David Cummings on Startups

Category: Entrepreneurship

  • Iterating in a Startup – Part One

    I’ve been hearing a good bit of chatter lately about how important it is to iterate in a startup. This generally refers to figuring out a product, market, and business model that will result in success. Of course, success means different things to different startups. For some, it is a large, market-disrupting company. For others, it is a profitable, growing business large enough to sustain a nice lifestyle for those involved. Let’s drill into iterating in a startup.

    Lance Weatherby values velocity and versatility in team members and has coined the term velocitile to label such a person. I believe that you need both a good market and flexible people to be successful in a startup. With both of those in place, iterating is a natural and healthy part of building a company.

    My Inc. 500 software company, Hannon Hill, makes mid-market web content management solutions for higher education and other industry verticals. It wasn’t always this way. When I first started the company in December of 2000, the vision was to provide a software-as-a-service (SaaS) application that would make it easy to update a generic, small business website, for $30 per month.

    The service worked with existing websites over FTP and provided a visual interface, similar to Windows Explorer, so that people could click on a file and edit it in a browser-based word processor. Upon saving the changes, the file would then be sent over FTP back to the web server, along with a backup version. The benefits of this model included:

    • No software to install on the web server or web browser
    • No up-front fee and a low monthly cost
    • Familiar file manager interface with word processor

    The software was as easy to use as web-based email. The only problem is that it was a complete failure. I started out working on the company part-time and eventually went full-time within six months. I learned several lessons shortly after going full-time:

    • The market wasn’t accepting of SaaS
    • $30 per month per site was much too cheap to build a business
    • Customers needed significant hand holding to get up and running

    At that point, I knew something had to change. By August 2001 we had retooled the product to be an installed server application (it was always a PHP/MySQL app) at the price point of $1,000 for a 10-user license.

    Stay tuned for part two to learn if our iterating paid off.

  • Personality Tests in Startups

    As part of my EO Forum we decided to take personality and values tests to learn how we can better relate to the other members of our group. We had the great pleasure of being facilitated and tested by Billy Mullins of Vikus Corporation. The process and outcome really opened my eyes to the benefits of these tests for several reasons:

    • Existing team members can better understand how other team members relate
    • Teams can identifiy characteristics missing from their group and work to recruit to fill in the gaps
    • Tests like the Hartman Values are complementary to personality tests like Myers Briggs and can address areas like work ethic and ability to incorporate new information

    Based on this experience, my company is now looking into tests to administer to existing employees as well as late-stage job candidates. In addition to Myers Briggs and Hartman Values, we’re also looking into Calipers and DISC.

    For startups, especially ones with multiple co-founders, I’d recommend taking some of these tests and looking at the outcome as part of the team building process. Team building is critical in all stages of a business, and I’m confident personality and values tests will help everyone.

  • Three Financial Tips for Growing Businesses

    Last week I had the opportunity to participate in the EO Accelerator quarterly education day as I’m the Champion for the Accelerator program on the EO Atlanta Board. Each quarter we have an all day education event taught by a certified facilitator that flies in for the program. The program, for entrepreneurs with revenues under $1 million, is three years long, with rolling admittance and unique content on the topics of People, Strategy, Money, and Sales. This was Money day.

    Money day was taught by Greg Crabtree, one of the most entrepreneur-minded CPAs I’ve ever met. Greg runs a firm in Huntsville, AL that charges a flat monthly fee, typically $400 – $1,000, to clients in exchange for fixed quarterly accounting services and unlimited advice. Greg provided several frameworks for thinking about financial concepts in business, that are especially helpful for entrepreneurs.

    Salary Cap

    The idea behind the salary cap comes from professional sports, like the NFL. The way to calculate it for your business is to take all your non-labor costs on a trailing 12 month basis and subtract that value from your trailing 12 month revenues. Why is this good to measure? It helps you focus on the maximum amount the business will bear for labor costs before the company won’t be profitable. Too often, entrepreneurs add new staff before the business warrants it and this provides a value to monitor. Note that looking at your trailing 12 months expenses and revenue is typically better than looking at annual values on a calendar year, for the purposes of making decisions like hiring.

    Core Working Capital

    One question I’ve asked many times, and been asked many times, is “How do I determine how much I should have in the bank before expanding/hiring?” Core working capital (CWC) is the answer to that question. CWC, according to Greg’s recommendation, is two months of monthly operating costs in cash in the bank after the following:

    • Taxes
    • Debt payments (he recommends no debt or line of credit)
    • Current liabilities

    Of course, the amount of desired working capital will vary from business to business, but this simple rule of two months of cash in the bank is a good starting point.

    Profit Margin Goals

    The third take away from Greg came in the form of profit margin goals. Greg’s advice was that businesses should strive for a 10% profit margin after fair market wages are incorporated for all principals in the business. Here are the three common profit ranges for a growing business:

    • 5% range – the danger zone
    • 10% range – the target for most businesses
    • 15% range – doing extremely well, especially if the business has scale

    I hope these three financial ideas for growing businesses are as beneficial to you as they are to me. Thanks again to Greg for doing a great job.

