David Cummings on Startups

Category: Entrepreneurship

  • Why the Lack of a Strategic Plan?

    When meeting with entrepreneurs I like to ask to see their strategic plan. Many times, I require seeing a simple strategic plan as a prerequisite before meeting so as to have a more informed conversation. Only, the vast majority of the time, no strategic plan exists, simple or otherwise. Then, when a strategic plan is present, and we go through several of the items, it becomes clear that it’s out of date and/or not remotely achievable. What gives?

    I hearken back to the early days of my first startups and realize I never had a strategic plan. My strategic plan was Herb Kelleher’s famous quote:

    We have a strategic plan. It’s called doing things.

    While that worked well for me with a tiny team and few moving parts, as team and complexity grew, I needed a way to align everyone around a common, high-level focus. Enter the strategic plan.

    Now, I believe, even with limited people and resources, a strategic plan is worthwhile. As a tool to communicate with employees, advisors, mentors, and investors, it’s invaluable.

    One of the reasons so few entrepreneurs spend time on a strategic plan is the belief that it’s time consuming and difficult. From my experience, the simpler, more concise, the better. Here’s a simple guide for a basic strategic plan:

    • What do you do? Why?
    • Who do you serve? Why?
    • What are the measurable goals? Current values? Target values?
    • What are the priorities? Who owns them?

    https://twitter.com/davidcummings/status/1134546561730584576

    More complicated strategic plans are less likely to be updated and maintained, rendering them nearly useless. Finding a balance that has enough value but isn’t cumbersome is key.

    Entrepreneurs should build, regularly update, and share their strategic plans. Keep it simple. Keep it accurate. Keep it worthwhile. Strategic plans are a valuable tool every entrepreneur should employ.

  • Statute of Limitations on Experience

    Last week I was talking to an entrepreneur and she started asking me questions about recruiting best practices. How do I recruit engineers? Where do I find them? How do I build a high performance engineering culture? All great questions, but is my personal experience out of date?

    This prompted me to think about the role of experience, more specifically recency of experience, in helping entrepreneurs. When an entrepreneur asks me for help, it’s most likely due to the success of Pardot. Only, Pardot was nearly seven years ago.

    Since we sold Pardot, I’ve started several more startups but never got to product/market fit, making it feel like there wasn’t as much experience gained. Now, the investing and co-founding side has proved more successful than expected, but I’m a layer removed from the front line decision-making.

    When does advice become stale?

    When does the statute of limitations for experience occur?

    Some of my recommendations should be timeless. Build regular simplified strategic plans. Be the best place to work and the best place to be a customer. Develop a meeting rhythm. Culture is the only sustainable competitive advantage completely in control of the entrepreneur.

    Yet, my more specialized knowledge is dated. SEO? Marketing automation? DevOps? Agile? UI/UX? Recruiting? I’m feeling stale on a number of things that were stronger a few years back.

    Now, my approach is to focus advice on high level startup and leadership strategies, and away from specific tactical things we employed at Pardot. Today, it’s more sharing personal experiences, mental frameworks, and startup strategies leaving tactical items to other practitioners with fresher knowledge.

    General experience is invaluable, tactical best practices age over time.

  • Mind the Valuation Gap

    Recently I was talking to an entrepreneur that’s raising a round and the topic of valuation came up. Valuation is always a sensitive issue. Entrepreneurs, rightly so, figure they should get the highest valuation possible. Investors, on the other side, want the lowest valuation possible that still wins the deal. Only, we’re in unusual times with valuations at or near their all-time highs (excluding the dot com days, of course).

    Entrepreneurs need to mind the valuation gap.

    The valuation gap is the delta between what the public market multiples currently support and the valuation private investors are willing to invest. For example, if super high growth SaaS companies trade at 8x run-rate on the public markets, and an entrepreneur raises money from an investor at 12x run-rate, there’s a 50% valuation gap.

    Assuming superb execution, the startup will grow into the valuation and skip over the gap. For entrepreneurs, the risk is raising at too high a valuation and not growing into it. One of the worst possible outcomes for a venture-backed startup on the fundraising treadmill is to have a down round. Startups are essentially broken when they raise a new round of funding at a valuation lower than their last round.

    The strategy for entrepreneurs: find a balance between the best valuation possible and the best valuation that ensures a strong likelihood of a higher valuation in the next round. There’s no right or wrong answer, but there’s often an answer that makes it easier to sleep well at night — find that one.

