David Cummings on Startups

Category: Entrepreneurship

Common Mistakes in a Business Plan Competition
Image via Wikipedia

Tonight I had the opportunity to judge the business plan competition for the MBA program at GA Tech (the site is powered by Hannon Hill). Personally, I’m against doing business plans as the time and effort required to do a quality one is better spent on a two page executive summary combined with talking to 50 potential customers. There is value in thinking through the different sections but I’ve never seen a business become successful by doing exactly what they set out to do with their original plan. Unfortunately, too many people start believing what they wrote in the plan and not spending time finding out what the market needs.

Here are the common mistakes we saw tonight while judging the business plan competition:
- Not clearly articulating the pain or problem being solved
- Not providing a memorable anecdote or hook for the idea
- Not painting a clear picture as to what they wanted from the presentation (e.g. a second meeting with investors)
- Using slides with too many words and too small of a font (the slides were designed as handouts and not for presenting)
Writing and presenting a comprehensive business plan is difficult. The students did a good job, the event was well done, and I was honored to be invited.

What else? What other problems do you commonly see in business plans?
September 23, 2011
To Spread or Not Spread FUD
Image by Brett L. via Flickr

Spreading FUD is a common tactic from traditional, old fashioned enterprise technology companies. Fear, uncertainty, and doubt (FUD) combined with patently false claims (e.g. the product doesn’t do X when it clearly does) are a way for companies to try and persuade a prospect that the other product and company are inferior. Startups with integrity and strong values don’t participate in slinging mud and prefer to stay above-board by focusing on solving customer problems instead of putting down the competition.

Here are some ways companies spread FUD about their competition:
- Cite things the product does or doesn’t do when two minutes of web research show the truth
- Talk about lack of funding or institutional investors in an attempt to imply that money makes a company successful (what happened to Webvan?)
- Provide anonymous quotes claiming to be from customers that switched products
Sales reps that spread FUD act like used car salesman in the worst of ways. Startups and sales reps should focus on solving customer problems and not putting down competitors.

What else? What do you think about startups that spread FUD?
September 22, 2011
Multi-Tenant SaaS and Virtualization are Two Different Things
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Recently I talked to two companies that said they were Software-as-a-Service (SaaS). After asking more questions and drilling into details for a bit I came to the realization that what they were referring to as SaaS was independent virtualized instances of their product in the cloud. SaaS, to me, is very different.

Here’s how I define multi-tenant SaaS:
- Application servers that support multiple clients
- Databases that support multiple clients in the same tables
- Infrastructure (load balancers, fail-overs, etc) to support many customers
Virtualization of the application delivered via the cloud is essentially a more manageable version of the late 1990s Application Service Provider (ASP) model, and not SaaS. A major benefit of SaaS is the engineering efficiencies and scalability of multi-tenant application services and multi-tenant database instances. Multi-tenant SaaS and virtualization are two different things.

What else? What do you think of people calling their business model SaaS when it isn’t multi-tenant?
September 21, 2011
Notes for Putting on an Annual User Conference
The Fall is a common time of year for annual user conferences. Salesforce.com had their Dreamforce conference recently and I know of many more happening now or shortly (Hannon Hill and Pardot). User conferences are an amazing time to bring together customers, prospects, partners, and employees to spend time face-to-face and talk about best practices, the past year, and what’s on the horizon.

For companies thinking about or doing an annual user conference, here are some notes:
- Splurge for a great venue — with people traveling to the conference it’s important to invest in the facility and make it memorable (I highly recommend auditorium-type seating with power outlets and great wifi for everyone)
- Find ways for attendees to intermingle and meet new people (mixers, receptions, consistent Twitter hash tags, etc)
- Give the conference a consistent name (user conference, users conference, user’s conference, or users’ conference — it doesn’t matter as long as it’s consistent)
- Put the attendees first name in big letters on their badge (it’s common for the first and last name to be the same size and hard to read amidst all the other text on the badge)
- Let customers do most of the talking and presenting during the sessions (avoid the tendency to have employees do most of the presentation)
Annual user conferences are great way to bring an eco-system together and I highly recommend them.

