David Cummings on Startups

Category: Entrepreneurship

  • Challenges Going the Local Investor Route

    Over the last year I’ve had the opportunity to meet a few entrepreneurs that have raised modest amounts of money from local investors in their region and built the basis of a meaningful, valuable business. When talking to the entrepreneurs, it’s clear that they value optionality — they don’t want to raise too much money so that they maintain control and they don’t want to get on the venture-backed train of go big or go bust.

    Yet, there are major challenges going the local investor route: lack of true domain expertise and recent been-there-done-that experience. Occasionally the local investors in the deal have it but the vast majority of the time they don’t. And, typically, when doing these local rounds, the money comes from non-professional investors that have a day job, usually in a different industry (e.g. successful business people, lawyers, doctors, etc.). The other major component is that many of the monied folks that do have domain expertise are many years removed from their last success. Basics like leadership and values are timeless, but many other facets of building a successful startup are different from 20 years ago.

    My default position is to not raise money unless it’s clear the machine is working, defined by a 5x increase in value for every dollar invested. Too many entrepreneurs blindly chase investor money believing it is the only path forward. For entrepreneurs that have already raised some local money, the key is getting people around them that know what they don’t know.

    For entrepreneurs that go this route, there are several solutions. First, get involved with an organization like EO or YPO, join a forum, and then reach out to the greater network and look for regional or national special interest groups that have current domain expertise. Second, apply to a non-profit like Endeavor which explicitly focuses on helping scalable, high impact entrepreneurship make the most impact. Third, recruit board members and advisors that truly care and will debate what’s best for the business (too many entrepreneurs surround themselves with people that won’t push back).

    Raising money from local investors is fine, but it requires more time and effort to get the expertise around the table to really help the entrepreneur realize his or her potential.

    Don’t settle.

    Get the help needed.

    Build an amazing business.

  • We > I for Entrepreneurs

    Over the last year I’ve had the opportunity to meet with dozens of entrepreneurs through the Endeavor program. At one of the events I was seated, listening to an amazing entrepreneur tell his story and it was incredibly compelling. Only, every 10th word was “I.”

    “I grew sales 30% last quarter.”

    “I acquired a competitor last year.”

    “I hired an amazing executive.”

    “I raised an institutional round.”

    https://twitter.com/davidcummings/status/1106166222821957632

    Finally, I interjected and asked, “Are you open to feedback?”

    Curious, thinking what he had said wasn’t necessarily feedback oriented, I shared that his use of “I” was disappointing. He didn’t achieve those things by himself. He leads a team, not just himself.

    Leaders need to say “we” and not “I”, especially when referencing organizational results.

    “We” accomplished the goal.

    “We” made it happen.

    “We” > “I”, always.

  • Where art thou startup exits?

    The startup world loves to talk about the potential upside, the potential exits. While there are plenty of newsworthy exits — think Qualtrics being acquired by SAP for $8 billion —  the reality is that exits are few and far between, especially outside the startup centers.

    https://twitter.com/davidcummings/status/1104146567030820864

    After startup investing for a decade now, and doing over 30 deals, I’ve had exactly one exit and two partial exits (selling some secondary). Now, on paper, the overall returns look great but it’s really, really hard to get any liquidity. Building great companies takes time, decades of time.

    For entrepreneurs, the key is to build an enduring business. A business that provides value to all stakeholders, grows in perpetuity, and has the ability to generate sustainable profits is the true measure of success. Should a strategic buyer come along, great. If not, no worries.

    In fact, in today’s market, if a startup is venture backed, they need to be on a path to $100M+ in revenue to have the opportunity to go public. Going public is an “exit” in that shareholders get liquidity and the company raises money from the public markets (assuming it isn’t a direct listing). Going public is the exit venture-backed startups should focus on.

    If a potential investor asks about an exit strategy, the answer should be to build a large, enduring business. Then, and only if the investor is looking for more specifics, offer up the logical acquirers for the business. Too many investors ask about an exit strategy, when, in reality, the world doesn’t work that way. Companies are bought, not sold.

    Build a great business and acquirers will come knocking; everything else is conjecture.

  • Pushing Harder and Pulling Back as an Entrepreneur

    Late in the original Pardot days we were having a constant internal battle around engineering. With the market growing fast, and competition fierce, there wasn’t enough time or resources to accomplish everything we wanted. Often, we’d push so hard on engineering — new features, bug fixes, removal of technical debt, etc. — that quality would start slipping and morale would drop. Then, belatedly, we’d realize we were pushing too hard and we’d have to pull back. Only, we’d pull back for too long and then be a little late ramping the intensity back up.

    The pushing harder and pulling back as an entrepreneur never ends.

    Eventually, we settled on an approach where we’d push hard one quarter on new feature development and crank out a ton of new functionality. Then, the following quarter, we’d pull back on the intensity of the team and focus on scalability, removing technical debt, and refining existing features. Product updates were always being pushed daily with continuous delivery but the internal approach would change each quarter with one pushing harder via longer hours and a greater focus on new features followed by the next quarter via slightly shorter hours and a greater focus on maintenance.

