David Cummings on Startups

Category: Entrepreneurship

  • University-Affiliated Angel Networks

    One of the projects I’ve been helping out with recently is the Duke Angel Network. Universities have been making a stronger entrepreneurial push over the past few years and startup funding is always a challenge. With the Duke Angel Network, the idea is to review Duke-affiliated startups that have a student, alumni, faculty, staff, or parent of a graduate on the founding team and present qualified companies to angel investors that are Duke-affiliated (same criteria for affiliation).

    Startups that raise money from the Duke Angel Network then have the option for a smaller matching investment from the Duke Innovation Fund. The Duke Innovation Fund is a charitable pool of committed capital that’s an evergreen vehicle to continually invest in Duke-affiliated startups indefinitely (e.g. all fund profits go back into the fund to invest in more startups). People can donate to the Duke Innovation Fund, get a charitable deduction, and know that the money will go to help the Duke-affiliated startups in perpetuity.

    Here are a few thoughts on university-affiliated angel networks:

    • Part of the pitch is that investing with a network of angels, whereby there are more people with expertise for any specific deal, will increase the overall returns (I’m hopeful this plays out but I don’t believe it will be the case)
    • Increasing tech transfer (licensing university developed IP) is also a goal such that the more commercialization of technology – funded by the affiliated angel network – will generate greater returns for the university
    • Development offices are fans of university-affiliated angel networks as it can help increase the affinity for the university and generate more engagement

    Look for more university-affiliated angel networks to emerge, especially as entrepreneurship remains hot and universities seek to engage with their constituents.

    What else? What are some more thoughts on university-affiliated angel networks?

  • Solving One Problem Magnifies Another

    Things are going well but there’s this nagging issue that won’t go away. If we could only solve this one problem, everything else would be great. Only, once the problem is solved, the next most important problem is magnified. And, it never stops.

    Solving one problem magnifies another.

    Here are a few thoughts to keep in mind:

    As an entrepreneur, it’s easy to get overwhelmed with all the on-going problems and challenges. Find a good cadence knowing that solving one problem magnifies another, and figure out how to grind it out.

    What else? What are some more thoughts on the idea that solving one problem magnifies another?

  • Tranche Investments in Startups

    Over the past year I’ve seen a little-used investment strategy come up a few times: the tranche. With a tranche, money is typically invested over two or three milestones based on the progress of the company (often at the will of the investor, and sometimes contingent on the entrepreneur’s approval). As an example, $250,000 might be put in immediately, and within the next six months, the investor has the option to put in an additional $250,000 at the same terms.

    Clearly, this is a nice benefit for the investor as they can see how the company performs before putting in the additional money, and if the company does well, the second part of the tranche investment is a better deal because the company is worth more as the investor is buying the equity at the previous valuation. Only, there are a few more nuances at play as well. Here are some thoughts on tranche investments:

    • Entrepreneurs almost always operate, and spend, as if the later round(s) of the tranche are going to come in, creating challenges if the business doesn’t perform as expected
    • Tranches often make the entrepreneur more beholden to the investor (possibly filtering the news to make things sound more promising) as they want to ensure that the next round of money comes in, and this can distract from growing the business
    • Tranches can be more distracting as they usually have a shorter timeframe – say three or six months – between milestones as opposed to the typical 12-24 months between financings
    • From a valuation perspective, tranches can be thought of as the average of the current valuation and the projected valuation(s) at the later milestones, such that the investor gets a bonus if the company does better than expected

    Entrepreneurs typically want to avoid tranches and focus on negotiating a fixed investment amount upfront, so that they know how much money and runway they have to grow the business before raising another round.

    What else? What are some more thoughts on tranche investments in startups?

  • What Wasn’t Said in the Response

    Last year, when talking to an entrepreneur about his startup, I asked him why he started the company. He responded that he wanted to build a big company and do well financially. Probing a bit deeper, he explained how he owned a certain percentage of the company and that there were several key financial goals he was hoping to achieve. What wasn’t said in the answer was more telling than the actual answer. Where was the excitement about changing the world? Where was the enthusiasm for solving a hard problem?

    Here are a few thoughts about what wasn’t said in the response:

    • Certain questions have certain expected responses, and they aren’t meant to be trick questions
    • When responding, the first idea in the explanation is always the most important, and most telling
    • Body language and nonverbal communication is a key part of the response

    Whether it’s an entrepreneur talking about their startup, or a potential employee sharing thoughts on their last job, what wasn’t said in the response can be even more important than what was said.

