David Cummings on Startups

Category: Entrepreneurship

  • The Thankful Entrepreneur

    With today being Thanksgiving here in the United States, it’s a great time to reflect and give thanks. As an entrepreneur, I’m continually amazed and thankful for the opportunity to do what I get to do and the people I get to work with on a daily basis.

    I’m thankful for my wonderful friends and family.

    I’m thankful for our team of awesome co-workers.

    I’m thankful for the excitement and optimism in the Atlanta Tech Village.

    I’m thankful for the rapid pace of technology.

    I’m thankful for having the opportunity to create and grow new startups.

    I’m thankful for living in this great country.

    It’s great to be an entrepreneur and I’m incredibly thankful.

  • 6 Customer Development Questions

    One of the biggest challenges for entrepreneurs running the customer development process (watch the explanation video) is leading the witness. What I mean is that entrepreneurs are so passionate and eager for potential customers to see the same vision they see, the entrepreneur asks leading questions that don’t allow for true understanding of both the severity of the problem as well as potential solutions.

    Here are a few ideas for customer development questions:

    1. How do you currently do X?
    2. What do you like about it?
    3. What do you dislike about it?
    4. How have you tried to improve X?
    5. If you could wave a magic wand and have a new solution, how would it work?
    6. How much of an issue is this problem/opportunity?

    Now, this is a simple starting point but the idea is to ask open-ended questions to learn from the potential customer without steering them in a specific direction. Entrepreneurs that are able to validate their ideas without leading the potential customers will have a stronger conviction that they’re headed in the right direction.

    What else? What are some other customer development questions for entrepreneurs to ask while validating an idea?

  • Fewer Series A Rounds than Million Dollar Lottery Winners

    Growing up, I heard the phrase “you’re more likely to get hit by lightning than win the lottery” many times. Both have extremely low odds and are unlikely to happen (as an aside, I know a local real estate developer that’s been hit by lightning twice — talk about crazy low odds). Well, for entrepreneurs looking to raise money, there are fewer Series A rounds per year than people that win $1 million or more in the lottery per year according to well known investor David Hornik:

    Entrepreneurs and the media alike love to talk about how much money startups have raised because it’s public and definitive. Well, in reality, 99.9% of startups that try to raise a Series A round fail. Yes, friends and family rounds are common but a Series A round from an institutional investor is actually quite rare.

    Entrepreneurs would do well to nail the 8 metrics questions for raising a Series A and focus on the appropriate initial traction for their business. Oh, and remember, that vast majority of successful entrepreneurs never raised a Series A round.

    What else? What are some more thoughts on the rarity of raising a Series A round?

  • 8 Metrics Questions to Raise a Series A

    Glenn Solomon has a good piece up on TechCrunch titled Series B Fundraising For Your Enterprise Startup. Now, outside the venture money centers, the title of the post if more aptly labelled for Series A fundraising than Series B, but the content and metrics are spot on. Here are the eight metrics questions that need to have solid answers to raise a Series A:

    1. What lead volumes are you driving?
    2. How much are you paying for qualified leads?
    3. What’s the cost to acquire a customer?
    4. How long is the sales cycle?
    5. What’s the average selling price of an initial deal?
    6. Do you have evidence of high customer retention and/or account expansion?
    7. How long does it take a sales person to ramp?
    8. What percent are hitting/exceeding quota?

    During the seed stage and beginning part of the early stage, these metrics don’t paint the whole picture due to a lack of sufficient data. As the startup grows, and more customers are signed, these become critical metrics post product/market fit to raise a Series A.

    What else? What are some other metrics questions that need solid answers to raise a Series A?

  • Video of the Week: How to Build a Startup

    Udacity has a great, free course taught by Steve Blank called How to Build a Startup. The course has dozens of short videos on YouTube covering everything from customer development to the business model canvas. If you want to learn a variety of modern entrepreneurial strategies, these videos are for you. Enjoy!

  • Rise of the Pre-Accelerator Program

    Yesterday I was talking with an entrepreneurial civic leader and he was telling me about the pre-accelerator program they do. Hmm, pre-accelerator, I hadn’t heard of that before. With the incredible growth of programs like Y Combinator and TechStars, and the corresponding level of difficulty to get accepted, it makes sense that programs are emerging to help prep startups for the application process.

    Here are a few components of a potential pre-accelerator program:

    • Pitch Practice – Entrepreneurs love to talk about their vision. Only, 9 times out of 10 it is too jargon-filled and complicated for the average person to understand. Refining this message and coming up with a written elevator pitch that’s 30 seconds long is a great exercise.
    • Goal Setting – When asked, most entrepreneurs say they want to be successful. Then, the next logical question is “how do you define success?” and there’s rarely a concrete answer. Entrepreneurs need to think through and write down SMART goals.
    • MVP Development – Many startups applying to an accelerator program already have a minimum viable product (MVP) and some even have a number of paying customers. No longer is it enough to apply to an accelerator program with only an idea so there’s a need to put a prototype together in advance of the application.
    • Executive Summary – Building a simple two page document that succinctly describes the main aspects of the startup is a start rite of passage for entrepreneurs. The executive summary should contain information about the idea, team, market, product, and more.

