David Cummings on Startups

Category: Strategy

  • The Search for a Business Model

    magnifying glass on an 17th century table
    Image via Wikipedia

    When an entrepreneur starts telling me about their business I always try to tactfully ask a few qualifying questions like the following:

    • What’s going well?
    • What isn’t going well?
    • Who’s your ideal customer?
    • What vendors do you replace or is it a greenfield/unvended market?
    • How long is the sales cycle?

    That last question “How long is the sales cycle” starts to get at the maturity of the business as well as if it is a revenue generating company or a startup in search of a business model. Most are in search of a business model. The search for a business model is one of the most difficult parts, hence an area most entrepreneurs get stuck, and go out of business if they don’t break through. Note: I’m talking about innovative businesses and not replicative businesses.

    Here are a few thoughts on the search for a business model:

    • It takes time — if you do it under 12 months you’ve done an amazing job
    • Expect several pivots/iterations as you collect more information
    • Pick a small, fast-growing market if you want more room for error as a great market makes up for many mis-steps
    • Don’t be too tied to your original thesis but do pay attention to the core of what you’re good at doing
    • Pretend like you’re a detective and need to talk to as many people as will listen, but know that only once you’re paid for something will you start to get deeper insight

    The search for a business model is filled with high highs and low lows. Know what you’re getting into and keep an open mind throughout.

    What else? What other tips do you have during the search for a business model?

  • Understand Competitor Metrics and Resource Allocation

    concentrating
    Image by J. McPherskesen via Flickr

    How many times have your heard someone say “that technology would be easy to build in a weekend”? My immediate response is that most technology companies aren’t successful based on their technology alone. In fact, it is a useful exercise to understand potential competitor metrics and resource allocation when thinking about getting into a market. Here are some items to consider:

    • How many employees does the company have and what percentage are allocated in areas like sales and engineering (use LinkedIn to find this out)?
    • Where does the company advertise and how much are they spending (do a Google search and see how high their ads rank as well as use a service like SpyFu to understand more metrics)?
    • How much traffic does the site have (use compete.com, quantcast.com, and alexa.com)?
    • How many Twitter followers, Facebook fans, and RSS subscribers do they have?

    So, the next time you think about creating a product or pivoting into a different market, use some of these techniques to better understand competitor metrics and resource allocation.

    What else? What are some other tools you use to analyze competitors?

  • Focus on Enterprise or SMB Accounts

    Street at SMB
    Image via Wikipedia

    For B2B technology startups one of the first questions they need to answer is whether or not they are going to focus on larger enterprise businesses or small-to-medium sized (SMB) companies. It is too difficult to service both enterprises and SMB with few companies ever successful at both. Companies like salesforce.com started almost exclusively with SMBs but now hunt large enterprises as well, and they are a rare exception.

    Here are some things to think through when considering a focus on enterprise or SMB accounts:

    • Enterprise products are typically much more expensive and require a larger amount spent on customer acquisition
    • SMB products are typically cheaper and sold through a self-service or inside sales model
    • Enterprise deals often involve long sales cycles and RFPs with SMB deals being shorter
    • Enterprise focus can be better with missionary product sales where the prospect has to be educated and closed as the sales cycle is more complex
    • SMB focus can be better when the enterprise segment has more advanced and entrenched competitors

    There’s no right or wrong answer for focusing on enterprise or SMB accounts but it’s important to acknowledge the difference and pick one battle.

    What else? What other ways do you differentiate enterprise and SMB focus?

  • Expand When Growth Plateau is on the Horizon

    Ernst & Young Entrepreneur of the Year award
    Image via Wikipedia

    Last month I talked to an entrepreneur who’s company was hitting on all cylinders and growing fast. I asked him about his product and how he started the business. He quickly recounted how this was actually their second product as the first product did well but that they expanded into this newer product once he saw a growth plateau on the horizon. Now, growth isn’t the most important thing to all entrepreneurs but many view growth as new challenges and adventures that make the journey fun.

    Here are a few questions to think through when there’s a growth plateau on the horizon:

    • How important is growth relative to profitability and stability?
    • Does growth mean 5% a year or 50% a year to me?
    • Is it time to expand geographic markets, new industry verticals, or a new product completely?
    • What risks and opportunities come with these changes?

