David Cummings on Startups

Category: Entrepreneurship

  • Simple is Difficult for Entrepreneurs

    Many startups talk about keeping things simple, almost like a badge of honor. When trying to solve a problem, present a message, or interacting with a user, complexity is the natural response. Humans, especially engineers, enjoy providing comprehensive solutions that meet the needs of as many people as possible. Or do they? On average, making something simple and good is much harder than making something merely good.

    Here are several areas where I’ve seen startups have difficulty with simple but good:

    • Elevator Pitch – More often than not, elevator pitches are too complicated and don’t leave the recipient with a decent understanding of the idea (see Offline Analogy to Describe a Startup)
    • Messaging – Quick, go to five startup sites and read their homepage or most recent press release. How clear is the message? How much jargon and corporate-speak is used? Overwhelmingly, startups struggle with clear messaging.
    • Metrics – Typically, too many numbers are tracked making the important metrics less meaningful and rendering the other metrics more likely to be glossed over (see Metrics Tracking Based on Startup Scale)
    • User Experience – Often, the user experience is the most difficult to make simple and still good. Making a product intuitively obvious to the casual user is more art than science, and few people understand it.

    Delivering simplicity that is also high quality throughout a startup is hard. Very hard. The best entrepreneurs follow the idea of Occam’s Razor: “simpler explanations are, other things being equal, generally better than more complex ones.”

    What else? What are some other areas that startups have difficulty delivering simple but good?

  • Consulting Work to Fund Product Development

    One of the more common entrepreneur strategies is to use consulting work to generate cash to then fund product development. In fact, the most successful fast-growing software company in Atlanta, MailChimp, is actually owned by The Rocket Science Group, which for many years was a web design firm. The Rocket Science Group built MailChimp after identifying a need in the market for a simple, easy-to-use email marketing product, and now they have one of the most widely used products in the world.

    In thinking about consulting work to fund product development, here are a few things to keep in mind:

    • Consultants think in terms of time and materials, which can be limiting when trying to build a successful tech startup
    • Try to separate the consulting team from the product team so that the product team isn’t distracted and can focus 100%
    • Plan for everything to take three times as long and cost three times as much (it’s incredibly difficult to get past the first two stages of the B2B tech co lifecycle)
    • Join a community of like-minded entrepreneurs and find members with successful tech businesses (e.g. Entrepreneurs’ Organization)

    Consulting work to fund product development is difficult to pull off but very desirable when it works. Set internal expectations accordingly and settle in for a long adventure.

    What else? What are some other thoughts on consulting work to fund product development?

  • Betting on Teams and Markets

    On a weekly basis I receive several requests from entrepreneurs to talk about their idea. Typically, I’ll reply back that I’m not a good judge of the quality of an idea and that customer discovery is a much better approach. Rather than discuss ideas, I’m much more interested in discussing execution and what’s working and what’s not working. Overall, especially from an investor perspective, I’m more interested in betting on teams and markets as compared to ideas.

    Here are a few thoughts on betting on teams and markets:

    • Rarely is the initial product direction the best (see Pivoting is More Common than Expected), so a team in a great market will find a better opportunity
    • Timing is critical (see Timing a New Market), and a strong team with a strong market is more likely to get it right
    • Markets are incredibly dynamic, making strength of team so important due to the huge of number decisions that have to be made on a regular basis

    When entrepreneurs talk about ideas, listen, but spend more time drilling into the team and market, as that’s a stronger bet.

    What else? What are your thoughts on betting on teams and markets instead of ideas?

  • A Few Data Points on Domain Name Prices

    Entrepreneurs that have been in the software world since the dot com days love a good domain. Now, we’re seeing more .co and .io domains but .com domains are still the the most sought-after and most expensive. Over the years, I’ve purchased several domains at auction and helped other entrepreneurs acquire domains.

    Here are domains I’ve purchased or been an angel investor in the startup at time of domain purchase along with their price:

    • terminus.com – $10,000
    • kevy.com – $4,000
    • atlantaventures.com – $1,750
    • inspirational.com – $14,000
    • chipshot.com – $12,000
    • salesloft.com – $1,000
    • rivalry.com – $10,000
    • rigor.com – $4,000
    • clickscape.com – $750

    Using a marketplace like Sedo.com and budgeting ~$1,000-$10,000, there are still a number of quality .com domains available for purchase.

    What else? What are some other example prices for domain names?

  • Lead Generation as the #1 Challenge for SaaS

    Continuing with yesterday’s post on SaaS Company Premium Valuations, there’s an important point about the SaaS business model that isn’t well understood. With all the talk about finding product/market fit followed by building a repeatable customer acquisition process (see the 4 Stages of a B2B Startup), it’s regarded that with enough time and money, both of these tasks will be accomplished. Assuming there’s sufficient need in the market, and enough resources, product/market fit can be achieved. Only, it’s the repeatable customer acquisition process that’s also capital efficient and profitable where there’s even more difficulty. Customer acquisition that’s capital efficient and repeatable starts with lead generation.

    Here are a few thoughts on lead generation as the #1 challenge for SaaS:

    • Cost of customer acquisition relative to the first year’s customer revenue is one of the driving metrics for building a SaaS business, and lead generation is the top of the funnel for customer acquisition
    • Company size upper limits are determined by the number of new customers signed relative to customers that leave (churn) and is also accentuated by the law of large numbers that makes growth more difficult at scale
    • Acquiring customers in a manner that is scalable and profitable isn’t always possible, which is why many entrepreneurs give up on building out a sales team due to repeated failure (the lower cost and higher volume of leads can be generated, the greater the chance for a profitable and repeatable customer acquisition process)
    • Top of the funnel lead generation is the most difficult to plan and control for — once a lead is in the pipeline, automated nurturing and human selling is very controllable

    The next time an entrepreneur talks about how hard it’ll be to scale the service for a large number of users or get the user interface just right, ask the harder question about how they’ll generate a huge number of marketing qualified leads.

