David Cummings on Startups

Category: Entrepreneurship

  • Deep Pockets and Short Arms

    Back in 2001, while an undergraduate in college, I spent a good bit of time meeting with angel investors in an effort to raise money for my startup. Not knowing much, I wrote an extensive 30-page business plan outlining every aspect of the business (I even made the mistake of paying a lawyer, yes a lawyer, to give me feedback on the plan — ouch!). At one of the meetings, the angel investor offered up a line that has stayed with me ever since: most angel investors have deep pockets and short arms.

    Of course, the joke is that even though angel investors are wealthy (deep pockets), investing is a hobby for them and they don’t write that many checks (short arms). Here are a few thoughts on angel investors with deep pockets and short arms:

    • When pitching angels, ask how many tech startup investments they’ve made in the last 24 months (it’s good to know if someone is truly active as many angel investors aren’t actually active angel investors)
    • Find out what size check they typically write as well as their areas of interest
    • Ask how they typically add value, if at all, for startups they invest in
    • Inquire as to their decision making process and what, if any, red flags they see with your potential deal

    While most investors — angel, VC, and other — have a combination of profit-motive and fear of missing out, angels, more so than other groups, are driven by the desire to help entrepreneurs and to be a part of something interesting. Regardless, deep pockets and short arms still holds true today, just like it did almost 15 years ago.

    What else? What are some more thoughts on the saying that angel investors have deep pockets and short arms?

  • The Wallet Test

    Jon Birdsong, CEO of Rivalry, wrote a post last month titled SaaS Gratification. The idea with SaaS gratification is that some products are faster to get value from whereas others take more time. There’s a related idea that’s equally important: the wallet test. Simply, the wallet test is how tightly the product is associated with revenue. Put another way, how easily and quantifiably does the software help customers make money.

    Here are a few examples of the wallet test:

    • Products that directly generate revenue (e.g. ecommerce shopping cart software or lead generation marketplaces for taxi drivers), are undeniably tied to the wallet (e.g. a 10 on a scale of 1-10 with 10 being the best)
    • Products that are closely tied to revenue, but don’t actually collect money (e.g. marketing automation software), are slightly lower on the wallet test (e.g. an 8 or 9)
    • Products that help organize information, and clearly add value but are harder to quantify (e.g. a CRM), are a bit higher than middle of the road on the wallet test (e.g. a 6)
    • Products that are a productivity tool, but aren’t in the revenue conversation (e.g. a screen capture app), are valuable yet low on the wallet test (e.g. a 3 or 4)

    When thinking through startup ideas, or evaluating opportunities, include the wallet test as part of the analysis. New ideas that score high on the wallet test are often areas of interest.

    What else? What are some more thoughts on the wallet test?

  • Entrepreneurs and Calls from VC Associates

    I remember it clearly: we were less than a year into Pardot and a venture capitalist reached out to us asking to talk. Excitedly, we set up a time for the call and waited anxiously for the date. Finally, the day arrived and we talked for 45 minutes only to realize that it wasn’t a good use of our time: the associate’s firm requires potential investments to have at least $5 million in annual recurring revenue whereas we had less than a million.

    Here are a few thoughts on calls from VC associates:

    • Associates cast a wide net and engage with as many entrepreneurs as possible, regardless of whether or not they’re a good fit yet
    • While associates source deals for the partners, most of the firm’s investments come from referrals and existing partner relationships — not from associates cold calling
    • Know that associates aren’t the decision makers at the firm and that they spend a huge amount of time cold emailing and cold calling startups (not too different from a sales rep)
    • Before taking a call from an associate, ask a number of qualifying questions, and only take the call if raising money is on the horizon (remember that the best time to raise money is when you don’t need it)
    • If getting ready to raise money, associates can be a good testing ground and opportunity to practice the pitch
    • Make an ask at the end of the call to be introduced to three portfolio companies that might be potential customers

    In the end, most entrepreneurs shouldn’t engage with associates unless they’re going to raise money in the near-term and they’ve pre-qualified the firm to ensure it’s a good fit. Too often, entrepreneurs get excited when a VC associate reaches out and it’s not actually a good use of time.

    What else? What are some more thoughts on entrepreneurs and calls from VC associates?

  • Failure to Attract Talent Starts with the CEO

    This past month I’ve had a number of CEOs reach out asking for help attracting talent. With a shortage of talented software engineers, digital marketing managers, and SaaS sales reps, competition is strong to attract the best and brightest. Many CEOs have a hard time owning this but a failure to attract talent starts with them.

