David Cummings on Startups

Category: Entrepreneurship

  • Investing in an Entrepreneur and Disliking the Idea

    Several months ago I was giving a high profile, out-of-town VC a tour of the Atlanta Tech Village. As we walked around the rooftop patio, I asked about one of his investments I had read about previously and he said something that surprised me, “I don’t think the idea for [redacted] is that good, but I love the entrepreneur and invested just so I could invest in whatever company he does after this one.” Wow! This is an investor who has put many millions of dollars into a startup saying the idea is only OK but that’s it’s all about the belief in this person.

    Naturally, I pressed further and asked about expected return on investment and how it compares to other investments. The expectation is still to make good money (e.g. a 10x), but that there’s no way it could be a 100x (or 1000x like Jeff Clavier’s Fitbit investment). So, disliking an idea while still believing it can generate good financial returns are not mutually exclusive. Regardless, a fundamental belief in the entrepreneur is the driving force.

    The next time you hear of an investor saying ‘no’ because they’re not interested in the idea, remember that the entrepreneur is even more important. In fact, some investors bet on the entrepreneur regardless of the idea.

    What else? What are some more thoughts on the idea of investing in an entrepreneur and disliking the idea?

  • Scale Needed for Sale

    One of the harder concepts for entrepreneurs to grok is that even when a startup has product/market fit, customers, employees, and investors, there’s almost no value to the business. Now, on paper, there’s a valuation the investors bought in at, so it feels like there’s value. But, unfortunately, there’s really very little value until the startup has some scale — say $5 million or $10 million in revenue. Similar to the idea that there’s no market for failed startup products, there’s almost no market for barely successful startups.

    Here are a few reasons why scale is need for sale or acquisition of a startup:

    • For any mid-to-large company that can afford to acquire the startup, the revenue needs to be meaningful, or the potential to be meaningful in a few years (e.g. at least 1-5% of the overall revenue)
    • Financial buyers, as opposed to strategic acquirers, are looking to pay based on a multiple of profits, not revenue, and most startups aren’t profitable (financial buyers often pay 4-6x EBITDA, depending on the type of business)
    • Transactions costs to acquire a company are high, especially with all the legal and accounting time as part of due diligence, adding considerable friction to the process of acquiring a startup
    • Someone within the acquiring organization has to be a champion for the acquisition and stick their neck out — it’s safer to pay more and acquire a startup that’s more established with more revenue

    Once there’s scale, many of the risks – customer adoption, value proposition, growth potential – are addressed and it’s more of an opportunity to take something that’s working and make it many times larger. Most mid-to-large companies aren’t interested in acquiring sub-scale startups.

    What else? What are some more thoughts on the idea that scale is needed for sale?

  • Entrepreneur by Day, Car Valet by Night

    Several years ago I was talking to an entrepreneur about his startup. When we got to the part about funding, he said that it was all bootstrapped. Each day he would work full-time on his company and then at night, to pay the bills, he would valet cars. Valeting cars is hard – constantly running back and forth, hoping the customer didn’t wait too long and will give a nice tip, and loss of a social life. Also, it’s something many people, especially engineers with college degrees, see as being beneath them. Only, to me, it showed how serious he was about being a full-time entrepreneur and doing whatever it takes to succeed.

    The next time an entrepreneur laments not being able to work full-time on their startup due to funding, ask a few questions:

    • What lifestyle sacrifices are you making to be an entrepreneur?
    • What can you change so that you can be a full-time entrepreneur?
    • What jobs can you do after hours to pay the bills (e.g. being an Uber driver or valeting cars)?
    • What percentage of your savings are you willing to invest in the startup?

    The initial stages – going from idea to product/market fit – are terribly difficult, and practically impossible as a part-time entrepreneur. Entrepreneurs that focus full-time on their startup have a much greater chance of success.

    What else? What are some more thoughts on the idea that entrepreneurs need to figure out how to go full-time on their startup?

  • Atlanta Tech Village as an Accelerant

    Recently I was talking to an entrepreneur at the Atlanta Tech Village and he told me how they had just found a great designer through the Village community. Then, later that same day, another entrepreneur volunteered that he had made several key connections through the Village, including signing one of his first customers. With the community, connections, and collaboration, the Village acts as an accelerant for entrepreneurs.

