David Cummings on Startups

Author: David Cummings

  • Video of the Week: Elon Musk on How to Build the Future

    For our video of the week watch Elon Musk: How to Build the Future. Enjoy!

    From YouTube: Access podcast and transcript versions of this interview here: https://www.ycombinator.com/future/elon/

  • The Startup Stages in 8 Words

    Continuing with yesterday’s post The Four Startup Stages, there’s another, much simper, way to describe the startup stages in eight short words:

    • Pilot it
    • Nail it
    • Scale it
    • Milk it

    Pretty simple, right? “Pilot it” is the idea stage with a prototype. “Nail it” is the search for product/market fit. “Scale it” is the repeatable customer acquisition process and growth. Finally, “milk it” is maximizing value.

    Need to describe the startup stages? Use these eight words.

    What else? What are some more ways to describe the startup stages in a simple way?

  • The Four Startup Stages

    Whenever someone tells me that want to join a startup, I always ask about their preferred stage. Typically, they don’t have a context for the stage name jargon so I go through the common ones:

    • Idea Stage – An idea is in place. Maybe there’s a team, maybe it’s just a founder. There isn’t much here yet other than an idea and a dream.
    • Seed Stage – The prototype works. Usually a few customers or beta users that are trying things out. Likely some friends and family funding or lots of sweat equity.
    • Early Stage – Product/market fit is solid and there are paying customers. Revenue is in the mid six-figures to low single digit millions. Customer acquisition is working and repeatability is the focus.
    • Growth Stage – Things are humming along nicely with the overall business cranking. Revenue is at least $5M and often much higher. Scaling is the main focus and there’s a path to the next major milestone.

    With each stage comes the typical pros and cons as well as a risk/reward trade off for potential new employees. When seeking a job at a startup, it’s important to understand the standard stages and think through what’s most appropriate.

    What else? What are some more thoughts on the four startup stages?

  • The SaaS Metrics Framework

    Updata Partners released their new SaaS Metrics Framework and it’s excellent. SaaS companies have a number of business model elements that are consistent from one company to another such that it’s possible to run them through a process and see how they stack up fairly quickly. Updata’s framework is one such model.

    Here are a few notes from the SaaS Metrics Framework:

    • Two SaaS metrics that matter most: Gross Margin Payback Period (GMPP) and Return on Customer Acquisition Cost (rCAC)
    • GMPP is the number of months required to break even on the cost of acquiring a customer
    • rCAC incorporates the element of customer churn/retention into the equation and calculates the multiple of the acquisition cost provided by the lifetime gross profit of a customer
    • Good is GMPP under 18 months and rCAC above 3x
    • Great is GMPP under 12 months and rCAC above 5x
    • Cohort level analysis is necessary and must be run across at least three critical dimensions: Vintage, Product, and Channel
    • Metrics and sequence of analysis
      1. MRR – Monthly Recurring Revenue
      2. tCAC – Total Customer Acquisition Cost
      3. RGP – Recurring Gross Profit
      4. GMPP – Gross Margin Payback Period
      5. eLT – Expected Lifetime
      6. LTF – Lifetime Value
      7. rCAC – Return on Total Customer Acquisition Cost

    One big takeaway: SaaS companies need to be thinking about many of the popular metrics like the SaaS Magic Number in the context of gross margin, not revenue. And, thankfully, gross margin should improve with scale. Want to understand SaaS unit economics better? Head over to SaaS Metrics Framework.

    What else? What are some more thoughts on Updata’s SaaS Metrics Framework?

  • The Dilution vs. Growth Rate Trade Off

    Once a startup finds product/market fit and a repeatable customer acquisition process, it’s off to the races to build a large, meaningful company (see The Four Stages of a B2B Startup). Only, when it’s really, truly working, there’s virtually no end to the capital available (assuming good unit economics and a fair valuation). More money is readily available, but every additional dollar of equity results in more dilution. Enter the dilution vs. growth rate trade off.

    Here are a few questions to consider:

    • What are some low/no dilution options to grow faster? Venture debt? Raise a smaller round to get to the next milestone?
    • What’s the competitive landscape like? How hard are the competitors pushing (this is one of the reasons scaling SaaS is so expensive)?
    • How’s the growth rate now? What’s the estimated growth rate necessary to win the market? What’ll it take to close that gap?
    • How promising are the expansion ideas? Geographic expansion? Industry expansion?
    • Who’s gone through this before that can be a good sounding board?

    Once a startup is working, it’s an amazing thing. Only, the dilution vs. growth rate trade off is real and should be constantly evaluated.

    What else? What are some more thoughts on the dilution vs. growth rate trade off?

  • The Importance of Markets and Timing

    Earlier today I was talking about markets and timing with an entrepreneur. Some startups with amazing teams fail while other startups with “normal” teams achieve incredible results. What gives? Markets and timing play a critical role.

    Here are a few thoughts on the importance of markets and timing:

    • Being too early to a market is a failure (how many times have you heard someone say “I had that same idea 10 years ago…”)
    • Being too late to a market is a failure (“we got crushed by the competition” said no entrepreneur ever, but happens all the time)
    • The best timing is slightly early so that when the market takes off, the startup already has customers, employees, and a foundation to build on
    • Two popular ways to think about markets: resegmenting a large, existing market with something better, faster, and cheaper or going after a small, fast-growing new market with a solution
    • Occasionally the size of a market can be expanded with a new solution (like Uber did for the taxi market) but often the market size is relatively static, so choose well

    Timing a market with the right product is difficult, very difficult. Entrepreneurs would do well spending more time thinking about markets and timing as they play an outsized role in success.

