David Cummings on Startups

Author: David Cummings

  • The Market Opportunity for Marketing Automation in 2009

    Back in 2009 we tried to raise venture capital for Pardot. While we didn’t end up raising any money, we did pitch dozens of venture capitalists and had a great experience doing it. One of the things potential investors were most skeptical about was the market opportunity. Even though we had over $1 million in annual recurring revenue and customers said it was a must-have (a painkiller), investors didn’t think it was a big enough market opportunity. Now that the space has three unicorns (billion dollar companies), it’s clear the market is massive.

    Here’s how we presented the market opportunity for marketing automation in 2009:

    • Marketing teams don’t have a central platform to run their campaigns and track ROI (e.g. accounting has QuickBooks, sales has Salesforce.com, etc)
    • B2B online marketing, while smaller than B2C online marketing, is growing fast and benefits from the shift in offline to online advertising
    • Roughly 150,000 companies pay for a modern, web-based CRM (Salesforce.com, SugarCRM, Netsuite, and Microsoft Dynamics)
    • The vast majority of companies that pay for a modern, web-based CRM need a marketing automation system, yet less than 3% of the market is vended (we cited publicly available customer counts from each CRM vendor and marketing automation vendor)

    Thankfully, our market analysis proved to be correct and marketing automation is now a huge market that’s still growing fast.

    The next time investors ask about the market opportunity, figure out how to present it in a way that’s compelling and incorporates social proof beyond something written in a Gartner report.

    What else? What are some more thoughts on framing a market opportunity and the marketing automation example?

  • 7 Questions Every Entrepreneur Needs to Answer

    Earlier this week I finished Peter Thiel’s new book Zero to One (see my previous post Creative Monopolies on the Mind). My favorite part in the book is where he talks about the seven questions every entrepreneur needs to answer. He provides details for each question and then goes through a few example companies with one that can positively answer the majority (Tesla) and one that can’t (Solyndra).

    Here are the seven questions every entrepreneur needs to answer:

    1. The Engineering Question
      Can you create breakthrough technology instead of incremental improvements?
    2. The Timing Question
      Is now the right time to start your particular business?
    3. The Monopoly Question
      Are you starting with a big share of a small market?
    4. The People Question
      Do you have the right team?
    5. The Distribution Question
      Do you have a way to not just create but deliver your product?
    6. The Durability Question
      Will your market position be defensible 10 and 20 years into the future?
    7. The Secret Question
      Have you identified a unique opportunity that others don’t see?

    While it isn’t critical to be able to answer every question in the affirmative, it is critical to answer a majority of the questions in the affirmative. One of my favorite lines from the book:

    If you don’t have good answers to these questions, you’ll run into lots of “bad luck” and your business will fail.

    Entrepreneurs would do well to answer these seven questions and revisit them on a regular basis.

    What else? What are some more thoughts on the seven questions every entrepreneur needs to answer?

  • Run the 10x Scenarios

    Dreaming about the future — it’s one of my favorite things. As a thought exercise, I enjoy going through growth scenarios. Here are some questions I like to ask:

    • What will happen when everything in the company is 10x larger? How will things work? What will break down? Where are we strong? Where are we weak?
    • What will happen if we make our engineering team 10x larger? What engineering projects would we accelerate? What new products or initiatives would we go after?
    • What will happen if we make our sales team 10x larger? How much larger will other departments have to be to support them?
    • What will happen if we started generating 10x the number of leads every month? What would the sales and marketing departments look like with that type of volume?

    At the next management strategy session or off-site retreat, run 10x scenarios and get everyone thinking about the future and major growth.

    What else? What are some more thoughts on running 10x scenarios?

  • Career Paths in Startups With Limited Visibility

    Back in 2009, we made it our stated goal at Pardot to be one of the best places to work. Excitedly, we applied to be a best place to work with the local business newspaper, had employees fill out the anonymous surveys from the third-party administrators, and waited patiently for the results. After six weeks the results came back and we weren’t even considered to be a finalist. We had failed on several categories, with the most prominent being employees not understanding the future of the company, specifically their roles and career paths.