    Here are a few thoughts on CEOs and attracting talent:

    • Talent is attracted to environments that promote autonomy, mastery, and purpose (see Dan Pink’s book Drive)
    • Corporate culture starts at the top and strong cultures attract strong talent
    • Absent a strong culture and interesting work, companies that can afford it resort to paying well above market salaries
    • Best practices for retaining employees also apply to recruiting employees
    • Recruiting and attracting talent should be viewed as first-class initiatives, and not ignored

    Attracting talent is one of the top five priorities of a CEO, and most CEOs neglect it. When a startup is having a hard time recruiting talent, know that it starts with the CEO.

    What else? What are some other thoughts on the idea that the failure to attract talent starts with the CEO?

  • Seed Rounds Up 4x But Series A Rounds Flat

    First Round Review has a great new post up titled What the Seed Funding Boom Means for Raising a Series A. The general idea is that the number of seed funding rounds is up 4x, but the number of Series A financings hasn’t increased, meaning a significant number of startups that were expecting to raise another round failed.

    Here a few notes from the post:

    • Just because it’s easy for some founders to raise a seed round doesn’t mean it’ll be easy to raise subsequent rounds
    • Seed rounds are often raised based on the strength of the team and idea whereas Series A rounds are based on startup traction, and many startups don’t have strong enough metrics to warrant institutional funding
    • One idea for seed-stage startups is to raise a larger seed round and/or make it last longer so as to provide more time to show results
    • When raising a Series A, consider starting with a lower desired amount of funding, and, if there’s more demand than expected, raise the amount (it’s easier to go up than it is to go down after talking to investors)
    • Metrics matter and entrepreneurs need to have a strong handle on the key drivers for their business (too often entrepreneurs wing it, especially when the startup is so young)

    For entrepreneurs that have raised a seed round, What the Seed Funding Boom Means for Raising a Series A is a must-read.

    What else? What are some more thoughts for entrepreneurs that have raised a seed round and are looking to raise a Series A?

  • Rule of 40% for SaaS Companies

    Brad Feld wrote a great piece last month titled The Rule of 40% for a Healthy SaaS Company. The idea is that growth plus profitability should be 40% or greater once at scale (double digit millions of revenue). As an example, if a SaaS company grew 100% year-over-year, and had negative margins of 60% (burning lots of cash), then those combined percentages equal 40% (yes, they’re two different percentages, but the metric is more of a gauge rather than scientific). As for another example, if a SaaS company grew 20% year-over-year, and had EBITDA (profit) margins of 20%, then those combined percentages equal 40%, and hit the mark.

    Here are a few thoughts on the rule of 40% for SaaS companies:

    • For seed stage (under $1M run-rate) and early stage ($1-$5M run-rate), the percentage should be much higher
    • Higher growth rates often equate to higher valuations (see the growth rate valuation multiplier)
    • No growth, and profit margins of 40%, would still fit this 40% metric, but not be nearly as interesting to traditional venture and growth stage investors (unless they thought significant revenue growth was possible)
    • As scale increases, maintaining high growth rates becomes much more difficult as the law of large numbers kicks in
    • Mailchimp, a rare unicorn, has double digit revenue growth and greater than 50% profit margins

    Thinking about growth rate in conjunction with profitability makes perfect sense as there’s always a trade off between the two. The Rule of 40% for SaaS companies provides a general metric that takes into account both growth and profitability.

    What else? What are some more thoughts on the Rule of 40% for SaaS companies?

  • 16 Signs You’re an Entrepreneur

    Last month I was talking to an entrepreneur that was going through a really difficult spell. No matter how hard he tried, it seemed like everything went wrong. After we talked about a number of challenges, I stopped, looked up, and said, “those are all signs you’re an entrepreneur.”

