David Cummings on Startups

Author: David Cummings

  • Notes from salesforce.com, inc. 2003 S-1 IPO Filing

    The largest and most successful SaaS/cloud company, salesforce.com, inc. (yes, that’s the proper spelling of the company), filed their S-1 for an IPO on December 18, 2003. With the annual Dreamforce conference next week, and the fact that their market cap is now $21.5 billion (NASDAQ: CRM), a little trip down memory lane to see how things were nine years ago is on tap.

    Here are notes from the salesforce.com, inc. 2003 S-1 IPO filing:

    • Signed 8,000 paying subscribers from February 2000 to October 2003 and 110,000 seats (pg. 1) – SFDC now has over 110,000 paying subscribers and many millions of seats
    • May 2003 IDC reports project SaaS/cloud-based apps to be $2.6 billion in 2007 (pg. 1) – SFDC alone is going to be larger than $2.6 billion in revenue in 2013
    • Incorporated in Delaware in February 1999 and released first product in February 2000 (pg. 2)
    • Revenues (pg. 4)
      2001 – $5.4 million
      2002 – $22.2 million
      2003 – $50.9 million
      Nine months ended Oct 31, 2003 – $65.9 million
    • Losses (pg. 4)
      2001 – $33.6 million
      2002 – $30.1 million
      2003 – $9.3 million
    • Accumulated deficit – $71 million (pg. 4)
    • Small business customers have shorter contracts and higher rate of attrition (pg. 9)
    • Fiscal 2003 sales to Europe and Asia accounted for 14 and 17 percent of revenue, respectively (pg. 11)
    • Database software comes from Oracle Corporation (pg. 13)
    • Research and development expenses (pg. 23)
      2001  – $3.3 million
      2002 – $5.3 million
      2003 – $4.6 million
    • In December 2001 abandoned excess office space and took a $7.7 million charge (pg. 26)
    • Owned 64% of a Japanese joint venture (pg. 27)
    • Raised $61.1 million from investors in exchange for preferred stock (pg. 38)
    • $3.5 million letter of credit for office rent in 2001 (pg. 39)
    • 2004 office lease expense of $5.4 million (pg. 39)
    • 10,000 free Personal Edition users activated (pg. 47)
    • Application is written in Java and Oracle PL/SQL (pg. 48)
    • A small number of customers have service level agreements (pg. 50)
    • Field sales offices in more than 20 cities (pg. 51)
    • 412 employees as of Oct 31, 2003 (pg. 53)
    • Equity owned before IPO (pg. 72)
      Marc Benioff – 31.6%
      Halsey Minor – 10.2%
      Parker Harris – 2.7%
      Attractor Funds – 6.0%

    Similar to the Workday IPO filing in the summer of 2012, this salesforce.com IPO filing from 2003 is highly unusual in that it’s a SaaS/cloud company that raised an impressive amount of capital and reached IPO-level recurring revenue in a short amount of time. Salesforce.com sets the standard for SaaS/cloud software companies and shows no signs of slowing down.

    What else? What are some other thoughts on the salesforce.com 2003 S-1 IPO filing?

  • Example New Customer Usage Patterns

    Recently I was talking to one of the early employees of S1 Corp., a banking software company in Atlanta. S1 Corp started as the first online-only bank and pivoted into online banking software in the mid-to-late 1990s. Before being acquired by ACI Worldwide in February of 2012, S1 Corp. had a market capitalization of $577 million (NASDAQ: SONE). One of the many interesting things the early employee of S1 Corp. told me was how the first customers of the new online bank used the service.

    Here’s what new customers would do with their first online bank:

    • Send a $100 check to S1 Corp. to open an account (the minimum to start)
    • Month 1: The customer uses online bill pay to send $1 to themselves to see if the service works
    • Month 2: The customer uses online bill pay to pay for a non-critical monthly bill (e.g. lawn service)
    • Month 3: The customer uses online bill pay to pay for a standard monthly utility bill (e.g. electric)
    • Month 4: The customer uses online bill pay to pay all their bills

    This provides a useful example for entrepreneurs to think through and track how new users engage with a product. Product usage should be analyzed on a regular basis, especially new users of the product.

    What else? What are some other thoughts on the example new customer usage pattern?

  • Notes from Flashpoint Cohort 2 Demo Day 2012

    Today was Demo Day 2012 for the second Flashpoint cohort of startups and everything went well. Most of the teams did great and a couple were such recent pivots that it probably didn’t make sense to present. This class of startups was a bit different from the first cohort in that the teams were closer to idea stage at the start of the program compared to the previous set of teams that were further along when the program began. Regardless, both cohorts are excellent and some very successful companies will emerge.

