Author: David Cummings

A couple days ago I was at an EO workshop put on by Cameron Herold, the former COO of 1-800-GOT-JUNK. Cameron covered a range of topics with the emphasis being on the painted picture where the future is vividly described in words. Towards the end of the workshop he revealed the ultimate formula for startup success:

___% focus  x  ___% faith  x  ___% effort  =  ___% liklihood of success

• Focus – the level of attention
• Faith – the passion and belief
• Effort – the amount of work

Cameron did a great job and I enjoyed the workshop.

What else? What do you think of this formulate for startup success?

There are three main things every entrepreneur needs to know. Yes, it’s really as simple as three little things. These don’t guarantee success, don’t address the market opportunity, and don’t address the management team. They do address things that are within your control and relate to how you run the business.

Here are the top three things every entrepreneur needs to know in order of importance:

1. Corporate culture is the only sustainable competitive advantage that is completely within the control of the entrepreneur. Develop a strong corporate culture first and foremost.
2. Companies that stay closest to the customer in order to understand their needs and wants produce the best solutions.
3. The feedback loop from new information to making a decision, if any, needs to be as short as possible. Organizational speed allows startups to beat more established organizations with extensive resources.

Pretty simple stuff: strong corporate culture. stay close to customers, and make decisions fast.

What else? What do you think of these top three things every entrepreneur needs to know?

Over the past few weeks I’ve been reading the fascinating biography Titan: The Life of John D. Rockefeller, Sr. I’m a big fan of biographies and autobiographies of entrepreneurs and this one doesn’t disappoint. Here are a few notes from the book:

• Rockefeller’s dad was a fake doctor with wives and kids in different states
• Rockefeller got his start as an accountant for a business in Cleveland that imported commodities
• Rockefeller started his own company in his 20s importing commodities and eventually realized refining oil was more lucrative
• Rockefeller’s company, Standard Oil, set up unfair partnerships with railroads that resulted in significantly lower shipping costs, which helped put many competitors out of business
• Rockefeller moved from Cleveland to NYC as more and more business was being done on the East coast and internationally
• Rockefeller had a daily lunch with his direct reports and that’s how they coordinated everything in the late 1800s
• Rockefeller was an extremely devout Baptist, a teetotaler his entire life, and funded many Baptist causes
• Rockefeller donated money for the original Spelman College in Atlanta and paid for many of its buildings over the years
• The University of Chicago was founded and funded by Rockefeller and has his name in the official university seal
• Rockefeller funded the Rockefeller Institute of Medical Research, and is credited with large scale philanthropy efforts around medical research, even though he was a devout believer in homeopathic remedies
• Rockefeller retired in his 50s and lived well into his 90s

Rockefeller built one of the first large-scale monopolies, was the world’s richest man, and spent decades immersed in philanthropy that truly impacted the world. The author does a great job capturing details and telling stores making for a great book.

Recently I was talking to a successful entrepreneur and he was telling me that he hasn’t decided if he’s going to start another company or go the venture capitalist (VC) route. He has the skills, resources, and track record to be a full-time, professional investor. One concern he has is that things won’t be as fast paced being an investor compared to rolling up your sleeves and getting in the trenches. Another concern is that he won’t be maximizing his value to society since he’ll be coaching others as opposed to doing it himself. A third concern is that he won’t have as much influence on things and won’t be able to control his own destiny in terms of the success of the investments.

One reason he’s really interested in being a VC is to get more economies of scale of his time by helping many entrepreneurs at once be even more successful. In addition, the day-to-day pressure of growing a business is on someone else’s shoulders likely resulting in a more relaxed quality of life for himself. A third benefit is not having all the eggs in one basket (a single startup) but rather having a portfolio approach. The entrepreneur enjoys working too much to not do anything.

It’ll be interesting to catch up him with again in six months and see what he decided.

What else? Would you rather be an entrepreneur or a venture capitalist?

One of the things I recommend to entrepreneurs formalizing their operating agreement, which spells out the rules of the business, is to define a simple formula for company valuation in addition to a buy/sell agreement that gives the startup the right, but not obligation, to buy back stock from team member no longer associated with the business. Best practices like a four year vesting schedule, one year cliff, and defining of roles and responsibilities among founders are more important, but having a defined buy/sell agreement is right up there to get in place immediately.

Here’s a simple methodology I like to use for company valuation in a buy/sell agreement:

• Take the comparable public market multiples of the business (e.g. 3x revenue for enterprise software companies, 5x revenue for SaaS companies, etc)
• Divide the public market multiple in half to account for lack of liquidity and make that a fixed number in the formula in the operating agreement
• Multiply trailing twelve months revenue times the discounted public market multiple by one plus the trailing twelve months top-line growth rate
• So, with a public market multiple of 2.5, revenue of $1 million, and growth rate of 70%, the company would be valued as follows: (2.5 x .5) * 1,000,000 * (1 + .7) = $2,125,000
• The formula put in the operating agreement would be as follows: 2.5 times the trailing twelve months revenue times the result of one plus the trailing twelve months revenue growth rate

This formula is easy to calculate and takes into account the dynamics of the market, recent revenue performance, and a premium for growth.

What else? What are your thoughts on having a defined formula for company valuation in a startup buy/sell agreement?

Everyone involved in web startups should learn to write simple code. I’ve argued before that every startup CEO should learn to write code but now I believe everyone in a web startup should learn to write simple code.

When people go to Paris for the first time, what’s the most common thing they do? Download TripLingo? Not quite yet (hopefully soon!). They pick up a little book with common phrases and attempt to learn some simple French. That’s right, they go to a new country and want to understand a tiny bit of the native tongue.

The native tongue for web-based startups is code.

We now require everyone on our services, support, and marketing team to get certified in basic HTML and CSS. The team members aren’t expected to code at all, but we do want them to be able to communicate with more technical people. The native tongue is code.

The solution: head on over to Codecademy and start learning to write simple code now. Don’t do it to become a programmer, but rather because it’ll help you better understand how the web works and be more successful.

What else? Should everyone in a web startup learn to write simple code?