    My recommendation is to consider expanding when a growth plateau is on the horizon.

    What else? What other considerations should be taken into account with a growth plateau?

  • Publicly Traded SaaS Companies

    Software as a Service
    Image by Jeff Kubina via Flickr

    Software-as-a-Service (SaaS) continues to be a hot area in the technology world. Partly because it has only really started to flourish in the past five years and partly because it is more geared towards SMB companies with a lower ticket price therefore requiring to sign many thousands of clients to reach scale, there aren’t very many publicly traded SaaS companies. SaaS companies are characterized by great recurring revenue, gross margins, predictability, and growth. Here are a few publicly traded SaaS companies and information about them as of December 12, 2010:

    • salesforce.com (NYSE:CRM) – customer relationship management SaaS and cloud computing company. They are the largest SaaS company and the first to reach $1 billion in recurring revenue.
      Market cap: $19.53 billion
      Last reported quarter’s revenues: $429.09 million
      Employees: 4,758
    • NetSuite (NYSE:N) – enterprise resource planning (accounting, inventory, etc) SaaS company.
      Market cap: $1.66 billion
      Last reported quarter’s revenues: $49.74 million
      Employees:  1,022
    • Constant Contact (NASDAQ:CTCT) – email marketing for small business SaaS company.
      Market cap: $872.21 million
      Last reported quarter’s revenues: $44.83 million
      Employees: 625
    • SuccessFactors (NASDAQ:SFSF) – human resources SaaS company.
      Market cap: $2.36 billion
      Last reported quarter’s revenues: $51.54 million
      Employees: 967
    • Taleo (NASDAQ:TLEO) – human resources SaaS company.
      Market cap: $1.29 billion
      Last reported quarter’s revenues: $58.74 million
      Employees: 916
    • LogMeIn (NASDAQ:LOGM) – remote machine access SaaS company.
      Market cap: $1.11 billion
      Last reported quarter’s revenues: $25.35 million
      Employees: 387
    • LivePerson (NASDAQ:LPSN) – live chat SaaS company.
      Market cap: $524.75 million
      Last reported quarter’s revenues: $28.22 million
      Employees: 349

    Personally, I’m a big proponent of SaaS and am very optimistic about the future. It should be an interesting market to watch.

    What else? What other publicly traded SaaS companies would you add to the list?

  • Thoughts on salesforce.com and Heroku

    At today’s Dreamforce show the big news was that salesforce.com has acquired Heroku for $212 million in cash. Heroku is a Platform-as-a-Service offering for Ruby on top of Amazon Web Services. This is salesforce.com’s largest acquisition ever, and is more dramatic considering that it is estimated that Heroku has less than $10 million in revenue.

    Here are a few thoughts on the acquisition:

    • salesforce.com has the Force.com platform for building apps but it requires a non-standard Java-like language that hasn’t had much adoption.
    • salesforce.com has the VMForce.com initiative in private beta which will run Java apps but Java apps are much more cumbersome to write compared to Ruby, PHP, and Python.
    • salesforce.com just launched database.com for a true cloud database offering but has a $10/user/month pricing in addition to storage costs which make it unlikely to catch on.
    • Heroku offers a true PaaS with pricing inline with the normal hosting industry making it the first real initiative that will grow salesforce.com outside their current core uses.
    • Heroku is built on Amazon Web Services which offers virtual private servers in the cloud. Heroku takes the Amazon cloud instances and sub-divides them further into even smaller instances as well as takes away much of the complexity. It is brilliant.

    My take is that this is a credible move requiring at least three years to prove worthwhile. It is super risky and brilliant at the same time.

  • Where’s the SaaS App Market Headed?

    After spending a day at Dreamforce it is clear that the SaaS app market, as well as associated salesforce.com AppExchange eco-system, is growing like gang busters. The top sponsorship slot for Dreamforce this year was Platinum for a whopping $250,000. Next year they’ll have two even more expensive slots: Diamond and Titantium. Imagine what those will go for.

