David Cummings on Startups

Author: David Cummings

  • Retire Early and Then Start a Company

    With the popular conversation about making lifestyle adjustments to be an entrepreneur, there’s another, more aggressive option: retire early and then start a company. The Washington Post recently profiled Mr. Money Mustache, a man in Colorado that retired at age 30 and now writes a popular blog on happiness and retiring early with a modest lifestyle. If you haven’t read about his approach, start with Getting Rich: From Zero to Hero in One Blog Post.

    So, the idea is to reduce lifestyle expenses as much as possible combined with saving enough money such that you can live solely off investments forever. For many people, it’s somewhere in the neighborhood of $20,000/year in expenses, and thus $500,000 in investments (assuming you live off 4% of the investments per year). In places like Atlanta, this is readily doable, even with a small family, by having an extremely modest lifestyle (own a $200,000 house with no mortgage, always cook at home, have catastrophic health insurance, share one used Honda with no car payments, etc).

    After retiring early, starting a company or joining a startup becomes easy as there isn’t pressure or a self-imposed timeline to get back to a previous salary or compensation level. There also isn’t the feeling that you have to raise money from investors before taking the plunge, as you control your own destiny.

    Retiring early isn’t for everyone, but it should be evaluated as a potential path.

    What else? What are your thoughts on retiring early and starting a company?

  • Valuing a Growth Stage Startup for Shareholder Liquidity

    After a startup has achieved $5 million plus in revenue, it is often referred to as a growth stage company. Growth stage companies have achieved product/market fit and are focused on scaling as fast as possible to capture the market opportunity. With that level of size and scale comes an opportunity for founders and early employees to sell some of their shares as there are many funds designed to provide liquidity for companies growing fast (> 40% YoY) with scale (> $5mm revenue).

    Now, the next question is how to value the company for shareholder liquidity. Here are a few ideas:

    • Software as a Service (SaaS) companies are often valued at 2 – 5x trailing twelve months revenue, depending on gross margin, growth rate, and growth opportunity
    • Recent transactions (deals from similar companies) as well as publicly traded companies are often used for comparisons
    • Private companies usually have a discount of 40 – 50% for a lack of security marketability (meaning it’s hard to sell private stock compared to stock in a public company)
    • Non-controlling shareholders usually have an additional discount to their value since they don’t have as much power in the business

    So, there’s no exact answer, but a simple approach is to find the most similar publicly traded company, determine the revenue or profit multiple, cut that value in half for being private and non-controlling, and you have a decent approximation.

    What else? What are some other ways to value a growth stage startup for shareholder liquidity?

  • 3 Tools for Improving Call Volume of Inside Sales Teams

    Sales is great because it’s so black and white as to what is, and isn’t, working. To complement an inside sales teams’ efforts, there are a number of solid tools for web-based sales and marketing, like Salesforce.com and Pardot, but there’s an area that has been underserved: web-based tools to improve outbound call volume. Over the past two years several tools have emerged to help make sales reps more effective via higher call volume.

    Here are three tools to help improve call volume of inside sales reps:

    Of course, there’s more to sales than call volume, but activity is directly correlated with results.

    What else? What are some other tools for improving call volume of inside sales teams?

  • Co-working, Job Creation, and Innovative vs Replicative Businesses

    At the Atlanta Tech Village we’ve had a number economic development agencies come through for a tour. As a new initiative for Atlanta and the Southeast, there’s a significant amount of interest and curiosity. Several of the economic development people have mentioned how they’re working on co-working space for startups in their own cities and neighborhoods.

    Co-working space is great for the freelancer and entrepreneur starting a business, but there’s another, more important issue not being addressed: innovative vs replicative businesses. Not all companies are created equal. Most companies are replicative businesses where they are replicating something that is already well defined and a known quantity, like a law firm or accounting firm. Innovative businesses, on the other hand, are building something new and trying something that hasn’t been done before. With innovation comes a high rate of failure, but also an opportunity for net new jobs due to being able to generate revenue from outside the region.

    In the context of job creation, it’s important to recognize that innovative and replicative businesses are two different things. Innovative businesses have greater risk, and greater reward. Co-working spaces often have both types of businesses, but their needs and challenges differ, such that one approach isn’t right for both types. To excel, it’s best to choose a focus and be the best in that target area.

    What else? What are your thoughts on co-working, job creation, and innovative vs replicative businesses?

  • Don’t Do Several Independent Products in a Web Startup

    After a product’s reached a modest level of traction, there’s an entrepreneurial tendency to start thinking of the next product to build — don’t do it. Too often I see startups with multiple products where the first one was a winner and the next two haven’t gone anywhere. Now, one web app segmented by functionality for different buyers is great and is not the same as separate code bases for truly independent applications.

    Here are a few thought on multiple products within a startup:

    • Startups are inherently resource strapped, such that spreading people thinner reduces the effort on everything
    • Complexity grows exponentially as there’s more than expected overhead constantly figuring out how time will be allocated
    • When talented people are transferred from the cash cow product to the new product, they get pulled back to the main product as soon as things aren’t going well or a serious challenge is encountered
    • Sales and marketing systems, sites, etc become much more difficult to manage and execute well with multiple products

    There are always exceptions to the rule, but entrepreneurs should avoid doing several independent products in a web startup.

    What else? What are some thoughts on the challenges with having multiple products?

