David Cummings on Startups

Category: Entrepreneurship

  • Best Exit Strategy Response

    People like to ask entrepreneurs “what’s your exit strategy”  as a nice conversation question. In fact, I like to ask it to get a gauge for an entrepreneur’s approach to the business. An exit strategy is simply what someone wants to do with the business when/if they are done with it. A typical exit strategy would be to get bought out by a larger, complementary company or to go public with an IPO (rare these days).

    My preferred exit strategy response is neither of the above. Here’s my favorite exit strategy response:

    My goal is to build the coolest, most innovative and profitable company I can. If an acquirer comes along I will consider it, but I’m focused on making something that is built to last.

    I believe that building a sustainable, enduring company is the highest form of entrepreneurship.

  • Employee 1% Community Time

    We value our corporate culture as one of the most important aspects of the company, and one way we give back is by employing 1% community time. What that means is all employees get to spend 1% of their time helping a non-profit in the community, fully paid for by the company. With a typical 50 week year, and 40 hours per week, for a total of 2,000 hours, 1% comes out to 20 hours, or 2.5 days of community service time. Yes, it is optional, but a good number of team members take advantage of it.

    What are some advantages of 1% time? Let’s take a look:

    • Great for employee morale
    • Powerful for team building and cross team rapport building
    • Positive impact for the community
    • Helps put things in perspective

    We’ve had events with Junior Achievement, helped clean up a park in South Atlanta, and have an event with the Boys & Girls Club coming up.

    My recommendation is to consider 1% community time for your company.

  • What Percentage of Startup Success is from What

    My views on the ingredients for startup success have changed significantly over the years. Originally, I believed that the management team was the overriding force. Now, the management team is still important, but I believe the market, including timing, for the idea is even more important. Here’s my gut allocation on how important different factors are for how I define a successful company:

    • Market – 40%
    • Team – 30%
    • Timing – 20%
    • Idea – 10%

    Notice that a great market with great timing represents the majority of the opportunity for success and that the actual idea is the least important. We’ve all heard the saying that ideas are a dime a dozen and that it’s the execution that counts. Combine all the pieces together and you have a winner.

  • The Healthy Department Symbiosis in SaaS Companies

    With Software-as-a-Service (SaaS) products, the operative word is service, not software. The service element, when done well, fosters a healthy symbiotic relationship between the company departments. Let’s look at the common departments:

    • Sales – Sets expectations with prospects and turns them into customers
    • Services – Gets clients successfully up-and-running
    • Support – Answers questions and continually helps clients
    • Engineering – Continually improves the product and fixed bugs

    By excelling in these departments, clients will renew their service and likely purchase additional services over time. Successful SaaS companies need to develop a service-oriented culture and exceed client expectations.

  • The “Don’t Know All Your Customers” Milestone

    Last week I was talking to a well regarded local entrepreneur who’s on his second venture. Near the beginning of the conversation, as we were talking about sales traction with his business, he said, “For the first three years I knew every customer, company name, and user at the company. Now we’re growing so fast, I don’t know all the customers anymore.” He’d reached the “don’t know all your customers” milestone in the business lifecycle.

    A key takeaway from the statement was just how close the entrepreneur was to his customers to know every single one, and that is over 200, for the first three years of the business. Being close to the customer is a significant business advantage that startups have over larger companies, and as the business scales it becomes much more difficult, which is why hiring the right people is so critical.

    My recommendation is to stay close the customer as long as you can and recognize the milestone that occurs when you no longer know every customer. It’s a bittersweet but significant milestone.

  • Why have the Shotput Ventures Requirements

    After publishing a post yesterday stating that the main reason applicants to Shotput Ventures are turned down is due to not meeting our published requirements, some people naturally defended the entrepreneurs as rule breakers (e.g. here). Thinking about it for a bit, I believe it is important to note that there is a serious difference between a rule breaker and fitting our thesis.

    Is the reason we have the requirements for Shotput Ventures to make it easy to turn away applicants? No.

    The reason we have the requirements is that we have a specific investment thesis that goes something like this:

    • We’re only scratching the surface as to how the Internet is going to change our lives
    • Never in history has it been so cheap to create a technology company
    • There is a segment of entrepreneurs that can afford to live on next to nothing and would like a group of mentors, and a small amount of money, to help see them through getting a prototype built

    We have the requirements in place because we’ve already funded eight companies and have learned from that experience. Things we require, like having a technical co-founder, and preferably two, have directly correlated with company success. Combine our experience with our investment thesis and you have why we enforce the requirements.

