David Cummings on Startups

Category: Entrepreneurship

  • Accrual vs Cash Basis Accounting for Startups

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    Entrepreneurs over the years have asked me whether or not they should do accrual or cash basis accounting for their startup. The general idea for accrual accounting is that as income or expenses are signed for they should be put on the books whereas with cash basis accounting you only worry about it when money changes hands. So, with accrual based accounting as soon as you receive the purchase order from a client you put the revenue on your books (assuming it is all recognized at once). With cash basis accounting you don’t count the money until you receive payment for it — even if that is 60 days after you received the purchase order.

    Here are some quick tips to keep in mind regarding accrual and cash basis accounting for startups:

    • Almost all startups should be cash basis as that most aligns with the nature of trying to get a business off the ground and being cash strapped (the number one reason startups go out of business is that they run out of money)
    • If you get prepaid for your service or service component of a product sale (like support), accrual is the way you should go since you can use the capital without paying taxes on it until it is recognized via the obligation being completed (e.g. it is December and you just got prepaid $12,000 for 12 months of your SaaS product, you only recognize $1,000 for the month of December for the purposes of the IRS for the year, yet you still have $11,000 in the bank to start the new year that you haven’t recognized yet)
    • The IRS requires the accrual method if you average more than $10 million in revenue and have inventory, so there’s no choice at that point

    Accrual and cash basis accounting are easy to understand once you go through a few scenarios with your accountant. Most startups should do cash basis accounting as cash coming in and going out most closely align with a business in the seed to early stage.

    What else? What other thoughts do you have on accrual vs cash basis accounting for startups?

    Update: See the comments for several people that recommend accrual accounting instead of cash basis accounting.

  • Startup Valuation Drivers over Time

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    Today’s TechCrunch post Why Startups Should Raise Money at the Top End of Normal has a great segment in it talking about the startup valuation drivers over time. Every entrepreneur should study and understand these drivers:

    • Product Risk – will the product work? how long will it take it to build?
    • Market Risk – will the market adopt it? will they love it?
    • Growth / Scale Risk – will the business scale? can the management team execute?
    • Monetization / Competition Risk – are the margins sustainable? what are the barriers?

    At each phase in the process the startup’s valuation increases substantially. Think through these when considering raising money and the potential valuation.

    What else? What do you think of these startup valuation drivers?

  • Go Deep or Wide with Product Feature Set

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    Most startups should pick one or two things and do them extremely well. I’ve seen more startups fail trying to be all things to all people than ones that have picked a narrow set of features and gone deep with the functionality. Now, there is a place in the market for products that are broad but lack depth, especially in the small-to-medium sized business segment. It’s important to make a conscious decision when developing the product around the direction and opinion of the application.

    Let’s look at a few examples:

    • Bronto – great email marketing platform with a deep feature set targeted towards online retainers (large but specialized market)
    • HubSpot – leading inbound marketing platform geared towards small businesses under 10 employees with solid features, but not as deep as specialized tools like SEOmoz.org or AWeber
    • Salesforce.com – largest SaaS CRM provider by far with a deep salesforce automation feature set and massive ecosystem of third-party apps facilitating a best-of-breed approach

    My recommendation is to make it clear early on whether you’re going to go narrow and deep (preferred) or broad and shallow (more difficult).

    What else? What do you think about going deep or wide with the product feature set?

  • Top 10 EO NERVE 2011 Takeaways

    The following is a guest post by my friend Chris Wegener, the co-founder of PaperStyle.com – cards and stationary. Chris attended the EO NERVE 2011 conference in NYC a couple weeks ago. Enjoy!

    Some of these you will know, some are simple but are great reminders, but nevertheless, they all were things that I feel are important!

