David Cummings on Startups

Category: Entrepreneurship

  • The $250,000 Annual Revenue Run Rate Milestone

    While there is much discussion around the large multi-million dollar seed rounds for pre-revenue startups, the reality is that most startups, especially ones outside California, won’t be able to raise any money. For those that haven’t raised any money, or raised a small seed round, one of the first substantial revenue milestone goals should be hitting the $250,000 annual revenue run rate mark. Here are a few reasons why:

    • Assuming strong gross margins (e.g. 80% or higher), the startup should be able to support 3-5 employees, making for a solid core team
    • With 3-5 employees and $250,000 in revenue, the business can be cash flow breakeven, resulting in infinite financial runway and the opportunity to grow indefinitely without outside financing
    • Investors are always looking to mitigate risk, and $250,000 in recurring revenue shows there is the basis of a more substantial market, making it easier to raise a larger seed round (to raise a Series A, investors often want at least a million in revenue)
    • Product/market fit is likely achieved and the start of a repeatable customer acquisition process in place, making the chance of continued success high (see the 4 Stages of a B2B Startup)

    Entrepreneurs would do well to make $250,000 in annual revenue run rate one of their first major financial goals as it represents a level of freedom and progress.

    What else? What are some more thoughts on $250,000 in revenue run rate as an important milestone?

  • Opportunistic Hiring

    One of the most important responsibilities for an entrepreneur is recruiting great people. Only, most entrepreneurs exclusively focus on recruiting people for open positions (e.g. ones that have a job listing on the site). Instead, entrepreneurs would do well about being more proactive with opportunistic hires. Yes, financial considerations are incredibly important, but so is getting the best people possible, even if the order of hiring differs from the current plan.

    Here are a few thoughts on opportunistic hiring:

    • Let team members know that the company is open to opportunistic hiring (most people don’t even consider it yet referrals from employees are often the best candidates)
    • Hold the potential opportunistic hires to an even higher standard, and ensure that they’re great culture fits
    • Evaluate how bringing on an opportunistic hire now affects the hiring plan and communicate how it would change things to team members
    • If the timing doesn’t work, let the candidate know and work hard to maintain a good relationship in the event of a future opportunity

    Opportunistic hiring is the most challenging in the seed and early stages. As the company grows, and there are more resources, opportunistic hiring becomes easier and more commonplace. Regardless, entrepreneurs would do well to be proactive about opportunistic hiring.

    What else? What are some more thoughts on opportunistic hiring?

  • Learn How to Sell

    Late in the summer of 2001 I was seriously frustrated. After raising money from a professor, hiring several friends as programming interns, and taking a leave of absence from college, we had built a good product, but only had two customers. Eagerly, I reached out to a mentor of mine I met earlier that year when he was on sabbatical from Microsoft.

    As he was back in Seattle, we scheduled a time to talk. Even today, I clearly remember that I was standing on a campus tennis court using my cell phone (a flip phone!) for the conversation. After sharing our progress, and my frustrations, he quickly diagnosed my problem: I needed to learn how to sell. Everything I did was focused on building the product, and not on acquiring customers. It was time for a change.

    Most entrepreneurs are in love with their product. Unfortunately, most products don’t sell on their own. One of the most difficult, and important, challenges for product entrepreneurs is to learn how to sell. When an entrepreneur reaches out for help, it’s almost always because they haven’t figured out to grow sales.

    What else? What are some more thoughts on entrepreneurs needing to learn how to sell?

  • Startup Review: Terminus

    Terminus, a new account-based marketing startup, launched last year at the Atlanta Tech Village (disclosure: I’m an investor). With so much marketing focus on individual lead generation and nurturing (e.g. the great functionality that Pardot provides), a big gap emerged around marketing and advertising to all the potential stakeholders at a company. Enter account-based marketing.

    Here’s how it works:

    • Existing leads and contacts from the CRM or marketing automation system are imported in based on rules (e.g. take all the leads/contacts with an active opportunity in the pipeline)
    • Based on job titles, additional contacts are retrieved from the targeted companies through different data sources (e.g. NetProspex and others)
    • Similar to retargeting, ads based on rules are shown on mainstream sites to everyone identified in the account (e.g. show specific ads based on where they are in the sales cycle)
    • Ad click throughs and conversions are tracked to show return on investment

    Companies with a complex sales process, especially for mid-to-high dollar ticket items, are great candidates to use Terminus as they work leads through the sales funnel. If you know anyone interested in increasing their close rate and shortening their sales cycle, have them take a look at Terminus.

    What else? What are some other thoughts on Terminus and account-based marketing?

  • Startup Pitch Deck Examples and Template

    Alexander Jarvis has a solid post up titled Pitch Deck Collection from VC Funded Startups. With 40+ pitch decks, there are a number of excellent examples to review. I especially love seeing artifacts from the early days of major success stories like LinkedIn and Airbnb. Taking the Airbnb deck as a template, here are the slides:

    • Welcome
    • Problem
    • Solution
    • Market Validation
    • Market Size
    • Product
    • Business Model
    • Market Adoption
    • Competition
    • Competitive Advantages

    Add in a Team and Summary slide and that’s a great format for entrepreneurs to copy. Pitch decks should tell a story and convince the potential investor that’s it worthwhile to spend more time on the opportunity.

    What else? What are some other items you look for in a startup pitch deck?

