David Cummings on Startups

Category: Strategy

  • Build a 10x Revenue Plan

    Entrepreneurs love talking about how they’re going to build the next unicorn startup (billion dollar valuation) or how they’re on a quest to hit $1 million in revenue to join Entrepreneurs’ Organization. While having big goals is important, it’s also important to map out how you’re going to get there. A good, simple exercise is to build a 10x revenue plan. The idea is to build out a one page document that outlines how you’ll make the business 10x larger. Most planning and budgeting is time-oriented (e.g. a one or three year plan). The 10x revenue plan isn’t designed to be a large, complicated financial model, rather the goal is to paint a picture of what’s needed to become 10x larger than now.

    Here are a few bullet points to include in the 10x revenue plan:

    • Current revenue and 10x revenue
    • Current staffing and staffing needed to be 10x larger (most likely not 10x the people)
    • Timeframe (often depends on size and scale of the startup currently)
    • Fundamental changes required (e.g. big rocks or milestones)
    • Key assumptions (things that will happen in the market, competitor changes, etc)
    • Financing needed, if any

    So, grab your co-founders and build a 10x revenue plan over lunch. Just putting the ideas down into a Google Doc does wonders for aligning team members and painting a picture of what’s required.

    What else? What are some other thoughts on building a 10x revenue plan?

  • A Better Experience to Grow a Market

    One of more interesting stories to emerge lately is around Uber and how it’s grown the market for taxis and black cars. In San Francisco, the entire spend on taxis and limos was $120 million per year and now people spend much more than that just on Uber in that one city, and the rest of the taxi and limo industry didn’t go away (from Bill Gurley’s excellent post An Alternative Look at Uber’s Potential Market Size). Uber is so easy, efficient, and high quality that they significantly grew the market for black cars and taxis (personally, I’m a big fan of the service).

    On the local front, this past weekend we used Instacart to order all our groceries from Whole Foods. Normally, we’d go to Publix, which is much closer than Whole Foods, but doesn’t have as large a selection of organic food. Instacart is growing the market for organic food by making it easy and efficient to have groceries delivered to a larger geographic area compared to what was previously served.

    At home, we rarely listened to music until Pandora came out several years ago. A few months ago we put in a Sonos wireless speaker system and now we listen to music 10x more than previously. The Sonos experience took Internet-delivered music services like Pandora and made them substantially better by disconnecting the device (e.g. iPad or laptop) from the delivery of the music (e.g. the sound system). Now, we choose a Pandora station for the Sonos speakers and forget about it. The result is more music with less effort and a better experience.

    Historically, business owners have focused more on making their product or service better, faster, and cheaper than their competitors in order to grow their market share, and in turn grow their business. Yes, the market overall was likely growing, but not in a dramatic way. Now, technology is helping deliver a better experience and even traditional slow-growth markets are growing at astounding rates. I’m looking forward to seeing more markets grow due to a better experience.

    What else? What would you use more of if you had an experience that was 10x better than before?

  • Thoughts on Salesforce.com Acquiring RelateIQ

    Earlier today RelateIQ announced that they were going to be acquired by Salesforce.com for up to $390 million. Now, I haven’t used RelateIQ but I’ve heard from a number of people that their approach to reimagining the CRM into a system focused on relationships is one of the best available, albeit still early. Instead of the standard CRM interface focused on leads, contacts, opportunities, tasks, etc., RelateIQ scans your email server and calendar (Microsoft Exchange and Google Apps) as well as other data sources to build an understanding of what’s going on and then provides automated recommendations (e.g. you should contact X as it’s been Y days since last touch point). Put another way, many people detest CRMs because of all the manual data entry and RelateIQ takes activities already performed and makes sense of them.

    Here are a few thoughts on Salesforce.com acquiring RelateIQ:

    • CRMs feel clunky and out-dated thereby creating an opportunity for an upstart to capture mindshare around a new type of CRM, and RelateIQ was leading the charge
    • Data entry is one of the most cumbersome aspects of a CRM and RelateIQ had already made great progress minimizing data entry
    • Salesforce.com wants to create a new X division to experiment with advanced technologies, much like Google X, and RelateIQ is believed to fulfill that function (via VentureBeat)
    • Salesforce.com is serious about preventing a next-generation CRM from disrupting them, so much so that they’d pay ~100x run rate for RelateIQ (see speculation from Jason Lemkin on Quora about RelateIQ’s run rate)
    • The CRM market still needs a clear #2 player, and with RelateIQ off the market, the chance they earn that spot is greatly diminished (HubSpot is still well-positioned)

    Salesforce.com has a done a great job helping other acquired product-lines grow like Pardot and Heroku. I’m looking forward to seeing how things play out with RelateIQ.

