David Cummings on Startups

Category: Entrepreneurship

  • Atlanta Startup Valuations

    I’ve read a number of executive summaries over the years and most will include a section on fundraising, including the amount of funding desired, and for a smaller percentage, the desired valuation. Naturally, the expected valuations are all over the place, and don’t usually designate whether it is the pre or post-money valuation. Unfortunately, the vast majority of desired valuations are much higher than the going rate, especially in Atlanta. There aren’t any hard and fast rules but here’s what I’ve seen over the past few years:

    • Angel deals for pre-revenue companies with a beta product are typically at a $500,000 post-money valuation (e.g. $100k would be invested and the angels would own 20%)
    • If the entrepreneur or team has been successful before building a multi-million dollar company, expect a $1.5 – $2 million pre-money valuation
    • Revenue generating startups should take their trailing twelve months revenue and multiple it by a comparable public market multiple (the going rate for a similar publicly traded company), less a discount of 25% – 50% for being private (no liquidity or market for shares)

    I recommend that startups use this as a guide when thinking about valuations and raising money.

  • The Fast Follower Approach

    One of the concepts I don’t hear entrepreneurs talk about enough is the fast follower approach. The general idea behind the fast follower approach is to build a product in a semi-established, fast growing market. All too often entrepreneurs feel their idea must be completely unique for it to be a good one. Some characteristics of the fast follower approach include:

    • Companies doing well in the market but no clear leaders
    • Market large enough to support multiple winners
    • Incumbents that are tied to a legacy platform and can no longer keep up with the modern web app expectations
    • Method to improve an aspect of the market resulting in an x-factor (7-10x improvement)

    I’m a fan of the fast follower approach and believe entrepreneurs should look for markets and opportunities that meet the characteristics listed above.

  • Atlanta $100k Startup Challenge

    After reflecting on Startup Riot this morning, and discussing it at lunch with a friend today, I realized there was an attribute most startups were seriously lacking: revenue. I don’t mean revenue like a few hundred or a few thousand per month, but rather, at least $100,000 in revenue. Yes, this isn’t a goal of Sanjay’s when putting on the event, since it is designed to be inclusive of all startups that meet the requirements.

    After going through the list of 50 startups again, my educated guess has a total of four, possibly five, of the 50 startups yesterday having trailing twelve months revenue of at least $100k. Why $100k? $100k isn’t enough to be profitable in most cases, but it does provide a foundation and paint a picture for how to build a much larger business.

    Here’s my challenge for Atlanta: let’s double the number of startups that present at next year’s Startup Riot that have $100k in revenue.

    Can we do it?

  • Competitive Differentiation

    One of the more exciting, and challenging, aspects of being an entrepreneur in a new, fast-growth market is the constant stream of changing competitors. New markets are very different from established markets in that they typically innovate faster and have lower barriers to entry (the technology doesn’t have to be as fully baked to be competitive). My advice is to pick a competitive strategy and don’t try to be all things to all people — a recipe for failure (trust me, I’ve tried it!). Of course, the strategy should be fluid and adaptable, but it is better to have a solidified one down on paper rather than none at all. Here are some competitive differentiation categories to consider:

    • Target company sizes
    • Target company verticals
    • Product price points
    • Product functionality (be opinionated!)
    • Geographic targets
    • Support policies (phone, email, 24/7, etc)
    • Sales tactics (aggressive, nice guy, etc)

    Again, I recommend putting a competitive differentiation plan together, aligning the team, and using it to make decisions quickly.

  • Doing vs Talking

    One of the most striking features of an entrepreneur is that he/she is the doer type instead of the talker type. You know what I mean — the person who is always getting things done and loves diving in and taking on projects. I think there’s a tendency, and this is partly driven by society, to build consensus and ask lots of questions before working on a project. For entrepreneurs, the strategy is more likely to be get something done, and then ask for forgiveness.

    Want some great examples? Take a look at Mark Suster’s post as part of his series on what makes an entrepreneur.

  • Part-Time Entrepreneurs

    I’ve heard the same question many times asking “can I start a venture part-time, on the side?” My advice is always the same: you can, but of the hundreds of entrepreneurs I’ve talked to, only one was successful (defined as built a multi-million dollar revenue company) doing the business part-time for the first few years. Now, this is different from a scenario like that of Marc Benioff, CEO of Salesforce.com, that started working on the business part-time while he was still at Oracle, but he also invested $6 million of his own money and had a full-time team working on the company.

