David Cummings on Startups

Author: David Cummings

  • Handle Initial Partnership Requests Via Email

    Before startups say no to 99% of partnership opportunities you have to qualify and find out what it is the other company is actually looking to do. There’s a standard song and dance where a VP or co-founder from another company gets an intro through a mutual connection or sends a cold email asking to set up a phone call to talk about an integration/partnership/relationship.

    Too often, myself included, if it looks interesting and targeted, entrepreneurs jump on the phone and spend an hour finding what the proposal actually is and what an integration might look like. Don’t. When the quality request comes in simply reply back via email and ask these three questions:

    • What, specifically, is the proposed integration?
    • What 10 customers have asked for this integration and why?
    • What parts can you do via the standard API we already have and what parts do we need that are non-standard?

    These three questions will provide a wealth of information and save you a ton of time. Now, you still might jump on a call for 30 minutes after you get the answers but the quality of the call will be significantly better, saving everyone time.

    What else? What other questions do you like to ask when handling initial partnership requests via email?

  • Assessing a Business Model’s Attractiveness

    In the first issue of Build, from the team at Inc. magazine, there’s an article with the headline: One way to evaluate the strength of your business model is to assess how difficult it is for your customers to leave you. The work comes from Rita Gunther McGrath, a professor at Columbia Business School.

    The idea is to rate the business model’s attractiveness based on 10 questions with a scale of one to seven for each, with a score of one being fully aligned with the first statement and a score of seven being fully aligned with the second statement. Once each question is scored, add up your total score, and if it’s 40 or higher you’re in the preferred zone. Here are the 10 questions to assess a business model’s attractiveness:

    1. The cost to a customer of switching to another provider is relatively low
      1 – 7
      The cost to a customer of switching to another provider is relatively high
    2. The model is based on individual transactions that must be repurchased each time
      1 – 7
      The model is based on a series of transactions (such as subscriptions) subject to renewal
    3. The user interface for the model is nearly the same for all providers (for instance, an ATM)
      1 – 7
      The use interface differs among providers (it’s easier for users to stick with one system)
    4. The benefits provided by the model are optional or discretionary
      1 – 7
      The benefits provided by the model are mandatory
    5. There are few network effects in this business, we are a late mover
      1 – 7
      We have the potential to create positive network externalities in this model
    6. This model solves the customer’s problem once and for all
      1 – 7
      The customer’s problem is ongoing
    7. The model is arm’s length or transactional
      1 – 7
      The model establishes some kind of relationship
    8. The model has little impact on the customer’s experience, or the impact is negative
      1 – 7
      The model changes the customer experience significantly, and the impact is positive
    9. The model operates on a stand-alone basis
      1 – 7
      The model creates a platform others can use to accomplish their goals
    10. We create the offer
      1 – 7
      The offer is to some extent cocreated

    This is a great methodology for quickly assessing a business model’s attractiveness. As you can see, Software-as-a-Service with strong customer service and high renewal rates score very high in this model.

    What else? What are your thoughts on this methodology of assessing a business model’s attractiveness?

  • 3 Unconventional Steps for the Hiring Process

    Hiring great talent that’s a strong corporate culture fit is one of the top responsibilities of a CEO, regardless of being a startup or established company. As part of hiring great talent there are three main areas to think through: casting a wide net to get candidates into the recruiting pipeline, assessing their culture fit and ability to do the job, and finally convincing the select few to join the team. For many types of positions there are plenty of quality candidates and the hiring process becomes the challenging area.

    Here are three unconventional steps for the hiring process:

    1. Written essays for all positions – a candidate’s ability to write correlates with the ability to do the job, regardless of position, more than anything else
    2. Culture checks by the founders and/or culture team – have people in the hiring process that are exclusively assessing corporate culture fit to build the strongest culture possible and to add checks and balances for hiring managers that get anxious to fill a position
    3. Unanimous approval – require 100% yeses from everyone involved in the hiring process regardless of seniority or position

    The idea isn’t to make the process as burdensome as possible but rather to build the best team. Spending more time in the hiring process makes sense considering the extensive amount of time you’ll spend with the person once they’re hired.

    What else? What are some other unconventional steps for the hiring process?

  • Consider Hiring Speed When Raising Money

    Many times over the past two years I’ve been asked why we haven’t raised money from VCs. There are a number of answers to that question but one of the big reasons is that once money is raised it has to be put to work as the goal is to grow revenue as fast as possible. For us, that involves hiring tons of people and spending more money on lead generation. It’s easy to spend money on lead generation but much harder to significantly increase our hiring rate and still maintain our corporate culture standards, which we’re going to maintain at all costs.

