David Cummings on Startups

Category: Entrepreneurship

  • International Product Distribution

    Subregions of Europe (UN geoschme)
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    Recently I was talking to an entrepreneur about international product distribution. The company already had a few clients overseas, mainly in the UK and Western Europe, and was looking for ways to proactively grow the base. To date, customers had come in as inbound leads from regular marketing campaigns. Here are a few considerations when thinking about international product distribution:

    • It is expensive to open a physical office and staff it with management, sales, marketing, and support.
    • Plenty of international companies specialize in reselling products, especially from American software companies, and are a good starting point.
    • If the international partner does product support, expect to do a more aggressive revenue split along the lines of 50/50 instead of the usually 10%-30%.
    • Look to sign up at least 10 international clients on your own to better understand any details or nuances of customers in foreign companies.
    • Product support including hours of operation become a much tougher issue with international clients.

    I think international expansion is a great way to grow but should be taken slowly unless you are already a $10MM – $20MM business and have the resources to make a major push.

    What else? What are some other considerations for international product distribution?

  • Community-Facing or Inward-Facing CEO

    "Castle Beach" – Singapore
    Image by williamcho via Flickr

    Earlier this week I was having dinner with a successful technology founder/CEO in town. After talking about what local activities he’s involved in it became clear that he’s much more involved with the community than I am. That’s when I asked, “Do you spend more time working with non-profits in the community than in your company?” Without missing a beat he said “yes” and outlined how he allocated his time.

    As a startup CEO, the more success you have the more requests there will be for your time, especially from the community. Here are a couple questions to think through:

    • How do I want to balance my time between industry activities, community activities, and company activities?
    • Do I want to be the face of the company like Steve Jobs of Apple or more behind-the-scenes like Jim Goodnight of SAS?

    My recommendation is to consider how your spend your time and balance community requests.

    What else? What other questions should CEOs consider regarding time allocation?

  • Considering Stock Options in Employee Compensation

    Stock options have been a part of the startup world for decades. We’ve all read how the receptionist and chef at Google became millionaires from their stock options that multiplied in value 100s of times by the IPO. Unfortunately, there’s a problem: most employees of startups over-value stock options in their compensation.

    I know of a startup in town that asked everyone on the team to take a serious pay cut when times were tough in exchange for many more stock options. Well, stock options are not well understood by most people and for the options to be in the money at this startup (e.g. worth more than the strike price), the startup needed to be valued at 15x the revenue. That’s right, the strike price was ridiculous. Most companies are valued at a multiple of profits (e.g. 4x-6x) or in the software business usually 2x-5x revenue. Thus the bar was crazy high and the employees were focused on the number of options as opposed to the percent ownership of the company. Having 100,000 options in one company could be less ownership than having 1,000 options in another company as it depends on how many total shares the company has and how many of those shares have been issued.

    For my company we generally don’t do stock options and instead focus on having our average compensation across all employees be in the 75th percentile as well as providing exceptional benefits (health, dental, 401k, disability, food, drinks, etc). People understand the value of a salary and benefits. Now, many startups would disagree with this approach but it has worked well for our culture.

    If you are an employee considering stock options as part of compensation I would ask the following questions:

    • How many total shares are there and how many outstanding? What percentage ownership of the company does this represent?
    • If the company sells for $5MM, $10MM, $25MM, or $50MM how much money would I get? Liquidity preferences of preferred shareholders can significantly affect how much money you take home e.g. even though you own 1% of the company you don’t get 1% of the proceeds.
    • What is the likelihood of raising more money and what would the dilution of shareholders look like?

    Stock options, or more commonly restricted stock now, represent a part of the startup world. My recommendation is to really understand them when considering overall compensation.

    What else? What other tips do you have when considering stock options as part of compensation?

  • Ask People to Accomplish Tasks for User Testing

    Building high-quality software is still more of an art than science, especially with the preponderance of different opinions to accomplish even the simplest of functionality. With the rise of open source software, great web development frameworks (e.g. Rails), and lighter languages (e.g. Ruby) it is cheaper and faster to build web applications. It’s hard to make an app easy. It really is difficult.

    One of the best ways to do user testing is to grab a person who hasn’t used the software before, give them a gift certificate or pizza, and ask them to accomplish tasks in the product. That’s it. Don’t ask about the color scheme, positioning of icons, or arrangement of navigation links. Simply ask for some deliverables and get out of their way.

    A critical part of this process is to not lead them on asking “what did you think about X” while they’re in the middle of the process. Too often product managers and co-founders are so excited about the product that they can influence the activities of the tester. It is best to make the desired tasks black and white and put them in front of the tester and have he or she go to town.

    What else? What other recommendations do you have for user testing?

