David Cummings on Startups

Category: Entrepreneurship

  • I have a Big Problem to Solve, Not I have an Idea

    Earlier this week I was on a panel with Dr. Paul Judge at a Google-sponsored event titled Georgia’s Digital Economy. The moderator asked a question about evaluating startup ideas and Paul responded with a great answer:

    I don’t want an entrepreneur to come to me and say “I have a great idea.” I want the entrepreneur to come to me and say “I have a big problem to solve.”

    Too often, entrepreneurs get caught up in having a big idea, but there isn’t a big problem to go with it. The next time an entrepreneur tells you they have an idea, tell them you want to hear about a big problem instead.

    What else? What are your thoughts on having a big problem to solve instead of an idea?

  • Startup Earnings or Winnings

    Last month a friend asked me what types of projects I was working on besides the Atlanta Tech Village with my winnings. Hmm, I thought, not saying it out loud, but isn’t the cash from selling a company more earnings instead winnings? Luck is an important part, but so is hard work and timing. Thinking about it some more, I have a few thoughts:

    • Winning the lottery is much more in the luck and randomness category, but to win you still have to put yourself out there and play the game
    • Working without a salary, or at a greatly reduced salary compared to market rate (sweat equity), is one of the many sacrifices to build a successful startup, making money gained from an exit that much more earned
    • Calling it earnings makes it that much more sweet as there’s a sense of making something great that the world chooses to buy, and then seeing the resulting value created

    Does it matter whether it’s called earnings or winnings? No. As an entrepreneur what do I prefer? Earnings.

    What else? What are your thoughts on startup earnings or winnings when describing a good monetary outcome?

  • Thinking About Long Term Profit Margins

    People like talking about enterprise software and Software-as-a-Service (SaaS) valuation multiples. Often, these valuations are presented in the context of a revenue multiple, as revenue is easier to track and more readily shared. In reality, these valuation multiples are driven by growth rate and expected profit margins. The startup phase is all about maximizing growth, but at some point growth stops and there becomes a focus on profitability.

    Here are some thoughts on long term profitability:

    • Greg Crabtree, author of Simple Numbers, Straight Talk, says that a 5% margin is OK, 10% is great, and 15% is amazing (this is for businesses in general and not necessarily tech companies)
    • Mark Suster’s recent post Why The Media Has Been Wrong About YouTube Networks, says the multi-channel network business should be able to achieve profit margins of 50-60%
    • SolarWinds, a publicly-traded software company that is unusually profitable, had a 40% operating margin for last quarter (Google Finance source)

    When thinking about valuations, profitability needs to be one of the top considerations, especially if the business is past the startup phase.

    What else? What are your thoughts on long term profit margins?

  • SaaS Business Apps with a Paid Mobile Client

    Last week I was searching the App Store for an unrelated item and I came across the listing for the HotSchedules iOS app. Now, I normally wouldn’t pay any attention but HotSchedules, with their office in Austin, TX, is actually owned by Red Book Connect, which is based in Atlanta. More importantly, I saw a price tag of $2.99 to buy the app, which really surprised me. Why the surprise? HotSchedules is a B2B Software-as-a-Service app for scheduling hourly workers (e.g. restaurant employees, retail staff, etc) — I’ve never seen a SaaS business app with a paid mobile client.

    It got me thinking about why they chose to charge for it. Here are a few ideas:

    • With an extremely large number of end-users forced to use the software, HotSchedules sees it as an additional, meaningful revenue stream (web based access to the product is free)
    • HotSchedule’s end-users, which are hourly workers, change jobs frequently and are likely to only use their app briefly, making support costs higher, and thus this could be a way to offset some of those costs
    • HotSchedules is in a competitive industry with foes like PeopleMatter and SnagAJob.com, providing more pricing pressure on the core product, such that if they can offer the main application at a lower price, they can capture more market share and make up the revenue via end-users

    I don’t believe paid mobile clients for B2B SaaS app will ever be the norm, but it’s interesting to know that there are examples out there and that companies are trying it.

    What else? What are your thoughts on SaaS business apps with a paid mobile client?

  • Entrepreneurship and the Sense of Adventure

    Recently I was talking to a soon-to-be-entrepreneur about his idea. After hearing the idea, I tried to peel back some of the layers. I asked the standard question, “why do you want to be an entrepreneur?” He provided an answer I hadn’t heard before:

    I want to be an entrepreneur for the sense of adventure.

    Normally, the entrepreneur response is that they want to scratch an itch, control their own destiny, change the world, or make more money. But, being an entrepreneur for the sense of adventure? I like it. Just like the Kon-Tiki story (with the recent movie) inspired a generation to challenge long-held beliefs and seek out adventure, entrepreneurship accomplishes a similar goal. So, add sense of adventure as another reason to be an entrepreneur.

    What else? What are your thoughts on desiring a sense of adventure as a reason for being an entrepreneur?

  • Does Providing Entrepreneurs with Accelerators and Office Space Help or Hurt?

    One of the questions I’ve heard several times about the Atlanta Tech Village and the Atlanta Ventures Accelerator is “does coddling entrepreneurs with an accelerator program and office space make things too easy?” Part of the question stems from the historical rite of passage entrepreneurs had to go through spending dozens of hours on office space, furniture, and internet access combined with the effort to find a community of like-minded entrepreneurs, educational programs, and screened mentors.

