David Cummings on Startups

Category: Entrepreneurship

  • How Much Traction Does a Startup Need to Raise Angel Money

    500 Startups has a great checklist for investing in startups that includes items like capital-efficient, internet-based distribution, simple revenue model, functional prototype, small but measurable usage, and more. One area that’s vague but super important is around the small but measurable product usage or early revenue, otherwise known as traction.

    In most of the country, startups need to have some level of traction to raise money unless it’s an entrepreneur that’s been successful before. Here are some thoughts on the amount of traction needed to raise angel money:

    • Valuations of $1 million – $1.5 million pre-money are pretty standard when startups have $25,000 – $100,000 in annual recurring revenue
    • Valuations start to move up once the startup has $250,000+ in recurring revenue
    • After $1MM in recurring revenue is achieved, valuations move up significantly (e.g. $5MM – $8MM pre-money) as the venture is often getting close to a repeatable customer acquisition process and the business is viewed as less risky

    Most startups I meet with are pre-revenue and in a difficult spot because angel investors want to see some traction, even if it’s modest, before investing. Entrepreneurs would do well to have a fair amount of recurring revenue to raise money on good terms.

    What else? What are your thoughts on the amount of traction a startup needs to raise angel money?

  • How big does a startup’s market need to be to make sense?

    Recently I was talking to an entrepreneur and he was sharing his new idea. Now, the idea was sound and made sense but it immediately struck me as too small a market. There’s no perfect method to determining the size of a market opportunity but there’s plenty of information available.

    Here’s how I like to think through if a market is large enough to go after:

    So, it doesn’t need to be a billion dollar business but it does need to be large enough to build a sustainable, successful business in a reasonable amount of time.

    What else? How big does a startup’s market need to be to make sense?

  • 4 Different Angel Investing Strategies

    Over the past few months I’ve asked a number of angel investors about their experience and strategies when it comes to angel investing. As expected, there are a variety of different approaches and outcomes. Most angels say they’ve made money angel investing, when leads me to believe there’s some survivorship bias as well as returns included from companies they’ve operated.

    Here are four of the most common angel investing strategies I’ve encountered:

    • Domain Expertise – looks for startups in a field related to personal background and areas of previous experience
    • Bet on Previous Winners – focuses exclusively on investing in entrepreneurs that have already been successful
    • Small Bets and Double Down – invests the minimum amount in a large number of startups and then invests significantly more in the winners
    • Follow the Leader – takes the lead from another angel investor and follows him/her in investing

    I don’t have much experience with this yet but I’m looking forward to learning more and getting a better understanding of each strategy.

    What else? What are some other angel investing strategies?

  • Choose the Right Medium for the Communication

    One leadership lesson that took me entirely too long to learn was that different communications require different mediums. The idea is that communication mediums like face-to-face, video chat, phone, and email make it easy to share words but the context and nuance varies wildly. As an example, if people are upset or any sort of miscommunication is going on, face-to-face is significantly better than email or text message.

    Let’s look at some of the different mediums and communication circumstances:

    • Face-to-face – Best for anything emotional (good or bad), alignment-oriented, or difficult
    • Video chat – Not as good as face-to-face but still auditory and visual, especially for staying connected to someone in a different physical location
    • Phone – For exchange and dialogue on a complicated subject as well as times when emotion and relationship are an important part of the equation
    • Email – Simple, fast, and effective for basic information exchange, tasks, and clarification

    Chat and text message are similar to email in that they’re digital but have a greater sense of immediacy and two-way communication about them. Regardless, it’s important to choose the right medium for the communication.

    What else? What are your thoughts on choosing the right medium for the communication?

  • 5 Goals for the Atlanta Tech Village

    Several people have said it’s cool that we’re building the Atlanta Tech Village and have wondered aloud if it’ll really make a difference. Immediately, I always reply with an emphatic “yes” that we’ll make a difference, a massive difference in Atlanta and the Southeast. After talking about the Atlanta Tech Village Mission, Vision, and Core Values, it’s time to talk about some of our goals.

    Here are five initial goals for the Atlanta Tech Village:

    • Help spawn 10,000 new high-paying jobs in Atlanta in 10 years (by 2022)
    • Have 600+ members from 150+ companies and a waiting list by the end of 2014
    • Facilitate over 100 events per year starting in 2014
    • Originate three companies per year that become successful businesses (my definition of a successful business)
    • See member companies raise more than $10 million per year from angels and venture capitalists

    I’m sure these goals will change over time but we feel they’re the right balance of being ambitious while still being attainable.

    What else? What are your thoughts on the five goals for the Atlanta Tech Village?

  • What makes a successful entrepreneur?

