David Cummings on Startups

Category: Entrepreneurship

  • The Talent War and Atlanta’s 10 Year Startup Opportunity

    English: The historic Georgia Tech trees on ce...
    Georgia Tech Tree Image via Wikipedia

    Last week I was at a brainstorming session for Georgia Tech’s Enterprise Innovation Institute initiative called Tech Connect. Tech Connect is attempting to address the gap in the market for “technology teenagers”, defined as growing companies between $1 million and $50 million in revenue with established products and services. The thinking is that startups trying to get off the ground have strong programs via the ATDC and large companies, especially ones considering relocating, are well supported by the Metro Atlanta Chamber of Commerce and regional economic development initiatives. Technology teenagers, which are somewhat successful, have already created jobs, and are most likely to create more jobs aren’t part of the conversation. Arguably, technology teenagers are the most important economic development engine, and the most neglected.

    At the TechConnect event I sat next to Steve McGraw, CEO of Compliance 360, which was just acquired for $42.3 million by SAI Global last month. Steve and I talked about the shortage of software engineers, with a rumored negative unemployment rate of 4 to 1 (e.g. there are four software development jobs in Atlanta for every one software developer looking to change jobs). There’s a talent war going on right now for smart people with programming skills.

    Why the acute shortage of skilled developers? Open source software, cloud computing, iPhones, and more have opened up a whole new world of opportunities that weren’t available 10 years ago. And we’re just getting started.

    As an aside, note that IT skills and software development skills are two different things. IT skills, like a MCSE Certification to manage Microsoft networks are plentiful. Software development skills from people that meet the smart and get things done criteria are what’s in need. It’s the reason New York City is betting big on an engineering school to the tune of $100 million. Only, Atlanta already has that school in Georgia Tech, and it’s worth billions.

    Georgia Tech is Atlanta’s 10 year startup opportunity. More specifically, we need a concerted effort to infuse startups into the campus culture and stimulate more GA Tech seniors to pursue jobs with startups. Unfortunately, companies like Google and Facebook get the attention at campus recruiting events.

    There are 1,000 undergrads in the GA Tech College of Computing. Assume 250 graduate each year, what percentage join a startup in the Atlanta area? 15? 20? Imagine if that number was 50 or 75 per year. The more graduates that join startups each year the more people that add to the momentum of the Atlanta startup community. More engineers in the community create more opportunities for future startups — they are the future founders and leaders.

    A talent war is going on right now and Atlanta is in the middle of it. Georgia Tech is the largest engineering school in the country, and produces incredible software engineers. Atlanta’s 10 year startup opportunity is unique in that the talent is already here — already drawn to Georgia Tech, in Atlanta, in the heart of the city. Significantly increasing the number of Georgia Tech seniors that join local startups should be priority number one for the long-term growth of the startup community.

  • Leadership Development Programs in Startups

    Lately I’ve been working on a simple leadership development program internally. A startup can only grow as fast as the leaders within the company grow, and no faster, so developing leaders is key. The current approach is fairly simple and works as follows:

    • Meet once per month for one hour
    • Separate managers into several groups such that no direct report of a manager is in the same group
    • Discuss one book or article per month (our book for this month is Drive by Daniel Pink)
    • Talk about any leadership challenges or opportunities over the past 30 days as well as the up-coming 30 days

    One of the most important parts of this program is actually taking the time to reflect for a few hours each month and to be intentional about getting better as a leader. Our program is just getting started but I’m excited to see how it progresses and how our leaders develop.

    What else? What are some other ideas for a leadership development program in a startup?

  • Crock Pot Instead of Microwave Mentality for Startups

    Recently I heard an analogy that I thought was particularly apt: too many entrepreneurs expect results like a microwave warms food. Yes, a microwave can heat up food quickly, and pop popcorn fast, but it’s main function is to heat something that’s already been prepared and cooked.

    Entrepreneurs that expect results in five minutes by rehashing something someone else has already done are rarely successful, and often disappointed. Instead, entrepreneurs need to think more like the crock pot mentality where a number of fresh ingredients come together and cook for many hours before results are available. Startup success in five years is much more likely than success in five months.

    The next time you hear an entrepreneur complain about the lack of success ask yourself if they have the crock pot or microwave mentality for their startup. The crock pot approach is going to win more frequently.

    What else? What are your thoughts on the crock pot vs microwave mentality for startups?

