David Cummings on Startups

Category: Entrepreneurship

  • Entrepreneurs and Cash in the Bank

    Entrepreneurs love to spend money on an opportunity and opportunities abound. Every day I meet entrepreneurs that are putting all their saving into their idea in hopes of making it work. Some use their personal funds and some raise money from investors. The old adage that you have to spend money to make money still rings true.

    Only, there’s a major downside to spending the cash too quickly — not making enough progress to get to breakeven or be able to raise another round. Unfortunately, the cash in the bank will be spent, it’s only a matter of time for a growth-oriented entrepreneur.

    The solution: find the optimal core metrics for the startup and pace yourself until those are met. Once the metrics are in place, ramp things up. One of the most common mistakes is investing heavily before the business is well understood (I’m personally guilty of this).

    Entrepreneurs love having cash in the bank. And, inevitably, it’ll be gone quickly if there isn’t a repeatable business model. Figure out the right rhythm for the startup and invest accordingly. Don’t be afraid to be patient until the right metrics are solid.

    What else? What are some other thoughts on entrepreneurs and cash in the bank?

  • Gross Margin and SaaS

    One important aspect of Software-as-a-Service (SaaS) that isn’t well understood to first-time entrepreneurs is the role gross margin plays into the business. Gross margin is defined as the percent of revenue left over after the cost of servicing that revenue is taken into account (see SaaS cost of goods sold). For example, with a SaaS company, things like application hosting costs, customer on-boarding costs, customer service costs, and any third-party fees like software licenses or data fees that are required to use the product are included in the calculation.

    Gross margin is also a reflection of how valuable a dollar of revenue is to the business. If the company is an ecommerce business with 20% gross margins (commodity products) vs a SaaS business with 80% gross margins, every additional dollar of revenue for the SaaS business is equivalent to four dollars in the ecommerce business (due to the much higher contribution margin). Margin is one of the main reasons a $10 million revenue company can be more valuable than a $100 million revenue company.

    Early on, a startup shouldn’t worry too much about gross margin. It’s most important to find product/market fit and build a repeatable customer acquisition process. Over time, economies of scale will start to kick in and most SaaS companies will be able to achieve gross margins in the 70-80% range, if not higher. Gross margin, subscription revenue, and great growth opportunities all come together to drive high valuations for SaaS companies.

    Pay attention to gross margin in SaaS companies and understand why it is so important.

    What else? What are some more thoughts on gross margin and SaaS?

  • The Sales-Oriented and Technically Proficient CEO

    When I think of the most successful startup CEOs I know, they all have a common thread: they are sales-oriented with a strong technical understanding of how things work. By sales-oriented, I mean that they enjoy and value the sales process. While some are more salesy than others, they all would do well in a standalone sales role.

    The other, almost as important piece, is that they are technically proficient. Some have written code and some haven’t, but every one of them loves technology and can tell you exactly how their product works. I call this being technically proficient. Think of it as having the technical understanding necessary to be a sales engineer, but not a full software engineer.

    So, for aspiring entrepreneurs that haven’t done sales, figure out how to get some sales experience, even if it’s as simple as having a hobby business on the side where you have to repeatedly sell something. For aspiring entrepreneurs that aren’t technically proficient, sign up for Codecademy and build and run a simple Rails app on Heroku.

    Think of the most successful tech CEOs you’ve worked with. Do they fit this bill? I bet they do.

    What else? What are some other thoughts on the sales-oriented and technically proficient CEO?

  • Not all Tech Startups Have High Growth Potential

    Many tech entrepreneurs, no matter how hard they try, won’t be able to make their current idea a high growth business. And, while sometimes it’s due to the entrepreneur, often it’s because of the idea. Not all tech startup ideas are bound for high growth — let’s look at a few reasons why:

    • Timing – Ideas that are good, but too early, are still a failure. The importance of timing should not be underrated.
    • Market – Some markets are small, very small. A successful business is not the same as a high growth business and often companies can be the former without the later.
    • Customer Value – Many businesses suffer from the cost of customer acquisition being prohibitively high relative to the amount of money the customer is willing to pay for the product or service. These businesses can be successful but often aren’t high growth (many small consulting firms suffer from this).
    • Capitalization – In limited circumstances the amount of capital required for success exceeds the entrepreneur’s ability to secure funds.

    Notice that it isn’t due to luck, innovation, or the competition. Unfortunately, not all tech startups have high growth potential. It’s up the entrepreneur to decide if high growth is important to them and to make the appropriate call if the business idea needs to be changed.

    What else? What are some reasons not all tech startup ideas are bound for high growth?

  • 10 Years and 10 Lessons Learned

    After yesterday’s post on the Top 3 Mistakes as a First-Year VC, it got me thinking of a similar topic across a longer period of time: 10 years and the top lesson learned each year. Every year brings new opportunities, and new challenges, with a number of lessons learned throughout.

