David Cummings on Startups

Category: Entrepreneurship

  • Standard Term Sheet Terms from Recent Venture Investments

    The most recent Silicon Valley Venture Capital Survey by Fenwick & West LLP just came out for Q3 2012. In it, the authors provide a great snapshot of anonymous financing terms for 117 companies based in Silicon Valley that raised money in the third quarter of 2012. Now, these companies are based in Silicon Valley where terms are usually more entrepreneur friendly, on average, compared to other parts of the country where capital is more sparse.

    Here are some of the more interesting, high level notes taken from the report:

    • 61% of deals were up rounds compared to 22% flat and 17% down
    • Software continues to lead as the number one category with the most venture deals
    • 33% of deals had senior liquidation preferences
    • 17% of deals had multiple senior liquidation preferences
    • 33% of deals had participating preferred liquidation preferences
    • 11% of deals had cumulative dividends as a component
    • 97% of deals had weighted average anti-dilution provisions

    Overall, the report showed financings were happening on even better terms than I expected with the majority of deals being clean (e.g. no liquidation preferences, not participating preferred, etc) — it’s a great time to be in technology. Please read the report for more information.

    What else? What other interesting information did you take from the report?

  • The Road to a $1M Recurring Revenue SaaS Startup

    One of my personal goals is to help more Software-as-a-Service (SaaS) startups reach $1 million in annual recurring revenue while raising less than $1 million in money from investors. As part of that goal, it’s important to help paint the picture for what that looks like so that it’s more readily visualized by entrepreneurs. Sure, it’s easy to say sign up 83 customers paying $1,000/month and you’ll be there but the reality is that most SaaS startups can’t command $1,000/month per customer, especially in the early days.

    For Pardot, it took 2.3 years from start of the business to hit $1M in annual recurring revenue (ARR). We started at roughly $150/month on average per new customer and were up to $500/month on average per new customers by the time we achieved a seven figure run rate (side note, it took 4.7 years to hit $10M in recurring revenue, so the first million really is the hardest). Pardot was an exceptional experience and not normal.

    For most startups, I would expect three to fours years before getting to $1M in ARR, assuming the business is going well (with SaaS it’s fairly easy to see if a business is going to succeed based on how the recurring revenue layers on top of itself each year). So, if it takes four years to get to $1M recurring, and the goal is burn less than $1M all-time to get there, that only leaves $250k/year for the annual burn — much less than most startups that raise a full seed round burn (see Death to the $700k Seed Round).

    In the end, the moral of the story is to plan for a long, hard path to get to $1M in recurring revenue, and as part of achieving that milestone, be scrappier than anticipated by being more capital efficient and burning less than $1M in investor money.

    What else? What are some other thoughts about the road to $1M in recurring revenue for SaaS startups?

  • Things We Could Have Done Better at Pardot

    Continuing with yesterday’s post Key Moments in the Life of Pardot, it’s also important to address some of the things we could have done better. Over the course of five and a half years we had a number of opportunities, many for which the appropriate response was saying “no” (see the post Startups Should Say No to 99% of Partnership Opportunities).

    Here are some things we could have done better at Pardot:

    • At one point we went almost an entire year without adding a net new salesperson, while our business and market continued to grow super fast (we subsequently invested heavily in our sales team and sales recruiters)
    • Hosting costs grew significantly faster than revenue for a period of time before we realized that we needed to change our approach, which we addressed and brought inline after six months
    • When we hit our stride and started growing fast on an absolute and relative basis, we ramped up hiring slower than possible (it took us time to realize we should be hiring for all major positions, all the time so as to always be opportunistically hiring)
    • Our London expansion turned out well but needed much more money than we budgeted to be successful

    All issues were high class and great learning experiences. We never strove to be perfect, rather, we worked hard to make the best decisions possible based on the information available.

    What else? What are some learning experiences from your startup where you could have done things better?

  • Key Moments in the Life of Pardot

    One of my goals is to document what worked well, and didn’t work well, in the life of Pardot leading to our acquisition by ExactTarget. Looking back, there were a number of key moments and decisions that turned out great and really shaped the growth trajectory of the business.

