David Cummings on Startups

Category: Entrepreneurship

What’s your FOTS plan?
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Sometimes startups need to engage in good old fashioned hand-to-hand combat and hit the streets to get customers. Twitter and Foursquare launched this way at SXSW. A friend of mine introduced me to FOTS recently which stands for Feet On The Street and the idea behind it is to set up a points system for your team members along with relevant goals (e.g. 100 points per quarter). Here are some examples:
- 1 point for each business card collected
- 3 points for each scheduled meeting
- 3 points for each targeted referral
- 5 points for each book delivered
- 10 points for each face-to-face meeting completed
- 40 points for serving on a panel
Now, activities should not be confused with results, but this is the right idea. These types of activities are more closely associated with professional services firms but can be applicable to a variety of startups.
October 12, 2010
Ask Prospective Investors About the Ideal Exit
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Yes, the ideal exit for a prospective investor is going public and having a $170 billion market cap like Google. In reality, the more likely exit is via acquisition by a larger company at a much smaller value. It is critically important to find out and align expectations with a prospective investor as to what the ideal return looks like as well as the minimum exit value for it to be worth their time. Here are some questions to ask:
- What type of cash on cash multiple do you shoot for? Minimum acceptable?
- What internal rate of return do you shoot for? Minimum acceptable?
- What percentage of your total fund do you look to return to your limited partners (LPs) on any single deal?
That last question is especially important as the larger firms result in a larger amount. As an example, say the fund is $200 million and the investor looks to return a minimum of 10% of the fund on any one deal, that’s a minimum of $20 million for the investor’s stake in the company. Say the investor will have 25% of the company, that means that the company needs to sell for $80 million for the investor to return the amount of money that is meaningful to their LPs.

My recommendation is to ask these three questions when talking to potential investors to learn about the type of returns that will make it worth their time.
October 11, 2010
Position a Product to Grow Into or Out of It
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One area that first-time entrepreneurs often give little thought to is how they are going to position their product. Generally, the desire to start a company and build a product is driven by the goal to “scratch an itch” and fix a problem or grab an opportunity. I’d like to divide product positioning into two super simple categories:
1. Little to no learning curve and you eventually grow out of it
2. At least some learning curve and you grow into it
Yes, there are many more nuances than this but for many entrepreneurs this provides a simple framework with which to use, especially for the many 37signals inspired simple web apps out there that fall into category 1. Once you’ve chosen a category, next you should find a product that falls into the other category relative to your product. Typically I’m against paying too much attention to competition and instead focusing on customers and prospects, but the competition works well in this case. Now with a deep understanding of the competitor that falls into the other category, make a list of the differentiation points that serve as a transition between the products and use that as a guide when building the product.

What else? What other points would you add with regard to growing into and out of products?
October 10, 2010
High Class Problems in Startups
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Recently a startup founder was asking me questions about how to architect his new web application so as to scale with millions of users. I told him that’d be a high class problem and he shouldn’t even worry about it right now as a minimum viable product is most important focus. Here are some high class problems in startups:
- Scaling the web app due to so many users
- More qualified job applicants than you can hire
- Funding round oversubscribed by investors
- More leads than your sales team can follow-up with in a timely manner
My recommendation is to not worry about high class problems and instead focus on what you can control and warrants attention.

What else? What are some other high class problems for startups?
October 9, 2010
Customer Intimacy and Product Management

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At today’s Atlanta technology community lunch the featured guest was Promod Haque, one of the most famous VCs in the world. One of the stories that stood out to me was when Promod recounted when it was first emphasized to him that customer intimacy was a major key to success.

10 years ago Promod was chairman of a company where the CEO was actively recruiting a VP of Engineering. The VP of Engineering was almost ready to join the company but stipulated that he had to talk to the chairman in person first. Promod, curious about this request, met with the prospective VP of Engineering, and was posed one single questions: is there money in the budget to hire a VP of Product Management? After saying, yes, of course, that they were actively recruiting a VP of Product Management, Promod inquired as to why this gentleman was concerned. The prospective VP of Engineering said that he can build anything but that he needs a VP of Product Management that is truly connected to the customers and can distill down what needs to be done. The yin to his yang would be critical to the success of the company.

My recommendation is for one of the company co-founders to own product management and make it one of his or her top priorities. Product management is one of the more difficult skills to hire for and is best done by someone who is truly passionate about the product and builds great rapport with customers.

October 8, 2010
Burnout in Startups
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Many people talk about how much hard work it is to build a company. I particularly enjoy the phrase “an overnight success takes 10 years.” One aspect of entrepreneurship that isn’t talked about very often is burnout in startups. Michael Arrington, the founder of TechCrunch, recently cited burnout as one the of main reasons he just sold his company to AOL. A startup is often all-consuming, and after five years, can be difficult to maintain the pace.

