David Cummings on Startups

Author: David Cummings

  • Valuing a Small Software Company With No Growth

    Yesterday I was talking to an entrepreneur about his small software company. After being in business for a number of years, and building a stable base of customers, the company has leveled off with a handful of employees and sub $1 million in revenues. Now, he feels it’s time to sell the business. Only, a small software company with no growth isn’t worth as much as he’d like, especially compared to the big multiples commonly referred to online.

    Here are a few thoughts on valuing a small software company with no growth:

    • Typical business valuation multiples apply with the most common being 4 – 6x profits
    • Software companies with scale and a good customer base are typically valued at 2 – 3x revenue for installed software and 3 – 6x revenue for Software-as-a-Service with growth rate and profitability being two major drivers
    • Strategic buyers pay more for a business than financial buyers, and it’ll be tough for either to get interested in a small business unless they want to significantly invest in it or it’s very complementary

    I told him that if his passion isn’t in the business anymore, it’s time to move on. The valuation might not be want he wants but by selling it new opportunities will open up and he’ll have the chance to make the next one even greater.

    What else? What are your thoughts on valuing a small software company with no growth?

  • The Nine C’s of the Atlanta Tech Village

    Johnson Cook put together a great presentation about the Atlanta Tech Village for the AIM Speak Easies: Rapid Talks From Brilliant Minds series in Omaha. I’m borrowing the nine C’s from his presentation and presenting my own thoughts on them here:

    • Core Values – Everything starts with the core values. For us, they are the following: be nice, dream big, pay it forward, and work hard / play hard. We can’t pick winning ideas but we can set the foundation with strong core values.
    • Curated – We have an application process for membership that starts with a tour of the Village. As part of our focus on building the best place possible for startups, it’s critical we curate membership.
    • Collaboration – Creating an environment that promotes serendipitous interactions increases formal and informal collaboration. Startups helping startups increases the likelihood of success.
    • Chaos – Having so many different entrepreneurs under one roof, combined with the desire to push the limits, results in chaos on a regular basis. We roll with the chaos and are constantly improving.
    • Concentrated – Assembling 100+ startups under the same roof makes for great density, which increases the efficiency and economies of scale for everything.
    • Colossal – Our goal is nothing less than creating 10,000 new jobs in Atlanta over the next 10 years. Go big or go home.
    • Community – The core of the Village is the people and we have an amazing community. Community is the main differentiator from a standard office building.
    • Control – Owning the physical real estate, making investments with a 20 year horizon, and not having external investors allows us to control the entire experience. We’re not perfect but we strive to be great.
    • Celebrity – Spotting several Tesla Model S electric cars in the parking deck and bringing by CEOs of Fortune 500 companies are two ways we incorporate a little celebrity excitement in the Village.

    So, there you have it — the nine C’s of the Atlanta Tech Village. What else would you add?

  • Thinking About Atlanta’s and London’s Startup Community

    The Economist has a new article up titled London’s Tech City: Start me up. It’s a good piece that has a variety of talking points about the strong cluster of tech startups in east London. From an local perspective, if you take all the talking points and substitute Atlanta, it’s nearly identical.

    Here are some of those talking points:

    • Need for a big exit or IPO to put the community on the map with King, makers of Candy Crush Saga, as the likely first billion dollar IPO, similar to AirWatch holding the billion dollar crown in Atlanta
    • Many new coworking spaces like Google’s Campus, similar to Atlanta Tech Village
    • Several accelerators including Passion Capital and Seedcamp, similar to Flashpoint and the Atlanta Ventures Accelerator
    • Seed Enterprise Investment Scheme to promote investments in startups, similar to the Georgia Angel Investor Tax Credit
    • Lack of technical talent, which is common everywhere
    • Dearth of venture capital, which is typical in most places

    Now, these talking points aren’t unique to Atlanta and London as I bet most major metro areas with at least a small-to-medium sized startup community as making similar progress. It’s great to startup communities growing around the world.

    What else? What are your thoughts on these talking points from Atlanta’s and London’s startup communities?