    What else? What are some more thoughts on the idea that what’s left unsaid in an answer can be critically important?

  • Video of the Week: Make Meaning in Your Company

    One of my all-time favorite entrepreneurial authors is Guy Kawasaki. His book Art of the Start is on my list of recommendations for entrepreneurs everywhere. One of his ideas that really resonates with me is the importance of making meaning in your company.

    Here is Guy Kawasaki talking on the topic as the video of the week:

    For more videos, take a look at Guy Kawasaki’s talk on Stanford’s Entrepreneurship Corner.

    Side note: one of my goals is to incorporate more videos into this blog, so look for them more regularly.

  • Talent Recombination in a Startup Community

    One of the ideas with the Atlanta Tech Village is that is would help increase talent recombination in startups. Meaning, more people in startups, especially ones that fail, would join other startups that are succeeding, such that the ones that are doing well would do even better (finding great talent is always one of the biggest challenges). Over the past year at the Village, I’ve seen the talent recombination idea play out several times. Here are a few observations about it:

    • Programs and events, like the weekly Startup Chowdown, truly help people connect and develop stronger rapport, making for faster recombinations
    • Shared community spaces, kitchens, conference rooms, game rooms, and coffee shop facilitate serendipitous interactions, helping keep different people top-of-mind
    • Interconnectedness, as well as frequency of communication, provide for more chances to know about potential opportunities for recombination
    • Stories of recombination spread quickly giving more people peace-of-mind that great people find new gigs quickly if things don’t work out

    Talent recombination is a real benefit of high-density startup communities. Team members in startups that fail find new jobs faster and startups that are doing well hire proven people faster.

    What else? What are some more thoughts on talent recombination in a startup community?

  • The Power of Long-Term Compounded Growth

    Recently I was reading about Liquid Web and their new CEO from Atlanta, Jim Geiger (founder of Cbeyond). Liquid Web is a well known web hosting company with over 400 employees and many thousands of customers. Now, when thinking about web hosting, it’s often viewed as a commodity and a low growth industry. Only, Liquid Web was on the Inc. 5000 last year with 79% three year growth. Founded in 1997, Liquid Web has well over $50 million in revenue (probably much higher) and shows the power of long-term compounded growth.

    Here are a few thoughts on long-term compounded growth:

    • Starting with $1 million in revenue, at the end of 20 years of 20% per year growth, the company would have over $38 million in revenue
    • Recurring revenue businesses are among the easiest to grow every year because of the existing base of business to build from (that’s one of the reasons why Software-as-a-Service is so desirable)
    • Ralph Roberts bought a little cable company with 1,200 subscribers in 1963 and now the company, Comcast, has 27.2 million subscribers and $68.8 billion in revenue last year (source)
    • Many multi-generation family businesses with substantial scale are great examples of decades of compounded growth (see the Mittelstand model in Germany)
    • Einstein has the famous quote: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” (source)

    Much like the Stanford marshmallow experiment, entrepreneurs that can delay gratification and continue to put more money back into the business to grow it faster, and do so for a long period of time, have the opportunity to build large companies due to the power of long-term compounded growth.

    What else? What are some other thoughts on the power of long-term compounded growth?

  • The Continous Product Management Process

    We already know that the product manager is one of the most difficult positions to fill in a startup. Often, one of the co-founders or the CEO acts as the product manager until the startup is large enough to warrant a dedicated person (or there’s an opportunistic hire). Regardless of having a full-time product manager, there’s a continuous product management process. Here’s what the process looks like for many startups:

    • Daily – Customer feedback via a GetSatisfaction-powered idea exchange, team member feedback in a product planning spreadsheet, and new features as well as bugs in the issue tracker (e.g. JIRA, Pivotal Tracker, or GitHub Issues)
    • Weekly – Direct customer and prospect conversations, update key stakeholders, look for trends, document new functionality, and start/review the sprint (assuming two week product sprints)
    • Monthly – Review the roadmap, evaluate the product metrics/KPIs, demo upcoming features to the team, and one-on-one meetings with stakeholders (sales, marketing, services, support, and engineering)
    • Quarterly – Update the roadmap, call/web meeting with the customer advisory council, and revise components of the Simplified One Page Strategic Plan

    Now, this doesn’t include aspects like sales demos, evangelism, strategy, positioning, and more that is often associated with product management. Rather, this is continuous product management process that is a core part of a successful startup.

