David Cummings on Startups

Category: Entrepreneurship

  • Being the Pretty Startup at the Party

    The startup community is great because it’s both tight-nit and inviting. Every year a handful of startups break out of the noise and become the pretty startup at the party with heaps of attention pilled on. It’s an amazing feeling to be recognized, especially after all the hard work necessary to get things off the ground.

    As an entrepreneur there are a few things to remember when you hit the limelight:

    • External validation is great for PR and should magnified through social media, SEO, etc
    • Winning an award does not equal more revenue from customers
    • Requests for your time for coffees, lunches, etc will go up and can take away your most precious asset — time
    • Don’t get a false sense of progress from recognition when happy customers are the true measure

    Being the pretty startup at the party is great fun but be cognizant of the demands on time and what’s truly necessary to be successful.

    What else? What are your thoughts on being the pretty startup at the party?

  • A Startup’s Purpose

    In the book Drive: The surprising truth about what motivates us by Daniel Pink he talks about the three most important areas necessary to maximize success with knowledge workers: autonomy, mastery, and purpose. Autonomy and mastery are straightforward to promote in a startup whereas purpose is more complicated. Sure, the purpose might be to create great XZY software but I don’t think that’s inspiring to team members outside engineering.

    A startup’s purpose is much more powerful when it involves improving society or making an impact beyond a profit. Here’s Starbuck’s purpose:

    To inspire and nurture the human spirit – one person, one cup, and one neighborhood at a time.

    A startup’s purpose doesn’t have to be as grandiose. For us we have a simple one: provide a platform for good work, good people, and good pay. Our purpose is centered more around being a great place to work and a great place to be a customer with corporate culture as the driving force.

    Spend time on your startup’s purpose and make it relevant and motivating.

    What else? What are your thoughts on a startup’s purpose?

  • ExactTarget in the 8x Revenue Club

    ExactTarget had a very successful IPO last week pricing above it’s expected range and then promptly gaining 32% in value the first day. ExactTarget is one of the most impressive SaaS companies due to their strong corporate culture (Orange Culture), growth rate north of 40% at scale, and headquarters in Indianapolis (outside the Silicon Valley echo chamber). It’s a small group of Software-as-a-Service companies that have had successful IPOs and the market has rewarded them handsomely in terms of valuations (SaaS IPOs are sexy article).

    Based on today’s stock price of $26.32 for ET, the company is valued at $1.7 billion. At a little more than $200 million in recurring revenue that puts them in the 8x revenue club (the company is valued at more than eight times their revenue, which is extremely high). Bill Gurley, a famous venture capitalist and long time blogger, has a great post All Revenue is Not Created Equal: The Keys to the 10x Revenue Club where he talks about factors that contribute to extremely high multiples of revenue (think LinkedIn, OpenTable, etc).

    Here are the factors Bill Gurley lists:

    1. Sustainable Competitive Advantage (Warren Buffet’s Moat)
    2. The Presence of Network Effects
    3. Visibility/Predictability are Highly Valued
    4. Customer Lock-In/High Switching Costs
    5. Gross Margin Levels
    6. Marginal Profitability Calculation
    7. Customer Concentration
    8. Major Partner Dependencies
    9. Organic Demand vs. Heavy Marketing Spend
    10. Growth

    ExactTarget has most the factors including #2 (The Presence of Network Effects), #3 (Visibility/Predictability are Highly Valued), #4 (Customer Lock-In/High Switching Costs), #5 (Gross Margin Levels), #6 (Marginal Profitability Calculation), #7 (Customer Concentration), #8 (Major Partner Dependencies), and #10 (Growth). A sustainable competitive advantage is there but not as obvious as lower cost providers continue to proliferate. In addition, there isn’t organic demand but rather very heavy marketing spend ($30 million in losses last year due to sales and marketing). With eight of the 10 factors readily identifiable, and the stock trading at 8x revenue, it’s squarely in the 8x revenue club.

    What else? What are your thoughts on ExactTarget in the 8x revenue club?

  • Sales – Percent Relationship and Percent Product

    People buy from people they like — we all know that old adage. All too often people purchase inferior products even after reviewing the superior product. Yes, there are reasons like price, functionality, implementation timeframe, etc that drive purchasing decisions but people underestimate the importance of the relationship in the sale.

    My guess is that the relationship with the prospect is 70% of winning the deal and the product details (features, price, etc) is 30% of winning the deal. The relationship really is that important. Some companies win a number of deals because their brand and marketing muscle open the door for relationships to begin. Companies that are market leaders get 10-100x more publicity than the second place vendor, and thus get in the door even more.

    The next time you win or lose a sale ask yourself how you did on the relationship building side of the equation. Was it better or worse than you had hoped? How important was the relationship in winning the deal? Almost always when I talk to sales people that just lost a deal they down play the importance of the relationship.

    People buy from people they like, especially with complex sales — it’s never going to change.

    What else? What are your thoughts on the percent of the deal attributable to the relationship and the percent of the deal attributable to the product?

  • Corporate Culture Book

    An idea we borrowed from Zappos several years ago is a corporate culture book. The book is a physical manifestation of our culture that sits prominently in our lobby on an ornate wood pedestal. In the book we’ve documented the history of things like Free Food Friday, inside jokes, and other aspects of the business so that new hires can get a better understanding of why we do the things we do. By being so visible in the lobby, it sets the tone for everyone in the office that corporate culture is out top priority.