  • #1 Reason Applicants are Rejected by Shotput Ventures

    A friend yesterday was asking me questions about Shotput Ventures. Five minutes into the conversation he posed a good question: what’s the number one reason applicants are rejected by Shotput Ventures? Immediately, I knew the answer.

    By far, the main reason applications for Shotput Ventures are turned down is due to not meeting our stated requirements for the team. Within this generic reason, here are several specific examples:

    • Not having a technical co-founder that is an experienced programmer
    • Not having all co-founders able to work 100% on the new venture (e.g. one has to keep his or her day job)
    • Not having all co-founders in the same city (e.g. one is based in D.C. and wants to stay there during the program)

    Applying for Shotput, and meeting the published requirements, is just part of the process for choosing companies in which to invest. My recommendation is to read the Shotput Ventures site and apply once the criteria have been met.

  • The Cash on Cash Equation for Investors

    One way investors analyze a potential deal is to look at the cash on cash potential outcomes. Cash on cash (CoC) refers to the amount of money returned divided by the amount put in. So, if you invest $10,000 in a company and end up with $50,000 at time of exit, it was a 5x CoC deal. This is a much easier number to contemplate when compared to the more commonly used internal rate of return (IRR) as the IRR takes into account the amount of time the investment required to get to exit (e.g. getting 3x the investment in two years vs getting 3x the investment in eight years makes for a vastly different IRR).

    Generally, VCs have a goal of any one investment having a CoC outcome of 8-10x. So, for every dollar they put in they expect to get back eight to ten dollars. Lately it has taken an average of seven years from VC investment to exit, so the process takes significant time. I would argue that it is worthwhile to start talking in terms of CoC relative to time with a simple equation. This approximates IRR, but is easier to compute mentally when compared to saying we had a 20% IRR on that day. A simple equation might be something like add 1x for every year the investment is outstanding starting at 2x CoC (double the investment). If the investment takes three years, a great outcome would be 4x CoC, if it it takes seven years, a great outcome would be 8x CoC (which equates to the average VC investment length and desired outcome of eight times the investment).

    What do you think? Is cash on cash relative to timeframe worth talking about more frequently?

  • Three Unexpected Fundraising Challenges for an Outside Consultant

    Earlier today I spent half an hour on the phone with a friend of mine who’s acting as a consultant to help a company in California raise a new round of financing. The company has previously raised $5 million from non-technology friends and family investors, is not profitable, and is looking to raise $3 million in the next 90 days from professional technology investors. Their goal is to get a solid financial footing as they work towards their next milestone of being cash flow positive. My friend has been working for them for 60 days now and has encountered three unexpected fundraising challenges:

    • The management team is not happy with the valuations VCs are mentioning (4-6x trailing twelve months revenue on a fast growth rate but low revenue base) as that would be a down round from their previous valuation even though their technology is very promising, they believe the company should be worth significantly more, which it probably would be if revenues were where they will be in 12-18 months.
    • The IP for their technology is owned by a separate entity that is co-owned by some of the management and investors, causing issues around clarity related to what it’ll take to roll the two companies together at time of financing, which is the goal (they have an agreed upon number but it is still more complicated).
    • The sales pipeline was presented as extremely optimistic, and had to be significantly throttled back once some common opportunity definitions were put in place around prospect budget, authority (decision making ability), need, and timeline (BANT) combined with forecasted deals slipping further out into the future.

    My recommendation is to set expectations that fundraising takes significantly longer than expected, should never be done when you are desperate unless you have no other choice, and to make the IP ownership and sales pipeline as straightforward and transparent as possible.

  • Time vs Money Trade-off for Startups

    When I started my company I would pinch pennies whenever I could. I still do. The big difference now is that I’ve come to realize that many things are better done by paying full price instead of laboring through different strategies to save a few dollars. Here are a few examples:

    • There are many do-it-yourself kits to incorporate a business, but it is worth paying a lawyer to walk you through the many considerations and setting it up right the first time. This is a tough one because it can easily be $1,000-$2,000 dollars – it is money well spent.
    • Yes, I can design my own logo with Photoshop or a free logo generating site, but paying a couple hundred dollars to one of the many excellent outsourcing sites gets a professionally done design that shows you’re serious about the business
    • The difference in quality between a business class cable modem and dedicated T1 line is dramatic. For us, paying several times more for high quality bandwidth and Internet access is more than worth it.

    These are just a few of the areas that I’ve found it is better to spend money instead of trying to save a buck and spend more time. Building a frugal mentality into the corporate culture is important, but the old saying that you have to spend money to make money still rings true.