    Look for more pre-accelerator programs to form and entrepreneurs to get value regardless of whether or not they’re accepted in an accelerator program. Entrepreneurship is hard and programs that help increase the chance of success are an important part of the community.

    What else? What are some more thoughts on pre-accelerator programs?

  • Four Core Energy Needs for High Performance Work

    When it comes to ideas, I’m always looking for ways to build a better organization and help team members achieve more. For example, Drive by Dan Pink, talks about autonomy, mastery, and purpose as three key things to ensure human motivation. In the recent NY Times article The Secret to Sustaining High Job Performance, the author highlights four core energy needs:

    1. Sufficient rest, including the opportunity for intermittent renewal during the work day
    2. Feeling valued and appreciated
    3. Having the freedom to focus in an absorbed way on the highest priorities
    4. Feeling connected to a mission or a cause greater than ourselves.

    Yes, these four core energy needs for high performance work resonate with me. While people have different styles and approaches, these are universal elements. Read The Secret to Sustaining High Job Performance and learn more.

    What else? What are some more thoughts on core energy needs for high performance work?

  • Customer Discovery as Pre-Selling

    There’s an old saying that if you want to raise money from investors, go to them asking for advice. There’s a similar element in customer discover (watch the explanation video) where the more time spent with potential customers to get their input, the more likely they are to buy in the future. Put another way, customer discovery is one of the best ways to pre-sell a potential customer.

    Here are a few thoughts on customer discovery as pre-selling:

    • Every customer discovery conversation has the opportunity to be a lead in the future
    • Building rapport and trust is a critical part of all relationships, and especially so in sales
    • Customer discovery is a sales process (uncover pain, validate severity of problem, understand desired solution, etc.)
    • One of the main reasons for customer discovery is to validate customer demand before building a product, which is pre-selling a product to be built later

    Entrepreneurs that love selling love the customer discovery process. Entrepreneurs that are more product-focused and less sales-focused will find customer discovery a challenge and laborious. When this is the case, it’s important to acknowledge it and plan on adding a sales-oriented person to the team as soon as possible. Nothing happens until something gets sold and customer discovery is a great way to pre-sell a potential customer.

    What else? What are some more thoughts on customer discovery as pre-selling?

  • Differentiating Between Innovative and Replicative Businesses

    During a recent talk to a group of civic leaders about entrepreneurship and the Atlanta Tech Village, I mentioned that almost all successful entrepreneurs aren’t successful with their first idea. Meaning, success either came after a failed venture or after a pivot to a new idea. The common story of an entrepreneur coming up with an innovative idea and succeeding on the first try is a myth.

    After the talk, one of the civic leaders eagerly came up and told me that his son was a successful entrepreneur that started a distillery and made it work on the first try. Biting my tongue, I nodded, smiled, and thanked him for attending the talk. At that point, I realized I hadn’t emphasized enough that I was talking about innovative businesses that invent a new product or solution that’s never been done before. Replicative businesses are ones that entrepreneurs create in an existing market with an existing type of product or service that has a number of direct substitutes. A local distillery is a replicative business.

    One of my favorite quotes for civic leaders is “the majority of new jobs created over the next 10 years will come from businesses that aren’t even in existence today.” Yes, new replicative businesses will create a number of jobs but new innovative businesses will create many more. Creating a successful innovative business is 100x harder than creating a successful replicative business.

    When talking about entrepreneurship and job creation, make sure to distinguish between innovative and replicative businesses.

    What else? What are some more thoughts on the idea of distinguishing innovative businesses from replicative businesses?

  • High and Low Equity Dilution Scenarios

    After reading the Notes from the Atlassian S-1 IPO Filing again, there’s one element that truly stands out for the proposed $3 billion company IPO: the two founders own 75% of the company. That’s simply unheard of for venture backed startups. Atlassian has been incredibly capital efficient and only sold a relatively small percentage of equity when they raised money. When raising money, there’s no set percentage that venture capitalists purchase, but it’s generally 15-35% of the company each round of financing.

    Let’s look at the difference of three rounds of financing selling 15% of the company each round vs selling 35% of the company each round.

    Selling 15% per round and assume no pro-rata and no extra dilution from new stock option pools:

    • Series A – Investors own 15%
    • Series B – New investors own 15% plus existing investors own 12.75% = 27.75%
    • Series C – New investors own 15% plus existing investors own 23.6% = 38.6%

    Selling 35% per round and assume no pro-rata and no extra dilution from new stock option pools:

    • Series A – Investors own 35%
    • Series B – New investors own 35% plus existing investors own 22.75% = 57.75%
    • Series C – New investors own 35% plus existing investors own 37.5% = 72.5%

    So, a startup with three rounds of low dilution owns 34% more of the company vs a startup with three rounds of high dilution. While there’s intense focus on the amount of money startups raise, there’s much less discussion about what percentage of equity was sold to raise that money.

    Entrepreneurs would do well to place more consideration on percentage of the company they sell to investors, especially in the context of raising multiple rounds of financing.

    What else? What are some more thoughts on high and low equity dilution scenarios?