David Cummings on Startups

Category: Entrepreneurship

  • The Business Card

    Generally I’m averse to more dead trees (read: paper) in business but the one area I don’t scrimp on is business cards. Back in 2001 I had started my business six months earlier and I was in Durham, NC participating in a workshop at the Council for Entrepreneurial Development (CED). The lady who was teaching the workshop escapes my mind but the topic was on setting goals and milestones for the business. Her goal at the time was to reach a certain level of sales and she was going to reward herself with a $60,000 Lexus SC 430 convertible, and thus had a picture of it up on her wall as a reminder.

    At the end of the event she said she would stick around and answer any questions as well as hear the elevator pitch for our business. I dutifully stood in line when the event was done and when it became time for me to talk to her she initially asked for my business card. Not thinking much of it, I handed her my homemade business card made using the business card construction kit from Office Depot (you print on card stock paper with perforated edges and pull the business cards apart). Immediately she started holding the card up in the air and flicking it with her finger to show how cheap and flimsy it was. I was thoroughly embarrassed. She then proceeded to tell me that while it might seem trivial, people notice the details and a homemade business card reflects poorly on me and my business. I’ll never forget that encounter as I learned a valuable lesson.

    My recommendation to entrepreneurs is to invest in your brand and image through a professional logo and business card using a low cost web-based service (e.g. LogoBee) and a professional printing company (e.g. Printing4Less).

  • Learning Startup Investor Speak

    Quick, do you know what the following mean in the context of investors and startups?

    • Pre-money valuation
    • Post-money valuation
    • Vesting schedule
    • Cliffs
    • Convertible debt
    • Preferred shares
    • Participating preferred
    • Non-participating preferred
    • Profitability vs cash flow breakeven
    • Seed round
    • Series A, B, C, etc round
    • Cash on cash expectations
    • Burn rate/runway

    Needless to say there is a good bit of jargon in the startup investor world. As an entrepreneur contemplating raising money, or committed to raising money, my recommendation is to spend time learning the jargon by reading the Venture Hacks archives as well as Mark Susters’ blog posts.

  • #1 Reason Startups Can’t Raise Money

    Earlier today I was watching a video where Mark Suster (entrepreneur turned venture capitalist) was interviewing Scott Painter, the CEO of Zag. The best part of the video was where Scott lays out his company’s dashboard and talks about the metrics that drive his business. Take a look at minutes 43-48:

    In the video, as part of talking through his company’s dashboard, Scott hits on the number one reason startups can’t raise money, without mentioning it directly. The main reason an entrepreneur isn’t able to convince an investor to invest: the entrepreneur can’t demonstrate defensible, metrics-driven data on how he/she is going to build a large business. Scott’s dashboard includes the following information for the past 30 days:

    • Unique visitors
    • Active prospects
    • Sales (cars sold)
    • Revenue

    While this idea makes sense, it is amazing to see how many entrepreneurs don’t fully realize it, spend a good bit of time trying to raise money, and end up disgruntled with investors by the end of the process. My recommendation is to build a story, with metrics, of how you’re going to build a big business, and then paint the picture for how the investor is going to make an out-sized return investing in your company.

    What else? Do you agree?

    Note that this is especially true in markets that are more conservative with startup investing like Atlanta.

  • Ideal Characteristics of Freemium Products

    Continuing the post from yesterday on the freemium business model, which elicited several comments, I wanted to offer up some more thoughts. In general, businesses are better off offering a proof of concept/free trial the majority of the time instead of a free edition of their product. With that said, here are the ideal characteristics of a product where the freemium approach works:

    • Ability to demonstrate immediate and obvious value (I contend most freemium products fail because it is too difficult to get value from them without serious hand holding by the vendor)
    • Minimally invasive product e.g. it doesn’t take over a website, doesn’t require a DNS change, doesn’t require IT people to help configure, doesn’t introduce confusing jargon, etc
    • Known type of market e.g. people already have expectations of product functionality like email marketing, CRM, etc
    • Clear value proposition and reason for upgrading later e.g. limits to key functionality, additional features, etc

    What else? What are some other ideal characteristics of a freemium model?

  • Thoughts on the Freemium Model

    The freemium model is a business approach where an account, typically with limited functionality, is offered for free with the hope that the person eventually upgrades to a paid premium account. I must admit that we don’t do a freemium model for any of our products (we do have a free product, Visitor ID, but that is more of a generic freebie). With that said, I have a few thoughts on the model:

    • Many entrepreneurs think it is the holy grail of business models only to learn that many companies won’t even use a product for free
    • At its core, freemium is simply a lead generation mechanism, much like open source
    • It is incredibly difficult to get someone to upgrade from a free version to paid version
    • Offering a free version of a product often times attracts a different crowd compared to a free trial
    • Many labor intensive items like support, on-boarding, and policing (e.g. if email marketing is involved) are expensive and difficult to scale with lots of non-paying customers

    My goal is to one day have a successful freemium product, but to date the feedback I’ve received from entrepreneurs that have one is that it is much more difficult than they expected.

    What else? What are some more thoughts on the freemium model?

