David Cummings on Startups

Category: Entrepreneurship

  • 5 Financial Best Practice Metrics for SaaS Masters

    One of the great things about Software-as-a-Service (SaaS) is the level of predictability it provides, especially on the financial side. Over the past 10+ years, as SaaS has hit the mainstream, a number of financial best practices emerged. Here are five financial metrics every SaaS entrepreneur should know:

    1. SaaS Magic Number – The ratio of last quarter’s new recurring revenue relative to the previous quarter’s sales and marketing expense should be less than one (if < 1, then spend more on sales and marketing, otherwise if > 1, then figure out how to make sales and marketing more efficient)
    2. 3x Recurring Revenue to Sales Compensation Rule – The fully burdened cost of an inside sales rep should be 1/3rd, or lower, of the new annual revenue required by quota, and field reps should be even lower (e.g. if a rep makes $50,000 all in per year, they should bring in over $150,000 in new annual recurring revenue, with some models going up to 8x recurring revenue to sales compensation)
    3. 3x MRR Lines of Credit – Banks that understand the SaaS model will often lend money at a rate of 3x the monthly recurring revenue (e.g. $500,000 per month in recurring revenue results in a line of credit of $1.5 million)
    4. 2.5x Growth Rate Valuation Multiplier – The growth rate of a SaaS company drives the valuation at approximately 2.5x the growth rate on top of a base valuation that’s double revenue (this is highly subject to the whims of the market and timing).
    5. 3%+ of Monthly Churn is Deadly – The hidden killer for SaaS startups is churn, and churn above 3% on a monthly basis is considered deadly (assuming the startup has some modest scale and accounts for the early exit customers)

    Over time, more financial best practice metrics will emerge as the industry matures. Regardless, these five metrics are a great place to start.

    What else? What are some other financial best practice metrics for SaaS masters?

  • Value of a Co-Founder

    Whenever I meet a solo entrepreneur, one of the first things I like to bring up is the value of having a co-founder. There are so many strategic discussions that need to be debated at length, in a way that’s different from the regular investor/advisor discussion. Every single detail and idea is made much better when two people with a great deal of respect for each other hash it out.

    Here are a few reasons a co-founder is so valuable:

    • Startups have high highs and low lows, so having a kindred spirit in the ride helps balance things out
    • Co-founders bring complementary skill sets such that the startup has deeper expertise at an earlier stage
    • Many decisions in a startup don’t have a clear answer, resulting in a significant amount of discussion, often best done with a co-founder
    • Balancing personality styles, such as someone who likes to think big with someone who enjoys ironing out the details, makes for a more successful team

    A great co-founder makes all the difference. Now, having two, possibly three co-founders total, is ideal, but be wary of having too many at the table. At the least, find one solid co-founder and they will add tremendous value.

    What else? What are some more thoughts on the value of a co-founder?

  • To Invest or Not Invest in Protecting IP in a Startup

    When walking down the glass hallways of the Atlanta Tech Village, a popular question is, “how do entrepreneurs keep all their trade secrets and intellectual property (IP) secure?” My response is that every idea someone is working on can already be found on Google. Nowadays, it isn’t about coming up with a novel idea, rather, it’s about out-executing everyone else.

    So, if ideas aren’t the value anymore, how does investing in protecting IP fit in with startups?

    Here are a few thoughts on investing in IP in a startup:

    • Paying for trademarks for company and product names is a no-brainer and an easy process (see the USPTO Trademarks site)
    • Avoiding patents is what most software entrepreneurs do now due to the high costs and long lead time to get a patent issued (it’s typically tens of thousands of dollars and 3-5 years and to get one patent, and there are no guarantees it’ll work out)
    • Filing a provisional patent is one way to start the process at a much lower cost than a full patent (again, most software entrepreneurs I know don’t bother with them)
    • Requiring confidentiality agreements and using non-disclosure agreements is one of the most straightforward ways to protect trade secrets

    Naturally, these recommendations will elicit a strong response from software entrepreneurs where patents were a big driver of their success. From my experience, most value is created via execution and not from intellectual property.

    What else? What are some more thoughts on investing in protecting intellectual property?