    Here’s a lesson learned from each year, with a bit of context thrown in:

    • 2002 – Signed deal to license SuperUpdate to GlobalSCAPE after serendipitous meeting at the December 2001 Internet World tradeshow. Lesson learned: luck plays an important role in success.
    • 2003 – Launched ContentXML (now called Cascade Server) at the San Jose Internet World tradeshow and won the Best of Show award for the Design category. Lesson learned: winning an award at a tradeshow doesn’t result in sales.
    • 2004 – Signed five customers and two were in higher education, so decided to focus on higher education. Lesson learned: figure out how to narrow things down to a defined market that’s big enough to build a business, but small enough for focus.
    • 2005 – Started to transition personal efforts from engineering and product management to sales and marketing, with a heavy emphasis on talking to the customer. Lesson learned: building a repeatable customer acquisition machine is hard, but possible.
    • 2006 – Entered high growth mode and hired a number of people that didn’t have a cohesive culture. Lesson learned: don’t sacrifice culture and core values to get people in the door.
    • 2007 – Started full-time on Pardot after identifying digital marketing as deficient for B2B marketers. Lesson learned: new opportunities emerge and sometimes it requires a tough decision to leave something else that’s going well.
    • 2008 – Heard feedback from customers that Pardot was so important that they didn’t know how they did their job before it. Lesson learned: sell pain-killers and not vitamins whenever possible.
    • 2009 – Hired a number of excellent people and established a foundation for future growth. Lesson learned: recessions are a great time to hire awesome people that were otherwise displaced.
    • 2010 – Market adoption really picked up and it was clear that marketing automation was going to be a big market. Lesson learned: timing a market is incredibly difficult, and one of the most important things.
    • 2011 – On a marketing budget of $1 million for the year, we spent $500,000 just on Salesforce.com’s four day Dreamforce conference, and it was a big success. Lesson learned: sometimes you have to get outside your comfort zone and invest to make your presence known.
    • 2012 – ExactTarget approached Pardot about a partnership and bought the company four months later. Lesson learned: build a company to last, and if an amazing offer comes along, take it.

    Those are 10 major lessons learned from the first 10 years of my career. I’m looking forward to learning many more lessons and continuing the journey.

    What else? What are some of your lessons learned in the last 10 years?

  • Top 3 Mistakes as a First-Year VC

    Jason Lemkin, author of some the best Software-as-a-Service (SaaS) content online at SaaStr (also check out David Skok’s great For Entrepreneurs site), recently tweeted his top three mistakes as a first-year VC:

    My takeaway after reading the tweets is that Jason is a big believer in betting on the jockey, more so than the horse. For many years I believed it was better to bet on a great market with a good team and now I’m in Jason’s camp — it’s best to bet on a great team and trust that they’ll find a great opportunity, even if it isn’t readily apparent.

    What else? What are some other thoughts on Jason’s top three mistakes as a first-year VC?

  • Lack of Market Awareness as Common Startup Challenge

    One of the most common startup challenges is the lack of market awareness that a solution exists. During the first four years of Pardot, we’d knock down doors and reach out to marketers only to find that they’d never heard of marketing automation and didn’t know the technology existed. Once we convinced them of the possibilities, and showed the application in action, the proverbial light bulb went off and they quickly got it. Only, it was extremely time consuming to get to that point.

    As the market grew and matured, awareness become a non-issue and the sales velocity accelerated. At that point, the business was nearly five years old and the market dynamics were established. It was too late for a new entrant.

    Here are a few thoughts on dealing with lack of market awareness:

    • Figure out a good pace in the business as timing a market is one of the most difficult things (being too early to a market is still a failure)
    • Know that a large amount of outbound activity is required
    • Inbound marketing doesn’t work due to the lack of searches (minimal awareness results in minimal searches)
    • Employee a team of business development reps (if the price point allows it)
    • Host in-person events in different cities and use sales reps to drive attendance (again, if the price point allows it)

    Lack of market awareness is a serious challenge for startups and many times isn’t surmountable. Startups would do well to brace for battle and engage in more manual tactics to get the message out.

    What else? What are some more thoughts on the lack of market awareness as a common startup challenge?

  • HubSpot, Marketing Automation, and Content Marketing

    After yesterday’s Notes from the HubSpot S-1 IPO Filing, there have been a number of interesting blog posts on the same topic including Louis Gudema on HubSpot’s S-1, BetaBoston on HubSpot’s S-1, and David Raab on HubSpot’s S-1. One of the points that I think is missed is that as part of HubSpot moving away from the small business market and into the mid-market, there’s also a shift from blogging with SEO tools to full marketing automation. With Marketo’s Q1 growth at 64% year over year, there’s huge money in marketing automation.

    Content marketing is hard due to the need for fresh content on a regular basis. I like how Louis Gudema defined running a content marketing program as publishing at least six pieces of content, of any length, per month. While I’m a fan of content marketing, one key point is that customers of HubSpot (and most any other provider, including Pardot) can still get tremendous value from the software through the marketing automation functionality.

