David Cummings on Startups

Category: Strategy

  • In the Path of Revenue

    Earlier this week I was talking to an entrepreneur and we were debating why some SaaS startups are more successful than others. He then commented that business models that are more in the path of revenue do better, in general, all else being equal. Basically, the idea is that products that clearly help companies make more money, as opposed to saving money or making things more efficient, are easier to sell and build a business around.

    Here are a few thoughts about products that are in the path of revenue:

    • Products that can unequivocally show they make money are the strongest in the path of revenue (e.g. Pardot with marketing automation or Shopify with ecommerce)
    • Products that are related to the revenue cycle, but not directly in the path of revenue, can be valuable but have to spend more time convincing buyers of their value
    • Many tech companies have ROI calculators on their website in an attempt to connect their product to revenue, but it’s often a sign that it’s less directly in the path

    There’s no requirement that successful products be in the path of revenue, and most aren’t. But, for the ones that are, it’s amazing to see how fast they grow and the size of the opportunity.

    What else? What are some more thoughts on this idea of evaluating where products are in the path of revenue?

  • Why Didn’t Salesforce.com Get Into Marketing Automation Sooner?

    Back in late 2009 we pitched dozens of VCs in an effort to raise money for Pardot. When asked the common question “who are your likely acquirers?” we’d always answer that Salesforce.com was perfect — the market leader with 100,000+ B2B CRM customers needed a complementary B2B marketing automation platform. Then, of course, we’d get the expected follow up question: why doesn’t Salesforce.com just build a marketing automation product now and compete directly?

    Immediately, we’d respond with the answer every entrepreneur should give when asked why doesn’t big company ‘X’ get into their market: it’s not worth their time. Of course, this is a confusing response. As entrepreneurs trying to raise money, we’re arguing that marketing automation is a great market worthy of millions of dollars of investment. Yet, we’re also arguing that the most logical player to get into the market shouldn’t do it because it’s not worth their time. Well, what is it?

    Here are the two reasons why Salesforce.com didn’t get into marketing automation sooner:

    • Strong Core Business Growth – When the main business is growing at high double digits, it doesn’t make sense to take resources away from it to address a related market. As long as the core business is experiencing major growth, stay the course.
    • Market Too Small, For Now – Startups often help create new markets that are small but fast growing. Marketing automation back in 2009 was too small for anyone to care about, especially Salesforce.com with their amazing growth. Put another way, if the related market can’t immediately add substantial revenue (e.g. > 5% of current company revenue), it isn’t worth their time.

    Salesforce.com was smart not to get into marketing automation 7+ years ago as their core business was growing fast and marketing automation was too small a market. Eventually, it became clear that marketing automation was a bigger market than expected with growth much greater than the CRM market, making the acquisition of ExactTarget + Pardot a strong strategic move.

    What else? What are some more reasons Salesforce.com didn’t get into marketing automation sooner?

  • 7 Elements of a SaaS Platform Company

    Within the B2B SaaS world, one of the common entrepreneurial aspirations is to build a platform company. A platform company, like it sounds, is one that achieves a level of success and market penetration such that a number of other companies build add-ons or integrations to programmatically interact with the platform. Salesforce.com (owner of Pardot) is the most well known SaaS example.

    Here are seven elements of a SaaS platform company:

    • Large, fast growing customer base (thousands of customers)
    • Publicly available API
    • Mature partner program with hundreds of integrations
    • Major annual user conference and regional conferences
    • Continued thought leadership and innovation
    • Category definer
    • Often publicly traded

    For SaaS entrepreneurs, building a platform company means a tremendous level of success. While there’s no single definition of a platform company, these seven elements are often a good indicator.

    What else? What are some more elements of a SaaS platform company?

  • Moving from General Tools to Prescriptive Solutions

    One of the biggest trends for SaaS over the next five years is new products that offer prescriptive solutions in place of general tools. What I mean is that there are a number of well-defined categories like CRM and ERP that are essentially customizable front-ends to specialized databases (e.g. CRMs are mostly contact management databases). These new products are still going to have the specialized database behind the scenes, but the front-end is more of a business process management system that actually tells the user what to do next.