  • Early Market Signals and Later Pivots

    At a lunch last week (yes, I believe in never eating alone) the entrepreneur and I were talking about places to eat. He offered up three nearby places for us and mentioned that one place was always empty at lunch time. After I asked why, he said that when they first opened they were dinner only and didn’t serve lunch. The restaurant’s early market signal that they weren’t open for lunch made it exceptionally difficult to later pivot and get into the minds of the local business people that they were an option. My friend’s guess is that the restaurant will be closed within six months.

    My recommendation is to pay special attention to market signals, especially at the launch of a new business. Some signals include:

    • Hours of operation
    • Pricing
    • Target customer
    • Brand / design

    I’m a fan of making decisions quickly and constantly iterating based on new information. The one caveat: take more time on decisions that aren’t reversible.

  • Why do Successful Entrepreneurs Raise Money for Subsequent Ventures

    Two weeks ago I was having lunch with an entrepreneur in town and we were talking about another startup that had just closed a nice sized Series A round of VC funding. The founder of the other startup had been super successful at his previous venture and had plenty of money to fund the new venture. The question then arose: why raise professional money for a new venture if you can easily fund it yourself?

    Here are a few of the reasons we came up with:

    • The professional money could have come from previous investors where the team had a solid relationship
    • The founder likely didn’t want to invest a chunk of money in the new venture since he didn’t have to (that comes with being successful — investors are much more likely to back you the next time around)
    • The founder could be employing the Nassim Nicholas Taleb’s Black Swan investor theory where he puts 90%+ of his money in ultra conservative bonds or Treasury bills and then puts the remainder in highly risky investments

    What else? What are some other reasons previously successful entrepreneurs with money bring in investors for their next venture?

  • Strategies for Identifying Recent College Grads to Hire

    One of the reasons we’ve been successful is that Atlanta is a great city for young professionals and we’ve developed a methodology for identifying recent college grads that can immediately start adding value to our company. Many companies are leery of hiring recent college grads as they are unproven, require training, and might not work out. Well, looking at most people’s resumes, regardless of being a recent college grad, you could say the same thing. Some benefits of recent college grads include that they are more Internet savy, social media active, and energetic, on average. Plus, they are eager to learn and prove themselves.

    Here’s how we identify recent college grads to hire that do a great job and fit with our corporate culture:

    • Determine if they have a strong work ethic demonstrated by a good GPA or challenging extra curricular activity like varsity sports or a full-time job
    • Give a written portion during the interview process in the form of essay questions about your industry that require research and writing skills
    • Have the candidate use your product and produce a deliverable that shows some competence after self-paced teaching
    • Look for professional and personality traits that fit your organization — one of my favorites is receiving a handwritten thank you note in the mail after interviewing a candidate

    These steps have worked for us and I encourage you to try them out.

    What else? What are some other strategies you use to determine if a recent college grad will be successful in your organization?

  • #1 Startup Tip for Negotiating Office Space

    Over the past 10 years I’ve done one direct lease and four subleases for office space. Needless to say we’ve moved every couple years as we would inevitably grow out of our space. It wasn’t until the past two subleases that I came across the number one tip I want all entrepreneurs to know when negotiating a lease/sublease: ask to pay for only the space you need now and grow into the space financially by paying for more over the life of the lease.

    As a startup, when looking for office space, I recommend getting the amount of space you expect to need by the last 6-12 months of the lease. So, if you’re doing a three year lease and you have five employees now, but expect to have 20 employees by the end, it becomes tricky to find the right space. Here’s an example of growing into space:

    • You find 5,000 square feet office but only need 1,500 sq ft at $18/yr/ft for a three year term but can’t afford that much space now and don’t need that much
    • Offer to pay for 1,500 sq ft for the first six months, followed by paying for 2,500 the next six months, and add another 1,000 sq ft to the bill every six months thereafter until you’re paying for the entire 5,000 sq ft
    • The $18/yr/ft would stay constant or increase 3% per year such that by the end of the lease you’re paying the standard asking price

    Naturally, your effective rate per square foot over the life of the lease would be significantly less than $18 sq ft but you get the benefit of the space you’re going to need at a price that meets your respective company size. Plus, landlords like to develop relationships with growing companies and people like to see startups succeed as it helps the economy.

  • GPA: Growth Plan Assets

    One of the serious challenges with a bootstrapped startup is determining when to expand. There’s a fine balance between having sufficient reserves in the bank and being aggressive with new hires and initiatives. About four years ago, after struggling with this issue for over a year and experimenting with different ideas, I settled on an approach I’ve been using ever since: growth plan assets (GPA).

    The GPA, much like a GPA in college, is a simple number that quickly summarizes the ratio of current assets to average monthly operating costs over the previous 90 days. Here’s how I calculate it:

    • Add up current assets including cash in the bank and accounts receivables that are not overdue
    • Calculate the average monthly costs to operate the business over the past 90 days (every single penny spent that wasn’t a one-time cost)
    • Divide the current assets by average monthly cost to get the GPA

    What else? How do you decide when it is time to invest in growth?