  • When the Opportunity is Bigger Than Expected

    Three years into Pardot we were humming along and had just cracked the $1M annual recurring revenue milestone. Customers were loving the product and saying things like, “I don’t how I did my job before using Pardot” — a great sign we had a must-have product, not a nice-to-have. After listening to customers talk about the value they received, internally we started debating raising the price to match the value.

    Then, of course, worries emerged:

    • Would prospects pay the higher price?
    • Would sales cycles lengthen?
    • Would sales velocity slow down?

    And, naturally, the sales reps didn’t like the idea because they feared they’d make less money.

    After getting internal feedback and input we made the call and doubled prices. What happened next was unexpected: sales and revenue grew even faster than planned.

    At that point, it dawned on me the opportunity was bigger than expected.

    Marketing automation was a billion dollar market in the making.

    We were at the right place, at the right time, with the right team.

    But, honestly, at the start of Pardot we thought it was a decent idea but didn’t know if it was good or great.

    We didn’t know if the timing was right.

    We didn’t know if the Great Recession would slow us down.

    Three years into the business we knew we were on to something big — even bigger than expected.

  • Challenge the Inertia Around You

    Back in 2012, I was frustrated with the lack of options for startup office space. Landlords, often with their institutional investors, had tremendous inertia to make any changes. Potential tenants had to sign 5+ year leases, show profitable operating history, and deliver letters of credit — all this just to get office space. Clearly, the commercial real estate industry had grown up around the traditional business as customer and was never going to provide a solution for high growth, high risk startups.

    Now, and then, it was abundantly clear the market missed a segment of potential customers. Today, the combination of community and co-working is incredibly popular and we have great options like the Atlanta Tech Village and WeWork.

    Challenging the inertia around you is often the most difficult, and rewarding, course of action.

    I tried workarounds in the commercial real estate industry for years — special subleases, different term structures, etc. — and the inertia was too strong. My solution was to buy a building, recruit a team, and move forward without the industry. Sometimes it takes more dramatic approaches, sometimes there are more elegant approaches.

    Embrace the inertia as a challenge. Recognize how and why it’s there. Fight through it.

    When the industry insiders scoff at you, like they did with us and the Atlanta Tech Village, you know you’re on to something.

    Challenge the inertia around you.

  • Competing Definitions of Product/Market Fit

    One of my favorite questions to ask seed/early stage entrepreneurs is “do you have product/market fit?” Then, naturally, it’s followed up by “how do you know and what are the metrics?” Of course, the answers, and rationale, are all over the place. While there are a variety of ways to define product/market fit, here are the three most common:

    1. By Unaffiliated Customers
      A simple, easily quantifiable definition is product/market fit is achieved when you have 10 unaffiliated customers that are passionate about the product. Unaffiliated, in this definition, is key in that the customers need to have bought the product based on its merit, not based on being a friend of the founder or an old colleague. Passionate customers are another important component in that there has to be a positive indicator beyond just paying money that there is a real need, one with authentic demand, being solved.
    2. By Positive Momentum
      A looser definition of product/market fit is when instead of feeling like everything is an up hill slog in the startup, things get easier and there’s palpable momentum. Examples include customers signing with significantly shorter sales cycles, PR opportunities popping up, and potential employees actively reaching out to join.
    3. By Distribution Scalability
      A later stage definition of product/market fit is when the cost of customer acquisition is favorable relative to the lifetime value of the customer. Here, the idea is that the solution is valuable and customers are being acquired in way that makes the startup indefinitely scalable.

    While there are a number of competing definitions, it’s clear that product/market fit represents good things happening in the startup and the foundation for a successful company.

  • Reforecasts and Communication

    Two years ago I was sitting down with an entrepreneur debating what to do next. It was early in the hyper growth stage of the startup and things were growing fast. Only, with limited operating history, growth expectations were even greater than reality, and there was no way the annual forecast was going to be achieved.

    Accountability was tied to the forecast.

    Goals/OKRs were tied to the forecast.

    Bonuses were tied to the forecast.

    What to do?

    This challenge is much more common than expected. Fast growing startups are inherently unpredictable. Even with bottoms-up and top-down forecasts, reality is different from the spreadsheet. At some point, trying to hit a forecast that is no longer possible is more demoralizing than motivating — it’s time for a reforecast.

    A reforecast is simply redoing the budget and expectations after the year has already started to reflect new information. The key is to get all the stakeholders together, work to make the new forecast as accurate as possible, and then communicate it with the team.

    Communication is the most important part.

    By over-communicating, including why the reforecast was necessary, learnings from the experience, and go-forward expectations, team members are more bought in and more accepting of the changes. People don’t expect leaders to be perfect; people expect leaders to lead and be transparent.