    1. David Rosenblatt (Formerly Double-Click CEO) – For your Board to be effective, they need skin in the game. Trust your gut and don’t be greedy.
    2. Maurice Ashley (Intl. Chess Player – Strategist) – Mercata in 2001 vs. Groupon in 2010 – Late movers often can build a product for less and more effectively… learning from all of the front runner’s mistakes. Groupon switched the ‘move order.’ Meaning, they told the retailer, no deal until a certain # of customers sign up… guaranteed sales or it won’t happen. In the past, hadn’t been done that way.
    3. David Rose (Investor, Big thinker and really bright guy) – Is anything secret anymore? Everyone knows a lot about everyone. Discussed theory of ‘Singularity’ by 2045. http://www.singularity.com/ and http://singularityu.org/
    4. Tony Hsieh (Zappos Founder) – Most of his presentation is from his book, Delivering Happiness. The Zappos way of marketing is to spend your resources/time on your current customers and let them advertise for you. Much cheaper and more effective. With a billion in revenue, I’m not going to disagree!
    5. Tony Hsieh (Zappos Founder) – Hire and fire based on your Core Values. If you can’t, you might want to re-think your Core Values. Commit to transparency and you have nothing to fear. His desk, like Zuckerberg’s appears to be in the center of a sea of desks. Hard place to hide!
    6. Tony Hsieh (Zappos Founder) – Played this video about his recent book tour. Evidence of his inspiring vision, story and cult… I mean culture! Like it or not, they are drinkin’ the Zappos juice…. and getting it done! Looks like they had quite a time.
    7. Tony Hsieh (Zappos Founder) – Chase your vision, not the $. Find your passion and goal in life. What would you be passionate about and do with no pay for 10 years? Be part of something bigger than yourself.
    8. Jeff Hoffman (Priceline Founder) – Does ‘Blue Sky Sessions’ 20 minutes a day. Let your mind wander and blurt out whatever it is you are thinking. No rules. No gravity. No editing. Uses post-it-notes on the wall of his office. By themselves, they may not mean much, but over time, all the ‘dots’ as he calls them, can form an idea. If you are saying things like “Wouldn’t be cool if ___________?” You’re on the right track.
    9. Jeff Hoffman (Priceline Founder) – Validate your idea in the marketplace before building it. Work backwards and ‘get out of the conference room and into the marketplace.’ Said he got kicked out of a lot of grocery stores following customers around asking for their opinions. Learned that future Priceline Customers were not as originally thought… cheap-skates, but rather people who only had $100 to spend on an airline ticket a cousin’s wedding, didn’t care what time they left and how many connections they had to make.
    10. Jack Daly (Sales Coach) – Was sitting on front row and Jack was the most passionate and entertaining speaker I have ever seen. No joke. Awesome. Major take-away was that companies who have great cultures beat the crap out of companies who don’t. Revenues, Stock Prices, Net Income and Job Growth flourish by huge percentages if you’ve got the culture right. Take care of your employees and allow them to grow. They are like plants that need to be watered he said. If you get it right with them, they get it right with your customer.

    Thanks again to Chris for taking these great notes.

  • Align Co-Founder Skill Sets with Market Approach

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    Recently I was meeting with the co-founder of a fledgling SaaS business and we were catching up about the progress of the startup. After talking for a bit it became readily apparent that the skill sets of the co-founder weren’t aligned with the startup’s approach to the market. What I mean by this is that the co-founder had a background in high-end enterprise sales (think million dollar plus deals) but was now building a company where the average deal size was much less than $10k/year.

    The co-founder was using his excellent consultative sales skills with clients, building comprehensive proposals, going through long sales cycles, and getting much less revenue per client as compared to his previous company. I asked the stereotypical question: Can you charge significantly more per client? He thought about it for a minute and said he wouldn’t get as many clients but he could charge more per client, work with fewer clients, and generate more revenue. That was the answer.

    My recommendation is to consider your co-founder skill sets when thinking about the market approach and align the strategy appropriately.

    What else? Have you seen examples of co-founder skill sets not aligned with the startup’s market approach?

