David Cummings on Startups

Author: David Cummings

  • A Startup is a Scalable Growth-Focused Company

    Paul Graham’s most recent essay this week, titled Startup = Growth, argues that startups are companies designed to grow with a scalable business model. The idea is that a startup is different from most businesses, like a barber shop, in that they are high growth-oriented from the beginning. So, a startup can be in the early low/no growth phase as well as the rapid growth phase that eventually levels off, resulting in a regular, large business, if the startup is successful.

    Another prominent startup author, Steve Blank, argues that a startup is an organization formed to search for a repeatable and scalable business model. The idea is that once the new entity figures out product/market fit and starts building a business, the organization is now a company and no longer a startup. Now, these are fundamentally different: one says that startups are high growth-oriented companies from the beginning through rapid growth stage and the other says that startups are temporary businesses at the earliest stage.

    My personal belief is that startups are of the Paul Graham definition (and a superset of the Steve Blank definition). Here’s how I view a startup:

    • Large, scalable business potential that isn’t predicated on any one person (most businesses are replicative of an existing model instead of innovative with a new model)
    • Significant amounts of change and uncertainty on a weekly or monthly basis (companies like a healthcare provider have change and uncertainty, but it doesn’t manifest itself in such a short time frame)
    • Top line annual revenue growth of 30% or more once a modest level of product/market fit has been achieved

    To me, startups are about scale and growth with the later being the most important, as Paul Graham clearly articulates.

    What else? What are your thoughts on a startup being a scalable growth-focused company?

  • Salesforce.com’s Stock is Priced for Perfection

    At Salesforce.com’s Dreamforce conference this past week there were a number of hot topics like cloud computing, social media marketing management (a.k.a. the marketing cloud), and big data. One item I heard discussed on the show floor was Salesforce.com’s meteoric stock price and market cap. When I asked further about the stock price to one attendee, he described it as “being priced for perfection.” Having not heard that phrase before, I asked what it meant. Simply put, it means that the price is so high that there’s no room for error and Salesforce.com must keep exceeding analyst’s expectations. If Salesforce.com misses analyst’s growth, revenue, and earnings expectations in a quarter, expect a large correction in stock price.

    Here are some of the numbers for Salesforce.com now, as of September 22, 2012, from Google Finance for NYSE:CRM:

    • Market cap: $21.57 billion
    • Stock price: 155.20
    • Cash on hand: $1 billion
    • Total current assets: $1.85 billion
    • Total debt: $508 million
    • Last quarter’s revenue: $731 million
    • Run rate based on last quarter’s revenue: $2.92 billion
    • Enterprise value: ~$21.07 billion
    • Revenue run rate multiple: ~7x

    A revenue run rate top line multiple of 7x is incredible for any company, but especially so with a company that has 8,765 employees. Salesforce.com’s stock is priced for perfection and I hope they continue to exceed expectations.

    What else? What are your thoughts on Salesforce.com and their stock being priced for perfection?

  • Odds of Raising Venture Money and Selling for $100M+

    Bob Dorf, co-author of Startup Owner’s Manual, has a post on Steve Blank’s blog titled Why Too Many Startups (er) Suck where he cites a stat that between .2% and 2% of all venture-backed startups ever sell for more than $100 million. Think about that for a minute: with 1,000 venture-backed startups, somewhere in the 2-20 range reach a nine-figure exit.

    Let’s take the math further. Suppose, for simple analysis purposes, that only venture-backed companies sell for at least $100M+ (not true but it’s even more rare for a bootstrapped company to sell for $100M+ compared to a venture-backed company).What percentage of companies actually raise venture capital? According to a piece on Quora, .6% of companies raise venture capital.

    Taking all companies that are created, all companies that raise at least one round of venture capital, and all companies that sell for $100M+, you get between .0012 and .00012. That is, one in 10,000 – 100,000 companies will raise venture capital and sell for $100M+.

    The next time someone offers raising venture capital as a way to get a slice of a watermelon instead of owning a grape, ask them how many watermelons are grown each year.

    What else? What are your thoughts on the odds of raising venture money and selling for $100M+?

  • Free Doesn’t Help if the Market Isn’t Ready

    Recently I was talking to an entrepreneur who’s working on a new open source product for a small but fast growing market. After talking about it with him for 10 minutes, and learning more about the opportunity, I told him that I thought he was much too early. Free doesn’t help if the market isn’t ready.

    For our company Pardot, we could give away our software for free and we wouldn’t materially increase the number of active, successful clients. The challenge with our market, and the market this entrepreneur is going after, is that there’s a) a significant lack of market awareness and b) a significant lack of product understanding. The two are related in that the more people use a new technology the more awareness there is of it and a positive adoption cycle continues until it’s mainstream.

