David Cummings on Startups

Category: Strategy

  • Resetting Revenues and Growth

    One of the hardest lessons to learn, and one that isn’t talked about much, is that as an entrepreneur of most types of businesses, your revenues reset each year. What I mean is that you have to sell a certain amount of your products or services the following year just get to the previous year’s revenues, and then some amount more to grow. Resetting revenues make growth difficult in tough economic climates.

    This is also one of the reasons why business models with subscriptions, like software as a service or required maintenance and support contracts, are so desirable. Assuming a high retention rate (90%+), each deal sold in a new year represents growth as your revenue base is already the revenue from the previous year, if not higher due to more recurring revenue at the end of the year compared to the beginning of the year.

    My advice for entrepreneurs is to look for businesses with a recurring revenue component.

  • SaaS Hidden Problem: On-Boarding Costs

    Software-as-a-Service (SaaS) really is an amazing delivery model for software in that it better aligns interests of vendors and customers compared with installed software that requires a large, up-front fee. In reality, the monthly or annual fees for SaaS make it so that the vendor is financing the customer due to the fact that the customer needs to hang around long enough to become profitable. If you sell a large enterprise installed product and the customer isn’t happy, it can still be profitable (though isn’t good business practice). With SaaS, if you have difficulty on-boarding the customer and making them successful, they can walk away.

    A hidden problem with SaaS is the on-boarding and switching costs relative to the cost of the solution don’t usually match up.

    Think about it: if you charge $1,000/month for a SaaS product, you need to be able to make customers successful with almost no effort, otherwise you need to have additional implementation fees for thousands of dollars, driving up the pain of switching, increasing the sales cycle, and increasing the non-scalable labor aspect of the business. Many SaaS companies don’t adequately account for the on-boarding costs to their business model as well as how it impacts the amount of time it takes for a customer to become profitable. SaaS is a more capital intensive model for entrepreneurs compared to installed software.

    My challenge for entrepreneurs is to incorporate the on-boarding costs into their model and really think about how they can remove the enormous friction that comes with switching over to their system.

  • SaaS Magic Number

    The term “magic number” in the Software-as-a-Service (SaaS) world has come up several times over the past month in casual conversations. Early last year, the term was popularized on Will Price’s blog via a guest post from Lars Leckie titled Magic Number for SaaS Companies. Generally, the magic number is a reflection of how efficiently a company is growing their recurring revenue relative to sales and marketing expenses.

    To calculate your magic number, take the difference in quarterly recurring revenue between your last quarter and the one before, multiple that by four, and then divide everything by all the sales and marketing costs of the  quarter before last.

    Magic Number = (((Last Quarter Recurring Revenue) – (Quarter-Before-Last Recurring Revenue)) * 4) / (Quarter-Before-Last Sales and Marketing Expense)

    The general idea is that if the magic number is greater than one, more should be invested in sales and marketing. If the magic number is less than .7, additional energy should be invested in making customer acquisition more cost effective.

    I’d recommending reading the original article and evaluating the equivalent magic number for your company.

  • Product Distribution Thoughts

    Whenever people ask about our sales and marketing strategy, I always tell them we focus on direct sales with a small percentage of revenue coming from indirect channels like value added resellers (VARs). Inevitably, I’ll get the question asking why we don’t do more with distribution partners. We’ve worked hard in the past at setting up reseller and OEM relationships only to never have them work out as well as both parties initially expected.

    I think distribution partnerships are a good idea but I wouldn’t bet the farm on them.

    Partnerships, like any other part of your business, take serious time and energy to cultivate well. My recommended approach is to take baby steps with distributors and build small wins over time. Once you have some simple wins under your belt, only then would I recommend taking the next step toward a deeper relationship.

  • Find your ZAG

    Yesterday I had the opportunity to spend a couple hours with three entrepreneurs as part of a special group devoted to continual business improvement. We meet once a month and talk about ways to improve our businesses, with a special emphasis on corporate culture. A topic for yesterday was for one of the entrepreneurs to take us through his new ZAG.

    ZAG comes from the Mary Neumeier book of the same name and is a way to express your company and brand in a succinct, no-nonsense manner by answering several simple questions. Once your ZAG is complete, you will have outlined several facets of your business, including:

    • What you stand for
    • Why you’re different
    • Who you want to be like
    • Where you’re headed
    • Several more…

    I recommend checking out the ZAG book to better clarify many aspects of your business.

