David Cummings on Startups

Category: Entrepreneurship

  • 2010 Atlanta-Area Inc. 500 Companies

    Photo taken in Atlanta area
    Image via Wikipedia

    The 2010 Inc. 500 awards just came out and there were eight Atlanta-area businesses on the list. Now, I’m personally disappointed there weren’t more but I know of several local companies that are doing great and will likely make it next year. Let’s take a look at the businesses:

    Congratulations to all the companies that made the list!

  • Margins and Business Models

    IMG_4401

    One area that I find many first-time entrepreneurs don’t think through is the type of potential margins for their business model. Let’s talk about the two main types of margins:

    • Gross margins are the percent of revenues after only the product/delivery costs are taken out.
    • Net margins are the percent of revenues that result in profit after all costs.

    As an entrepreneur, it is important to understand both gross margins and net margins. For me right now, I’m only interested in business models with potential gross margins greater than 70%. That typically rules out physical products, services, and other businesses that are labor intensive. High gross margin businesses are important to me because they often provide for more scalable enterprises, with greater profit opportunity, which allows for more latitude to invest in growth.

    What else? What other considerations do you have for margins and business models?

  • Hiring Your First Sales Person

    An entrepreneur in town recently reached out to me for advice as he’s about to hire his first sales rep. Building a sales team is no easy task, and hiring successful sales people ranks right up there as being one of the most difficult positions to figure out if someone will work out. Why? Sales people are the best at selling themselves, and not always your product. A great sales person is worth their value many times over.

    I’ve written about sales on numerous occasions. Here are some of my posts:

    What else? What other advice would you give to someone about to hire their first sales rep?

  • The Difficulty of Modernizing Legacy Software

    Outline of a cloud containing text 'The Cloud'
    Image via Wikipedia

    As part of my recent project researching ideas on building high quality prospect lists, I reached out to several different providers. One of the companies had a really promising product that allowed for slicing and dicing data, presumably from Dun & Bradstreet or Hoovers. After getting excited about their technology, merely based on their marketing collateral, it came time for the product demo from a sales rep.

    Guess what?

    The application with a Windows product with no web-based components at all. Their response to the question about them building a Software-as-a-Service product: no plans at all. Now, I don’t know how successful this company is but it was pretty amazing to see a product that clearly should be in the cloud, connected to CRMs like salesforce.com and SugarCRM, and all around part of the normal web ecosystem.

    The point here isn’t what one single company should do, but rather the difficulty of modernizing legacy software. Once companies become successful with one product, working one way, it is incredibly difficult to introduce a new or modern product built from the ground up.

    With difficulty comes opportunity. Startups don’t have the legacy baggage of code debt, existing customer needs, and the status quo. Wherever you see a legacy system that is still continuing along, there’s room for a startup to do a modern version of the product, in the cloud, and be successful.

  • Ask the Right Questions

    One major takeaway I have from working on startups over the past 10 years is that asking the right questions is more important than providing the answers. With startups, many if not most challenges that arise require someone to accomplish a task that they haven’t done before. Naturally, as one of the leaders of the company, people come forward with issues looking to you for answers. This is where it’s important to ask the right questions and do your best to empower the person to solve it on their own.

    Don’t get me wrong, it is important to help, but the best way to help is by asking the right questions. Some thoughts on asking the right questions:

    • Ask the five whys
    • Ask for his/her current recommendation
    • Ask what was done so far
    • Ask about the next steps

    What else? What other questions should be asked?

  • Parallel Entrepreneurs

    Reading the ATDC Team page for yesterday’s post, one of the terms that stood out, but isn’t seen too often, comes from Paul Freet’s bio:

    Paul is also a parallel entrepreneur and enjoys creating startups.

    A parallel entrepreneur is someone who builds more than one company at a time. The biggest reason I believe we’ll be seeing this more frequently is that the time, money, and effort to launch a website/web app has gone down significantly over the past decade. That’s not to say it doesn’t take a meaningful amount of money to launch a business — it does — but if you have technical skills, it is easy to start experimenting with works and what doesn’t work.