    Because so few people have used our type of technology, we spend thousands of dollars per customer making sure they’re successful and manually helping them out. 5-7 years from now enough people will have used our type of technology such that a lower cost entrant in our market will be successful by offering a simpler interface with only the most important features and they’ll be able to sign up companies that already have experience, and thus don’t need a comprehensive on-boarding experience.

    Free or open source works for an educated market. When the market isn’t ready, these types of distribution models don’t work as well as traditional models.

    What else? What are your thoughts on free or open source products in a market that isn’t ready?

  • Dreamforce 2012 Exhibitors as Proxy for Hot SaaS Categories

    Salesforce.com’s annual Dreamforce conference is here again promising to have over 80,000 attendees in San Francisco. One of the many interesting aspects of the show is to see all the different Software-as-a-Service (SaaS)/cloud companies exhibiting at the show (250+). In many respects, the exhibitors at the show act as a proxy for the excitement surrounding different SaaS categories. Booths at the show range from ~$30,000 for a bronze sponsorship to $1,000,000 for a diamond sponsorship.

    Using the sponsorship level as an approximation for company size, we can gauge different SaaS sectors on their size. So, Bronze = 1 point, Silver = 2 points, Gold = 3 points, Platinum = 4 points, Titanium = 5 points, and Diamond = 6 points.

    Here’s a quick analysis of the different SaaS/cloud categories based on the vendors at Dreamforce 2012 with at least a Silver sponsorship level and the points earned by that category based on sponsorships:

    • Cloud Consulting: 6, 5, 5, 4, 4, 3, 3, 3, 3, 3, 3, 3, 3, 3, 3, 2, 2, 2, 2, 2, 2
    • Marketing Software: 5, 5, 4, 4, 2, 2, 2, 2, 2
    • Contract/Quote Management: 4, 3, 3, 3, 3, 3
    • Document Collaboration: 4, 3, 2, 2
    • E-Signature: 4, 3
    • Accounting/ERP Software: 3, 2, 2, 2, 2
    • Business Intelligence: 3, 3, 3, 2
    • Forecasting/Pipeline Management: 3
    • Expense Management: 3
    • Data Quality Management: 3
    • Cloud Integration Middleware: 3, 3, 3, 2, 2, 2
    • Customer Service/Call Center Software: 3, 3, 2, 2, 2, 2, 2, 2, 2
    • Data Services: 3, 2, 2, 2
    • Mobile Software: 3, 2
    • Human Resources Software: 3, 2
    • Sales Compensation Management: 3
    • Billing Management: 3
    • Learning Management Software: 2
    • User Engagement Software: 2
    • Conferencing Software: 2
    • Project Management: 2
    • Ecommerce Software: 2
    • Sales Process Management: 2, 2, 2, 2, 2
    • Identity Management: 2

    The four clear winners in order of size: cloud consulting, marketing software, customer service/call center software, and contract/quote management software.

    What else? What are your thoughts after seeing the different categories of vendors and size of their investment in the Dreamforce 2012 conference?

  • Premature Scaling Worries in a Startup

    Recently I was talking to an entrepreneur about his startup. After about 10 minutes into his idea, I stopped him and said that he was having premature scaling and delivery worries. 95% of startups fail due to a lack of a sales and 5% fail due to a lack of being able to deliver what’s been sold (made up numbers but the idea is still true).

    Here are some common premature scaling questions to look our for as an entrepreneur:

    • Should I choose Zendesk or Help.com for my support software? Have you sold anything yet? Go sell something first and use plain email until you’re overwhelmed with support inquires.
    • Where will I find good operations people? Have you sold anything yet? Good people are readily available once you have revenue.
    • How much money should we raise for this idea? Have you sold anything yet? Investors are unlikely to invest in the idea until the startup has some paying customers.

    The next time you hear premature scaling worries, focus the conversation on building a repeatable customer acquisition process and defer the scaling conversation until it becomes a high class problem that’s on the near-term horizon.

    What else? What are some other premature scaling worries in a startup?

  • The Boulder Thesis Applied to Atlanta for Startup Communities

    Last night I finished reading a pre-release copy of Brad Feld’s new book Startup Communities: Building an Entrepreneurial Ecosystem in Your City. Brad does a great job of covering a wide range of topics and presenting a number of tactical ideas for community building, startup or otherwise. The book is closer to a how to manual with anecdotes than it is a strategy business book like you might find from Jim Collins. If you’re a hands-on, doer type, then it’s for you.

    Here is Feld’s Boulder Thesis for startup communities:

    1. Entrepreneurs must lead the startup community;
    2. The leaders must have a long-term commitment;
    3. The startup community must be inclusive of anyone who wants to participate in it; and
    4. The startup community must have continual activities that engage the entire entrepreneurial stack.