    Startups need to consider their hiring speed when raising money and building an expected budget for investors. Too often the model shows hiring numbers for each department (e.g. X engineers, Y sales people, Z support people, etc) with too short of a time horizon to hire the right people. A financing round is often viewed as raising enough money to last 18 months with the idea that 12 months will be for reaching the next milestone and the final six months will be used for raising the next round. Well, if the round is large, and you plan on hiring 50 new people, and it’ll take at least six months to find those people, six months for them to ramp up, and then six months to see results, you’re already 18 months out, thus you need to adjust the model and expectations with investors.

    Entrepreneurs need to consider their hiring speed when raising money, especially when raising money from institutional investors.

    What else? What are your thoughts on paying more attention to hiring speed when raising money?

  • Build a Minor Leagues System for Sales Reps

    Continuing with yesterday’s post on Sales Rep Training Programs for Startups, it’s also important to build a farm system where you can nurture and train junior outbound cold callers (business development reps) into polished senior account executives. I like to think of this as a minor leagues system whereby reps have an automatic promotion to the next level based on results, not timelines.

    Here’s an example minor leagues farm system progression for sales reps:

    • Try outs – Business development rep that does outbound calling and sets appointments — makes the team once a certain number of appointments have been completed
    • Single A – Account executive with entry-level salary and quota while continuing to refine the skills and working towards a goal (e.g. $3M in bookings or $1M in annual recurring revenue)
    • Double A – Nice salary, quota, and on target earnings increase with a new, incremental goal (e.g. additional $3M in bookings or $1M in annual recurring revenue)
    • Triple A – Additional incremental bump in salary, quota, and on target earnings with a new sales target to reach the highest rank
    • Major leagues – Senior account executive title for the most successful reps with the highest salary, quota, and on target earnings

    As you can see, the model isn’t that complicated since it has a series of promotions based on results, often with the increase in quota making the increase in salary functionally equivalent financially for the company. Plus, junior people trying to get into sales like seeing a 5 – 10 year career path laid out in front of them that’s based on performance, and not time or seniority.

    What else? What are your thoughts on building a minor leagues system for sales reps?

  • Sales Rep Training Programs for Startups

    Hiring and training sales reps is one of the more difficult challenges for entrepreneurs that aren’t experienced sales managers. I’ve talked to a number of entrepreneurs over the years that have tried hiring their first sales person only to have it fail multiple times, so much so that the entrepreneur continues to be the lone sales person in the company. Now, the sales assistant should be an entrepreneur’s first sales hire but most entrepreneurs, after deciding they want someone to come in and sell for them, want it to be completely taken care of and watch revenue magically come in the door.

    SaaS startups in early adopter markets are even more dependent on developing a great sales team due to the nature of early adopter markets whereby there’s a lack of market awareness such that people aren’t even searching Google for the product because they don’t know it exists (this is one case where inbound marketing doesn’t work). As the SaaS startup grows, the need to scale out the sales team grows even faster, creating an acute need for sales rep training programs. Most companies, and especially startups, don’t train their sales people enough.

    When developing a sales rep training program internally or evaluating outsourced ones, here a few things to keep in mind:

    • Soft skills like presence on the phone need to be taught, in addition to more formal methodologies like Solution Selling or SPIN Selling
    • Quality sales training with have some in-person training, some e-learning, and continual professional development indefinitely with the first year being the most critical
    • An intense first week of hard core training is often a great way to set a foundation
    • Mentoring from and shadowing of a senior rep is a great way to get some of the fuzzier, harder to document items transferred to a new hire
    • Sales managers and executives are often the best to train new reps but their time is actually more valuable working with proven reps to help them be even more successful

    Startups should outsource most sales training and focus on what’s core to their business while continually investing in their people. Sales rep training is hard to do well and it’s often not done, contributing to the hire failure rate of sales reps.

    What else? What are your thoughts on sales rep training programs and what training firms do you recommend? Does anyone have a sales rep finishing school they’d recommend?

  • SaaS Recurring Profit Margin Metric

    The CEO of Zuora has a nice slide deck online titled The Only 3 SaaS Metrics that Matter where he talks about the subscription economy, gives the three metrics, and provides benchmarks from publicly traded companies. The three metrics are straightforward and make sense:

    • Retention Rate – How much of your Annual Recurring Revenue (ARR) you keep each year
    • Recurring Profit Margin – ARR less churn less non-growth spend (growth spend is money spent on sales and marketing)
    • Growth Efficiency – How much does it cost to acquire $1 of annual contract value?

    Retention rate is a common one as is growth efficiency in the form of the SaaS Magic Number, although I like that growth efficiency is much easier to understand than the ratio of sales and marketing spend from one quarter compared to recurring revenue growth in the next quarter.

    The middle metric, recurring profit margin, is a great idea and not mentioned enough. One of the reasons successful SaaS companies have such great valuations relative to other companies with similar revenues and profits is that many SaaS companies could be much more profitable and still retain their revenues if they cut back on sales and marketing — recurring profit margin represents this number.