    What else? What are some more thoughts on the importance of markets and timing?

  • Measuring SaaS Churn Rates 2.0

    Dave Kellog published a new post recently titled A Fresh Look at How to Measure SaaS Churn Rates in which he introduces several new concepts related to SaaS churn. On the surface, SaaS churn seems pretty straightforward — take the number of customers that were up for renewal at the start of the time period, take the number that left during the time period, and divide the second into the first — but it’s much more nuanced than that. What about logo vs revenue churn, by cohort, by product, by account, or by any of a number of other measures? It gets more complicated, quickly.

    Here are a few notes from the article:

    • Leaky Bucket Equation: Starting ARR + new ARR – churn ARR = ending ARR
    • Tracking it as churn is more common that tracking it as renewals
    • Shrinkage (anything that shrinks ARR) and expansion (anything that expands ARR) need to be factored in
    • Two most important churn rates: logos (by customer count) and ARR (by recurring revenue)
    • 5 churn rate formulas:
      • Simple churn = net churn / starting period ARR * 4
      • Logo churn = number of discontinuing logos / number of ATR+ logos.
      • Retention = current ARR [time cohort] / time-ago ARR [time cohort]
      • Net churn = account-level churn / ATR+
      • Gross churn = shrinkage / ATR+

    Want to better understand churn in the context of SaaS? Head over to A Fresh Look at How to Measure SaaS Churn Rates and take a deep dive.

    What else? What are some other good resources on SaaS churn?

  • Venture Debt as Safety Net

    Lately, several entrepreneurs have asked me about venture debt. Venture debt is bank-provided debt for startups that have raised money from venture capitalists or have a few million in annual recurring revenue. At Pardot, we didn’t raise any venture capital but we did use a $3M line of credit from SVB. Only, I’m not seeing entrepreneurs sign up for venture debt to actually use, like we did at Pardot.

    Today, entrepreneurs are signing up for venture debt as a safety net. The idea is to have the money available in the event things don’t go according to plan, but not to be used as part of the plan. Here are a few thoughts on venture debt as safety net:

    • Entrepreneurs are optimistic at their core, but they also know that things don’t always work out like the plan. Having a financial back up option provides some peace of mind.
    • Venture debt has a price (legal fees, closing costs, etc.) but the actual debt doesn’t have to be drawn down making it much cheaper than expected to have access to the capital
    • Signing up for venture debt requires more ongoing financial rigor with the bank, but that financial rigor is a good thing in that there’s another set of eyes reviewing the business operations (e.g. someone at the bank that reviews a number of these types of businesses)

    Entrepreneurs that have the scale or funding should actively evaluate venture debt as a safety net. The costs are relatively low and the value is high.

    What else? What are some more thoughts on venture debt as safety net?

  • The 3-Step Startup Marketing Framework

    Hiten Shah has a great post up titled The 3-Step Startup Marketing Framework where he outlines the process he used to help grow popular startup Kissmetrics. Here are the three steps:

    1. Identify your target customer by understanding:
      • What your product does
      • The problem your product solves
      • Who wants this problem solved
    2. To find out where your target audience hangs out:
      • Create a master list of potential places
      • Establish criteria for ideal marketing channels
      • Vet your list according to those criteria
    3. To engage with your customer
      • Identify your method of engagement
      • Expand as far as this method allows
      • Confine your reach only to the target audience
      • Aim to deliver a high amount of value

    Go read The 3-Step Startup Marketing Framework and follow his process.

    What else? What are some more thoughts on this startup marketing framework?

  • Pros and Cons of Being a Solo Founder

    Continuing with this week’s theme of co-founders (see here, here, and here), there’s another topic to address: solo founders. While a pair of co-founders is the more common success story, major companies like Amazon.com were founded by a solo entrepreneur. I’ve founded a number of startups both with co-founders and as a solo founder and have a few thoughts on it.

    Here are some pros and cons of being a solo founder:

    Pros

    • Simple – There’s no recruiting another founder to join the team. It’s just you starting out with no dependencies.
    • Cheap – Work on your startup during the day and drive Uber at night to pay the bills. It’s only your expenses.
    • Style – Whatever your style is, you get to keep doing it. You make the rules, the hours, the whatever — it’s just you.
    • Equity – The startup is 100% yours. You get to personally debate the whole “all of a grape vs a slice of a watermelon” regarding your strategy to raise money or bootstrap and the potential outcomes.

    Cons

    • Lonely – Having a co-founder means having a companion that’s there with you 24/7 focused on making the startup successful. Going solo can get lonely.
    • Speed – Small, high quality teams move much faster than an individual. There’s a ton to do and never enough time.
    • Debates – Decisions are often better when two committed people work to come up with the best solution. As an individual, there’s often a single perspective (advisors and mentors can help here).

    Some of these cons can be solved by raising money and hiring people. Only, it’s a chicken and egg problem in that you need traction to raise money. And, to get traction you need people. Also, most investors want to see at least two founders as it fits their pattern recognition.

    Being any type of founder isn’t easy, and being a solo founder is especially hard. Consider the pros and cons and make the best decision for you.

    What else? What are some more pros and cons of being a solo founder?