David Cummings on Startups

Category: Entrepreneurship

  • Why Groupon will Continue to be a Success

    Groupon logo.
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    There have been so many discussions as of late about Groupon and clones, especially with regards to whether or not Groupon will continue to be a major success. Here are some of the common shots at it:

    • It’s only an email list
    • They only do one deal per day per city
    • Anyone can compete with them
    • Their 50% fee to businesses isn’t sustainable
    • People who use it aren’t repeat customers and therefore not profitable customers

    Here are reasons why it will continue to be a major success:

    • Building a critical mass of opt-in email addresses is terribly difficult and expensive, combined with fatigue from people getting emails from too many different competitors
    • Groupon already announced that they are going to offer multiple deals per city per day targeted against user preferences as well as hyper local deals based on zip codes
    • Creating a massive sales force to sell to local businesses takes a small fortune, and the only other companies suited to that are existing yellow pages and coupon companies, not low-cost startups
    • Businesses will always be opening new locations, remodeling existing locations, as well as other types of constant change that will make running a Groupon campaign beneficial to bringing people in the door

    What else? Do you think Groupon will continue to be a huge success?

  • Offline Analogy to Describe a Startup

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    One of the most powerful ways to describe a startup’s business is to think of an offline analogy. The idea is to create a hook in the listener’s mind so that they understand and remember the startup’s purpose. By using an offline analogy, you connect to a more known quantity.

    Here are a few examples:

    • We’re like the printing function of FedEx Kinko’s, but entirely web-based with next day delivery at 30% less
    • We’re like a manual financial audit by a CPA, but done automatically every night
    • We’re like the Manheim Wholesale Auto Auctions, but online for dealers only

    It can also be useful to try out a few different offline analogies to find the one that is most memorable. My recommendation is to come up with an offline analogy for your business and use that when describing your startup. The most important goal is to have the person you’re talking to be able to recall it in the future for potential customers, partners, investors, and employees.

  • Launch Fast, with Minimum Viable Product

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    As part of the lean startup movement and customer driven development, the concept of a minimum viable product is one of my favorite components. I’m a big proponent of launching fast: less than 90 days from starting, a web services company should go live with their product.

    Now, 90 days isn’t much time, and it isn’t alway possible to launch that fast, but having a constraint in place where the engineering effort is time boxed really forces you to strip off functionality and deliver a minimum viable product. All too often I see engineers so wrapped up in their product that they keep thinking they need to add one more feature, when in reality they don’t have enough market feedback, haven’t achieved product/market fit, and are building a product without a market. I’ve been there.

    My recommendation is to get the product out the door as quickly as possible, with the bare minimum functionality that still makes it useful. With that in place, work hard to acquire customers, preferably paying, and then learn what their needs are, and incorporate that into your opinionated software.

  • The Boat Analogy for Startups

    There’s a common line describing the lack of agility in big companies: they’re like a tanker ship that has immense force but little ability to change course. Well, let’s take the boat analogy a bit further and apply it to the many startup stages:

    • Concept stage – you’ve picked out the boat of your dreams, how you’ll operate it, and where you’ll take it, but it is still a dream.
    • Seed stage – you realize you can’t afford the boat of your dreams, but really want to get out on the water, so you start with a jet ski suitable for you and your co-founder. Wow, this thing goes fast and turns on a dime.
    • Early stage – OK, now you have a few people on board. It is time for a nice ski boat, like a MasterCraft with an in-board motor ready to go fast and turn hard.
    • Growth stage -Things are starting to get crowded, you need more room, people demand decent sleeping quarters: it is time for the used 40′ Hatteras yacht.
    • Late stage – With so much value now, the cruise ship has left the port and hit the open ocean. There’s ton of people and value on board, but little hope of changing course.

    What do you think? How applicable are these boat analogies to the different startup stages?

  • Atlanta Startup Community Challenge: Low Cost of Living

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    If you’ve read some of my previous posts you’ll know that I’m a big proponent of Atlanta, especially the low housing costs. At lunch today with two successful entrepreneurs I threw out an idea that I could tell neither one agreed with: one of Atlanta’s startup community challenges is that you can have a great lifestyle for common technology positions (e.g. programmer, sales rep, etc). Paul Graham wrote about similar idea a while back. The theory goes like this:

    • Smart programmer or sales rep gets a job out of college in technology making $60,000 per year.
    • He/she is good at what they do and progress quickly making $70k – $90k/year by their mid-to-late twenties.
    • Now, with minimal expenses (e.g. no spouse and kids), they live like a king in a great, low cost city by buying a new, fancy high-rise condo for $200k, a nice sports car for $30k, and doing whatever else they please.

    Why leave the nice lifestyle for more risk a low/no pay in a startup when you’re already doing something you love?

    In Silicon Valley, rent is 2x – 2.5x more expensive for a comparable place in Atlanta, but part of that is made up in the higher salaries. The major difference actually comes when you get married and want to buy a house. Right, that nice little three bedroom, three bath ranch house in Palo Alto in the good school district. Wait, that simple house costs $2 million. In Atlanta, in a good school district, you’re looking at $500k ITP and in the $350k range OTP. That’s quite the difference isn’t it? Combine the outrageous housing costs (to buy, not rent) with the technology eco-system (e.g. everyone else is doing it and tons of success stories) and you have strong reasons why they are so successful.

    Thinking through this, I don’t want Atlanta to be Silicon Valley. I do want a vibrant startup community in Atlanta and I want people to start thinking through how to get entrepreneurial people involved in startups when they already have such a great lifestyle, partly because Atlanta has such a low cost of living.

  • Anatomy of a Seed Stage Atlanta Startup

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    Recently I spent some time with a local seed stage Atlanta startup that has the makings of a successful business. The anatomy and DNA of this company are a great example of the type of team that can build a thiriving business. Let’s take a look at some of their characteristics:

    • Two passionate co-founders in their late 20s who met as grad students at Georgia Tech
    • Raised a low six figure angel round from local investors after building a working prototype
    • Built a B2B product using Python deployed on Google App Engine
    • Have a small number of paying customers and are slowing growing their client list
    • Seek advice from a good group of mentors and advisers that are actively helping the entrepreneurs
    • Members of ATDC
    • Participate in the local technology community by attending events

    Now, I believe this company will be successful but by no means are the above characteristics requirements. Atlanta is a great city to build a startup and this company is well on its way.

    What else? What are some of characteristics of seed stage companies that you believe will be successful?

  • 2010 Atlanta-Area Inc. 500 Companies

    Photo taken in Atlanta area
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    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

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    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'
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    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.