David Cummings on Startups

Category: Entrepreneurship

  • Build a Quick Financial Model

    Whenever I talk to an entrepreneur about an idea, I like to ask about the financial model. Now, I don’t expect them to have the exact pricing down (I know pricing changes a ton — see here, here, and here) or to have a complex financial model, as that’s not a good use of time. What I do want to know is that they’ve thought through things as they currently stand.

    Here’s what a quick financial model might look like:

    Column 1

    • Revenue
      – Sales reps
      – Customers added
      – Customers lost
      – New monthly recurring revenue
      – Total monthly recurring revenue
    • Payroll
      – Cofounder 1
      – Cofounder 2
      – Engineers
      – Sales
      – Commissions
      – Other employees
      – Taxes
    • Expenses
      – Office
      – Infrastructure
      – Marketing
      – General
    • Cash
      – Cash on hand
      – Total Revenue
      – Total Payroll
      – Total Expenses
      – Monthly cash flow
      – Remaining cash on hand

    With these items in column 1, the next 12 columns represent the next 12 months with the corresponding values either manually inputted (like number of sales people) or dynamically calculated (like remaining cash on hand). This entire financial model should be built in less than an hour from scratch and updated on a regular basis as new information about the business model is learned.

    What else? What are some other thoughts on a quick financial model for startups?

  • 2x Growth Likely but 10x Requires Innovation

    Jason Cohen, founder of WP Engine, has a great new post up titled The Lindy Effect on Startup Potential. I had dinner with Jason a few years ago before a Capital Factory Demo Day and he’s as thoughtful and passionate in person as he is in his writing. The idea in this most recent post is that the Lindy Effect, understood as the expected lifespan increases according to the length of its current age, directly applies to startups. Said another way, the longer you’ve been doing something, the longer it’s going to last.

    My favorite part of the post is where Jason applies the Lindy Effect to startup growth when he says:

    You can probably double your size, doing roughly what you did to get to this point, but 10x will require innovation.

    I’ve seen this happen several times. A startup achieves product-market fit and a solid repeatable customer acquisition process. Everything looks great, and then at a certain point, the growth stalls as the primary lead generation channel only has so much capacity, no matter how hard it’s pushed. Just like the lead velocity rate is the most important metric in SaaS, if the primary lead source peaks or additional quality lead sources aren’t found, growth won’t continue.

    Doubling the current size is likely but getting to 10x the size requires innovation.

    What else? What are some more thoughts on Jason’s post and the idea that 2x growth is likely but 10x growth requires something new?

  • Always Hiring Sales Reps

    Jason Lemkin has an awesome guest post on his blog by Nick Mehta, CEO of Gainsight, titled The Second-Timers: Nick Mehta, CEO of Gainsight – “Never Stop Hiring Reps”. Nick’s learning #6 is that once the repeatable customer acquisition model is working, Software-as-a-Service (SaaS) startups shouldn’t stop hiring sales reps.

    At Pardot, we made this exact mistake. We’d ramp up sales rep hiring, hire a few reps (always hire reps in pairs, if possible), and then six months later we’d be ready to hire more reps. Only, now it’d take a couple months to ramp up hiring again, so it would be several more months before we had our newly desired number of sales reps. Instead, the better approach is to always be hiring sales reps, even if you have to say that the start date is a few months out.

    Here are a few thoughts on always hiring sales reps:

    • Just like sales reps have a pipeline of prospects, recruiters and hiring managers should have a pipeline of sales candidates
    • If the hiring plan calls for hiring a certain number of sales reps per quarter, try and have all the sales reps already signed well in advance to start the following quarter
    • Depending on the annual contract value and lifetime value of the customer, if a sales rep can bring in enough revenue, there’s an argument to hire as many sales reps as possible until diminishing marginal returns set in
    • Sales reps often have friends that are sales reps, so include referral bonuses for employees to refer potential employees

    After product-market fit has been achieved, and the unit economics are proven, SaaS startups should always be hiring sales reps.

    What else? What are some other thoughts on always hiring sales reps?

  • Customer Success and Retention Software

    We’ve all heard the old adage that it’s much more cost-effective to keep an existing customer than it is to sign a new customer. Well, there’s a relatively new class of Software-as-a-Service (SaaS) products known as customer success / customer retention software. This class of software is similar to marketing automation software (like Pardot) in that it has tools to track and communicate with users, but it’s much more focused on the unique needs of existing customers as opposed to generating prospects and turning them into customers. Imagine analyzing user behaviour in the application, correlating it with activity data in the CRM, and making recommendations as to customers that are likely to churn (e.g. if the user doesn’t sign into the application regularly, doesn’t use the most popular features, doesn’t interact with the support or customer success teams, etc).

    Here are a few vendors in the space:

    Customer success and retention software is going to be a major category. While not as large as marketing automation, it’s a good market and will have big winners.

    What else? What are some more thoughts on customer success and retention software?

  • Inventory of our Current Business Apps

    Every year I like to take an inventory of the tools and products we use on a regular basis within our startups. Most products stay the same from year to year, but there are always a few new break-out products that catch on quickly.

    Here’s what we use day-to-day:

    This list applications shows the rise of Software-as-a-Service (SaaS). My prediction is that three years from now we’ll be using 50% more applications.

    What else? What are some other business apps you use on a regular basis?