  • Strategy Change for Small Ecommerce Business

    Two weeks ago I met with an entrepreneur that is in the midst of changing the strategy for his small ecommerce business. As ecommerce sites have become more prevalent, and big brands like Amazon.com have continued to expand product lines, it is more difficult for small vendors to compete. This entrepreneur’s enhanced strategy is as follows:

    • Eliminate 30% of the products offered as the secondary line extensions added over the past few years have not proved successful and diluted the brand
    • Invest much more heavily in custom content about the products, including unique information and rich media (e.g. 360 degree product views)
    • Spend more time training sales and customer service personnel on the products, and allocate time for them to actual use what they sell

    I don’t know much about ecommerce businesses but his enhanced strategy sounds strong to me.

  • Software Roadmap Process

    In addition to watching the U.S. Open tennis tournament, I’ve been thinking about our product roadmap process. The previous roadmap process for our SaaS product hasn’t kept up with the pace of product demands due to success in the marketplace. Here are the general ideas for our new process:

    • Shared Google Spreadsheet with individual tabs for each department, a tab for the actual roadmap, and a tab for customer ideas from our idea exchange
    • Each department keeps a laundry list of what they’d like to see in the product in their respective tab
    • The sheets have the following columns:
      – Item
      – Description
      – Sponsor
      – Priority
      – Difficulty
      – Discussed
    • Department managers come together once a month to discuss items that haven’t been discussed yet and to lobby for their requests to be moved to the main roadmap
    • The product manager makes the final decision, based on input from the key stakeholders

    It’s a new process for us and I’m excited to see the results. The most important aspect of product management is to be opinionated about the product vision and fanatical about what does, and what does not make it into the application.

  • Marketplace No Man’s Land

    I had one of my weekly entrepreneur lunches yesterday with a gentleman who took his first technology company public in 1995 and is currently in the process of building his second company, while remaining chairman of his original venture. We had a great conversation about our respective businesses and current challenges.

    One of the comments he made stood out to me — he was battling being in a marketplace no man’s land. The idea is that they are still struggling to find their place in a new market that is rapidly evolving. After we left, I spent a few minutes thinking about how to determine if a company is in marketplace no man’s land. Here’s what I came up with, based on my experience:

    • The length of the sales cycle for your goods or services fluctuates wildly on a regular basis (e.g. one deal takes a week while the next one takes six months)
    • The positioning of your product in the market is hard to articulate
    • The last three sales have been to very different companies, and it is tough to find overlapping need
    • The leads being generated aren’t consistent or predictable

    Part of what I’ve described can come from an immature market while part can come from the difficulty of finding a place in an existing market. Positioning is a critical part of success and comes with significant trial and error. If you find your product in marketplace no mans land, I would suggest spending more time talking with customers and letting them guide you. Customer input is invaluable.

  • Defensible Market Positions and SaaS

    One of the topics we debated today was building defensible market positions with software-as-a-service (SaaS) companies. SaaS companies typically don’t have many of the traditional barriers to entry like high development costs, high infrastructure costs, and slow time to market. As we proved earlier this summer, many companies can be launched in 90 days for $20,000 or less.

    Certain SaaS companies like salesforce.com (proper spelling is with a lower case ‘s’) have built defensible market positions due to their proprietary AppExchange marketplace of hundreds of platform plug-ins. Salesforce.com, being one of the earliest and most vocal SaaS companies, required over $100 million in financing to establish their beachhead position and market dominance. They were the first SaaS company to go from $0 to $1 billion in recurring revenue.

    How does a SaaS company answer the defensible market position question? I think the answer lies in explaining that this new generation of products isn’t about defensible positions but rather about first mover advantage and grabbing market share. The barriers to entry are so low that the most important task is to sign up as many customers as possible, while offering such a compelling solution that they won’t want to switch or their switching costs will be too high to warrant making a change. SaaS is about economies of scale with a multi-tenant architecture whereby more engineering time is spent on innovation and less on solving one-off customer issues.

    The number of software companies that are going to succeed due to patents and significant networks effects is significantly smaller than in the past.  Today, it is all about innovating quickly and taking market share.