David Cummings on Startups

Category: Entrepreneurship

  • Credit Lines for Software-as-a-Service Startups

    Now that Software-as-a-Service (SaaS) is mainstream and seemingly billion dollar acquisitions occur on a monthly basis (see Responsys to be acquired by Oracle for $1.5 billion from last week), it’s important to discuss the line of credit options available for these types of businesses. See, most entrepreneurs won’t qualify for a line of credit unless they have personal assets to guarantee the loan (e.g. if you want to borrow $100,000 be prepared to have $80,000 in deposits, real estate, etc. to put up as collateral). SaaS, due to recurring revenue, high gross margin, and the predictable nature of the model makes for a unique business that’s well suited to loaning money based on recurring revenue (even absent free cash flow).

    Here are a few thoughts on credit lines for SaaS startups:

    • Credit lines are often based on a multiple of monthly recurring revenue (e.g. 3x) and annualized renewal rate (e.g. 80%) — an example is doing $500k/month in recurring revenue ($6 million annual run rate) with an 80% renewal rate results in a line of credit of $1.5 million * .8 = $1.2 million
    • Covenants are always required, typically around customer renewal rates (e.g. 70%+ annually), growth rates (20%+ annually), gross margins (70%+), and cash collected over the past 90 days (70% of the line of credit)
    • Banks and other lenders want some level of scale to do a deal (e.g. must qualify for at least a $500,000 line of credit as they don’t want to do smaller lines due to the lender’s business model)
    • Square 1 Bank and Silicon Valley Bank both have great programs for SaaS companies
    • Firms like SaaS Capital are emerging that offer smaller lines of credit as well as lines that aren’t as restricted as banks (but have a correspondingly higher interest rate)

    Pardot was a major beneficiary of a credit line from Silicon Valley Bank and it allowed us to significantly invest ahead of growth. Once a SaaS startup achieves enough scale to qualify for a line of credit, it’s one of the best ways to finance the business.

    What else? What are some other thoughts on credit lines for Software-as-a-Service startups?

  • The Angel Investor Dilemma

    If you ask a successful tech entrepreneur if they’ve made any angel investments, more often than not the answer is yes. Only, if you follow up that question with “have you made money”, the answer is almost always the same: no. Yet, many are still interested in angel investing as they see value in their existing investments, want to help entrepreneurs, and, of course, want to make out-sized returns.

    I’ve found that after successful tech entrepreneurs scratch the itch of making a few angel investments, they don’t make any more investments even though they are casually interested in doing so. After probing why they haven’t made more investments, it always comes down to one main reason: they haven’t made any cash on the existing investments because they haven’t had any exits and the existing investments are illiquid.

    Angel investments often take 7+ years to see a return, if any comes at all. So, after making a few investments, and not having any liquidity for a few years, angel investors get cold feet and don’t write more checks. Add in challenges like having to invest more money to maintain ownership positions for future financings (assuming pro-rata rights are respected by subsequent investors) combined with continued uncertainty about the outcome, and it’s clear that angel investing is much less glamorous than it appears.

    Angel investors have a dilemma in that there’s no cash flow and an extended horizon to see any return, as well as no liquidity. Yet, there’s such great potential, both to help an entrepreneur and make a difference. Angel investing is difficult, very difficult.

    What else? What are your thoughts on the angel investor dilemma of an illiquid financial model with a long-term horizon combined with the opportunity to help entrepreneurs change the world?

  • Updated SaaS KPIs Dashboard for Startups

    Christoph Janz, the VC that put together an awesome SaaS KPI dashboard, has an updated version available (I previously adapted it for SaaS startups with an inside sales team). This enhanced model now includes different pricing tiers and annual plans as well as more charts for analysis.

    Here are the charts in the SaaS KPI dashboard Excel file:

    • Visitors & Signups
    • Signups & Paying Customers
    • Conversion Rate By Plan
    • New MRR
    • Total MRR
    • Upgrade, Downgrade & Churn MRR
    • Customers by Plan
    • MRR by Plan
    • Churn
    • Annual Subscriptions
    • ARPA
    • M/M Growth Rate
    • Cost of Customer Acquisition
    • Time to Recover CAC
    • Cash

    Every SaaS entrepreneur should use this model, or a variation of it, when managing their business. It’s the best one on the market.

    What else? What are some other thoughts on the updated SaaS KPIs dashboard for startups?

  • Startup Trends for Entrepreneurs

    There’s never been a better time to be an entrepreneur, and it’s only getting better. Technological change in society is growing at a faster rate due to the proliferation of smart phones, the power of cloud computing, and the connectedness of society. Now, it’s 10x cheaper to build a minimum viable product compared to a decade ago and there are many more tech opportunities available.

    Here are a few startup trends on the horizon for entrepreneurs:

    • Talent War – Technology has such great economies of scale that it magnifies the value of smart people who get things done, and that demand is only going to increase
    • Changing Workplace – Millennials seek an environment that encourages autonomy, mastery, and purpose along with a focus on results, not being in the office from 9-5
    • More Outsourcing – With continued technological enhancements comes more ability to outsource non-core work and more items available as a service (even office space as a service)
    • Emphasis on Design – No longer is it good enough for the product to just work — now people look for it to work in an intuitive and beautiful manner

    More opportunities results in more competitors, but overall it’s a great time to be an entrepreneur. With these trends, and more, look for continued entrepreneurial opportunities.

