David Cummings on Startups

Category: Entrepreneurship

  • Rajeev’s Rule

    Through a tweet I came across Brad O’Neill’s blog post on Rajeev’s Rule:

    “When any sincere individual or group of people asks for your assistance in the pursuit of their business dream, strive to help them in any way that you can, be it small or large.”

    Rajeev Motwani was a Stanford professor and angel investor that was one of the most respected advisors in Silicon Valley and was always looking to help others. While I haven’t achieved his level of respect, I do aspire to give back and help other entrepreneurs in pursuit of their business dream.

    Please shoot me an email or tweet if I can help.

  • Money Now or Later

    One of the challenges in a startup is deciding when to trade off short term revenues (money!) to focus on the long term plan. This might sound like a strange concept — why would I want to say no to money? Let’s look at a few examples where this can happen:

    • A key beta customer really wants to pay for consulting work, but you know, based on previous experience, that this will take too much energy away from the product
    • Traffic is growing nicely on your site, and the urge is to put up advertising, but you know it’ll detract from the user experience
    • Users are using your service for free, and several have offered to pay, but time is better spent improving the product and not implementing a payment system

    Of course, this can be a good problem to have. My recommendation is to think hard and be wary of making short term decisions that can hinder growth or don’t have economies of scale.

  • StartupLounge PitchCamp

    Today I had the opportunity to help at the monthly StartupLounge PitchCamp program facilitated by Michael Blake and I must say that it is a great program for entrepreneurs and I highly recommend it. The program is designed to give entrepreneurs a brief overview of elevator pitches, time to refine the pitch with a couple mentors, and finally a chance to practice it in front of everyone. Generally, the thinking is that as an entrepreneur we suffer from expert’s syndrome where we know so much about our business that we can’t concisely say what we do in a 30 second elevator ride, and thus having an objective third party goes a long ways in helping.

    Here are some of the guidelines from PitchCamp:

    • There’s no perfect elevator pitch but there are ways to make a good one
    • Answering questions such as who you are, what you do, what pain you solve, and what you want is a good formula
    • An analog analogy can be useful to make the business more memorable by attaching the idea to an existing concept people are familiar with
    • A hook, or opening comment like “I was frustrated trying to…” can also be memorable

    Some other tips include recording yourself and practicing it on anyone who will listen. A choice quote: an amateur practices until they get it right while a professional practices it until they can’t get it wrong.

  • 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.