  • Review of Twitter’s Revenue Streams

    Following up on yesterday’s post titled Notes from the Twitter S-1 IPO Filing, it’s important to drill into how Twitter makes money. Twitter is still experimenting with different advertising, licensing, and partnership opportunities, and it’s clear there are many other options, so let’s look at their current initiatives:

    • Data Licensing – Companies like Gnip and DataSift pay large amounts of money to Twitter to have access to the raw “firehose” of tweets, which they then process and make available to other companies for a fee. This is a good revenue stream but limited overall as the number of companies that will buy the data is small compared to the revenue opportunities with advertising.
    • Partnerships – Companies partner with Twitter to run specialized programs and campaigns that are outside the standard offerings. For example, the NFL and Twitter just announced a partnership to provide exclusive content only available via Twitter that has a revenue sharing component to it.
    • Promoted Tweets – Companies can advertise their own tweets right in the timeline of Twitter users based on context, geographic location, and several other factors making these super valuable and timely. Companies are only charged for these tweets when someone clicks a link in the tweet (thus, a form of performance-based advertising).
    • Promoted Accounts – Companies can advertise their own Twitter account as an account for someone to follow and only pay when that action takes place (more performance-based advertising).
    • Promoted Trends – Twitter has a popular feature that shows trending topics (e.g. hashtags that are currently popular) such that advertisers can put their own topics in the trending topics area to garner clicks (more performance-based advertising as advertisers only pay for actions).
    • Advertising Network – Twitter recently acquired MoPub for up to $350 million to have a leading mobile advertising network. Advertisers place ads and publishers display the ads with Twitter taking a cut of the transactions.

    I believe the MoPub advertising network and Promoted Tweets will turn out to be the most successful revenue streams and prove to be unbelievably valuable. The most important thing Twitter can do is to continue building the value and size of the community so that these revenue streams increase in value.

    What else? What are your thoughts on Twitter’s revenue streams?

  • Notes from the Twitter S-1 IPO Filing

    The Twitterverse is buzzing about the upcoming Twitter IPO, and now we have all the intimate details courtesy of the S-1 IPO filing with the SEC. I’ve found Twitter to be an amazing medium that I use on a daily basis (@davidcummings), so I want the company to succeed in a way that grows both the value of the community and shareholder value.

    Here are a few notes from the Twitter S-1 IPO filing:

    • 215 million monthly active users (pg. 1)
    • 500 million tweets per day (pg. 1)
    • 75% of users accessed it from a mobile device (pg. 2)
    • 45% of Super Bowl ads used hashtags to engage users (pg. 5)
    • 300 billion Tweets created since origination (pg. 6)
    • Revenue (pg. 10)
      2010 – $28.3M
      2011 – $106.3M
      2012 – $316.9M
    • Losses (pg. 10)
      2010 – $67.3M
      2011 – $129.8M
      2012 – $79.4M
    • 87% of revenue from advertising Promoted Tweets, Promoted Accounts, and Promoted Trends (pg. 16)
    • Accumulated deficit of $418.6M (pg. 24)
    • 2,000 employees (pg. 26)
    • 2011 FTC settlement that requires biennial security assessments for 20 years (pg. 31)
    • February 2013 attackers accessed 250,000 user records (pg. 32)
    • 6 U.S. patents issued and 80 patents pending (pg. 33)
    • 25% of revenue is international (pg. 60)
    • Equity ownership (pg. 144)
      Dick Costolo – 1.6%
      Jack Dorsey – 5%
      Benchmark Capital – 6.7%
      Evan Williams – 12%

    Twitter’s IPO is going to do exceptionally well due to the large number of consumers that love the service and the fact that it’s an extremely fast growing technology business, which is in high demand.

    What else? What are your thoughts on the Twitter S-1 IPO filing?

  • Do the Personal Math When Thinking About Raising Money

    Yesterday I was talking to an entrepreneur that was contemplating whether or not to raise a Series A round for his Software-as-a-Software startup. The business is growing nicely and it’s clear there’s a big market opportunity. With a low cost of customer acquisition and a great lifetime value, the financial model is there to scale the business indefinitely with little outside capital. Only, there’s so much market potential that with outside capital the business can grow significantly faster and gain marketshare in a relatively greenfield space.

    My answer to him regarding raising money was pretty simple: do the personal math on the expected outcomes with and without venture capital.

    Here are a few questions related to doing the personal math when thinking about raising money:

    • How many rounds of financing will the business take and how much equity will be sold at each round?
    • How much more difficult is it to find a buyer for the business when the valuation exceeds $50M? $100M? $500M?
    • With no outside capital, how fast and how long do you believe the growth will persist?
    • Is it a winner-take-most market where marketshare matters or is it a fragmented market with many winners?
    • What are your personal goals and aspirations related to control, company size, and financial outcomes?

    There’s no right or wrong answer when it comes to raising outside capital but more often than people expect, going the independent route makes more sense financially, assuming the startup can get to the point where it’s self-sustainable. The next time an entrepreneur says they’re raising outside money, tell them to do the personal math.

    What else? What are your thoughts on doing the personal math when thinking about raising money?

