David Cummings on Startups

Category: Operations

  • Working with Recruiters in Startups

    Diana looks for leadership at the U.S. Capital
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    For many years I was against working with recruiters as I felt the best candidates were the ones proactively looking for a new position through word-of-mouth or online job listings. Over time I’ve come to appreciate that recruiters help for hard-to-fill positions as well as time sensitive positions. There’s also the rare time when the company is growing faster than it can hire or just landed a round of investment capital.

    Here are a few tips to keep in mind when working with recruiters:

    • Use your personal network and offer employees a $1,000 bonus if they refer someone, as hiring via referrals is generally the highest quality source
    • Make sure there is at least a 90 day refund period if a new hire doesn’t work out (give the recruiter 60 days to replace the person first but if they can’t deliver someone that you hire, get your money back)
    • Employ an applicant tracking system where all candidates fill out a form online for efficiency as well as if you have concerns about multiple recruiters supplying the same person and getting double billed

    My recommendation is to use your network first to find candidates and then go to recruiters if that doesn’t work out. Recruiters have a role for startups and should be used where applicable.

    What else? What other tips do you have for working with recruiters?

  • Catalytic Mechanisms in Startups

    Harvard Business Review wordmark
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    Jim Collins, the famous author who wrote Good to Great and Built to Last, wrote an article in the summer 1999 issue of Harvard Business Review titled Turning Goals into Results: The Power of Catalytic Mechanisms  (third-party review of it). Every startup should know about catalytic mechanisms. The idea behind catalytic mechanisms is to put in triggers and rights that force change or improvement by their very nature — think tactics that empower the person or user who is often in a position of less power to be more empowered.

    Here are some example catalytic mechanisms in startups:

    • No contracts for a SaaS vendor – this forces the SaaS vendor to win the client’s business each and every month as opposed to annual contracts where the vendor might not meet expectations for many months of the contract only to scramble at the end
    • Allowing customers to strike out items that didn’t meet their satisfaction on the bill, and not pay – this forces the vendor to get every detail right and provide a high level of customer satisfaction knowing the customer is empowered to not pay
    • Requiring unanimous approval for new hires – this empowers all team members to have veto power and ensure corporate culture standards, including personal buy-in of hiring decisions

    My recommendation is to think through catalytic mechanisms for your startup, even ones that really challenge traditional convention.

    What else? What other catalytic mechanism examples do you have?

  • Recurring Revenue to Support a Line of Credit

    Stock market of Brussels
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    The Wall Street Journal published an article three days ago titled Royalty Financing: An Alternative to Venture Funding, Bank Loans that mentions some of the challenges I talked about in my post on Junk Bonds for Startups a week ago. The general idea is that startups usually don’t have much need in the way of physical assets to take loans out against (e.g. real estate, heavy equipment, etc) and so when it comes to bank loans they really aren’t available unless you have personal collateral to cover the majority of the amount. Royalty financing is generally taking a percentage of the future revenues as a way to finance a loan.

    A line of credit is worth considering for revenue-producing startups. Most of the time it’s tied to the current accounts receivables (monies owed) to the business and a bank will provide a line of credit for 75% of those receivables. The challenge for many SaaS businesses is that they are paid monthly on a credit card resulting in little receivables relative to the size of the business.

    SaaS businesses should find a bank that understands recurring contract revenue and will set up a line of credit based on the last 90 days monies received from recurring revenue. For example, technology company-focused banks will do lines of credit for 75% of those monies for profitable companies. Thus, if $1 million of recurring revenue was collected in the past 90 days, the business might get a line of credit for $750,000. A bank line of credit or loan, especially with today’s interest rates, is often the cheapest way by far to finance a business. The challenge is getting it.

  • Customer Service Shouldn’t Be Hard

    RDNS Customer Service Representative
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    One of the simplest and best ways to differentiate your startup is through customer service. I know this sounds basic but it is amazing how low the bar is set when it comes to getting help. Lately, I’ve had to interact with sales reps from two different companies — yes, people who are making a commission off my business — only to have them take 48 hours to respond to my emails. 48 hours for a response!

    Here are a few customer service tips:

    • Build high quality customer service into the core of your corporate culture
    • Work to have customer service and sales questions answered within 15 minutes and no longer than two hours, if possible
    • Set the tone that employees on the front line should use out of office autoresponders when they won’t be able to get back to the inquiry within a reasonable amount of time
    • Celebrate and store customer praise for great service, put customer testimonials on the wall, and recognize employees who go beyond the call of duty

    My recommendation is to deliver great customer service and make it a core of the business.

    What else? What other customer service practices should be employed?

  • Cash Conversion Cycle for Startups

    One area startups don’t usually think through is their cash conversion cycle. What I mean by cash conversion cycle is how much work it takes to make a sale, deliver the goods or services, and get paid. At first it doesn’t seem like a big deal. You sell something and you get paid, right? Wrong.

