David Cummings on Startups

Category: Entrepreneurship

  • Figure Out How to Stay in the Game Long Enough to Win

    One aspect of entrepreneurship that’s taken me years to grasp is the importance of staying in the game long enough to win. What I mean by that is it’s incredibly hard to time a market, and timing is one of the most important aspects for major success. If it’s hard to time a market, and timing is so important, it follows that it’s best to pick big markets and give yourself enough runway to zig and zag within the market to find the greatest opportunities. In a sense, the goal is to experiment in a large target market so as to create your own timing for whatever is the best path.

    Here are a few thoughts on staying in the game long enough to win:

    If this sounds like a tough situation, that’s because it is. Startups are incredibly hard and figuring out how to survive so that you can be at the right place at the right time makes all the difference.

    What else? What are some other thoughts on figuring out how to stay in the game long enough to win?

  • The Tech Square Ventures Model

    Urvaksh broke the news on Friday about a new $10 million seed fund called Tech Square Ventures run by Blake Patton. Atlanta has a dearth of seed stage, high risk capital, so this is great for the city. Blake is an experienced operator who is well-regarded in the startup community, having run several venture-backed companies, making him an ideal person to lead a new fund.

    From an entrepreneur perspective, I think it’s important to understand how a $10 million seed fund typically works:

    • Capital is committed but not sitting in the bank (it has to be called from the investors, often at a rate of 20% per year for five years)
    • 99% of the capital is from investors and 1% is from the partners
    • 2.5% of the total fund amount is made available for the first five years for operating costs (e.g. $250,000/year to pay for salaries, office space, legal, accounting, travel, etc.) with a reduced amount for the next five years and nothing beyond 10 years
    • Partners receive 20% of the profits (carry) after the fund and all money used for annual operating costs have been returned
    • 1/3 of the money for initial investments and 2/3 of the money for follow-on investments (e.g. when a $1 is invested, $2 needs to be saved to invest in some of the companies at a later date as they grow)
    • Example investment approach:
      15 initial investments of $250,000 each = $3,750,000
      5 of the 15 investments show promise and an additional $6,250,000 is invested in those five
    • Target investor return is three times cash on cash in seven years, meaning take the $10 million invested and turn it into $30 million

    So, my guess is Tech Square Ventures will make somewhere in the neighborhood of 15 investments over an initial 3-4 year period, with most investments providing little to no return and 2-3 investments providing almost all the returns.

    I’m excited for Blake and want to see Tech Square Ventures become a successful establishment in Atlanta.

    What else? What are your thoughts on the $10 million seed fund model?

  • A Gap in the Market Doesn’t Imply an Absence of Competition

    I love when entrepreneurs come in saying that there isn’t any competition for their idea. No competition? No way. There’s always competition. And, competition is a good thing. If there wasn’t competition, there wouldn’t be other people that believe in the opportunity as well.

    Now, just because there’s competition, it doesn’t mean that there aren’t gaps in the market. Look at the marketing automation market six years ago. Strong companies like Eloqua were doing well addressing the mid-to-high end segment of the market, but when it came to the small-and-mid sized segment of the market, there wasn’t much activity. Yes, you could buy Eloqua Team Express Light (that’s really what they called it at the time) and get a product for $1,500/month, but it wasn’t feature rich since it wasn’t the market they really cared about. Pardot filled a gap in the market for SMB companies that wanted a complete solution in the $500 – $1,000/month range.

    A gap in the market doesn’t imply an absence of competition. Rather, competitors exist and are focused on a different segment that they find more appealing. With time, many large, meaningful markets actually have several winners that carve out their own segment and dominate.

    What else? What are your thoughts on gaps in the market and competitive dynamics?