    Of the thousands of big decisions in the first 5.5 years of Pardot, these were some of the most important (dates will be approximate but they are directionally correct):

    • December 2006 – Started brainstorming the idea with my co-founder and bought the domain name Pardot.com for $8
    • March 2007 – Co-founder and I started working full-time on the business with the original model being a pay per click bid arbitrage platform to generate leads from potential technology buyers and then sell them to technology vendors (like LendingTree for technology leads)
    • May 2007 – Pivoted into marketing automation software using most of the code we’d already written for the original product (we were already 60% of the way to a minimum respectable product) and built the product focused on serving the needs of a 25 person software company
    • June 2007 – Hired our amazing lead engineer that did an unbelievable job (he was a colleague I’d worked with before)
    • August 2007 – Soft launch of our product with a key partner that specialized in SEO and SEM
    • September 2007 – Hired an incredible sales leader that did everything we could hope for and more (he replied to our job posting for a junior sales rep on Craigslist even though he had 10 years of experience)
    • December 2007 – Signed our first customer, via a partner introduction, and we were off to the races
    • April 2008 – Raised prices from $65/user/month to $325/account/month to encourage more user adoption in the organization and to capture value based on other usage params (number and types of modules)
    • October 2008 – Signed our 100th customer and knew the business was going to be successful (roughly 1.5 years after starting)
    • January 2009 – Added email marketing to the native product functionality after religiously staying away from it (previously we’d connect with third-party email marketing tools to do email but were too limited in functionality)
    • July 2009 – Passed $1M in annual recurring revenue and decided it was time to raise venture capital so that we could significantly accelerate our growth (took 2.3 years to get to a $1M run rate)
    • November 2009 – Participated in our first Salesforce.com Dreamforce conference (startup sponsorship level with a modest kiosk for a booth)
    • December 2009 – Decided to not raise money after talking to 30+ VCs and doing five full partner pitches (sales really took off in Q4 2009 such that it didn’t make sense to raise money based on how fast we could grow organically)
    • March 2010 – Raised our prices to $1,000/account/month and included a free quick start services package to on board customers (this was a major game changer since we previous required a $2,500 quick start services package for new customers that created too much friction in the sales process)
    • April 2010 – Atlanta Business Chronicle named Pardot the #1 fastest growing technology company in Metro Atlanta with a 42,000% growth rate (it’s easy to grow fast on a relative basis when the first year’s revenues are almost $0)
    • June 2010 – Published our company book Think Outside the Inbox, which proved to be more successful than I ever expected
    • August 2010 – Participated in our second Salesforce.com Dreamforce conference as a silver sponsor, and, more importantly, at the end of the conference, committed to a $400,000 Dreamforce Platinum sponsorship for 2011, representing a full 50% of our 2011 marketing budget (huge risk but completely worth it)
    • December 2010 – Launched our London office through a joint venture
    • December 2010 – Passed $5M in annual recurring revenue
    • August 2011 – Participated in our third Salesforce.com Dreamforce conference as a platinum sponsor, with one of the best positions on the entire floor, and gave notice to the entire marketing automation market that we were a serious player with strong momentum
    • January 2012 – Passed $10M in annual recurring revenue
    • April 2012 – Atlanta Journal Constitution named Pardot the #1 place to work in Metro Atlanta
    • August 2012 – Inc. magazined named Pardot to the Inc. 500 as the 172nd fastest growing company in the United States
    • October 2012 – ExactTarget acquired Pardot

    Companies, like everything, have a story to tell and follow an arc that builds on previous experiences. Thousands of important moments occurred over the 5.5 years, with these being some of the most important.

  • Continuous Deployment in Startups

    Continuous deployment is a methodology whereby software code checked into a repository for a web application is automatically sent to the production server after all automated tests pass with no other human intervention. While not being an easy process to describe, it’s revolutionary in how it affects software development. The traditional software development process, even if agile, often involves bottlenecks around manual QA, a limited number of engineers empowered to push a release, and numerous issues when major changes are pushed.

    Here are some thoughts on continuous deployment:

    • Software releases go from big productions to non issues
    • Small changes result in small issues and large changes result in large issues (bugs are inevitable, so keep them small)
    • Automated testing becomes a critical part of the development process and no longer an after thought (there’s no right answer to how much code coverage is necessary other than it needs to be suitable to the product)
    • New developers should push code to production on their first day, setting the tone for a culture that moves quickly and isn’t afraid to make mistakes
    • Config flags are an important part of continuous deployment such that code that’s being worked on, but not ready to be seen by end users, is still pushed to production during development

    Software-as-a-Service, whereby programs are delivered over the internet, makes continuous deployment possible (continuous deployment doesn’t work for installed software). With time, continuous deployment will become more prominent, especially when firms like Etsy espouse its benefits.

    What else? What are your thoughts on continuous deployment in startups?

  • APIs and the Future of Web Apps

    Today’s TechCrunch piece entitled 3 Pillars Of The New Business World: APIs, Identity, and Data hits on several topics I’m passionate about. With the proliferation of Software-as-a-Service (SaaS) for line-of-business applications, there’s a huge opportunity to use APIs, as well as the exchanging of data, to the make businesses more efficient, and decision making more effective.

