David Cummings on Startups

Category: Strategy

Entrepreneurs Don’t Need Focus Groups
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In the past two days I talked to three first-time entrepreneurs that wanted input on their ideas. Every single one cited the desire to use focus groups to help validate their project. Entrepreneurs don’t need focus groups. Henry Ford has a famous quote that exemplifies how I feel about focus groups: If I’d asked customers what they wanted, they would have said “a faster horse.”

Now, talking to customers and potential prospects is the right idea. Doing focus groups in the traditional sense is overkill and too expensive. Entrepreneurs are much better off seeking out prospective customers and engaging in a customer driven process using the 4 Steps to the Epiphany (free PDF of book) or Lean Startup model.

A few things to consider when attempting to validate a startup idea:
- Talk to at least 10 potential customers about the idea and get their input
- For the prospects that express interest, ask for a firm commitment for them to use it (e.g. timeframe, cost, etc)
- Ask them how they go about solving the problem now as well as what other things they’ve looked into to solve the problem
- Seek out entrepreneurs or potential advisers that have relevant domain expertise
Validating an idea before jumping into it full-time is one of the harder things to do as an entrepreneur. My recommendation is to roll up your sleeves and talk one-on-one with as many people as makes sense and get direct feedback.

What else? What other tactics do you have to validate a startup idea?
March 18, 2011
SaaS Startup Growth Metrics
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Software-as-a-Service (SaaS) continues to be a hot area for startups. The Responsys IPO filing shed more light on the numbers behind a larger scale SaaS business, including ratios of license to service revenue as well as growth over many years. As a SaaS company, whereby clients essentially rent the software, and thus are financed compared to paying a large up-front license fee, it is critical to understand if you’ll be making money over a long-term horizon as there’s a great chance you’ll lose money in the short-term due to the nature of the business.

Here are some SaaS growth metrics we track:
- Churn rate in terms of number of clients as well as in dollars
- Monthly, quarterly, and annual recurring revenue growth
- Client acquisition costs as well as how many months/years it takes for a client to be profitable
- Omniture Magic Number – ratio of sales and marketing costs two quarters ago to new annual recurring revenue from last quarter
- Average revenue per customer/user
- Lifetime value of the customer as well as the lifetime value discounted against the cost of capital
- Cost of goods sold (typically hosting and customer service fees) per client
Managing and tracking these SaaS metrics help us better understand our company as well as benchmark us against data from publicly traded SaaS companies. My recommendation is to prepare a monthly analysis of this type of information.

What else? What other SaaS startup growth metrics do you track?
January 30, 2011
Thought Exercise: Describe a new medium

Cover via Amazon

Last night I finished the book Burn Rate describing one founder’s journey through the craziness of the dot com hey day. I enjoyed it — it’s a really good book, not quite as good as Startup, but it’s worth reading nonetheless. On the last page of the book, the author Michael Wolff, recalls an assignment he had in school:

Describe in a one-page essay a completely new medium. Not television. Not radio. Not records. Not movies. Not magazines. Not newspapers. Not books. Something else.

Go on, take 60 seconds to think about that. What would a new medium look like? How would it work? What would it do? Where would it fit in? Who would invent it?

The iPodTouch/iPhone/iPad family of touch-screen iOS devices strikes me as a new medium. Twitter is a new medium. What’s the next new medium? What’s your new medium?

January 18, 2011
Winner Take Most Markets
Yesterday’s TechCrunch post titled Why We Invested in Groupon: The Power of Data mentioned something that isn’t talked about often enough in startup circles: winner take most markets. Winner take all markets, like eBay with online auctions and Microsoft with operating systems (for many years), are much more commonly talked about.

What are some winner take most markets? Here are a few ideas:
- Groupon in the local deals market (there are tons of smaller competitors but I’m sure Groupon’s revenues are more than all the others combined)
- Wal Mart in the local goods market (Target and other brands do well but Wal Mart takes most of the revenue)
- Constant Contact in the small business email marketing market (even though iContact and MailChimp continue to do great and will probably change this one day)
Winner take most markets, also known as one company having the majority of revenue in a market, is much more common than winner take all. Entrepreneurs should be talking about winner take most markets more frequently than winner take all.

What else? What are some other winner take most markets?
January 13, 2011
Products that Make or Save Money
Image by Mastery of Maps via Flickr

I’m a B2B guy. I really am. I don’t understand how to make a consumer product successful. For B2B technology products, especially more complex and costly ones, you listen to prospects and customers, innovate, collect a tidy sum, then rinse and repeat. There’s one line, when considering startup strategy, that should be repeated over and over in the founder’s mind:

Are we helping people make money or save money?

