David Cummings on Startups

Category: Entrepreneurship

  • 16 Startup Metrics for Entrepreneurs to Master

    A16Z has a great post up titled 16 Startup Metrics that outlines many of key metrics investors look for and entrepreneurs often get incorrect. I’m guilty of this: when I went into one of my first investor pitches 10 years ago, I talked about revenue when it really was bookings, and the VC politely corrected me.

    Here are the 16 metrics to test your knowledge before reading 16 Startup Metrics:

    1. Bookings vs. revenue
    2. Recurring revenue vs. total revenue
    3. Gross profit
    4. Total contract value vs. annual contract value
    5. Lifetime value
    6. Gross merchandise value vs. revenue
    7. Unearned or deferred revenue … and billings
    8. Customer acquisition cost … blended vs. paid, organic vs. inorganic
    9. Active users
    10. Month-on-month growth
    11. Churn
    12. Burn rate
    13. Downloads
    14. Cumulative charts (vs. growth metrics)
    15. Chart tricks
    16. Order of operations

    Every entrepreneur should read 16 Startup Metrics and understand the metrics applicable to their startup.

    What else? What are some more startup metrics that are important?

  • Revenue-Based Financing for Startups

    After last week’s post on Early SaaS Loans Before Bank Credit Lines, a couple people mentioned Lighter Capital as an alternative lender that does revenue-based financing. The idea is that instead of the normal venture debt model, which is interest plus warrants in the business, revenue-based financing takes a percentage of revenue over a certain period of time, typically five years.

    With a starting point of $1 million in revenue, an annual growth rate of 30% per year, and a fee of 10% of revenue for a $500,000 loan, here’s how it might look:

    • Year 1 – $1,300,000 in revenue, fee of $150,000
    • Year 2 – $1,690,000 in revenue, fee of $169,000
    • Year 3 – $2,197,000 in revenue, fee of $219,700
    • Year 4 – $2,856,000 in revenue, fee of $285,600
    • Year 5 – $3,713,000 in revenue, fee of $371,300
    • Total fees (which includes repayment): $1,195,600

    Simply doubling the initial money over five years results in a 15% internal rate of return, so borrowing $500k and repaying $1.2 million is just a bit higher when thinking of interest rates for a normal loan. I don’t know if this is exactly how Lighter Capital works, but I believe it’s directionally correct.

    The next time an entrepreneur asks about alternative lending options, mention revenue-based financing as an option.

    What else? What are some more thoughts on revenue-based financing for startups?

  • Central Non-Profit for Entrepreneurs

    Back in college I’d routinely jump in my old Jeep Wrangler and make the 10 mile drive down the Durham Freeway to RTP for events and programs at the Council for Entrepreneurial Development (CED). CED bills itself as “the network that helps Triangle entrepreneurs build successful companies” and has 700+ member companies with 4,000 members. In Atlanta, we have a number of strong entrepreneurial non-profits:

    Only, we don’t have a central entrepreneur organization that encompasses both tech and non-tech startups. As expected, there are a tremendous number of non-tech entrepreneurs in town. EO has a strong Atlanta chapter with over 100 members, but that’s limited to companies with at least $1 million in revenue. Where do non-tech entrepreneurs go?

    Last week I had the chance to learn about Endeavor, which is a non-profit for helping high impact entrepreneurs (defined as ones that have the potential to scale and create a large number of jobs). Endeavor has chapters all over the world and focuses on mentorship, connections, talent, education, and capital. As different from most non-profits for entrepreneurs which are broad, Endeavor is extremely hands-on with a limited number of entrepreneurs in each city (e.g. 10).

    Strong entrepreneur organizations are important for great startup ecosystems.

    What else? For Atlantans, does Atlanta need a central non-profit organization for entrepreneurs? For non-Atlantans, is there a central non-profit organization in your city?

  • Raising Angel Money vs. Venture Capital

    In any given week I’ll talk to 5 – 10 entrepreneurs, on average. Many of the hey-let’s-get-together meetings are for advice on fundraising, hiring, and sales/marketing. Lately, it feels like the fundraising topic has been especially popular (a sign of the times?). Whereas a few years ago, most entrepreneurs would want to talk about raising venture capital, now more are focused on raising angel rounds, or the equivalent of a Series A round, but not from institutional investors. Naturally, I like to dig into some of the differences when thinking through the alternative financing approaches:

    • VCs will require a larger target ownership percentage (e.g. 20-33%) of the company whereas angels are often fine with 1-5% (having a large number of angels could result in the same ownership percentage as a VC)
    • VCs will require a board seat (most often) and get heavily involved in the company whereas angels are often more hands-off and passive
    • VCs will care more about the company and fight harder to see it succeed (assuming they do their job)
    • VCs will work towards and require an exit, often within 5-7 years, whereas angels will expect a return, but are usually more flexible on timing and style (e.g. dividends, exit, etc.)
    • Raising VC money makes it more likely that tech banks will provide a large line of credit whereas raising from angels often won’t help with a bank line (bank lines are still available once the startup has a few million in annual recurring revenue)
    • Raising VC money is significantly more difficult than raising angel money

    The next time an entrepreneur says they want to raise money, ask about angel money vs. venture capital and share some of the pros and cons of each.

    What else? What are some more thoughts on raising angel money vs. venture capital?

  • 2015 Inc. 500 Software Companies

    In addition to the Atlanta companies on the 2015 Inc. 500 list, I’m also very interested in the software category. As expected, it’s dominated by B2B Software-as-a-Service products across a number of different verticals and industries. Here’s the list:

    With 45 companies in the software category, it’s one of the larger areas of the Inc. 500. Surprisingly, over 20% of these software companies are marketing applications. I predict we’ll see continued growth in the marketing technology sector. Congratulations to all the Inc. 500 winners.