    On the positive side, it’s clear that the instant community and physical infrastructure adds tremendous value. Entrepreneurs get to focus their time and energy on building their company with minimal administrative overhead, can walk down the hall to get expert feedback on an issue, and gain a serious edge when recruiting talent.

    On the negative side, there’s an increased chance that entrepreneurs who aren’t as motivated and resourceful will be able to coast in an environment that is fun and feels great without making any substantial progress. Yes, that can happen anywhere, but the support and community in a high density startup cluster softens the frustration of not having startup success as the human desire to be a part of tribe is being met.

    Overall, having a great startup center with a cohort of entrepreneurs significantly outweighs the downside of things being too cushy and some entrepreneurs just coasting.

    What else? What are your thoughts on whether or not providing entrepreneurs with accelerators and office space helps or hurts?

  • The Three Stages of Evolution for SaaS Markets

    After watching the email marketing world for over a decade now, I’ve come to identify three stages of market evolution. These stages are applicable to other Software-as-a-Service (SaaS) markets as well but email marketing is uniquely suited since the market grew up with the Internet and didn’t have an installed software background like others (e.g. accounting software).

    Here are the three stages of evolution for SaaS markets:

    1. Broad, enterprise-strength products. Think Responsys where you have a high-end, infinitely flexible product that’s a private Oracle database instance combined with a powerful front-end. The product does its job well and is very complex.
    2. Turn-key, fairly easy to use products. Think Mailchimp where you have an affordable, straightforward product that’s a magnitude less expensive than the incumbents while still meeting the needs of most businesses.
    3. Vertical-specific, specialized products. Think Sailthru where you have a product that is tailored for the publishing industry with a heavy emphasis on personalization and delivering content to users based on their previous engagement.

    This evolution makes sense as the early startups invent the market and thus go to the large companies, which are willing to pay the most money for the technology. After the market is more defined and well understood, new entrants emerge and take advantage of technological enhancements that have gone on in parallel (e.g. open source, processing power, cloud computing, etc) to deliver a similar service with a better experience at a lower price. Finally, with the generic technology mainstream, in this example email marketing, nuances and applications that are vertical specific get applied to add even more value in a more specialized segment of the market.

    SaaS markets for many applications beyond email marketing are maturing and I believe we’ll see more vertical-specific applications as a result.

    What else? What are your thoughts on the three stages of evolution for SaaS markets?

  • Startups are a Reflection of the Founders

    We like to think of startups as independent entities out to change the world. In reality, startups are a reflection of the founders and their personal styles, goals, and desires. As the founders go, so go the startups.

    Vision, mission, and values are three areas the founders most influence, as defined by Wikipedia in their strategic planning article:

    • Vision – Outlines what the organization wants to be, or how it wants the world in which it operates to be. It is a long-term view and concentrates on the future.
    • Mission – Defines the fundamental purpose of an organization or an enterprise, succinctly describing why it exists and what it does to achieve its vision.
    • Values – Beliefs that are shared among the stakeholders of an organization. Values drive an organization’s culture and priorities and provide a framework in which decisions are made.

    One of the most visible reflections of the founders is the office space and environment. As soon as you step into an office, you have a good feel for the type of people and organization — it’s a reflection of the founders. Startups are a collection of people and a reflection of the founders.

    What else? What are your thoughts that startups are a reflection of the founders?

  • Sugar High with One-Time Sales

    A few weeks ago I was talking to an entrepreneur that has a couple different product lines with one product being installed software and the other product being Software-as-a-Service (SaaS). Naturally, the strategic focus is on the SaaS product but the installed product is still doing well replacing more expensive incumbents. The entrepreneur then said something that really stuck with me:

    A one-time sale is a sugar high for the business.

    Think about it for a minute. Selling an installed product that has a one-time fee is great for short-term revenue but, like a sugar high, it’s only temporary. The following year you have to sell the same amount as the previous year just to get back to the same level of annual revenue. Now, with recurring revenue, each new customer adds more revenue that layers on to the existing revenue making it much easier to grow and making cash flow more predictable (assuming a sticky product with a high renewal rate).

    Businesses with one-time sales aren’t bad, but, if possible, recurring revenue is a much more desirable business model.

    What else? What are your thoughts on the saying that a one-time sale is a sugar high for the business?

  • Atlanta Tech Village as a Sales and Recruiting Tool

    Last week I was talking to a sales executive at the Atlanta Tech Village. He works for one of the startups in the Village and we were talking about how things are going. After hearing about a big deal he’s working on, he volunteered something I wasn’t expecting: the Village is a sales tool whereby if the prospect is local, he’ll invite them to a Startup Chowdown. Pretty sweet.

    Startups are always looking for an edge, especially when it comes to signing customers. With little brand recognition for the startup, sales reps seek to associate with other brands through social proof by referencing recognizable customers or mentioning something that might pique a prospect’s interest, in this case the Village if they are local.

    Later in the week I was talking to another startup that was in the process of hiring a couple new people. After catching up on progress, I heard again how bringing a potential new hire to the Startup Chowdown was a great recruiting tool as it gives the candidate a taste of the energy in the building and gets them excited about being part of the startup community. There’s a real war for talent going on and having an edge makes a big difference.

    Startups are closing more deals. Check. Startups are recruiting great talent. Check. These are great benefits of being in a startup campus that aren’t appreciated until you hear about the results.

    What else? What are your thoughts on the Atlanta Tech Village as a sales and recruiting tool?