    Now, I don’t recommend being a parallel entrepreneur for everyone. For some types of personalities, especially people who enjoy the getting-the-company-off-the-ground stage of a business, it can be very rewarding.

  • Power of Building Relationships First

    A very obvious piece of advice: the time to start building relationships is now. Yes, relationships. Relationships for a variety of reasons take time to develop and it’s best to seek out people to get to know them well in advance of needing their help. Here are some types of people you should consider:

    Relationships are likely to take longer than you expect to develop. My recommendation is to start building your network now.

    What else? Do you agree/disagree? What are some other types of people you should consider?

  • SaaS Products with the Same Name as the Company

    One of the many exciting decisions to make when starting a company is the name of your first product. For many software-as-a-service (SaaS) companies, the product is synonymous with the company and is referred to as the same name as the company. Depending on if you’re taking a multiple product approach vs a single product approach, it is important to think through the product naming convention.

    Some companies like GE name every division using the company name followed by a word specific to what they do e.g. GE Energy, GE Capital, etc. Other companies like P&G have different brands for their products and don’t co-brand them with the P&G label e.g. Tide, Bounty, Duracell, etc.

    My recommendation for SaaS companies is to call your main product the same name as the company and keep it simple, or add a generic term after it like “App”, “Suite”, or “Platform.” Once you are successful your customers and users will identify with the company and not the individual product.

  • Buy/Sell Agreements for Startups

    One of the more important legal documents startups should have in place, especially between co-founders, is a buy/sell agreement. A buy/sell agreement basically outlines an arrangement for the company to buy back stock when an equity owner leaves the business, especially businesses that haven’t raised money from outside investors.

    Think about it: if you and a co-founder go into business together planning on building a company for the next five or more years, and he/she leaves after the first year (no longer interested, passes away, retires, etc), you want to be able to buy back his/her equity. It is better to negotiate those arrangements when you are on good terms and not after a problem has arisen.

    A few ideas around buy/sell agreements:

    • Include one or more formulas for the value of the shares (e.g. some minimum return on investment, a multiple of revenues, a multiple of profits, etc)
    • Consider the option that if one founder offers to buy out the other founder, the non-originating offer founder gets the right to buy out the originating founder’s offer (this keeps things honest and is called a “shotgun” term in the real estate investor world when two partners are at odds)
    • Think though having a cliff and vesting schedule as part of the co-founder equity considerations

    What else? What other considerations do you recommend for buy/sell agreements?

  • Passionate Customers with Kids Consignment Sales

    Each time in the Fall, for the past two years, my sister-in-law has attended a kids consignment sale in Durham, NC near the RDU airport. I’ve heard her talk about it several times, and every time you can literally hear the excitement in her voice. The consignment sale has tons of great kids clothes and toys at awesome prices. For her, one of the best parts of it is the priority access she gets where you get to go through and purchase stuff during a private pre-sale only available for certain people.

    Now, this is where it gets interesting. Inquisitive as I am, I asked how she gets access to the pre-sale. One way to get access is to bring 10 items, only from specific brands, a week in advance to put up for consignment at the show. Once those items are evaluated and approved, then your name gets put on a list. That’s for one day before the show begins.

    The even more amazing thing is how to get access to the show two days before it begins. How, you ask, do you get such early access? Glad  you asked. Here’s how: you volunteer for 20 hours helping the show producers sort items, put on price tags, and generally do whatever they need help with. Wow, 20 hours of labor to get access to a consignment show? Oh, and it is a for-profit event. That’s right, the people who put on the show get moms to work for free for them so that they can then buy stuff from them where the stuff they buy is from someone else on consignment, hence the owners of the show don’t have to carry any inventory.

    If that’s not some of the most passionate customers, I don’t know what is — and, yes, my sister-in-law is one of the ones who donates 20 hours of labor to get first dibs access to the goods.

    What do you think? What are some similar stories you’ve heard of regarding passionate customers doing things that are hard to believe and loving it?