    Techturized

    • Talk and shop for African American hair
    • Focused on hair care retail
    • African American hair care market is $3 billion per year
    • Life change = hair change
    • Moods: freedom, new reality, new person
    • Cycle of style
    • Working with Carol’s Daughter store
    • Raising money

    Pickoff Sports

    • Background in rivals.com and scout.com
    • Fantasy sports and March Madness
    • Pick teams that you think will win and earn virtual currency
    • Played right within Facebook
    • Habit loop that emails you how your picks did
    • Raising $500k

    CourseShark

    • Course registration is a big hassle
    • Solution is a modern frontend on legacy data
    • Students will share their course info with recruiters and companies
    • Help students get jobs
    • Georgia Tech students love it
    • FERPA blocks schools from sharing student courses

    Soccermetrics

    • Like Money Ball for soccer
    • Soccer data is not as developed as other sports data
    • Sourcing, analytics, decisions are separate companies
    • Key is making valuable information available fast
    • Have several sources of data
    • Product is an analytics engine

    Buzztastic

    • Help businesses market together
    • Cross promotions like sweepstakes or contest
    • Together marketing is a new category of marketing
    • Product is inherently viral
    • Raising $1MM round

    Deliverable

    • Freelancer verification to top employers
    • Huge number of people are now freelancers
    • Free-agent economy
    • Growing from 28% to 40% of work force

    SeeMove

    • Simple solution to track movement of moving boxes
    • 15% of population moves each year
    • $11,000 per interstate move
    • Logistics experience

    BeSmart Ventures

    • Maximize value of gift cards
    • $100 billion market
    • Growing 30% over next few years
    • Loyalty programs moving to phone
    • Breakage is unredeemed value – $7 billion in 2011

    The OR Standard

    • Inefficiencies in OR are wasting money
    • Delayed cases cost serious money and bad experiences
    • Solution is an intelligent communicator scheduler with checklists
    • Mobile app for doctors, nurses, patients, and patient family members

    Springbot

    • Marketing automation for ecommerce
    • Amazon.com functionality for SMB ecommerce sites
    • Ecommerce sites don’t know where to spend the next marketing dollar
    • Solution helps track ROI and provide marketing tools
    • Value in integrating disparate tools and tracking data
    • Business model of monthly fee with data fees
    • Already closed a $1MM angel round

    ScheduleLogicMD

    • Healthcare in US wastes $750 billing per year
    • Intelligent scheduling is in its infancy
    • Scheduler – receives calls all day
    • Different insurance companies have different payment terms and patients should be scheduled with that in mind

    Dwellio

    • Increase renter retention for apartment owners
    • 54% annual apartment turnover
    • Renter 50% more likely to renew if friend in building
    • Mobile app to help property managers interact with tenants
    • Raising $1.5MM

    We & Co

    • Talent management for service economy
    • 2 million service businesses in US
    • 70% turnover
    • $5,500 replacement costs
    • 30 million service professionals in US
    • Like LinkedIn for service professionals
    • Acquired 10,000 service professionals in last 90 days

    Vehcon

    • Smart vehicle connections
    • Usage-based insurance
    • Accurate odometer reading in vehicles is super hard
    • Odo-foot app takes pictures of odometer plus metadata
    • Deliver authenticated data with a fingerprint based on the car
    • $55 per driver per year

    I enjoyed the second cohort’s Demo Day today and I’m excited to see the startups grow and be successful.

    What else? What are some other thoughts on Flashpoint cohort 2 Demo Day 2012?

  • Atlanta Needs More $1MM in Annual Revenue Profitable Companies

    Earlier this summer, Chris Dixon wrote a blog post titled Shoehorning Startups Into the VC Model where he argues most startups aren’t appropriate for venture capital (similar to the 4 Reasons to Raise Venture Capital). Joshua Baer, founder of Capital Factory (startup accelerator program) and several successful startups, wrote a comment on the post outlining his strategy to grow the Austin-area startup community:

    The first thing I usually do when I talk to a startup about raising funding is to try and talk them out of it and provide alternative options (customers paying in advance is the best!). At Capital Factory, we are focusing on tech startups that can reach $1mm in profitable annual revenue on less than $1mm of funding. They can get all of that from Angels and many won’t ever need to raise more funding from VCs (and many will go raise more money).

    This is a great strategy and applicable to Atlanta as well. With so few startup exits in Atlanta each year, we need more focus on building companies that are profitable on $1MM in annual revenue with less than $1MM in funding. Once a tech company achieves profitability on $1MM in annual revenue, there are many more options available like growing organically without raising more money, raising more money (money is easy to raise when you’ve derisked the model by hitting the $1MM in revenue mark), or paying dividends to owners (something that should happen more frequently in markets that don’t have many exits).