This is critical to keep in mind as it drives several aspects of the business, including:
- Who’s our target buyer?
- What verticals/industries make the most sense?
- How should we price it?
- How should we position it?
Products geared towards making money are often sold to sales and marketing. Products that save money and drive efficiency are often sold to IT and finance. There are big implications here. There’s no right or wrong answer but I believe it is important to ask yourself that question when generating product ideas as well as finding product/market fit.

What else? What are some other considerations related to products making money or saving money?
January 11, 2011
Sports Bookies and Startups

In reading about tonight’s BCS College Football Championship Game I came across the Vegas odds line from the sports bookies. Now, the actual line (who’s favored to win and by how many points) isn’t what’s important. What’s important is understanding how bookies work.

Sports bookie lines aren’t designed to pick the winner but rather to ensure that bookies make money.

For startups, there’s an important lesson: a marketplace of buyers and sellers can provide a “good deal” where one party still always money. The marketplace always makes money.

Whenever a friend says they should bet on a game because the line doesn’t make sense, I always think that the line moves based on the bets for the house to make money, not based on the particularities of the teams that are playing (the line does start out trying to be reasonable based on the teams playing).

Groupon always makes money. eBay always makes money. Is there an opportunity for your startup to be a marketplace?

January 10, 2011
Antiques Roadshow and Startups
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Have you seen Antiques Roadshow on PBS? They do a great job of telling stories and history about random antiques people bring into a regional show. Oh, and they excitedly ask: do you know how much this is worth? Nine out 10 times the guest is flabbergasted by the high value. The value is the auction price before fees, but interesting nonetheless. Geico even did a funny commercial parodying the show talking about the value of a bird in the hand (antique) being worth two in the bush.

What’s a lesson for startups from Antiques Roadshow?

A few lessons:
- One man’s junk is another man’s treasure
- Most junk is exactly that: junk
- Sponsors of the show are striking at the optimal time: when people are thinking about the value of their antiques and collectibles
- Stories and history add significant value to products
What else? What other startup lesson are there in Antiques Roadshow?
January 3, 2011
Packaging the Same Product into Multiple Products
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One strategy startups should consider is packaging the same product into multiple products. There are three common ways this is accomplished:
- Segment the same product into different editions where features or usage rates are changed (e.g. group, professional, enterprise, and ultimate editions)
- Apply an industry specific name to the product (e.g. technology, healthcare, financial services, etc)
- Make the platform (same code base) divided into separate, but related products, available independently or combined a la carte (e.g. marketing suite, sales suite, and support suite)
Most often, one size does not fit all and buyers like to buy when a company speaks their own language. My recommendation is to consider ways to package the same product into multiple products.
December 24, 2010
Startups and the Scientific Method
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Remember the scientific method as a kid in fourth grade science class? Well, all the same principles apply to startups. Let’s review the scientific method courtesy of ScienceBuddies.org:
- Ask a question — what business problem or unmet need do you want to solve?
- Do background research — talk to as many friends and colleagues as you can about your idea and get firm commitments from people that will use it.
- Construct a hypothesis — decide what angle you’re going to take and build a minimum viable product.
- Test your hypothesis by doing an experiment — put the product in the hands of your committed users and get their feedback.
- Analyze your data and draw a conclusion — look at the results and decide if you’re on the right path.
- Communicate your results — talk to your committed users and share your next iteration or pivot (if applicable).
The scientific method maps perfectly to the world of lean startups and should be used liberally.

What else? What are ways is the scientific method applicable to startups?
December 20, 2010
When to Pivot in a Startup
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Continuing with yesterday’s post on The Search for a Business Model it’s also important to think through when to pivot in a startup. A pivot, or iteration, is when you take information learned and make a change to the business model, some changes more dramatic than others. Here are a few items to keep in mind when considering a pivot:
- Think through the core strengths of the startup and consider pivots that play to those strengths as well as experience already gained
- Talk to as many people as possible about the current thesis and pivot when it’s clear it isn’t working (e.g. talk to five companies and consider pivoting if you don’t pick up any new clues or meet milestones)
- Ask yourself if you’re making enough progress in your current direction and if you’ve encountered any related ideas that are more promising
- Don’t be afraid to keep your current offering up while you explore new ideas, you never know what information you might learn in the interim
In general, I’ve seen that people don’t pivot soon enough and continue down a path that isn’t working. My recommendation is to pay close attention to progress, or lack of progress, with the current business model and don’t be afraid to make changes quickly based on new information.

What else? What other tips do you have when thinking through pivoting in a startup?
December 18, 2010