David Cummings on Startups

Category: Entrepreneurship

  • HR Recruiting and Applicant Tracking Systems

    Recently I was talking to an entrepreneur about finding great team members and technologies used to help with the process. We got into talking about the ideal system and realized we didn’t know of the best tools for what we wanted. Here’s what we’d like:

    • Multi job board listing distribution and management (e.g. post a job to a number of sites automatically)
    • Ability for candidates to apply online and submit their resume
    • Video integration for candidates to post a video of answering specific questions (to help speed up the process in lieu of a phone screen)
    • Internal review of candidates and resumes (e.g. ranking and collaboration tools)
    • Workflow system to take candidates through the hiring process
    • Marketing functionality to message candidates in a repeatable manner (much like drip programs)
    • Integration with LinkedIn to find potential candidates and see the strength of relationships for candidates in the pipeline

    There are so many strong HR Software-as-a-Service tools out there that I’m guessing there are a number of systems that accomplish this. Finding great people is such a critical role in any business that it’s clear there’s a role for technology to enhance it.

    What HR recruiting and applicant tracking system do you use? Do you recommend it?

  • 26 Lessons Learned from Investing in 26 Startups

    After yesterday’s post Investing in 100 Startups, several people asked me about the lessons learned from the 26 startup investments I’ve already made. Generally, startup investing is much harder and less glamorous than it sounds, but I really enjoy it — entrepreneurs have such great energy and enthusiasm.

    Here are 26 lessons learned from investing in 26 startups:

    1. Entrepreneurs are always overly optimistic
    2. If anything seems fishy or out of the ordinary, immediately pass
    3. Any signs that the entrepreneur isn’t self-starting and resourceful, immediately pass
    4. Everything takes twice as long and costs twice as much
    5. Look for a pattern where the entrepreneur had already started a prior business, failed, and is at it again
    6. Lean startups are better than heavy startups
    7. Expect regular investor updates
    8. More traction reduces risk
    9. Lack of liquidity is one the biggest challenges
    10. Exits are few and far between
    11. Plan for 7-10 years before seeing a return on investment
    12. Exit value is more important than entry value (e.g. a small piece of a big pie is usually better than a big piece of a small pie)
    13. Reserve twice as much as the original investment for follow-on investments (e.g. exercising the pro-rata rights)
    14. Personality fit is more important than entrepreneurs realize
    15. $300k is the ideal amount for a seed round
    16. Build a portfolio for diversification
    17. Investor jargon is more prevalent than expected
    18. Know that winning a pitch competition isn’t the same thing as a successful startup
    19. Fewer seed-funded startups as a percentage raise a Series A round
    20. Developing rapport well in advance of investing is important
    21. Evaluate the Investment Readiness Level
    22. Seed capital is different from venture capital
    23. Bet on the horse, course, or jockey
    24. Understand the difference between friendly customers and unaffiliated customers
    25. Milestones met pre-investment help improve confidence
    26. Investing is an incredibly hard way to make money

    Even after investing in 26 startups I still feel I have a ton more to learn. Every investment is different and every entrepreneur is different. When I eventually make investment number 100, I’m sure I’ll feel the same way.

    What else? What are some more lessons learned from investing in startups?

  • Generic Market Research Questions

    Recently an entrepreneur emailed me some market research questions as they’re working on refining their product and trying to better understand the pain points. Seeing the list, I immediately thought that this is a good starting point for other entrepreneurs doing research as many of the questions can be repurposed to be broadly applicable.

    Here are some generic market research questions where ‘XYZ’ should be substituted for the specific topic:

    • How do you currently accomplish XYZ?
    • How many people in your organization are involved in XYZ?
    • Have you ever had any problems with XYZ?
    • What are your most common problems with XYZ, if any?
    • What is the workflow like for people that are involved in XYZ?
    • How would you make XYZ better?
    • What do you dislike the most about XYZ, outside of the problems?
    • With 10 being most important and 1 being least important, how important is it for you to improve XYZ?
    • With 10 being most important and 1 being least important, how important is it for you to solve the biggest problem with XYZ?
    • What other products or services related to XYZ do you use?
    • Are there any challenges with the related products or services?
    • Any other thoughts, comments, or recommendations for us?

    Entrepreneurs researching a market would do well to employ these questions as they gather information and talk to prospective customers.

    What else? What are some more generic market research questions to add to the list?

  • 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?