David Cummings on Startups

Category: Entrepreneurship

  • 2017 Simplified One Page Strategic Plan

    Continuing with yesterday’s post Time for 2017 Budgets, it’s also time to get the 2017 Simplified One Page Strategic Plan ready. The goal with the plan is to align everyone in the company around a simple, straightforward document that outlines the most important things in a concise manner. Too often, the entrepreneur runs around with a number of great ideas in his or her head and doesn’t realize that everyone else in the organization doesn’t see what they see. Communication and alignment takes work; start with a simple plan.

    Here are the contents of the Simplified One Page Strategic Plan (Google Doc template, example plan, and the free SimpleStrategicPlan.com):

    Purpose

    • One line purpose

    Core Values

    • General – fit on one line
    • People – fit on one line

    Market

    • One line description of your market

    Brand Promise

    • One line brand promise

    Elevator Pitch

    • No more than three sentences for the elevator pitch

    3 Year Target

    • One line with the goal

    Annual Goals

    • 3-5 annual goals in table format with the start value, current value, and target value

    Quarterly Goals

    • 3-5 quarterly goals in table format with the start value, current value, and target value

    Quarterly Priority Projects

    • Three one-line priority projects with the percent complete for each

     

    That’s it — simple yet powerful. Check out the Simplified One Page Strategic Plan Google Doc template and take a look at an example plan. Good luck!

    What else? What are some more thoughts on the Simplified One Page Strategic Plan?

  • Time for 2017 Budgets

    With the end of 2016 almost upon us, it’s a great time to start planning for 2017, and that means making budgets. Budgeting, especially for seed and early stage startups, is more about outlining the costs to execute a plan and defining a not-to-exceed number as things are fluid and change rapidly with new information.

    For budgeting, I like a simple Google Spreadsheet (see this budget example) as follows:

    • One tab for XYZ Budget Detail and one tab for XYZ Budget Summary
    • One column for each month “Budget” and one column for each month “Actual” followed by the corresponding quarter “Budget” and “Actual”
    • A concluding column for the year “Budget” and the year “Actual”
    • In the “Detail” sheet, a line item for each thing in the category followed by a summary row for the category
    • In the “Summary” sheet, a line item for each category summary followed by a row total for the month, quarter, and year

    Here’s an example budget Google Sheet that works well for a department and can be copied and customized.

    Budgets aren’t the most fun project but are an important part of a startup when scaling the organization.

    What else? What are some more thoughts on budgeting?

  • SaaS Funding Valuations Based on a Forward Multiple

    Continuing with last week’s post on 3 Quick Ideas When Thinking about SaaS Valuations, there’s another common way to determine a SaaS valuation for funding purposes based on a multiple of what the revenue or run-rate will be in 12 months. This approach is known as a “forward multiple”, and because the valuation is based on an expected amount in the future, it effectively takes into account the current growth rate, which is one of the largest, if not the largest, drivers of valuation, everything else being constant.

    Long term, SaaS companies will likely trade at 4-6x revenue based on strong recurring revenue, great gross margins, and excellent economies of scale. As a simple example, if a SaaS company was put into harvest mode, it could generate 60-80% profit margins and get an EBITDA multiple of 6 – 10x, resulting in the same value as 4-6x revenue.

    So, if a startup is doubling year over year, and expects to double again next year, a funding valuation could be 4-6x the expected run-rate in twelve months. If a startup is at $5 million today, and will clearly be at $10 million in 12 months, asking for a pre-money valuation of $40 – $60 million might get funded, assuming a great team and market. Investors would be willing to “pay up” for a fast-growing startup as they believe it’ll continuing growing fast and has the opportunity to be a large, meaningful business.

    For entrepreneurs raising money, use the idea of a forward multiple when discussing valuation.

    What else? What are some more thoughts on SaaS funding valuations based on a forward multiple?