    What else? What are some other thoughts on Salesforce.com acquiring RelateIQ?

  • Power of an Asset’s Value Compounding Annually

    In yesterday’s The Upshot section of the New York Times, there was an article titled Sterling to Reap 15,900 Percent Return on Sale. From the article, “Sterling bought the Clippers for $12.5 million in June 1981, according to some reports, and he’ll get a tidy 15,900 percent return over 33 years, an annualized rate of 16.6 percent.” Think about that for a second: turning $12.5 million into $2 billion is amazing (assuming the sale goes through). That’s the power of an asset compounding annually over an extended period of time.

    Let’s take a look at an example startup with revenue doubling every year:

    • Year 1 – $1,000,000
    • Year 2 – $2,000,000
    • Year 3 – $4,000,000
    • Year 4 – $8,000,000
    • Year 5 – $16,000,000

    At some point the law of large numbers kicks in and it becomes much more difficult to sustain the high growth rates. If you assume it’s a technology company valued at four times revenue, the value of the company increased from $4 million in year one to $64 million in year five — impressive appreciation. The takeaway is that sustaining a high growth rate over an extended period of time is one of the best ways to build value. Albert Einstein’s famous quote rings true, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it. (source)”

    What else? What are some other thoughts on the power of an asset’s value compounding annually?

  • Enterprise-Focused Public SaaS Companies More Likely to Be Acquired

    Reflecting on the list of publicly traded B2B SaaS companies from yesterday, it’s clear that over the past few years, companies that reached scale and went public were more likely to be acquired if they focused on selling to large companies (enterprises) as opposed to ones selling into the small-to-medium sized business segment. Companies like ExactTarget, Eloqua, and Responsys are all in the email marketing space, which is white hot (and just had another nice exit with IBM buying Silverpop and closing the transaction today). If you go back another year you have SuccessFactors and Taleo both getting acquired, and both targeting the enterprise with HR software.

    Here are a few thoughts on why enterprise-focused startups are more likely to be acquired:

    • Companies targeting the enterprise with scale have an easier time maintaining a fast growth rate due to the nature of high dollar sales (if each new deal is $200k/year in annual recurring revenue, it’s easier to put a bunch more feet on the street and pound the pavement to bring in more deals as compared to trying to sign the equivalent number of small businesses)
    • Large acquirers are more prevalent in the enterprise-focused space (think of Oracle, SAP, Salesforce.com, etc vs Intuit, etc), and once a category is declared strategic and an acquisition is made, the big competitors start circling the remaining players
    • CIOs and executive-level technical buyers communicate more with the large acquirers since they purchase so many different products whereas many SMB products are bought via a credit card by line-of-business managers

    Again, this is anecdotal evidence based on a limited number of public market acquisitions. As for building an SMB or enterprise-focused SaaS company, I’d go after whatever market has the most opportunity. Regardless, publicly traded enterprise-focused SaaS companies are more likely to be acquired.

    What else? What are some other reasons why enterprise-focused public SaaS companies are more likely to be acquired?

  • Product Must be 10x Better to Build a Large Business

    Earlier this week I read a quote from Bill Gross, founder of Idealab: to build a large business, the product must be 10x better than the current standard bearer, and it must be a large market. Naturally, this makes sense. Only, when you think of most startups, do you think their product is 10x better than what people currently use? Not every entrepreneur is looking to build a large business, but for the ones that are, rarely does the product/idea seem 10x better.

    Here are a few thoughts on the concept that a product must be 10x better to build a large business:

    • Once a type of product is entrenched, it’s difficult to get people to switch unless there’s something truly compelling
    • Better, faster, and cheaper are the typical vectors of improvement, with “better” being the one most commonly pursued
    • Making a product that’s 10x better is magnitudes more difficult than one that’s 2x better
    • Many small, profitable markets exist, and there’s nothing wrong with an innovative product that’s 2x better

    The next time an ambitious entrepreneur says they want to build a large business, ask them how their product is 10x better than what’s in the market.

    What else? What are some more thoughts on why a product needs to be 10x better to build a large business?