What else? What are some other notes from user conferences you’ve attended?
September 19, 2011
5 Ways to Increase the Value of Existing Marketing
Entrepreneurs spend incredible amounts of time and energy to generate leads and drive traffic to their website. One area that is often overlooked is increasing the value of existing marketing efforts. Think about it: if you wanted to double the number of leads generated from your website you could either double the amount of traffic to the site or double the site’s conversion rate. Which one is easier? Increasing the conversion rate is always easier than increasing traffic. In addition to focusing on the conversion rate, it is also important to take the current marketing efforts and automate ways to improve their value, much like improving the conversion rate.

Here are five simple ways to increase the value of existing marketing efforts:
1. Retargeting – Retargeting allows you to show banner ads on a large number of different sites exclusively to people who have already been on your site (I’m generally against banner advertising with retargeting being the one major exception)
2. RSS Broadcasts – Take an RSS feed of blog posts, press releases, or whatever else you like of yours and have Twitter, Facebook, and LinkedIn automatically updated when each new item is published
3. Newsletter Sign-up Option – Add a sign-up link or text box on your site and encourage people to give their email address to get your newsletter (the contents of the newsletter should be repurposed blog posts)
4. Live Chat – Engage with your site visitors through live chat to answer their questions as well as convert anonymous visitors into identified prospects
5. Company IP Address Lookup – automatically identify companies on your site based on their IP address
Existing marketing efforts are easily augmented and improved with these tactics and more.

What else? What are some other ways to increase the value of existing marketing efforts?
September 18, 2011
5 Steps to Action
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Whether you’re trying to sell a product or recruit a new team member to you join your team, there are five steps to action. These have been talked about for decades in marketing textbooks and were first made popular by Madison Avenue firms.

Here are the five steps to action:
- Unaware – the person doesn’t know the product exists
- Aware – the person knows the product exists but doesn’t understand it
- Understand – the person comprehends the product but hasn’t established a position
- Believe – the person has bought into the product but hasn’t pulled the trigger on it
- Action – the person buys the product
Thinking through these five steps, especially with regards to sales and marketing, helps increase the effectiveness of your team. Sales and marketing messages (e.g. email communication) should be tailored to the respective stage of the prospect.

What else? What do you think of these five steps to action?
September 16, 2011
The Daily Scrum in a Startup
Every day we do a bottom-up daily scrum. Every person in the company participates in one or more daily scrums so that there’s an effortless flow of information. We believe that staying closest to the customer and having the shortest feedback loop to make decisions provides us a competitive advantage. The daily scrum allows us to do just that.

Here’s how the daily startup scrum works:
- 9:30 – 9:40 manager with team members
- 9:40 – 9:50 C-level with managers
- 9:50 – 10 CEO and C-level execs
We answer three simple questions: What did you accomplish yesterday, what are you going to accomplish today, and do you have any roadblocks? This daily scrum makes it so that everyone knows the top three key items for each person in daily chunks allowing up to make decisions quickly and execute fast.

What else? What are your thoughts on doing a daily scrum?
September 15, 2011
Startups and Competitive Differentiation
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Earlier today I was talking with a successful entrepreneur about competitive differentiation. As with many markets, there’s 500-pound gorilla that’s slowly moving into his space and he’s working hard on a long-term competitive differentiation plan. His business continues to grow nicely but there’s the persistent threat of this significant competitor seriously affecting his startup.

Here are some ideas when thinking through competitive differentiation with startups:
- Build a competitive matrix listing everything possible comparing the different companies, even if it isn’t a software product
- Consider softer items like quality of customer service, contract terms, and variety of options
- Look to adjacent parts of the value chain that are less likely to be entered
- Analyze marketing and lead generation options that are too difficult or too niche for large competitors
Competitive differentiation is hard, especially in commoditized markets. Startups should focus on staying close to the customer and making decisions quickly without overly focusing on the competition. It’s prudent to regularly think through competitive differentiation and make sure all team members are aligned.

