David Cummings on Startups

Author: David Cummings

  • 4 Reasons for Startups to Avoid Big Partnerships

    We’ve all heard the story: an entrepreneur spends a tremendous amount of time and energy signing a big partnership only to have it result in nothing. Every. Single. Time. Personally, I’ve done the big partnership thing multiple times and never had it work out. Do as I say, not as I’ve done.

    Here are four reasons why big partnerships fail:
    1. Loss of Sponsor – When one person is driving the partnership, and that person leaves, there’s a good chance that the replacement person won’t feel as strongly about the relationship
    2. Change in Strategic Priorities – While the partnership might be important when the deal was signed, that could change at any time as the company is continually changing strategic direction
    3. Limited Early Results – Big companies operate with a shorter horizon, so if the partnership doesn’t yield great results immediately, there’s a good chance the partnership will be cut or downsized
    4. Lack of Resources – While big companies have extensive resources and often talk about the possibilities of the partnership, many times resources are already committed to other projects and are in fact limited

    So, the next time an entrepreneur wants to bet the business on a big partnership, make sure it’s crystal clear to them that most big partnerships fail.

    What else? What are some other reasons big partnerships don’t work out?

  • 3 Key Times to Talk to Investors

    Entrepreneurs are always talking about talking to investors. There are so many pitch sessions, angel investor events, and venture conferences that entrepreneurs are constantly saying they want money. In reality, there are three key times for entrepreneurs to talk to investors:

    1. When you don’t need money: this is the best time as investors want to fund successful businesses that don’t need financial help
    2. When the business has hit a major milestone: whether it’s a new revenue achievement (e.g. $1M in annual recurring revenue) or a major new relationship, investors love to hear about results
    3. When you’re building a relationship in advance of raising money in the future: investors invest in people they know, so it’s important to build relationships well in advance of needing money (if you’re going to start raising money in six months, now is the time to start building relationships)

    Entrepreneurs would do well to be more intentional about how and why they talk to investors. Talking to investors when you need money right away and don’t have an existing relationship is what most entrepreneurs do, and it’s the least effective.

    What else? What are some other key times to talk to investors?

  • Never Settle on New Hires

    As an entrepreneur with a vision and a dream, it’s tempting to hire the first good candidate that comes along. Entrepreneurs love building things, and it’s necessary to assemble a team to get things done fast and execute the plan. Only, all too often, I see entrepreneurs settle with their first few hires. Never settle on new hires. Here are a few things to think about:

    • Culture is set by the founders and team members, so ensure each hire is a great culture fit
    • After interviewing several people, and not finding a great candidate, it’s tempting to hire a decent candidate — don’t do it (continue to hold out until the right person is found)
    • Hire for aptitude and culture fit, not purely based on experience (we look for people who are positive, self-starting, and supportive)
    • People associate with other people like themselves, so if you hire great fits early on, they’re going to recruit their friends, and the talent pipeline will grow

    In the end, entrepreneurs should never settle on new hires. This is true throughout but especially true early on when resources are so limited.

    What else? What are some other reasons entrepreneurs should never settle on new hires?

  • SaaS Valuations Driven By More Complicated Metrics

    Andreesen Horowitz has a great new piece up titled Understanding SaaS: Why the Pundits Have It Wrong. The idea is that SaaS valuations are under intense scrutiny due to the recent run up and down in the public markets. In reality, SaaS companies have financial models and metrics that are more difficult to understand when compared to traditional software companies. With a traditional software company, you spend a ton of money, close a deal, and collect the majority of the lifetime value of the customer immediately. With a SaaS company, you spend a ton of money, close a deal, and then collect a small portion of the lifetime value every month for (hopefully) several years. Financial statements for SaaS companies look worse compared to traditional software companies, yet the business model is significantly better.

    Some key points from the Andreesen Horowitz article on SaaS:

    • More growth requires more capital as money is spent to acquire and onboard customers, yet customer payments are spread out over an extended period of time
    • R&D is much more efficient for SaaS companies due to having a single code base as opposed to lots of different versions of a product
    • Metrics like lifetime customer value, cost of customer acquisition, churn, and billings are critical for SaaS companies, yet difficult to discern from financial statements

    SaaS and subscription-revenue entrepreneurs would do well to read Understanding SaaS: Why the Pundits Have It Wrong.

    What else? What are some other takeaways from the article and reasons SaaS companies aren’t as well understood?