    Entrepreneurs meet more people faster.

    Entrepreneurs sign their first customer faster.

    Entrepreneurs fail faster.

    Entrepreneurs find key employees faster.

    Entrepreneurs learn best practices faster.

    Entrepreneurs grow their business faster.

    Whether it’s the Atlanta Tech Village or another entrepreneurship community, my recommendation is for entrepreneurs to find a place and get involved. It’s hard to appreciate the value until it’s experienced first-hand.

    What else? What are some other thoughts on the Atlanta Tech Village as an accelerant for entrepreneurs?

  • Well, There’s Nothing Left to Build

    During the first summer of Pardot we embarked on a crazy adventure with 11 full-time summer interns. While I wouldn’t recommend that to anyone, we learned a ton and built the foundation of an amazing product. Near the end of the summer, most of the interns had finished and one excellent one stayed around to continue working part-time during the school year. One day, when all the immediate summer engineering projects were done, he walked in and said with a straight face:

    Well, there’s nothing left to build. We finished everything and the product is completely done.

    Of course, the product is never done. Here are a few reasons why:

    • Markets are constantly iterating and evolving (features that are hot one quarter won’t be hot the next)
    • Customer demands and needs continually change (as customer usage matures, more requests come in for edge cases)
    • Competitors introduce valuable new functionality (there’s always an arms-race between the major players in an industry)
    • New technologies emerge (e.g. supporting different screen resolutions, devices, and formats)

    Products with fast-growing customer bases are continually improving and never done. If anyone suggests otherwise, take them through any major product they use on a regular basis and point out how it’s evolved.

    What else? What are some other thoughts on the idea that there’s always room to improve?

  • Startup Review: Rivalry for Sales Coaching Software

    Rivalry, at the Atlanta Tech Village, is one of the fastest growing companies in the building (disclosure: I’m an investor). After creating a sales rep leaderboard platform to promote internal competition for teams, they found a bigger opportunity with sales coaching and accountability software. The big idea: the one-on-one once a week between a sales manager and sales rep often isn’t process driven and lacks appropriate follow-up. With sales coaching software, sales reps shorten their sales cycle, increase the average deal size, and sell more.

    Here’s how it works:

    • Every sales manager and sales rep has a user in the system (can be single sign-on via the CRM)
    • A specific template of weekly questions for each role is created (or taken from standard best practices)
    • Metrics are automatically pulled from the CRM (important to see where the rep stands during coaching sessions)
    • Sales managers and sales reps use the software each week during their one-on-one to answer questions and create follow-up tasks right within the system
    • Reports show progress and insights (e.g. which sales reps are making the most progress and which managers are most effective at coaching)

    Rivalry ensures one-on-ones happen, are productive, and are documented. Check out Rivalry as a great way to improve sales coaching and accountability.

    What else? What are some more thoughts on Rivalry and sales coaching software?

  • Get on a Plane

    Several months ago I was talking to a successful, serial entrepreneur. He had sold several companies and hadn’t had to work for many years. Even still, he loved creating companies and so was at it again with his next startup. After talking for a while, the topic of travel and sales meetings came up. Naturally, he loved chasing big deals and was on the road 50% of the time. His mantra: get on a plane. There’s no substitute for face-to-face interaction.

    Here are a few thoughts on the importance of getting on a plane:

    • People buy from other people they like (this is one of the reasons the best product doesn’t always win)
    • Collaboration tools like Google Hangouts and Skype Video are good, but in person is significantly better
    • Rapport and strong relationships help when challenges inevitably arise (e.g. bugs, downtime, late delivery, etc.)
    • Body language and subtle feedback are critical when negotiating important deals

    While many entrepreneurs fantasize about a world of self-service products with no business development deals or humans selling, the reality is that most startups require a heavy human component. When there’s a heavy human component, there’s no substitute for getting on a plane and meeting in person.

    What else? What are some other thoughts on the importance of getting on a plane and meeting face-to-face?

