David Cummings on Startups

Author: David Cummings

  • Expand When Growth Plateau is on the Horizon

    Ernst & Young Entrepreneur of the Year award
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    Last month I talked to an entrepreneur who’s company was hitting on all cylinders and growing fast. I asked him about his product and how he started the business. He quickly recounted how this was actually their second product as the first product did well but that they expanded into this newer product once he saw a growth plateau on the horizon. Now, growth isn’t the most important thing to all entrepreneurs but many view growth as new challenges and adventures that make the journey fun.

    Here are a few questions to think through when there’s a growth plateau on the horizon:

    • How important is growth relative to profitability and stability?
    • Does growth mean 5% a year or 50% a year to me?
    • Is it time to expand geographic markets, new industry verticals, or a new product completely?
    • What risks and opportunities come with these changes?

    My recommendation is to consider expanding when a growth plateau is on the horizon.

    What else? What other considerations should be taken into account with a growth plateau?

  • Publicly Traded SaaS Companies

    Software as a Service
    Image by Jeff Kubina via Flickr

    Software-as-a-Service (SaaS) continues to be a hot area in the technology world. Partly because it has only really started to flourish in the past five years and partly because it is more geared towards SMB companies with a lower ticket price therefore requiring to sign many thousands of clients to reach scale, there aren’t very many publicly traded SaaS companies. SaaS companies are characterized by great recurring revenue, gross margins, predictability, and growth. Here are a few publicly traded SaaS companies and information about them as of December 12, 2010:

    • salesforce.com (NYSE:CRM) – customer relationship management SaaS and cloud computing company. They are the largest SaaS company and the first to reach $1 billion in recurring revenue.
      Market cap: $19.53 billion
      Last reported quarter’s revenues: $429.09 million
      Employees: 4,758
    • NetSuite (NYSE:N) – enterprise resource planning (accounting, inventory, etc) SaaS company.
      Market cap: $1.66 billion
      Last reported quarter’s revenues: $49.74 million
      Employees:  1,022
    • Constant Contact (NASDAQ:CTCT) – email marketing for small business SaaS company.
      Market cap: $872.21 million
      Last reported quarter’s revenues: $44.83 million
      Employees: 625
    • SuccessFactors (NASDAQ:SFSF) – human resources SaaS company.
      Market cap: $2.36 billion
      Last reported quarter’s revenues: $51.54 million
      Employees: 967
    • Taleo (NASDAQ:TLEO) – human resources SaaS company.
      Market cap: $1.29 billion
      Last reported quarter’s revenues: $58.74 million
      Employees: 916
    • LogMeIn (NASDAQ:LOGM) – remote machine access SaaS company.
      Market cap: $1.11 billion
      Last reported quarter’s revenues: $25.35 million
      Employees: 387
    • LivePerson (NASDAQ:LPSN) – live chat SaaS company.
      Market cap: $524.75 million
      Last reported quarter’s revenues: $28.22 million
      Employees: 349

    Personally, I’m a big proponent of SaaS and am very optimistic about the future. It should be an interesting market to watch.

    What else? What other publicly traded SaaS companies would you add to the list?

  • My Innovation Rejection at IBM

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    Twelve years ago I did a summer internship at IBM in RTP. I was an undergrad at Duke and excited about the opportunity to work for a large technology company writing Java code . My role was to build example apps for what would eventually become WebSphere. At the time, my department was writing components and infrastructure objects for a big beta client: the State of Connecticut.

    IBM was a study in contrasts. Every morning when I came in and every day when I left I had to log in to a mainframe app on a green screen to record my time. That’s right, I used a mainframe app as a time keeping system while building web-based apps in Java. At the end of each payroll period I’d log in to the same green screen app and double check my hours. I had never used a green screen app before and have never used one since.

    One of the initiatives IBM had that summer was asking employees for ideas and ways to innovate. Funny enough, I’m never short on ideas so I submitted what I thought to be an obvious idea: enhance printer drivers to prompt users to not include the last page of the print out if it came from the web and had less than 5% ink coverage. The annoyance that I had encountered many times was printing a web page and having the last page be the copyright date or footer links — something of no value that wasted a piece of paper.

    I typed up several pages of examples and rationale around the idea. After submitting the idea I didn’t think anything of it until a month letter I received a letter thanking me for the idea and letting me know it was rejected due to not being useful. Oh well, I tried. The consolation prize was a lanyard to hold my serial number badge. My days of innovating at IBM were over.