    Let’s take a look at SalesLoft (disclosure: I’m an investor) as an example of a prescriptive solution:

    • Configure a multi-step cadence that outlines the business process (e.g. flow of emails, phone calls, social outreach, etc. over a period of time)
    • Based on the sales rep’s role, the cadence tells them exactly what to do and feeds up the next activity for them to perform (e.g. call this person now and it has an auto-dialer to dial the phone for them — the software holds their hand)
    • Activities are constantly analyzed in an effort to improve the process and make the sales reps more successful

    Now, compare the prescriptive solution to a standard contact management tool. Contact management tools have the specialized database with contact info, lists of people, etc. but they are merely databases where the user has to figure what to do and how to best interface with it, not business process engines. Look for more prescriptive solutions to emerge that make people much more productive at specific functions.

    What else? What are some more thoughts on moving from general tools to prescriptive solutions?

  • Product Pricing Doesn’t Matter Pre Product/Market Fit

    Recently I was talking with an entrepreneur about product pricing and positioning ideas. Only, this startup was pre product/market fit and didn’t have 10 passionate customers. My advice: product pricing doesn’t matter when searching for product/market fit. What matters is getting the product in the hands of as many potential customers as possible and iterating based on feedback.

    Here are a few thoughts on product pricing pre product/market fit:

    • Charge something, even if it’s nominal, so as to get quality feedback
    • Pricing is fluid and will change several times per year, even after product/market fit (see Pardot’s pricing progression through the years)
    • Start pricing higher than initially thought as prospects are more likely to give pricing feedback that things are too high than they are that it’s too low. Also, it’s easier to offer discounts to test different pricing strategies than it is to try and retroactively raising prices.

    When debating product pricing pre product/market fit, ignore coming up with a perfect price and instead focus on customer delight.

    What else? What are some more thoughts on product pricing pre product/market fit?

  • Quiet Mode Before Launching

    For years we’ve heard the saying that stealth mode is bad and entrepreneurs should talk about their concept. The idea is that no matter how much an entrepreneur thinks they know what the market wants, they have to get out of the building and talk to customers. Instead of stealth mode, I recommend “quiet mode” for entrepreneurs whereby they focus on getting 10 customers and making them super happy before “launching” their company.

    Here are a few thoughts on quiet mode before launching:

    • Quiet mode is focused on making a small handful of customers happy and not trying to do everything else that’s eventually needed to make a startup successful (it really focuses everything on the customer)
    • Achieving the goal of having 10 super happy customers will help the entrepreneur decide if the business is even worth continuing — if you can’t get 10 happy customers with a product, pivot to a new idea
    • Having happy customers at launch will provide for much better social proof, messaging, and belief that the company will be successful
    • If the first launch doesn’t succeed (media doesn’t pick up the story, little-to-no buzz, etc.) then sign 10 more customers and launch again (there’s no limit to the number of times a new startup can launch)

    Most entrepreneurs just getting started would do well to operate in quiet mode and just focus on the customer. Too much time is spent trying to launch startups without substance.

    What else? What are some more thoughts on quiet mode instead of stealth mode?

  • Must-Have vs Nice-to-Have SaaS Products

    One of the biggest considerations in the early days of a new Software-as-a-Service (SaaS) product is the must-have vs nice-to-have question. A must-have product fundamentally alters the way work gets done — either changing existing processes to be 10x better or unlocking new value that wasn’t previously achievable — and once used, companies will never go back. A nice-to-have product provides some value — perhaps being twice as good as doing it by hand or with spreadsheets — yet isn’t valuable enough to compel a critical mass of adopters, and won’t be successful.