  • Evaluating the Purity of a SaaS Business

    Recently I was talking to an entrepreneur that has sold his last company and is actively looking for a new business to either start or join. As we got to talking, it became clear that his goal is to get involved with a pure Software-as-a-Service (SaaS), as opposed to a tech-enabled business service where there’s a hybrid between proprietary technology and human-powered services. Some of his drivers for a pure SaaS business include higher valuations at the same revenue levels, greater economies of scale, and perception that there are better opportunities.

    Assuming a pure SaaS business is the goal, here are a few financial model considerations to contemplate:

    • Gross margin (especially at scale e.g. > $20mm in revenue)
    • Cost of customer acquisition
    • Lifetime value of the customer
    • Renewal rates
    • Scalable lead generation

    The ideal SaaS business will have high gross margins (> 80%), low cost of customer acquisition (< first year’s revenue), high lifetime value of the customer (many times the acquisition cost), high renewal rates (> 90% per year), and copious amounts of leads.

    When thinking about SaaS metrics, it’s important to review Insight’s Periodic Table of SaaS Metrics and Omniture’s Magic Number.

    What else? What are some other ways to evaluate the purity of a SaaS business?

  • Pitching Atlanta’s Strong Tech Clusters to TechCrunch

    Last week I had dinner with several writers and team members from TechCrunch. TechCrunch was in Atlanta for their meetup at the The Fabulous Fox Theatre and invited several members of the community out to dinner in advance of the event. At dinner, I pitched Atlanta’s strong tech clusters:

    Atlanta has over 125,000 high-tech jobs and is growing at a nice rate. When pitching TechCrunch, or anyone else, it’s important to tell a story. Atlanta’s story is that of success across a number of sectors with no signs of slowing down.

    What else? What are some of the next strong tech clusters emerging in Atlanta?

  • Assembling a Minimum Viable Product for Market Validation

    After repeatedly talking about customer acquisition, and the idea that startups are no longer required to build an amazing product upfront, the natural next question is how to assemble a minimum viable product to validate the market. Ideally, it’s getting something into the hands of prospects and figuring out the value and potential scalability of the business as quickly as possible. The days of needing hundreds of thousands of dollars to build a software prototype are done.

    Here are a few ideas on assembling a minimum viable product for market validation:

    • Build a seemingly-functional mobile app using Fluid UI and then let potential customers click around on the app
    • Create web app wireframes and map out the most salient pieces for a software engineer (wireframes are one of my favorite ways to map software ideas before a product is built)
    • Recruit a developer to moonlight and build a prototype after hours (most developers have side projects) and be ready to pay $50 – $100/hr
    • Explore freelancers and outsourcing firms on Elance, paying special attention to references that you can contact and verify quality
    • Incorporate tools for rapid prototyping and deployment like Ruby on Rails, Bootstrap, and Heroku

    Cost wise, expect to pay between $5,000 and $20,000 to get something built and published. While it might not be a minimum respectable product, it should be functional and suitable to put in the hands of users. Assemble a minimum viable product and search for market validation before spending too much money.

    What else? what are some other thoughts on getting a product into the hands of potential customers as quickly and affordably as possible?

  • Why are there more startups now?

    Two of the more common questions I hear include “Are we in a tech bubble?” and “Why are there more startups now?” Yesterday, @semil tweeted a great response to the second question:

    Let’s look at each of these ideas:

    • Generational attitudes – Millennials don’t ever entertain the idea of lifetime employment and want to get to the top as soon as possible.
    • Cheap to build – Open source software plus cloud computing and a lower learning curve to use the modern tools make it dramatically cheaper to build a product compared with 10 or 15 years ago
    • Weak job market – Outside of sales and software engineering, it’s still a tough job market, especially for recent college grads with little to no experience
    • Romanticized in pop culture – Every time Mark Zuckerberg is referenced on the news or in a movie like The Social Network, more people are inspired to start their own company
    • $ flying around – Money is still hard to come by outside Silicon Valley, but angel investors are more active everywhere due to the inflated stock market and recent tech success stories

    Much like it used to be cool to be in a band, it’s now cool to be in a startup. And, on the whole, that’s a good thing.