  • Published Prices Aren’t Always the Main Business Model

    Photo taken in Atlanta area
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    Whenever I come across a pricing page on a site I immediately think “Oh, OK, that’s how they make money and where they fit in the market.” Well, recently, I came across a company that I knew how many employees they had, how many customers they had, and saw their published pricing. After some simple mental calculations, and knowing they hadn’t raised money, I quickly realized the math didn’t make sense. They couldn’t support that many employees with that little revenue, even in Atlanta (great Fast Company interview of Alan Taetle).

    After asking around I found the answer. The monthly fee for the web service is what everyone pays, and it is very competitive for what they offer, but if you choose to use their “free” payment processing option, they charge an additional 1% of the transaction fee as an additional commission. Yep, that’s right, they generate more annual revenue on that 1% transaction fee than from the monthly service for their product. Only, you wouldn’t know it from browsing their site.

    My recommendation is to think through ways to generate multiple revenue streams, and consider ones that aren’t always as obvious as a monthly subscription fees (yes, recurring revenue is the best form of revenue).

  • Google Docs and Gmail Canned Responses for Process

    Image representing Gmail as depicted in CrunchBase
    Image via CrunchBase

    As a startup grows from a couple co-founders to small team and eventually to departments, it becomes important to add more process while not stifling innovation. One of the best ways to start adding more structure is to document activities in Google Docs and create Gmail canned responses to go with them. Here are some tips:

    • Use Google Documents for unstructured content, canned response emails, and any other documentable information
    • Use Google Spreadsheets for processes that are linear and structured
    • Use Google Drawings for Visio-like drawings that have conditionals and dependencies
    • Use Gmail canned responses for as many steps as possible (e.g. sales process, recruiting process, accounts receivables process, etc)

    My recommendation is think through processes that are repeated and document them as well script out canned email responses. In addition to saving time and providing greater consistency, another benefit is more efficient delegation to new team members.

  • Non-Compensation Sales Rep Recognition

    Photo of Cormac O'Reilly, the Sales Guru.
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    Sales are the lifeblood of most organizations and sales reps are an integral component of success. I love sales people as they are typically out-going, passionate, and easily carry a conversation. Yes, money is a primary motivator for sales people but it is also important to have non-compensation recognition. Here are a few of the ways we do that:

    • Hero of the month award voted on by other team members (any department, not just sales)
    • Mentor program for senior reps to help junior reps
    • Million dollar club (once a sales reps has sold $1 million in total recurring revenue)
    • Priority choice for tradeshows (e.g. shows in San Francisco are more desirable)

    My recommendation is to consider ways to recognize sales people beyond financial remuneration.

    What else? What are some other good ways to recognize sales people?

  • Google Tips to Gauge Industry Competitiveness

     

    Google Appliance as shown at RSA Expo 2008 in ...
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    So you’re thinking about building a new product and are in the due diligence phase of the research. You’ve found a few companies in the space but you don’t have a good feel for competitiveness in the industry. Here are my top three Google tips to help with your research:

    My recommendation is to employ these three tips whenever you’re researching a potential industry.

    What else? What are some other Google research tips?

  • Don’t Ask Yes or No Questions in Sales

    Opening (inverted) and closing question marks ...
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    Continuing with our sales theme from yesterday, the next topic I want to look at is asking questions during the sales process. We’ve been trained by our parents to be polite and ask yes or no questions (e.g. can I have a second piece of cake, can I go to Jimmy’s house, etc). The problem with yes or no questions during sales is that you’ll do all the talking and prospects will quickly close out the conversation. The most important thing you can do during sales is to get the prospect talking by asking quality, open-ended questions that start with the following words:

    • Who
    • What
    • Where
    • Why
    • When
    • How
    • Which

    A great question to always have handy is “How so?” That way, the prospect can continue explaining whatever it is they were talking about and go into greater detail. The best sales people are great listeners and ask great questions. Sales is about listening more than selling.

    What else? What are some other tips related to asking questions in sales?

  • Features, Benefits, and Advantages

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    At today’s EO Accelerator education workshop on sales, one of the comments the facilitator, Jim Ryerson, said really caught my attention: every company needs to quickly explain their features, benefits, and advantages. Most startups talk about features and benefits, but rarely explicitly get into their advantages. Let’s look at simple definitions in the startup context:

    • Features – product functionality and abilities
    • Benefits – the outcomes from using the product features
    • Advantages – differentiating factors compared to other competitors in the market or traditional methods

    For the advantages, stating the competitor’s name isn’t required, but a nice sales tip when a prospect says they use a competitor is to ask how they accomplish some task or provide some service that the other company doesn’t do, without being condescending. For example, say your competitor doesn’t offer quarterly strategy calls you might ask, “How did your most recent quarterly strategy call go?” Of course, since the competitor doesn’t do those you’ll get the prospect thinking as to what else the competitor doesn’t do.

    My recommendation is to have scripted messages around features, benefits, and advantages while making sure everyone in the startup is on the same page.