David Cummings on Startups

Category: Entrepreneurship

  • High End SaaS Valuations Using the 2017 Inc. 5000 Data

    Every year I love pouring over the Inc. 500 (now Inc. 5000). When I first read Inc. magazine in high school in the late 90s, I made it a personal goal to win the award. As a founder/CEO, I first succeeded with Hannon Hill (#247 on the 2007 Inc. 500) and then with Pardot (#172 on the 2012 Inc. 500). And, now, as a co-founder/chairman, succeeded with Rigor this year (#430 on the 2017 Inc. 500).

    When looking through this year’s list, a number of well funded SaaS startups appeared:

    • Gainsight – $23.1M, 3,843% growth, #102
    • Bizible – $3.4M, 2,405% growth, #179
    • Domo – $79.9M, 2,250% growth, #192
    • GuideSpark – $24.8M, 525% growth, #856
    • Smartsheet – $64.3M, 425% growth, #1021

    Let’s take Gainsight as it has the highest growth rate and look at some high end SaaS valuations from their funding rounds.

    Gainsight Notes

    • Funding rounds listed in Crunchbase:
      • May, 2017 – $52M Series E
      • Nov, 2015 – $50M Series D
      • Oct, 2014 – $25M Series C
      • Nov, 2013 – $20M Series B
    • Recognized revenue by year:
    • Estimated end of year run rate (run rate is always ahead of recognized revenue for fast growing companies):
      • 2016 – $30M
      • 2015 – $17M
      • 2014 – $8.5M
      • 2013 – $3.5M
    • Published valuations:
      • Nov, 2015 – $348M post-money (source)
    • Estimated valuation as a multiple of run rate:
      • Nov, 2015 – $16M run rate with a $298M pre-money valuation making a valuation multiple of 18.6 times run rate
      • Nov, 2013 – $3M run rate with an estimated $80M pre-money valuation making a valuation multiple of 26.7 times run rate

    SaaS valuations are typically in the range of 3-5x run rate and can go as high as 10x run rate for the fastest growing startups (see SaaS Funding Valuations Based on a Forward Multiple). When valuations are 18 and 26 times run rate, it’s a bet on building the category winner and a different game compared to 99% of the venture capitalists out there.

    Want to explore more? Check out the 2017 Inc. 5000 and Crunchbase.

  • 3,000 Posts, and Time for Something New

    Today marks blog post number 3,000! I’ve been blogging daily for over eight years and it’s time to mark the end. Early on, I did it as a challenge to myself. Can I blog daily for a week straight? A month straight? Then, it took on a life of its own.

    So, what’s next? I’m still going to blog, but instead of one per day, I’m only going to blog when I have a topic or idea I really want to share. In addition to the normal short posts, I’m going to do longer, more detailed posts.

    Writing is cathartic for me. I enjoy sharing a thought that I found useful or interesting. I enjoy comments and ideas, especially when I’m wrong or there’s another dimension I need to understand. It isn’t always easy, but it is always valuable.

    Here’s to the first 3,000 posts, and many more.

    So long, and thanks for all the fish.

  • 4 Ideas for Finding Customers

    TX Zhuo has a good post up titled Teaching startups the art of the sale where he describes several customer acquisition ideas. Most startups struggle with sales — often in conjunction with not having product/market fit — making for a high likelihood of failure. From the article, here are four ideas for finding customers:

    1. Partner with the first three lighthouse accounts and charge them whatever they’re willing to pay (e.g. a big discount) so that they’ll be references and provide testimonials
    2. Spend time with investors and use their connections to find potential prospects
    3. Form a customer advisory board and use it as a way to entice potential customers (e.g. if you sign, we’ll add you to our customer advisory board)
    4. Deliver a good mix of targeted social, email, and event marketing alongside clear messaging to help your voice be heard

    Sales and marketing is hard. Try these ideas and more to figure out what does, and doesn’t, work.

    What else? What are some more ideas for finding customers?

  • When Customer Expansion Outpaces Churn

    One of the holy grails of successful SaaS businesses is having the expansion of existing customers outweigh customer churn. Meaning, if the business didn’t sign any new customers in a year, the upgrades from existing customers would be more money than the lost revenue from customers that leave, resulting in growth for the company. A business that doesn’t have to sell anything new, but still grows, is in an enviable position.

    Here are a few benefits when customer expansion outpaces churn:

    • More Money to Acquire Customers – When customers regularly grow their account, more money can be spent to acquire the initial account, providing additional options for customer acquisition.
    • Faster Growth Rates – The law of large numbers starts to kick in making it hard to grow fast at greater scale. When customer expansion is more than churn, it makes it easier to grow faster as there’s a built-in growth engine.
    • Raising Money – Investors look for unit economics that show the fundamentals of the business are strong, and excellent customer expansion, along with customer renewals, and gross margins are three of the most important metrics making it easier to raise money.

    Customer expansion outpacing customer churn is the hallmark of a successful SaaS company.

    What else? What are some more thoughts on the importance of customer expansion being larger than customer churn?

  • Entrepreneur Evolution Over Time

    One of the amazing experiences that comes with investing in entrepreneurs is seeing the entrepreneurs evolve over time. Early on, the entrepreneur is blissfully ignorant about what lies ahead and grinds it out to (hopefully!) to an early milestone of a million recurring, willing the startup forward. Then, slowly, it becomes clear that the entrepreneur needs to go from doer to manager (see Maker’s Schedule, Manager’s Schedule).

