David Cummings on Startups

Category: Entrepreneurship

  • Pre-Mature Business Optimization

    Earlier today I talked to an entrepreneur about his upcoming marketing program. The entrepreneur has been working on a book about his industry that attempts to educate potential clients on certain pitfalls and how the major players in the market don’t always have their clients’ best interests in mind. After talking for 20 minutes about the book and some of its contents, I jumped into the reason for the call: talking about how to handle all the leads that the book will generate.

    Only a couple minutes into the meat of the conversation I realized things were awry. The entrepreneur had spent significant monies on a customized Microsoft CRM implementation, new website, marketing consultant to do market research, and still hadn’t launched the book. All the infrastructure work was in preparation for the perceived onslaught of leads that he wouldn’t be able to handle. I quickly told him that he was doing way too much pre-mature optimization of his business and that generating more leads than he can manually handle would be a great thing. Of course, this was difficult to hear but he took it in stride and agreed.

    My recommendation is to not pre-maturely optimize for an expected outcome when you’re a startup and can deal with issues quickly. Launch projects early and often and iterate based on feedback. Nothing replaces gathering real information from the field.

  • The Value of Being a Market Leader

    At lunch today I had a good conversation with a serial technology entrepreneur and the topic of market leaders came up. Of course, in the public markets companies like Salesforce.com (NYSE: CRM) get premium valuations — the question is why. What value is there in being a market leader other than being the biggest?

    By being a market leader, especially in a market that has been around and is fairly mature, the main benefit is that cost of customer acquisition will be lower than competitors. Whenever a company thinks about buying the type of solution a market leader provides the market leader will always be in the deal, almost like an incumbent even though they aren’t even the vendor yet. The other, non-market leaders will be the ones forced to differentiate their products and they’ll have to work harder and longer to win the deal compared to the market leader.

    With a lower cost of customer acquisition, the market leader will have better margins, and is likely to grow faster and/or more profitably. In the end, the result is that market leadership compounds on itself and produces more valuable companies.

    What else? What are some other benefits of being a market leader?

  • The Three Critial Numbers for SaaS

    Software-as-a-service (SaaS) is a great business model that provides recurring revenue for vendors, continual upgrades for users, and fewer hassles for customers. When looking at a SaaS business, there are three critical numbers to watch:

    • Churn — the percentage of customers that leave monthly/annually (the equivalent is looking at the renwal rate of customers)
    • Current customer revenue growth — the growth of revenue from up-selling existing customers
    • New customer sales — the number of new customers signed up and the corresponding revenue

    These are the three most important metrics to monitor for a SaaS business.

  • Ted Turner’s Autobiography

    Lately I’ve been on an autobiography kick reading four in the past couple months. I went from Richard Branson, to Tony Hsieh, to Andre Agassi, and I’m about to finish Ted Turner’s autobiography. Ted does a great job telling stories about his companies, sailing, family, and everything in between.

    From a business perspective, Ted’s stories really capture the growth and dynamism of the TV, cable, and entertainment industry. Here are a few of my takeaways:

    • Ted was constantly pushing his business to the limit financially and several times almost lost control of the company
    • Leverage (debt) using junk bonds made many of his acquisitions possible
    • His biggest regret was having to raise money after an acquisition he couldn’t afford, resulting in new board members that had veto power in his business (he still had a majority stake but their preferred shares could block certain transactions)
    • He had the idea for CNN several years before he launched it, and didn’t do it right away because he thought one of the big networks would do it, but they didn’t
    • Big ideas, some of which were failures, were a trademark of Ted, and he kept pushing the envelope with everything he did

    The book is a great read and I’d recommend it, especially for Atlantans as it gives some good history of the city.

  • Entrepreneurs Owning Community Banks

    Everyone has read about the number of bank failures over the past couple years. In fact, Georgia leads the nation in bank failures, so we know it well locally (my company bank, Georgian Bank, was one of the ones that failed). Lately, I’ve noticed a trend: three EO members that I know are part owners and on the board of local community banks.

    I’ve mentioned before that banks aren’t in the business of loaning money when you don’t need it or when you don’t have hard assets to use as collateral. With this in mind it makes good sense why several of my friends are investors in banks:

    • They have million dollar plus companies, so keeping their desirable accounts at the bank they invest in helps the bank
    • They know lots of people and can refer them to their bank
    • They encounter opportunities where they need access to capital and I’m sure being part owner helps with the loan process

    I also talked to an entrepreneur that had sold his company to another entrepreneur where the entrepreneur that bought the company also owned a bank, and that played a role in the transaction. The reason it played a role is that the business was a good cash flow, 100% recurring revenue business. Because of the industry and structure of the business, partners in the future would buy into the business, get financing from the bank that was owned by the entrepreneur that also owned the business. Banks can borrow money from the fed at next to nothing right now. Owning a bank that can borrow money at next to nothing, loan it to a business partner that is buying into a business you also own at a standard rate (say prime plus 2%), and making money even if the new business partner walks away, seems like a pretty shrewd operation.