  • Enterprise-Focused Public SaaS Companies More Likely to Be Acquired

    Reflecting on the list of publicly traded B2B SaaS companies from yesterday, it’s clear that over the past few years, companies that reached scale and went public were more likely to be acquired if they focused on selling to large companies (enterprises) as opposed to ones selling into the small-to-medium sized business segment. Companies like ExactTarget, Eloqua, and Responsys are all in the email marketing space, which is white hot (and just had another nice exit with IBM buying Silverpop and closing the transaction today). If you go back another year you have SuccessFactors and Taleo both getting acquired, and both targeting the enterprise with HR software.

    Here are a few thoughts on why enterprise-focused startups are more likely to be acquired:

    • Companies targeting the enterprise with scale have an easier time maintaining a fast growth rate due to the nature of high dollar sales (if each new deal is $200k/year in annual recurring revenue, it’s easier to put a bunch more feet on the street and pound the pavement to bring in more deals as compared to trying to sign the equivalent number of small businesses)
    • Large acquirers are more prevalent in the enterprise-focused space (think of Oracle, SAP, Salesforce.com, etc vs Intuit, etc), and once a category is declared strategic and an acquisition is made, the big competitors start circling the remaining players
    • CIOs and executive-level technical buyers communicate more with the large acquirers since they purchase so many different products whereas many SMB products are bought via a credit card by line-of-business managers

    Again, this is anecdotal evidence based on a limited number of public market acquisitions. As for building an SMB or enterprise-focused SaaS company, I’d go after whatever market has the most opportunity. Regardless, publicly traded enterprise-focused SaaS companies are more likely to be acquired.

    What else? What are some other reasons why enterprise-focused public SaaS companies are more likely to be acquired?

  • Enterprise Software Public Company SaaS Valuations for Q2 2014

    Once a year I like to inventory the public company SaaS valuations (see 2013, 2012 and 2010). Earlier this year SaaS valuations shot up a good bit, but have subsequently come back down over these past few weeks. We’ve also had several SaaS companies acquired over the past year including ExactTarget, Eloqua, and Responsys as well as new IPOs like Cvent and ChannelAdvisor.

    • salesforce.com (NYSE:CRM) – customer relationship management SaaS company.
      Market cap: $30.86 billion
      Last reported quarter’s revenues: $1,145 million
      Employees: 13,300
    • NetSuite (NYSE:N) – enterprise resource planning (accounting, inventory, etc) SaaS company.
      Market cap: $5.53 billion
      Last reported quarter’s revenues: $122.96 million
      Employees:  2,434
    • Constant Contact (NASDAQ:CTCT) – email marketing for small business SaaS company.
      Market cap: $874.21 million
      Last reported quarter’s revenues: $78.87 million
      Employees: 1,235
    • LogMeIn (NASDAQ:LOGM) – remote machine access SaaS company.
      Market cap: $981.18 million
      Last reported quarter’s revenues: $49.02 million
      Employees: 675
    • LivePerson (NASDAQ:LPSN) – live chat SaaS company.
      Market cap: $506.71 million
      Last reported quarter’s revenues: $47.83 million
      Employees: 796
    • Demandware (NYSE:DWRE) – ecommerce SaaS company.
      Market cap: $1.69 billion
      Last reported quarter’s revenues: $35.54 million
      Employees:  383
    • Marketo (NASDAQ:MKTO) – marketing automation SaaS company.
      Market cap: $950.39 million
      Last reported quarter’s revenues: $32.29 million
      Employees: 519
    • ServiceNow (NYSE:NOW) – IT asset management SaaS company.
      Market cap: $6.66 billion
      Last reported quarter’s revenues: $139.09 million
      Employees: 1,830
    • Workday (NYSE:WDAY) – HR and financial management SaaS company.
      Market cap: $12.48 billion
      Last reported quarter’s revenues: $141.87 million
      Employees: 2,600
    • Cvent (NYSE:CVT) – Events management SaaS company.
      Market cap: $990.58 million
      Last reported quarter’s revenues: $30.70 million
      Employees: 1,450
    • ChannelAdvisor (NYSE:ECOM) – Ecommerce channel management SaaS company.
      Market cap: $542.43 million
      Last reported quarter’s revenues: $19.34 million
      Employees: 216

    Valuation wise, the two biggest movers were Constant Contact and Demandware doubling in value over the past 12 months. SaaS/cloud computing companies continue to command larger valuations relative to other technology companies.

