David Cummings on Startups

Category: Entrepreneurship

  • Corporate Culture isn’t Defined by Benefits

    The ATDC has a great interview with Craig Hyde, the CEO of Rigor, titled Strong Company Culture is Good for Employees and Business. Rigor was named the #1 best place to work in Atlanta by the Atlanta Business Chronicle and is one of the fastest growing companies in the Atlanta Tech Village (Disclosure: I’m an investor in Rigor). One of the most important things entrepreneurs struggle to understand is that companies with a great corporate culture don’t have a great culture because of good benefits. I know of several companies that offer great perks but people don’t enjoy the culture.

    Here are a few thoughts on the idea that corporate culture isn’t defined by benefits:

    • Culture is defined by the core values of the people at the company
    • Strong cultures have the most aligned core values across all the team members (not everyone is best friends)
    • Great benefits are usually a sign that the company cares about its people, but alignment of core values is more important
    • Many companies don’t have great benefits yet still have a great culture

    The next time you hear about a great culture, find out what makes it great. The answer, as expected, is that it’s all about the people.

    What else? What are some more thoughts on the idea that corporate culture isn’t defined by benefits?

  • Rise of Sales Development

    SalesLoft put on an amazing event these past two days as part of their Rainmaker 2015 conference. With over 200 sales professionals attending, it’s clear that sales development is a major growth area. Two of my favorite sales speakers, Derek Grant and Allen Nance, headlined the early afternoon session. Modern sales development was popularized by Aaron Ross in his book Predictable Revenue. The core idea — a team dedicated to setting appointments for other sales reps — isn’t new. What is new is the formal methodology Aaron introduced in his book that includes a process with email and phone outreach to set demos with key people.

    Here are a few ideas regarding the rise of sales development:

    • Metrics and expectations for sales reps are clear and manageable, aligning the sales reps and sales management
    • Inside sales is growing faster than field sales, resulting in more emphasis on appointment setting and a lighter-touch sales process
    • Buyers have much more extensive information available online, resulting in more product understanding before even engaging a sales rep, helping reduce the need for in-person sales meetings
    • Tools like SalesLoft Cadence (for emailing and process management) make the sales development process incredibly effective (Disclosure: I’m an investor in SalesLoft)

    Sales development is incredibly effective for the right type of product and sale. Look for more conferences like Rainmaker 2015 in the future and more awareness of the Predictable Revenue methodology.

    What else? What are some more thoughts on the rise of sales development?

  • SaaS Funding Relative to Recurring Revenue

    Recently I was talking to an investor and he mentioned they were looking at a deal, liked the company, but were concerned with how much cash the startup had burned relative to current annual recurring revenue. For Software-as-a-Service (SaaS) startups, it’s especially difficult to get the business model going, and once it’s going, it’s especially cash-intensive to scale it.

    Here are some example ratios to consider when analyzing funding relative to recurring revenue:

    • Seed Round – 8:1 ratio of funding to revenue (e.g. $800k raised and $100k in new annual recurring revenue)
    • Series A Round – 3:1 ratio of funding to revenue (e.g. $3 million raised and $1 million in new annual recurring revenue)
    • Series B Round – 2:1 ratio of funding to revenue (e.g. $12 million raised and $6 million in new annual recurring revenue)
    • Series C Round – 1:1 ratio of funding to revenue (e.g. $20 million raised and $20 million in new annual recurring revenue)
    • Example Total: $35.8 million raised with annual recurring revenue of $27.1 million

    Note: this assumes the money raised has been spent, while most startups haven’t spent all their cash. Startups that are doing great would see these ratios cut in half (e.g. they are twice as efficient growing revenues relative to money spent). There’s no exact formula for the ratio of funding to new annual recurring revenue, but this is directionally correct.

    What else? What are some more thoughts on SaaS funding relative to recurring revenue?

  • Initial Product-Market Fit

    When entrepreneurs set out to build their company, they have grand visions and aspirations. The product needs to do this, and that, and the other thing. The list goes on and on. Only, product-market fit starts small. Really small.

    Here are some thoughts on initial product-market fit:

    • 10 friendly customers like the product and give friendly-focused feedback, helping move a bit closer to product-market fit
    • 10 paying unaffiliated (non-friendly) customers sorta-like the product and give tons of feedback, significantly moving towards product-market fit
    • 10 more paying unaffiliated (non-friendly) customers really-like the product and give great feedback, inching the product closer to product-market fit
    • Finally, 10 more paying unaffiliated (non-friendly) customers rave about the product and have improvement ideas, but ones that are approaching the nice-to-have category, helping assert the arrival of initial product-market fit

    Product-market fit is a continuum, and doesn’t happen quickly, but when it does happen, the types of customer responses change, and enthusiasm grows. Look for happy customers, with minimal issues, and less-critical improvement suggestions, and there’s a good chance product-market fit has arrived.

    What else? What are some more thoughts on initial product-market fit?