    Marketing automation, while still requiring content for landing pages, drip programs, autoresponders, and more, doesn’t require fresh content. Companies can invest in content periodically, without having dedicated people on staff, and see a huge return on investment (ROI) from marketing automation. In addition to the ROI, there’s real benefit in sales and marketing alignment, closed loop reporting, and improved marketing accountability.

    The key takeaway: HubSpot understands the continual production challenges with content marketing and demonstrates value to customers via marketing automation, such that customers still have a strong ROI even without content marketing.

    What else? What are some other thoughts on HubSpot, marketing automation, and content marketing?

  • Notes from the HubSpot S-1 IPO Filing

    HubSpot just filed their S-1 to go public and I’m excited to dive into it. HubSpot has been in the B2B online marketing space slightly longer than Pardot and has awesome co-founders in Brian Halligan and Dharmesh Shah. Dharmesh is truly the king of content marketing with his excellent slide shows, best-selling book Inbound Marketing, and huge OnStartups.com community.

    HubSpot started out as a blogging platform before adding search engine optimization functionality and finally becoming a marketing automation platform. As HubSpot became more focused on marketing automation, Pardot and HubSpot started to see each other more often in the market and had a few partnership discussions before we ultimately decided we were heading down a path of direct competition.

    Here are notes from HubSpot’s S-1 IPO filing:

    • 11,624 customers and 1,900 marketing agency partners (pg. 1)
    • Focused on the mid-market (pg. 1 — this is a change from a few years ago when they were small business focused)
    • Revenue (pg. 2)
      2011 – $28.6 million
      2012 – $51.6 million
      2013 – $77.6 million
      2014 1H – $51.3 million
    • Losses (pg. 2)
      2011 – $24.4 million
      2012 – $18.8 million
      2013 – $34.3 million
      2014 1H – $17.7 million
    • Mid-market defined as companies between 10 and 2,000 employees (pg. 2 — this is a very broad definition of the mid-market)
    • Average revenue per customer is $8,823 per year (pg. 2)
    • 20% of customers outside the U.S. (pg. 4)
    • Professional services revenue (pg. 6)
      2011 – $2.8 million
      2012 – $5.7 million
      2013 – $6.8 million
      2014 1H – $4 million
    • One major risk factor is the inability of customers to create content to make blogging, social media, and inbound marketing in general worthwhile (pg. 10 — regularly writing good content is a serious effort)
    • 719 full-time employees as of June 30, 2014, up from 304 as of December 31, 2011 (pg. 12)
    • Accumulated deficit of $123 million (pg. 39)
    • More than 90,000 individuals with a free or paid Signals account used the Signals product during June 2014 (pg. 47)
    • 88.6% annualized subscription dollar retention rate (pg. 47)
    • $11,334 cost of customer acquisition (pg. 48 — it’s awesome that they are so transparent with their renewal rates and cost of customer acquisition)
    • $7.3 million in cash on hand and negative $22 million in working capital (pg. 60)
    • Great letter from the founders that describes the background of the business and the big vision (pg. 71)
    • Seven core principles of the HubSpot Culture Code (pg. 88)
      We are maniacal about our mission and our metrics.
      We empower every employee, at every level, to “Solve for the Customer”.
      We are radically transparent.
      We give ourselves the autonomy to be awesome.
      We are unreasonably picky about our peers.
      We invest in individual mastery and market value.
      We constantly question the status quo.
    • Venture capitalists own 66.3% (pg. 110)
    • Founders own 13.7% (pg. 110)
    • Co-founder/CEO owns 4.9% (pg. 110)
    • Note: The S-1 made no mention of competitors like Pardot and Marketo, which is unusual for this type of document.

    Overall, I expect this IPO to be very successful due to the excellent team, large market opportunity, current growth rate, and awareness of the company within the online marketing industry. Look for HubSpot to have a market capitalization in excess of $1 billion shortly.

    What else? What are some other thoughts on the HubSpot S-1 IPO filing?

  • Economics of Customer Onboarding Programs

    After talking about The Importance of a Customer Onboarding Program, it’s now time to talk about some of the economics of customer onboarding. Many Software-as-a-Service (SaaS) entrepreneurs don’t realize that customer onboarding costs have to be amortized over some period of time and that they affect the cost of goods sold (here’s a separate primer on SaaS cost of goods sold).

    Let’s say the customer onboarding costs are as follows:

    • 10 hours of manual labor and hand-holding, on average, for each new customer onboarding
    • $60 per hour fully burdened cost for the implementation team
    • $600 in total onboarding costs for each new customer
    • One year amortization period for the customer onboarding costs (this length of time is debatable)
    • $600 total cost, divided by 12 months, equals $50 per month for the first year in additional cost of goods sold

    So, if the SaaS service is $1,000 per month, the gross margin is reduced by 5% per month for the first year due to the onboarding program costs. Of course, customer success and happiness is much more important than gross margin, but it’s important to understand how onboarding programs play into the economics of the business.

    What else? What are some other thoughts on the economics of onboarding programs?