    Now, let’s take these items and go through them in an Atlanta context:

    1. Entrepreneur lead community (grade: B) – Many events, like Startup Lounge, Hypepotamus meetups, Startup Riot, and B2B Camp are entrepreneur lead. Several programs like Flashpoint, Venture Atlanta, ATDC events, High Tech CEO Council, and others have entrepreneurs within the leadership group, but aren’t purely entrepreneur lead as there is heavy government, university, and service provider involvement.
    2. Long-term commitment (grade: A) – Most of the core group of entrepreneur leaders in the city have lived in Atlanta 10+ years and show all the signs of a long-term commitment.
    3. Inclusiveness (grade: A-) – With ATDC opening up to everyone a couple years ago and the rise of massive events like Startup Riot, the inclusiveness of the community has gone up tremendously. There are still some invite-only events, but they are waning.
    4. Activities to engage the entrepreneurial lifecycle (grade: B) – The seed stage through the first part of the early stage is pretty well covered with opportunities to improve via more frequent pitch events (see the Atlanta Startup Village pitch night idea). The later part of the early stage as well as the growth stage and beyond don’t have much activity outside of Venture Atlanta (partly because there aren’t that many companies at those stages and partly because the companies at those stages aren’t as collaborative as you would hope).

    So, overall, I’d give Atlanta startup community a grade of a B+ when applied to Feld’s Boulder Thesis. I see an A- as readily achievable with an A on the long term horizon. Just in the past 12 months there have been several new entrepreneur-lead initiatives and the quality of the community continues to improve.

    What else? What are your thoughts on the Boulder Thesis applied to Atlanta for startup communities?

  • Employee Equity in a Salary Multiplier Context

    Yesterday’s post titled Common Equity Grants for Startup Employees gave broad, simple amounts of equity for employees of a funded startup, which serves as a good starting point. In reality, things are much more nuanced with amount of salary being one of the biggest drivers of equity (e.g. more salary results in less equity). Another recommended way of determining the amount of equity for a position is to do it as a multiple of the market-rate salary in the context of the four year business goals.

    Here’s an example of employee equity in a salary multiplier context:

    • Employee position: $100,000 market rate salary for a software engineer with some experience
    • Startup raised $2 million on a $3 million pre-money valuation for a $5 million post-money valuation
    • Entrepreneurs decide the target equity goal for the employees is to make 2x their market-rate salary in value after four years (equity has four year vesting with a one year cliff)
    • Assume the startup doubles in value each year by executing well and growing revenue with these being example valuations (these are valuations, not revenue):
      Year 1 – $5 million
      Year 2 – $10 million
      Year 3 – $20 million
      Year 4 – $40 million
    • Assume 50% dilution from future funding rounds (so really need 4x their market-rate salary to get to 2x after dilution)
    • $200,000 as a percentage of $40 million is 0.05%
    • Double the 0.05% to account for dilution taking out half and you have 0.1% to start

    So a software engineer with a $100k salary would get equity amounting to 0.1% of the business for a startup that just raised a funding round, but still at an early stage. If the entrepreneurs wanted to offer a greater multiplier on salary, or if the business was more mature with respect to valuation, the percent ownership with be adjusted appropriately.

    What else? What are your thoughts on employee equity in a salary multiplier context?

  • Common Equity Grants for Startup Employees

    Dave Williams, the CEO of BLiNQ Media, posted some great comments on the Physical Atlanta Startup Village Idea article from a couple weeks ago. In one of his comments he argues that more young talent needs to be part of a big exit so that they can get a taste of what it’s like and participate in the upside of owning a piece of a startup. With that said, it’s important to understand common equity ballpark amounts for startup employees in the seed to early stage.

    Here are some equity amounts for common startup positions with near market startup salaries:

    • VP – 1%
    • Lead Engineer – .5%
    • Director / Senior Engineer – .25%
    • Manager / Junior Engineer – .1%

    Of course, equity grants need to be taken in context with salary, bonus, benefits, and other factors. Another key item is thinking through how much more dilution is likely based on future financings, as that will seriously impact the ownership percentages.

    What else? What are your thoughts on the common equity grant amounts for startup employees?

  • Strong Corporate Culture is Intentional

    Earlier today I had the opportunity to attend the Atlanta Business Chronicle’s 2012 Best Places to Work Awards ceremony at the Georgia Aquarium. A best places to work award ceremony is really a large celebration of business leaders that believe in the importance of corporate culture. My takeaway from the morning: a strong corporate culture is intentional.

    Here a few thoughts from the best places to work awards ceremony and winning company commentaries:

    • Employees are clearly put ahead of customers and investors
    • Shared values are critical (one winner said they look for people that are nice, passionate, smart, and fun)
    • Happy workspaces set the tone (an open, office-free environment was the recommendation from one winner)
    • Multi-year award winners are common, showing that intentional corporate culture continues indefinitely

    The next time you hear an entrepreneur talk about their great team, culture, or environment, there’s a good chance they’re intentional about making it great. Remember that corporate culture is the only sustainable competitive advantage that’s within the control of the entrepreneur.

    What else? What are some other thoughts on strong corporate culture being intentional?