David Cummings on Startups

Category: Operations

  • SaaS Recurring Profit Margin Metric

    The CEO of Zuora has a nice slide deck online titled The Only 3 SaaS Metrics that Matter where he talks about the subscription economy, gives the three metrics, and provides benchmarks from publicly traded companies. The three metrics are straightforward and make sense:

    • Retention Rate – How much of your Annual Recurring Revenue (ARR) you keep each year
    • Recurring Profit Margin – ARR less churn less non-growth spend (growth spend is money spent on sales and marketing)
    • Growth Efficiency – How much does it cost to acquire $1 of annual contract value?

    Retention rate is a common one as is growth efficiency in the form of the SaaS Magic Number, although I like that growth efficiency is much easier to understand than the ratio of sales and marketing spend from one quarter compared to recurring revenue growth in the next quarter.

    The middle metric, recurring profit margin, is a great idea and not mentioned enough. One of the reasons successful SaaS companies have such great valuations relative to other companies with similar revenues and profits is that many SaaS companies could be much more profitable and still retain their revenues if they cut back on sales and marketing — recurring profit margin represents this number.

    Here’s a quick SaaS startup example for recurring profit margin:

    • $1 million in annual recurring revenue
    • 85% renewal rate
    • $50,000 profits (so, $950,000 in annual expense)
    • $300,000 spent annually on sales and marketing
    • Recurring profit margin: 1,000,000 times .85 minus the difference between total expenses and sales and marketing expense (950,000 – 300,000) = $200,000 or 20%

    Another way to calculate recurring profit margin is by taking away the sales and marketing expense (e.g. $300k), subtracting out the annual recurring revenue amount from customers that leave based on the churn rate (e.g. $150k), and adding in existing profits (e.g. $50k). Startups that spend an unusually large amount on sales and marketing, have high renewal rates, and still break even, will have excellent recurring profit margin metrics.

    What else? What are your thoughts on SaaS recurring profit margin metric?

  • Culture Checks to Help Scale a Startup

    One of the changes we made recently was to put in culture check teams to help us scale our interviewing process. As we add more and more team members it becomes difficult for the founders to personally interview everyone (although we still do it currently). Here’s how the culture check idea works:

    • Teams of two people do culture checks together (we have two teams for a total of four people)
    • People on a culture check team strongly embody our culture and can identify culture fit with candidates
    • The culture check interview is only done at the very end of the process when the candidate is in the finalist stage
    • The culture check interview isn’t for assessing domain expertise but for fit with core values (candidates that don’t make it through are great people that just don’t quit fit our culture)

    Culture checks are working out well and we plan on expanding the number of teams as the number of people we’re hiring grows.

    What else? What are your thoughts on culture checks for scaling in a startup?

  • Startup Expansion Via an Office in Europe

    After successfully getting a Software-as-a-Service (SaaS) startup off the ground in North America, one of the natural tendencies is to start thinking about world domination, starting with an expansion office in Europe. London, due to its large population center, English speaking people, and easy transportation is a common choice for a European office. Startups often make the mistake of trying to launch a European office too soon and are better off waiting until they can fully fund it.

    Here are a few things to keep in mind with setting up an office in Europe:

    • A SaaS company should typically have $10M – $30M in recurring revenue to have enough scale and resources to fully invest in European expansion
    • Ideally a handful of customers will already be in Europe pre-expansion so that they can help out by acting as references to future clients as well as be case studies for the region
    • An easy way to get started is to hire one or two full-time contractors to work remote from London and have them be part of a department, just like a team member in the office
    • Many entrepreneurs in London and other cities specialize in helping North American software companies expand through a joint venture or via a subsidiary
    • One approach is to find a team member that’s been on your team at least year that wants to move to London for one to two years and set up the office, as well as ensure a consistent culture develops (most important!)
    • Sales, marketing, and support are the most common functions for an office in Europe with sales being the dominant one

    We’d had a London office now for almost 18 months and it’s worked out well following some of the ideas listed above. Europe is a huge market that’s ripe for startup expansion.

    What else? What are some other things to think about when opening an office in Europe?

  • Quick Management Exercise for Startup Team Building

    In the book The Advantage, Patrick Lencioni argues that one aspect of organizational health is management trust and connectedness. Many management teams don’t have enough trust and rapport amongst each other and that shows when they’re focused on achieving personal and department goals while sacrificing company-wide goals. In order for management to work better together they need to understand more about each other on a personal level.

    Here’s a quick management exercise for startups to help get to know each other better in 20 minutes by each person answering the following questions:

    • Where were you born?
    • How many siblings do you have?
    • What was your birth order?
    • What was the most difficult or challenging part of your childhood?

    Obviously the last question is the most difficult, and the most insightful, for getting to know someone better. The next time you’re looking to building connectedness, try out this exercise.

    What else? What are your thoughts on this quick management exercise for startup team building?

  • Organizational Health as the Next Corporate Frontier

    Yesterday I started reading The Advantage: Why Organizational Health Trumps Everything Else in Business by Patrick Lencioni, one of my favorite authors. So far, it’s another must-have book in an entrepreneur’s collection.

    Lencioni uses the term “organizational health” and explicitly says he doesn’t like the term “corporate culture” because it’s over used. I disagree. He uses the subtitle “Why Organizational Health Trumps Everything Else in Business” and corresponding book content is nearly identical to my favorite saying that corporate culture is the only sustainable competitive advantage completely within the control of the company.

