David Cummings on Startups

Blog

  • Differentiating Between Innovative and Replicative Businesses

    During a recent talk to a group of civic leaders about entrepreneurship and the Atlanta Tech Village, I mentioned that almost all successful entrepreneurs aren’t successful with their first idea. Meaning, success either came after a failed venture or after a pivot to a new idea. The common story of an entrepreneur coming up with an innovative idea and succeeding on the first try is a myth.

    After the talk, one of the civic leaders eagerly came up and told me that his son was a successful entrepreneur that started a distillery and made it work on the first try. Biting my tongue, I nodded, smiled, and thanked him for attending the talk. At that point, I realized I hadn’t emphasized enough that I was talking about innovative businesses that invent a new product or solution that’s never been done before. Replicative businesses are ones that entrepreneurs create in an existing market with an existing type of product or service that has a number of direct substitutes. A local distillery is a replicative business.

    One of my favorite quotes for civic leaders is “the majority of new jobs created over the next 10 years will come from businesses that aren’t even in existence today.” Yes, new replicative businesses will create a number of jobs but new innovative businesses will create many more. Creating a successful innovative business is 100x harder than creating a successful replicative business.

    When talking about entrepreneurship and job creation, make sure to distinguish between innovative and replicative businesses.

    What else? What are some more thoughts on the idea of distinguishing innovative businesses from replicative businesses?

  • High and Low Equity Dilution Scenarios

    After reading the Notes from the Atlassian S-1 IPO Filing again, there’s one element that truly stands out for the proposed $3 billion company IPO: the two founders own 75% of the company. That’s simply unheard of for venture backed startups. Atlassian has been incredibly capital efficient and only sold a relatively small percentage of equity when they raised money. When raising money, there’s no set percentage that venture capitalists purchase, but it’s generally 15-35% of the company each round of financing.

    Let’s look at the difference of three rounds of financing selling 15% of the company each round vs selling 35% of the company each round.

    Selling 15% per round and assume no pro-rata and no extra dilution from new stock option pools:

    • Series A – Investors own 15%
    • Series B – New investors own 15% plus existing investors own 12.75% = 27.75%
    • Series C – New investors own 15% plus existing investors own 23.6% = 38.6%

    Selling 35% per round and assume no pro-rata and no extra dilution from new stock option pools:

    • Series A – Investors own 35%
    • Series B – New investors own 35% plus existing investors own 22.75% = 57.75%
    • Series C – New investors own 35% plus existing investors own 37.5% = 72.5%

    So, a startup with three rounds of low dilution owns 34% more of the company vs a startup with three rounds of high dilution. While there’s intense focus on the amount of money startups raise, there’s much less discussion about what percentage of equity was sold to raise that money.

    Entrepreneurs would do well to place more consideration on percentage of the company they sell to investors, especially in the context of raising multiple rounds of financing.

    What else? What are some more thoughts on high and low equity dilution scenarios?

  • 7 Quick Tips for Entrepreneurs Starting Out

    With so much information online, there’s a real challenge for entrepreneurs to find best practices based on their current business stage. Entrepreneurial struggles at the seed stage are different from the early stage which are different from the growth stage. And, stages aren’t clear-cut, resulting in difficulties when transitioning between stages.

    To begin, here are seven quick tips for entrepreneurs starting out:

    1. Culture is key and needs to be intentional
    2. Plan go/no-go goal metrics from the beginning
    3. Know that raising money is 100x easier with traction and find traction metrics for your industry
    4. Work to achieve product/market fit as quickly as possible
    5. Use the Simplified One Page Strategic Plan, and make the strategic direction clear
    6. Ensure a growth-oriented entrepreneur is on the team
    7. Find a peer group

    Building a successful business is incredibly hard. Entrepreneurs starting out would do well to follow these seven quick tips and improve their chance of success.

    What else? What are some other tips for entrepreneurs starting out?

  • Video of the Week: Blitzscaling Session 1 – Household Stage

    Admit it, we live in an incredible period of time where the most successful people in the world freely publish their lessons learned online and we can virtually “attend” some of their classes. This week we’re doing exactly that with Reid Hoffman teaching his Stanford class on scaling a rapidly growing company. Watch his video titled Blitzscaling Session 1: Household Stage and learn from the person that started and scaled LinkedIn (NYSE:LNKD). Enjoy!

  • Go/No-Go Metrics for Continuing a Startup

    Recently I was talking to an entrepreneur that has spent $350,000 so far building stuff for his startup but nothing related to customer acquisition. This includes a visual brand identity, website, web app, and native mobile apps for Android and iOS. Now, during our conversation, I wanted to learn about his metrics. After mentioning that they haven’t signed any customers yet because they’re polishing the product, and therefore didn’t have any metrics yet, I asked about his go/no-go metrics to continue on with the idea. Meaning, what are his near-term goals, with specific metrics, to know if they’re making enough progress to keep moving forward. His answer: I don’t know.