    What else? What are some other reasons there are more startups now?

  • Atlanta Tech Village as Perceived Startup Employment Stability

    Yesterday I was meeting with a very successful entrepreneur in town at the Atlanta Tech Village. As we were talking about the facility and community, he cited an important observation I hadn’t previously heard: people who join startups at the Village feel they have more stable employment, all things equal, compared to working for a startup in a traditional building. Right or wrong, there’s some truth to it. One of the more difficult things to do is to recruit someone from a non-startup to a startup, especially if it’s an area of the country that has a limited startup scene (which is most of the country).

    Here are a few thoughts on the perceived startup employment stability in an entrepreneurship center:

    • Strength in numbers provides comfort with the idea being that if the hundreds of people around me are working for startups, there must some societal acceptance to it
    • High highs and low lows are a routine part of startup life, and mentally removing some of the stability nervousness also helps with modulating the other fluctuations
    • Relationships and personal networks still drive the majority of startup hires, so being in a large community of like-minded individuals increases the size and growth of individual connections, making the prospects of finding another job higher in the event the current startup doesn’t work out

    Time will tell if startups at the Atlanta Tech Village have a higher success rate and therefore more employment stability. Regardless, I’m confident in the importance of inter-personal relationships to find a new job, and the Village will result in a shorter time and more opportunities for someone when a startup doesn’t work out.

    What else? What are some other thoughts on the Atlanta Tech Village as perceived startup employment stability?

  • The Indirect Revenue Model App

    There’s a popular web pundit quote, “If you don’t pay for the product, you are the product.” Think about a company like Twitter or Facebook — they don’t charge to use the app but they make money by turning you, the user, into a product to market ads on behalf of the the advertiser. While this makes sense, there are actually a number of apps out there that aren’t what they seem when it comes to their primary revenue stream. Here are a few app examples:

    • Lead Gen Apps – Often micro-apps, these are simple services that provide some value in exchange for personal information for a sales rep to follow up and sell something else (see Micro Apps as Next Generation Content Marketing)
    • Transaction Apps – Even if an app has a monthly fee, there are many products out there that actually make more money off of transaction fees (e.g. pay $50/month to be a customer and then pay 10% for each payment collected resulting in more revenue from the transaction fees than the recurring monthly fee)
    • Secondary Apps – Some apps are built and sold as stand alone products, but they are really designed to fill in the gaps for a complementary app. This often happens when a technological shift has occurred and the original app can’t be adapted with the required changes, making it more cost effective and less painful to build a new app that takes advantage of the improved technology while supporting the original app.

    Product pricing and the main revenue stream for an app aren’t always what it seems. Pay attention to indirect revenue model products and figure out the true strategy.

    What else? What are some other examples of indirect revenue models?

  • Customer Acquisition, Customer Acquisition, Customer Acquisition

    As I talk to entrepreneurs, it’s apparent that the #1 challenge far and away is customer acquisition. The days of needing to raise serious cash to build a product are over. The days of worrying about scaling an app are over (see WhatsApp supporting 450 million users with 32 engineers). That’s right, if an entrepreneur shows up and hasn’t been able to get a simple prototype built and some people using it, they aren’t meeting the new minimum expectation.

    As building a prototype has dropped to a few thousand dollars, it puts even more pressure on customer acquisition. If anyone can build a product, it makes sense that more products will get built, and more competition will emerge for the same potential customer.

    Looking back, there are so many customer acquisition related posts that it makes sense it’s the most difficult problem to solve. Whether it’s Pick a Customer Acquisition Model that Make Sense, Lead Generation as the #1 Challenge for SaaS, or Double Inside Sales Rep Productivity in a Week, there’s no shortage of ideas to try.

    Customer acquisition is much harder than entrepreneurs expect. In fact, it’s the hardest thing to master.

    What else? What are some other thoughts on customer acquisition?