David Cummings on Startups

Category: Entrepreneurship

  • Raising Venture Money While Still Keeping Options Open

    Continuing with yesterday’s post 99% of Entrepreneurs Shouldn’t Raise Venture Capital, there is a case that I left out: entrepreneurs should consider raising money when VCs offer simple terms that keep future options open. But first, a story.

    Earlier this year I was talking to an entrepreneur that was growing a nice seven figure SaaS business. There was a desire to raise money and grow faster, but the current market opportunity wasn’t large enough to warrant institutional capital (remember: the size of the VC fund necessitates the size of the minimum exit), coupled with the desire to keep options open in the event an opportunity arose for a < $50 million exit. After talking to a number of VCs, it was clear there was interest to raise money at a fair valuation and do so with a term sheet that didn’t have blocking rights (meaning, the entrepreneur could choose to sell the business and not have to have the VC’s permission).

    The entrepreneur chose to raise money on simple terms while keeping options open.

    So, 99% of entrepreneurs shouldn’t raise venture capital, but a tiny percentage of entrepreneurs that might not otherwise raise money, should consider it if they can do so on their own terms.

    What else? What are some more thoughts on raising venture money while still keeping options open?

  • 99% of Entrepreneurs Shouldn’t Raise Venture Capital

    Raising venture capital is glorified in the news and blogosphere resulting in many entrepreneurs believing that they too need to raise venture capital. Well, 99% of entrepreneurs shouldn’t raise capital, and here are a few reasons why:

    99% of entrepreneurs shouldn’t raise venture capital. Think that doesn’t include you? Think again.

    What else? What are some other reasons that 99% of entrepreneurs shouldn’t raise venture capital?

  • 15 Posts Every Seed Stage Entrepreneur Should Read

    Recently I was talking with an entrepreneur that had a seed stage startup and a number of questions. After the conversation, I realized that I didn’t have a good link to share with a number of resources for seed stage startups. Well, here are 15 posts every seed stage entrepreneur should read:

    1. 9 Simple Weekly Metrics
    2. 5 Sales Tips
    3. Budgeting for the $300k Seed Round
    4. Don’t Hire Consultants to Raise Money
    5. The Value of a Sales Assistant
    6. 5 Common Mistakes After Raising a Seed Round
    7. 7 Tips When Starting Out
    8. 8 Metrics Questions to Raise Another Round
    9. Startup Value Creation is Back-Loaded
    10. Resist the VP of Sales Temptation
    11. The Four Stages of a Startup
    12. Simplify it Down to Selling or Building
    13. 6 Steps to Building a Culture of Accountability
    14. Develop a Meeting Rhythm
    15. Build a Simplified One Page Strategic Plan

    The seed stage is especially difficult and challenging. Entrepreneurs would do well to join a peer group and carve out time to learn from other entrepreneurs.

    What else? What are some more posts every seed stage entrepreneur should read?

  • 3 Quick Thoughts from Eric Paley on Venture Capital

    Eric Paley has a great post up on TechCrunch titled Venture Capital is a Hell of a Drug. As a successful entrepreneur and investor, he offers up a number of great ideas. Here are three quick thoughts:

    1. Venture capital increases risk for founders
      1. You limit your exits
      2. You increase burn to dangerous levels
    2. VCs need billion-dollar exits — you don’t
      1. Capital has no insights; it’s just money
    3. Exit value is a vanity metric
      1. Practice efficient entrepreneurship
      2. Smart people, dumb money

    Head on over to TechCrunch and read Venture Capital is a Hell of a Drug.

  • Selling Personal Equity During a Financing Round

    Continuing with yesterday’s post Plan for Equity Dilution Over Multiple Rounds, there’s another element worth mentioning: entrepreneurs often sell some personal equity during a financing round. Selling personal equity, as different from the company selling equity, is often called “taking chips off the table.” Since the entrepreneur has taken a significantly below market salary (if any salary), and now he or she is signing up for at least 3 – 5 more years, the natural desire is to de-risk things and sell some equity.

    Here are a few thoughts on selling personal equity during a financing round:

    • Many investors won’t buy founder equity unless there’s at least a few million in recurring revenue (often, much more revenue, or being near cash-flow breakeven, is required)
    • Entrepreneurs can usually only sell a small amount (e.g. ~5% of their equity)
    • Investors are more motivated to buy founder equity if they have a target ownership percentage (e.g. they want to buy a minimum of 20% of the startup, but with existing investors there’s only room for 18%, so they buy 2% more from the founders)
    • When there’s a more competitive funding round (e.g. competing term sheets from multiple investors), it’s more likely that the entrepreneur can sell some personal shares

    Entrepreneurs selling equity and “taking some chips off the table” during a financing event is fairly common once institutional investors get involved (e.g. after the seed stage). Entrepreneurs would do well to know what’s possible and what the current market will bear when it comes to selling personal equity.

    What else? What are some more thoughts on selling personal equity during a financing round?