  • New Product Idea Generation

    Last week an entrepreneur-to-be was asking me how I come up with new product ideas. I explained that most of my ideas come out of necessity — I experience an issue and look for a product or solution to solve it. While not fancy, it has served me well. Beyond having a problem first-hand and wanting to fix it, I’ve seen a number of different ways to come up with ideas:

    • Apply an idea or trend that’s working well in one industry to another industry
    • Reimagine an old technology on a new platform (e.g. the cloud, smart phones, etc.)
    • Take an existing product and make a new one that’s better, faster, and/or cheaper
    • Talk to friends or acquaintances and ask them what problems they have in their business
    • Watch for when a big company acquires a hot startup, potentially leaving a void in the current market (most acquisitions slow innovation and take the acquired product up market)

    While coming up with ideas is part of the process, evaluating if a startup idea is good is just as important. Almost every idea is already available online, so it’s more about execution and timing rather than novelty. Regardless, there are many ways to generate new product ideas.

    What else? What are some more ways to generate new product ideas?

  • Regular Investor Updates

    After investing in a number of startups over the years, it’s clear that entrepreneurs need some guidance around regular investor updates. At the most basic level, investors should be updated on a regular basis either monthly or quarterly, both to help the investor understand how things are going as well as to let the investor know areas where they can help. Almost all investors want to add value, and regular communication is key.

    Here are a few items to include in regular investor updates:

    • Key financial metrics including monthly recurring revenue, cash on hand, monthly burn rate, etc.
    • Quick department updates (e.g. 3-4 bullet points for sales, marketing, services, support, engineering, etc.)
    • Culture update (it’s important to highlight the culture, even with investors)
    • Company needs and areas to help

    Entrepreneurs that have raised money should put a recurring event on their calendar to provide regular investor updates. Ongoing communication is critical to a healthy relationship.

    What else? What are some more thoughts on regular investor updates?

  • Develop an Interview Process Around Culture Fit

    Whenever I give a talk, highlighting many of the topics from the Mercer University Commencement Address, one of the most common questions I hear is “How do you interview for culture fit?” This is a tough one. Culture fit is so important, yet often not given the appropriate attention.

    Here are a few ideas for developing an interview process around culture fit:

    • For each core value, create a series of questions and rank the answers 1-10, with 10 being the best, so that you can compare the answers amongst the interviewers as well as in the future if the person is hired
    • Implement a culture check team that purely assesses the candidate for culture fit in addition to everyone else in the interview process assessing culture fit
    • Make the interview process required unanimous consent so that anyone can veto the candidate
    • Ensure the person passes the canoe test (e.g. would you look forward to spending half a day in a canoe with this person and no one else)
    • When performing reference checks, ask the reference how well they’d rate the person against each of the company’s core values
    • Spend time going through the full Topgrading process, especially for any candidate in a management or leadership position

    Company success and strong cultures are highly correlated. Companies that develop an interview process around culture fit help strengthen the culture and reinforce the values.

    What else? What are some more ideas for an interview process around culture fit?

  • Thoughts on Zombie Startups

    Ever watched the show The Walking Dead? Every episode zombies appear and mayhem ensues. Even years after the apocalypse started, zombies (called walkers in the show) are still roaming around doing their thing. Well, the startup world has a similar challenge with zombie startups (minus the gore and killing part). Zombie startups are startups that have enough revenue to stay in business but not enough growth or scale to raise more money or be attractive to an acquirer. Note: a tech company that’s primarily owned by the founders, didn’t raise any money, and can persist indefinitely while providing a nice living is a cash flow business and not a zombie startup.

    Here are a few thoughts on zombie startups:

    • With the massive growth in seed rounds, and the limited number of Series A rounds, the number of zombie startups has gone way up
    • Turnover, especially at the top, is common for zombies as investors are trying to find new leadership that can get the company growing again
    • Opportunities exist to create a holding company that rolls up zombie startups and focuses on profitability (e.g. take a $2 million/year SaaS business that’s breakeven and put it in harvest mode generating $500,000/year in profits)
    • Venture investors that have a zombie startup are motivated to get out of the company as quickly as possible while still meeting their fiduciary responsibilities (time is often the most limiting factor for investors)

    Look for more zombie startups to emerge, especially when the current boom in seed investments settles down and the frothy times are over. Zombie startups are a normal part of the tech community but it’s important to pay attention and recognize them for what they are in the ecosystem.

    What else? What are some more thoughts on zombie startups?

  • Viewing the Venture World as an LP

    After we sold Pardot, I decided to invest in a few venture funds as a limited partner. While I want to receive great returns (e.g. 3x cash on cash), I’m even more interested in understanding how venture works and what it looks like from the inside. After a number of conversations, quarterly updates, and annual meetings, I have a few thoughts on the venture world as it operates in Atlanta:

    • Making good returns is much more difficult than it seems. While there isn’t much venture capital locally, it’s still difficult to find investable opportunities.
    • Most of the Atlanta-based venture firms do a substantial number of deals outside of Georgia.
    • Even investing in startups with a minimum of a million in revenue and great growth rates doesn’t guarantee success. In fact, several investments in companies that met that criteria became worthless.
    • Investments in startups and entrepreneurs that are a dud take substantially more time and energy than the ones that do well, so picking correctly at the onset is more critical than expected.
    • Valuations are a major topic, with a heavy focus on getting good deals (read: low valuations), as the goal is to swing for singles and doubles.

    Being a limited partner in several venture funds has given me a greater appreciation for the difficulty of being an institutional investor. I’m looking forward to learning more as the funds progress through their lifecycle.

    What else? What are some more thoughts on the venture world from the inside?