David Cummings on Startups

Category: Entrepreneurship

  • 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.

  • 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?