David Cummings on Startups

Category: Entrepreneurship

  • More Ideas to Help Entrepreneurs

    After giving a tour of the Atlanta Tech Village last week to a C-level executive of a local Fortune 500 company, he asked, enthusiastically, how he could help out. I cited the normal ways like mentoring, hearing curated pitches from startups (see One Way Government Can Help Startups), and spreading the word about the innovation taking place in their own backyard. Then, he asked something else that stuck with me: what are some other ideas you’re considering to help entrepreneurs?

    Here are a few more ideas to help entrepreneurs and startups:

    • Host a weekly/monthly AMA (ask me anything) in-person where a successful entrepreneur answers questions (straight Q&A)
    • Lead a regular webinar that’s open to anyone with a different entrepreneurship topic each week (e.g. product management, engineering, sales, marketing, fundraising, etc.)
    • Facilitate an entrepreneur bootcamp program
    • Run more programs to help founders meetup, internship fairs, and domain expert roundtables

    Ultimately, increasing the collaboration and flow of information will help more entrepreneurs succeed.

    What else? What are some more ideas to help entrepreneurs?

  • Entrepreneurs are a Little Crazy

    Fourteen years ago the dot-com crash had just finished and I went to my professor asking for $20k. He obliged, I started recruiting classmates as summer interns, and sought out my college advisor to take a leave of absence even though I was only 2.5 credits away from graduating. In hindsight, I was a little crazy, yet completely determined to succeed.

    Jason Lemkin likes entrepreneurs that are a little crazy, in a good way:

    Here are a few ideas to evaluate if an entrepreneur is a little crazy:

    • When they talk, is there a glint in their eye that what they’re pitching might actually happen?
    • Is there a feeling of determination that they’ll walk through walls to be successful?
    • Are they blissfully ignorant to the challenges ahead while levelheaded otherwise?
    • Do you get the feeling that it’s not a matter of if they’ll be successful, but rather when and at what scale?

    After thinking about it, I agree that some of the best entrepreneurs are a little crazy, in a good way. Creating something from nothing is incredibly difficult, and entrepreneurs that are a little crazy are more likely to succeed.

    What else? What are some other thoughts that entrepreneurs are a little crazy?

  • The Power of a Winning Team

    Recently I was talking with an entrepreneur that has an amazing team. He said that they paid well, but not the best. He said they had good benefits, but not great. So, naturally, I asked the next question: how was he able to recruit such a team? The answer, to him, is that people want to be on a winning team. Whether the company is winning or the local sports team is winning, people want to be a part of it.

    Success attracts more success. As an entrepreneur, one of the initial challenges is to push hard enough to get to that first level of success. The milestone might come by way of a paying customer, or a team member that joins without pay — something that’s concrete and meaningful. Then, after more hard work, the next milestone is achieved. And the next. And the next. Suddenly, the Big Mo has arrived and things get easier. Winners keep winning.

    Never underestimate the power of a winning team.

    What else? What are some more thoughts on the power of a winning team?

  • One Way Bigger Valuations Help Recruit Talent

    With all the press about startups raising large sums of money at huge valuations, especially Slack just a few weeks ago raising $160 million at a $2.8 billion valuation, one item that hasn’t been talked about much is how large valuations help when it comes to recruiting talent. In the war for talent, equity compensation plays an important role, and larger valuations make it easier to give larger dollar amounts of equity, everything else constant.

    Let’s look at how larger valuations make it easier to give more enticing equity grants:

    • Post Series A, a standard equity grant for a software engineer might be .1% (one tenth of one percent)
    • If the startup raises a $10 million Series A on a $40 million pre-money, the post money valuation is $50 million and the .1% equity grant is valued at $50,000, assuming a full, in-the-money sale of the business
    • If the startup raises a $50 million Series A on a $200 million pre-money, the post money valuation is $250 million and the .1% equity grant is valued at $250,000, assuming a full, in-the-money sale of the business
    • An equity grant of $250,000 is much more compelling than an equity grant of $50,000

    Of course, if the valuation was less, more equity can be granted to make the dollar amounts equal. Only, the amount of equity is a fixed constant (e.g. you can’t have more than 100% of the equity, but you can keep diluting existing shareholders, within reason, to create new stock option pools). While equity is fixed, the valuation has no max, so a higher valuation makes it easier to make the same stock option grant look much better because the dollar amount is much higher.