  • Interviews Where Only One Question Matters

    A month ago I was talking to an entrepreneur about corporate culture and the interview process. He said that he knew of an entrepreneur that would ask a bunch of questions during the interview process but only cared about one of them. There was one single interview question that decided the majority of the hiring process. I asked if he remembered the question, but he didn’t.

    The mere idea that an interview where only one question matters got me thinking. For us, we ask a number of interview questions and there are only three that really matter, each aligned around one of our core values. Could we do it in one question? Yes, one question accounts for the majority weight of the three important questions, and gets us pretty far, but would leave us short of our current success rate.

    Our interview process is designed to find candidates that fit our corporate culture (#1), are smart, and get things done. Joel on Software articulates the smart and gets things done idea nicely. The next time you are interviewing someone, ask yourself what your three most important interviews questions are and why. You might surprise yourself.

    What else? What interview questions matter most to you?

  • Notes from the Facebook S-1 IPO Filing

    The eagerly anticipated Facebook S-1 IPO filing is finally available on the SEC’s website. Facebook represents the once-a-decade company that truly changes the world (think Google as another one). The Facebook IPO filing, unlike some of the other companies to go public in the last couple quarters, gets so much attention that the most interesting facts have already been shared. I’ll try to share those items along with some less common items that are still very interesting.

    Here are notes from the Facebook S-1 IPO filing:

    • Mission: make the world more open and connected (pg. 1)
    • More than 800 million monthly active users (pg. 1)
    • More than 425 million mobile monthly active users (pg. 1)
    • 2.7 billion Likes and Comments per day (pg. 1)
    • CEO has control over key decision making as a result of his control of a majority of our voting stock (pg. 5)
    • Revenue (pg. 4):
      2009: $777M
      2010: $1,974M
      2011: $3,711M
    • Net income (pg. 4):
      2009: $229M
      2010: $606M
      2011: $1B
    • Advertising represents 85% of revenue (pg. 12)
    • Facebook has been or is currently restricted in whole or in part in China, Iran, North Korea, and Syria (pg. 15)
    • Culture emphasizes rapid innovation and prioritizes user engagement over short-term financial results (pg. 16)
    • Zynga accounted for approximately 12% of revenue (pg. 18)
    • If Mr. Zuckerberg controls the company at the time of his death, control may be transferred to a person or entity that he designates as his successor (pg. 21)
    • 3,200 employees (pg. 23)
    • More money is spent on marketing and sales than research and development showing that most of their ad sales aren’t done via a self-service model (pg. 40)
    • Early revenue (pg. 43)
      Year 1 – $382,000
      Year 2 – $9M
      Year 3 – $48M
    • $2.4 billion in restricted stock unit expense that hasn’t been charged yet (pg. 48)
    • Unsecured $2.5 billion line of credit that’s unused (pg. 57)
    • Television, print, and radio accounted for $363 billion, or 62% of the total advertising market in 2010 (pg. 78)
    • From 2010 to 2015, the worldwide online advertising market is projected to increase from $68 billion to $120 billion (pg. 78)
    • Facebook stores more than 100 petabytes (100 quadrillion bytes) of photos and videos (pg. 90)
    • Facebook.com is largely written in PHP (pg. 90)

    Overall, the Facebook S-1 IPO filing is straightforward and detailed. The revenue and profit growth of Facebook over the past eight years is astounding. For potential investors. the fact that Mark Zuckerberg single-handedly controls the company makes for an unusual situation. Facebook deserves to be in the 10x revenue club.

    What else? What are your thoughts on the Facebook S-1 IPO filing?

  • Stronger Startup Cultures Take Longer to Hire

    Recently a team member was lamenting about how long it was taking us to fill a position. We had interviewed a number of qualified candidates, some even getting to the final stage of the process. Internally, I had to keep reiterating that these candidates were very strong but not perfect for us. Frustrating? Yes. The right thing to do? Absolutely.

    The stronger the startup’s corporate culture the longer it takes to hire the right person.

    The difference between a perfect fit and a good fit culturally is enormous. Every person that’s hired either makes the culture stronger or weaker — there’s no in between. Peter Drucker said it best: culture eats strategy for breakfast!

    Longer to hire means longer to find the right candidate, on average, and not a longer interview process. When the right person is found, strong corporate cultures know it and act fast. When the company moves quickly with an offer to a great fit, it makes a strong statement with the candidate.

    What else? Do you agree that stronger startup cultures take longer to hire?

