David Cummings on Startups

Category: Entrepreneurship

The Search for Recurring Revenue
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After talking with hundreds of entrepreneurs in the Entrepreneurs’ Organization and the community, one of the more repeated themes that comes up is the search for recurring revenue. The pattern is as follows: entrepreneur follows his/her passion, startup gets some traction after two or three years, revenue is lumpy, school of hard knocks teaches entrepreneur that inconsistent revenue is extra challenging, and finally entrepreneur starts searching for recurring revenue. Numerous entrepreneurs have brought this up to me.

Here are some reasons why recurring revenue is desirable:
- Allows for more consistent cash flow
- Makes it easier to plan and forecast
- Provides for better sleep at night knowing payroll will be met (assuming break even or profitable)
- Enables easier year-over-year growth since the recurring revenue layers on top each year (assuming low churn)
- Values a company more substantially, all things being equal, to a similar revenue and profitability company that isn’t recurring
Recurring revenue is often more difficult to get going as the customer is financed over a period of time vs paying a lump sum up-front. In general, a recurring revenue business is the way to go, but much harder to achieve. The search for recurring revenue continues.

What else? Have you talked to entrepreneurs searching for a recurring revenue business?
August 18, 2011
Atlanta Startup: Digital Assent
Earlier this week I had the opportunity to spend time with Andy Ibbotson, CEO and co-founder of Digital Assent, which helps automate the patient check in process. Digital Assent was started in 2009 to provide a tablet-based software plus hardware solution for doctors’ offices. Specifically, they focus on simplifying the traditionally paper intensive and laborious process of signing in at fee-for-service specialty clinics like plastic surgeons and dermatologists (elective, out-of-pocket procedures). After starting the year with three employees they now have more than 30 and will end the year around 50 — crazy fast growth!

Here’s a quick snapshot of the company:
- Founded: 2009 in Atlanta
- Employees: 30
- Solution: PatientPad for doctors’ offices to have patients sign in digital and help start the transition to electronic health records
- Funding: $10 million+ ($2 million Series A in February and $7.5 million Series B in June, and a line of credit from SVB)
- Cool Fact: They picked the product name PatientPad and trademarked it before the iPad came out — good name selection!
Digital Assent is off to a fast start and the only Atlanta company I’ve heard of that’s closed a Series A and Series B investment in the first six months of 2011. I look forward to watching their success.

What else? Have you heard of Digital Assent and what do you think of them?
August 17, 2011
Creative Workarounds and Red Light Cameras

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Part of building a successful startup is finding creative workarounds. One of the more creative workarounds I’ve heard recently involves red light cameras. A person in Georgia really didn’t like red light cameras and set out to get them banned in the state. After several failed attempts to get them banned via the state legislature someone came up with a creative workaround: pass a law such that lights with red light cameras must add one additional second to the yellow light display.

Adding a simple extra second to the length of time the yellow light is shown seems like such a trivial change but it had a profound impact. See, many of the red light cameras are joint ventures with the manufacturers of the equipment and the local government agency. Well, by adding an extra second to the yellow light the number of tickets issued dropped precipitously (people pressing on the gas to make it through the light successfully do so with higher frequency when they have an extra second). With lower revenue from red-light-running-tickets, it was no longer profitable to manage and run the program at some intersections, so the cameras came down.

Did you have a roadblock in your startup? What are some creative workarounds that worked for you?

August 16, 2011
When Inbound Marketing Doesn’t Work
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Last week @agraber retweeted an article Inbound Marketing Deception Uncovered that cites a useful example of when inbound marketing doesn’t work. The general idea is that inbound marketing works for replicative businesses but not as much for innovative businesses early in the adoption lifecycle. Put another way, inbound marketing works if people are online actively searching for and talking about your category of product or service. If the category doesn’t have a name yet, or search/conversation volume is too tiny, you won’t see results using inbound marketing.

