David Cummings on Startups

Author: David Cummings

  • Capital Light Startups and Small Funds

    Continuing with yesterday’s post Thoughts on Boston’s New Pillar Fund, AVC has a great post up today titled Small Ball where he highlights a few of the benefits of being small in the startup and venture capital world. Here are a few takeaways from the post:

    • Some of the best USV investments were in startups that didn’t need to raise money or raised a single round
    • Founding teams that owned 50%+ at exit were often focused on a revenue/business model at launch and stayed very efficient
    • Large funds have a really hard time returning 3x the fund due to the law of large numbers (if it’s a $1 billion fund, it needs to generate $3 billion in returns — an astronomical number)
    • Small funds, while still difficult to generate 3x, are able to do well with smaller exits, which are much more common

    Go read Small Ball and spend time in the comments to get even more perspective.

    What else? What are some more thoughts on capital light startups and small funds?

  • Thoughts on Boston’s New Pillar Fund

    Yesterday I was reading about a new $100 million venture fund in Boston called Pillar in an article titled With Pillar and Other Newcomers, Boston’s Venture Scene Shifting. The pitch: an experienced VC is building a new, modern fund that’s much more entrepreneur friendly.

    Here are a few of the new ideas in the fund:

    • Only buys common stock in startups so that they’re always aligned with entrepreneurs (no preferences, no anti-dilution, etc.).
    • Cash out opportunity for the founders to sell some of their equity (up to $1M) after three years and certain milestones so that they don’t feel pressure to sell the entire company too soon.
    • Limited partners that are local entrepreneurs with a range of expertise and are willing to help the investments

    The big idea is that venture funds make their money on the investments that go well, not by getting some of their money back from ones that go poorly. Thus, be as desirable as possible to the entrepreneurs so that the fund gets the best investment opportunities.

    I’m looking forward to seeing how it plays out and if the model works.

    What else? What are some more thoughts on Boston’s new Pillar fund?

  • Radical Focus: Achieving Your Most Important Goals with Objectives and Key Results

    Christina Wodtke recently published a great book called Radical Focus: Achieving Your Most Important Goals with Objectives and Key Results. As expected, the author takes the reader through a fable of a young startup that is ambling along making progress in certain areas while struggling with alignment and focus. After a mentor introduces OKRs to the team, they are slowly infused into the organization and the company takes off.

    Here’s how the author describes the system:

    1. Set inspiring and measurable goals.
    2. Make sure you and your team are always making progress toward that desired end state no matter how many other things are on your plate.
    3. Set a cadence that makes sure the group both remembers what they are trying to accomplish and holds each other accountable.

    While it sounds simple in theory, in practice it takes a good deal of time and discipline. I’m a proponent of setting goals and using a system to help manage the goal process.

    What else? What are some more thoughts on the book Radical Focus and the idea of goals based on OKRs?

  • Know the Potential Investor’s Desired Returns

    Recently I was talking to an investor about my personal angel investing strategy and I mentioned that I don’t follow on most of the time. Why? Because I’m interested in getting a 10x or greater return, and as the valuations go up, the chance of getting a 10x+ return goes down. Of 1,000 startups that have raised venture capital, between .2 and 2% ever sell for $100 million or more. Now, that’s for ones that have raised venture money and the odds are even lower for the ones that haven’t.

    Here are few thoughts on a potential investor’s desired returns:

    • Some investors are playing for the 100x homerun return and double down on their winners, regardless of stage (most VCs outside the Valley play a different game)
    • Larger venture partnerships often manage multiple funds with different return expectations (e.g. a venture fund for earlier stage deals and a growth fund for later stage deals)
    • Generally, as the size of investment goes up, the size of the expected return goes down (e.g. 3x is a common return goal when investing at north of a $150 million valuation)

    Entrepreneurs need to know the potential investor’s desired returns and make sure they align with their own goals.

    What else? What are some more thoughts on needing to know the potential investor’s desired returns?

  • Top 15 Blog Posts

    Every so often I like to check and see what’s popular here on the blog. As expected, Software-as-a-Service (SaaS) continues to be hot (it’s my favorite market). Here are the top 15 blog posts based on traffic this year:

    1. SaaS Cost of Goods Sold for Startups
    2. Simplified One Page Strategic Plan from Rockefeller Habits
    3. How Much is Enough: A Story from Jimmy John’s
    4. The 9 Building Blocks of a Business Model
    5. SaaS Founder/CEO Equity at Time of IPO
    6. Example Simplified One Page Strategic Plan
    7. Costs to Furnish a Nice Startup Office
    8. Gross Margin and SaaS
    9. Arriving at the Pardot Acquisition Price
    10. HubSpot Growth: $300,000 to $3,000,000 in ARR in Six Months
    11. Google Spreadsheets for KPI Dashboards
    12. Quantifying the SaaS Valuation Growth Rate Multiplier
    13. Google Spreadsheet Marketing Budget Template for Startups
    14. 99% of Tech Startups Never Hit $1 Million in Revenue
    15. Killer SaaS KPIs Spreadsheet Dashboard