  • Large Growth Companies Create Sizable Startup Opportunities

    Jason Lemkin wrote a great post last month titled The Simple Reason Why There Will be 10-20 Great CRM IPOs in the Next Few Years. The idea is awesome: when a company like Salesforce.com hits $10 billion in run rate, the bottom 10% of the customers get neglected, creating $1 billion in revenue opportunities for startups. Here are a few thoughts on large growth companies creating sizable startup opportunities:

    • Market reinventions happen every 10-15 years, so it’s inevitable everyone will be disrupted at some point (think mainframes, PCs, Internet, mobile, etc)
    • Opportunities come in the form of a vertical-specific offering, a lower priced offering, and/or a better solution
    • Better solutions in CRM will come in the form of more fully integrated marketing and sales platforms that aren’t tied to traditional conventions
    • Disruptive vertical-specific offerings will be the most prominent (e.g. CRM for real estate, CRM for legal, CRM for accounting, etc.)
    • Startups that can hit $5 or $10 million in run rate will have nice, solid businesses whereas ones that can get to $75-$100 million in run rate will be homeruns, and the market will support several of these

    Go read Jason’s post on why there will be 10-20 great CRM IPOs in the next few years. Large growth companies create sizable startup opportunities and entrepreneurs should capitalize on it.

    What else? What are some other thoughts on large growth companies creating sizable startup opportunities?

  • Think About The Market As Much As The Product

    Entrepreneurs spend a tremendous amount of time focused on specific product ideas and not enough time evaluating the overall market and trends. Most successful startups pivot at least once before finding the idea that turns out to be the one, so picking a good market increases the likelihood of developing knowledge in an area that has multiple opportunities.

    Back in March of 2007, Pardot started out as a Pay Per Click (PPC) bid arbitrage platform whereby we would generate leads and sell them to companies. Much like LendingTree.com where you fill out a form one time for a mortgage and get several responses, we wanted to do the same thing for B2B technology leads. Add in some industry analysis like Gartner or Forrester and you have a pretty good idea of Pardot 1.0.

    After 45 days of Pardot 1.0 we realized that we’d picked a good market (helping tech companies with lead gen) but didn’t pick the best product offering. At that point we pivoted and decided to offer the tools we’d built to help generate, track, and disseminate leads as a standalone marketing product instead of selling leads. We then spent the next four months fleshing out the product and did a soft launch in September 2007. After six more months of finding product/market fit, the business took off and the rest is history.

    In the end, our original idea wasn’t successful but we picked a great market and had impeccable timing. Entrepreneurs would do well to spend time thinking about the market in addition to the product.

    What else? What are your thoughts on the importance of picking a good market?

  • Purposefully Adding Friction to a Process

    Generally, I’m a big proponent of making things as frictionless and simple as possible. Whether it’s product pricing, customer onboarding, support channels, or any number of other items, less headache is better. Now, there are certain things where adding friction actually adds value, especially when done in a tasteful way.

    Here are a few areas to consider adding friction:

    • Hiring Process – It’s important candidates have a good experience, but it’s also important to fully vet and evaluate the person with tasks like a writing assessment, technical evaluation, reference checks, and more
    • Partnerships – While startups should say ‘no’ to most partnership requests, opportunities do arise that merit further evaluation, and adding friction like guaranteed minimums, joint marketing arrangements, and more can make it worthwhile
    • Raising Money – Just because an investor offers money doesn’t mean extensive reverse due diligence shouldn’t take place by calling CEOs of past investments, holding mock board meetings, and vetting the investor as much as the startup’s been vetted

    Adding friction here means being more thoughtful and taking more time that originally anticipated so as to achieve a better outcome. Most of the time friction should be removed but in select cases it should be added.

    What else? What are some other thoughts on when friction should be added to a process?

  • 7 Quick ‘Whys’ for Startups to Consider

    Last week I had some downtime due to Spring Break with the family and I got to thinking about several strategic initiatives. In my mind, I went through a number of current projects and did something of a “five whys” exercise to better evaluate things. After thinking about it more, I believe startups would do well to step back and ponder these 7 quick ‘whys’ on a regular basis:

    1. Why are we doing this?
    2. Why is now the right time to do this?
    3. Why are we going to win?
    4. Why aren’t we doing even better?
    5. Why do employees want to work here?
    6. Why is this the right product?
    7. Why do customers love us?

    It’s easy to get caught in the weeds of working in the business and not spending enough time stepping back and working on it. Asking why more frequently helps frame the thinking in a more strategic manner.

    What else? What are some other good ‘whys’ for startups to consider?