Inbound marketing is still worth doing in this scenario so as to build up a cache of content and links to be in a strong position when the market grows. For this type of early adopter market, before the chasm has been crossed, the solution is to use outbound marketing including:
- Online advertising
- Email marketing
- Cold calling
Outbound marketing is, and will continue to be, an effective form of marketing, especially for early adopter markets.

What else? What other times does inbound marketing not work?
August 15, 2011
Questions to Ask at Capital Factory Demo Day 2011
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Next month I’ll be at the Capital Factory Demo Day 2011 on 9/7 in Austin, Texas. In addition to being my first time in Austin, I’m looking forward to learning how the startup community is similar and disimilar to the Atlanta community. Austin is like Atlanta in many ways — low cost of living, prominent university, numerous young professionals, and more. Atlanta wins when it comes to metro population, professional sports teams, and airport size but Austin wins when it comes to anchor technology company (Dell), coolness factor (Keep Austin Weird), and events (SXSW and live music).

Here are some questions I’m going to ask people in the local Austin startup community:
- What things are going well in the Austin startup community and what areas are struggling?
- What group or organization acts as the heart of the community and what do they do?
- Which local angels and VCs are actively investing and how many investments have they done in the past 12 months?
- What local startups are doing really well? Which ones are close to an IPO?
- What’s the B2B vs B2C startup mix like for the startup community?
These aren’t hard hitting questions but rather the goal is to get a feel for the community and get a feel for what is and isn’t working. I’m looking forward to the trip.

What else? What other questions should I ask and what should I look for in Austin?
August 14, 2011
The Tactical B2B Marketing Gameplan
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Marketing is often an after-thought to first-time entrepreneurs when in reality lead gen should be built into the startup’s DNA on day one. With that said, marketing is often more difficult for entrepreneurs because of its delayed gratification nature. You see, when entrepreneurs are on the phone selling or on their MacBooks writing code, there’s immediately feedback — the deal is/isn’t moving forward or the new feature is now in place. With marketing, yes, you can see that blog post that was just written but you likely won’t see results for months. Entrepreneurs are often ADHD and seek out the next shiny object.

The good news is that social media and PPC ads give more immediate results for marketing but that bad news is that marketing is much more involved and takes significant ongoing time and energy. Entrepreneurs need to have a marketing gameplan, and stick to it. Here’s a tactical B2B marketing gameplan:
- Blog Posts: Write three blog posts per week (one thought leadership, one industry commentary, and one varied)
- Twitter/Facebook/LinkedIn: Send at least one tweet/Facebook post/LinkedIn status update per day linking to industry content as well as any new blog posts, events, white papers, etc
- White Papers: Write one new 7-10 page white paper per month with accompanying slide show and make it available on your site, on a landing page, on YouTube, on SideShare.net, and social media
- Press Releases: Write one new press release at least every two months talking about a new release, event, award, etc and publicize it on the wire as well as social media
- User Conferences: Hold one annual user conference to engage with clients, partners, and prospects in person
- Books: Publish a printed trade paperback book about the industry and use it to educate customers, prospects, trade show attendees, and new employees
This tactical marketing gameplan doesn’t have anything groundbreaking but by sticking to it over the course of months and years you’ll see a significant return on investment.

What else? What do you think of this tactical B2B marketing gameplan?
August 13, 2011
Legacy Customers and Pricing Increases in Startups
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Recently I received an email from a sales rep for a service we’ve been paying a couple thousand dollars a year for over three years. He politely informed me that we’ve been going over our monthly allotment resulting in overage fees, but more importantly, our current pricing is significantly out of date and the plan we’re on now, even when adding in overages, is more than twice as much for new customers. Since we were one of their first paying customers they are offering to cut their published price in half in exchange for us signing their new terms of service, which are more strict and less desirable (changes to SLA, number of items that can be used, etc).