    Here are a few thoughts on go/no-go metrics for startups in the earliest of stages:

    • While it’s easy and fun to build product, make a plan, with goals, and include aspirational metrics as well as “must hit” minimum metrics
    • Consider goals related to identifying if product/market fit has been achieved
    • Ask existing and potential investors what metrics they look for and would require for a subsequent round of funding

    Too often, entrepreneurs don’t have metrics in mind when they’re starting out and get caught up in the grind without a target in sight. Also, remember the 3:1 customer acquisition to engineering spend ratio when budgeting in the early days as too many entrepreneurs spend all their money on the product and forget that they need even more money to acquire customers.

    What else? What are some more thoughts on go/no-go metrics for continuing on with a startup?

  • Cockroach Mode for Startups

    Jeff mentioned not too long ago that tech startups aren’t really focused on innovating on a daily basis. Rather, they’re focused on not dying. For many entrepreneurs, especially those in the idea stage, they are closer to being a science project than an actual company. As Steve Blank famously says, “Startups are temporary organizations designed to find a repeatable business model.” I like to think of startups in this do-not-die stage as the hardiest of insects: cockroaches.

    Here are a few thoughts on cockroach mode for startups:

    • Look for little-to-no salaries for the entrepreneurs (a famous investor said the best predictor of startup success was the CEO’s salary)
    • Look for entrepreneurs valeting cars in the evening to pay the bills
    • Look for entrepreneurs staying in Airbnbs or friend’s sofas instead of hotel rooms on trips
    • Look for everyone on the team focused on how to acquire customers (make money!) or find investors, not just the CEO
    • Look for a palpable level of persistence and determination in the entrepreneur (watch out for the desperation level)

    Building a successful startup is incredibly difficult. Cockroach mode for startups happens more often than people realize and entrepreneurs that make it through it are even stronger due to the experience.

    What else? What are some more thoughts on cockroach mode for startups?

  • Great Variation to Common Questions

    Yesterday, I was talking with an entrepreneur at lunch. Right at the beginning of the conversation he said, “What’s the most interesting project you’re working on now?” Then, this morning, a different entrepreneur asked, “What’s the most interesting new startup in the Atlanta Tech Village?” Thinking back on these interactions, it’s clear that adding “most interesting” is a great variation to the common question “what’s going on.”

    There are a number of common questions where adding “most interesting” makes it better:

    • When using the CEO Tools and walking the four corners, ask a question like “What’s the most interesting project you worked on last week?”
    • When doing the weekly one-on-ones, ask “What’s the most interesting thing you learned last week?”
    • When talking to entrepreneurs, ask “What’s your most interesting challenge right now?”

    The next time you use one of your go-to questions, add “most interesting” to it and see what happens.

    What else? What are some more thoughts on the “most interesting” variation to common questions?

  • Notes from the Atlassian S-1 IPO Filing

    Atlassian, makers of popular software engineering and management tools, just released their S-1 IPO filing. Almost 10 years ago I used their JIRA issue tracker software and have been a fan ever since. Atlassian is known within the tech entrepreneur community for hitting $100 million in sales with no sales people — pretty amazing. In addition, they raised a $60 million Series A in 2010, which is large by today’s standards, and was incredibly large back then.

    Here are a few notes from the Atlassian S-1 IPO filing:

    • To reach this expansive market, we distribute and sell our products online without traditional sales infrastructure where users can get started in minutes without the need for assistance. We focus on enabling a self-service, low-friction model that makes it easy for users to try, adopt and use our products. (pg. 2)
    • More than 5 million monthly active users of the products and more than 48,000 customers (pg. 2)
    • Revenues (pg. 2)
      • 2013 – $148.5 million
      • 2014 – $215.1 million
      • 2015 – $319.5 million
    • Net Income (profits! – pg. 2)
      • 2013 – $10.8 million
      • 2014 – $19.0 million
      • 2015 – $6.8 million
    • Free Cash Flow (pg. 2)
      • 2013 – $47.1 million
      • 2014 – $65.0 million
      • 2015 – $65.5 million
    • Core values (pg. 4)
      • Open Company
      • No Bullsh*t
      • Build with Heart and Balance
      • Don’t #@!% the Customer
      • Play, as a Team
      • Be the Change You Seek
    • In fiscal 2014 and 2015, our research and development expenses were 37% and 44% of our revenue, respectively. (pg. 14)
    • 1,259 employees as of June 30, 2015 (pg. 14)
    • We have in the past experienced breaches of our security measures and our products are at risk for future breaches as a result of third-party action, or employee, vendor or contractor error or malfeasance. (pg. 15)
    • We believe that a critical contributor to our success has been our corporate culture, which we believe fosters innovation, teamwork and an emphasis on customer-focused results. (pg. 22)
    • The dual class structure of our ordinary shares has the effect of concentrating voting control with certain shareholders, in particular, our co-chief executive officers and their affiliates, which will limit your ability to influence the outcome of important transactions, including a change in control. (pg. 29)
    • Great products x Low pricing x Automation = High volume (pg. 82)
    • Build great products -> Keep prices low -> Low prices necessitate volume -> Volume means we sell to everyone -> Selling to everyone means we sell online -> Selling online requires transparent pricing and easy trial -> Easy trial means we need to build great product. So… (pg. 82)
    • Web site visitors have the opportunity to try our products for free and we generate on average more than 6,500 such evaluations per typical business day (pg. 83)
    • Equity ownership positions (pg. 114):
      • Co-CEO #1 – 37.7%
      • Co-CEO #2 – 37.7%
      • Accel Partners – 12.7%

    As far as I can tell, Atlassian will be the first publicly traded software company with no sales team and no product price negotiations. Because the company is controlled by Co-CEOs with their special voting stock (and huge ownership positions!), they’ll be able to operate with a long-term view and focus on steady, profitable growth indefinitely. This is not your typical software company.

    What else? What are some more thoughts on the Atlassian S-1 IPO filing?

  • Working In the Business vs On the Business

    In the entrepreneurial circles, there’s a well known book called The E-Myth Revisited, by Michael Gerber, where he popularized the concept of working on the business as opposed to in the business. Generally, the idea is entrepreneurs often get caught up on the day-to-day running of the business and don’t spend enough time dreaming, planning big goals, and thinking about the future.

    Only, it doesn’t make sense to worry about working on the business if there isn’t much of a business to begin with. At the beginning, almost all time should be spent working in the business. Due to limited resources, domain expertise, and many other factors, the entrepreneur is usually the best person to be working in the business. Over time, this changes, and as the business grows and achieves some stability, the entrepreneur does need to consciously allocate more time to working on the business. Here are a few thoughts on working in the business vs on the business:

    • Paul Graham has a great essay titled Maker’s Schedule, Manager’s Schedule that highlights one of the challenges an entrepreneur goes through from being a doer to a manager (once in the manager state, it’s even more important to work on the business)
    • From a company size and scale perspective, when companies meet my simple definition of a successful business, entrepreneurs should be spending at least 10% of their time working on the business
    • Overall, the more time spent managing and leading other people, the more time that needs to be spent working on the business

    Entrepreneurs would do well to think about the concept of working on the business vs working in the business. Early on, most of the time is spent working in the business. Then, as the business grows, the entrepreneur needs to allocate more time to working on the business instead of in it.

    What else? What are some more thoughts on working in the business vs working on the business?

  • The 10X Rule

    Recently I started reading The 10X Rule by Grant Cardone based on a friend’s recommendation. Basically, the 10X rule is an idea that every project you do will take 10 times more time, energy, money, and effort than assumed, so set the much more difficult expectation, and if it happens to take less, then great. Too often, people set out to accomplish challenging goals (e.g. I want to build a successful business, I want to lose 20 pounds, etc.) and don’t set even remotely realistic expectations. However hard you think it is, set expectations for it to be 10 times harder and then you’ll be in the ballpark. Put another way, most people don’t reach their goals because they didn’t work hard enough at it.

    Here’s a list of things successful people do, according to the author:

    • Have a “can do” attitude
    • Believe that “I will figure it out”
    • Focus on opportunity
    • Love challenges
    • Seek to solve problems
    • Persist until successful
    • Take risks
    • Be unreasonable
    • Be dangerous
    • Create wealth
    • Readily take action
    • Always say “yes”
    • Habitually commit
    • Go all the way
    • Focus on “now”
    • Demonstrate courage
    • Embrace change
    • Determine and take the right approach
    • Break traditional ideas
    • Be goal oriented
    • Be on a mission
    • Have a high level of motivation
    • Be interested in results
    • Have big goals and dreams
    • Create your own reality
    • Commit first – figure out later
    • Be highly ethical
    • Be interested in the group
    • Be dedicated to continuous learning
    • Be uncomfortable
    • “Reach up” in relationships
    • Be disciplined, create successful habits

    After re-reading that list, I can’t but think that it does a great job summarizing successful entrepreneurs as well. If you’re looking for some good ideas with the feel of a motivational speaker, check out The 10X Rule by Grant Cardone.