    Interestingly, I read about a company in Portland last year that was generating millions of dollars a year in revenue by saving companies money on paper by doing the very thing I’d proposed at IBM. This is a small example that shows many ideas are too small for big companies, but big enough to be a small company.

  • Salesforce.com Dreamforce 2010 Wrap-up

    Salesforce.com put on another impressive Dreamforce show this week at the Moscone Center in downtown San Francisco. We’ve been doing the show now for three years and it continues to grow fast. Last year had 17,000 attendees and this year there were 30,000. That’s impressive growth, especially at scale. Some of the key takeways from the show for me include:

    • The cloud is becoming more and more pervasive with salesforce.com leading the way
    • Salesforce.com Chatter is now freemium whereby companies can use it for free and then pay a premium if they need more advanced functionality. I think Chatter is nice but won’t be the game changer that transforms salesforce.com, as they claim it will.
    • Salesforce.com launched database.com as a database-in-the-cloud service (side note: imagine how expensive that domain name was — I’m guessing at least $1 million). I don’t think database.com will be successful as long as the per user pricing model remains. The other big challenge it has is lack of drivers and code to make it work seamlessly in popular languages like PHP, Ruby, and Python.
    • Salesforce.com bought Heroku for upwards of $250 million and finally has a credible strategy to significantly expand beyond their traditional user base and per seat pricing. It’s going to take many years to see if this acquisition was worthwhile but my guess is that if they can get the corporate culture alignment right it’ll prove to be brilliant.

    Salesforce.com is one of the best sales and marketing machines in the world and the show didn’t disappoint.

  • The Time and Money Relationship for Startups

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    Time and money have a unique relationship in the startup world. The vast majority of startups have significantly more time than money. If you don’t have any money, every penny potentially spent gets scrutinized, as it generally should, and time is sacrificed to save money. Once a startup raises significant capital, the two suddenly flip flop. If you raise $10 million dollars in venture capital, expectations immediately change and the bar for success is significantly raised. The expectation is clear: spend the money to grow the business as fast as possible with the goal to achieve escape velocity and dominate the market.

    Some items to keep in mind when thinking about the time and money relationship:

    • Is this a winner-take-all-market like eBay or is more like email marketing where there are many successful companies
    • Shifting the mindset from scrappy to putting money on the line faster is hard to do and shouldn’t be taken lightly, especially for bootstrapped companies
    • Startups that don’t raise money but reach multiple millions in revenue will start to see the time and money relationship change as they make hard decisions around maximizing profits vs maximizing growth

    There’s a distinct relationship between time and money in startups.  Accordingly, it’s important to understand and be cognizant of it.

    What else? What other considerations between time and money should be considered in startups?

  • Thoughts on salesforce.com and Heroku

    At today’s Dreamforce show the big news was that salesforce.com has acquired Heroku for $212 million in cash. Heroku is a Platform-as-a-Service offering for Ruby on top of Amazon Web Services. This is salesforce.com’s largest acquisition ever, and is more dramatic considering that it is estimated that Heroku has less than $10 million in revenue.

    Here are a few thoughts on the acquisition:

    • salesforce.com has the Force.com platform for building apps but it requires a non-standard Java-like language that hasn’t had much adoption.
    • salesforce.com has the VMForce.com initiative in private beta which will run Java apps but Java apps are much more cumbersome to write compared to Ruby, PHP, and Python.
    • salesforce.com just launched database.com for a true cloud database offering but has a $10/user/month pricing in addition to storage costs which make it unlikely to catch on.
    • Heroku offers a true PaaS with pricing inline with the normal hosting industry making it the first real initiative that will grow salesforce.com outside their current core uses.
    • Heroku is built on Amazon Web Services which offers virtual private servers in the cloud. Heroku takes the Amazon cloud instances and sub-divides them further into even smaller instances as well as takes away much of the complexity. It is brilliant.

    My take is that this is a credible move requiring at least three years to prove worthwhile. It is super risky and brilliant at the same time.

  • Where’s the SaaS App Market Headed?

    After spending a day at Dreamforce it is clear that the SaaS app market, as well as associated salesforce.com AppExchange eco-system, is growing like gang busters. The top sponsorship slot for Dreamforce this year was Platinum for a whopping $250,000. Next year they’ll have two even more expensive slots: Diamond and Titantium. Imagine what those will go for.