    Here are a few thoughts on must-have vs nice-to-have SaaS products:

    • Every spreadsheet is another SaaS app, but every SaaS app isn’t a must-have
    • Apps that unequivocally help companies make more money, like marketing automation, are a must-have
    • Apps that improve productivity must be 10x better than the manual process, not 2x, which results in a nice-to-have
    • Note: this is for products in new categories and greenfield opportunities, not new products in existing categories

    As an entrepreneur, the next time you evaluate an opportunity, consider the must-have vs nice-to-have question — it’s a big one.

    What else? What are some more thoughts on must-have vs nice-to-have SaaS products?

  • Applied Analytics with Business Processes + Big Data + Information Rights

    Georgian Partners has codified an interesting set of ideas around applied analytics as part of their core investing thesis. Generally, the idea is that B2B tech companies that provide a core business process (e.g. CRM, help desk, etc.), with the permission of their users to anonymize the data (information rights), can apply big data analysis to come up with meaningful insights to help customers get more value than they otherwise would from a basic tool. Meaning, the more customers that use a given application, the more valuable the app is to those customers because it can provide insights from across the customer base to any given customer.

    Here are the 11 principles from the applied analytics theory:

    1. Understand the entire process
    2. Identify and prioritize the most valuable insights
    3. Create a dataset that is unique and broad
    4. Raw data is of little or no value
    5. Insights are more valuable the closer they are to being actionable
    6. Leverage the shortage of data scientists to your advantage
    7. Separate analytical insight from how it’s consumed
    8. Inject insights into business processes at the moments of highest impact
    9. It’s not about ‘owning’ the data
    10. Governance and compliance is a foundational discipline
    11. Lead by example

    As a simple example, imagine an email marketing company with 50,000 customers. Using the dataset, the application can proactively notify users when they use words that are likely to trigger spam filters or provide a visual analysis of email open and delivery rates compared to similar customers. By proactively helping customers be more effective in an automated fashion, the company is actually creating a moat around the business that new upstarts will have a hard time duplicating (you can’t duplicate it unless you have a critical mass of customers, and it’s incredibly difficult to achieve that scale).

    For entrepreneurs in B2B tech, they’d do well to read the applied analytics theory.

    What else? What are some more thoughts on applied analytics with business processes, big data, and information rights?

  • Revenue Growth vs Logo Growth

    As a growth-oriented entrepreneur I’m always focused on new annual recurring revenue. Only, at Pardot, we had a heavily-funded competitor that was focused on logo growth. Meaning, they’d do everything in their power to sign up a new customer — a new logo — even if that meant discounting their product by 50% or more in the first year so that they could then charge much higher prices in later years. In hindsight, we were playing two different games: revenue growth vs logo growth.

    Here are a few thoughts on revenue growth and logo growth:

    Revenue Growth

    • Best for most startups
    • Better if bootstrapped or capital light
    • Easier to understand the value
    • Fluctuates based on the customer size

    Logo Growth

    • Best for platform companies where scale matters
    • More expensive short-term but potentially more valuable over the lifetime of the customer
    • No difference whether signing a large or small customer

    If there’s an opportunity to build a platform company, and capital is readily accessible, logo growth makes sense. For most startups, revenue growth is the more common focus.

    What else? What are some more thoughts on revenue growth vs logo growth?

  • Inherent Scale to a Business

    Last week I was talking to an entrepreneur and the idea of empire builders vs. lifestyle builders came up. After some discussion, she brought up a key question most entrepreneurs don’t think through: what’s the inherent scale to the business? Too often, entrepreneurs come up with a good idea, build a viable business, and only then realize that even if they build a great beachhead in their respective market, it’ll still be small business.

    Here are a few thoughts on scale in a business:

    • Consider if it’s a small, fast-growing market that will be large or a large, slow-growing market, or neither (most markets)
    • Evaluate the geographic element of the business as many are local in nature and difficult to scale outside of the city or region
    • Think through “share of wallet” and the opportunities to start small with customers and grow the account over time by expanding the existing product or introducing new products

    Remember that market size is more important than most people realize and there’s an inherent scale to a business.

    What else? What are some more thoughts on inherent scale to a business?