  • Entrepreneurs Taking Money Off the Table

    Earlier this week Buffer announced that they were raising another round of funding and that the co-founders were taking some money off the table (see We’re Raising $3.5m in Funding: Here is the Valuation, Term Sheet and Why We’re Doing It). While it used to be frowned upon for entrepreneurs to sell some of their stock before the entire company is sold, now it’s becoming more common once the startup achieves scale and profitability.

    Here are a few thoughts on entrepreneurs taking money off the table:

    • Set expectations early with potential investors that some of the proceeds from the next round will go towards founder and early employee equity redemption
    • Evaluate what percentage of equity to sell and at what desired price (remember that common shares will often have a huge discount to the preferred equity that’s setting the companies valuation)
    • Plan which employees, if any, will get to sell stock and how that will be shared with the entire company

    An entrepreneur I know took some chips off the table several years ago in an effort to diversify his assets. As part of the process, the VCs pitched him on doing it because they wanted a larger ownership stake. Well, the business went south and his taking money off the table made all the difference.

    Entrepreneurs, if presented the opportunity, would do well to take some chips off the table, especially if it’s at a reasonable valuation.

    What else? What are some more thoughts on entrepreneurs taking chips off the table?

  • When Growth Stalls

    Things were going well. The startup was making good progress over the course of several years and had reached a point of modest self-sustainability. Then, what had been steady 30-50% per year growth rates, stalled completely and turned into a revenue decline. For Software-as-a-Service (SaaS) companies, growth is the biggest driver to earn a premium valuation for the business.

    Here are a few ideas when growth stalls:

    • Evaluate how much of the change in business growth is due to market dynamics (e.g. new entrants or competition) vs. macro economic factors (e.g. a recession that hits all players)
    • Review expenses, cash burn, and runway, especially if the business isn’t profitable (venture investors are going to be extremely concerned when a portfolio company stops growing)
    • Consider adjacent products, verticals, geographies, etc. and how that will help/hurt the core business vs. the overall business
    • Reach out to mentors and advisors and get feedback and advice — you never know who’s already experienced this first-hand
    • Engage with key team members as the most talented people are going to start looking for other opportunities if the business isn’t growing

    Remember that a startup is a scalable, growth-focused company. If growth stalls or a decline sets in, the dynamics of the business can change dramatically.

    What else? What are some more thoughts on growth stalling in a startup?

  • Consulting Services Within Product-Based Startups

    Recently I was talking to an entrepreneur that had a working product and a handful of paying customers. We got to talking about the market and amount of custom, one-off services required to on-board a new customer. Halfway through the conversation, he paused, looked down, and said something to the effect of “I wish we could automate more of our functionality but it’s going to require serious consulting services for each new account.” Without missing a beat, I responded that there’s nothing wrong with needing a services component to make customers successful. While entrepreneurs dream of everything being automated, self-service, and high margin, plenty of super successful companies have a required services component.

    Here are a few thoughts on consulting services within product-based startups:

    • Productize the services whenever possible to ensure consistency and scalability
    • Make sure the consulting fees relative to monthly fees are inline (see our lessons learned with Post Mortem on a Failed Product)
    • Consider partnering with other consulting firms or independent contractors to grow services capacity without more in-house staff
    • Allocate product engineering cycles to add functionality that reduces the amount of consulting effort over time, if possible

    Consulting services are common even within product-based startups. Entrepreneurs would do well to embrace services to make customers successful and find a balance between consulting and product revenue.

    What else? What are some more thoughts on consulting services within product-based startups?

  • Atlanta Startup Village October 2014

    Tonight was Atlanta Startup Village #22 at the Atlanta Tech Village. With over 500 signups, it’s the largest monthly gathering of entrepreneurs in the Southeast. Every month five entrepreneurs deliver a five minute pitch followed by five minutes of audience Q&A.

    Here are the Atlanta Startup Village October 2014 presenters:

    • WeCareCard – Like a Kickstarter platform to raise money from friends and family (the example given was raising money for a funeral)
    • SwipeLoyalty – Loyalty programs built around a debit card for retailers to move consumers away from credit cards
    • Farrago Comics – Imagine an App Store for comics where everything is free and advertiser-driven
    • Campus Bubble – Take the best of social networks and make it private to the college
    • Rivalry – Automate the sales coaching process and grow faster

    Join the Atlanta Startup Village Meetup Group and come next month — it’s an awesome event.

