David Cummings on Startups

Category: Entrepreneurship

  • The 3:1 Customer Acquisition to Engineering Spend Ratio

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    First-time technology entrepreneurs repeatedly make a common mistake: they don’t budget enough for customer acquisition relative to software development/engineering costs. Over the past five years I’ve talked to plenty of entrepreneurs that raised angel money ($100k – $1m), spent 90% of the money building the product of their dreams, and realized too late that it costs serious money to acquire customers. Unfortunately, they weren’t able to show enough traction to raise more money and shut down the startup. It happens more than you think.

    There’s a distinct 3:1 ratio for customer acquisition (sales salaries, sales commissions, marketing salaries, and marketing expense) costs relative to engineering (software development, architecture, quality assurance, etc) costs. A typically software company budget might look like the following:

    • 60% – customer acquisition (sales and marketing)
    • 20% – software development/engineering
    • 20% – general and administrative

    Yes, some rare products have a self-service model resulting in the percent of budget to customer acquisition swapping with engineering but the majority of B2B software companies follow the 3:1 customer acquisition to engineering ratio. My recommendation is for entrepreneurs to pay close attention to these ratios when planning and building their company.
    What else? How you seen this 3:1 customer acquisition to engineering ratio in your experience?

  • Not Everyone Should be an Entrepreneur

    Diverging Paths

    Yesterday’s post on lifestyle modification to be an entrepreneur touched off a series of interesting comments. One thing I want to clarify is that as much as I talk about entrepreneurship I do want to make one thing clear: not everyone should be an entrepreneur. Everyone that wants to be an entrepreneur, and makes whatever necessary sacrifices, should have the opportunity.

    Here are some reasons why not everyone should be an entrepreneur:

    • The high highs and low lows of the entrepreneurial roller coaster make for an exciting, but stressful environment
    • The level of uncertainty and lack of information when making decisions is uncomfortable and disconcerting at times
    • The high chance of failure is scary (failure should not be frowned upon and 90% of companies fail within five years and 95% of companies never reach $1 million in annual revenue, ever)

    Each one of these reasons can be turned around as a reason why it is great to an entrepreneur due to the thrills of success, thriving on uncertainty, and beating the odds. Not everyone should be an entrepreneur but they should have the chance, if they want it.

    What else? What are some other reasons why not everyone should be an entrepreneur?

  • Lifestyle Modification to be an Entrepreneur

    The Statue of Liberty front shot, on Liberty I...
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    Last week I spent some time talking to the entrepreneur that I mentioned before that has his entrepreneurial desires trapped by the American dream of home ownership. This young professional has a business idea, two co-founders, a mortgage, and a finance background with no software development experience. I asked him where he’s spending his time outside his day job and he said there wasn’t much for him to do since he wasn’t a developer. Naturally, I told him that he should roll up his sleeves and learn HTML, CSS, and PHP or Ruby and get to work on developing his skills since software engineering is just like finance where you solve logic puzzles according to given rules.

    The real heart of the conversation came when he said he was going to continue helping out part-time on the business until they made enough progress to pay himself a salary and go full-time. I said that wasn’t a good approach because his goal is to be an entrepreneur noe and building a business on the side is going to significantly prolong the amount of time it’ll take before he makes enough progress for it to be his full-time job. A startup isn’t a part-time job (see Rob Kischuk’s comments on trying to get funding while still having a day job). I said he should view it like wanting to be a doctor — plan for four years of med school and a couple years of residency and you’ll have the right mindset. That’s right, he needs to modify his lifestyle now by cutting back his expenses and selling his house so that his spouse can support him without his income and plan for working full-time for the next six years, likely on multiple business ideas or pivots, before he’ll be back to where he is now in terms of income and ability to go on vacation for a week and not have to worry about anything. That’s a serious commitment, and not one to be taken lightly.

    What else? Do you agree a serious lifestyle modification will help him be a successful entrepreneur sooner?

  • Migrating Models from Enterprise Sales to Inside Sales

    Software as a Service
    Image by Jeff Kubina via Flickr

    Yesterday I had lunch with a successful entrepreneur in town to talk about our inside sales model. His business has raised a fair amount of institutional capital, been growing nicely, and realized it has a customer acquisition problem. His SaaS product sells in the mid five figures with a handful of six figure deals and he has an enterprise sales team resulting in a cost of customer acquisition that is twice the first year’s revenue.

    For SaaS companies, a good rule of thumb is that the fully loaded cost of customer acquisition (sales salaries, commissions, marketing salaries, and advertising) should be less than than the first year’s new client revenue of all new clients combined. The thinking was to move to an inside sales model with a lower average deal size and a significantly lower cost of customer acquisition.