    What else? What are your thoughts on startup trends for entrepreneurs?

  • Entrepreneurs are Patient and Impatient

    One of the more common refrains I hear from entrepreneurs with a working product is that sales aren’t where they had hoped. Peeling back the layers, the real issue is that entrepreneurs are impatient and want to see results immediately.

    Now, on the other hand, entrepreneurs are patient in that it takes a tremendous amount of time to see a pay-off for all the risk, if they have any success at all. It takes years to get a business off the ground and in a position that’s sustainable and predictable. But, of course, during the process of building a business, most entrepreneurs are super impatient. Here are common issues:

    The product is taking too long to build.

    The suppliers are too slow.

    The sales people can’t close deals fast enough.

    The potential investors take too long to make a decision.

    Impatient, impatient, impatient.

    Being impatient is a healthy attribute as it’s correlated with pushing hard and constantly seeking results. Overall, it takes a unique person that’s patient with a long-term horizon and impatient with short-term results. Entrepreneurs are an unusual breed.

    What else? What are your thoughts on entrepreneurs being both patient and impatient?

  • Thinking About Annual Planning in a Startup

    With the end of the calendar year upon us, it’s time for the annual ritual entrepreneurs love: planning. Why do entrepreneurs love planning? Easy, because it’s an opportunity to dream about the future. Entrepreneurs love scheming up the next big thing.

    Here are a few ideas about startup annual planning:

    Annual planning is an important part of every startup and shouldn’t be overlooked.

    What else? What are some more thoughts on annual planning in a startup?

  • Forcing Sales Without Product / Market Fit

    Over the years, I’ve seen startups raise significant amounts of money from investors and plow it into sales and marketing. Only, many times this is prior to product / market fit — I call it forcing sales. The reason it’s forcing sales is that the product doesn’t meet the needs of the market (yet) and good sales and marketing can sell an inferior product.

    What’s the tell tale sign sales are being forced?

    Answer: high churn rates.

    Now, some products, due to the nature of what they do, are prone to high churn rates (think of things that are one-off or temporary). But, products that are designed to be used indefinitely, as long as they are providing real value, shouldn’t have high churn rates (annual renewal rates in the 75 – 90% range are normal with 90%+ renewal rates being exceptional).

    So, if you hear of extremely high churn rates, peel back the layers and see if sales are being forced without product / market fit.

    What else? What are your thoughts on forcing sales without product / market fit?

  • Thinking About Early Employee Equity in a Startup

    An important part of the startup ethos is equity and having an owner’s mentality, especially for early employees. Naturally, co-founders have a good chunk of equity along with investors, advisors, and employees. Early employees will often have equity in the range of .1% – 1%, depending on the role, experience level, and salary (executives and key hires often have larger percentages of equity depending on the stage of the startup).

    Here are a few thoughts on early employee equity in a startup:

    • Vesting of equity is common with it being either time-based (e.g. vesting over four years) or performance-based (e.g. vesting based on hitting milestones)
    • Salary and equity should have an inverse relationship with market-rate salaries having less equity and below-market salaries having more equity
    • Tempering expectations as to getting rich off early employee equity is important – I like to present it as if we do well, it’ll pay for a new car; if we do great, it’ll pay for a new house; and if we are a once-in-a-generation company, it’ll pay for a new life
    • Cash compensation should cover minimum lifestyle expenses, if possible, otherwise the added stress of not making ends meet can derail the focus on making the startup successful
    • Ownership percentages aren’t static – raising money from investors as well as issuing more stock options will result in dilution, which is a normal part of growing a business

    Equity is an important and sometimes challenging topic. Early employees in a startup would do well to further research it and have a conversation with the founders of their startup.

    What else? What are some other thoughts on early employee equity in a startup?

  • Differences as an Entrepreneur on the Next Venture

    Life as a first-time entrepreneur is well documented. Naturally, things change on the next entrepreneurial venture, especially when the first time goes well. Here are a few differences as an entrepreneur on the next venture:

    • Culture – Eventually entrepreneurs arrive at the understanding that people trump all other opportunities and challenges in a startup, making a focus on culture from the beginning more commonplace
    • Hiring – People want to be part of a team with proven success, making the recruiting process easier
    • Rhythm, Data, and Priorities – Whether it’s Mastering the Rockefeller Habits, or some other methodology, the second time around is easier due to having an established management process
    • Capital – Raising money is much easier after having a successful exit and investment terms are more entrepreneur friendly

    Finding product / market fit, building a customer acquisition machine, and scaling the business are still extremely difficult, regardless of being a first-time or tenth-time entrepreneur. Startups are hard, but having gone through it before makes entrepreneurs on their next venture more confident and more likely to not make the same mistakes.

    What else? What are some other differences as an entrepreneur on the next venture?

  • 2 Action Items Going from Doer to Leader

    Last week an entrepreneur emailed me for advice on going from doer to leader. His startup is doing well and now has several employees for the first time. Only, he’s being pulled in many directions and knows he needs to start the slow process of spending a more time on the business and less time in the business.

    I quickly responded that there are two immediate action items to start going from doer to leader:

    So, join a group of other people that are interested in improving their leadership abilities and implement rhythm, data, and priorities to establish a foundation for the business to scale.

    What else? What are some other recommendations for entrepreneurs going from doer to leader?