    What else? What are some other observations on public company SaaS valuations?

  • Data Exhaust and Startup Opportunities

    Last week I was talking to an entrepreneur about ideas to grow his business. Halfway through the conversation, he volunteered that he’s a fan of using data exhaust — that is, data other companies produce but aren’t focused on — to do more targeted cold calling and marketing. What are some examples of data exhaust that exist out there? Let’s take a look:

    • Kabbage realized there was tremendous credit history value in past eBay transactions, UPS shipping records, and more resulting in a more efficient system to loan money to online merchants
    • BuiltWith realized that websites include code that shows the company is a customer of one or more web products, which is great for other companies selling competing or complementary products
    • List building products like SalesLoft that can take existing information online, like prospect profiles, and make them organized and actionable

    Keep an eye out for data exhaust others might not focus on and consider how it can be used to your advantage.

    What else? What are some other examples of data exhaust creating startup opportunities?

  • The Techie and the Entrepreneur

    For most of my life I was known as an IT guy. In high school, I was the go to guy for computer support, setting up networks, connecting to the internet, etc (most of the time I just had to remind them to reboot the computer). In college, I was the go to guy for web design and building sites (in 1998 my roommate and I were running a Linux server in our dorm room to power a textbook exchange service for students).

    After college, while working on my content management software company, I was still known as an IT guy. Even with dozens of employees, whenever asked about my profession, I’d say software entrepreneur, and the most common follow-up question was, “Do you work out of your house?” Clearly, the word “software” took more precedence over the “entrepreneur.” People still looked to me for help with IT projects.

    Sometime in the last five years I became known for entrepreneurship and no longer known as an IT guy. Perhaps it was because I was focused on digital marketing software and not website management software. Perhaps people didn’t need as much IT help as Macs and iPads were so much more prevalent. Regardless, people were coming to me for help with their startup, and not for their IT needs.

    I wanted people to view me as an entrepreneur and not as a techie (even though I love technology). I had arrived. I’m an entrepreneur first.

    What else? Do people think of you for one thing when you aspire for something else?

  • Raising Money Doesn’t Equal Product/Market Fit

    Yesterday at the SEVC event, I was talking to an entrepreneur who was in the middle of trying to raise a Series B round from venture capitalists. We were talking about how VCs want to see a repeatable customer acquisition process whereby it’s clear that if you put in $1, you’ll get $2 back (or some multiple of the investment). The idea is that venture money is almost always used to accelerate the growth of a model that’s already working.

    After asking him about his metrics related to customer acquisition costs, gross margin, lifetime value of the customer, and more, it was clear that the story wasn’t sound yet — stage two of the B2B startup lifecycle hadn’t been achieved. Talking more about the existing customer base, I then realized that product/market fit wasn’t in place yet either (see Assessing Achievement of Product/Market Fit). It then struck me that even though they had raised a Series A in the past, and were now raising a Series B, they hadn’t proven their product fit the needs of the market.

    Just because an entrepreneur raises a Series A round, it doesn’t mean that product/market fit has been achieved.

    What else? What are some other thoughts on fundraising and product/market fit?

  • 5 Recommendations for Teams at Conferences

    Over the years I’ve had the opportunity to attend dozens of industry conferences. Some large, some small, and mostly worthwhile. My first real conference as an entrepreneur was the Internet World trade show at the Javits Center in NYC in December 2001. With 50,000 attendees and 300 vendors, I was blown away by the size and scale. At the show I met the company that licensed our product and indirectly financed our next product, which ultimately helped make the company successful — it was a big inflection in the lifecycle of the startup.

    Here are five recommendations for teams at conferences:

    1. Make a plan with goals in advance of the conference
    2. Divide up roles and responsibilities, and ensure all team members are on the same page
    3. Schedule meetings with prospects, customers, and partners a month in advance (it’s a great sales tactic to say that you’re in town for the conference and would enjoy stopping by to meet)
    4. Enforce a “no sit together rule” whereby team members divide up during sessions so as to meet more people (the main point of tradeshows is to build relationships, so hanging out with coworkers during show time doesn’t help that)
    5. Debrief at the end and come up with a list of to start, stop, and continue doing at future conferences

    Even in the digital age, building relationships face-to-face is critically important and conferences, when done well, are a great way to do it. Put time into the conference before and after the event to make it worthwhile.

    What else? What are some other recommendations for teams at conferences?