companies that are growing faster are actually losing more money. More growth = more losses.
    • Cost to acquire a customer needs to be less than the lifetime value of a customer
    • Customer lifetime is defined as 1/churn rate, therefore the greater the monthly churn rate, the shorter the customer lifetime
    • Negative churn is a goal whereby revenue growth from existing customers is greater than revenue lost from existing customers
    • Common variable pricing axes are features, users, and depth of usage
    • Retention rate should be analyzed both as customer retention rate and dollar retention rate
    • Customer happiness index is a way to predict the likelihood of churn as well as the business value of the application
    • Ideal cost to acquire a customer is less than or equal to the first 12 months of revenue
    • Lifetime value of the customer should be 3x or greater than the cost of customer acquisition
    • Monthly recurring revenue is the core metric for the business
    • Salesperson on target earnings should 5x less than their quota (e.g. $60,000 in compensation for a $300,000 new annual recurring revenue quota)
    • Different sales models are increasingly more complex and 10x more expensive at each stage: freemium, no touch self-service, light touch inside sales, high touch inside sales, field sales, field sales with sales engineers
    • 3 keys to SaaS success: acquisition, retention, and monetization

    If you’re in a SaaS business, go read SaaS business model and metrics with the 3 Stages of a Startup.

    What else? What are some other key components of the SaaS business model and metrics?

  • More At-Bats for B2C Startups in the Community

    An entrepreneur recently asked me why we don’t have more B2C startups in town. Consumer startups, as opposed to business ones, have a lower success rate. Much like the movie business, even experts have a hard time telling what’s going to do well financially and what isn’t — it’s a “hits” business. With the continued success of Yik Yak here, there’s a renewed interest, and hope, in more B2C startups locally. What’s the solution? More at bats. More swings. More strikeouts. More hits.

    Here are a few thoughts on more at-bats for B2C startups:

    • Incubators like Switchyards are working on developing institutional knowledge around what does, and doesn’t work, while catalyzing the community
    • More local success will result in more local hires that get exposed to consumer startups, and in turn they’ll start their own companies (success breeds success but there’s a chicken and egg problem to get it going)
    • More meetups, experience sharing, and public startup funerals will help give people confidence to take more at-bats, and if it doesn’t work, closure to move on

    When someone asks about creating more B2C startups, tell them it’s a numbers game and that we need more at-bats.

    What else? What are some more thoughts on at-bats and B2C startups?

  • Thiel’s Paradox

    The New Yorker has a fascinating piece on Marc Andreessen, a well known entrepreneur and venture capitalist, titled Tomorrow’s Advance Man. In addition to a number of excellent stories, the author mentions Thiel’s Paradox from early Facebook investor Peter Thiel:

    When a reputable venture firm leads two consecutive rounds of investment in a company, Andreessen told me, Thiel believes that that is “a screaming buy signal, and the bigger the markup on the last round the more undervalued the company is.” Thiel’s point, which takes a moment to digest, is that, when a company grows extremely rapidly, even its bullish V.C.s, having recently set a relatively low value on the previous round, will be slightly stuck in the past. The faster the growth, the farther behind they’ll be. Andreessen grinned, appreciating the paradox: the more they paid for Mixpanel—according to Thiel, anyway—the better a deal they’d be getting.

    Generally, entrepreneurs want to bring in new investors for each round of funding so that they can create an auction-like environment to get the best combination of valuation and value-add. Thiel’s Paradox is that for entrepreneurs of fast growing companies, an insider round from existing investors, no matter the valuation, results in a good deal for investors. The next time you read about a startup raising another round of funding exclusively from the existing investors, think about Thiel’s Paradox.

    What else? What are some more thoughts on Thiel’s Paradox?

  • Learning More Now than While in School

    Recently I was talking with an entrepreneur and he made a comment that really stuck with me: I’m learning more now than while in school. Yup, that’s right. The best entrepreneurs I know are the fastest, and most voracious, learners. Every time I talk with them, they’re sharing some new lesson learned or idea gleaned.

    Here are a few thoughts on learning more now than while in school:

    • While in school there might be more new facts learned weekly, but as an entrepreneur there are many more real-world, applicable insights and strategies learned weekly
    • Make a goal to learn something new every day (see one new insight per day)
    • Find a peer group of like-minded people that share your desire to learn
    • Surround yourself with team members that enjoy learning and want to share ideas

    Entrepreneurs would do well to make sure they’re always learning and instill continual learning as a value within their organization.

    What else? What are some more thoughts on learning more now than while in school?