David Cummings on Startups

Category: Entrepreneurship

  • Entrepreneurs and Families – Have a Place to Go

    A couple years ago I was at lunch with one of the most prominent software CEOs in Atlanta. I mentioned I had a baby at home at the time and we were talking about raising kids. He then went on to tell me a story of an entrepreneur that he really respected who he thought raised great kids. This CEO posed the question to the gentleman he respected: what was the best thing you did to have your kids turn out the way they did?

    The answer was that his family had a place to go, in this case a little farm they owned two hours away, and spent many weekends there each year as a family. Here are some of the reasons he cited that having a place to go was so important:

    • The kids were removed from their typical surroundings so they did more things together as a family instead of the typical hanging out with friends
    • There was no Internet at the farm so most work had to be left behind for the CEO
    • The family always had a few projects going on like fixing the barn or working on a garden, which brought the family closer together

    Looking at the benefits, it is many of the same reasons companies hold off-site retreats for the management team.

    This story from two years was brought back to me as I finished the Richard Branson autobiography last week. In it he mentions Necker Island, the private island he owns, as one of the best things he ever did for his family. My recommendation is to consider having a place to go on a regular basis to take the family and get away from the normal routine of daily life.

  • Track Competitor Displacements

    Earlier today we had a good conversation about the recent trend we’ve seen where new customers were already vended and came over to us from a competitor. Traditionally we haven’t seen too much competitor displacement as our market is small but growing fast. This might be a sign that our market is maturing but I wouldn’t give it too much credit. Rather, enough companies have had a chance to use our competitors and we’ve come in with the right value proposition at the right time.

    New customers, once they’re smiling and satisfied, are a font of information about their previous vendor. Here are a few reasons why it is important to track competitor displacements:

    • Understand if there are any trends e.g. a certain competitor’s customers seem to be switching so you should focus on reaching out to more of that competitor’s customers
    • Learn what the competitor doesn’t do well and exploit it as a weakness
    • Figure out what the competitor does do well and incorporate it into your strategy, if applicable
    • Inquire if there’s anything about the customer experience you provide that was better or worse about their experience with your competitor

    My recommendation is to track competitor displacements and spend time understanding the nuances of the deal as it will provide significant intelligence for your company.

  • Dividends and Private Equity with Angel Investors

    A few days ago Dave Walters published a TechDrawl piece about the state of angel investment in the Atlanta startup community. Dave made a strong call to action for investors to step up and fill the void that is being created as the most prominent angel investor in town, Sig Mosley, stops making new investments at the of this month. Lance Weatherby followed up with a good post arguing that Dave was asking the wrong questions and that entrepreneurs in Atlanta need to take their companies further without angel investors.

    Two areas I haven’t seen mentioned in the blog posts and ensuing comments are that of dividends and private equity (PE) firms. Here’s how they play a role with angel investors:

    • Dividends – I know of two examples where angel investors put in money, haven’t had an exit, but have had dividends that paid back the initial investment within five years, and the companies are still doing well. In one case, the company is doing north of $10 million a year in revenue, paying out an annual $1 million dividend, and is still growing 10%+ per year, but feels that investing the dividend amount back into the company doesn’t have an ROI, hence the annual payout.
    • Private Equity – I know an investor that put $200,000 into an early stage company several years ago and exited the investment recently when a private equity firm bought out his stake for $650,000 as part of a recapitalization. My understanding is that private equity firms are still sitting on a ton of money, and even though the acquisition and IPO market are soft, my belief is that we’ll see more angels make money from PE firms buying out investors in good, profitable companies.

    Granted, these aren’t homeruns, but angels making money helps the community in that the angels have more of an appetite for future deals.

    What do you think? Should dividends and private equity firms be talked about more in conjunction with angel investors?