    Reforecasts are part of normal startup life. They shouldn’t happen yearly, but they do happen in the normal course of business. When a reforecast is necessary, make the changes and over-communicate with the team.

  • The Double Sale

    Earlier this week I was talking to a successful software rep about what it was like selling the three different products he’s represented in his career. When discussing his current role, he said something that stuck with me: now, I don’t have to make the double sale.

    So, what’s the double sale? The double sale is when you have to first sell the prospect on why they even need your product, and then the second sale is your actual product.

    Double sales are required when it’s early in a market and there’s a lack of market awareness. This is the good double sale, assuming it’s not too early — with time, the double sale will go away in favor of a regular, single sale.

    Double sales are also required for nice-to-have products that people don’t need but might purchase if there’s a strong sales person. These are the double sales to watch out for as startups can be built selling a vitamin, but selling pain-killers is much more valuable and capital efficient.

    https://twitter.com/davidcummings/status/1116346894970650626?s=20

    Pay attention to the sales process and recognize the potential for a double sale, and more importantly, whether or not the double sale is for a good reason. Work towards a future where a double sale isn’t required to achieve greater success.

  • When the Startup Stalls

    Last week I was talking to an entrepreneur with a stalled startup. After being in business for several years, getting to millions in recurring revenue, and having a great run, the business plateaued. What to do next? Of course, there are a number of areas that can be improved in the business, as is always the case regardless of growth, so I asked the bigger question: What do you want to do with the company?

    After much back and forth, it became clear that the desire was to keep running the business and to get it back on a high growth trajectory. We talked about a number of different strategies and decided to focus on three areas: retention, customer acquisition, and the rule of 40.

    Retention

    Retention represents the core health of the business. Customers that are happy, successful, and finding value renew their contracts. The old adage that it’s more cost-effective to keep an existing customer than to find a new one still rings true. With a mature, no-growth business there’s even more time to focus on the existing customers and ensure they have a great experience and renew (see SaaS Enemy #1).

    Customer Acquisition

    Customer acquisition represents all aspects of acquiring new customers. Often, when a business slows, the customer acquisition channels haven’t scaled with the company and the law of large numbers kick in such that growth on an overall percentage goes down as the number of churned customers goes up (see Leaky Bucket). Now’s the time to analyze the customer acquisition channels deeper and look for opportunities to make improvements.

    Rule of 40

    The Rule of 40 states that the profitability, as a percentage, and the overall growth, as a percentage, when combined, should be 40 or higher. A business with 10% margins growing 30% annually meets the Rule of 40 while a business that’s breakeven and growing 10% annually is significantly below. Put another way: grow fast without making money or generate healthy cash flow with little-to-no growth. For a plateaued business, if it’s clear it can’t grow more, it’s time to meet the Rule of 40 by making it more profitable and focusing on operational efficiency.

    Stalling startups is all too common and part of the normal course of business. By its very definition, a startup is a growth focused business, so if growth isn’t currently possible, it’s likely time to sell, look for new product ideas, or no longer be a startup.

  • Quantifying Local Startup Impact

    When talking about the virtues of entrepreneurship for local communities, my two favorite benefits are transference of personal growth and high quality job creation. The faster people grow at work, the more abilities they have to help their community. The more high paying jobs, the more taxes and economic impact to help their community.

    Startups have much greater opportunities for personal development, being growth focused organizations at their core. Fast growth translates into more leadership training, more pushing the limits personally, and more overall personal growth. Values and lessons developed in the startup spill over into the local non-profits, community organizations, and religious organizations. The faster people grow personally, the greater everyone around them benefits.

    High quality job creation is a real challenge for most communities. Large companies, like the Fortune 500, are the business of doing more volume with fewer employees, and have seen their payrolls shrink. Alternatively, startups, while having a high failure rate, also create a tremendous number of jobs when they hit the growth and scale up stage.

    Take for example a startup that’s created 100 jobs. In the non ultra expensive parts of the country, a growth stage startup might have an average salary of $125,000. At a 6% state income tax, that’s $750,000 of annual tax dollars to the state. Add in all the other regular expenditures like food, housing, transportation, local sales taxes, and it’s likely that the startup is contributing $6+ million to the local economy (e.g. half of the total salaries). Hosting a Super Bowl is estimated to bring $100 million of local impact, depending on who you ask. Only, a big event is a one-time impact. Startups persist indefinitely and contribute to the economy year after year. Put another way, adding 20 different 100 person startups to a city is the economic equivalent of having the Super Bowl every single year.

    Quantifying local startup impact is difficult. Identifying areas like the benefits of greater personal development and general economic impact begins to outline the value of the startups in local communities.