    Here are a few SaaS app trends I see:

    • More connectors and off-the-shelf integration between SaaS products (who’s going to win the generic app marketplace e.g. a marketplace that isn’t the Google Apps Marketplace and isn’t the salesforce.com AppExchange marketplace?)
    • Integration and migration of legacy data continues to be a big challenge (garbage in, garbage out, regardless of industry)
    • Ease of use continues to be a major focus (design for the novice, customize for the pro)
    • Pricing and complexity of contracts is starting to decrease, making things better for the customer

    All in all, the SaaS market continues to grow fast and I’m very bullish about it. We’re only scratching the surface of SaaS apps changing how businesses operate.

  • Thoughts on salesforce.com on the Flight to Dreamforce

    Image representing Salesforce as depicted in C...
    Image via CrunchBase

    This blog posts comes from 30,000 feet in the air courtesy of free WiFi for the holidays from Google Chrome on Delta. Right now, I’m flying to San Francisco for my third consecutive annual salesforce.com conference known as Dreamforce. As one of our main partners and the leader of the SaaS industry, I pay close attention to salesforce.com. Dreamforce never disappoints.

    Here are a few thoughts on salesforce.com:

    • They are a brilliant sales and marketing machine with reportedly 50% of their employees in sales (which represents thousands of people).
    • They were the first SaaS company to reach $1 billion in recurring revenue.
    • They are extremely focused on selling seats of their software, with sales reps and support reps being the majority of their users. Because there’s typically a 10-to-1 relationship between sales reps and marketing people, and they want to sell seats, salesforce.com has stayed out of the marketing automation market.
    • They have a great product but the real value comes from the AppExchange eco-system of other products that integrate with their API. This creates a network effect resulting in exponentially more value.
    • They have been promoting “no software” as their mantra for years now, which is brilliant to position SaaS against traditional installed apps. Yes, they sell software.

    Every year the salesforce.com CEO gives a keynote presentation announcing their results as well new features or products to much fanfare. Last year they introduced Chatter to allow companies to run an internal Facebook-like community. It’ll be interesting to see what they announce this year. Stay tuned for an update later in the week.

  • Pricing a SaaS App

    Saas im Prättigau
    Image via Wikipedia

    Pricing is one of the areas that I see first-time entrepreneurs undersell themselves. What I mean is that there’s a tendency to price a product too low. Paul Graham says, “You’ve found market price when buyers complain but still pay.” It’s not that you’re trying to take advantage of customers but rather attempting to determine the optimum price (which often isn’t the highest). Software-as-a-Service (SaaS) is especially interesting due the rental nature of the relationship. The client isn’t buying the software but rather paying a monthly or annual fee for access to the application.

    Here are a few things to keep in mind when pricing a SaaS app:

    • Under $10/month is generally a consumer app that is fully self-service
    • $20-$100/month is more small business and self-service or limited service to get going
    • $100-$500/month is no-man’s land where it is too expensive to be self-service and it is too cheap to compensate consultative inside sales reps (the exception is products that replace existing, known quantities like VoIP services replacing phone services)
    • $500-$1,500/month is the sweet spot for having a quality inside sales team that is well compensated
    • $1,500+/month enters the territory of an expensive field sales force with significant travel and expense costs

    Pricing is one of the more difficult things to do early on and I recommend starting two or three times higher than your initial thinking and always remember that it is easier to lower prices that to raise prices.

    What else? What are some other considerations when pricing a SaaS app?

     

  • What’s your Net Promoter Score?

    Several years ago a friend of mine gave me the book The Ultimate Question as a colleague of his at Bain had written it. After reading the book we immediately started to implement it as part of our quarterly client check-in calls. The Ultimate Question, according to the book’s author Fred Reichheld, is as follows:

    Would you recommend this product/service to a friend or colleague?

    The theory is that it isn’t whether or not a customer is happy but rather how likely they are to rave about you to others. Too often people will say they are satisfied when they are indifferent or don’t actually care. The most profitable and successful companies, like Apple and Google, have the most rapid fans.

    Calculating the net promoter score is fairly easy (see this online calculator). Ask customers to answer The Ultimate Question on a scale of 0-10 with 10 being the highest. Once you have the scores, categorize the responses into promoters (9-10), passives (7-8), and detractors (0-6). To determine the score, take the percentage of promoters and subtract the percentage of detractors (the percentage that are passives are ignored). That’s it. Companies that score above 75 are considered excellent, and yes some companies have negative scores.

    My recommendation is to consider using net promoter score as way to measure how successful your company is with your customers.