  • 3 Reasons Sales Calls Get Returned

    After yesterday’s post on having prospects itemize their top priorities, I wanted to continue the sales theme today. One area that we spent a good bit of time on Thursday was sales, which makes sense as Jim, the facilitator, owns a professional sales training company. We spent time talking about how to get potential prospects to return our call. Here are the three reasons a potential prospect will call back:

    1. Mentioning someone that referred you, or a relevant company (e.g. partner or competitor)
    2. They need what you’re calling about (less than 1% chance)
    3. They appreciated your persistance and thought you sounded nice

    The average number of times a sales person calls on a potential prospect before giving up is 2.4. That’s not enough. My recommendation is to clearly identify your ideal customer profile and plan on being persistent, and nice, with sales calls.

  • Profitability Traps

    Today was the quarterly education day for Accelerator, with the topic being money. Our facilitator was Jim Ryerson of SalesOctane who brings a great deal of energy and passion to the program. We worked through a series of exercises, one of which was talking about profitability traps. Profitability traps are where you do things that aren’t profitable. Why would do something that isn’t profitable? Good question — let’s look at a few, straight from the Accelerator materials:

    1. “Falling in love with” your customers
    2. Valuing quantity over quality
    3. Creating work to keep the staff busy
    4. Failing to correctly account for costs
    5. Making up for per-unit costs in volume
    6. Taking projects at a loss to keep competitors from getting them

    My recommendation is to pay attention to these types of traps and continually ask yourself if a customer or project is going to be profitable before jumping into the work.

  • 3 Keys to a Strong Corporate Culture

    As an entrepreneur, I most underestimated the importance of a strong corporate culture when building a company. Yes, having a great office, fun toys (like Razor Scooters and a Segway), and free food+drinks set the tone, but they aren’t nearly as important the three areas both Dan Pink in the book Drive (autonomy, mastery, and purpose) and John Bogle in the book Enough (autonomy, connectedness, and competence) identify. Here’s what I view as the three keys to a strong corporate culture, and personal happiness:

    1. Autonomy – empowering team members to make and own their own decisions
    2. Camaraderie – knowing that others in the company care about each team member on a personal level, especially managers and direct reports
    3. Mastery – truly excelling at your given role and achieving a level of confidence and proficiency

    My recommendation is to spend time on your corporate culture knowing it is one of the most important things your company can do to be successful. I agree with Richard Branson when he says that employees come before shareholders, customers, and vendors.

  • The Direct Flight Challenge

    One difficulty entrepreneurs have in smaller cities is what I call the direct flight challenge. Basically, most flights go through a regional hub, and if you aren’t that hub, trips become more difficult as well as much more expensive. If you’re from the South, this quote is common:

    Whether you go to heaven or hell, you have to pass through Atlanta’s airport to connect.

    Lack of direct flights can be an issue for startups due to several reasons:

    • Many investors (e.g. VCs) want to be able to fly in and out on the same day, which is usually difficult without a direct flight.
    • Sales and business development travel costs and time will be significantly greater.
    • Potential partners and acquirers will be more reluctant to get involved, all things being equal, as it is more difficult to get together.

    My recommendation is to keep direct flights in mind when choosing a city to start a company, especially if air travel is an important component.

  • Harness One of Four Emotions in Ads

    By now most of us have heard a simplistic yet powerful piece of advice when considering a new product/company: spend $20 on Google pay-per-click ads attached to a simple landing page and generate leads before you even have a product. The goal is to validate market demand while talking to potential prospects about your plan so as to get input at the earliest stage — pre product.

    A key part of making this successful is crafting the copy of the text ad as well as the copy on the landing page. There are four main human emotions that should be considered when writing the ad and content:

    • Fear – How many times have you seen an ad for a home security system that shows a thief breaking into a house? The ad is playing off of fear by taping into human desire to protect his or her family.
    • Greed – Every get rich quick scheme plays off the secular society goal of having more money. Think of all the ads you’ve seen to become a real estate investor, double your income, and get money for free from the government.
    • Exclusivity – We’ve all seen ads where the offer is limited to the first 100 callers. Do we really think if we’re caller 101 they won’t talk to us? I don’t think so, but there’s real power in creating an artificial sense of urgency.
    • Vanity – Who doesn’t want to be more attractive? The quantity of commercials from cosmetic companies lends credibility to the success of using vanity to help sell products.

    My recommendation is to pick one of these emotions and consciously use it when creating ads and landing pages. It will help with customer acquisition and product/company success.