    As a manager, the entrepreneur struggles. People require trust, and systems, and patience. The entrepreneur wants results, now. Slowly, after many mistakes, this whole people thing starts to come together. Culture starts to become important. More lessons, more learning.

    Then, the next challenge: becoming a manager of managers. More people, more processes. More debating whether to work in the business or on the business. Onward and upward.

    The entrepreneur evolution is fascinating. No two journeys are the same, but all are interesting.

    What else? What are some more thoughts on the entrepreneur evolution over time?

  • The 7 Words Entrepreneurs Should Use Frequently

    Entrepreneurs have a variety of leadership styles. One my favorites is servant leadership, defined as:

    …both a leadership philosophy and set of leadership practices. Traditional leadership generally involves the accumulation and exercise of power by one at the “top of the pyramid.” By comparison, the servant-leader shares power, puts the needs of others first and helps people develop and perform as highly as possible. Servant leadership turns the power pyramid upside down; instead of the people working to serve the leader, the leader exists to serve the people.

    Entrepreneurs that believe in servant leadership should use these seven words frequently:

    Let me know how I can help

    Pretty simple, right? These seven words show that you’re proactive and want to help. Many people want help. Fewer people ask for help. Servant entrepreneurs would do well to incorporate these seven words.

    What else? What are some more thoughts on servant entrepreneurs using these seven words?

  • Deliver a Simple Message

    Yesterday’s post Write Your Equivalent of The Secret Tesla Motors Master Plan drove home a really important point: deliver a simple message. The master plan is all of 35 words, in plain English, with no jargon. How many entrepreneurs deliver plans like that? Very few.

    Simple messages don’t mean incomplete messages. Take the Simplified One Page Strategic Plan as an example. The document has a wealth of information but it’s not verbose. Every word and every category matter. The fewer the words, the more likely it’ll be read, but the entire message still needs to be communicated.

    Entrepreneurs would do well to deliver a simple message, and repeat it often.

    What else? What are some more thoughts on the idea of delivering a simple message?

  • Write Your Equivalent of The Secret Tesla Motors Master Plan

    Exactly 11 years ago from tomorrow Elon Musk famously published The Secret Tesla Motors Master Plan (just between you and me). Few people read it then and most that did didn’t take it seriously. Only, now, over a decade later, it’s come to fruition. And, from that, entrepreneurs should learn an important lesson.

    But first, from the post, the master plan is:

    1. Build sports car
    2. Use that money to build an affordable car
    3. Use that money to build an even more affordable car
    4. While doing above, also provide zero emission electric power generation options
    5. Don’t tell anyone.

    Entrepreneurs should take this concept — a simple long term master plan — and write one out for their startup. Make it clear, concise, and easily understood. Then, share it with everyone.

    The best way to see the future is to invent it.

    What else? What are some more thoughts on the Secret Tesla Motors Plan and entrepreneurs building their own plan?

  • Entrepreneurs that Can’t Sell

    Last month I was talking to an entrepreneur that lamented he can’t sell. No matter how hard he tries selling his prototype to prospects, his idea to investors, or his vision to potential employees, it’s just not clicking. After hearing this, I asked a few questions about his strategy and approach. It became clear that a little feedback was in order.

    Here are a few thoughts for entrepreneurs that are having a hard time selling:

    • Go with Passion – Emotion and passion are critical for entrepreneurial selling. Figure out what’s energizing and ensure it’s shared with the audience.
    • Know the Audience – Prospects, investors, and potential employees all warrant a different pitch. Think through what the audience wants to hear and map it out in a simple Google Doc. Ask a friend for feedback and constantly refine the message.
    • Read up on Sales – Start with the classic sales books like How to Win Friends and Influence People as well as many others. In addition, there are a number of excellent sales articles online.
    • Find a Co-Founder – Look for a co-founder that has a complementary skill set — plenty of people out there love to sell and are good at it. Take a look at The Co-Founder Complement.

    Entrepreneurs that can’t sell need to improve their skills to get them up to a modest level and find a partner that can help. Selling isn’t easy but with effort can always be improved.

    What else? What are some more thoughts for entrepreneurs that have a hard time selling?

  • Feature Death March

    Last week I talked to a pre-revenue startup that felt if they could just hire another developer and add one more important feature to their product, customers would start buying. In the book Angel by Jason Calacanis, he describes this as the “feature death march” where the entrepreneur has had limited success to date and feels if they just add one more major feature, customers will start buying.

    Prospects saying they’ll purchase the product when it has one more feature is often an excuse. If the prospect is serious, and the feature fits the entrepreneur’s vision, get the prospect to commit to buying the product now with a timeline for when the feature will be done. Ask for a signed contract. Once a contract is involved, and terms are negotiated, it gets serious. Too often, entrepreneurs go on a feature death march only to bring the new feature back to the prospect and have them still say “no” and ask for another, different feature or outright say they won’t buy it.

    Missing an important feature can be a legitimate reason for a prospect to say “no” but more often than not, it’s an excuse and they’ll never buy. Figure out the difference and don’t go on a blind feature death march.

    What else? What are some more thoughts on the idea of a feature death march?