So, a summary of the situation:
- Early adopter customer of three years paying slightly less than half the new pricing
- Vendor desires the customer to be on the current pricing plan with more strict terms of service and pricing model but better support hours
- Vendor offers customer 50% off published pricing to move to current plan so as to standardize contracts, pricing, and lock in rates for future customer growth
This is a fair approach and we’ll go with the new pricing. My recommendation is to grandfather in existing customers letting them keep their pricing as long as they want. If a legacy customer requires a serious change to their plan, the new pricing should take effect with a long-standing customer discount. It is time consuming to have customers on different plans but the goodwill and continuity of consistent pricing helps keep happy customers, which are the lifeblood of a business.

What else? What are your thoughts on legacy customers and pricing increases in startups?
August 12, 2011
White Labeled Software Strategies for Startups
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Recently I was talking to an entrepreneur with a B2B SaaS startup and the topic of white labeling his product came up. White labeling is a term to describe making the software brandable by a reseller (e.g. a reseller wants to make the product look like their own product to their clients). When the entrepreneur brought up the idea I immediately said that he should think really hard about it before doing it as there are serious long-term implications.

Here are some considerations when thinking about offering a white labeled product:
- If you want to build a large, standalone brand, white labeling is likely not the way to go, although co-branding works well (e.g. some pieces like the logo and colors of the app are customizable but the URL, documentation, etc refers to the core product name much like salesforce.com does)
- White labeling often works well if resellers are the primary distribution channel as well as having big companies resell it (in this case you’re helping others build their brand and you’re fine with being the behind-the-scenes provider)
- White labeling also works well if you offer an affordable product that goes on a credit card and brand doesn’t play a role (e.g. 37signals and Campaign Monitor have great products that can be white labelled)
In general, most startups that are considering a white labeled version of their product should start with a co-brandable version and see if that meets the market demand as most of the time it does.

What else? What are your thoughts on startups offering a white labeled version of their product?
August 11, 2011
Defining a Qualified Lead for a Startup
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Continuing with yesterday’s post on The Value of a Qualified Lead for a Startup, the next logical question is how to define a lead as qualified. Most leads aren’t qualified, and treating unqualified leads as qualified often results in contention between sales and marketing. At a base, I like to think of it as startup-specific criteria that often incorporate Budget, Authority, Need, and Timeline (BANT).

Here are startup-specific criteria I like to look at when defining a qualified lead:
- Specific job titles or functional responsibilities (usually related to Authority)
- Specific verticals/industries along with number of employees or amount of revenue
- Specific pain points or situations that are present (usually related to Need)
- Ability to make a purchase within a specific period of time (usually Budget and Timeline)
Defining the criteria for a qualified lead, and having everyone in the startup agree on it, results in better communication and results. Instead of pointing to the number of leads generated on a daily/weekly/monthly basis, the metrics should be the number of qualified leads generated in a time period.

What else? How do you define a qualified lead?
August 10, 2011
The Value of a Qualified Lead for a Startup
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Determining the value of a qualified lead is difficult for most companies, especially startups without historical data to draw from. The value of a qualified lead should be approximated early in the life of a startup as it is essential to understanding where to invest money and resources.

Here’s a simple way to think about the value of a qualified lead for a startup:
- Average monthly customer fee (e.g. $500/mo or $6k/yr)
- Times the gross margin of the business (e.g. 70%, so $6k*.7 = $3,200)
- Times the discount for sales salaries, sales commissions, and marketing salaries (e.g. 20%, so $3,200*.8 = $2,560)
- Times the discount for the cost of capital (e.g. 10%, so $2,560*.9 = $2,304)
- Divided by the number of qualified leads needed to close a sale (e.g. 10 leads to close one customer, so $2,304/10 = $230 for a qualified lead)
In reality, you should also take into account the average life of the customer (e.g. 48 months) and factor that into the value of a qualified lead but from a startup efficiency point of view it is best to acquire a customer for less than the first year’s gross margin revenues, and the cost of a lead is only one piece of that equation.

What else? What do you think of this method to calculate the value of a qualified lead for a startup?
August 9, 2011