    Here are 16 signs you’re an entrepreneur:

    1. One day you’re on the top of the world and the next day you’re completely demoralized
    2. Those layoffs last year were done by you personally
    3. Dozens of investors have rejected your investment pitch
    4. In the morning you’re writing code, at lunch you’re emptying the trash, and in the afternoon you’re on the phone doing a sales call
    5. That first company credit card was really your personal card
    6. Those two employees that don’t fit the culture — you agreed to their hiring out of desperation to fill the position
    7. Every week you have a new idea to make the company better
    8. Competitors have raised way more money than you
    9. Those channel partners you expected to sell your product haven’t even hit 10% of expectations
    10. Culture is valued more than anything else since it’s the only thing within your control
    11. Everything you thought you’d accomplish took twice as long as expected and was twice as expensive
    12. After thinking you were alone, you found 10 other entrepreneurs in the same exact spot
    13. No matter how hard you try, there are never enough hours in the day
    14. The original idea for the business wasn’t the idea that ultimately became successful
    15. Making decisions with imperfect information gets you excited
    16. When things are going well, you have the best job in the world

    Being an entrepreneur is both exciting and scary at the same time. These 16 signs ring true for entrepreneurs around the world.

    What else? What are some other signs you’re an entrepreneur?

  • More Investor Emphasis on a Repeatable Customer Acquisition Process

    Over the past month I’ve talked with several entrepreneurs that are trying to raise money for their startup. Often, there’s some initial success from a couple friends or a rich uncle that will put in $25,000 or $50,000, and then, when talking to angel investors, there’s not much luck. The challenge: angel investors are requiring that entrepreneurs have the start of a repeatable customer acquisition process in place. No longer is having a product with a handful of paying customers enough. Now, more investors need to see how acquiring the first 50 customers is going to translate into acquiring the next 500 customers.

    Here are a few thoughts on investors requiring a repeatable customer acquisition process:

    • Entrepreneurs that only have a product, or a product with a limited number of customers, are going to have an increasingly difficult time raising money (it’s already hard to raise money)
    • More entrepreneurs are going to realize the importance of distribution sooner (e.g. using tools like SalesLoft to proactively reach out to prospects)
    • Investors are always looking for ways to de-risk an investment, and more proof of a repeatable process helps add confidence

    Investors are requiring more of a repeatable customer acquisition process from entrepreneurs before investing. Entrepreneurs would do well to plan for this and ensure that they have enough progress to satisfy investor requirements.

    What else? What are some other thoughts on more investor emphasis around a repeatable customer acquisition process?

  • Atlanta Tech Village Job Board as #1 Benefit for Startups Hiring

    Earlier this week I was talking with a few entrepreneurs in the Atlanta Tech Village and I posed the question: what’s the best benefit of the being the community? Naturally, I was thinking I’d hear things about cool office space or the opportunity to work with a number of other like-minded entrepreneurs. Two entrepreneurs immediately chimed in that the best benefit was the Atlanta Tech Village Job Board. Now, in this case, they both had recently filled open positions, so hiring was top of mind, and some of their highest quality candidates came from the job board.

    Here are a few thoughts on the Atlanta Tech Village Job Board as the #1 benefit for startups that are actively hiring:

    • Recruiting talented people that fit the values is the most important thing an entrepreneur does, so increasing the pool of quality applicants is invaluable
    • Costs for recruiters to place candidates can easy run 20-30% of the first-year salary, thus finding one $100k/year team member through the job board can cover the cost of office space for the whole year
    • Job boards are everywhere, thereby making it hard for startups to standout while the Village job board helps self-select people that are actively looking to work at a startup (just like SaaStr.Jobs)

    Entrepreneurs in the Village would do well to list on the Atlanta Tech Village Job Board and job-seekers looking to get in with a startup would do well to browse the openings. Many startups are hiring and finding some of their best candidates through the job board.

    What else? What are some other thoughts on finding candidates through a job board as a major benefit of being in a large tech entrepreneurship center?

  • Time is the Great Equalizer

    Recently I was talking to an entrepreneur about competitors and market strategies. Then, he said something that stuck with me: time is the great equalizer. That is, all of us only have 24 hours in the day. Competitors don’t get more time. Markets don’t get more time. Yes, some firms have more resources, but they don’t have more time.

    Here are a few thoughts on time as the great equalizer:

    • No matter how hard I work, there’s always more that I want to accomplish, and I’m not alone
    • Software engineering, unlike most other creative efforts, has some of the most incredible economies of scale (one small team’s product can be used by millions of people as readily as it can by 10 people)
    • Teams with the best people can run circles around teams with regular people, and time compounds the quality of work the best people perform
    • While resources are important, most startups that win do so with limited resources in their first few years

    Entrepreneurs would do well to realize that everyone is constrained by time and that it’s the great equalizer.

    What else? What are some more thoughts on the idea that time is the great equalizer?