David Cummings on Startups

Category: Entrepreneurship

  • Build a Competing Company, Internally

    Forbes has an excellent article titled Starting Over: How FreshBooks Reinvented Its Online Accounting Service On The Fly. FreshBooks is a popular online accounting app (think major competitor to QuickBooks and Xero, but more focused on micro and small businesses) that’s been around for over 15 years. After 10+ years with the original application, it was clear that the product architecture and user experience wasn’t going to scale for the next 10 years.

    We all know that the a full product rewrite is the kiss of death. What to do?

    FreshBooks created a separate company, with a separate team, in a separate office, to build a new competitor called BillSpring. BillSpring’s goal was to build a real business with it’s own customer base, that if successful, would replace the original FreshBooks product. After two years, BillSpring was working well and customers loved it. FreshBooks made the BillSpring product the new FreshBooks product while maintaining the legacy product and not forcing customers to switch. Now, FreshBooks has a platform for the future.

    Need to reinvent your company? Consider building a competing company, internally.

    What else? What are some more thoughts on building a competing company to reinvent the business?

  • Recessions and Expensive Software Incumbents

    Earlier this year I had the opportunity to sit down with the Salesforce.com executive that opened the Atlanta office a number of years ago. After hearing that the Atlanta office was one of the most successful ones, I wanted to know the secret. What was the special sauce? Easy, he said.

    The recession hit many years ago and all these mid-to-large companies in the Southeast were running Siebel Systems with annual license costs that were millions of dollars per year. Combine license costs with staff plus infrastructure and you get a serious line item in the budget. Now for the Salesforce.com pitch: cut your overall Siebel costs by 90% and move everything to the cloud. CFOs especially liked this message and Salesforce.com took off.

    It’s been a number of years since the last recession and SaaS has grown tremendously. When the next recession hits, look for a new wave of SaaS products to run the same playbook and replace the expensive incumbents with a system that’s more modern, and much cheaper.

    What else? What are some more thoughts on recessions and expensive software incumbents?

  • Top 10 Blog Posts

    Periodically, I like to review the top 10 most post popular blog posts over the last 12 months. I’m interested in what’s resonating and what’s popular from social media shares and search traffic.

    Here are the top 10 most popular blog posts:

    1. The 9 Building Blocks of a Business Model
    2. SaaS Cost of Goods Sold for Startups
    3. Costs to Furnish a Nice Startup Office
    4. Simplified One Page Strategic Plan from Rockefeller Habits
    5. How Much is Enough: A Story from Jimmy John’s
    6. Example Simplified One Page Strategic Plan
    7. Gross Margin and SaaS
    8. Hockey Stick Growth for Startups
    9. Quantifying the SaaS Valuation Growth Rate Multiplier
    10. SaaS Magic Number

    Have a topic you’d like to see on this blog? Please let me know in the comments.

  • Excellent Conversations Don’t Equal Product/Market Fit

    Recently I was talking to an entrepreneur that was excited about a number of excellent conversations he was having with prospects. Potential customers were sharing details around their problems and expressing real pain. Then, the entrepreneur volunteered that he thought he was close to product/market fit.

    Excellent conversations don’t equal product/market fit.

    Product/market fit comes from real users getting real value from the product. Product/market fit takes many iterations and a significant amount of time. When assessing product/market fit, consider several usage and metric dimensions knowing that it changes from customer to customer.

    Conversations aren’t product/market fit. Rather, it’s all about customers getting value.

    What else? What are some more thoughts on the idea that conversations don’t equal product/market fit?

  • Comparative Advantage, Or Why Entrepreneurs Should Hire an Office Manager

    One of my favorite classes in college was an introductory economics course taught by David Johnson. During a section, we got into comparative advantage, which is the idea that even though you might be able to do something yourself, your time is best spent doing what you’re uniquely qualified to do. From Investopedia:

    Comparative advantage is an economic law referring to the ability of any given economic actor to produce goods and services at a lower opportunity cost than other economic actors.

    Here, the key is opportunity cost, defined as the highest valued opportunity foregone. Meaning, doing a low-value thing takes away time from doing a high-value thing. For entrepreneurs, this is spending time writing code, selling product, leading the company, etc. and not tasks that are readily handed off to another team member.

    Entrepreneurs should recognize comparative advantage and hire an office manager after their first round of funding. An office manager is the perfect way to delegate tasks so as to focus time and energy on the most important tasks. Start with a key hire, start with an office manager.

    What else? What are some more thoughts on comparative advantage and hiring an office manager?

     

     

  • $136,000 Median SaaS Revenue Per Employee

    Once the startup begins scaling, leaders from each team start asking for more resources (e.g. we just signed 10 more customers, let’s hire another person to do ‘X’). Only, outside the budget, it’s difficult to assess the overall efficiency. One of the best metrics to track efficiency is revenue per employee.