    Atlanta needs more $1MM in annual revenue profitable tech companies with less than $1MM of funding to help grow the startup community.

    What else? What are your thoughts on the value of $1MM in annual revenue profitable companies?

  • 4 Reasons to Attend Flashpoint Demo Day 2012

    Flashpoint, the startup engineering accelerator associated with Georgia Tech, has its second Demo Day on Tuesday, September 11, 2012 at 2:30pm in Tech Square at the Flashpoint offices. With this being the second cohort of startups, Flashpoint is still in its early days but off to a great start under the leadership of Merrick Furst.

    Here are four reasons to attend Flashpoint Demo Day:

    1. Get a chance to hear from 14 of the most promising seed stage startups in Atlanta
    2. Learn more about lean startups, customer development, and startup engineering
    3. Meet investors, entrepreneurs, and executives in the Atlanta community
    4. Stretch your mind with some of the coolest and most interesting startup ideas

    If you can’t make the Atlanta Demo Day, Flashpoint will be in NYC and San Francisco later this month. I’m looking forward to Tuesday’s Demo Day.

    What else? What are some other reasons to attend Flashpoint Demo Day 2012?

  • SaaS Apps Can Learn from Casual Game Engagement Techniques

    One of the more common techniques to increase engagement and usage of casual games on the iPad is to provide goals or challenges each time the game is played. As an example, the three active goals in a game might be to beat your previous high score, get to level five, and purchase a digital item in the store. Some, like beating your high score, are context-sensitive and straightforward. Others, like purchasing a digital item in the store, are designed to increase the user’s engagement with different parts of the game, and set the foundation for in-app purchases.

    Software-as-a-Service (SaaS) apps should learn from this approach. In SaaS apps, it’s easy to automatically track what features are, and are not, being currently used. With this information, as well as analytics around what’s going on with usage of active features, the software could recommend new features to take advantage of as well as ways to get more value from existing features. Even better, data across multiple customers of the SaaS app can be anonymized and used for benchmarking, so that the recommendations give a context as well (e.g. you’re 5% below the average for this category and here’s what you should do to improve).

    Here are some example goals or challenges that a SaaS app might provide:

    • Create a new page called ‘about’ in WordPress
    • It takes you an average of 40 days to get paid, and for your type of business the average should be 35 days, according the QuickBooks app, so here is a best practices guide to improving payment turnaround
    • Try out our new commenting feature in a cell in one of your Google Spreadsheets

    The next time you’re contemplating ways to increase engagement and reduce customer churn, consider goals and challenges on the main application screen of the SaaS app.

    What else? What are some other things SaaS apps can learn from casual game engagement techniques?

  • Atlanta History: Notes from the ISS S-1 IPO Filing

    Internet Security Systems, easily the most famous and successful B2B Atlanta tech startup of the past 15 years, filed to go public in late 1997 with a target IPO date of January 20, 1998 (SEC filing for ISS Group, Inc. IPO). After a successful run as a public company, IBM bought ISS in late 2006 for $1.3 billion in cash (source: IBM.com). Being a connoisseur of the Atlanta startup and technology community, I wanted to learn more about ISS. SEC documents, like an S-1 filing, are some of the most honest and transparent business documents you’ll ever read.

    Here are notes from the 1997 ISS Group, Inc. IPO filing:

    • Proposed raising $31.6M (pg. 1)
    • Over 1,500 customers (pg. 3)
    • First product was distributed as shareware in 1992 and the business wasn’t incorporated until 1994 (pg. 4)
    • Selling 2,500,000 shares out of 15,878,428 shares total (pg. 4)
    • Revenues and employees (pg. 8)
      1995: $257,000 / 7
      1997: $13,467,000 / 141
    • 80% of revenue from the Internet Scanner product (pg. 9)
    • VCs bought 3,650,000 Series A shares (pg. 18) representing 23% of the business
    • VCs bought 2,086,957 Series B shares (pg. 18) representing 13.1% of the business
    • Channel partners receive discounts ranging from 35% – 50% off list price (pg. 21)
    • Accumulated deficit of $5.2M (pg. 21)
    • Gross margins (pg. 22)
      1995 – 98.4%
      1996 – 99.6%
      1997 – 95.0%
    • Strategy (pg. 29)
      – Continue leadership position in security technology
      – Expand domestic sales channels
      – Promote professional services capabilities
      – Expand international operations
      – Create category awareness
    • Field sales reps focus on opportunities that have at least $200,000 in deal value (pg. 36)
    • Management age at time of IPO (pg. 41)
      Tom Noonan – 37
      Christopher Klaus – 24
    • Christopher Klaus founded ISS in April 1994 and Tom Noonan joined in August 1995 (pg. 41)
    • VCs owned 31.1% of the equity after the offering (pg. 50)

    The ISS S-1 is fascinating to read as it is an example of a company that went public with a small amount of venture capital raised in a short period of time, something that’s no longer possible due to the much larger revenue requirements to be public along with costs related to Sarbanes-Oxley. Entrepreneurs interested in the history of the Atlanta technology community should read the ISS S-1.

