David Cummings on Startups

Author: David Cummings

  • Demonstrate Growth Momentum, Even at Modest Scale

    This week I’ve already had conversations with multiple seed stage entrepreneurs that are having a hard time raising money. In each case they have some modest metrics that show progress but don’t have enough revenue to get investors excited. Now, with limited capital, it’s a catch-22 where they need more money to get to the point investors where investors want to invest but can’t get there without investment. My advice: figure out how to show a growth momentum story, even if it’s a modest scale.

    The goal is prove momentum and show month-over-month growth for the last 4-6 months. Here’s what that might look like:

    • Annual recurring revenue started the year at $100,000 and is now at $175,000 five months in growing 15% month-over-month (e.g. $100,000 in month 1, $115,000 in month 2, $132,500 in month 3, $152,000 in month 4, $174,900 in month 5, etc.)
    • Daily active users started the year at 100,000 and are now at 207,000 five months in growing 20% month-over-month (e.g. 100,000 in month 1, 120,000 in month 2, 144,000 in month 3, 172,800 in month 4, 207,360 in month 5, etc.)

    In both of these examples the metrics are still in the seed territory (e.g. institutional investors want to see at least $1 million in annual recurring revenue for a SaaS startup) but there’s a clear story of sustained growth at a modest scale over several months. That sustained growth proves something is working and helps an investor believe that there’s opportunity for even more growth in the future.

    What else? What are some more thoughts on demonstrating growth momentum as a way to get investors interested?

  • The 6/10 Law – A Growth Framework

    Continuing with 7 Takeaways from Mike Maples on the Black Box of VC at the end of the slide deck the author introduces the 6/10 Law as a growth framework to evaluate the scale necessary to build a legendary company. Generally, the idea is that the IPO sweet spot is between years six and 10 such that a startup needs to reach a scale in that timeframe to achieve escape velocity. Here’s the 6/10 Law process:

    • Select 3 Analogous Companies (high, medium, low success) with similar business models
    • All 3 should have gone public
    • Thought Experiment:
      – Can we grow at those rates?
      – How much money did they need to raise and when?
      – When were they IPO-ready?
      – What did their businesses look like? Revenue, growth, margins, G&A, R&D, etc.

    The next time you’re looking for a leadership team exercise, or a personal thought experiment, go through this process and analyze your startup relative to a legendary one with a similar business model.

    What else? What are some more thoughts on the 6/10 Law growth framework?

  • 7 Takeaways from Mike Maples on the Black Box of VC

    Mike Maples, Jr has a great slide deck up titled Inside the Black Box of Venture Capital. Over the course of 77 slides he shares a number of excellent ideas. After reading through it, seven takeaways stood out to me:

    1. Only 3% of VC Partners generate >3x in their careers
    2. VCs are paid to take high risk for high return. It’s the only reason LPs invest in VCs.
    3. The best company in a given year will usually be more valuable than all other 9,999 companies combined
    4. VCs have very little incentive to tell you exactly what they are thinking
    5. There is only one good answer to “who else are you talking to…” – “The usual suspects.”
    6. How much traction do you have? Ideally 30% a month growth in an important area (sales, revenue, users)
    7. Schedule all of your meetings in a single week 3 weeks out into the future if you can; 2 weeks of meetings is OK, but close to the limit

    Interested in venture capital? Interested in raising money from VCs? Go read Inside the Black Box of Venture Capital.

    What else? What are some more takeaways from Inside the Black Box of Venture Capital?

  • Sales and Marketing as a Percentage of Sales, for Public SaaS Companies

    Bloomberg Businessweek has a chart with the sales and marketing costs as a percentage of revenue in the last 12 months for several notable public SaaS companies:

    • Workday – 37%
    • Salesforce.com – 49%
    • ServiceNow – 50%
    • NetSuite – 52%
    • Marketo – 60%
    • Box – 80%

    https://twitter.com/guan/status/734536100027478017

    A few thoughts:

    • These companies clearly believe there is tremendous growth in the market, and investors are backing them up
    • While it isn’t this simple, imagine cutting sales and marketing costs by 80% and many of these companies would be very profitable (another reason why it’s reasonable to value SaaS companies at 4 – 6x revenue)
    • If these public SaaS companies with scale are spending 50%+ of their revenue on sales and marketing, imagine what the unicorn SaaS companies are spending as a percentage of revenue (hint: well over 100%)

    Knowing this, it’s easy to see why Sales-Oriented Startup CEOs are preferred. The most successful SaaS companies are incredibly focused on sales.