  • Startups as a Way to Build Community Leaders

    A few weeks ago I was having lunch with a successful entrepreneur that had sold his business for a large sum of money over a year ago. During the conversation I asked him why he started the company and what were some of the reasons for being. He cited some of the more common ones like being his own boss and financial independence by age 45, but then he mentioned one of his top five purposes as a business was to build community leaders.

    As I hadn’t heard this community leaders example before I drilled in to collect more information. Here are some reasons building community leaders was important to him:

    • Every person has leadership abilities at some level and their internal programs to train their people to be leaders helped their business
    • The startup can only grow as fast as the leaders in the company grow
    • Leadership training helps people be better leaders at home, their children’s schools, church, non-profits, and more, making for a better community
    • Career development happens faster with more leadership training, making for an even greater positive impact on people’s lives

    Like self-actualization of a person, I now view self-actualization of a startup as one of the important goals and growing team members is tightly related.

    What else? What are your thoughts on startups as a way to build community leaders?

  • Pre-Paid SaaS Contracts are Free Working Capital for Startups

    Software-as-a-Service (SaaS) as a business model has a number of advantages including alignment of value between customer and vendor, strong cash flows, high gross margins, and great economies of scale. As with any growing startup, one of the most limiting factors is cash — the faster the business grows, the more cash it eats. Another benefit of SaaS that should be mentioned more often is that of pre-paid contracts.

    With pre-paid contracts, like Salesforce.com requires, payments are made in advance of service being rendered. These contracts are often pre-paid quarterly or pre-paid annually with a discount (e.g. pay for the full year and get 10% off). For the startup this results in free working capital to grow the business. Yes, there’s an unearned income liability and an obligation to fulfill the service, but with the money in the bank, many startups use it to grow the business even faster than if they didn’t have pre-payments.

    There’s another secondary benefit of pre-paid SaaS contracts: potential profits in the bank aren’t taxed until revenue is recognized and profit earned. Say it is December 31st and the startup’s bank account has $100,000 more than it started the year. Normally, if that’s profit it would be taxed around 30% leaving only $70,000 left to invest and grow the business. Well, with accrual accounting and $100,000 of unearned income due to pre-paid contracts, that money isn’t taxed until the revenue is recognized resulting in more capital to grow the business on January 1st.

    Pre-paid SaaS contracts provide free working capital for startups and should be considered when thinking through business ideas (e.g. can we get customers to pre-pay us to help fund the business?).

    What else? What are your thoughts on pre-paid SaaS contracts as free working capital for startups?

  • Benchmarking Data for Startup Marketing

    When having lunch with the CEO of a prominent Atlanta software company five years ago, I asked for advice about marketing. One of his suggestions was to do primary research and publish it. Journalists, prospects, customers, and partners love to read new information, especially if isn’t something recycled.

    Earlier today David Skok, a VC with one of the best blogs out there for entrepreneurs (ForEntrepreneurs.com) tweeted that ZenDesk’s new Satisfaction Index is a great marketing idea:

    http://twitter.com/#!/BostonVC/status/163748555423617024

    Startups, especially successful ones, have an abundance of valuable data that is confidential to each customer. In many cases, this data can be aggregated and anonymized in order to provide benchmarking information to help customers compare their results with the average as well as for marketing purposes to generate awareness for the startup.

    Startups should provide benchmarking data as part of their marketing strategy.

    What else? What are your thoughts on benchmarking data for startup marketing?

  • Professional Services Revenue as it Relates to Software Startups

    In the software business not all revenues are created equally. Revenue from subscriptions or licenses is significantly more profitable and scalable compared to revenue from professional services. When talking to entrepreneurs I like to get a feel for the mix of revenue from subscription/license vs professional services. One of the simple proxies for this is the number of employees they have in professional services.

    Here are some notes on professional services revenue for software startups:

    • Professional services revenue as a percent of total revenue is often super high for early stage startups still looking for product/market fit (e.g. they are doing consulting work to pay the bills)
    • Once a product takes off services revenue is typically a small percentage of overall revenue, especially if channel partners (value added resellers) are used
    • As the core business and market matures, many software companies add more services as a way to grow even though margins decline
    • Some services companies masquerade as software companies when in reality the software is for lead generation for their consulting work or their product requires so much customization it doesn’t get much in the way of economies of scale

    When thinking through startup opportunities, and evaluating companies, it’s important to understand how the services component fits in.

    What else? What are some other thoughts on professional services revenue as it relates to software startups?