    What else? What are some other thoughts on Internet Security Systems and their IPO?

  • 4 Reasons to Raise Venture Capital

    At last night’s Venture Atlanta reception I had the opportunity to talk with a number of entrepreneurs that are out trying to raise venture capital. Naturally, I enjoyed asking the question “why are you raising venture capital?” The common refrain was that their business was doing great and that if an investor saw the potential in it, and bought in at a nice valuation, they’d raise money. Hmm, I thought to myself, that’s not a good answer.

    Here are four reasons to raise venture capital:

    1. 5x Exit Value Increase – You’re focused on making a significant amount of money, and believe the company will be worth at least 5x the value compared to what you can build without venture money (the 5x amount comes from expected dilution after several rounds of financing e.g. if you start with 50% of the business you’ll likely end up with 10% at the end of the process, thus needing a significantly greater exit to have a financial gain compared to what you can do on your own)
    2. Winner Take All – It’s a winner take all or most market such that the 2nd or 3rd place company is nearly irrelevant (think about eBay dominating the online auction market in the U.S.), which often requires raising a substantial amount of money and spending it ahead of growth
    3. Anchor Company – You want to build a large, anchor company in your city, as quickly as possible, and need to raise a substantial amount of money for the business to achieve escape velocity so that it can get big quickly
    4. Accountability – You value the accountability that having a board of institutional investors brings to the table on a regular basis helping you to execute at a higher level than you might do otherwise

    Other reasons for raising venture capital you might hear include wanting money to do a tuck-in acquisition, taking money off the table (that’s really growth equity or private equity and not traditional venture capital), or to help attract talent. These, along with raising money because of a good valuation, are not ideal as raising venture capital significantly changes the timeline and trajectory of the business.

    What else? What are some other reasons to raise venture capital?

  • Security Ideas for SaaS Apps

    Software-as-a-Service (SaaS) apps have the same security challenges as any other web-based products. The good news is that many SaaS apps are more secure than installed enterprise apps due to more timely roll outs of security enhancements and better economies of scale for vulnerability testing.

    Here are some simple best practice security-related ideas for SaaS apps:

    • Require more complicated passwords for users (e.g. at least eight characters with upper case, lower case, and numbers included)
    • Enforce two-factor authentication for any power users
    • Audit the application quarterly with vulnerability scans, cross site scripting scans, and SQL injection scans
    • Limit server access to as few people as possible and enforce IP address white listing
    • Authorize individual machine access after email confirmation
    • Expire user passwords on a regular basis

    SaaS security best practices are well known at this point and should be implemented early on for apps that contain confidential information.

    What else? What are some other security ideas for SaaS apps?

  • Startups Should Simplify Everything

    A few weeks ago I was talking to an entrepreneur and he was showing me his web-based product. After 10 minutes of eagerly demoing functionality, I stopped and asked how much customization went into what he just showed me. Answer: 60 minutes. Not bad for B2B Software-as-a-Service (SaaS) application. I then asked to show me the behind-the-scenes admin section of the product to see exactly what customization looked like — it was painful.

    For a product with a free trial, there was no way their target audience was going to do a self-service signup and get value from the application without extensive hand holding and support. My recommendation was to simplify the product and have logical defaults such that with as little effort and friction as possible the end user could get value. It needs to be as close to zero configuration as possible.

    Here are some common things startups should simplify:

    • Customer sign-up and on-boarding process — use defaults that deliver 80% of the value
    • Bonuses — don’t have any
    • Commissions — make it so simple that the commission plan fits on a single page
    • Vacation — give unlimited vacation time and make it a results only work environment
    • Laptops — use MacBook Airs for everyone
    • Employee reviews — do them quarterly and only ask no more than four questions
    • Pricing — make it so easy it doesn’t require an Excel spreadsheet and publish the pricing online

    Startups win by staying closest to the customer with the quickest decision making process possible. Startups should simplify everything.

    What else? What are some other common things startups should simplify?