  • Entrepreneurs Should Find a Peer Group

    One of the most beneficial things I’ve done as an entrepreneur is to join the Entrepreneurs’ Organization (EO), and, more specifically, join a forum within EO. A forum is a small group, typically 7-9 entrepreneurs, that meet once per month in a specific format. Here are some of the benefits I’ve found from having a peer group that meets regularly:

    • Always have a group of entrepreneurs that are there to help each other and who genuinely care
    • Constantly learning how other businesses operate including what works well and what doesn’t
    • Ability to develop deeper relationships compared to other professional colleagues

    I’m the membership chair for EO Atlanta for 2010-2011, so please reach out to me for more information. We have EO for entrepreneurs with revenues over $1 million and we have Accelerator for entrepreneurs with revenues under $1 million. Our goal is to assemble the most influential entrepreneurs in Atlanta that have a thirst for learning and peer-to-peer experience sharing.

  • Will Future Venture Funds Include a Dividend Component

    There’s been quite a few articles and blogosphere discussions over the past two years about the impending decline in the number of active venture capital funds (TechCrunch, WSJ, NY Times). Several trends cited for the decline of the size of the venture industry include:

    • Negative returns for the venture industry over the past decade
    • Asset allocation size readjustment due to overall asset value decrease (e.g. if a University endowment allocates 5% of assets to venture investing, and the value of the endowment drop 20%, which has happened to many schools, the original 5% allocated to venture is now significantly higher as a percentage of overall assets resulting in a need to reduce the amount put into venture on an absolute basis)
    • Fewer liquidity events where a company is acquired or goes public (IPO)
    • Lower cost to get a web company off the ground (but still expensive to scale)
    • Longer time frame to exit a business of 7-10 years instead of the previous 3-5 years, requiring larger exits to get the same desired rate of return
    • Lack of liquidity becomes significantly less desirable during times of market turbulence

    A typical venture investment in a company is for preferred shares of stock, with protections for downside scenarios, as well a seat on the board of directors. Venture capitalists then make money for their limited partners when the company is acquired, the shares are purchased by another investor, or the company goes public. Generally, VCs will say they are shooting for an 8x-10x return on their investment (e.g. get eight times the money they put in).

    In the public markets, a really simplistic way to think about the types of companies is to divide them into two camps: one type of company is focused on growth, doesn’t pay a dividend, reinvests profits, and is valued on its future potential whereas the other type of company pays a dividend, and is based on the value of future dividends. Usually technology companies are valued on future potential and companies that have a dividend, like banks, are valued on dividends (e.g. here’s a history of BB&T bank paying dividends).

    Venture capitalists often invest in technology companies and the investment is based on the potential growth and eventual sale of the business. Therein lies the challenge: if fewer companies are exiting for nice returns, it doesn’t take as much money to build a technology company, and exits are taking twice as long, something has to change. Thinking about the two simplistic types of public companies outlined above, it makes sense for some future venture funds to take a hybrid approach where they have a dividend component on investments in order to provide smaller amounts of liquidity back to the limited partners earlier than normal, while still generating the majority of their returns from the sale of portfolio companies.

    Let’s a take a look at an example:

    • The VC invests $1,000,000 into a company for preferred shares representing 20% of equity and a 15% dividend starting after 12 months that can be converted to equity at investor’s discretion but is assumed to paid annually.
    • If the company is growing fast, the dividend is converted to equity.
    • If the company isn’t growing as fast as desired, a $150,000 per year dividend is paid. As an example, after five years, with no dividend in the first year, $600,000 would be paid, and 20% of equity still owned (assuming no new investors).
    • If the company is sold for $20 million after the fifth year, the 20% is worth $4 million, plus the $600,000 dividend, results in a $4,600,000 aggregate return on the $1 million invested.
    • The $600,000 dividend doesn’t move the needle for the total return but does provide liquidity and mitigates complete write-off potential for the investors.

    My guess is that we’ll continue to see the trends that caused the decline in the size of the venture capital industry and by providing new approaches, like this one, investors will be more interested in participating.

    What do you think? Will a hybrid venture capital approach that provides dividends make it more appealing for some investors?