    Often, the size of the equity grant to a new employee goes down with each round of financing as the number of employees to be hired from the pool of equity goes up (e.g. after Series A, hire 25 people, after Series B, hire, 75 people, after Series C, hire 150 people, etc). So, assuming a bigger valuation early in the multi-round fundraising process, talent is easier to recruit as the same percentage of ownership results in a much higher dollar amount.

    What else? What are some more thoughts on bigger valuations helping to recruit talent?

  • Scaling Culture in a High Growth Startup

    With corporate culture being the only sustainable competitive advantage completely in the control of the founders, it’s critical to be proactive about nurturing and enhancing it. Only, as the startup grows, scaling culture can be a real challenge. More people. More personalities. More challenges.

    Here are a few thoughts on scaling culture:

    Scaling culture is hard. With the necessary time and attention, the culture at 100 employees can be even stronger, and more sustainable, than at 10 employees.

    What else? What are some other ideas for scaling culture in a high growth startup?

  • Understanding Investor Pro-Rata Rights

    One area that doesn’t seem well understood is how investor pro-rata rights work. When an investor buys a portion of a startup, whether as an angel or VC, they almost always also get the right to invest in subsequent rounds to maintain their same percentage of ownership. If the investor doesn’t continue to put in more money each time the company raises a round, the percentage of ownership in the business goes down. Here’s how it might look:

    • Angel investor puts in $100,000 for 5% of a startup as part of the seed round ($2 million post-money valuation)
    • Startup raises a $3 million Series A at a $7 million pre-money valuation and a $10 million post-money valuation
    • If the angel investor doesn’t invest any additional money at the Series A, the 5% ownership is reduced to 3.5%
    • If the angel investor does want to participate pro-rata, the angel investor has to put in $150,000 (5% of the $3 million), and thus still own 5% of the company, but has now invested a total of $250,000

    This process of needing to invest more money in each subsequent round to maintain ownership continues until the company goes out of business, is acquired, or goes public. Additionally, ownership, as a percentage, is still likely to be reduced, regardless of subsequent rounds, by things like new stock option pools. Ownership, as a percentage of a startup, is a moving target, and investors participating pro-rata, or not, is an important component.

    What else? What are some more thoughts on investor pro-rata rights?

  • Bronto and the Big Bootstrap Exit

    Back in 2002, a year after I started Hannon Hill for content management software, I was introduced to Joe Colopy, CEO of Bronto, as he had just started a new email marketing company with Chaz Felix. Both of us were based in Durham, NC, and even with the Duke/UNC rivalry, entrepreneurs enjoy connecting with entrepreneurs. After talking briefly on the phone then, we connected again in 2008 as Bronto was one of the first Pardot customers.

    Well, last week, Bronto announced that NetSuite was acquiring them for $200 million, making it a huge exit, especially for a bootstrapped company.

    Here are a few notes on Bronto:

    • 271 employees on LinkedIn (source)
    • 2013 revenue of $27 million (source)
    • 2014 revenue of $38 million (source)
    • 18 billion emails sent per year (source)
    • Definitive agreement signed but actual closing of deal not expected until end of 1H 2015 (source)

    It’s awesome to see another big bootstrap exit and congratulations to Joe, Chaz, and the whole Bronto Nation!

  • Uber Burning $750 Million in a Year

    Recently, I heard an astounding piece of information: Uber is going to burn $750 million in capital this year as part of their expansion. Considering their most recent funding announcement of $1.2 billion in equity and $1.6 billion in debt, and the idea that most funding rounds are for 18-24 months of runway, the math makes sense. Still, burning $750 million in any context, let alone 12 months, is truly incredible.