    Recently I was talking to an entrepreneur-turned-investor and he asked me the question “what makes a successful entrepreneur?” After thinking about it for a minute, several characteristics came to mind.

    Here are a few things that make for a successful entrepreneur:

    • Extreme resourcefulness
    • Strong work ethic
    • Excellent team building
    • Clear vision

    Did I include money or book smarts as a pre-requisite for a successful entrepreneur? Nope. Those things can help, but it’s much more important to have the four characteristics listed above.

    What else? What other some other items that make a successful entrepreneur?

  • Separating Angel Investing Returns from Operating Angel Investing Returns

    One of the questions I’ve been asking angel investors lately is “how confident are you that an angel investor can make money investing in tech startups?” Unequivocally, every one says they are confident angel investors can make money. I then probe deeper and ask if their investment returns include money they put into their personal companies, that is investments they made in businesses they operated or invested significant sweat equity. Each one said yes.

    Now, being an angel investor doesn’t strictly mean being a true passive investor. What it does mean is that not all angel investor returns are equal. Many angel investors credit the returns generated from their own personal businesses as angel investor returns, which they are, but not in the way everyone thinks about passive investing returns. The next time you’re talking to an angel investor, ask them about their track record and level of success investing with their own personal companies removed from the equation. This provides a clearer picture and often removes outliers.

    What else? What are your thoughts on separating angel investing returns from personal operating business angel investing returns?

  • Informational, Feedback, Progress, or Pitch Meeting with Entrepreneurs

    Over the years I’ve talked with hundreds of entrepreneurs about their startup. Conversations are all over the place, based on whatever the entrepreneur is looking to accomplish. One of the things I appreciate is when entrepreneurs take the time to prepare questions in advance to get the most out of the meeting. Even better is preparing questions and setting expectations for the type of meeting desired.

    Here are some of the most common meetings with startups:

    • Informational – mostly a meet and greet sharing backgrounds, areas of interest, and the current state of the union
    • Feedback – the entrepreneur has a specific idea/issue/challenge and they want to get a second opinion or guidance on it
    • Progress – this meeting occurs after one of more meetings previous meetings and the entrepreneur provides updates on goals, what’s new, etc
    • Pitch – here the entrepreneur is pitching to raise money directly or to get introduced to other investors

    The next time an entrepreneur asks for a meeting, clarify in advance the type of meeting to make things more productive and useful.

    What else? What are some other types of entrepreneur meetings about startups?

  • Saying No to Product Feedback Requests

    Several years ago an entrepreneur was evaluating marketing automation software and asked me about Pardot. After a web demo and several calls with a sales rep, he ultimately chose a competitor’s product. Upon selection, he reached out to me to see if I wanted to do a 30 minute phone call so he could tell me why he chose the other product and provide feedback. I politely declined his request over email and passed on doing the call. He was put off when I declined what he viewed as a favor. Here are a few reasons why I said no to product feedback:

    • He wasn’t our normal buyer profile
    • Our product management and engineering teams had their plates full and were doing great work
    • Product feedback channels were open and healthy
    • My time was better spent elsewhere

    It’s hard to say ‘no’ to someone that’s clearly trying to help you, yet it’s the right thing to do. You have to say ‘no’ to most things to be able to say ‘yes’ to the important things.

    What else? What are your thoughts on saying ‘no’ to product feedback requests?

  • The Best Startups Come From Solving Problems You Can’t Get Out of Your Mind

    A number of people have asked me why I’m working on the Atlanta Tech Village when I could be taking time off and relaxing on the beach. Beyond the amazing opportunity to build something that will have an unbelievable impact on Atlanta and the Southeast, there’s another strong reason: I simply had to do it. Literally, for 12 years straight, I’ve battled the traditional commercial real estate world (#1 startup tip for commercial real estate) playing all sorts of games to make it work for a series of software companies with little visibility into just how fast we’d grow and how much space we needed to take (at one point we had 40 people and needed 14,000 square feet of space but went ahead and took 20,000 square feet because it was a good deal and we had an outside chance of needing it all, which proved to be correct).

    Historically, it didn’t make sense for me to invest in real estate as my company was growing and eating tons of cash. Real estate is capital intensive, and my taste (a desire for Class A- space), makes it an expensive proposition to build something that really excites me. I knew that I wanted to solve the office space challenge for tech companies and startups for years but I never did anything about it because the timing wasn’t right. It’s a problem that I couldn’t get out of my mind — it never went away. Now, I can help build a solution that is perfect for companies between 1 and 25 people that don’t have good visibility into their staffing levels as well as have a desire to be part of a community full of cool people doing cool things. My itching needed scratching and I’m all in.

    The best startups come from solving problems you can’t get out of your mind.

    What’s on your mind?