    Here are some reasons why being a part-time entrepreneur might not result in success:

    • Challenge of making enough progress with the opportunity relative to how fast the market is moving
    • Lack of belief in the idea and/or market, resulting in a wait and see approach
    • Difficulty in juggling a day job and doing a startup on nights and weekends
    • Inability to get other team members or co-founders to join because of the perceived lack of seriousness

    My belief is that the first issue (not making enough progress) is the real killer of part-time startups because they are such roller coasters whereby you need high highs to balance the low lows. I do believe working on a startup part-time is worth the effort but I would stress that that is more of a learning experience and less of a recipe for success. Good luck!

  • Internal vs Outsourced Software Development

    One of the core challenges with building a web-based company is developing the software. Naturally, there are many debates between developing the software with an internal engineering team vs outsourcing the development to a firm, onshore or offshore. Let’s look at a few issues to consider:

    • Is the product central to the company’s success or is good enough OK?
    • Do the founders or CTO have experience managing an internal or outsourced development team? An outsourced team is generally considered more difficult to manage and management intensive.
    • What type of financial resources are available in the near term and longer term? One-time projects might be more cost effective when outsourced if scope is sufficiently defined and the platform is a known technology (e.g. writing a simple iPhone app).
    • How fast and iterative are the product changes? I’ve generally found internal teams faster at iterating when compared to an outsourced firm that is juggling multiple projects.
    • How accessible is local software development talent? The size of the city and quality of nearby engineering schools can be a factor in finding good internal software engineers.

    In my experience, I’ve had the most luck with internal software development teams as our product is our core competency. I have heard stories of software companies having success with completely outsourced software development, even offshore work, but the number of failures I’ve heard about significantly outweighs the wins. My advice is to seriously consider an internal team, even if on the surface it appears more expensive.

  • Market Opportunity or Management Team

    At lunch today I was talking with an entrepreneur who was lamenting that the company he was recently with has disjointed, inefficient technology powering their web services. He also talked about management turnover at the C-level as well as board of directors. I then casually asked how the company was doing financially and he said it was growing like crazy with substantial revenues and profitability.

    This conversation got me thinking about the old debate as to whether the market opportunity or the management team is more important in a startup. Some people, like Marc Andreessen, the Netscape and Ning co-founder, believe that market opportunity and size is more important. Others, like Mark Peter Davis (a classmate of mine at Duke), believe that the management team is critical.

    Personally, I’m starting to put more stock in the market opportunity and timing over the management team.

    Now, of course, there has to be a modicum of competency on the management. But, beyond that, I think the market, product, timing, and product to market fit are the real drivers for phenomenal success.

    What do you think?

  • Consider Lead Gen from the Beginning

    Today, I had the chance to meet with an entrepreneur working on a new business idea. After hearing the pitch and asking questions I realized he hadn’t spent much time on one of the most crucial aspects of a business: understanding how leads are going to be generated. That’s right, lead generation is one of the most important concepts that is paid little attention.

    Building a product, thinking through all the business plan questions, etc is so much more exciting and fun when compared to addressing how much it costs to acquire a customer, ramp the customer up, and the lifetime value of the customer. My advice to entrepreneurs is simple: consider lead generation to be one of the most important parts of the business.

  • 5 Ways to Improve the Atlanta Startup Community

    Tonight I had the opportunity to attend a dinner, sponsored by a great VC firm in town, for the sole purpose of discussing the Atlanta technology startup community, including what’s working well and what can be improved. None of the solutions are effortless, nor are too many likely to happen soon, but the goal is to spread awareness of how we can improve things. Here are five ways to improve the Atlanta technology startup community:

    1. Allow the Georgia government pension funds to invest in the venture capital alternative asset class
    2. Convince Fortune 500 companies in the metro area to buy from local startups and acquire local startups
    3. Introduce several new local seed stage and early stage investment funds
    4. Encourage successful entrepreneurs to give back and reinvest in the community
    5. Increase the number of clusters and improve their recognition (e.g. online marketing, vertical e-commerce, lead generation, etc)

    There are many more but these were some of the main takeaways from the evening. The great news is that over the past five years the Atlanta startup community has really blossomed and has many different ways to get involved.