  • Billion or Bust

    Recently I had the chance to watch the On Doers interview of Allen Nance and hear him talk about the quest to build billion dollar businesses. Silicon Valley has averaged one new billion dollar tech company per quarter for many years now while most cities, Atlanta included, are lucky to have one billion dollar tech company every five years (Air Watch was the last Atlanta one and sold for well over a billion in 2014). Allen’s new venture, Tech Square Labs, aims to create two billion dollar tech companies in the next 10 years.

    Earlier today @danprimack tweeted a billion or bust comment from a corporate development person:

    To me, most entrepreneurs don’t set out to build a billion dollar business. Most want to solve a problem, build a great lifestyle, create jobs, and control their own destiny. I’m a fan of thinking big and shooting for a billion dollar company, but realize it’s not commonplace. Entrepreneurs would do well to outline their goals as early as possible in the entrepreneurial process and make them known to anyone that will listen.

    What else? What are some more thoughts on having a stated goal of building a billion dollar company?

  • Desire to Win

    Last week I was talking with a successful entrepreneur. He’d sold two companies and never had to work again. Even with the financial success he continues to work hard on a new startup. Of course, I had to ask why he’s still chugging away. Here’s his answer:

    I have a desire to win. Personally, I love the game of business. It’s such an incredible thrill to build a winning company.

    Thinking about it, I really like this answer. The desire to win and build a great company drives me. Also, there’s an element to proving the naysayers wrong (every successful business I’ve been involved in I’ve had someone tell me it wasn’t a good idea or market).

    The next time things are getting tough, figure out how important the desire to win is to you.

    What else? What are some other thoughts on the desire to win?

  • Lessons Learned from Heavy Startups

    Over the past few years I’ve invested in a number of lean startups and a few heavy startups. As it sounds, a heavy startup is nearly the opposite of a lean startup: a high burn rate from the beginning and an assumption that the original idea will be successful. While the heavy startups are making progress, the lean startup model has been superior.

    Here are a few lessons learned from investing in heavy startups:

    • No matter how great the idea sounds, it always hard to build a product that customers love and where customers can be repeatedly acquired
    • Every successful business requires multiple product iterations, and sometimes full pivots, before arriving at the product that takes off (thus, it’s important to plan accordingly with financial resources)
    • Regardless of how much cash is in the bank, it will be burned within 12 months, so the more cash in the bank, the higher the monthly burn rate — entrepreneurs love to spend money to get things done (myself included)
    • Many aspects of the customer discovery and product/market fit process take time no matter how many people are on staff (similar to the idea that adding software engineers towards the end of a project actually makes the project take longer — see The Mythical Man Month)
    • Laying people off is much more painful to morale compared to running on limited staff and waiting to hire until the requisite revenue growth

    Heavy startups, while more limited now, are still a part of the startup ecosystem. My recommendation is to go the lean startup route and delay raising a large amount of money and hiring a big team until product/market fit is in place and a repeatable customer acquisition process has been proven.

    What else? What are some other lessons learned with heavy startups?

  • Community Building Adds Value to Entrepreneurs

    Two years ago I gave a talk about the Pardot experience to a group of entrepreneurs in Atlanta. After the event, an entrepreneur approached me saying he was looking for his next opportunity. Immediately, I put him in touch with another entrepreneur that was looking for a co-founder with his skillset, and they hit it off. Now, they have one of the fastest growing startups in town and are doing great. Community building pays off in more ways than expected.

    Here are a few ways that community building adds value to entrepreneurs beyond the primary benefit of helping the region:

    • Recruiting – We’ve hired a number of team members where the relationship originated at a community event, and if you add in referrals from those employees, the number gets even bigger.
    • Lead Generation – One of the earliest Hannon Hill customers was Silverpop, and that relationship started when I approached their CEO after he spoke at an entrepreneur event. On the other side, we’ve signed a number of customers over the years based on relationships that started while helping grow the community.
    • Investment – The best investor relationships start well in advance of trying to raise money. I know one entrepreneur that attributes his ability to easily raise money to the fact that he had already built rapport through his community building with his lead investor before he had even started a company.

    Entrepreneurs that pay it forward receive significantly more value that they give out. Entrepreneurs would do well to get involved in community building and make a difference.

    What else? What are some other ways community building adds value to entrepreneurs?

  • 3 Ideas to Grow the Atlanta Startup Community

    Earlier today I was talking with a few civic leaders in Atlanta on the topic of how to grow the region’s startup community. We discussed several of the current trends, including the rise of entrepreneurship centers around town (e.g. the Atlanta Tech Village), more focus on creative space by local commercial real estate firms, and general excitement around entrepreneurship. I then offered up three ideas to grow the Atlanta startup community:

    1. Entrepreneur Education – Run programs from the Kauffman Foundation and others on a regular basis in different parts of the city. These programs would be much more in-depth and hands-on for entrepreneurs to learn new business skills and build relationships with other entrepreneurs and mentors in town.
    2. Connect Local Businesses and Startups – Most mid-to-large companies in the area don’t have a good understanding of the technology innovation taking place in their own city. The idea is to run regular programs where curated groups of startups present in front of local companies (cash from customers is always the best type of cash for startups).
    3. Elevate Successes to the National Stage –  While there are a number of great entrepreneurial success stories, very few are known nationally — southern charm makes for a humble city. More showcasing of success stories will result in more credibility and interest from investors.

    So, there you have it: educate the entrepreneurs, make it easy for businesses to buy local tech, and get the megaphone out for the success stories. Atlanta has all the ingredients to be a top 10 tech startup city and is on the way to realizing its potential.

    What else? What are some other ideas to grow the Atlanta startup community?