    What else? What are some other thoughts on the software companies in the 2015 Inc. 500?

  • Atlanta Startup Community Panel Takeaways

    Earlier today I had the opportunity to moderate a panel for our downtown Atlanta Rotary club (see Panel Moderator Preparation). Collectively, the three entrepreneurs have raised $250 million for their current ventures, have hundreds of employees, and represent three major areas for Atlanta: FinTech, Health IT, and Mobility. Here are a few takeaways from the panel:

    • Capital is mobile and entrepreneurs with traction can raise money from anywhere
    • Almost all the capital raised by the entrepreneurs was from outside Atlanta
    • Great front-end and back-end software engineers are available in Atlanta, but more specialized skill sets like machine learning are much harder to find
    • Align with investors on the targeted outcome before raising money (e.g. a single/double vs going for a home run)
    • Company-wide communication and alignment is more important than expected, and becomes increasingly difficult as the company grows
    • Culture is one of the most important components of a company and is driven top-down (conversely, the stronger the culture, the more painful it is to merge two companies together)
    • Developments like Ponce City Market and the Atlanta Tech Village help recruit great talent

    A big thanks to the three panelists and Atlanta Rotary for having us — it was a great event.

    What else? What are some other takeaways from the Atlanta startup community panel today?

  • Panel Moderator Preparation

    Tomorrow I have the opportunity to moderate a panel on the Atlanta startup ecosystem with three great entrepreneurs including Lynn Laube, Greg Foster, and Tyler Droll at the Rotary Club of Atlanta. As moderator, I like to go through a few simple preparation steps:

    • Develop 5 standard questions
    • Develop 2 panelist-specific questions (e.g. a question directed at a specific panelist)
    • Develop 3 recent news/events questions (the goal with the questions isn’t to get through them all but rather to have different options available based on how the conversation flows)
    • Confirm panel attendance 48 hours in advance
    • Meet 30 minutes before the panel to go over any last minute items, ensure mics work, etc.

    As moderator, I want to make sure the panel conversation is lively, interesting and worthwhile — I’ve been to too many panels that weren’t engaging. Assuming the panelists are strong, this type of panel moderator preparation helps ensure a quality event.

    What else? What are some more panel moderator preparation ideas?

  • Early SaaS Loans Before Bank Credit Lines

    Over this past year I’ve talked to several Software-as-a-Service (SaaS) startups that have over $1M in annual recurring revenue (ARR), raised an angel round, but aren’t convinced they want to go the venture capital route. On the financing side, once SaaS startups have about $3M in ARR, banks like Silicon Valley Bank and Square 1 Bank have great credit lines based on recurring revenue (e.g. 3x monthly recurring revenue times (MRR) annual renewal rate), but there are few options for companies in the $1M – $3M ARR range.

    There exists a gap in the market for high interest loans to SaaS companies to help them grow faster without raising outside capital. Here’s how it might work:

    • $750,000 fixed-rate two-year interest-only loan at 20% annual interest rate for a total of $1.08M payable at the end of two years
    • $1M+ ARR startup hits $4M ARR at the end of year two, thereby qualifying for a $1M bank line of credit (assume 3x MRR), and then pays back the high interest loan
    • High interest loan provider makes a good return, the tech-focused bank gets a new customer, and the entrepreneurs create more wealth without giving up more equity

    With this model, that startup has the opportunity to grow faster than it would otherwise and avoids more dilution. The high interest loan provider would need to be very comfortable with the SaaS model and a plan would need to be in place in the event the loan couldn’t be paid back after 24 months.

    Look for more models like this to emerge that provide funding for SaaS startups that have the start of a great business but don’t have the scale to qualify for a bank line of credit.

    What else? What are some more thoughts on early SaaS loans before bank credit lines?

  • Video of the Week: Marc Andreessen on Big Breakthrough Ideas and Courageous Entrepreneurs

    Marc Andreessen, besides having one of the best Twitter streams @pmarca, and an incredible blog, has a stellar track record as both an entrepreneur and investor. In this video of the week from the Stanford Graduate School of Business, Marc covers a number of excellent topics and provides a genuinely optimistic view of the continued disruption by technology.

    From YouTube: Marc Andreessen, Co-Founder & Partner at Andreessen Horowitz, discusses his philosophy on investing in technical founders and the role of technology in today’s startups. Andreessen also addresses the kind of entrepreneurs and ideas his venture capital firm look for: “Big breakthrough ideas often seem nuts the first time you see them.”

  • A Viewpoint Against Angel Investing

    Tucker Max has a new piece up titled Why I Stopped Angel Investing (And You Should Never Start) outlining some of his theories and lessons learned as a successful angel investor. With so much excitement and exuberance in the tech startup world, especially for angel investing, it’s important to understand some of the counter points.

    Here are a few notes from the article against angel investing:

    • 2 reasons he stopped angel investing:
      • There aren’t enough good people to invest in (and too much money is already chasing bad deals)
        • Poor education on going from tested idea to scalable company
        • Young and inexperienced founders thinking they know everything
      • Angel investing is a poor use of time
        • Majority of time should be spent on the best and highest use of skills, with everything else delegated or outsourced
    • The biggest thrill in angel investing is that people flatter you and beg for your resources, and that makes you feel powerful and respected
    • The entrepreneur is doing the important work, not the investor
    • 2 reasons no one should be an angel investor:
      • The economics of angel investing work against all but a select few
      • The structure of angel investing works against all but a select few
    • If you have to be an angel investor, do it as a syndicate on AngelList

    I agree that most people should approach angel investing as a way to help entrepreneurs and to stay engaged or learn something new. As a way to make money, most people are better off staying away from direct angel investments and instead syndicating through a successful investor.

    What else? What are some other reasons against being an angel investor?