    What else? What are some thoughts on tonight’s startups?

  • 4 Best Sales Books Every Entrepreneur Needs to Read

    It took me three years as a full-time entrepreneur before I started to realize the importance of sales. My original thinking was that if I built a great product, customers would find me and I’d be successful. The reason I was even able to get to three years was that we found a company to license our first product and earn pre-paid royalties that provided more runway. When that money ran out, I really had to figure something out, and that’s when I dove into sales (if I would have done a better job pursuing mentors, I would have figured it out sooner).

    As a solution, I decided to read every sales book I could find. Over time, I read more and more sales books and now recommend these four:

    Entrepreneurs would do well to educate themselves on sales and the importance of selling when building a company. These four books provide a strong sales foundation.

    What else? What are the best sales books for entrepreneurs?

  • Not Everyone Wants to be an Entrepreneur

    Last week I was talking with a person that I thought would make a great entrepreneur: smart, hard working, ambitious, and successful. Only, after I brought it up, there was a thoughtful response along the lines of “I’ve thought about it and I know it’s not right for me as I want to do what I do best and leave the harder choices to someone else.” Since I’m somewhat obsessed with entrepreneurship and startups, I was taken aback as this person would do a great job as an entrepreneur.

    Here are a few more thoughts from the conversation about not wanting to be an entrepreneur:

    • Ambitious people can achieve great success without starting a company, in fact most successful people achieve success without starting a company
    • Joining an existing startup that already has product-market fit or is in the scaling phase can be immensely rewarding and much less stressful than the earlier phases (see 106 Career-Launching Technology Companies)
    • Playing to one’s strengths is the best strategy, and just because someone is successful doesn’t mean they want to run a company
    • Seeing a founder make incredibly hard decisions in the past, like who to lay off when things are going bad, was one example that drove home the feeling of not wanting to be an entrepreneur

    Being an entrepreneur isn’t for everyone. Some people need to go out and try it for themselves to figure out where they stand while others are self-aware and never need to try. Just because someone seems like they could be a successful entrepreneur doesn’t mean they want the life of an entrepreneur.

    What else? What are some more thoughts on people not wanting to be an entrepreneur?

  • Get 10 Unaffiliated Customers as Quickly as Possible

    Yesterday an entrepreneur emailed me saying he’d like to talk after he gets his app built and has 10 customers. Naturally, I like this as my personal focus is on helping entrepreneurs scale from 50 customers to 500 customers, and not going from 0 to 10. Going from 0 to 10 is so industry and market specific, that I can’t add much value. Going from 50 to 500 involves building a repeatable customers acquisition machine, scaling the organization, and a number of other aspects that are more process and team oriented.

    Only, in the entrepreneur’s email, he said he needed eight months to build the product and get the first 10 unaffiliated customers. Eight months is too long to wait to know if an idea is good or not, so it’s critical to get customers as quickly as possible. Here are a few thoughts on getting 10 unaffiliated customers after running a customer discovery process and building a simple product:

    • Users are oxygen for a product otherwise the human tendency is to enhance a product in a vacuum, and build functionality that isn’t highest priority
    • Unaffiliated customers are ones that don’t come from friends, family, or colleagues (friendly customers are fine, but focus on unaffiliated customers until there’s a critical mass of impartial customers)
    • Unaffiliated customers provide more direct feedback, aren’t worried about hurting the entrepreneur’s feelings, and will be more demanding (it’s key that money changes hands and that they aren’t a free user)
    • Implement a marketing process like Traction to systematically find 10 unaffiliated customers (e.g. use cold calling, pay per clicks ads, social media, etc to get 10 customers in the door)
    • Listen to the customer requests while maintaining an opinionated vision for the future

    One of the most common entrepreneur mistakes is taking too much time to prove they are on the wrong path. Of course, it’d be great if every new product idea was successful, but most of the time they aren’t. By getting to “no go” as soon as possible, it provides more time to pivot/iterate and try the next direction. Grinding it out is hard, but critical to achieve entrepreneurial success.

    What else? What are some more thoughts on getting 10 unaffiliated customers as quickly as possible?