David Cummings on Startups

Category: Entrepreneurship

  • Enterprise-Focused Public SaaS Companies More Likely to Be Acquired

    Reflecting on the list of publicly traded B2B SaaS companies from yesterday, it’s clear that over the past few years, companies that reached scale and went public were more likely to be acquired if they focused on selling to large companies (enterprises) as opposed to ones selling into the small-to-medium sized business segment. Companies like ExactTarget, Eloqua, and Responsys are all in the email marketing space, which is white hot (and just had another nice exit with IBM buying Silverpop and closing the transaction today). If you go back another year you have SuccessFactors and Taleo both getting acquired, and both targeting the enterprise with HR software.

    Here are a few thoughts on why enterprise-focused startups are more likely to be acquired:

    • Companies targeting the enterprise with scale have an easier time maintaining a fast growth rate due to the nature of high dollar sales (if each new deal is $200k/year in annual recurring revenue, it’s easier to put a bunch more feet on the street and pound the pavement to bring in more deals as compared to trying to sign the equivalent number of small businesses)
    • Large acquirers are more prevalent in the enterprise-focused space (think of Oracle, SAP, Salesforce.com, etc vs Intuit, etc), and once a category is declared strategic and an acquisition is made, the big competitors start circling the remaining players
    • CIOs and executive-level technical buyers communicate more with the large acquirers since they purchase so many different products whereas many SMB products are bought via a credit card by line-of-business managers

    Again, this is anecdotal evidence based on a limited number of public market acquisitions. As for building an SMB or enterprise-focused SaaS company, I’d go after whatever market has the most opportunity. Regardless, publicly traded enterprise-focused SaaS companies are more likely to be acquired.

    What else? What are some other reasons why enterprise-focused public SaaS companies are more likely to be acquired?

  • Data Exhaust and Startup Opportunities

    Last week I was talking to an entrepreneur about ideas to grow his business. Halfway through the conversation, he volunteered that he’s a fan of using data exhaust — that is, data other companies produce but aren’t focused on — to do more targeted cold calling and marketing. What are some examples of data exhaust that exist out there? Let’s take a look:

    • Kabbage realized there was tremendous credit history value in past eBay transactions, UPS shipping records, and more resulting in a more efficient system to loan money to online merchants
    • BuiltWith realized that websites include code that shows the company is a customer of one or more web products, which is great for other companies selling competing or complementary products
    • List building products like SalesLoft that can take existing information online, like prospect profiles, and make them organized and actionable

    Keep an eye out for data exhaust others might not focus on and consider how it can be used to your advantage.

    What else? What are some other examples of data exhaust creating startup opportunities?

  • The Techie and the Entrepreneur

    For most of my life I was known as an IT guy. In high school, I was the go to guy for computer support, setting up networks, connecting to the internet, etc (most of the time I just had to remind them to reboot the computer). In college, I was the go to guy for web design and building sites (in 1998 my roommate and I were running a Linux server in our dorm room to power a textbook exchange service for students).

    After college, while working on my content management software company, I was still known as an IT guy. Even with dozens of employees, whenever asked about my profession, I’d say software entrepreneur, and the most common follow-up question was, “Do you work out of your house?” Clearly, the word “software” took more precedence over the “entrepreneur.” People still looked to me for help with IT projects.

    Sometime in the last five years I became known for entrepreneurship and no longer known as an IT guy. Perhaps it was because I was focused on digital marketing software and not website management software. Perhaps people didn’t need as much IT help as Macs and iPads were so much more prevalent. Regardless, people were coming to me for help with their startup, and not for their IT needs.

    I wanted people to view me as an entrepreneur and not as a techie (even though I love technology). I had arrived. I’m an entrepreneur first.

    What else? Do people think of you for one thing when you aspire for something else?

  • Raising Money Doesn’t Equal Product/Market Fit

    Yesterday at the SEVC event, I was talking to an entrepreneur who was in the middle of trying to raise a Series B round from venture capitalists. We were talking about how VCs want to see a repeatable customer acquisition process whereby it’s clear that if you put in $1, you’ll get $2 back (or some multiple of the investment). The idea is that venture money is almost always used to accelerate the growth of a model that’s already working.

    After asking him about his metrics related to customer acquisition costs, gross margin, lifetime value of the customer, and more, it was clear that the story wasn’t sound yet — stage two of the B2B startup lifecycle hadn’t been achieved. Talking more about the existing customer base, I then realized that product/market fit wasn’t in place yet either (see Assessing Achievement of Product/Market Fit). It then struck me that even though they had raised a Series A in the past, and were now raising a Series B, they hadn’t proven their product fit the needs of the market.

    Just because an entrepreneur raises a Series A round, it doesn’t mean that product/market fit has been achieved.

    What else? What are some other thoughts on fundraising and product/market fit?

  • Minimize Cofounders and Save Equity for Key Hires

    Earlier today I was at the Southeast Venture Conference in Atlanta. Reggie Aggarwal, the CEO and cofounder of Cvent (Notes from the S-1 IPO Filing) gave a great keynote on his lessons learned as an entrepreneur. One of the more interesting points in his talk was that many entrepreneurs don’t take into account the massive dilution that comes with multiple cofounders.