After the company has achieved a level of success and stability I believe it is important to start moving towards a work/life balance. Here’s a few of the things I’ve found useful:
- Daily thinking time (I walk a mile every other day)
- Weekly date nights with your significant other
- Monthly peer group meetings (see EO or YPO)
- Quarterly off-site celebrations with the company
- Quarterly vacations
What else? What are some other ideas for work/life balance to help with burnout in startups?
October 7, 2010
Sales Rep Territories and Multiple Lead Queues
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Building a sales team is one of the more difficult things to do as an entrepreneur. You see, sales people are a great type of person that can sell themselves better than anybody, but it isn’t easy to determine if they’ll be effective for your product and prospects. Another challenging aspect of building a sales team, in addition to finding the right people, is determining who gets what leads. The traditional approach, especially with field reps, has been territories or geographic regions. The biggest challenge with territories for fast growing companies is that as you hire more sales reps territories inevitably shrink leading to disillusionment among sales reps, especially if their sales volume goes down after being a high performer.

We have an inside sales team and don’t do territories. Here’s what we do:
- Two different lead queues for round robin assignment of leads
- The first queue is for regular leads that come from standard sources like white paper downloads, campaigns, etc
- The second queue is specifically for test drive sign-ups as those are our best and highest qualified leads
Both queues are round robin and by having two different queues we solve the problem of the highest quality leads getting passed out in an equitable manner. This avoids the situation where all leads go to the same queue and certain reps having bad luck with the leads that come their way.

My recommendation is to think through these challenges early in the process of building a sales team as it can help the moral and effectiveness during fast growth periods.
October 6, 2010
The Trifecta of a Perfect Business Model
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Most entrepreneurs start a company based on an idea that they are passionate about without regard to some of the more optimal financial ingredients in a business model. Let’s take a look at the trifecta of financial attributes for the perfect business model:
- Recurring revenue — revenue that recurs on a monthly, annual, or multi-year basis is the best as it provides predictable cash flow
- High renewal rate — going hand in hand with recurring revenue, renewal rates at 90% plus provide future enterprise value and contribute to the predictability of the business
- High gross margin — revenue that has little to no marginal cost for each additional customer provides more room for profitability and investment in the business
A couple examples of businesses that typically meet these criteria include private wealth managers and software-as-a-service providers. My recommendation is to consider these three attributes when thinking through a business model.

What else? What are other attributes of a perfect business model?
October 1, 2010
Valuing a Business
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Last night EO Atlanta had an event on positioning a business for sale including how to value it. Typically a business that is bought by an acquirer actively browsing is worth more than when a company shops itself around to other companies. Let’s look at a few more factors in valuing a business:
- Concentration of customers (e.g. one big customer or lots of little customers where more customer variety usually is worth more)
- Gross margins (percent of revenues after only product/service costs are taken out with high gross margins being more valuable)
- Recurring revenue (percent of revenue that comes from monthly or annual fees with higher percentage of recurring revenue being more valuable)
- Profits over the last twelve months (a simple formula for an average company is that the company is worth 4-6x the previous year’s profits)
- Growth rate over the last twelve months (faster growth rate is more valuable)
- Liquidity of the shares (more liquidity like with publicly traded companies is typically much more valuable e.g. 50%+ more valuable)
As you can see there are many different factors in determining the value of a business. It comes down to what another company or person is willing to pay for it with the more profitable and faster growing businesses being more valuable. An example would be a company with $1 million in trailing twelve months revenue with $200,000 in profit (assuming founders and management had market rate salaries) might be valued at 5x the profit, or $1 million. Some companies with no profits are bought for many times revenue due to their strategic value whereas other companies with significant revenues are bought for only a fraction of revenue due to significant debt, losses, and a decline in the business (e.g. Newsweek for $1).

Valuing a business is tough as the market of buyers is usually very small. These guidelines can help you come up with a rough idea of what a business might be worth.
September 30, 2010
Venture-Backed Zombie Startups
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There’s a term used to describe startups that have raised money from venture capitalists (VCs), been around for several years, built sustainable businesses, but don’t have the hockey stick growth necessary to raise more money or provide a venture quality return: zombies. Zombie startups are actually more prevalent than you might think and represent one of the more difficult situations for VCs. Here’s a few reasons why these are so tough:
- VCs often have more money than time and can only sit on a limited number of boards and still be effective
- Once a VC believes an investment is a zombie they want to sell it and move on
- Valuations are down significantly compared to three years ago and companies that try to sell themselves often don’t command as much money as when a strategic buyer comes knocking
- The VC still has a personal reputation and brand to maintain thus needing to provide significant energy to sell the company and get the highest price as part of their fiduciary responsibility to the limited partners in the fund
Now, if the startup was bootstrapped and in the same position it could still be a great business for the managers and employees to continue indefinitely. It is very unlikely for a VC to sell his or her stake back to the company or co-founders due to the difficulty of the buyer coming up with enough money. Zombies are part of the startup community and should be understood by entrepreneurs.
September 29, 2010