  • Plan for Equity Dilution Over Multiple Rounds

    One of the areas I like to help entrepreneurs understand is how equity dilution works with each round of financing. A general rule of thumb is 30-40% dilution with each round (e.g. 30% for investors and 10% for a new employee option pool) such that founders usually have between 4 and 15% at time of IPO (see Founder Equity of Ownership at Time of IPO).

    For simple math, let’s say an entrepreneur has 100% of the business. Here’s how the dilution might work, assuming 35% dilution in each round:

    • After round 1 – 65%
    • After round 2 – 42%
    • After round 3 – 28%

    So, after three rounds of financing, an entrepreneur would have 72% less equity (28% of the original equity).

    Entrepreneurs would do well to understand how dilution works and to plan accordingly.

    What else? What are some more thoughts on equity dilution over multiple rounds?

  • Simple Product Management Planning Process

    Scaling the product management planning process is a real challenge as the startup goes from idea stage to early stage to growth stage. At first, the entrepreneur guides all product functions. Then, there are too many different pieces and a product management group convenes on a regular basis to plan and curate functionality. Finally, product management becomes it’s own team (initially a team of one) and grows from there. Naturally, more process is required as the company grows.

    Here’s an example product management planning process:

    • Create a simple Google Spreadsheet with sheets for different constituencies
    • Solicit requests from sales, marketing, services, support, client advocates, product management, and engineering in individual sheets
    • Review the customer idea exchange and take the top 10 most popular items and 20 other items that have the most bang-for-the-buck and add them to a new sheet
    • Analyze trends from the 100 most recent support tickets and confirm the big ones are in the Google Spreadsheet
    • Categorize every item based on priority (low, medium, high) and difficulty (low, medium, high)
    • Get a group of stakeholders together, no more than five people, and debate everything that’s been assembled and decide on the items for the next quarter
    • Share the quarterly roadmap with the team and ensure alignment
    • Repeat each quarter

    Start with a simple product management process and expand it from there always considering the balance between moving fast and making the best decisions possible.

    What else? What are some more thoughts on a simple product management planning process?

  • A Feature vs a Product

    Whenever an entrepreneur shares their idea with me, the following question always comes up, “is this a feature or a product?” Occasionally, it’s clear that this is a feature with product and platform potential, but most products, especially minimum viable products, start out as a feature solving a simple problem.

    At Pardot, version one of our software tracked individual page views of prospects (micro web analytics) and captured web forms. Over time, email marketing, landing pages, scoring, grading, automation rules, drip programs, and more were added. At first it was a feature and then over the course of several years became a product.

    Here are a few questions on the feature vs product debate:

    • How valuable is this functionality as a standalone application?
    • How much more valuable is this feature as part of a broader set of features?
    • How much of a nice-to-have vs a must-have is this functionality?
    • Are there existing products in the market that should add this feature? Why or why wouldn’t they do that?
    • Where is the market headed? More standalone features or products that combine features?

    The feature vs product debate is ongoing, but one of the main takeaways is whether or not an ecosystem and industry gets built around the business (a product/platform) or if the business runs in more of a silo and offers a more limited, but highly focused, feature.

    What else? What are some other thoughts on the idea of a feature vs a product?

  • Scenario Planning

    One of the fun things to do with spreadsheets is build out different “what if” scenarios around sales, marketing, operations, fundraising, exit opportunities, and more. So many different inputs, data points, metrics, and formulas to test. Only, to do this efficiently and effectively, it’s imperative to have accurate data and tools.

    Here are a few thoughts on scenario planning:

    • Ask an advisor, mentor, board member, or fellow entrepreneur for an existing spreadsheet to use as an example
    • Resist the temptation to just plug in a number (e.g. 2% of calls will result in a demo), and instead use real data from the current team in the current time frame (e.g. use a system like SalesLoft to capture the outbound call, email, and demos scheduled data)
    • Build multiple scenarios for each “what if”, including the high/medium/low outcomes or optimistic/average/conservative outcomes
    • Run the results by an experienced CFO or entrepreneur and solicit feedback
    • Shares the results with key members of the team and use it to inform decision making

    Scenario planning is a common strategy entrepreneurs use to grow their business. Build out different “what if” scenarios and make better decisions.

    What else? What are some more thoughts on scenario planning?

  • Terminus as #1 Best Place to Work

    Yesterday, Terminus won the local Atlanta Business Chronicle award for being the #1 best place to work in Atlanta. Awards like this are great external validation for the amazing culture and team that makes up the organization. And, there are several benefits:

    • Employees and other stakeholders have a greater sense of pride and ownership being part of one of the best organizations in the region
    • The workplace surveys, done by a third-party, provide valuable feedback as to areas for improvement (even after coming in 1st place there are ways to get better)
    • Recruiting gets easier as people actively seek out organizations that are best places to work

    Winning a best place to work award is a real honor and Terminus deserves it. Congratulations to Eric and the team!