David Cummings on Startups

Category: Operations

  • Steve Jobs and the Weekly Project Review

    Recently I started reading the book Inside Apple by Adam Lashinsky in attempt to find new ideas about how to run a great company. The book is pretty good so far covering some well-known details of Apple as well as a number of things I hadn’t seen before. My favorite idea is the weekly project review instituted by Steve Jobs.

    Here’s how the Apple executive team weekly project review works:

    • Every Monday the senior management team meets for two hours
    • The top 4-6 highest priority projects are reviewed in minute detail with most projects being product launches (new products and updates to existing products)
    • All projects and tasks have a specific Directly Responsible Individual (DRI)
    • There’s always one DRI for a line item and never multiple people

    How many leadership teams of billion dollar plus companies get into the details on a weekly basis for a small number of most important company projects? My guess is not too many. The weekly detailed project review fits nicely with the one page strategic plan and quarterly rocks whereby the rocks represent the most important projects that need to get done.

    What else? What are your thoughts on the idea that Steve Jobs personally reviewed details of the most important projects on a weekly basis?

  • Automated Billing for Startups

    Automated billing is hard — very hard. When starting out the tendency is to try and guess how things might work when it comes to billing and to start building a module for it. Don’t. The best thing to do is to get the product in the hands of customers and then iterate based on their feedback.

    More often than not the product pricing and billing nuances will change several times as you work towards product/market fit. Time spent on a billing module, that needs to be modified with each pricing change, will actually make you more reluctant to change the pricing model because it’ll involve more billing module rework.

    The best thing to do is to bill by hand or use a semi-automated tool like CheddarGetter until you have enough paying customers that you’re confident it’s worth the time to build a billing module or write logic to integrate with a billing system’s API. Avoid the temptation to write a billing module too early.

    What else? What are your thoughts on automated billing for startups?

  • Cloud vs Colocation vs Managed Hosting for Startups

    With all the talk about cloud computing it’s easy to forget that there are two other common types of hosting for startups: colocation and managed. In a cloud computing environment the servers are virtualized such that a physical machine is often shared by one or more customers and it’s easy to scale up or down as needed (shared hosting and VPS setups fall under cloud computing). Colocation and managed hosting are similar in that the physical machines are dedicated to the customer, but differ in who’s responsible for the actual hardware costs and maintenance, and thus the monthly fee. Colocation is a bring-your-own-hardware approach whereas managed hosting is renting the hardware from the provider.

    Here’s how I think about cloud, colocation, and managed hosting in the context of startups:

    Cloud

    • Good for starting out when server needs are unknown and it’s easy to scale up and down quickly
    • Best for environments that have differing scale needs on a regular basis (e.g. imagine you normally need 20 servers but for a few hours each night you need 100 servers to crunch data)
    • Great for an on-demand infrastructure backup (e.g. replicate the database data but don’t turn on all the other necessary servers unless another facility goes down)
    • Higher latency on average

    Managed

    • Best for the core infrastructure in a 3 – 25 server environment where a relatively constant amount of horsepower is needed (most startups operate this way) and capital is not as plentiful (renting a server is more capital efficient than buying it when getting started)
    • Cheaper than the cloud on a per-server basis but more expensive than colocation assuming a low cost of capital

    Colocation

    • Best for maturing startups that can afford acquiring servers and personnel to manage them
    • Requires more effort and management compared to cloud and managed
    • Maximum flexibility regarding the hardware used (e.g. fancy servers and storage configurations)

    In general, I recommend startups start with the cloud using an environment like Amazon Web Services and then move on to managed hosting followed by colocation as the business progresses.

    What else? What are your thoughts on cloud vs colocation vs managed hosting for startups?

  • Pre-Paid SaaS Contracts are Free Working Capital for Startups

    Software-as-a-Service (SaaS) as a business model has a number of advantages including alignment of value between customer and vendor, strong cash flows, high gross margins, and great economies of scale. As with any growing startup, one of the most limiting factors is cash — the faster the business grows, the more cash it eats. Another benefit of SaaS that should be mentioned more often is that of pre-paid contracts.

    With pre-paid contracts, like Salesforce.com requires, payments are made in advance of service being rendered. These contracts are often pre-paid quarterly or pre-paid annually with a discount (e.g. pay for the full year and get 10% off). For the startup this results in free working capital to grow the business. Yes, there’s an unearned income liability and an obligation to fulfill the service, but with the money in the bank, many startups use it to grow the business even faster than if they didn’t have pre-payments.

    There’s another secondary benefit of pre-paid SaaS contracts: potential profits in the bank aren’t taxed until revenue is recognized and profit earned. Say it is December 31st and the startup’s bank account has $100,000 more than it started the year. Normally, if that’s profit it would be taxed around 30% leaving only $70,000 left to invest and grow the business. Well, with accrual accounting and $100,000 of unearned income due to pre-paid contracts, that money isn’t taxed until the revenue is recognized resulting in more capital to grow the business on January 1st.

    Pre-paid SaaS contracts provide free working capital for startups and should be considered when thinking through business ideas (e.g. can we get customers to pre-pay us to help fund the business?).

    What else? What are your thoughts on pre-paid SaaS contracts as free working capital for startups?

