David Cummings on Startups

Author: David Cummings

  • 5 Simple Reasons Entrepreneurs Fail

    As I think back to my many entrepreneurial endeavors that failed (e.g. post mortem of a failed product), several clear themes come to mind. It isn’t that any one issue or challenge was the culprit, rather there were a number of items that colluded together. Also, most were within my control and I still failed.

    Here are five simple reasons entrepreneurs fail:

    1. Not giving it 100% – it’s hard enough to succeed when working on something full-time that entrepreneurs working on an idea part-time are even more likely to fail because they won’t make enough progress to figure out how to make it successful
    2. Premature scaling – resources are scarce so a self-inflicted death is more likely when staff or resources are added before a business model is found (see startups shouldn’t hire a VP of Sales)
    3. Building product in a vacuum – customer usage is oxygen for a product and too often entrepreneurs add features based on whims that don’t add value to customers while also slowing down future product development (e.g. code debt)
    4. Lack of resourcefulness – it isn’t easy recruiting team members, raising money (if necessary), signing customers, building partnerships, etc and many entrepreneurs run into a brick wall without breaking through it
    5. Poor market timing – this is the toughest of them all as it is outside the entrepreneur’s control but sometimes it’s the right idea at the wrong time and sometimes it’s just a bad idea, and it is always difficult to tell

    There’s no fool-proof way to be successful but the five simple reasons entrepreneurs fail comes up over and over again. Learn from these issues and increase your chance of success.

    What else? What are some other reasons entrepreneurs fail?

  • When is a Startup No Longer a Startup

    A controversial article and topic like work/life balance in a startup is good fun as people have strong feelings on it. I really enjoy hearing competing opinions and point-of-views. After more debate on the original topic, another item came up: when is a startup no longer a startup?

    Devon Wijesignhe offers up that once you are profitable and have at least $10 million in revenue you aren’t a startup:

    I agree with him that those criteria could be part of what makes a company no longer a startup but revenue and profitability alone don’t feel right. In fact, I wanted to offer more specific ideas of when a startup is less like a startup and more like a regular business. Here are a few ideas to distinguish a startup from a regular company:

    • Product/market fit has been achieved and the focus has been on scaling as opposed to staying alive for at least one year (it takes time to realize where you are)
    • Profitability has been achieved for at least one year and revenue predictability within a 10% margin of error has been achieved (one theme is that once the startup is no longer unpredictable, it is no longer a startup)
    • Management team and team member depth is strong enough such that any person in the company can go on vacation for two weeks without any issues and everything keeps moving forward
    • Growth has slowed down to the point that the approximate maximum business size is foreseeable (e.g. it’ll be a ~$5M business indefinitely based on current factors as opposed to the possibility of being a $1B business)

    Part of being a startup is that it feels like a startup internally. That could be a flat hierarchy, quick decision making, people wearing many hats, or a sense of unbridled optimism. Regardless, a startup is no longer a startup when people inside it feel like it is no longer a startup. There’s no right or wrong answer.

    What else? When do you think a startup is no longer a startup?

     

  • Work/Life Balance and Startup Success Aren’t Mutually Exclusive

    My Fast Company article titled How Southern Tech Workers Build Booming Businesses and Still Go Home at 5 elicited a number of strong responses, many arguing that it makes startups in the South uninvestable and that you need to work more early on in fast moving markets.

    https://twitter.com/rkischuk/status/216558110565867521

    True, the article said, “consider that many people in my company, and in companies of friends, leave the office around 5 p.m. or 5:30 p.m.” but that’s more of a focus on work/life balance as opposed to sheer number of hours worked. CNN reported in April that the Facebook COO leaves every day at 5:30pm regardless. Much like it goes on to say that Sandberg checks email and works after the kids go to bed, so do I. Startups and entrepreneurship are very involving, and that’s great, especially because of the passion that exists for it beyond being a job.

    I know entrepreneurs that have built successful startups from the ground-up while still being able to attend their kids’ sporting events every night. Even with competitive, fast-moving markets there are enough hours in the day to accomplish a great deal and still spend time with your family. Imagine cutting out TV. How much time will that save? Imagine working 20% smarter instead of 20% longer. How much time will that free up?

    Work/life balance and startup success at any stage aren’t mutually exclusive. There are enough hours in the day to be effective and present.

    What else? What are your thoughts on ways that work/life balance are or are not mutually exclusive?

  • Anatomy of an Executive Summary for Startups

    Ideally, an entrepreneur would show an angel investor a demo of a product prototype online or on an iPhone, get it, and write a check. Unfortunately, angel investors still look for an executive summary or slide deck as the standard document that starts the investor + entrepreneur dance. The executive summary is best thought of as a business plan boiled down to one or two pages. Business plans should be avoided in favor of business model canvases, so it’s best to only write the executive summary.