  • 3 Reasons Founders Might Not Make Any Money After Raising Venture Capital

    Yesterday’s post on Most Founders that Raise Venture Capital Don’t Make Any Money prompted a number of comments and questions. One of the popular questions was “why?” If a startup raises millions of dollars of institutional capital, why would a founder not make any money? Here are three reasons:

    1. Stacked Preferences – Most venture investments are either participating or non-participating preferred equity such that investors get their money back first in the event of a sale. For example, if the startup raises $25 million in capital and ends up exiting for $20 million, the $20 million would go to the investors and the founders wouldn’t make anything (unless there was a carve out or incentive plan to join the new company). The more money the startup raises, the higher the bar to sell where everyone is happy.
    2. Down Round – If a startup raises a round at a valuation lower than the previous round, a variety of anti-dilution clauses kick in that “true up” the previous investors’ quantity of shares to reflect their previous investment in the context of the new, lower valuation. Depending on how much lower the valuation, these anti-dilution measures can completely wipe out the common shareholders including the founders.
    3. Bankruptcy – Not all venture-backed startups succeed, and a small percentage go bankrupt even after raising institutional capital. With a bankruptcy, shareholders are wiped out, including the founders.

    A general rule is that if the startup sells for 3x the amount of money raised, things are usually OK for the founders. If the startup sells for 10x the amount of money raised, things are great for the founders.

    Most founders don’t make any money after raising a venture round and these are a few reasons why.

    What else? What are some more reasons founders might not make any money after raising venture capital?

  • Most Founders that Raise Venture Capital Don’t Make Any Money

    TechCrunch has a great article up titled A longtime VC on the virtues of not swinging for the fences where the author interviews Jodi Sherman Jahic. Jodi’s fund, Aligned VC, focuses on capital efficient B2B startups where the entrepreneurs aren’t trying to build the next unicorn. From the post:

    The majority of the time — something like 75 percent of the time, according to [the benchmarking company] Sand Hill Econometrics — founders who take venture money get not a dime.

    Think about that for a minute: with all the focus and hype around raising venture money, the majority of founders that go that route don’t make any money at all. Of course, entrepreneurs choose to raise institutional capital for a variety of reasons, primarily to grow faster and build a large, valuable business. Only, the majority of entrepreneurs that go down this path don’t make a dime when the company sells.

    The next time an entrepreneur says they want to raise venture capital, let them know that the majority of entrepreneurs that do so don’t make any money.

    What else? What are some more thoughts on the idea that most entrepreneurs that raise venture capital don’t make any money?

  • Gratitude

    Happy Thanksgiving!

    Want to be happy? Be grateful.

    From YouTube: The one thing all humans have in common is that each of us wants to be happy, says Brother David Steindl-Rast, a monk and interfaith scholar. And happiness, he suggests, is born from gratitude. An inspiring lesson in slowing down, looking where you’re going, and above all, being grateful.

  • 5 Weekly Action Items for Entrepreneurs

    As the startup grows and raises a financing round or achieves product/market, it’s time to add more structure and process. Now, it’s still critical to stay close to the customer and move fast, but it’s also important to start building a foundation for the future.

    Here are five weekly action items for entrepreneurs:

    1. Write a weekly team update email
    2. Track the right metrics for the stage of the company
    3. Update the Simplified One Page Strategic Plan
    4. Run the internal meeting rhythm
    5. Review the sales opportunity pipeline

    This process seems pretty simple but it’s actually harder than it looks. Issues are always coming up and there’s always something else to work on — figure out a process and stick to it.

    What else? What are some additional weekly action items for entrepreneurs?