    What else? What are some more components of the continuous product management process?

  • 24 Months to Get the Startup Going

    When first-time entrepreneurs set out on a new startup, there’s a desire for immediate results and expectations for quick success. Only after a few set-backs – everything takes twice as long and costs twice as much – does reality start to take hold. Then, it feels like this thing is never going to make it, often called the trough of sorrow, where it even gets worse. Finally, things start to pick back up (hopefully!) and there’s nice steady growth.

    Here’s what the first 24 months might look like:

    • 6 months – Tons of conversations, administrative work, product exploration, and a few beta customers
    • 6 months – Product and messaging refinement, more customers signed, and stronger focus (or, things aren’t working and you start back over from scratch a.k.a. the pivot)
    • 6 months – Approaching product/market fit, more confidence, and more customers
    • 6 months – Product/market fit and the start of a repeatable customer acquisition process

    So, if everything goes well, the business will feel like it’s starting to hit its stride, albeit with modest revenues, after 24 months (see SaaStr on the 24 months timeframe as well). Even with more money and more team members, it still takes 24 months to really get the startup going.

    What else? What are some more thoughts on the idea that it takes 24 months to get the startup going?

  • Notes from the Xactly S-1 IPO Filing

    Xactly, a sales performance and incentive management SaaS company, just filed their S-1 to go public. Over the years, I’ve seen Xactly’s booth many times at the Salesforce.com Dreamforce show but didn’t know too much about the company. After reading the S-1, it’s clear that there’s a big growth opportunity using software to manage commissions for sales reps and other incentive programs.

    Here are a few notes from the Xactly S-1 IPO filing:

    • Company offering: solutions that help executives design, manage and analyze incentive programs and provide visibility into employee and incentive program performance. Employees use the solutions to monitor, estimate and track their own and their team’s performance in real-time, and modify their behaviors to maximize their payout consistent with company goals. (pg. 1)
    • 725 customers (pg. 2)
    • Revenues (pg. 2)
      2013 – $36.3 million
      2014 – $47.2 million
      2015 – $61.1 million (average of $84,275/year/customer)
    • Losses (pg. 2)
      2013 – $9.4 million
      2014 – $14.5 million
      2015 – $18.5 million
    • Replaces spreadsheets and integrates with customer relationship management (CRM), configure price quote (CPQ), human capital management (HCM), supply chain management (SCM) and enterprise resource planning (ERP) applications. (pg. 2)
    • According to IDC, the worldwide SaaS and cloud software market reached $39.3 billion in revenue in 2013, a 22.6% year-over-year growth rate, and will grow to $102.9 billion by 2018, at a compound annual growth rate of 21.3%, compared to an expected compound annual growth rate of 6.3% for the broader software market for the same time period. (pg. 2)
    • Only 12.7% of companies using a commercial incentive compensation management system as their primary method in 2014. (pg. 3)
    • 14 million people in sales and related occupations in the United States (pg. 3)
    • Average revenue per user of $280/year (pg. 3)
    • 28% of subscribers are outside of the United States (pg. 5)
    • Founded in March of 2005 (pg. 6)
    • Professional services revenue (pg. 9)
      2013 – $8.8 million
      2014 – $11.3 million
      2015 – $13.8 million
    • Accumulated deficit of $115.8 million. (pg. 12)
    • As of January 31, 2015, had approximately $198.7 million and $67.5 million of federal and state net operating loss carryforwards. (pg. 28)
    • Define enterprise customers as those customers with a minimum of 4,000 employees and mid-market customers as those customers with at least 350 and less than 4,000 employees. (pg. 49)
    • 104% revenue retention rate in the last 12 months (pg. 50)
    • As of January 31, 2015, had 333 employees, with 93 in research and development, 125 in sales and marketing, 86 in operations, customer support and professional services, and 29 in general and administrative. (pg. 88)
    • VCs own 67.4% of the company (pg. 113)
    • Founder/CEO owns 6.6% (pg. 113)

    Xactly is a good representation of the major growth opportunity for SaaS: taking old-line business functions and building them from scratch in the cloud. By providing a better experience and delivery model, SaaS actually grows the size of the market. Look for Xactly to do well in their IPO and beyond, especially if they can keep their top-line growth above 30%.

    What else? What are some more thoughts on the Xactly S-1 IPO filing?