    Here’s a quick SaaS startup example for recurring profit margin:

    • $1 million in annual recurring revenue
    • 85% renewal rate
    • $50,000 profits (so, $950,000 in annual expense)
    • $300,000 spent annually on sales and marketing
    • Recurring profit margin: 1,000,000 times .85 minus the difference between total expenses and sales and marketing expense (950,000 – 300,000) = $200,000 or 20%

    Another way to calculate recurring profit margin is by taking away the sales and marketing expense (e.g. $300k), subtracting out the annual recurring revenue amount from customers that leave based on the churn rate (e.g. $150k), and adding in existing profits (e.g. $50k). Startups that spend an unusually large amount on sales and marketing, have high renewal rates, and still break even, will have excellent recurring profit margin metrics.

    What else? What are your thoughts on SaaS recurring profit margin metric?

  • Beware Lawyers Charging to Edit Business Plans

    Slightly more than 10 years ago I was living in Durham, NC working full-time on my startup on Ninth St. right near the edge of Duke’s East Campus. I was actively involved in the fledgling Research Triangle startup scene with the Council for Entrepreneurial Development (CED) as the heart. At the CED I participated in a great program called FastTrack that came from the Kauffman Foundation (side note: one of my goals is to start a Cummings Foundation one day that is similar to the Kauffman Foundation with a focus on entrepreneurship) and through the program I had the chance to meet several entrepreneurs as well as startup-focused service providers in the area.

    One of the lawyers that spoke at the program did a great job and was very approachable. After his talk at the class I went up and introduced myself and what we were doing. He said he liked what he heard and that we should get together and talk more. I diligently followed up and we met for an hour to talk about my startup. At the end of that conversation he asked if I had a business plan, so I naturally said yes (that was the thing to do then although I recommend against business plans now). He said if I’d like he take a look at it and give me feedback. Wow, I was thinking, this guy is super helpful.

    After our meeting I promptly emailed him the latest version of my business plan hoping to get some great insight from him. Well, two weeks later I received a fax from his assistant where he had taken a printed version of the business plan and handwritten a few number of comments and questions in the columns. Hmm, I thought, that’s an interesting approach to feedback, but I was anxious for any third-party thoughts on what I was doing. I quickly sent a thank you email and commented on his comments.

    A week later I received a bill for $500 for his time commenting on the business plan. I was stunned. It wasn’t the $500, although that was a ton of money for a bootstrapped startup that did $15,000 in revenue that year, but rather that he would charge for it without clarifying in advance it was billable hours. It was a good lesson learned early on. My advice: always ask the cost for any services up front and beware of lawyers charging to edit business plans.

    What else? Have you had any experiences like this?

  • Think of Startup Employees as Volunteers

    Earlier today I was having lunch with an entrepreneur and we were talking about corporate culture when she said something that really stuck with me: the newest generation of employees are best thought of as volunteers like at a non-profit. Now, this isn’t volunteers in the sense of not getting paid but rather volunteers in the way they want to be treated and the way they approach things.

    Here are a few reasons why startup employees should be viewed as volunteers:

    • Mission and purpose is more important than the money
    • The best work is done when you care deeply about something
    • Volunteers often need praise and encouragement to feel appreciated
    • Length of tenure is shorter

    Treating startup employees as volunteers makes sense as the employer is beholden to the creative, mobile, sought-after employee. With the creative class, the volunteer mindset is very prevalent.

    What else? What are some other reasons why startup employees should be viewed as volunteers in the non-profit sense?

  • Picking a Startup Idea

    Most entrepreneurs looking to start a new business have a limited number of startup ideas and eventually pick one from a small list. Some entrepreneurs on the other hand have a gift for coming up with startup ideas, but then like having too many choices of cereal at the grocery store, run into analysis paralysis and get bogged down making a decision. Of course, picking a startup idea is a huge decision, so it shouldn’t be taken lightly.

    Here are a few things to consider when picking a startup idea:

    • Market Timing – Is this an idea that’s going to be successful some day but timing the market will be critical to success or is clear that the opportunity is in the short run (e.g. next 1-2 years)?
    • Domain Expertise – How much experience do you need to be productive for this startup? Does not having experience help so that you have a fresh perspective?
    • Capital – How capital-light or capital-intensive is the startup idea and what are you comfortable with?
    • Passion – How passionate and committed are you to the industry and opportunity vs something that you think will be successful but aren’t that interested in?

    Picking a startup idea is a big decision but picking a market to be in is a monumental decision. I’ve never met an entrepreneur that was successful with their original idea — the idea always changed but their market rarely did.

    What else? What are some other things to consider when picking a startup idea?