  • Breakout Startups Grow the Ecosystem of Talent

    When talking to local software engineers, sales people, and entrepreneurs that come through the Atlanta Tech Village, I find a common pattern where the individual starts their career at a non-startup company and then eventually gets recruited by a startup. After a taste of the startup experience, the individual never wants to go back to a regular business. Now, once the individual is in the startup ecosystem, every 2-4 years they move to a different startup and bring their experience and expertise to a new opportunity.

    This is all good and well but it doesn’t significantly grow the startup community since most startups fail and the talent gets recycled into the community (which is fine and healthy). What does grow the startup community is breakout startups. Startups that create 100+ jobs locally bring a ton of talent into the startup community. Software engineers get recruited from all kinds of backgrounds, especially right out of school. Sales reps get recruited from insurance jobs, telcom positions, and other traditional sales roles. And, of course, entrepreneurs that started ventures that didn’t work out join the breakout startup, provide great leadership for a few years, and then go on to start their next thing.

    Having more startups helps grow the entrepreneurial ecosystem, but a greater impact comes from breakout startups that bring in tons of talent and introduces them to a better way of life.

    What else? What are your thoughts on breakout startups growing the ecosystem of talent?

  • Syndicating Angel Deals in Atlanta with AngelList

    AngelList just launched their Syndicates offering and it’s a big deal. Angel investing is notoriously inefficient due to corralling hobbyist investors, extensive paperwork, and generally small dollar amounts. Syndicates works to change that and deliver some of the benefits of a venture fund with a larger amount of investments dollars, fewer investors to wrangle, and the speed and leadership of a lead investor.

    Here are a few details on AngelList Syndicates:

    • Lead angels get a carry (part of the profits, if any, from doing the deals) and AngelList gets a carry (that’s how they make money as a company)
    • Money invested from lead angels in a deal often represents a much higher percent of the deal, and personal wealth, compared with venture capitalists investing from their own fund (e.g. the lead angels have much more skin in the game compared to VCs)
    • No management fees (management fees are money taken out of the fund to pay salaries, office space, etc. regardless of making a profit)
    • Open to accredited investors and qualified purchasers (it isn’t crowdfunding)

    Overall, this has the potential to make lead angel investors much more meaningful and impactful with their time and effort.

    From an Atlanta perspective, this is awesome. This provides the opportunity to bring together startup investors that don’t want to commit capital to a fund, and the requisite long term illiquidity, but still want the guidance, deal flow, and help that a lead investor provides. It’s win-win.

    I’m looking forward to using it and seeing how it changes the market for angel and venture funding.

    What else? What are your thoughts on syndicating angel deals with AngelList?

  • Serial Entrepreneurs at the Village

    When originally thinking about the Atlanta Tech Village, I viewed it as community and office space for first-time entrepreneurs. After a month, it became readily apparent that serial entrepreneurs and venture-backed startups wanted to be in the community just as much as first-time entrepreneurs. Entrepreneurs, whether on their first try or fifth try, want to be around each other.

    Here are a few ideas about serial entrepreneurs at the Village:

    • Entrepreneurs, even ones that have been so successful so as to never have to work again, enjoy the energy and camaraderie that comes with a strong community
    • Markets and technologies are changing so fast that even if you were successful before, the same tactics applied again aren’t guaranteed to succeed
    • Talent is always at a premium, so being in an awesome environment for recruiting new talent into the startup world is always beneficial
    • Leadership skills and the importance of great people are the same, regardless of first-time or serial entrepreneurs

    So, the Village isn’t a home for first-time entrepreneurs; it’s a home for all entrepreneurs.

    What else? What are your thoughts on serial entrepreneurs at the Village?

  • Entrepreneurs Taking Chips Off the Table

    Several years ago there was significant discussion around the pros and cons of entrepreneurs taking chips off the table. Taking chips off the table is another way of saying that the entrepreneur sells some of his or her equity before selling the entire business. Generally, the idea is that by putting some money away now, especially if it’s a decent amount, pressure is removed to sell the whole thing early and instead go for building a much larger business.

    I’m a fan of entrepreneurs taking chips off the table for several reasons:

    • Having 99% of your assets tied up in one company creates pressure to take the first good offer that comes along
    • Spousal and family stress during the entrepreneurial journey can be partially alleviated when things like the house and college for the kids are completely secured
    • Investors that buy some of the entrepreneur’s equity show faith in the venture and the opportunity for it become significantly more valuable

    For investors, one of the major considerations when buying equity from an entrepreneur is ensuring that the entrepreneur still has enough equity to be sufficiently motivated going forward. There’s no exact science here but it’s a topic of consideration nonetheless.

    For successful startups with meaningful value creation, entrepreneurs would do well to take some chips off the table.

    What else? What are some other reasons entrepreneurs should take chips off the table?