    Morale, culture, and team dynamics are all things that seemed fuzzy and not important to me in the early years. Then, with time, the value became clear that these are major determinants why some teams win and others lose. Constantly oscillating between pushing harder and pulling back is part being an entrepreneur.

    Entrepreneurs need to pay attention to the intensity within the organization and look for ways and strategies to proactively work the ebb and flow.

  • Markets or Ideas for Startup Success

    As I look for patterns in successful startups, the more I believe the market, inclusive of timing, is more important than the initial startup idea. People get so enamored with the idea — even putting it up on a pedestal as the be-all-end-all — that they don’t step back and spend enough time assessing the market.

    An entrepreneur will research an idea for a few weeks before jumping into a journey that might take 10 years. Instead, spend several months in the market. Learn it. Study it. Look for trends and gaps. Really experience the market, however possible.

    Take Pardot as an example. The initial Pardot idea was lead generation as a service, not marketing automation. We picked a great market — online lead generation — and had great timing — the shift of offline marketing dollars to online — making the pivot into marketing automation successful.

    Take SalesLoft as another example. The initial SalesLoft idea was alerts and news about your contacts, not sales engagement. We picked a great market — productivity software for sales people — and had great timing — the shift of offline selling to online — making the eventual pivot into sales engagement successful.

    Take any famous entrepreneur. I bet they picked a great market (and timing!), found an opening in the market (an initial idea), and then built a suite of offerings to service that market over many years.

    Archimedes, the Greek inventor, has a famous quote:

    Give me a place to stand and with a lever I will move the whole world.

    Entrepreneurs with a tiny wedge into a large market can build a great business.

    Pick a market, not an idea.

  • Startup Storytelling, Simple Pitches and 100 Words

    Reflecting more on last week’s adventure at the amazing SaaStr Annual and Endeavor international selection panel, I noted that entrepreneurs, with all their enthusiasm and energy, have an opportunity to improve on their elevator pitch and storytelling.

    https://twitter.com/davidcummings/status/1094997223639781376

    The simplest, and most straightforward, elevator pitch is like a Mad Libs:

    My company _________ helps businesses like _________ make more money by _________.

    Pretty easy, right? Start with the company name, then add social proof via existing customers, and finally top it off by a brief explanation of the actual service.

    Let’s look at an example:

    My company Calendly helps businesses like LinkedIn and Zendesk make more money by scheduling meetings without the back-and-forth emails.

    Now, there’s much more to the business, vision, etc. but the goal isn’t to share your life’s story. Rather, the goal is to assess interest, evaluate body language, and decide if it’s time to share more. With a positive nod and enthusiasm from the simple pitch, it’s time for the next step.

    With the audience primed, it’s time for the 100 word story.

    Warby Parker, a popular direct-to-consumer eyeglasses company tells their story in 100 words.

    Once upon a time, a young man left his glasses on an airplane. He tried to buy new glasses. But new glasses were expensive. “Why is it so hard to buy stylish glasses without spending a fortune on them?” he wondered. He returned to school and told his friends. “We should start a company to sell amazing glasses for non-insane prices,” said one. “We should make shopping for glasses fun,” said another. “We should distribute a pair of glasses to someone in need for every paid sold”, said a third. Eureka! Warby Parker was born.

    Share the origin story of the business.

    Share the vision of the future.

    Share what’s next.

    But, most importantly, do this in 100 words. Something succinct. Something easily digestible. Too often, entrepreneurs take too much time and go into excruciating detail. Keep it light, fun, and memorable. Stories are memorable, details are not.

    Take a few minutes, develop a simple pitch, a 100 word story, and align the team around it — think storytelling, not detail telling.

  • Segment Customers, from Flies to Whales

    For the last two days I’ve had the opportunity to spend time with entrepreneurs from around the world through Endeavor. In our group, we had entrepreneurs from Venezuela, Columbia, Greece, Argentina, and Saudi Arabia all sharing stories of challenge and opportunity. As part of the program, we spent time talking through their customers using a simple naming convention:

    • Flies
    • Rabbits
    • Deer
    • Elephants
    • Whales

    Now, these names aren’t meant to degrade or belittle certain customers. Rather, they’re for the entrepreneur to understand what is, and what isn’t, working within segments of the business.

    For each segment, here are some common metrics:

    • Cost of customer acquisition
    • Average revenue
    • Renewal rate
    • Lifetime value

    Only, by looking deeper, new insights emerge.

    Instead of investing resources to grow all segments, invest in the most important segments.

    Segments are divided based on a variety of characteristics including:

    • Number of employees
    • Revenue
    • Potential usage (users, locations, etc.)

    Initially, as the business is growing, it’s best to keep things simple. Once some level of scale is reached — say 100+ customers — it’s good to segment the customers and understand the business in a more fine-grained way.

    What else? What are some more ideas on segmenting customers?

  • Scrappy First, Comfortable Financial Balance Later

    Earlier this week I was talking to an entrepreneur that shared stories of a previous startup he’d joined a few years back. The now-removed leader of this previous company had a big-shot corporate executive background and was placed in this over-funded startup before it had product/market fit. As expected, their office was lavishly furnished, money was spent like they were already a profitable cash cow, and six months later the startup was bankrupt.

