David Cummings on Startups

Author: David Cummings

  • GPA: Growth Plan Assets

    One of the serious challenges with a bootstrapped startup is determining when to expand. There’s a fine balance between having sufficient reserves in the bank and being aggressive with new hires and initiatives. About four years ago, after struggling with this issue for over a year and experimenting with different ideas, I settled on an approach I’ve been using ever since: growth plan assets (GPA).

    The GPA, much like a GPA in college, is a simple number that quickly summarizes the ratio of current assets to average monthly operating costs over the previous 90 days. Here’s how I calculate it:

    • Add up current assets including cash in the bank and accounts receivables that are not overdue
    • Calculate the average monthly costs to operate the business over the past 90 days (every single penny spent that wasn’t a one-time cost)
    • Divide the current assets by average monthly cost to get the GPA

    What else? How do you decide when it is time to invest in growth?

  • Participating on a Panel Discussion

    Last week I participated as a panelist on a Technology Executive Roundtable discussion on mobile apps in the enterprise and this week I participated as a panelist at the Executive Sales & Marketing Association discussion on lead nurturing for revenue growth. Participating on a panel is a great way to meet new people, establish yourself as a domain expert, and learn from others.

    Here are some tips for participating on a panel:

    • Come prepared with 5 – 10 talking points that you want get across
    • Think of several stories or anecdotes in advance that will resonate with the audience
    • Have a call to action at the end of the panal discussion to get people to give you their business cards (I offered to give a copy of my marketing automation book for free to anyone who gave me a card)
    • Don’t always take the easy, agreeable positions on panel questions when you have a more memorable and debatable stance (people love to hear opposing view points)

    Panels are a great way to get involved and I recommend taking advantage of invitations to participate.

  • Dialogue with Enterprise Software End Users

    One of the challenges with product management and certain enterprise software products is creating a dialogue with end users. Often the product purchase and management is driven by the IT department, which also administers the application. Administrators then become the contact points, but don’t use the product in the same way as their end users.

    Here are some ideas to address this issue:

    • Include a prominent link in the application requesting feedback
    • Have an idea exchange for users to submit ideas
    • Do quarterly check-in calls with customers and ask to speak with end users
    • Invite admins and end user to a user conference

    My recommendation is to work hard and create relationships with the different types of product end users.

  • Pre-Mature Business Optimization

    Earlier today I talked to an entrepreneur about his upcoming marketing program. The entrepreneur has been working on a book about his industry that attempts to educate potential clients on certain pitfalls and how the major players in the market don’t always have their clients’ best interests in mind. After talking for 20 minutes about the book and some of its contents, I jumped into the reason for the call: talking about how to handle all the leads that the book will generate.

    Only a couple minutes into the meat of the conversation I realized things were awry. The entrepreneur had spent significant monies on a customized Microsoft CRM implementation, new website, marketing consultant to do market research, and still hadn’t launched the book. All the infrastructure work was in preparation for the perceived onslaught of leads that he wouldn’t be able to handle. I quickly told him that he was doing way too much pre-mature optimization of his business and that generating more leads than he can manually handle would be a great thing. Of course, this was difficult to hear but he took it in stride and agreed.

    My recommendation is to not pre-maturely optimize for an expected outcome when you’re a startup and can deal with issues quickly. Launch projects early and often and iterate based on feedback. Nothing replaces gathering real information from the field.

  • The Value of Being a Market Leader

    At lunch today I had a good conversation with a serial technology entrepreneur and the topic of market leaders came up. Of course, in the public markets companies like Salesforce.com (NYSE: CRM) get premium valuations — the question is why. What value is there in being a market leader other than being the biggest?

    By being a market leader, especially in a market that has been around and is fairly mature, the main benefit is that cost of customer acquisition will be lower than competitors. Whenever a company thinks about buying the type of solution a market leader provides the market leader will always be in the deal, almost like an incumbent even though they aren’t even the vendor yet. The other, non-market leaders will be the ones forced to differentiate their products and they’ll have to work harder and longer to win the deal compared to the market leader.

    With a lower cost of customer acquisition, the market leader will have better margins, and is likely to grow faster and/or more profitably. In the end, the result is that market leadership compounds on itself and produces more valuable companies.

    What else? What are some other benefits of being a market leader?

  • Finding Successful Industries for a Product

    It might not seem obvious but many entrepreneurs build a product to scratch their own itch without regard to a specific industry vertical. Of course, doing generic pay-per-click (PPC) advertising on Google for keywords (e.g. project management) will generate leads from a variety of industries. This works well to start talking to prospects and understanding their domain-specific needs.

    The challenge occurs when the PPC value dries up and, inevitably, it always does. What do I mean that it dries up? Well, PPC works as an auction so you can’t spend more money and get more clicks in a linear fashion. The cost for additional clicks goes up exponentially as you have to bid more to get to the next position higher, causing the cost for all your clicks to go up.