What else? What are some other ideas when thinking through competitive differentiation with startups?
September 13, 2011
Startup Valuations Involving Preferred Equity are Best Viewed as Bonds with Warrants
Image via CrunchBase

People love to talk about startup valuations. The most recent extravagant valuation to make the rounds was Twitter Closing Its $400M Secondary Offering at an $8 billion valuation. On the surface it looks like $400M represents 5% of the equity (assuming the $8 billion is the post-money valuation and not the pre-money valuation). To me, I’m not sure if Twitter is worth $8 billion but that isn’t the right way to think about it.

With preferred equity it is best viewed as a bond with warrants. Here’s why:
- Preferred equity is often 1x participating preferred (double dip) or 1x non-participating preferred (investor gets all their money back before anyone else). Assuming it is a more entrepreneur-aligned investor with 1x non-participating preferred, there still will be ~10% cumulative annual dividends. What this means is that if Twitter sells for $500 million in 2.5 years, the investors that put in $400 million will get all $500 million and the other shareholders won’t get anything. Do I think Twitter is worth $500 million? Absolutely. This is a low risk investment in my opinion (assuming you’re comfortable making follow-on investments to maintain your position).
- A bond is senior to equity just like preferred equity is senior to common equity or previous rounds’ preferred equity. That is, in the event of a sale or liquidation, the senior debt and equity get their money back first. Add in the cumulative dividend and the preferred equity looks even more like a bond.
- Warrants are similar to stock options in that it is the right to buy stock at a certain price. Continuing with the preferred equity acting like bonds with warrants, if the preferred equity was 1x participating preferred and Twitter sold for $8 billion in 2.5 years, the investors who put in $400 million would get $500 million (the original equity plus dividends) plus 5% of the remaining $7.5 billion (double dip) for a total of $725 million. Put another way, the $400 million investment could have been bonds for $400 million with a 10% dividend combined with warrants to purchase 5% of the stock for a penny and they would have ended up at the same point. Would I make that investment? Absolutely.
Arguing if Twitter is worth $8 billion is fun conjecture. In reality, the investment and subsequent valuation aren’t the same as thinking about buying common stock of a publicly traded company, which is how most people think about it. A better way to think about preferred equity is as a senior bond (debt) with warrants to buy stock and participate in the upside.

What else? What do you think of this way to view preferred equity?
September 12, 2011
Three Startup Examples of Wasting $10,000 Dollars
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One of the startup traits I value highly is being scrappy, especially is regards to making every dollar go far. Now, don’t be a penny wise and a pound foolish, and invest in what has the best return even if it isn’t the cheapest. It’s one thing to waste a few hundred dollars, or even a thousand, but it is really bad when $10,000 is wasted. In fact, we’ve had the unfortunate experience of wasting more than $10,000 on three different occasions.

Here are three of our startup examples of wasting $10,000+:
- We tried out a new advertising mechanism, raised the bid per click high to try and spend a few hundred dollars to determine the ROI, and got no clicks for a week so we moved on without turning it off on accident. Only the next month we got a bill for north of $10,000, and no good leads from it.
- We had scripts running to backup our 100+ servers daily, including several extremely large databases, on an Amazon S3 account. Well, that S3 account and corresponding bill wasn’t monitored, and backup purging wasn’t turned on (e.g. purge backups older than X weeks). Once the S3 charge was brought up for budgeting, we realized we’d wasted much more than $10,000 due to storing unnecessary files.
- We signed up for a conference/trade show looking to generate leads and build our brand in an adjacent market. Well, it proved to be a horrible investment and we didn’t generate any leads. That was a $10,000 lesson learned.
My recommendation is to pay attention to expenses, especially ones that hit a credit credit, and know that as you get bigger more items fall through the cracks.

What else? What are some ways you’ve wasted money in a startup?
September 11, 2011