David Cummings on Startups

Category: Entrepreneurship

  • One Year Personal Development Plan

    Several years ago a friend of mine came back from an EO University and was raving about a session he attended where they built a one year person development plan. Naturally, I love these kind of things and asked him for all the details. The idea is straightforward, as expected, but incorporates numerical goals as well as specific habits. Most of the time people think of one year goals as “I want to make X dollars and lose Y pounds.” This methodology is useful because it incorporates those goals as well as more specific habits desired (e.g. I want a healthy marriage so one habit is having a date night once a week).

    Here’s the plan template:

    • Professional
      – Category, 2014 Achievements, Habits
      – e.g. My Startup, $1,000,000 in revenue, attend one entrepreneur event/month
      – e.g. My Income, $100,000, 50 cold calls/day
    • Family
      – Category, 2014 Achievements, Habits
      – e.g. Spouse, Good marriage, Date night/week
      – e.g. Child, Healthy relationship, One adventure/bi-weekly
      – e.g. Vacations, Out of town, One week/quarter
    • Community
      – Category, 2014 Achievements, Habits
      – e.g. Non-profit board, Donate time, Two hours/month
      – e.g. Donations, Give $1,000, One meeting/month
    • Personal
      – Category, 2014 Achievements, Habits
      – e.g. Weight, 175 pounds, Run 10 miles/week
      – e.g. Learning, Reading, One book/month
      – e.g. Fun, Attend a sporting event, One event/quarter

    So, dust off those recent New Year’s Resolutions and add habits to go along with the goals, as well as break things out into professional, family, community, and personal.

    What else? What are your thoughts on a one year personal development plan?

  • The Challenge of Surpassing a Previous Success

    If you like to run, it’s easy to keep track of your time when running a 5k or 10k, so you can continually strive to set a new personal best — it’s human nature to want to improve and get better. Of course, this applies to the entrepreneur world as well. After a big success, the goal is to surpass it with the next venture. But, what if the bar is set extremely high? How do you measure success?

    Here are a few thoughts on the challenge of surpassing a previous success:

    • Think about the journey more than the destination
    • Success comes in many forms like creating jobs, being challenged, building relationships, achieving goals, etc
    • Limits and guidelines should be set around personal capital invested, amount of risk desired, etc
    • Legacies come in many different forms and doing one thing well repeatedly isn’t required

    Surpassing a previous best is a real challenge that is rarely achieved in the entrepreneurial world. Regardless, as long as the game is fun, it should be played.

    What else? What are some other thoughts on the challenge of surpassing a previous success?

  • Two Products, One Startup — Don’t Do It

    Whenever I see a startup offering two different products on their website I cringe. It’s so incredibly hard to make one product successful that having a second product means resources are going to be spread more thin. Personally, I’ve tried it three times and have failed all three times. Can it be done? Yes. Is it rare? Yes.

    Here are a few thoughts on a second product:

    • Whichever product pays the bills is going to get all the attention
    • Having a second product is actually 10x more difficult that it appears
    • Finding product / market fit still takes 12 – 24 months with the second product
    • Micro apps that are a subset of the mothership’s functionality are fine as long as they share the same code base
    • Building a successful second product suffers many of the same issues as being a part-time entrepreneur
    • If it’s going to be done, consider having a separate, dedicated team of people and website devoted to the product

    When the first product has plateaued or is in decline, a second product makes sense to try and start growing again. Regardless, startups should stay away from a second product as long as possible.

    What else? What are some other thoughts on a startup having two products?

  • SaaS Startup Funding Between an Angel Round and a Series A

    With all the success and publicity around Software-as-a-Service (SaaS) companies, a number of new startups have emerged. Of course, SaaS valuations for market leaders have been exceptionally high, helping fuel the creation of more startups. Only, there are a number of SaaS startups that have raised angel rounds but don’t have enough traction to raise a Series A round. This is also related to the Series A crunch whereby the number of VCs has gone down while the number of angel investors has gone up, resulting in a lower percentage of angel-backed startups raising money from VCs.

    Let’s look at an example scenario:

    • Startup raised $500,000 from angels
    • Spent 18 months and burned all the cash
    • Generates $100,000 in annual recurring revenue from 50 customers
    • Added $50,000 in annual recurring revenue in the last 90 days
    • Needs $30,000/month to break even

    This is a tough, common situation. It’s clear that there’s a decent level of product / market fit with 50 paying customers. Yet, only $100,000 in annual recurring revenue, making it far from having a repeatable customer acquisition machine. The good news is that by adding $50,000 in new annual recurring revenue in the last 90 days, assuming no churn, in another 12 months the startup will be break even a $300,000 run rate. So, one way to look at it would be how to get a $200,000 bridge loan to get to break even and have time to figure out how to accelerate growth so as to raise a Series A round.