    What else am I missing? Why are there so many community banks?

  • My First Software Product: Statbook

    In ninth grade I started working on my first commercial shareware software product called Statbook. The goal with Statbook was to provide baseball and softball coaches with a Windows 3.1 application that made it easy to keep track of all the statistics for their team (games, hits, pitches, etc). I set the price at $12.95, put in on CompuServe, and when I was 15 years old I received a check in the mail from a gentleman in Minnesota. That was it! I was hooked on writing and selling software.

    In addition to CompuServe’s shareware section, I put it on AOL, and built a simple website for people to download it. Not knowing much about sales and marketing, I also made some 3.5″ floppy labels in a desktop publishing program and attempted to sell copies of the program during little league season at my elementary school (Gilchrist in Tallahassee). Needless to say I didn’t sell any that way. Sales from CompuServe continued to trickle in from people all around the country and over the course of a two years I made a three hundred dollars from the product.

    From this experience in early high school I knew I’d be involved in technology startups the rest of my life.

  • My Hero Growing Up: Michael Dell

    When I was in high school I read a biography about the Michael Dell and by the end I knew that he was the guy I wanted to emulate: my hero. His dad was an orthodontist, like mine, and he grew up working on computers from an early age like I did. He started his company with $1,000 in his dorm room when he was 19 — I took inspiration from him and started mine in my dorm room when I was 20. Of course, he’s been a bit more successful than I have been :-).

    Dell is best known for establishing the made-to-order PC market, which was revolutionary when he did it. In addition, his company has been innovative in other areas like having negative working capital where the suppliers are required to have warehouses within a certain distance of the factory and supply product as needed in advance of being paid. These innovations and more, along with timing, helped make Michael Dell so successful. I think it is important to have heroes and people you really respect.

    Who’s your entrepreneurial hero? Why?

  • Value Added Reseller Plans for Startups

    Selling a product indirectly through value added resellers (VARs) is a great way to reach a broader market at a lower fixed cost. These channel partners can help augment your services, shorten the sales cycle because they already have existing relationships, and provide valuable feedback. My one piece of advice for startups is to not expect the channel to be the best way to grow your business early on. The channel is extremely hard to get up and running, gives little visibility into the sales pipeline, and follows the 80/20 rule (20% of the partners will deliver 80% of the partner deals).

    Why shouldn’t you focus on the channel when first starting out? It is so important to have clear and unfettered lines of communications with your customers that only direct sales provides. In addition, direct sales allows for more visibility into the pipeline and more ability to control your own destiny. Only after you have a repeatable sales process yourself should start putting more effort into the channel.

    Just starting out with the channel I recommend a simple revenue sharing policy. Something easy like a 10% referral fee for leads that they give to you that you have to close the deal along with a 30% referral fee if they do all the selling and close the deal handing you a purchase order. Having the 10% and 30% plan makes it quick and straightforward for VARs to do deals and sell their bread and butter offering (typically consulting services billed as time and materials).

    What else? What other advice do you have for startups and VARs?

  • Startup Docs to Create in Month One

    I was recently looking through Google Docs for my company to get an idea of what documents we put together in the first month. The idea is to get a bit of introspection on what we felt were important to iron out right away. Really, these are very much strategy and alignment docs to get the founding team on the same page.

    Here are some of the Google Docs we put together:

    • Company Overview (official company name, market description, positioning, team, etc)
    • Customer Acquisition Strategy
    • Pricing
    • Road Map
    • Action Items
    • Passwords
    • Technical Setup

    Note that there were no KPIs, one page strategic plans, etc in the initial docs. Operational items like those come with time as the business develops. Strategy documents like those outlined above are critical for getting everyone on the same page.

    What else? What other documents do you recommend creating when getting a new business off the ground?

  • Don’t Reinvent the (UI) Wheel

    One question I hear a good bit from software entrepreneurs building their first product is “Who made your user interface?” There’s a dearth of quality user interface (UI) and user experience people, especially in markets like Atlanta. Many people think they can get their graphic designer friend that made the company logo to also do the user interface. I’ve gone down that route and it failed.

    My recommendation is the classic R&D — ripoff and duplicate — of a major product where the company likes to have apps that have a consistent user experience with their app. That’s right, please don’t reinvent the wheel when it comes to the user interface. Companies like Google, Apple, and Microsoft have invested millions in the UI for their different products. For example, Gmail, Google Analytics, and Google AdWords have nice clean and fast UIs that are perfect for most B2B web apps.

    What else? Do you agree or disagree that most people shouldn’t reinvent the wheel when it comes to UIs?