    Here are some quick details on a corporate culture book:

    • Have all stories in the book come directly from employees
    • Invest in a high quality cover for it
    • Place it in a noticeable position
    • Update it on a regular basis
    • Encourage new hires to read and spend time with it

    A corporate culture book is a fun and powerful way to emphasize the importance of corporate culture.

    What else? What are your thoughts on a corporate culture book?

  • Watch Out for Someone in the Hallway When the Money Ball Exploded

    One of our Shotput Ventures speakers from three years ago gave a great talk about his experiences as an entrepreneur. About halfway through his talk he was giving advice about what to look for in a mentor and angel investor and he said a line I’ll never forget: watch out for someone who is rich because they were in the hallway when the money ball exploded. The idea is that some people had immense financial luck without gaining the experience of building a sustainable business because they were at the right place at the right time.

    Josh James, the co-founder of Omniture and Domo, sent a tweet out recently saying that sometimes success comes in spite of what you did and not because of it — pay attention to the truth:

    https://twitter.com/#!/joshjames/status/182546524973182977

    The next time you’re seeking a mentor or angel investor find out if they were in the hallway when the money ball exploded or if they were something else.

    What else? What are your thoughts on deciphering how success was achieved by someone?

  • Keepers of the Culture

    Strong corporate culture starts from the top with the co-founders. If the co-founders don’t emphasize corporate culture it’ll take on a life of its own, even more so than it already does. As the company grows, middle management will drive corporate culture if it isn’t pushed from the top, and the outcome can be fine but the only sustainable competitive advantage that’s completely controllable will be lost.

    When a company is starting out it’s important for the co-founders to interview and approve every new hire. Only A players hire A players. As the company gets larger, around 100-200 employees, it becomes much more difficult for the co-founders to be involved in all the hiring. At this point designated Keepers of the Culture should already be trained and at least two should be in every hiring process — exclusively assessing corporate culture fit.

    How do you train Keepers of the Culture? Easy, get them involved in the hiring process at an earlier stage in company growth and have them interview a significant number of potential hires and compare cultural fit with the notes from the co-founders. Only after the Keepers of the Culture and the co-founders opinion match 100% of the time are the Keepers of the Culture ready to carry the torch forward, and train future Keepers of the Culture.

    What else? What are your thoughts on Keepers of the Culture?

  • APIs Provide Unbelievable Power

    Application Programming Interface (API) is the term to describe a way for computers to talk to other computers in an automated fashion. Imagine your accounting software talking to your payroll software to cut checks, pay taxes, and facilitate 401k matching — that would be done via an API. APIs open up a world of unbelievable power due to the ability to control other systems as well as consume data, and vice versa.

    The famous Paul Graham of Y Combinator sent a tweet recently saying an API is self-serve business development:

    https://twitter.com/#!/paulg/status/171840230373081088

    Business development is traditionally slow, labor intensive, and often ineffective. With APIs acting as self-serve business development, companies can start integrating services or data from other providers and mashing it up with their own functionality. This way, they can build real enterprise value and let the market decide faster than humans trying to work out deals with other humans. APIs provide unbelievable power.

    The next time someone talks about building a new feature or developing their own data source, do some Google searching and see if an API is already out there — you might be surprised.

    What else? What are your thoughts on APIs?

  • Thinking, Fast and Slow for Startups

    Recently I started reading the book Thinking, Fast and Slow by Daniel Kahneman after an entrepreneur recommended it to me. Now the book is a tome packed with anecdotes and research by the author who won the Nobel Price in Economics. The idea is that the mind has two core systems as follows:

    • System 1 – the instinctive response that you immediately know (e.g. 2 + 2)
    • System 2 – the thinking that goes into a more detailed thought that takes time to answer (e.g. 17 x 12)

    Even though Kahneman won the Nobel Price in Economics there’s a significant amount of psychological and human elements that are fascinating with a number of behavioral economics items thrown in as well. As an example, if a person gets the option to flip a coin and can win $13 if they guess right and lose $10 if they guess wrong, they are less likely to take the bet at all due to loss aversion even though the weighted average is clearly in their favor. This applies to the corporate world where people don’t take risks for fear of failure. As for startups, those are the people that like the bet.

    If you enjoy psychology and economics I’d recommend the book.

    What else? What were your thoughts on the book?

  • Subtle Marketing That’s Effective

    Earlier today I was at the Atlanta Zoo with my little kids. We were at the playground area on the right just past the entrance hanging out on the short climbing wall. Five minutes in, the little train comes around the corner and proceeds to honk its horn several times. Naturally, all the little kids stop and wave as the train moves by followed promptly with asking their parents if they could ride the train. Was the train honking its horn with the kids there subtle marketing, general train conductor behavior, or both?

    In Atlanta there are a number of burrito places around town including Chipotle, Moe’s, and Willy’s. When I ask my son which one is his favorite (we frequent them all) he always says Moe’s. I ask him if the burritos are better — nope. I ask him if the chips are better — nope. I ask him why he likes it the best and he says he doesn’t know why. My theory why he likes it the best is that when he walks in the door the Moe’s employees always say “Welcome to Moe’s” and that enthusiastic greeting sets the tone for the rest of the experience. It’s subtle marketing that’s effective.

    The next time an experience puts a smile on your face or nudges you towards a buying event, ask yourself if the marketing was overt or subtle — it might just surprise you. Subtle marketing is some of the most effective marketing.

    What else? What are some other examples of subtle marketing that’s effective?