    Here are some thoughts on migrating from an enterprise sales model to an inside sales model:

    • The type of sales management for an inside sales team needs to be more activity focused (calls, demo, and pipeline opportunities) and less relationship focused due to the shorter sales cycles
    • Enterprise sales reps are typically $70-90k base while inside sales reps are typically $30-$45k base resulting in the need to hire a new team
    • More focus needs to be on marketing and lead generation to build a steady flow of qualified prospects for the sales team (lead generation drives SaaS)

    Moving from an enterprise sales model to an inside sales model will be a difficult transition but appears to be the right move based on market dynamics and pricing.

    What else? What other thoughts do you have on migrating from enterprise sales to inside sales?

  • Business Idea: Content Marketing as a Service – Part 2

    All Marketers Are Liars
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    Continuing with yesterday’s business idea on Content Marketing as a Service, I wanted to flesh out the concept a bit more as the post generated a number of good comments and tweets. As the idea isn’t hard technically, the real challenge is customer acquisition and execution. Let’s look at some pros and cons of the potential business model:

    Pros

    • Broad, growing market need to deliver fresh content for inbound marketing
    • Readily available market of journalists and marketers that can produce high quality work as freelancers (potential for stay-at-home moms and dads as well to be part of the content contributors)
    • Economies of scale, expertise, and proprietary technology will enable delivery of the service significantly cheaper and more effectively compared to doing it in-house (think about the SecureWorks model)
    • Marketing departments have budgets with discretionary spend
    • Proliferation of online marketing tools is overwhelming for many marketers

    Cons

    • Difficult to convince marketers and executives that the content marketing as a service startup will be able to speak intelligently about a specific business and industry due to potential jargon and lack of domain expertise
    • No barriers to entry
    • Potential 3-6 month time period required to see value (visitors will come right away but marketing qualified leads could take time)
    • Trust issue with giving access to WordPress account, Twitter account, Facebook Page, etc for the outsourced service provider to execute the work

    Marketers and business executives need this type of service. I expect to see it on the market within 12-24 months, if not sooner.
    What else? What are some other pros and cons of the content marketing as a service idea?

  • Business Idea: Content Marketing as a Service

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    Image by Hao-Zhong Wang via Flickr

    More and more companies are buying into the inbound marketing approach of providing fresh, original content on a regular basis to attract visitors to their site. Unfortunately, understanding and believing in the idea doesn’t mean most marketing departments spend the time to make it happen. There exists a need in the market for a company to provide content marketing as a service.

    Here are some details around the idea:

    • A typical plan might be $1,500/month for one blog post/week, three tweets/week, and one email newsletter per month (based on the blog posts) as well as managing the tools to publish the content
    • The price point would be significantly lower than a full-time person in-house to do it
    • The price point allows for a marketing manager to put it on his or her credit card without having to get approval from others
    • Technology would be used to facilitate the workflow with approval process, coordination of freelance writers, and phone integration so that subject matter experts could talk for a couple minutes about a topic to have that content put into a blog post by a writer
    • The project managers and some of the editorial team would be in-house while the writers would be freelancers
    • Available up-sells include white papers, video publishing to YouTube, slide publishing to SlideShare, and coordinating webinars

    Yes, a PR or marketing agency would be happy to do these things but agencies are typically not set up to get economies of scale with this level of specialization and aren’t good at building proprietary technology.

    Inbound marketing works and the market needs content marketing as a service.

    What else? What do you think of the idea? Pros and cons?

  • The Real Estate Equation for Fast Growing Startups

    Bangalore Properties - Real Estate India - Vas...

    Real estate is tough for startups. There’s the unpredictability with where you’ll be in 24-36 months combined with one of the last remaining old boys network (at least in Atlanta). The best thing for startups to do is go the sublease route. Unfortunately, with the sagging commercial real estate market many of the subleases have dried up as companies that went out of business turned their space back over to the landlord and the macro economy has been soft for several years now resulting in enough time for many subleases to be rented by tenants.

    Subleases are most plentiful right after the economy turns downward and companies put excess inventory on the market. When things are starting to pick up, even so slightly like now, companies hold on to excess space longer in the event things do continue to improve and the space is needed. Fast growing startups have an even bigger challenge because they are hiring people so quickly they need an even larger amount of unused space on hand to accommodate the growth. There’s no easy equation.

    The best thing to do, absent a sublease, is to look for flexible landlords and build into the contract things like an option to break the lease early if you out grow it, right of first refusal on adjacent spaces, and flexibility to move into other spaces in the same complex without penalty. Yes, flexibility is the most important consideration for direct deals.