    Here’s an example cash conversion cycle:

    • Start calling on companies to build a sales pipeline for three months.
    • Have an average of a two month sales cycle. Now you’re at five months before the first sale.
    • Collect 50% up-front and 50% upon completion, Net 30 days (you give them 30 days to pay you).
    • Take 60 days to implement, train, and make the client happy.
    • Invoice for the final 50%, Net 30 days.

    So, three months of calling, two months of selling, and waiting 30 days to get paid results in six months for your first dollar to come in. Then, two months to implement, and another 30 days to get paid, and it’s three more months after the first payment to get the second. Nine months after you start you get full payment is this example cash conversion cycle.

    My recommendation is to think through the cash conversion cycle when deciding on your business model.

  • Margins and Business Models

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    One area that I find many first-time entrepreneurs don’t think through is the type of potential margins for their business model. Let’s talk about the two main types of margins:

    • Gross margins are the percent of revenues after only the product/delivery costs are taken out.
    • Net margins are the percent of revenues that result in profit after all costs.

    As an entrepreneur, it is important to understand both gross margins and net margins. For me right now, I’m only interested in business models with potential gross margins greater than 70%. That typically rules out physical products, services, and other businesses that are labor intensive. High gross margin businesses are important to me because they often provide for more scalable enterprises, with greater profit opportunity, which allows for more latitude to invest in growth.

    What else? What other considerations do you have for margins and business models?

  • The One Hour Per Day Criteria for Investment

    This post isn’t about investing one hour per day in a task. Rather, the simple idea is that if you use something an hour or more per day you should invest in the best. The most obvious items include:

    • Chair – Aeron’s of course (get them used)
    • Computer – MacBook Pro (preferably with SSD)
    • Monitor – 24″ or greater
    • Shoes – whatever is most comfortable
    • Work environment – awesome people, surroundings, and projects

    Of course, when you’re starting out you can’t always afford the best. My recommendation is to pay attention to the details and invest in the best when it comes to items you use an hour or more per day.

  • Profitability Traps

    Today was the quarterly education day for Accelerator, with the topic being money. Our facilitator was Jim Ryerson of SalesOctane who brings a great deal of energy and passion to the program. We worked through a series of exercises, one of which was talking about profitability traps. Profitability traps are where you do things that aren’t profitable. Why would do something that isn’t profitable? Good question — let’s look at a few, straight from the Accelerator materials:

    1. “Falling in love with” your customers
    2. Valuing quantity over quality
    3. Creating work to keep the staff busy
    4. Failing to correctly account for costs
    5. Making up for per-unit costs in volume
    6. Taking projects at a loss to keep competitors from getting them

    My recommendation is to pay attention to these types of traps and continually ask yourself if a customer or project is going to be profitable before jumping into the work.

  • #1 Startup Tip for Negotiating Office Space

    Over the past 10 years I’ve done one direct lease and four subleases for office space. Needless to say we’ve moved every couple years as we would inevitably grow out of our space. It wasn’t until the past two subleases that I came across the number one tip I want all entrepreneurs to know when negotiating a lease/sublease: ask to pay for only the space you need now and grow into the space financially by paying for more over the life of the lease.

    As a startup, when looking for office space, I recommend getting the amount of space you expect to need by the last 6-12 months of the lease. So, if you’re doing a three year lease and you have five employees now, but expect to have 20 employees by the end, it becomes tricky to find the right space. Here’s an example of growing into space:

    • You find 5,000 square feet office but only need 1,500 sq ft at $18/yr/ft for a three year term but can’t afford that much space now and don’t need that much
    • Offer to pay for 1,500 sq ft for the first six months, followed by paying for 2,500 the next six months, and add another 1,000 sq ft to the bill every six months thereafter until you’re paying for the entire 5,000 sq ft
    • The $18/yr/ft would stay constant or increase 3% per year such that by the end of the lease you’re paying the standard asking price

    Naturally, your effective rate per square foot over the life of the lease would be significantly less than $18 sq ft but you get the benefit of the space you’re going to need at a price that meets your respective company size. Plus, landlords like to develop relationships with growing companies and people like to see startups succeed as it helps the economy.

  • GPA: Growth Plan Assets

    One of the serious challenges with a bootstrapped startup is determining when to expand. There’s a fine balance between having sufficient reserves in the bank and being aggressive with new hires and initiatives. About four years ago, after struggling with this issue for over a year and experimenting with different ideas, I settled on an approach I’ve been using ever since: growth plan assets (GPA).

    The GPA, much like a GPA in college, is a simple number that quickly summarizes the ratio of current assets to average monthly operating costs over the previous 90 days. Here’s how I calculate it:

    • Add up current assets including cash in the bank and accounts receivables that are not overdue
    • Calculate the average monthly costs to operate the business over the past 90 days (every single penny spent that wasn’t a one-time cost)
    • Divide the current assets by average monthly cost to get the GPA

    What else? How do you decide when it is time to invest in growth?