    According to the 2016 Pacific Crest SaaS Company Survey Benchmarks, the median SaaS revenue per employee is $136,000:

    https://www.slideshare.net/AlexanderJarvis/2016-pacific-crest-saas-company-survey-benchmarks

    Over time, the revenue per employee changes as the startup scales from pre-revenue through to seed stage and beyond. Each milestone often has a higher revenue per employee with ones at the expansion stage typically having $200,000 or more in revenue per employee.

    Entrepreneurs would do well to track their own revenue per employee and benchmark it against other startups of similar size and scale.

    What else? What are some more thoughts on using revenue per employee to evaluate the efficiency of the startup?

  • Accountability in a Startup

    As the startup grows from a small group of co-founders to the first early employees and beyond, organizational accountability needs to scale as well. Co-founders, talking so frequently and being self-starters, often mind-meld on a daily basis and don’t need as much structure. Only, that doesn’t scale.

    Here are a few ideas for accountability in a startup:

    Accountability in a startup takes work. Make it a system with the right rhythm, data, and priorities.

    What else? What are some more thoughts on accountability in a startup?

  • Quick Notes from Marc Andreessen’s AMA

    Stripe has an excellent post up titled Marc Andreessen answers questions from Stripe Atlas founders. Andreesseen, as always, doesn’t disappoint (see the article about him in The New Yorker). Here are a few quick notes from the article:

    • On raising money:
      • At the seed stage, when a startup is brand new, the decision is driven almost entirely by the people.
      • At the venture stage, when a startup has a prototype or an initial product but not yet a fully functional business, the decision is some combination of the people, as with seed rounds, but also product/market fit
      • At the growth stage, when a startup is fully in market and building out sales and marketing efforts to expand, the decision becomes far more about the financial characteristics of the business
    • How many pitches annually:
      • Out of the 2,000 we see, we will make somewhere between 20 and 40 investments per year. So around a 1-2% hit rate.
      • The very best VCs in the US collectively make perhaps 200 investments per year. Out of those 200, about 15 of them will generate 90%+ of the investment returns for the entire year.
    • On SaaS pricing:
      • But if I were to give general advice, I’d say that we see far more SAAS startups underpricing their product than overpricing.
      • TLDR: When in doubt, double prices. 🙂

    Want to read more? Head on over to Marc Andreessen answers questions from Stripe Atlas founders.

  • 5 Strong Core Values from Godard Abel

    Godard Abel, co-founder of G2 Crowd, published an excellent blog post earlier today titled Home Again With My Entrepreneurial Family. After selling his last company Steelbrick to Salesforce.com, he rejoined G2 Crowd. In the post, he highlighted their five core values, referring to them as “mantras”:

    • Work with joy
    • Learn quickly and continuously
    • Buyers come first
    • Slap and tickle
    • Live at the peak

    Entrepreneurs should define their core values and ensure they’re deeply integrated throughout the company. These five core values are a great starting point.

    What else? What are some more example core values that you like?

  • Personal Loans for Founder Stock

    Recently I was talking to a successful entrepreneur that’s interested in some personal liquidity (e.g. selling startup equity for cash) but doesn’t want to send the wrong message to the board and investors by selling some of his founder stock. Generally, there aren’t many options in this case. I offered up that there’s likely a market — depending on the appetite for the private company stock — to get a high interest personal loan that’s collateralized against his equity that doesn’t require a personal guarantee.

    Here’s how it might work:

    • Startup was valued at $200 million post-money after their last round
    • Founder owns 15% (so, $30 million of value on paper, but not liquid)
    • Founder borrows $1,000,000 with the following terms:
      • 10% annual interest rate
      • Sale proceeds of 10% of the loan amount in equity at last valuation (like a warrant that increases or decreases in value as equity value changes)
      • 3 year term
      • Collateralized against $3 million of equity based on the last valuation

    Example exit scenarios:

    • If the startup exits 12 months later at a $300 million valuation, the founder would repay the loan as follows:
      • $1,000,000 in principal
      • $100,000 in interest
      • $150,000 in sale proceeds (the 10% of loan value was $100,000 and increased to $150,000 as the company value increased 50%)
    • If the startup exits 12 months later at a $100 million valuation, the founder would repay the loan as follows:
      • $1,000,000 in principal
      • $100,000 in interest
      • $50,000 in sale proceeds (the 10% of loan value was $100,000 and decreased to $50,000 as the company value decreased 50%)

    Obviously, this would be a very expensive loan. But, as an entrepreneur that’s looking for options, and optimistic that the value of the equity will increase substantially, this is a better way to get some liquidity now without selling the equity immediately.

    As more startups achieve scale and substantial valuations, look for new methods for entrepreneurs to get partial liquidity.

    What else? What are some more thoughts on personal loans for founder stock?