  • Calculating Your FU Money Amount

    Yesterday’s post What’s Your FU Money Amount prompted several great comments and tweets. Stephen Flemming chimed in with his target FU money amount from several years ago:

    http://twitter.com/#!/StephenFleming/statuses/75752957307658240

    Seeing Stephen reference $42 million made me think it would be interesting to calculate FU money assuming a “Buckhead fabulous” lifestyle. Here’s how that might be calculated assuming a 30 year horizon with no inflation and no interest/appreciation:

    • House – $1.5 million
    • Beach house on 30A – $2 million (@lance prefers Rosemary Beach)
    • The Westminster Schools for three kids ($20k/child/year) for 12 years – $720k
    • Ivy League college for four years @ $50k/year/child – $600k
    • Living expenses/property taxes/etc @ $150k year for 30 years – $4.5 million
    • Two nice cars @ $10k/year/car for 30 years – $600k
    • Two $50k angel investments per year for 30 years – $3 million
    • Total: $12,920,000

    So, a little south of $13 million of after tax dollars in the bank gets you a “Buckhead fabulous” lifestyle in one of the wealthiest communities in the Southeast with extra to spare.

    What do you think? How would you calculate your FU money?

  • What’s Your FU Money Amount

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    At today’s EO Accelerator Accountability Group meeting one of the topics I facilitated was around business valuations and estimating the value of a startup. For these startups with under $1 million in revenue the most common valuation range is 4-6x profits (e.g. $500k in revenue startup with $100k in profits might be worth $500k). After Accelerants went around and talked about how they viewed the value of their business they then answered the question “How much money would you need for it to be FU money?”

    F%!@ You money is defined as the amount of money where you never have to work again and have the resources to do whatever you like, whenever you like.

    After going around the room the general consensus was that FU money was between $5 million and $10 million after taxes. That number is probably double if you live in California or New York.

    FU money is an interesting concept to think about and is a worthwhile mental exercise.

    What else? What do you think of FU money and what’s your amount?

  • Base Hit to Homerun Values in a Startup Exit

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    The business world loves sports metaphors. When I was at Duke in the late 90s the business school offered a course on sports metaphors geared towards foreign students because metaphors are so prevalent. One of the more common phrases for startups is homerun, meaning that the startup was bought for a huge amount or went public at a massive valuation. In addition to homerun, other types of baseball hits are used regularly.

    Here are baseball hits to describe different types of approximate startup exit valuations:

    • Base Hit: $2 – $10 million
    • Double: $10 – $25 million
    • Triple: $25 – $100 million
    • Homerun: $100+ million

    If the startup is in Silicon Valley multiple these by 10x otherwise this holds true for most parts of the country.

    Sports metaphors are common in startup land and baseball hits are the most popular way to describe startup exits.

    What else? Do you agree with these baseball hits to describe different types of exit valuations?

  • The Startup Toolkit’s Business Model Canvas

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    Yesterday’s post on The 9 Building Blocks of a Business Model prompted a comment by Denis Baranov recommending The Startup Toolkit. I was first shown The Startup Toolkit and their Business Model Canvas a couple months ago at the TiE VISTA Conference by one of the attendees. The Business Model Canvas is the 9 building blocks of a business model broken out into a one page view facilitated by a point-and-click webapp.

    I’m a fan of frameworks to think through and plan different strategies. Two popular one include the One Page Strategic Plan from Mastering the Rockefeller Habits and Porter’s Five Forces Framework for Analysis. There’s no silver bullet for thinking through strategy but these two combined with the Business Model Canvas provide a good starting point for different purposes.

    What else? What do you think of the Business Model Canvas and what are your favorite strategy frameworks?

  • The 9 Building Blocks of a Business Model

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    A few months ago I ordered the book Business Model Generation on Amazon.com after seeing it mentioned on several blogs. Memorial Day weekend makes for the perfect time to dive into the book and I’m just getting started. Straight from the book, here are the nine building blocks of a business model:

    1. Customer Segments – An organization serves one or several customer segments.
    2. Value Propositions – It seeks to solve customer problems and satisfy customer needs with value propositions.
    3. Channels – Value propositions are delivered to customers through communication, distribution, and sales Channels.
    4. Customer Relationships – Customer relationships are established and maintained with each customer segment.
    5. Revenue Streams – Revenue streams result from value propositions successfully offered to customers.
    6. Key Resources – Key resources are the assets required to offer and deliver the previously described elements…
    7. Key Activities – …by performing a number of key activities.
    8. Key Partnerships – Some activities are outsourced and some resources are acquired outside the enterprise.
    9. Cost Structure – The business model elements result in the cost structure.

    What else? Is there anything else you’d add to the building blocks of a business model?