David Cummings on Startups

Category: Entrepreneurship

  • 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?

  • 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?