  • Impact of a Recession on the Startup World

    Last week someone asked me what I thought would happen to the startup world when the next recession comes along. I don’t spend any time worrying about recessions, but I also know that they’re a normal part of the business cycle and will eventually happen. Here are a few thoughts on the impact of a recession on the startup world:

    • Volume of Startups Increase – With large numbers of layoffs comes more people that become entrepreneurs out of necessity. Most will be replicative entrepreneurs but there will still be plenty of innovative entrepreneurs.
    • Valuations Go Down – As public SaaS market multiples go down, so do SaaS valuations. Hot startups will still demand a premium but VCs will be in a stronger position of power as their dollars will be able to buy more equity.
    • Hiring Becomes Easier – Suddenly there are great people on the market actively looking and more people that have jobs are open to talking after their own company just laid off employees. Top talent will still be in high demand but things get slightly easier for finding good people.
    • Angel Funding Goes Down – As the stock market and real estate decline in value, individuals start feeling the wealth effects of a smaller portfolio, and that translates into fewer angel deals. Family offices will be fine but most angels will cut back.
    • More Zombie Startups – Thousands of zombie startups, defined as startups that have enough revenue to stay in business indefinitely but little or no growth, already exist and that number will grow faster when the economy gets tougher.
    • Nice-to-Haves Wash Out – Products that are in the path of revenue thrive and the nice-to-haves suffer. Meaning, products that help companies make more money do much better than ones that are more difficult to quantify value.

    Pardot was built during a recession and became stronger because of it. Recessions have a real impact on the startup world, but great companies are started in all business cycles.

    What else? What are some more thoughts on the impact of a recession on the startup world?

  • Customer Churn is Always Higher in the Early Days

    At Pardot, in late 2012 at the time of acquisition, our monthly customer churn was 1.4% (meaning, we lost 1.4% of all our customers every month). Why do I still remember that number over four years later? Well, because it was seared into my mind by being one of the top five questions asked by investors. And, we pitched over 35 VCs through the years, making it a popular topic of conversation.

    Now, in some SaaS businesses, 1.4% monthly churn isn’t that good, but we were a month-to-month solution for small-to-medium businesses (SMB). In that market, with that type of no-contract situation, that was considered a great churn rate. Only, it wasn’t always that way. In fact, most startups have high customer churn in the early days and then get better with time.

    Here are a few reasons why customer churn is higher initially:

    • Customer Consistency – Early on, the ideal customer profile isn’t well defined as the goal is to get early adopter customers in the door and to work towards product/market fit. Inevitably, bad-fit customers get signed and contribute to a higher churn rate.
    • Contracts – Many startups, like Pardot, start with little or no contract, as a way to remove friction to adoption. While it is customer-friendly is some regards, it makes for customers that sign when it’s really a short-term paid trial in their mind, makes for more volatility when customers hit hard times and leave with no notice, etc. Contracts, at least annual deals, help minimize some of the churn potential in the first few months after the sale.
    • Product Maturity – Software products always have bugs. Always. Early on, products aren’t very mature and will have more bugs resulting in greater potential for customers to have a bad experience that increases the risk of churn.

    Entrepreneurs would do well to work towards a low a churn rate and keep in mind that it’s always higher in the early days.

    What else? What are some more reasons why customer churn is higher early in the life of a startup?

  • Challenges of a Seed Without a Lead

    When entrepreneurs set out to raise a seed round, they typically find that it’s hard to get a lead investor. Lead investors are often professional investors and/or institutional investors that commit a significant amount of time and energy to the company, not just money. At the seed stage, there’s no product/market fit or repeatable customer acquisition process (see The Four Stages of a B2B Startup), making the investment more of a belief in the team and market, not the existing momentum or traction in the business.

    Here are a few challenges when there isn’t a lead investor:

    • Accountability – The lead investor is the point person for accountability with the entrepreneur, ensuring timely monthly investor updates, annual reviews, etc.
    • Board Meetings – The lead investor requires regular board meetings and helps enforce standard fiduciary responsibilities
    • Follow On Rounds – If the company isn’t hitting its targets, it’s much more likely that the investors will walk away and not do a bridge round or additional financing as everyone has a more limited ownership stake and participation

    Another way to put it is that a seed round without a lead usually results in “just money” whereas a lead investor is a real partner for the entrepreneur.

    Entrepreneurs raising a seed round would do well to think through the pros and cons of having, or not having, a lead investor.

    What else? What are some more thoughts on the challenges of a seed round without a lead investor?