  • Pros and Cons of Free Product Trials

    We’ve been offering free trials of our software for years and have come to understand some of the pros and cons of doing so. 

    Pros to Offering Free Trials

    • Helps assess how serious of a prospect you have
    • Provides an opportunity for the prospect to interact with other members of your team (services, support, etc) and show them how great of a company you have
    • Sets prospect expectations of what the product does and aligns interests with the company, proving that it is a good fit
    • Provides a sense of urgency as the free trial will expire at a certain date

    Cons to Offering Free Trials

    • Usually more labor intensive, especially for more complex products as services and support teams need to be involved
    • Can lengthen the sales cycle as the prospect might have to get other people from his/her organization involved, and actually do real installation work
    • Some prospects will keep asking for free trial extensions, which can create an adverse situation with the sales person that wants to solidify the deal or walk away

    A couple other items of note:

    • The free trial is really a proof of concept project, and should be referred to as such
    • Before doing the trial, clear success guidelines must be set up and agreed to by the prospect (e.g. in the proof of concept, we will show x,y, and z working resulting in some benefit, and culminating in the prospect signing a contract)

    In almost all cases, I recommend offering free trials (proofs of concept).

  • More Benefits of Daily Check-ins

    As you might know, I’m a big fan of daily check-ins. After spending some more time doing them (we’ve been doing them for 16 months with the leadership team), I’ve realized there are several additional benefits I didn’t consider before. Here are some more benefits that come to mind:

    • Having everyone stand up and talk in front of their colleagues gets the energy level up
    • Since it is at the start of the day, everyone says hello or good morning, helping promote the team camaraderie
    • As you’ve already talked with your team that morning, if an issue comes up later in the day related to one of your priorities, it doesn’t take as much time to get them up to speed on something you need help with

    I highly recommend doing daily check-ins across your company.

  • Frameworks for Fast Growing Companies

    One of the hardest things to do for a fast growing company is to get everyone aligned and on the same page. One business guru said successful businesses are 1% vision and 99% alignment. Here are some good books for entrepreneurs once they get past $1 million in revenue:

    What are your thoughts? What books do you recommend?

  • SaaS/Web is Ideal for ADHD Entrepreneurs

    A common trait you’ll find among entrepreneurs is that they have tons of ideas and routinely can be described as ADHD. Due to this phenomenon, SaaS products, and the web in general, make for an ideal medium as it affords an elegant manner with which to constantly tinker. In many cases, you can have an idea, see it live in production, and get customer feedback in a matter of days or weeks (with strong automated testing, of course!). What other types of products allow you to do that? Physical goods? No. Services? Rarely.

    Constant iteration and innovation really is adrenaline for enterpreneurs. It doesn’t get much better than SaaS/Web for products.

  • Some Thoughts on Sales Commission Strategy

    Sales commissions are a tricky thing. Once you put them in place, it is difficult to change them without the sales team being demoralized that their compensation is going to go down (even if it isn’t!). The goal, generally, is to minimize base salary and maximize performance based compensation. Here are some thoughts on strategy:

    • Align company interests with the commission (e.g. have commission percentages based on the profitability of the item being sold such that things like license revenue have a higher percentage commission than services revenue)
    • Significantly reduce compensation if quota isn’t hit (e.g. cut the standard commission in half if quota isn’t reached for the designated time period)
    • Don’t limit the up-side (e.g. don’t put a cap on the maximum amount a sales rep or account manager can make)

    Sales, and management of a sales team, is one of the most difficult, and rewording, aspects of a business. Good luck!

  • What are your three most important business measurements?

    It’s that time of year to start next year’s planning. We’re currently debating the three most important items to measure and set goals against. Here are the current three we’re working on:

    • Employee satisfaction
    • Customer renewal rate
    • Revenue bookings
    What are your three?

  • Debt is Your Friend

    This one is for entrepreneurs and not consumers: debt is your friend. Too often, first time entrepreneurs think the first step to starting a business is raising money from other people or venture capitalists. My recommendation is to get the business off the ground doing whatever it takes — including using your credit cards. I used credit cards for my business eight years ago and even played the game of applying for new cards that had no interest for the first X months and transferring balances between cards in an effort to minimize the interest rate. Having tens of thousands of dollars of credit card debt, like I had, isn’t for the faint of heart, and is not recommended for most people, but it is often times the only way to get access to money.

    As for banks, the truth is that most entrepreneurs will never get a loan from a traditional bank unless you have collateral for 80% of the value (e.g. stocks, bonds, real estate, accounts receivables, etc). People think banks are in the market of loaning money but they are really in the market of buying physical goods on your behalf and letting you pay them back for it. They aren’t there to fund your dreams that involve intangible assets.

    My advice is to seriously consider debt whenever possible.