    For startups that have raised a seed round and are having difficulty raising a Series A round, the most important thing is figuring out how to grow revenue quickly and paint a picture of how putting in $1 of investment yields revenue growth of $1+ (again, assuming almost all recurring revenue and high renewal rates). If there’s no growth story and no customer acquisition machine, investors aren’t going to get excited about investing.

    SaaS startup funding with limited traction is hard, and it’s especially difficult between an angel round and a Series A. As Guy Kawasaki says, sales solves all problems.

    What else? What are some other thoughts on SaaS startup funding between an angel round and a Series A?

  • SaaS Valuation Drivers

    When thinking of Software-as-a-Service (SaaS), one of the first things that comes to mind is the quality of the business model. With almost all recurring revenue, high gross margins, great renewal rates (ideally), and strong market adoption, it really is one of the best models across all types of business. Due to the confluence of factors like quality of business model, hype in domestic public equities, and desire for growth, SaaS companies are currently receiving extraordinary valuations. While I don’t believe 10x+ revenue valuations are sustainable, I do believe we’ll see 4 – 6x revenue valuations indefinitely, assuming 30%+ revenue growth rates (otherwise valuations will quickly drop to 2 – 3x revenue).

    Here are a few valuation drivers for SaaS companies:

    • Growth Rate – this is the most important factor and I calculated growth rate to be a 2.5x multiplier for valuation
    • Market Opportunity – the bigger the better (one of the reasons Workday – NYSE:WDAY – gets such a big premium, in addition to growth rate)
    • Up-sell / Cross-sell Potential – the more complementary the better (one of the reasons Pardot was so valuable to ExactTarget / Salesforce.com)
    • Scale – hitting $10M in revenue really opens things up for larger acquirers and hitting $50M+ in revenue opens things up for an IPO (more options creates more leverage)
    • Renewal Rates – 90%+ is the target (some have greater than 100% revenue renewals because they expand the account size in existing customer accounts), but watch out for leaky buckets
    • Gross Margins – 80%+ is desirable but some SaaS companies have weaker gross margins due to more services work, unusually high on-boarding costs, or other expenses (e.g. third-party fees or licenses)

    SaaS startups, like all companies, should optimize for the needs of the customer and not maximum valuation, but it’s useful to keep these in mind when building the business.

    What else? What are some other valuation drivers for SaaS startups?

  • 4 Startup Stages in 8 Words

    Earlier today a friend emailed me a Quora article on the one thing that you would advise NOT to do when you start a startup. The author provides some great insight, but, more importantly, includes an awesome graphic that overlays four startup stages on Geoffrey Moore’s Crossing the Chasm theory. Similar to the August post titled 5 Steps to Startup Success in 30 Words, the goal is to synthesize startup stages in a concise manner.

    The four startup stages in eight words:

    1. Pilot it
    2. Nail it
    3. Scale it
    4. Milk it

    So, there you have it: the lifecycle of a successful startup in eight words. Short, sweet, and concise.

    What else? What are your thoughts on the four startup stages in eight words?

  • The Unusual Relationship Between Revenue and Valuation Over Time

    People love to think of a startup’s valuation as readily determinable by a valuation expert based on agreed upon financial formulas. In reality, a startup is only worth what an acquirer is willing to pay. This is true because equity in a startup is an illiquid security that is very difficult to turn into cash, especially in a reasonable amount of time. Of course, valuations are set all the time based on things like public market comparables, multiples of profit (a typical company is worth 4-6x profit), combination of growth rate plus revenue, and other factors.

    For startups, there’s an even a more unusual relationship between revenue and valuation over time as there’s no-to-little operating history, no-to-little revenue, and no profits. Here are a few data points over time:

    • Month 1 – With a fresh idea and unlimited potential, the startup is actually worth more than when it starts to generate early revenue (e.g. valuation of $2M pre-money for an angel investor)
    • $50,000 in annual recurring revenue (ARR) – With a few paying customers and some product / market fit, investors will begin digging into the start of a financial model, and since there’s some revenue, will start talking about multiples of revenue or annual run rate (e.g. valuation of $1.5M pre-money even though the company is clearly further along than month one yet the valuation isn’t better)
    • $1,000,000 in ARR – With the magical seven figures market crossed, a whole new class of investors emerge (many VCs won’t invest unless the startup has at least a million in recurring revenue), valuations are discussed as multiples of revenue (e.g. a valuation of $5M pre-money based on 5x run rate)
    • $5,000,000 in ARR – With an even more substantial base of revenue, product / market fit clearly in place, and market adoption risk negated, the revenue multiple starts to expand, especially with a high growth rate (e.g. a valuation of $35M pre-money based on 7x run rate)

    So, valuation stays flat or even goes down from the initial formation of the company though the first or second year. Then, as revenue starts to grow, valuation grows at an even greater rate and really expands at a few different inflection points. Today, Software-as-a-Service is super hot and the market leaders are often trading at 13x revenue, which isn’t sustainable, but is the current state of affairs. Revenues and valuation don’t have a straight relationship over time.