  • Professional Services Revenue as it Relates to Software Startups

    In the software business not all revenues are created equally. Revenue from subscriptions or licenses is significantly more profitable and scalable compared to revenue from professional services. When talking to entrepreneurs I like to get a feel for the mix of revenue from subscription/license vs professional services. One of the simple proxies for this is the number of employees they have in professional services.

    Here are some notes on professional services revenue for software startups:

    • Professional services revenue as a percent of total revenue is often super high for early stage startups still looking for product/market fit (e.g. they are doing consulting work to pay the bills)
    • Once a product takes off services revenue is typically a small percentage of overall revenue, especially if channel partners (value added resellers) are used
    • As the core business and market matures, many software companies add more services as a way to grow even though margins decline
    • Some services companies masquerade as software companies when in reality the software is for lead generation for their consulting work or their product requires so much customization it doesn’t get much in the way of economies of scale

    When thinking through startup opportunities, and evaluating companies, it’s important to understand how the services component fits in.

    What else? What are some other thoughts on professional services revenue as it relates to software startups?

  • SaaS Leaky Bucket Number

    Software-as-a-Service (SaaS) has a number of important metrics for the business model with one of the most important being customer renewal rates / customer churn. Josh James, the co-founder of Omniture, which was bought by Adobe for $1.8 billion a couple years ago, sent this tweet out last week:

    http://twitter.com/#!/joshjames/status/154644835490463744

    The idea that they’d sign up 1,200 customers per month and have 800 customers leave per month drives home the need to closely watch customer renewals. The ratio of new customers to lost customers is critical and now has a formal name:

    Leaky Bucket Number = New Customers Per Month / Customers Lost Per Month

    Note that it doesn’t take into account the average revenue per new customer vs the average revenue per customer that leaves as well as customer upgrades or downgrades. Generally, it’s a good metric to monitor because it’s easier for people to understand we signed 29 customers and lost 11 customers because it continues to keep the number of lost customers top-of-mind. And, it’s especially important for this number to be greater than one otherwise the startup is losing more customers than it’s adding.

    What else? What do you think of the SaaS leaky bucket number?

  • Revenue Growth for Startups isn’t Linear

    There’s plenty of jargon terminology in startupland, one of which is ‘hockey stick growth.’ The idea is that revenue growth isn’t linear but rather starts out really slow and at some point (hopefully) things really take off.

    Imagine the annual revenue numbers as follows:

    • Year 1 – $75,000
    • Year 2 – $150,000
    • Year 3 – $300,000
    • Year 4 – $1,000,000
    • Year 5 – $4,000,000

    So, if the company did $4M in Year 5 revenue, and they are on the accelerated growth part of the hockey stick, their growth as a percentage basis is higher than the earlier years and on an absolute basis it’s tremendously higher. The value creation for most successful startups takes place when they hit the accelerated growth portion. From a startup valuation perspective, high growth is significantly more valuable than low growth, everything else being equal. Revenue growth for successful startups is almost never linear.

    What else? What are some reasons revenue growth for startups isn’t linear?

  • Financial Controls for Startups

    As a startup grows, inevitably more processes and procedures get put in place. One area of note that should be done sooner than later is financial controls. Yes, at first it is easy to keep track of everything when there are only five people but that doesn’t scale when there are 50 people.

    Here are some simple financial controls for startups:

    • Require two signatures for checks over a certain amount (e.g. $5,000)
    • Put a modest spending limit (e.g. $2,000) on all corporate credit cards except for one that is designated for larger purchases
    • If possible, separate out the accounts receivable function from the person who actually deposits the checks
    • Pay for an annual review of your books by a CPA or get a full audit if required by investors
    • While not financial controls, backup your data using Dropbox and your website using CodeGuard

    For banks, it is a best practice that all employees take two weeks of consecutive vacation each year so that potential fraud will surface. That’s obviously for a different industry, but it is interesting to think about nonetheless. Financial controls are important for startups and should be implemented early on.

    What else? What are some other financial controls startups should implement?

  • Credit Card Processing for Startups

    Recently there was a Flashpoint email thread on credit card processing options for web startups. Processing customer payments is both good (get $$$) and bad (payment gateways are usually difficult and frustrating to deal with). At the end of the email thread there was no general consensus but several were offered up that startups in the cohort had used and were happy with.

    Here are some credit card processing vendors that were mentioned:

    There are also add-on services that interface with the payment gateways to provide more functionality, especially around recurring revenue with Recurly and CheddarGetter being two popular ones.

    Payment processing is a part of startups and these vendors provide a good starting point to comparison shop.

    What else? What are your thought on credit card processing and vendors for startups?

  • Simplified One Page Strategic Plan from Rockefeller Habits

    Early last year I mentioned that the Rockefeller Habits One Page Strategic Plan is too complicated, cluttered, and jargon filled. Answering all the questions and providing it in one page form is a great exercise but team members need something that is much more digestible. Well, here’s a simplified one page strategic plan that fits on one page of a Google Doc with margins set at .3 inches and a font size of 10 (Google Doc template and example plan):

    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

     

    Now, it’s still a significant amount of information but the jargon has been removed, it flows top to bottom, and it fits on a single side of one sheet of paper. My recommendation is for entrepreneurs to do an updated one page strategic plan on a quarterly basis following the ideas from Mastering the Rockefeller Habits (Google Doc template and example plan).

    What else? What do you think of this simplified one page strategic plan from Rockefeller Habits?