  • Lessons Learned from Failed Startups

    Autopsy.io is a new site that aggregates info on failed startups. As an entrepreneur, some of my most important lessons learned came from failures. Take the eCrowds post mortem – poor customer discovery, mismatched on-boarding costs relative to monthly pricing, and slow application speed – now it’s included in Autopsy, and more accessible to entrepreneurs.

    Here are a few thoughts on failed startups:

    • Failure is a normal and accepted part of the startup ecosystem
    • Most startups will fail
    • Even if a good idea was too early, it’s still a failure
    • One of my favorite questions to ask entrepreneurs – regardless of success or failure – is “what did you learn?”
    • Running out of money is most common reason startups shut down

    Entrepreneurs would do well to research startups on Autopsy.io and learn from previous experiences. With the recent growth in tech startups over the past few years, look for an increase in failed startup post mortems as well.

    What else? What are some other thoughts on failed startups?

  • Economics of a Startup Studio

    Continuing with yesterday’s post on High Alpha Studio and Seed, let’s look at the hypothetical economics of a B2B Software-as-a-Service startup studio. Assuming $20 million to be spent over five years to build 20 startups, here’s what it might look like:

    • $4 million per year budget
    • Expenses
      • $3 million/year for 20 full-time employees plus four partners, including benefits
      • $250,000/year for office space (10,000 sq ft at $25/ft)
      • $50,000/year for office items (equipment, supplies, etc.)
      • $100,000/year for legal and accounting
      • $100,000/year for software
      • $100,000/year for miscellaneous
      • $300,000/year for marketing/advertising (this is for the products created, not the studio itself)
      • $100,000/year held in reserve for years after the five years to manage the studio’s responsibilities
    • 20 startups created
      • 10 fail (minimum respectable product built, beta customers signed on, and the plug pulled for one reason or another)
      • 10 raise outside financing (or at least raise money from the separate investment fund)
        • Average ownership stake before outside financing: 75% (assume 25% for the management team and employees)
        • Average ownership stake after outside financing: 56% (assuming 25% dilution)
    • Outcome needed to be successful
      • $80 million in aggregate equity value to generate 4 times the $20 million invested resulting in a 3x return to investors (roughly 1x of return goes to the partners in the studio – see Investor IRR on Paper to Raise Another Fund)
      • With 10 startups, that’s an average of $8 million in equity value per startup
      • With an average 56% ownership stake, that’s an average startup valuation of $14.3 million (so, $143 million in total value for the 10 startups)

    While the studio would produce a number of startups, the reality is that the financial outcomes of the startups produced are more likely to be lopsided where one or two produce the vast majority of the returns and most aren’t worthwhile. Regardless, the economics of building a studio to build SaaS companies is appealing, especially in today’s hot market.

    What else? What are some more thoughts on the economics of a startup studio?

  • High Alpha Studio and Seed

    Earlier today, Scott Dorsey, the former CEO of ExactTarget, and a great team of entrepreneurs, launched High Alpha Studio and High Alpha Seed (see Dorsey, Gravity investors raise $35M to Launch High Alpha) in Indianapolis, Indiana. The idea is a startup studio focused on building business-to-business (B2B) Software-as-a-Service (SaaS) applications combined with a separate seed fund to invest in the startups that spin out of the studio as well as other unrelated startups.

    Here are a few thoughts on High Alpha Studio and Seed:

    • Entrepreneurs are drawn to starting incubators, and this is a great way to do it with a combo incubator and fund
    • Scott and his team have already shown the ability to generate great returns by starting and selling ExactTarget to Salesforce.com for $2.5 billion in cash
    • Having the seed fund ready at the same time as the studio is smart since a number of startup incubators build products but don’t have the corresponding funding to spin the ideas out into their own standalone business
    • Hiring 15-20 people for High Alpha Studio, per the article, makes for a serious staff (assume $100k/year/person and that’s a couple million dollars per year for staff)
    • Getting anchor investments from Emergence Capital (lead investor in SalesLoft) and Greenspring Associates provides a nice institutional investor tie-in for future financings

    I’m excited for Scott, Kristian, Mike, and Eric and look forward to following their progress at High Alpha. Also, if you’re in the Indianapolis area, High Alpha is hiring for a number of positions.

    What else? What are some other thoughts on High Alpha Studio and Seed?