    Another interesting point he makes is that management teams are so strong, on average, with strategy, operations, marketing, etc that those are much less of a differentiator than they used to be. Talent is still extremely important but for companies of size the managers are good enough in the main functional areas. Now, the real differentiation comes from organizational health and the softer, internal people side of the business.

    I’m looking forward to reading more of the book and can already recommend it to entrepreneurs that believe a strong corporate culture is critical to success.

    Note: The Six Critical Questions for Every Entrepreneur.

  • Startups Need a Weekly Cash Review

    Cash is king when it comes to young startups. The only reason startups go out of business is because they run out of cash. Because cash is so important, one of the startup’s co-founders needs to be responsible for reviewing the cash in the bank on a weekly basis. Yes, it’s that important.

    What I like to do is to get a report, either manually or automated, every Friday afternoon, that shows our cash in the bank, the amount of our short-term accounts receivables, and the amount of our short-term liabilities. This helps me assess where we are as a business from an operational perspective.

    If you aren’t profitable, and have a burn rate, it’s also important to review the number of months you have left until you run out of cash. Some startups use the number of months left as a motivator and put it up on a big screen or big whiteboard so that everyone can see and rally around it. Some startups aren’t as open with their burn rate for fear it’ll scare some of their less risk-loving employees (perhaps the startup environment isn’t right for them?). Regardless, the co-founders need to know where they stand with cash, burn rate, and amount of runway left on a weekly basis.

    What else? What are your thoughts on startups needing a weekly cash review?

  • All Startups Should Use Google Hangout

    For years I’ve been a Skype user — not a heavy user but a regular one. With Skype video a few years ago it became even stronger because conversations are better when you get to see and hear the person on the other end. With our daily check-ins we had a standard call-in number for anyone not at the meeting. After Skype came out with group chat we started trying to use it for our daily check-ins but the friction was too high as one person had to initiate the connection to the other people potentially on the call, which was too time consuming for a daily 10 minute meeting.

    Google Hangout came along and solved our problems.

    Google Hangout is great because you can make a private room, XYZ Startup, and then share it as a link with other members of your team. Everyone can bookmark that link and then whenever a meeting occurs anyone invited can join the hangout room and have full voice and video capabilities. There’s also screen sharing and other collaboration tools right in the virtual room.

    Oh, and the best part is that it’s free.

    What else? What are your thoughts on Google Hangout?

  • Manage Email Like a Boss

    Email is a necessary evil that isn’t going away, at least not until Paul Graham’s request is fulfilled. In the interim, my advice is to manage email like a boss. Well, like a good boss that’s savvy and effective.

    Here are some tips to manage email:

    • Use Gmail (yes, especially for business) with the web interface as the primary means and the Microsoft Exchange emulation for IMAP support on the iPhone
    • Install the ‘Send and Archive’ button from Gmail Labs so that when you reply to an email it is also removed from the inbox
    • Install the ‘Auto-advance’ Gmail Labs option so that whenever you act on an email it automatically takes you to the next email
    • Install the ‘Hide Unread Counts’ Gmail Labs option so that you aren’t constantly distracted when new email arrives
    • Follow Getting Things Done (GTD) by David Allen and never read the same email twice in your inbox. Either reply right away if it’ll take less than two minutes or file it into the appropriate folder.
    • Don’t reply to every email — that’s right, if you get an email and don’t want to reply, archive it right away instead of letting it sit there and fester.

    I’ve been doing Inbox Zero nightly for over three years with this approach and it’s worked great. Inbox Zero doesn’t mean you’ve replied to every email, rather, it means that every email is moved out of your inbox on a daily basis. Manage email like a boss and you’ll be glad you did.

    What else? What are some other best practices for managing email?

  • What One Thing Needs the Most Improvement in Each Department

    At our most recent monthly leadership dinner I posed the question: what one thing needs the most improvement in your department? This question is designed as a conversation starter for each senior manager to answer around the table. One major benefit of doing it in a dinner setting is that there’s ample time for discussion and brainstorming. In fact, more often than not, the items that need improvement translate nicely into quarterly rocks to be addressed in the near-term.

    Here are some example issues that might come out of a discussion around what needs the most improvement in each department:

    • Marketing has saturated known advertising opportunities and needs more ideas
    • Sales opportunity-to-close rate has dropped by 3% quarter-over-quarter
    • Finance cash conversion cycle has grown by five days

    It’s also interesting to find out what each senior manager sees as most pressing in his or her department. Solving problems is part of the startup process and this exercise is especially useful.

    What else? What are your thoughts on regularly asking senior managers what one thing needs the most improvement in his or her department?

     

  • Small Changes That Have a Big Impact

    Successful startups can always point to a few pivotal decisions that made a huge difference. Maybe it was using Google pay per click ads before they became popular or maybe it was sponsoring a certain online communities that provided an enormous return. The reality is that it isn’t one or two major decisions that made the business successful but rather the numerous small decisions over time that put the startup in the position to see the big opportunity and make the decisions that led to big improvements.

    A serious challenge is tunnel vision where something is left alone because it’s always been that way, even if that way isn’t the best. Here are some small changes that might have a big impact:

    • Introducing a referral program to encourage customers to refer prospects
    • Making a corporate decision to pursue a best places to work award and truly going after it
    • Bringing on a new team member that raises the bar for everyone else

    There are so many small changes that happen on a regular basis it’s hard to tell which ones will have a big impact. What’s most important is to constantly look for opportunities for improvement and to continually pursue them.

    What else? What are some other examples of small changes that have a big impact?