    Startups are inherently unstable and have limited visibility. So, then, how do career paths fit in? Here are a few thoughts on career paths in startups:

    • While it’s difficult to predict the future, it’s possible to outline the company’s desired scale and size over time, assuming things go well, and to plan out potential roles and positions
    • Managers should meet with team members and talk about career interests at the quarterly check-ins such that potential career paths and timelines are well understood
    • Individual contributor roles and managerial roles should be treated with similar weight such that all the emphasis isn’t on becoming a manager (many companies have roles like Distinguished Engineer or Director of Strategic Accounts, which are individual contributor roles for high achievers with significant experience)
    • Multiple career options should be available whenever possible (e.g. as the company grows, there will be more specialization, and more opportunities to “own” certain areas)

    While career paths aren’t fixed and perfect timelines aren’t available, entrepreneurs would do well to lay out an operational vision for the next three years and team members should be able to see an opportunity to progress within the company. Career paths are important and team members with better career path visibility enjoy greater satisfaction.

    What else? What are some more thoughts on career paths in startups with limited visibility?

  • Dreamforce 2014

    This week is the annual Super Bowl of Software-as-a-Service (SaaS) with the Dreamforce 2014 event in San Francisco. It’s the biggest event of its kind and draws 100,000+ people from all over the world. While I’m not attending this year, I’ve been many times in the past.

    Here are some thoughts from previous years:

    If you’re a software entrepreneur and haven’t been to a Dreamforce event, I’d highly recommend it.

    What else? What are some other thoughts on Salesforce.com’s annual Dreamforce event?

  • Doing the Dilution Dance with Investors

    Entrepreneurs love talking about fundraising announcements from other startups. Fundraising, while it’s much too celebrated, is the most dramatic and firm number that’s readily associated with many startups. Whenever a fundraising announcement comes out, it’s fun to speculate on things like pre-money valuation, participating preferred vs non-participating preferred, stock option pool size, and other stipulations.

    From an entrepreneur’s perspective, too much effort is focused on raising a specific dollar amount and not enough on dilution. After building a financial model, and plugging in imaginary numbers, it’s easy to get fixated on a specific amount as the must-have number. Only, with that number in mind, investors have more leverage in negotiating the pre-money valuation and other terms as the conversation is centered around the amount of money the entrepreneur wants to raise.

    Instead, when raising money, it’s best to give a range (e.g. we want to raise $2-$3 million for our Series A) and make the conversation more focused on valuation and key terms and less about a specific amount. When we tried to raise money for Pardot in 2009, we received one verbal offer to invest $1 million at a $2 million pre-money valuation and a separate verbal offer to invest $5 million at a $7 million pre-money valuation. Both offers came from venture capitalists, and both were at the same time for the same business (we had slightly over $1 million in annual recurring revenue at the time). In one case we could sell 33% of the business for $1 million and the other case we could sell 40% of the business for $5 million. We passed on both offers.

    When doing the dilution dance with investors, focus on the key terms and less on the actual dollar amount raised.

    What else? What are some more thoughts on entrepreneurs focused on raising a specific dollar amount instead of more important terms like valuation and control provisions?

  • Two Year Anniversary of the Pardot Acquisition

    Today marks the two year anniversary of Pardot being acquired by ExactTarget (see ExactTarget and Pardot Join Forces followed by Thoughts on Salesforce.com Acquiring ExactTarget/Pardot). It’s still surreal looking back on the Pardot experience and reminiscing about everything we accomplished.

    Of course, I enjoy working on a number of different initiatives and It’s been a busy two years since the sale. Here are a few accomplishments over the past 24 months:

    • Bought 3423 Piedmont Rd and named it the Atlanta Tech Village
    • Finished almost all the renovations on the Atlanta Tech Village (all office space has been renovated and there are only a few patio, basement, and garage items left)
    • Started Kevy and have already signed 100+ paying customers
    • Made six major startup investments that were greater than $200,000
    • Made four small startup investments that less than $50,000
    • Joined three non-profit boards
    • Endowed a startup grant at Duke in honor of my professor

    The journey continues to unfold in fascinating and interesting ways. Life’s changed since the sale of the Pardot but the core tenants of family, community development, and working with startups hasn’t changed. Life is good.