  • SaaS Value Creation is Back-Loaded

    One interesting aspect of Software-as-a-Service businesses is that most of the value creation is back-loaded. What I mean is that the majority of the valuation growth occurs in the later years, assuming the startup makes it there and has a rapid growth rate. Here’s an example five year trajectory with amount of recurring revenue and corresponding (hypothetical) valuation:

    • Year 1 – $20,000 annual run rate with a valuation of $2 million (valuation isn’t based on revenue but rather based on the market for a seed-stage SaaS startup)
    • Year 2 – $200,000 annual run rate with a valuation of $4 million (valuation is based on the market for a late seed-stage SaaS startup)
    • Year 3 – $1,000,000 annual run rate with a valuation of $8 million (valuation is based on the market for a Series A SaaS startup)
    • Year 4 – $3,000,000 annual run rate with a valuation of $15 million (valuation based on 5x run-rate)
    • Year 5 – $8,000,000 annual run rate with a valuation of $40 million (valuation based on 5x run-rate)

    So, assuming the startup is sold at the end of five years for $40 million, $32 million of that value was created in the last two years and over 50% of the value was created in the final year. In reality, value is created all along, but the premium paid for growth rate (even with modest scale) really emerges at the end as the revenue is ramping up.

    What else? What are some more thoughts on the idea that SaaS companies create most of their value at the end before being acquired?

  • Losing Product-Market Fit

    One of the hot topics in startups is around product-market fit. Whether it’s how to know if you’ve achieved product-market fit or how product-market fit relates to raising money, there’s plenty of information available. Well, there’s another aspect of product-market fit that’s almost never talked about: losing it. Just because product-market fit is achieved, it doesn’t mean it’s going to stay.

    Here are a few thoughts on losing product-market fit:

    • When churn rates increase, product-market fit is likely slipping away (if churn hits 3% per month, you don’t have a business)
    • When the sales team loses the majority of competitive deals, it’s a bad sign
    • When the growth rate of the business stalls at modest scale, it’s likely the customers’ needs have changed

    Markets move quickly and many startups that had a good thing going for a while get passed by when the next wave of innovation comes through. Don’t assume that achieving product-market fit also means that it will be maintained.

    What else? What are some more thoughts on losing product-market fit?

  • Time for Tactical and Strategic Work

    Most entrepreneurs are doers, meaning they enjoy rolling up their sleeves and working directly on whatever needs to get done. Similar to the idea that if you want to something done, ask a busy person to do it. Only, there’s all this talk that entrepreneurs should work on the business instead of in it. One challenge that comes up repeatedly is making time for tactical and strategic tasks.

    Here are a few thoughts on making time for tactical and strategic work:

    Constantly switching between tactical and strategic work is a real challenge for entrepreneurs. Naturally, human nature is to go towards the easiest tasks — tactical in nature — and to put off strategic items. Entrepreneurs need to make time for strategic work.

    What else? What are some more thoughts on time for tactical and strategic work?

  • Make a Good Decision, Learn from It, and Move Forward

    Recently I was talking to a friend and he said he had no interest in being an entrepreneur. Curious, I asked why. There was one simple reason: he didn’t like to make decisions with limited information. As an entrepreneur, so many decisions have to be made with little or no data and lots of gut instinct. For many people, especially perfectionists, making those kinds of decisions over and over is terrifying.

    For me, I like to keep in mind that I’m trying to make a good decision, learn from it, and move forward. Here are a few thoughts on entrepreneurial decision making:

    • Perfect information never exists, never
    • Limited information is normal, and often good enough to make quality decisions
    • Almost all decisions aren’t permanent (thankfully!)
    • Constantly learning and adapting is key to get to the right answer
    • Moving forward is better than standing still

    When the next decision is required on limited information, make the call, learn from it, and move forward. As General Patton said, “A good plan violently executed now is better than a perfect plan executed next week.”

    What else? What are some more thoughts on making decisions, learning, and moving forward?

  • 3 SaaS Market Types to Consider

    When analyzing Software-as-a-Service (SaaS) market types, it’s helpful to have different frameworks or patterns to compare against. While people like to talk about SaaS in general, the type of market a particular SaaS product is targeting greatly affects things like sales cycle, potential investor enthusiasm, and overall opportunity.

    Here are three SaaS market types to think through:

    • New Technology – Are customers replacing a legacy product or is this the first time they’ve ever bought a product like this because it’s a new technology? Almost all of Pardot’s customers had never used marketing automation before.
    • Middlemen – Are customers replacing a legacy service that’s traditionally used middlemen (e.g. benefits, financial planning, etc.)? In this case, they’re spending money but not necessarily on a SaaS offering.
    • Labor Intensive – Is the outcome that the SaaS product provides already achievable but labor intensive? Things like building a list of prospects (SalesLoft) or integrating ecommerce systems (Kevy) can be done by hand, but are time consuming and error-prone.

    When evaluating an opportunity, it’s important to understand the market type and corresponding nuances. No type is perfect but each has example success stories.

    What else? What are some other SaaS market types to consider?

  • Comparing Two Strategic Directions

    Recently I was talking to an entrepreneur that was making good progress in his startup. After signing a couple dozen customers it became clear that there were two strategic directions to take the business, each with their own pros and cons. We got to talking more about the strategic directions, and even after drilling in, both appeared favorable.

    Here are a few questions to ask when comparing two strategic directions:

    • Of the existing customers, how many fit the proposed directions? How many are good fits vs OK fits for the new directions? Why?
    • Which direction has the largest total addressable market?
    • Which direction is growing fastest?
    • Which direction has the most competition? How innovative is the competition (e.g. most incumbents have difficulty innovating)?
    • Which direction excites the team the most?

    Tweaking the strategic direction in a startup is more common than expected. In fact, there are many success stories of startups that started doing one thing and ended up doing something entirely different. Regardless, comparing strategic directions is a normal part of the journey.

    What else? What are some more thoughts on comparing two strategic directions?