    Application Programming Interfaces (APIs) are a way for computers to talk to other computers in an automated fashion. As an example, all iPhone apps that interface with servers to get data or call functions are interfacing with APIs that are accessible over the web (e.g. checking your flight on the Delta mobile app). Just like mobile apps access web-based APIs, web-based applications access the APIs of the other web-based applications, providing more value to the customer. When a marketing automation system interfaces with a CRM, the marketing automation platform can automatically pull down CRM pipeline opportunity information and correlate it back to lead gen campaigns, providing a more complete picture of the return on investment for a dollar spent by marketing — APIs make that possible.

    An application talking to other applications is nothing new. Only now, with so many more applications being delivered over the web, the friction and difficulty of one app talking to another is significantly diminished as challenges with custom code and firewalls are no longer present. The future of web apps is more APIs and more data exchange, significantly enhancing the value of business software.

    What else? What are your thoughts on APIs and the future of web apps?

  • Founder/Idea Fit for Startups

    Product/market fit is a common startup concept relating to how well a product meets the needs of the market. There’s another kind of fit that deserves more discussion: founder/idea. Founder/idea fit is taking into account the passions and strengths of the co-founders and maximizing them in the context of the business idea. A founder with little interest or zeal for an idea, even though it’s the best one he could come up with, is more likely to fail than a founder that truly believes in something, even if the idea isn’t as good.

    Here are some ways to look at founder/idea fit:

    • Take the concepts from Strengths Finder and apply those to the founder in regards to the startup idea
    • Identify the things that you do for fun, regardless of getting paid, and see if the idea gets real value from them
    • Imagine yourself five years from now running the startup at a successful, sustainable scale — how happy do you see yourself?

    Founder/idea fit is a critical component of the startup equation and shouldn’t be underestimated. Some of the best advice I ever received was to figure out what I was good at, figure out what I truly enjoy, and figure out how to combine those to make a living — you’ll never work a day in your life.

    What else? What are your thoughts on founder/idea fit for startups?

  • Team Building in the Early Days of a New Startup

    Knowing that startups are all about people, people, people, it’s important to address team building in the early days of a new startup. Getting the right people on the bus is the first and foremost priority followed by building rapport and trust amongst the team members — the better the team works together, the better the results.

    Here are some team building ideas for the early days of a new startup:

    • Use daily check-ins to align focus and develop transparency
    • Simple things like breaking bread and grabbing lunch together on a regular basis goes a long ways
    • Get team members involved in the hiring decisions whenever possible and always focus on corporate culture fit
    • Work to understand each other’s personality styles and be open about how best to communicate internally

    People are what make a startup work, or not work, and should be taken very seriously. With the right people in place, the next step is getting the team operating at a high level — this takes time and is critically important.

    What else? What are some other ideas for team building in the early days of a new startup?

  • Startup Failures Lead to New Opportunities

    Failing at a startup is never fun. In fact, it’s often emotionally draining and frustrating. Fortunately, for many entrepreneurs I’ve talked to, myself included, failing at a startup always results in amazing learnings. When a startup fails there’s often so much more to learn because a number of tactics were tried and didn’t work. When a startup succeeds and does really well, it’s easy to believe that most of the decisions were right without necessarily learning many hard lessons.

    After an entrepreneur fails, often some of the best opportunities emerge, including joining a new startup. Here are some observations about entrepreneurs that have decided to move on to the next venture:

    • After a failure, it’s easier to judge what type of team and market you want to be part of for the next venture
    • Failure creates more humility and hunger for the next go around
    • Often what not to do is easier to define than what to do
    • Failure tests whether you really like the startup world or would prefer a different type of environment

    Startup failures are a healthy part of the ecosystem, especially when the entrepreneurs reflect on what worked, and didn’t work, and talent is recycled into the next wave of ventures.

    What else? What are some other reasons startup failures lead to new opportunities?

  • How Does Life Change After a Nice Exit

    Recently I was talking to a friend and he posed the question, “how does life change after a nice exit?” After thinking about it for a second, I quickly replied that things really aren’t any different. This amazing, life-changing event happens and things continue as normal, as would be expected.

    Here are some things that do change after a nice exit:

    • More people ask you to join their non-profit board, be a startup advisor, give advice, etc
    • Local entrepreneur-related organizations ask you to speak (you’re the cool new kid at the party)
    • Private wealth managers and investment advisors aggressively seek to manage your money with many different ideas on how to invest it
    • Friends, family, and acquaintances realize that this crazy entrepreneur (you) really was on to something and wasn’t just toiling away alone in the basement (things seem so much more legitimate when there’s a large dollar exit attached to it)
    • Earning money, for the purposes of making ends meet and having a nice lifestyle, no longer becomes something on the to do list, resulting in more thinking about how to make an impact in your field/community and leave a legacy

    In the end, life is about the journey, relationships, higher purpose, and the all the little things. Like a big canvas with only a tiny picture drawn, a nice exit is just an opportunity to continue fleshing out the art.

    What else? What are some other ways life changes after a nice exit?