    What else? What are your thoughts on lead generation as the #1 challenge for SaaS companies?

  • Time to Shut Down a Startup

    Last week an entrepreneur emailed me that he’s shutting down his startup and moving on. After working hard, spending many months on the idea, and over $100,000 of personal savings, it was clear that the business wasn’t going to be successful. There were a number of signs leading up to his decision.

    Here are a few indicators to evaluate if it’s time to shut down a startup:

    Deciding to shut down a startup is a difficult decision. Once the decision is made, and the trigger is pulled, the result is a major sense of relief.

    What else? What are some other indicators when deciding to shut down a startup?

  • How to Decide if Inside Sales Makes Sense

    With all the talk about sales and cold calling, it’s important to step back and run some simple math to see if inside sales even makes sense. Most entrepreneurs fail with their first sales rep for a variety of reasons and really should just hire a sales assistant. Assuming the sales assistant is already in place, let’s run through some logic to see if it makes sense to hire an inside sales rep:

    • Take the average gross margin in the business (e.g. 30-80% based on the type of company — let’s say 70% for a Software-as-a-Service business)
    • Grab the average deal size in the first year (e.g. $1,000)
    • Evaluate the cost of salary and commission to hire the caliber person required to be successful (e.g. $35k base and $75k on target earnings)
    • Figure out how many deals are required for the gross margin to match the fully loaded costs of the sales rep
    • If the gross margin of the first year is greater than or equal to the expected output of the sales rep, hiring a sales rep makes sense
    • Here’s the math for the example above:
      $75,000 + taxes for the sales rep = $85,000
      70% gross margin times $1,000 per deal times X number of deals = $85,000
      121 deals at $1,000 per deal = $121,000 times 70% gross margin = $85,000
      121 deals are required for the sales rep to make sense.

    So, run the numbers based on educated guesses and see if it makes sense to hire an inside sales rep. Generally, as the average customer value goes up and the sales cycle goes down, inside sales makes more sense.

    What else? What are some other thoughts on how to decide if inside sales makes sense?

  • Plan for Three Years of Personal Runway

    For years I thought that entrepreneurs should plan for two years of personal runway to have sufficient time to iterate on an idea and get to break even. Looking back on it, I was wrong. After starting a few companies and investing in several more, I now believe entrepreneurs should plan for three years of financial runway.

    Here are a few reasons why entrepreneurs should plan for three years:

    • Pardot took three years and Hannon Hill took four years to clear $1 million in revenue ($1 million is a great milestone for sustainability as well as the ability to pay a decent salary for the founders)
    • Almost all successful companies go through at least one pivot (see examples)
    • Finding product/market fit often takes 1-2 years and building a repeatable customer acquisition process often takes 1-2 years, making the prospects of solid revenue in less than three years unlikely (see the 4 Stages of a B2B Startup)

    So, when thinking about taking the entrepreneurial plunge, budget for three years of personal runway. Building the base of a successful business is a long, hard process.

    What else? What are your thoughts on planning for three years of personal runway?

  • The 10x Improvement Challenge

    Entrepreneurs have an innate ability to solve problems and continuously find ways to make things better. I, like many entrepreneurs, have a tendency to look for incremental improvements e.g. let’s figure out how to shorten the sales cycle from 43 days to 42 days. Instead, entrepreneurs need to challenge themselves to find 10x improvements.

    Here are a few examples of potential 10x improvements:

    • Cold Calling – Say your reps are doing 30 dials per day and getting three conversations per day. What if you implemented a service like ConnectAndSell and did 300 calls per day and had 30 conversation per day per rep?
    • Marketing – Say your cost per marketing qualified lead (MQL) is $200. What if you truly invested in great content (not average content) for inbound marketing and drove the cost per MQL to $20?
    • Support – Say your customer support team processes 100 tickets per day. What if you revamped the product’s user experience and associated help/training materials such that customers had a much better experience and support tickets dropped to 10 per day?

    The next time you want to improve something, stretch your brain and look for ways to make it 10x better and not 10% better.

    What else? What are your thoughts on the 10x improvement challenge and what are some more examples?

  • Why hasn’t an idea been marketed to me?

    Whenever I add a new entry to my ideas spreadsheet, one of the first questions that comes to my mind is “Why hasn’t the idea already been marketed to me?” Most ideas aren’t original, and with Google it typically takes about two minutes to find 10 other companies already doing it. So, if it’s a decent idea, and the market needs it, why haven’t I heard about it?

    Here are some thoughts on why an idea might not have been marketed to you yet:

    • Vertical Rollout – Certain verticals have greater need and they haven’t gotten to your market yet
    • Job Title – Similar to verticals, there’s a good chance select job titles are preferred and receive more attention
    • Early Adopters – Market penetration could be light such that only early adopters actively seeking a solution encounter the marketing campaigns

    If the idea is sound, and you’re the target, startups will find a way to get you the message. The next time you come up with a new business idea, ask the marketing question.

    What else? What are some other thoughts on why an idea hasn’t been marketed to you yet?