David Cummings on Startups

Category: Entrepreneurship

  • A Killer Feature or a Killer Collection of Features

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    This one’s a tough one because you won’t know until you’re successful but the best products have a killer feature or a killer collection of features. The distinction here is terribly important as some products only need one killer feature (e.g. automatically identifying companies on your website) while other products need a collection of features that when combined make it a killer product (e.g. any one feature of Basecamp isn’t nearly as useful as the collection of features).

    A killer collection of features is one of the main reasons we see feature creep in products as well as startups in stealth mode for an extended period of time — the entrepreneur/product manager believes it needs substantial functionality to be useful. These are the most common startups that die because they take so long to validate.

    A killer collection of features is more difficult for several reasons:

    • The functionality takes longer to build resulting in a greater chance of running out of money
    • With more functionality comes more friction to adoption and understanding
    • The chance of adding useless features grows while the chicken and egg problem of needing happy customers without a killer collection of features grows

    My recommendation is to think hard about your killer feature or your killer collection of features necessary for success. The latter is much more difficult to achieve but is more commonly found.

    What else? What other thoughts do you have on killer features vs killer collections of features?

  • Economics of a Roll-Up Strategy

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    This morning I had the opportunity to talk with an entrepreneur that is starting the process of doing a roll-up for his market. After boot-strapping his company for the past 15 years he’s achieved a bit more than $10 million in annual revenues. Now, he’s made good money being the sole owner of the business and but he was ready for a new challenge: $50 million in annual revenue in five years through acquisitions and organic growth. His thinking is that his firm will be significantly more valuable to an acquirer with greater scale and more comprehensive offerings.

    What are the economics of a roll-up strategy?

    The current company, with $10 million in revenue, might have 10% margins (e.g. make $1 million/year profits), making it worth 4-5x profits (so, $4-5 million in value). Potential acquisitions are other firms in the space with lower revenues and are valued mostly based on profits, but also based on longevity of profits and growth rate. Thus, a firm with $2 million in revenue, 5% margins, and $100,000 in profits might be acquired for 10% of the equity of the combined entity even though revenue is 20% of the combined entity.

    Why would the smaller company do this? As profits increase, company value as a multiple of profits increases due to the potential for greater economies of scale and sophistication of a potential acquirer such that a company with $5 million in profits might be worth 7-8x profits ($35-$40 million in value). So, for the smaller company, their same $100,000 in profits might be worth double (e.g. going from a 4x profit multiple to an 8x) due to being part of a large company. This happens all the time.

    Roll-ups are extremely difficult and the best acquisitions happen with aligned corporate cultures. The economics make sense for entrepreneurs that are ready to hitch their wagon to someone else’s train and believe that the opportunity for success and the weighted expected outcome is higher.

    What else? What do you think of the economics of a roll-up strategy?

  • Pods in R & D at salesforce.com

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    A friend of mine from college joined salesforce.com (yes, all lowercase is the proper spelling — it’s a late 90s dot com thing) right after he finished business school and has been there for several years. At last year’s Dreamforce conference I was asking him about their engineering department and how they structure on-shore/off-shore software development. He said all the R&D is done in San Francisco in a pod-like setup similar to yesterday’s post on pods at Rackspace.

    Here’s some info on pods in R&D at salesforce.com:

    • There are roughly 28 different teams/pods
    • Each team focuses on a specific module or piece of a module in the product
    • The pods have one product manager, roughly five engineers, and a QA person
    • Each pod does a daily stand-up scrum meeting led by the product manager
    • The large number of product managers allows each of the small teams to stay close to the customer and minimize the telephone game where details get lost in layers of bureaucracy

    The pod approach makes it easy for salesforce.com to scale their R&D by adding more and more pods as the business grows while staying agile and innovating quickly.

    What else? What do you think of the pod approach to scaling R&D?

  • Pod/Matrix Team Approach in Startups

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    A couple years ago the co-founder of Rackspace told his success story to the EO Atlanta chapter. One of the takeaways I enjoyed from the event was the concept of the pod/matrix approach. Morris, the co-founder, recounted Rackspace hitting several hundred employees and feeling the growing pains trying to service customers with fanatical support. They had dozens of people of in their support department, dozens of account managers interfacing with customers, and dozens of people in accounting to field all the billing questions.

    Departments where having difficulties with more and more layers of management and customer complaints were increasing. In addition, the executive team was really concerned as to how they would scale the entire business from a few hundred people to a few thousand. The solution was a pod system where teams of five were built to handle the majority of customer questions quickly and efficiently. Pods were built to match the most common customer requests:

    • Two Tier 1 support reps
    • One Tier 2 support rep for harder technical issues
    • One account manager for sales
    • One accounting clerk for billing

    With these pods in place, scaling the business was simply a matter of having more and more of these teams as they added more and more accounts. Problem solved.

    What else? What are you thoughts on a pod/matrix system like this?

  • On the Startup Path

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    As I was rushing to the airport tonight to fly from Chicago to Atlanta (I’m prone to be late) I had time to reflect on the train. You see, sitting on the train to Midway Airport there was nothing I could do to speed things up to catch my 6:45 flight. I had my goal in mind: make my flight so as to get home at a reasonable hour for a weekend with my family.

    Being the startup geek that I am, I equated the experience with entrepreneurship.