    $750 million over 12 months is $62.5 million per month (the burn rate won’t stay constant month to month, but let’s assume it does). As a fun mental exercise, here’s how $62.5 million might be spent per month:

    • $5 million on legal – With all the local and state regulation battles, I bet Uber has an army of in-house and third-party lawyers.
    • $5 million on lobbying – States and local government aren’t going to change their laws based on simple requests, hence lobbyists are hired to help accelerate the process.
    • $30 million on market managers – Each market has local staff and regional staff that manage a territory. Assuming each market costs $30,000/month, on average, for fully burdened staff compensation, that provides for 1,000 new cities, which includes international expansion.
    • $2 million on office rent – Rent is super expensive in San Francisco, and Uber now has 113,000 square feet there, not counting other cities (this amount references all cities).
    • $4 million on insurance – Even though the drivers are independent contractors, Uber still has to carry huge amounts of insurance as things, inevitably, can go wrong.
    • $10 million on driver support – Screening drivers, running background checks, training, and ensuring a great consumer experience for hundreds of thousands (millions?) of drivers is no small feat.
    • $10 million on technology – While the Uber app is straightforward, a company with such scale and complexity needs a variety of internal tools to ensure continued success, and many of them are custom.

    Other potential categories include marketing, administrative costs, financing cars, more staff, etc.

    Uber is one of the fastest growing companies of all time, and on a mission to be one of the largest logistics marketplaces in the world. Burning $750 million in a year is incredible, and, a sign of the times.

    What else? What are some other thoughts on Uber burning $750 million in a year?

  • Do VCs Add Value?

    Charlie O’Donnell from Brooklyn Bridge Ventures has an interesting piece up titled VC Value add: Why it probably doesn’t matter, but I try anyway. Charlie, having been at First Round Capital and Union Square Ventures, which are two of the premiere venture firms, talks about how he believes 99.999% of billion dollar exits are due to the founders, and nothing to do with the investors. That’s an impressive statement from someone who’s been around the best in the business.

    Personally, I haven’t seen a billion dollar exit, so I don’t know what it’s like at that scale. As for going from idea stage to seed to early to growth, I have seen a number of good examples. Here are a few areas where investors should add value:

    • People – Great talent is one of the top challenges for entrepreneurs, and investors should have a strong network of people.
    • Psychologist – Building a great company requires making a number of hard decisions, and sometimes the best help an entrepreneur needs comes from a good listener that asks the right questions.
    • Processes – Growing a business is hard, especially as more employees are brought on. Putting in processes and procedures, like a Simplified One Page Strategic Plan every quarter, is part of every entrepreneur’s maturation process.
    • Fundraising – One round of funding doesn’t guarantee another, and helping portfolio companies raise the next round of funding is an important role.
    • Introductions – Making introductions is the most important value add for investors, especially in regards to helping find customers, partners, and employees.

    I do believe the right investors can add significant value. Can they influence the outcomes on billion dollar exits? I don’t know. Can they be the difference between building a successful business and not building a successful business? Absolutely. Some investors add value and some don’t, and as an entrepreneur, the key is to figure that out in advance of partnering.

    What else? What are some more thoughts on VCs adding value?

  • The Delta Between a Startup’s General Value and the Value to a Strategic Acquirer

    Last week I was talking to a gentleman that previously ran corporate development for a large tech company. During his tenure, the firm acquired dozens of companies and spent billions of dollars on acquisitions. After talking about a few experiences, he explained one of the things people have the hardest time understanding: why strategic acquirers buy companies for much more than what it seems like a company is worth.

    Actually, the answer is very simple, especially when the company being acquired has a real business with customers and revenues. The delta between a startup’s perceived value and the value to a strategic acquirer comes down to distribution. In a word, sales. Large tech companies have massive sales teams and partner channels whereby they can add new products and significantly grow product revenue.

    Imagine a software or hardware company doing $20 million in revenue with 50 sales reps and 10 channel partners. Depending on the overall economy, size of the market, growth rate, gross margins, etc, the company might be worth 3-10x revenue. Now, an acquirer comes along and sees the startup as strategic. The acquirer has 10,000 sales reps and 10,000 channel partners. Instead of the startup being worth ~$100 million, to the strategic, based on a model that shows the the product doing ~$100 million in sales in 24 months, the startup might be worth $400 million. That’s a big delta between a $100 million valuation in the general market vs $400 million for a strategic acquirer.

    The next time you see a big valuation multiple for an acquisition, ask yourself how much faster revenue will grow under the new owner, and how that changes the value equation.

    What else? What are some more thoughts on the delta between a startup’s general value and the value to a strategic acquirer?