    Here are a few SaaS app trends I see:

    • More connectors and off-the-shelf integration between SaaS products (who’s going to win the generic app marketplace e.g. a marketplace that isn’t the Google Apps Marketplace and isn’t the salesforce.com AppExchange marketplace?)
    • Integration and migration of legacy data continues to be a big challenge (garbage in, garbage out, regardless of industry)
    • Ease of use continues to be a major focus (design for the novice, customize for the pro)
    • Pricing and complexity of contracts is starting to decrease, making things better for the customer

    All in all, the SaaS market continues to grow fast and I’m very bullish about it. We’re only scratching the surface of SaaS apps changing how businesses operate.

  • Thoughts on salesforce.com on the Flight to Dreamforce

    Image representing Salesforce as depicted in C...
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    This blog posts comes from 30,000 feet in the air courtesy of free WiFi for the holidays from Google Chrome on Delta. Right now, I’m flying to San Francisco for my third consecutive annual salesforce.com conference known as Dreamforce. As one of our main partners and the leader of the SaaS industry, I pay close attention to salesforce.com. Dreamforce never disappoints.

    Here are a few thoughts on salesforce.com:

    • They are a brilliant sales and marketing machine with reportedly 50% of their employees in sales (which represents thousands of people).
    • They were the first SaaS company to reach $1 billion in recurring revenue.
    • They are extremely focused on selling seats of their software, with sales reps and support reps being the majority of their users. Because there’s typically a 10-to-1 relationship between sales reps and marketing people, and they want to sell seats, salesforce.com has stayed out of the marketing automation market.
    • They have a great product but the real value comes from the AppExchange eco-system of other products that integrate with their API. This creates a network effect resulting in exponentially more value.
    • They have been promoting “no software” as their mantra for years now, which is brilliant to position SaaS against traditional installed apps. Yes, they sell software.

    Every year the salesforce.com CEO gives a keynote presentation announcing their results as well new features or products to much fanfare. Last year they introduced Chatter to allow companies to run an internal Facebook-like community. It’ll be interesting to see what they announce this year. Stay tuned for an update later in the week.

  • Recurring Revenue to Support a Line of Credit

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    The Wall Street Journal published an article three days ago titled Royalty Financing: An Alternative to Venture Funding, Bank Loans that mentions some of the challenges I talked about in my post on Junk Bonds for Startups a week ago. The general idea is that startups usually don’t have much need in the way of physical assets to take loans out against (e.g. real estate, heavy equipment, etc) and so when it comes to bank loans they really aren’t available unless you have personal collateral to cover the majority of the amount. Royalty financing is generally taking a percentage of the future revenues as a way to finance a loan.

    A line of credit is worth considering for revenue-producing startups. Most of the time it’s tied to the current accounts receivables (monies owed) to the business and a bank will provide a line of credit for 75% of those receivables. The challenge for many SaaS businesses is that they are paid monthly on a credit card resulting in little receivables relative to the size of the business.

    SaaS businesses should find a bank that understands recurring contract revenue and will set up a line of credit based on the last 90 days monies received from recurring revenue. For example, technology company-focused banks will do lines of credit for 75% of those monies for profitable companies. Thus, if $1 million of recurring revenue was collected in the past 90 days, the business might get a line of credit for $750,000. A bank line of credit or loan, especially with today’s interest rates, is often the cheapest way by far to finance a business. The challenge is getting it.

  • Pricing a SaaS App

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    Pricing is one of the areas that I see first-time entrepreneurs undersell themselves. What I mean is that there’s a tendency to price a product too low. Paul Graham says, “You’ve found market price when buyers complain but still pay.” It’s not that you’re trying to take advantage of customers but rather attempting to determine the optimum price (which often isn’t the highest). Software-as-a-Service (SaaS) is especially interesting due the rental nature of the relationship. The client isn’t buying the software but rather paying a monthly or annual fee for access to the application.

    Here are a few things to keep in mind when pricing a SaaS app:

    • Under $10/month is generally a consumer app that is fully self-service
    • $20-$100/month is more small business and self-service or limited service to get going
    • $100-$500/month is no-man’s land where it is too expensive to be self-service and it is too cheap to compensate consultative inside sales reps (the exception is products that replace existing, known quantities like VoIP services replacing phone services)
    • $500-$1,500/month is the sweet spot for having a quality inside sales team that is well compensated
    • $1,500+/month enters the territory of an expensive field sales force with significant travel and expense costs

    Pricing is one of the more difficult things to do early on and I recommend starting two or three times higher than your initial thinking and always remember that it is easier to lower prices that to raise prices.

    What else? What are some other considerations when pricing a SaaS app?