    Here’s an example format for an executive summary:

    • Team – the top three of four members of your team with one sentence each
    • Description – what does the business do
    • Product – what is the solution or service
    • Market – how big and how fast is the opportunity growing
    • Customer Benefits – why do companies/people use the product
    • Competition – who else is in the market
    • Company Stage – where are you currently
    • Investment Opportunity – how much are you looking to raise and what are you selling

    This seems like a good amount of content, and it is, but each section should be super short and the whole thing should fit on one page. Most people are fine with a two page executive summary, but I prefer one page as the goal is to get the reader exited enough to want a meeting, and the more content you have, the less likely it will get read.

    What else? What are your thoughts on executive summaries and what would you recommend?

  • Raising an Angel Round in the South

    Today, two different entrepreneurs asked me for advice about raising an angel round, and both are located in the South, making for its own unique dynamic. Even with the negative press about the Facebook IPO, which was very successful for Facebook, the startup world is buzzing with enthusiasm and opportunity. From a trends perspective, social, mobile, and local show no signs of slowing down.

    So, for entrepreneurs raising an angel round anywhere, but especially in the South, here are a few recommendations:

    • Build a simple executive summary that is shared as a PDF and no more than two pages.
      Executive summary sections:
      – Team
      – Description
      – Product
      – Market
      – Customer Benefits
      – Competition
      – Company Stage
    • Make some very basic financial projections
    • Build a working prototype (minimum viable product) and sign a couple paying customers
    • Consider the amount of money necessary to achieve a major milestone in the next 12 – 18 months (e.g. it might take $500k to hit $100k in annual recurring revenue in 12 months, so $500k plus some margin of error would be the amount to raise)
    • Think through the pre-money valuation, which is typically $1 million plus or minus 50% for most startups, with exceptional startups getting $3M – $4M pre-money valuations
    • Network through local technology groups, co-working spaces, lawyers, and accountants for intros to angel investors
    • Apply online to local angel networks (e.g. Atlanta Technology Angels)
    • Remember that the best time to raise money is when you don’t need it

    Raising money is hard. Raising money in the South is even harder. One of the best things you can do is to start developing relationships with people in the startup and technology community well in advance of raising money. There’s no sure way to raise money but the path outlined above works well.

    What else? What are some other recommendations for raising an angel round in the South?

  • Entrepreneurs Fail at Hiring Sales Reps

    As part of yesterday’s EO event on hiring, Adam spent a fair amount of time talking about hiring sales reps. Ah, the elusive sales rep that makes an entrepreneur’s life easy, or so you would hope. Previously, I advocated for entrepreneurs to hire a sales assistant to help give them economies of scale of their time before diving into a full-time, quota-bearing sales rep.

    Well, Adam articulated nicely why hiring salespeople is so difficult, especially for entrepreneurs. Here are his words why it is so challenging:

    • Great salespeople are always in demand
    • Mediocre salespeople are A-Players when it comes to selling themselves
    • Great salespeople are a product of environment
    • Entrepreneurs get desperate to fill the position

    The next time you’re out there, ready to hire your first salesperson, consider why it is so challenging, and look for someone who has the four super-elements.

    What else? What are some other reasons entrepreneurs fail at hiring sales reps?

  • The 4 Super-Elements for Startup Hiring

    Earlier today I attended the Entrepreneurs’ Organization workshop lead by Atlanta native Adam Robinson of Hireology. Adam did a great job taking us through best practices around hiring. This wasn’t a workshop for sourcing candidates, on-boarding candidates, or any other recruiting best practices. One of the segments that I really enjoyed was learning about Hireology’s so called super elements. Much like the periodic elements in nature, there’s a long list of elements to analyze for making great hiring decisions, with four being the most pervasive regardless of position.

    1. Attitude – their general feelings or disposition
    2. Sense of Accountability – the extent to which a person believes he or she has control over their own outcomes, also called the “locus of control”
    3. Prior Related Job Success – having met formal goals in past jobs that are similar to the job at hand
    4. Culture Fit – the degree to which the candidate shares similar values with the organization, and demonstrates an authentic interest in the job at hand

    Adam did a great job and entrepreneurs should pay attention to Hireology’s thought leadership content and application.

    What else? What are your thoughts on the four super-elements for startup hiring?

  • The Massive Differences Between Installed Software and Cloud Startups

    Being in the installed enterprise software world for a decade and the cloud/SaaS world for over five years now, there are massive internal differences between these two types of startups. The business models are inherently different, and should be viewed as such, even though both are full scale software companies.