  • Debate Between Startup Growth and Founder Dilution

    One of the more common debates I hear from founders that have hit $1 million in annual recurring revenue is around growing faster by raising money vs the tradeoff of more equity dilution. There’s never a right answer and there’s always a spreadsheet scenario to go either way. At Pardot, we debated this for many years and ended up not raising any money (see the Pardot timeline). Here are a few thoughts on the debate:

    Entrepreneurs love to take calculated risks and raising money to grow faster, or taking it slower and owning more of the company, is a continual debate. Regardless, take the time to understand the different options and make an informed decision.

    What else? What are some more thoughts on the debate between growing the business faster vs taking more founder dilution?

  • Video of the Week: Guy Kawasaki – The Top 10 Mistakes of Entrepreneurs

    For the video of the week, listen to one of my favorite startup authors Guy Kawasaki talk about The Top 10 Mistakes of Entrepreneurs. Enjoy!

    From YouTube: Kawasaki, former chief evangelist of Apple and co-founder of Garage Technology Ventures, explained the top ten mistakes that entrepreneurs make. His talk covered all stages of a startup from inception to exit.

  • Special Sales Rep Incentive Ideas

    Generally, I like to err on the side of keeping things as simple as possible, and sales rep compensation is no different. Compensation plans like commission based on 50% of the first four months revenue are easy to understand and manage. Sometimes the desire arises to implement special sales rep incentives to help get a new product launched or get initial traction in a new market.

    Here are a few special sales rep incentive ideas:

    • Double Commission on the First 10 Deals – Paying out extra commission is a great way to incentivize reps when there’s a new, unproven opportunity that’s potentially strategic to the company.
    • Add Extra Commission for Certain Customer Segment – If the push is to move up market or sell bigger deals, add addition commission for that type of new customer for a specific time period (always have a time period limit to special incentives).
    • Comp on Logos – Some markets are a race to build marketshare and get out in front of the competition. One approach here is to compensate sales reps based on the number of logos (customers) they sign that fit a profile (e.g. Fortune 1000 companies) instead of based on the size of the deal knowing that market share or land and expand will pay off in the long run.

    Keep sales rep compensation plans simple and straightforward. Selectively use special incentives when needed to better align the rep and the company.

    What else? What are some more special sales rep incentive ideas?

  • Two Common SaaS Sales Compensation Plans

    Continuing with Mark Roberge’s book The Sales Acceleration Formula and the recent post on HubSpot Growth: $300,000 to $3,000,000 in Six Months, there’s another really important topic to discuss: SaaS sales compensation plans.

    In the early years of Pardot everything was sold month-to-month with no annual contract. We quickly learned that if a customer stayed with us past month four, they’d stay with us indefinitely (we had a monthly customer churn of 1.4% with no contracts). So, naturally, we set our sales compensation plan based on this learning about the critical nature of the first four months. Sales reps were paid commission of 50% of the monthly revenue for the first four months (e.g. the equivalent of 2x the monthly recurring revenue). We wanted the reps to sell good fit customers, and if the customer churned after the first month or two, the sales rep would get a substantially reduced commission.

    Unbeknownst to us at Pardot, HubSpot arrived at the exact same formula: their reps were paid 50% of the first four months of revenue.

    Overtime, HubSpot evolved to a different formula that did a better job of promoting good fit customers. Sales reps were paid a commission on monthly recurring revenue as follows:

    • 50% of the first two months
    • 50% of month six
    • 50% of month 12

    By paying half the commission in the first two months and then spreading the commission out over two key junctions – the six and twelve month milestones – HubSpot was able to align the sales team with the company goal of signing customers that were great fits.

    Entrepreneurs would do well to consider the company goals and organize the sales compensation plans accordingly in a way that balances the short-term and long-term.

    What else? What are some more thoughts on these two SaaS sales compensation plans?

  • Product Engagement and Usage Understanding

    One of the areas that I want to better understand is that of product engagement and usage metrics in the context of a B2B SaaS app. I’ve looked at a number of usage reports from Google Analytics and other apps but haven’t had the opportunity to see an expert in action combined with a system that adds insight.

    Some of the product engagement and usage questions I’m interested in:

    • What are basic product engagement elements that every B2B product manager should know?
    • What are some of the more advanced techniques and best practices?
    • What metrics should be tracked daily, weekly, and monthly?
    • What are the best apps and tools to to track and analyze product engagement?

    I’m confident that staying close to the customer is one of the most important things to do and understanding product engagement and usage is a critical part of this. Now, I’m interested in learning more.

    What else? What are the answers to these questions and what other questions need to be asked?