    Entrepreneurs have a goal of building a successful company. Once the goal is crystallized, much like my more simple quest to get home to my family, you start working backwards and planning the steps to achieve it. During many parts of the entrepreneurial journey there are situations where you put yourself in a position that you are at the mercy of others around you, no matter how much you’d like to speed things up, similar to how I was sitting on a train hoping to get to the airport faster.

    The most important takeaway is there are many things you can control and many things you can’t control. Setting your sights on a target, controlling what you can control (that was a favorite line of Andre Agassi’s coach), and putting yourself in a position to succeed makes all the difference.

    What else? What are some other parts of the startup path?

  • Mission, Vision, and Values

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    At last week’s EO Strategy Summit we spent time on a number of topics and one of the areas was around mission, vision, and values. EO does a great job with these and should be commended. Here’s a definition of each and EO’s position:

    • Mission – purpose, reason for being, the “why”
      EO mission:  Engage leading entrepreneurs to learn and grow.
    • Vision – where we’re going, aspirations
      EO vision: To build the world’s most influential community of entrepreneurs.
    • Values – non-negotiable rules of the road
      EO values:
      Boldly Go! – Bet on your own abilities
      Thirst for Learning – Be a student of opportunity
      Make a Mark – Leave a legacy
      Trust and Respect – Build a safe haven for learning and growth
      Cool – Create, seek out, and celebrate once-in-a-lifetime experiences

    Mission, vision, and values are important and I recommend entrepreneurs spend time working on them for their startup.
    What else? What do you think of mission, vision, and values?

  • Little Apps or More Modules in the Core Product

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    Sometimes we get the urge to build a little app on the side to solve a certain problem that isn’t as core to our main product (like billing). Fight the desire, we must. Building a small app outside the core product introduces a host of challenges like:

    • The fresh excitement to build an app from scratch wears off when no one wants to maintain it on a day-to-day basis
    • Testing and QA won’t be as rigorous due to higher priorities
    • Interface changes won’t be implemented consistently due to the separate code base
    • Server monitoring and administration infrastructure won’t be as thorough due to unique aspects of the architecture that are different from the main app

    My recommendation is to avoid making little apps when at all possible as maintenance of them becomes a serious challenge. Unfortunately, they won’t be given the necessary on-going attention.
    What else? What other thoughts do you have on making little apps vs more modules in the core product?

  • The RSS-Driven Startup Dashboard

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    RSS is great in that so many apps support publishing and consuming the XML format. So much so that it really becomes the core plumbing to drive a startup dashboard. Tools like Google Reader, Socialite Mac, and Thunderbird support bringing in RSS feeds along with other types of information, perfect for creating a central hub of data.

    Here are some potential items for the RSS-driven dashboard:

    As you can, this is really a list of critical business apps and RSS provides a mechanism to centralize the most important information for each, which in turn represents the current pulse for the entire business. Of course, this could lead to information overload but I’ve found it’s better to have too much information compared to too little.
    What else? What do think of an RSS-driven dashboard and what feeds would you add?

  • Business Idea: Prospect Instant Call-Back and Qualification Service

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    There’s a need in the market for a technology-enabled business services startup that specializes in calling inbound leads and qualifying them immediately in a pay-per-action manner. Most companies do a poor job of getting back to prospects that raise their hand for the first time in a timely manner. Think about this: when you fill out an online form, how long does it take for you to hear back from someone? In my experience, I expect to talk to someone within 24 hours of filling out a form, would prefer to talk to someone within an hour, and usually hear back in 2-3 days, if I’m lucky.

    It isn’t that companies don’t want to follow-up on their new prospects instantly, it is that it is too costly to staff a dedicated person to do it and existing sales and marketing teams already have competing priorities. Studies have shown that the sooner you get an inbound lead on the phone after they request information, the higher the chance of closing the deal. That’s right — let a lead linger and every hour you wait the chance of them buying from someone else goes up.

    Here are some ideas on how the business might work:

    • Pay a fixed cost per lead called and qualified (e.g. $50) as well as a bonus for the desired outcome (e.g. an additional $25 if a web demo is scheduled on the phone)
    • Allow for hot-swapping the call from the person qualifying the lead to a sales rep
    • Provide a set of standard questions to qualify the lead as well as simple next steps.
    • Use an extremely friendly, well-paid onshore call center
    • Interface with leading marketing automation, inbound marketing, and CRM products to process leads
    • Partner with marketing agencies, appointment setting firms, and marketing technology products as the indirect channel
    • Sell directly to marketing managers and sales managers espousing the benefits of timely follow-up

    There’s a marketing opportunity for a technology-enabled business services company to fulfill this need and provide more timely call-backs to new prospects. Everyone wins: sales and marketing close more deals and leads get to talk to a company representative faster.
    What else? What do you think of the business idea?

  • ARMD Goals for Startups

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    Continuing the EO Strategy Summit theme from yesterday, there was another new methodology used that I hadn’t seen before: ARMD goals. Back in 2008 I talked about SMART goals, and now that I know about ARMD goals I like them better because they are simpler and don’t have the redundancy sometimes found in SMART goals.

    Here are ARMD goals:

    • Actionable – What specific things need to be accomplished?
    • Realistic – How attainable is the goal?
    • Measurable – Is there a number (metric is ideal) or “completed/not completed” that can be attached to it?
    • Date – When is it going to be done?

    My recommendation is to answer the four points of ARMD when making goals.
    What else? What do you think of ARMD goals?