    We ran into this issue with our mid-market web content management product. PPC ads were cheap at the time (back in 2004 – 2005) and we started buying as many clicks as we could afford. As sales went up, we could afford more, and our bill kept rising. We peaked at a spend of more than $10,000 per month on clicks. Now, we spend a couple thousand per year on PPC. It just doesn’t have a return on investment for us anymore.

    What did work was looking at the customers we’d signed up from the PPC campaigns. After a year we identified higher education as our most successful industry so we slowly started to focus in on that industry vertical. We’d cold call campus web masters, sponsor conferences, and do whatever we could to stay top-of-mine with our target colleges and universities. We’ve been a leader in the market ever since.

    My recommendation is to start broad, do whatever you can to get customers from several different industries, listen carefully, and then double-down on the vertical that you think will be the most successful for your product. It isn’t easy, but it works.

    What else? What are your thoughts on finding successful industries for a product?

  • The Three Critial Numbers for SaaS

    Software-as-a-service (SaaS) is a great business model that provides recurring revenue for vendors, continual upgrades for users, and fewer hassles for customers. When looking at a SaaS business, there are three critical numbers to watch:

    • Churn — the percentage of customers that leave monthly/annually (the equivalent is looking at the renwal rate of customers)
    • Current customer revenue growth — the growth of revenue from up-selling existing customers
    • New customer sales — the number of new customers signed up and the corresponding revenue

    These are the three most important metrics to monitor for a SaaS business.

  • Ted Turner’s Autobiography

    Lately I’ve been on an autobiography kick reading four in the past couple months. I went from Richard Branson, to Tony Hsieh, to Andre Agassi, and I’m about to finish Ted Turner’s autobiography. Ted does a great job telling stories about his companies, sailing, family, and everything in between.

    From a business perspective, Ted’s stories really capture the growth and dynamism of the TV, cable, and entertainment industry. Here are a few of my takeaways:

    • Ted was constantly pushing his business to the limit financially and several times almost lost control of the company
    • Leverage (debt) using junk bonds made many of his acquisitions possible
    • His biggest regret was having to raise money after an acquisition he couldn’t afford, resulting in new board members that had veto power in his business (he still had a majority stake but their preferred shares could block certain transactions)
    • He had the idea for CNN several years before he launched it, and didn’t do it right away because he thought one of the big networks would do it, but they didn’t
    • Big ideas, some of which were failures, were a trademark of Ted, and he kept pushing the envelope with everything he did

    The book is a great read and I’d recommend it, especially for Atlantans as it gives some good history of the city.

  • Startups and Disability Insurance

    One area that is often difficult for startups is insurance. Difficult in the sense that being so small, with so few employees, if any, rates are typically high and options are low. Now health insurance is always considered the most important insurance, and it is, but another type of insurance that isn’t talked about as frequently is disability insurance.

    In the past two weeks I’ve talked with entrepreneurs that mentioned situations where disability insurance would have been valuable. One entrepreneur had an employee with cancer that took significant time off. Another entrepreneur had a key employee that was pregnant and needed bed rest for the last two months of the pregnancy. In both cases, disability insurance would have been beneficial but the entrepreneurs didn’t have it.

    Short term disability insurance usually pays 60% of the employee’s salary for up to 12 weeks, with a maximum of $5,000 per month while long term disability is usually more customized. At a cost of $30 – $70 per employee per month, it becomes clear that having a single issue arise more than pays for itself. Hopefully, an issue will never come up.

    My recommendation is to look into disability insurance and purchase it if you can afford the payment. Insurance is usually cost effective and helps give piece of mind to the entrepreneur and team members.

  • Entrepreneurs Owning Community Banks

    Everyone has read about the number of bank failures over the past couple years. In fact, Georgia leads the nation in bank failures, so we know it well locally (my company bank, Georgian Bank, was one of the ones that failed). Lately, I’ve noticed a trend: three EO members that I know are part owners and on the board of local community banks.

    I’ve mentioned before that banks aren’t in the business of loaning money when you don’t need it or when you don’t have hard assets to use as collateral. With this in mind it makes good sense why several of my friends are investors in banks:

    • They have million dollar plus companies, so keeping their desirable accounts at the bank they invest in helps the bank
    • They know lots of people and can refer them to their bank
    • They encounter opportunities where they need access to capital and I’m sure being part owner helps with the loan process

    I also talked to an entrepreneur that had sold his company to another entrepreneur where the entrepreneur that bought the company also owned a bank, and that played a role in the transaction. The reason it played a role is that the business was a good cash flow, 100% recurring revenue business. Because of the industry and structure of the business, partners in the future would buy into the business, get financing from the bank that was owned by the entrepreneur that also owned the business. Banks can borrow money from the fed at next to nothing right now. Owning a bank that can borrow money at next to nothing, loan it to a business partner that is buying into a business you also own at a standard rate (say prime plus 2%), and making money even if the new business partner walks away, seems like a pretty shrewd operation.

    What else am I missing? Why are there so many community banks?