    Assuming equal split among cofounders, here are equity percentages:

    • 2 co-founders: 50% each
    • 3 co-founders: 33% each
    • 4 co-founders: 25% each
    • 5 co-founders: 20% each

    Reggie’s recommendation is to minimize the number of cofounders (e.g. two is optimal) and to save the equity that might be extended to additional cofounders and instead use it for future key hires. Once the business is running, many executive positions that might have been considered for cofounders can be filled with considerably less equity (e.g. 1%-2% of equity is common for VP-level positions once money has been raised).

    What else? What are some other thoughts on minimizing the number of cofounders to save equity for key hires?

  • Finding a Weekly Rhythm

    After announcing the purchase of the Atlanta Tech Village, I received an influx of requests to see the building and hear about the plans. Naturally, I wanted to get the greater Atlanta community involved, so I set out meeting with hundreds and hundreds of people. After having a large number of meetings, I realized that I needed to get more intentional with my schedule and consciously allocate my time to different endeavors.

    After trial and error, I settled on a weekly rhythm:

    • Meetings day on Monday (management meetings, product sprint reviews, quarterly check-ins, etc)
    • Daily check-ins in the morning (Mon – Thurs)
    • Meetings and tours in the afternoon (Mon – Thurs), powered by Calendly with specific day/time rules
    • Daily catch up in the late afternoon for emailing and reviewing projects
    • Freestyle Fridays where I limit scheduled events and look to attend Startup Chowdown whenever I’m in town

    This weekly rhythm has allowed me to focus more and compartmentalize different tasks. I’m sure it’ll continue to evolve but it’s been working well for a couple months now.

    What else? What are some other things you incorporate in your weekly rhythm?

  • How long do you keep grinding it out?

    Most startups don’t work out. Even with an experienced management team, funding, and a good market, the chance of building a large, enduring business is minimal. So, the saying “may the odds ever be in your favor”, especially rings true when it comes to new ventures. If the chances aren’t great, yet you have to keep grinding it out, how long should you keep going?

    The answer: as long as you’re making meaningful progress in a great market, keep grinding it out.

    Breakthroughs can happen at any time but silver bullets are unlikely. Grinding it out in a great market long enough results in a solid understanding of the opportunities and a clear direction. Remember, almost all successful startups pivot at least once (see Pivoting is More Common Than Expected). What typically happens with success stories is that the entrepreneur thinks there’s an opportunity in a market, jumps in, and finds another opportunity nearby that’s the real winner. Sometimes it takes years of grinding it out to find the best opportunity (see Plan for Three Years of Runway).

    Keep grinding it out if real progress is being made and the market it solid.

    What else? What are some other thoughts on figuring out how long to keep grinding it out?

  • Product Must be 10x Better to Build a Large Business

    Earlier this week I read a quote from Bill Gross, founder of Idealab: to build a large business, the product must be 10x better than the current standard bearer, and it must be a large market. Naturally, this makes sense. Only, when you think of most startups, do you think their product is 10x better than what people currently use? Not every entrepreneur is looking to build a large business, but for the ones that are, rarely does the product/idea seem 10x better.

    Here are a few thoughts on the concept that a product must be 10x better to build a large business:

    • Once a type of product is entrenched, it’s difficult to get people to switch unless there’s something truly compelling
    • Better, faster, and cheaper are the typical vectors of improvement, with “better” being the one most commonly pursued
    • Making a product that’s 10x better is magnitudes more difficult than one that’s 2x better
    • Many small, profitable markets exist, and there’s nothing wrong with an innovative product that’s 2x better

    The next time an ambitious entrepreneur says they want to build a large business, ask them how their product is 10x better than what’s in the market.

    What else? What are some more thoughts on why a product needs to be 10x better to build a large business?

  • Investment Sections from Sequoia’s Seed Deal With YouTube

    Miles Grimshaw has a great post up with the original YouTube investment memo from Sequoia partner Roelof Botha to do a seed investment of $1 million on September 2nd, 2005. Google bought YouTube for $1.6 billion a year later.

    Here are the sections from the investment memo:

    • Introduction
    • Deal
    • Competition
    • Hiring Plan
    • Key Risks
    • Recommendation
    • Additional resources
      – Investment summary
      – Competitive analysis
      – Technology overview
      – Team bios
      – Company presentation
      – Company metrics

    Overall, it’s a worthwhile read that’s concise while still covering a number of topics. It’s much like an expanded executive summary without all the detail found in a full business plan. Plus, it includes real operating metrics and data. Entrepreneurs would do well to read the original YouTube investment memo.

    What else? What are some other thoughts on Sequoia’s investment memo on YouTube?

  • 15 First-Time Entrepreneur Misconceptions

    Entrepreneurs are a unique bunch. So much ambition, optimism, and blissful ignorance all wrapped in a desire to change the world. First-time entrepreneurs are especially exciting as they don’t know what they don’t know, making for even more limitless possibilities.

    Here are 15 misconceptions for first-time entrepreneurs:

    1. The destination is more fun than the journey
    2. The initial product idea will be successful
    3. All money is created equal
    4. Things happen fast
    5. Great products sell themselves
    6. If you build it, they will come
    7. Failure to raise money is due to a lack of investors that get it
    8. Culture is one of many items that can be controlled
    9. Timing a market is easy
    10. It’s lonely at the top
    11. Work/life blend isn’t possible
    12. Scaling a business takes the same skills as starting one
    13. No competition is a good thing
    14. Business plans are required
    15. The company with the most funding wins

    Often, you have to experience something first-hand to truly believe it. With time and experience, many of these misconceptions will be dispelled by first-time entrepreneurs.

    What else? What other misconceptions would you add to the list?