    What else? What are some more thoughts on sales and marketing as a percentage of revenue for SaaS companies?

  • Video of the Week: Khan Academy – Raising Money for a Startup

    For our video of the week, listen to Sal Khan of the Khan Academy explain Raising Money for a Startup. Sal has such a great, straightforward way of teaching concepts. Enjoy!

    From YouTube: Raising money from an angel investor. Pre-money and post-money valuation.

  • Proximity to Success Inspires Entrepreneurial Confidence

    Recently I overheard an entrepreneur in the halls of the Atlanta Tech Village say, “I’m going to be successful like X.” Now, ‘X’ in this case, was a successful company in the Tech Village. The fact that another company, in the very same building, achieved success made the entrepreneur more confident.

    Proximity to success inspires entrepreneurial confidence.

    The early employee at a startup that goes on to do great things has more entrepreneurial confidence to start their own venture.

    The high school student who reads about the entrepreneur down the road is more likely to say “I can do it too.”

    The next door neighbor that just had their first successful exit inspires their neighbor to think “what if” on a new idea.

    The idea that successful entrepreneurial activity attracts other entrepreneurial activity is real. Inspiration comes from many places and proximity to success is one of them.

    What are you doing to increase your entrepreneurial confidence? What are your doing to put yourself around successful entrepreneurs?

  • An Executive vs a Manager

    Recently I was talking to an entrepreneur and we got into a discussion about the difference between an executive and a manager. Many people claim to be an executive, especially in the startup world, but they aren’t as common as claimed. While executives and managers both manage teams, there are several differences with an executive.

    Here are a few ways an executive is different from a manager:

    • Executives are more strategic and jump between long-term planning and short-term execution
    • Executives set the direction while managers run the day-to-day
    • Executives are more likely to push back and debate an idea
    • Executives often oversee multiple teams or departments while managers have one specific group

    An executive is different from a manager. Entrepreneurs would do well to recognize the difference, especially as the business starts to grow and scale (it becomes more apparent with time!).

    What else? What are some more thoughts on executives vs managers?

  • Micro Apps for Lead Generation

    One of the lead generation strategies that works well, but takes time and engineering efforts to do right, is micro apps. Micro apps are super simple web applications that do one thing in exchange for providing an email address. Just like people are often willing to give their email address to download an ebook, people are also willing to give their email address for use of a simple micro app that provides value. Here are some popular examples:

    The key is for the micro app to be meaningful yet self contained with little friction to get value. Often, the value is a tiny piece of what the main product provides such that it’s the same audience and a lead generation opportunity.

    The next time you’re thinking about lead generation ideas, consider a micro app.

    What else? What are some more thoughts on micro apps for lead generation?

  • Startup Launch: PubNation

    My brother Christopher recently launched his new startup PubNation targeting the problem of ad quality management. As part of building SpanishDict to millions of unique visitors every month, he kept hearing complaints from users about inappropriate ads, but had a hard time tracking down who was showing the ads since everything went through third-party ad networks. Enter PubNation.

    Here are some of the features:

    • User Complaint – Hear feedback directly from users about the ads on the site.
    • Partner Information – Know which partner served the ad in question without searching through lines of code.
    • Screenshot Replay Technology – Validate the complaints through PubNation’s Screenshot Replay Technology.
    • Ad Speed Measurement – See which ads are loading large files or making too many requests through PubNation’s Ad Speed Measurement.
    • Ad Server Information – See exact information from the ad server about the partner, campaign, and CPM associated with the bad ad.

    The next time you see an inappropriate ad, you’ll know the exact problem PubNation is solving. And, if you know anyone in the media space, please pass PubNation over to them.

    What else? What are some thoughts on the idea of ad quality management software?

  • Get It, Want It, and Capacity to Do It

    In the book Traction: Get a Grip on Your Business, Gino Wickman talks about the people component of a business and shares several insights. One insight is how he assesses potential new hires or internal promotions against a simple framework called get it, want it, and capacity to do it:

    • Get It – Does the person understand the role and responsibilities? Does he or she “get” what’s expected of them?
    • Want It – Does the person have a desire for the position? Do they really want it or are they interested in it just because they feel it’s the next step in their career?
    • Capacity to Do It – Does the person have the ability to do a great job in the position? Or, is it likely to be a Peter principle case?

    The next time you’re interviewing someone for a position, go through the quick get it, want it, and capacity to do it exercise.

    What else? What are some more thoughts on the get it, want it, and capacity to do it idea?