    Here are some of the massive differences between installed software and cloud/SaaS startups:

    • Installed software companies typically provide releases every 3 – 18 months whereas cloud/SaaS startups push releases multiple times per day creating a different dynamic around time-to-market and scope of functionality
    • 10% – 20% of engineering efforts for installed software companies are for debugging issues that are network or environment specific compared to cloud/SaaS companies that control all aspects of the data center hardware
    • Installed software vendors often have more lock-in and higher switching costs compared to cloud/SaaS vendors  due to the heavy customization and internally managed servers
    • Getting the majority of the lifetime value of the customer up-front with installed software makes it easier to cross the desert to profitability, but creates lumpier quarterly revenue and predictability compared to cloud/SaaS startups with recurring revenue

    Installed software and cloud/SaaS startups have massive differences, and startups should think through the pros and cons of each.

    What else? What are some other differences between installed software and cloud/SaaS startups?

  • Sales and Marketing Should be Separate Functions in Startups

    Sales and marketing are tightly linked, complementary disciplines. Too often in startups I hear that the one sales guy also does the marketing. Now, if the startup can’t afford to separate the functions that’s one thing, but sales and marketing are two distinct functions. When I see a single person with the title VP of Sales and Marketing it often means the company takes a German approach — beat down the door with sales people and don’t bother with marketing.

    Here are a few reasons sales and marketing should be separate functions in startups:

    • Lead lifecycles are so complicated with visitor, prospect, marketing qualified lead, sales qualified lead, opportunity, and closed deal stages that it requires specialized knowledge to optimize each one
    • Marketing is often more measured in their approach which provides a nice yin to the yang of sales people that tend to embellish what can be done
    • Sales managers tend to be more sports-coach-like with an emphasis on motivating sales people while marketing managers tend to be more creative with an emphasis on project management
    • Marketing should be charge of messaging, content, events, positioning, etc while sales should be in charge of helping leads through the sales process

    Historically marketing was viewed as a sales support function, but with the advent of marketing automation, marketing has all the accountability and credibility of other major departments. Sales and marketing should be separate functions in startups.

    What else? What are some other reasons sales and marketing should be separate functions in startups?

  • Notes from AutoTrader.com’s S-1 IPO Filing

    AutoTrader Group, Inc., one of Atlanta’s biggest technology success stories over the past decade, filed their S-1 for an IPO yesterday. After massive organic growth from 1997 – 2010, they brought in a private equity group in 2010 and acquired several companies for nearly $1 billion in cash.

    Here are notes from the AutoTrader Group, Inc. S-1 filing:

    • 29 million average monthly unique visitors and 3.4 million car listings (pg. 1)
    • Has the largest dealer sales force in the U.S. automotive industry, with over 1,400 sales and support people (pg. 1)
    • Owns Kelley Blue Book (kbb.com) and reaches 60% of online car buyers (pg. 1)
    • 20,000 car dealers pay a monthly fee to list their cars (pg. 1)
    • Last quarter generated 86% of revenue from Digital Media business (advertising) and 14% of revenues from Software Solutions (dealer inventory management tools) (pg. 2)
    • 9% overlap in visitors between AutoTrader.com and KBB.com (pg. 4)
    • 75% of revenue is recurring (pg. 6)
    • Revenues (pg. 12)
      1997 – $1M
      2009 – $629M
      2010 – $730M
      2011 – $1,025M
    • Net income (pg. 12)
      2009 – $10M
      2010 – $49M
      2011 – $68M
    • Most Digital Media revenue comes from dealers advertising used cars (pg. 17)
    • Spent $111 million on TV and radio ads in 2011 (pg. 20)
    • Aren’t allowed to do anything with motorcycles, RVs, heavy trucks, etc due to license agreement for trademark of the name (pg. 21)
    • Google sends ~1/3 of all traffic to AutoTrader.com and KBB.com (pg. 23)
    • $884M in debt (pg. 37)
    • Drew $400M from their line of credit in 2012 and paid a $400M dividend to their shareholders (pg. 46)
    • Raised $316M from existing shareholders in 2010 (pg. 64)
    • Acquisitions (pg. 65)
      vAuto – $192.8M in cash and $34.5M in earn out
      HomeAuto – $61.6M in cash
      Kelley Blue Book – $532.4M in cash
      VinSolutions – $134.6M in cash and $13M in earn out
    • Kelley Blue Book added $125.7M in revenues in 2011 (pg. 72)
    • For new car dealers, new car sales represent 16% of gross profits, used cars represent 33% of gross profits, and the remainder comes from services and parts sales (pg. 92)
    • Have spent $780M on marketing initiatives since inception (pg. 97)
    • 3,200 full or part-time employees (pg. 114)
    • Chip Perry, the President and CEO, was the first employee in August 1997 and has lead the company the whole time (pg. 119)

    AutoTrader Group is an impressive growth story and I hope their IPO is very successful.

    What else? What are your thoughts AutoTrader Group’s S-1 IPO filing.