David Cummings on Startups

Category: Entrepreneurship

  • 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?

  • 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?