    What else? What other thoughts do you have on real estate for fast growing startups?

  • Business Idea: SaaS Line of Credit Provider

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    There’s a void in the market for high gross margin recurring revenue businesses to get a line of credit based on the recurring revenue. Banks are designed to lend money when you don’t need it (e.g. very profitable) or when you have assets to put up as collateral (a friend of mine got an SBA-backed bank loan for $1.2M to buy some franchises and had to put up $800k of personal money into a CD that the bank held until the loan was repaid).

    The most common assets for collateral are accounts receivables, real estate, and heavy equipment. Software-as-a-Service (SaaS) companies shouldn’t have any of those. Accounts receivables, especially if the majority of customers pay by credit card, are almost non-existent as the customer payment is made on a regular, timely basis (e.g. monthly). A SaaS startup’s appetite for capital is even more acute due to the fact that the “services” part of SaaS results in effectively leasing the product over the life of customer, as opposed to receiving a lump-sum of money up-front like with enterprise software. This clearly impacts cash flow and is made more difficult due to the cost of sales commissions and providing on-boarding and training services. SaaS companies are doing well if after 12 months of having a client they break even. Typically, it isn’t until years two and three that they start turning a profit.

    The business idea is a technology fund that provides lines of credit to SaaS companies. Here are some details:

    • The amount of capital is dependent on several factors including: monies received from recurring revenue in the past 90 days, gross margin, customer renewal rate, customer contract length (if any), and more
    • The fund has a core amount of capital that is then leveraged up with a third-party loan
    • Members of the fund’s management team must have technology experience and be willing to take over a SaaS company that doesn’t meet its obligations (the SaaS companies are using their business as collateral)
    • The idea is riding two waves: lack of sophistication from traditional banks to lend against recurring revenue without hard assets and the proliferation of small SaaS companies that aren’t venture backed

    There’s a clear opportunity in the market for a business like this and I hope entrepreneurs step in and fill the void.

    What else? What do you think of the idea?

  • Entrepreneurial Desire Trapped by the American Dream

    The American Dream (Mike Jones album)
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    Two separate young professionals that want to be entrepreneurs reached out to me this past week asking for advice. In each case they’re married, have great jobs, a mortgage, and want an angel investor to invest in their idea so that they can quit their day job while maintaining their current lifestyle. The chance of that happening is slim-to-none. Yes, investment from the three Fs (friends, families, and fools) is possible, but they want to avoid that route.

    These young men have an entrepreneurial desire but are trapped by the American dream.

    Of course, the American dream I’m referring to is home ownership. Home ownership requires them to keep working on their salary since their spouse’s salary alone doesn’t cover their costs. What about selling the home? The home price has decreased so much that they can’t afford to sell it. Their remaining option, which I suggested, is to rent out their house, live in an apartment, and cut their costs such that they can live off one salary and pursue their dream. Both young professionals said they didn’t want to do that.

    What do you think? Would you invest in young professionals that want to be entrepreneurs but aren’t willing to make serious personal sacrifices to do it?

  • Business Idea: iPhone App to Make Driving a Game

    black Audi R8.
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    Earlier today I was driving to my ALTA tennis match and enjoying the beautiful day. On Roswell Road heading towards Chastain Park, I was merging into the turn lane and found myself splitting two reflectors in the road due to vering a bit too early. The precision with which I spaced the reflectors on either side of my front left tire put a smile on my face and an idea popped into my head: there needs to be an iPhone app to make driving a game.

    I’m sure someone else has already thought about it and that an app already exists (I haven’t checked yet) but here are some thoughts as to how it would work:

    • Use the GPS and accelerometer to measure the car’s location and motion
    • Develop tracks or routes like “Lenox Mall to Piedmont Park” or “GA 400 Exit 1 to Harvest on Main in Blue Ridge, GA) and have leader boards based on route time, average speed, lateral Gs pulled, and more
    • Award badges and bonus points for items like the fastest speed through turn two, night owl for doing the route after midnight, etc
    • Be able to put in your type of car for a handicap (e.g. a Ford Explorer would get an adjustment compared to an Audi R8)
    • Allow for custom routes like recording your daily commute for more badge types and categories (longest commute, most variable commute, most turns in a commute, etc)

    Yes, there are some public safety concerns with people driving too fast in attempt to set a personal best or top the leader board but I don’t think it’s anything crazier than people already on the road.

    Driving is fun. An iPhone app with a community makes it even more fun.

    What do you think of the idea? Will it work?