    What else? What are some other observations since the sale of Pardot?

  • Dreams Worth More Than Limited Reality With Fundraising

    This is a topic that continues to fascinate me, so here it goes again: startup dreams are worth more than limited reality when it comes to fundraising. Entrepreneurs pitching an unproven idea with no product or customers can often raise money at a higher valuation than if they have a working product with a few paying customers.

    The potential of the unknown. What might the business become? How big can this thing really be in a few years? Without a product these are all fantastic questions. Being blissfully ignorant about the true potential makes for a dreamy discussion when it comes to valuation: there’s no data so the valuation can be as high as the entrepreneur can convince the investor.

    Once a product has been built and a handful of customers are using it, there’s data. All kinds of data. How frequently is the product used? How much did it cost to acquire the customers? How much do the customers pay? How long does it look like they’ll use the product? With data, it’s easy to build a financial model and make estimates around growth, financing needs, etc. Then, valuations are more definable (even if some part of the financial models are imaginary).

    Entrepreneurs would do well to remember that dreams are worth more than limited reality when it comes to fundraising and valuations.

    What else? What are some other thoughts on the disconnect in valuations for a startup with an idea vs one with a product and a handful of customers?

  • Customers Finding Bugs

    Yesterday I was talking to an entrepreneur about their recent product launch. The application looks solid and has a minimum respectable feature set (one level above a minimum viable product). Only, he thought the product was sufficient for now and wouldn’t need as much engineering attention for a month or two.

    A new product never survives contact with customers. Never. Customers always find bugs, problems, inconsistencies, and issues. In fact, it never stops, and it’s a good thing.

    Here are a few thoughts on customers finding bugs:

    • Acknowledge the bug when found and graciously apologize to the customer
    • Allocate some amount of engineering time on a recurring basis to address bugs
    • Incorporate exception handling software that automatically registers product errors in a third-party service that notifies the engineering team (e.g. Airbrake)
    • Add automated tests (e.g. unit tests, integration tests, synthetic browser tests, etc.) as new issues arise to ensure core elements of the application are always working

    Customers finding bugs is a normal part of the software experience. Develop a process and best practices for handling them when they occur and work hard to make customers happy.

    What else? What are some other thoughts on customers finding bugs?

  • 7 Tips for Startup Community Building

    Earlier today I had the opportunity to talk to a group of business leaders that were in town as part of the Cincinnati Leadership Exchange to learn about Atlanta and recent city initiatives. I was asked to talk about the Atlanta Tech Village and ways to grow a startup community. Of course, we had several lessons learned over the past 18 months.

    Here are seven tips for startup community building:

    1. Don’t try to control all the startup community activities in town — let a thousand flowers bloom
    2. Bring the community together on a monthly basis for entrepreneurs to share progress on their startup with the greater community, and have no other agenda beyond building community (see the Atlanta Startup Village)
    3. Connect mid-to-large companies in the region with startups through curated meetings (the best form of funding for startups is helping them find customers)
    4. Focus entrepreneurs on building successful, sustainable businesses and not on raising money (too many people view raising money as the measure of success)
    5. Foster serendipitous interactions in the startup community through clusters of tech companies in different areas of town
    6. Support entrepreneurs with different programs based on the stage of the company (e.g. The 7 Figure Club)
    7. Incorporate mentors and community leaders that want to give back, but understand that the strongest startup communities are lead by entrepreneurs

    Note that physical office building with startups isn’t necessary for community building, but physical proximity is critical. Startup community building is difficult and rewarding at the same time. Plan for a long journey and enjoy the ride.

    What else? What are some other tips on startup community building?