    Boom, millions of dollars incinerated and nothing to show for it.

    Starting lean and scrappy is an important part of the startup process.

    When entrepreneurs raise a large round before a repeatable, scalable business model, most of the time bad things happen. Entrepreneurs are an optimistic bunch, so it’s only human nature to burn all the cash in 18 months, regardless of whether or not the business is working. When the cash is burned, and the business doesn’t make enough progress, investors are less likely to put in more cash, the cap table is often broken, and the startup usually ends in failure.

    At Pardot, we never had institutional investors. From day one, we had to be scrappy — there was no other way. Every dollar we saved was a dollar to invest and grow the business. Even when we had over $10M in recurring revenue, Adam and I shared a hotel room on every trip. Little costs add up to big costs as the business scales.

    Now, once the business model is working, there does come a time to ease up on the scrappiness — within reason, of course — and find a comfortable financial balance between spending too conservatively and being a spendthrift. But, like many things, as the financial purse strings are loosened, it becomes harder and harder to tighten them back.

    Entrepreneurs would do well to ensure a scrappy, financially resourceful environment until a repeatable business model, and then slowly find a comfortable balance.

  • The Rise of Revenue Financing Loans for SaaS

    Recently, several entrepreneurs have asked me about revenue financing loans. Revenue financing is a fancy way of saying a semi-complicated loan where payback is dictated by a number of elements including a percentage of revenue, not just a traditional interest rate. The good news is that it provides for a more aggressive, non-dilutive (usually) form of financing for Software-as-a-Service (SaaS) companies. The bad news is that it’s much more expensive than a bank loan, but still not nearly as expensive as venture capital.

    Here’s how an example revenue financing loan might work:

    • Loan amount equal to 20% of current annual recurring revenue (e.g. $10M in ARR, $2M loan)
    • Loan covenant where one month’s operating costs in cash required on hand at all times (e.g. $800k of monthly expenses, with a $2M loan, only $1.2M can actually be used)
    • First 18 months interest-only monthly payments (on the full $2M, not the usable $1.2M) where the “interest” is 3% of the monthly cash receipts (hence the name revenue loan as the interest rate is directly driven by the revenue of the business)
    • 3.5 years of equal principle payments after the first 18 months plus the continued interest of 3% of the monthly cash receipts (so, the loan is paid back after five years and the interest payments keep rising assuming revenue keeps growing)
    • Additional 10% of original loan amount payment due after final payment or at time of next financing event (payment can be cash or equity)
    • Minimum of 1.7x the original amount back to the loan provider with a max of 2.5x (since the interest rate is a percentage of revenue, if the business grows faster than expected, the interest rate could be much higher and up to 2.5x would be paid back)

    Wow, it is complicated! Net net, it’s roughly a 25% interest rate loan with variability based on how fast revenue grows. SaaS, with its amazing margins and cash flow predictability, makes this type of financing uniquely suited to both the investor and the recipient, especially compared to most types of other businesses.

    SaaS entrepreneurs looking to grow faster, but reluctant to sell equity, would do well to talk to the newish crop of revenue financing firms out there.

    What else? What are some more thoughts on revenue financing loans?

  • Avoid Judging an Entrepreneur’s Idea

    Every week entrepreneurs reach out to me for feedback and advice. I like to start the conversation over email, asking different questions and requesting a Simplified One Page Strategic Plan. Inevitably, most of the entrepreneurs haven’t made much progress and are really just interested in feedback on their idea.

    When the request to judge an idea comes in — and it always does — I politely decline and explain that I’m not the customer. I’m not the target. The only people that can judge the idea are the ones that need it, will pay for it, and want to sign up for it before it’s even ready.

    Entrepreneurs are actually worse off when people who aren’t potential customers judge their ideas. Too often, people give feedback — positive or negative — that puts the entrepreneur on a path that isn’t helpful. In places that are polite and more supportive (hello, Atlanta!) the tendency is to be encouraging and tell the entrepreneur that their idea is great. When the idea isn’t great, which is most of the time due to a lack of customer discovery, the entrepreneur pats herself on the back and digs in even harder. Only, they’re extending their path to nowhere. Too many entrepreneurs continue to pursue ideas that should be killed based on customer feedback, not random person feedback.

    While I don’t judge the entrepreneurs’ ideas directly, I like to share different frameworks and ways to think through opportunities. For example, team, stream, and “not a meme” is one of my favorite ways to evaluate a startup. The team, of course, is the entrepreneurs. The stream is the trend or inevitable change they’re riding. And, finally, “not a meme” means the solution is a “must have”, not a “nice to have” (every meme, no matter how funny, isn’t mission critical).

    Fight the urge, don’t give entrepreneurs feedback on their idea. Instead, push them to talk to customers (customer discovery). Push them to talk to partners. Push them to talk to the experts in the specific industry, not a random person who’s been successful. Help an entrepreneur by not judging her idea.