  • Sequoia – We Don’t Choose People, We Choose Markets

    The Stanford Graduate School of Business has a great series of technology startup videos on YouTube with talks from a number of famous people. Recently, I watched Don Valentine, the founder of Sequoia, tell his story and share his philosophies: A Dream and a Way to Solve a Problem Are the Path to Sequoia Capital’s Door.

    My biggest takeaway from the video is that Sequoia chooses markets, not people. Of course, the people that they back are super smart, but it’s the size and scope of the market opportunity they’re most interested in. When you hear him talk of their investments in Apple, Yahoo, Google, Zappos, etc it’s amazing to think of how they analyzed the markets and made bets that turned out even more impressive than imaginable. Sequoia’s goal is to build big businesses, and that’s only possible with big markets.

    What else? What are your thoughts on choosing markets, not people?

    Bonus: Don makes a great point that he doesn’t accept questions of more than 20 words from the audience — he wants concise questions and not speeches.

  • Raising a Series A Requires a Reasonable Chance at a $250 Million Exit

    John Greathouse, an entrepreneur turned VC, writes one of my favorite anecdote-filled startup blogs called Infochachkie. His most recent post is titled The Series A Crunch Is For Entrepreneurs Who Can’t Create Their Own Luck. In the post he quotes one of his VC partners, Jim Andelman:

    If a venture does not have a reasonably high-perceived chance of a $250 million exit, most Series A investors are passing.

    In the startup world, billion dollar exits are idolized and thrown about like they’re an everyday occurrence. In reality, there are very few deals that exceed $100 million, let alone $1 billion. With venture-backed startups taking longer to reach an exit, and startups raising more money because of the long time horizon, shooting for a $100 million exit is no longer enough. Now, the target is a $250 million exit, or as my friend likes to say “I shoot for a $300 million exit so that everyone will be happy and make good money.”

    The next time you hear an entrepreneur talk about wanting to raise VC money, ask them how their company will be worth $250 million in 5-7 years.

    What else? What are your thoughts that raising a Series A requires a reasonable chance at a $250 million exit?

  • More Web Marketing Tools for the Entrepreneur’s Arsenal

    There are so many good web tools that it becomes hard to keep up with the latest and greatest. Recently, two entrepreneurs introduced me to several new tools as well as combining existing tools for greater productivity.

    • ClearSlide – Upload your sales presentations and track interactions
    • Schedule Once – Self-service scheduling software that integrates with Google Calendar (in an email or landing page combine both a ClearSlide presentation link and a ScheduleOnce link to sign up for a product demo — self-service is great service)
    • PadiAct – Prompt site visitors to sign up for your newsletter or receive marketing collateral by email only after a certain level of engagement
    • Perfect Audience – Advertise on Facebook only to people that have been to your site
    • Hello Bar – A/B test call to actions across the top of your site

    What else? What are some other web tools that you like but aren’t mainstream yet?

  • What’s the appropriate reduction in lifestyle to take the entrepreneurial plunge?

    In talking to hundreds of entrepreneurs over the years, I’ve had the opportunity to hear from people with a number of different backgrounds. One segment that is particularly interesting is executives from mid-to-large companies looking to make the entrepreneurial plunge. They have an idea, maybe a prototype, and they’re out raising money and often have low six figures ready to go from friends and family.

    Now, as an executive at a mid-to-large company, they have $150,000 – $300,000/year compensation packages, so naturally, I like to ask the question: how are you going to reduce your lifestyle to handle a startup salary? A startup salary is often 1/4 to 1/2 what they were previously making, assuming they raise a sizable angel round. Too often, it hasn’t crossed their mind just how little salary they’ll get and how they will have to change their lifestyle.

    Here are a few thoughts on lifestyle reduction to take the entrepreneurial plunge:

    • At the simplest level, the compensation should be no more than the bare minimum to support the existing lifestyle (e.g. save no money each month and cut down on frivolous purchases)
    • One approach is to do a flat, round salary like $50k or $100k and keep it simple, regardless of lifestyle
    • Another approach is to maintain a salary similar to that from the large company, but to require that the entrepreneur invest 100% of his or her life savings into the company immediately, so that there’s significant skin in the game and alignment of interests

    This is one of the most difficult topics for successful people that want to change things up and become an entrepreneur. Society glorifies the middle class lifestyle and many people get trapped by their mortgage, car payments, school loans, and more such that they don’t have the ability to make a career change without a significant lifestyle reduction.

    What else? What are your thoughts on the appropriate reduction in lifestyle to take the entrepreneurial plunge?

  • Move Fast to Find Success or Failure

    Recently I was talking to an entrepreneur about a new B2C web-based product he was building. After digging into the idea and business model, he said he was trying to figure out if he should invest more in product development to accelerate the pace. I inquired as to why he wanted to burn more cash and he said that it would help find success or failure faster.

    That’s right — it’s important to determine if something isn’t going to work as quickly as possible. Too often, all the focus is finding a successful opportunity, which is the right approach, but usually happens to the exclusion of determining if it’s more appropriate to hang it up. Most ideas will fail, and speed to failure is an important skill, such that there’s energy and stamina to try a new idea.

    Hard work, passion, and being blissfully ignorant are great traits for entrepreneurs changing the world. At the same time, it’s important to move fast to find success or failure as quickly as possible.

    What else? What are some other thoughts on moving fast to find success or failure?