    What else? What are some other thoughts about the unusual relationship between revenue and valuation over time?

  • Overestimate the Next Two Years and Underestimate the Next Ten

    One of my favorite big-picture quotes comes from the Microsoft co-founder Bill Gates:

    We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.

    I’ve seen it play out so many times with new technologies, organizations, initiatives, etc. Things start slow, as they always do, and then eventually pick up momentum such that you look back a few years and are blown away by how much has changed. Coming from the startup world, this quote is especially applicable as the first couple years are always overestimated by entrepreneurs (think about how revenue and progress is always below expectations).

    Here are a few examples of overestimating the short-term and underestimating the long-term:

    • Twitter – I had heard about it for two years before I created my @davidcummings account at a Georgia Technology Summit in 2009. It didn’t seem like a big deal at the time but the early adopters loved it. Now, looking back, I clearly underestimated its potential.
    • Atlanta Tech Village – We’re still in the top of the first inning at the Village but I’m confident that the Atlanta community overestimates what we’re going to accomplish in the short-term as it takes so long to build great startups. On the other hand, I believe people underestimate the profound impact we’re going to have on the city over the next decade.
    • Marketing Automation – During the first two years of Pardot most people thought that B2B marketing tools were good enough and business buyers weren’t in the market for a whole new platform. Now, Pardot is almost seven years old and I can honestly say that I underestimated the power of marketing automation and how fast it would catch on in a major way.

    Humans are apt to repeat themselves and consistently overestimate the next two years and underestimate the next ten, and that’s never going to change.

    What else? What are your thoughts on the idea of overestimating and underestimating change?

  • What do National Lampoon’s Christmas Vacation and Netflix have in common about annual bonuses?

    With the ring of a doorbell on Christmas Eve, Clark Griswold (played by Chevy Chase) eagerly rushes to the door in anticipation of his annual company bonus check. Only, after opening the envelope, he quickly reads that there’s no bonus, and, instead he’s receiving an annual supply of jelly. Yes, jelly. Then, to the 10+ family members gathered around, he announces that he’s received a Christmas bonus for 17 straight years and is devastated to not have one.

    This scene from National Lampoon’s Christmas Vacation captures the number one problem with annual corporate bonuses: people view the bonus as part of their standard compensation and don’t see it as a bonus. If you take away the bonus, it seriously hurts morale. If the bonus is given out, people don’t think anything of it. If you make the bonus tied to individual performance, people naturally game the system to their best interests. If you tie the bonus to company performance, people don’t feel they have much control over it.

    Harvard Business Review has an article in their most recent issue titled How Netflix Reinvented HR where the author, Patty McCord, former head of HR at Netflix, talks about corporate bonuses. McCord writes:

    During my tenure Netflix didn’t pay performance bonuses, because we believed that they’re unnecessary if you hire the right people. If your employees are fully formed adults who put the company first, an annual bonus won’t make them work harder or smarter.

    McCord nails it perfectly. Bonuses don’t do what they’re intended to do and are perpetuated because that’s how it’s always been done.

    What’s the solution if you do away with annual bonuses? Pay competitive, market-rate salaries as short-term compensation and include equity or stock options as long-term compensation.

    What else? What are your thoughts on the idea that companies shouldn’t do annual bonuses?

  • Thinking About Entrepreneur Commonalities

    One of my favorite types of books is entrepreneur biographies. After reading The Everything Store: Jeff Bezos and the Age of Amazon, it drove it home to me that every entrepreneur’s style is different. There’s no one-size-fits-all. There’s no best personality type. Every entrepreneur approaches things differently and shapes the world to their style.

    While the styles are different, there are entrepreneur commonalities:

    • Persistence – Adversity and challenges are everywhere but they are especially prevalent when trying to change the world
    • Grand Ambitions – Perhaps it’s revisionist history but the stories present the entrepreneurs as having large dreams from the beginning
    • Willingness to be Misunderstood – When venturing out with a new idea most people don’t think much of it but entrepreneurs are happy to keep moving things forward even with others doubting
    • Amazing Timing – Timing is the most difficult but one of the most important things to get right

    Introverted or extraverted? It doesn’t matter. Micromanager or hands-off? It doesn’t matter. Entrepreneur commonalities are more about the big picture and less about specific personality styles.

    What else? What are some more entrepreneur commonalities?