David Cummings on Startups

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  • 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.

  • Video of the Week: Salman Khan, Founder of the Khan Academy

    Khan Academy is one of those great “accidental” entrepreneur stories: smart guys makes educational videos to help his cousins, other people see the videos and clamor for more content, richest guy in the world likes it and invests, and millions of people benefit from awesome, free educational content. Hear this great story, right from the founder Salman Khan in this video of the week. Enjoy!

     

  • The Huddle Checklist

    Continuing with yesterday’s post on The Great Game of Business for Startups, the author has an excellent Huddle Checklist on his site. While a few of the items are dependent on the type of culture and work environment (e.g. a focus on leaving fired-up isn’t common), most are broadly applicable.

    Here’s the Huddle Checklist:

    • Meetings are frequent and on time.
    • Communication revolves around The Critical Number, the numbers that drive the business, and the stories behind the numbers.
    • Communication is fast-paced and to the point.
    • Communication is forward-focused — highlighting risks and opportunities.
    • People arrive prepared.
    • People openly and candidly share both wins and losses.
    • People freely commit to helping each other succeed.
    • Learning is emphasized.
    • Questions are encouraged, complaints are discourages, and assumptions are challenged.
    • Contributions and successes are recognized and celebrated.
    • There is clear accountability and follow-through.
    • People leave with a clear line-of-sight between what they do every day and the financial outcomes of the business.
    • Please leave focused on, informed about, and feeling included in the business.
    • People leave committed to an action item that will improve the score.
    • Please leave fired-up and energized.

    Every entrepreneur would do well to ensure that most of these checklist items take place during internal meetings.

    What else? What are some more thoughts on the Huddle Checklist?

  • The Great Game of Business for Startups

    Earlier today an entrepreneur reminded me of an excellent business book that doesn’t get mentioned often enough: The Great Game of Business – Unlocking the Power and Profitability of Open-Book Management by Jack Stack. The author shares his stories of growing a successful business and emphasizes how educating team members on all aspects of the business (not just their area of focus), combined with transparency and open book management, results in a more aligned and committed team. Of course this makes sense, yet too many CEOs think it’s beneath them to spend so much time on these “softer” aspects of the business.

    At Pardot, we worked hard to educate our team and provide an open book environment. Here are some of the things we did:

    • Paid for financial literacy programs for our employees
    • Mounted an LED Scoreboard on the wall for everyone to see our current revenue and other critical metrics (even guests in our lobby could see all our data)
    • Rolled out our updated Simplified One Page Strategic Plan every quarter so that goals and priority projects were clear and documented
    • Constantly refined our meeting rhythm and worked hard to over communicate

    While open book management makes many leaders uncomfortable, we found tremendous success empowering our employees with as much information and communication as possible. For entrepreneurs interested in learning more, check out the The Great Game of Business.

    What else? What are some more thoughts on extensive transparency and employee education in a startup?

  • Defined Exit Strategy or Built to Last

    Whenever I’m asked about the exit strategy for our company, my response is always “our goal is to build the best possible company, and if an offer comes along that we can’t refuse, we’ll take a look.” The general idea is that it’s best to build a sustainable, high-growth company that makes great, long-term decisions. Pushback I’ve gotten over the years from this strategy is often along the lines of “that’s great, but how do your employees that have equity get to cash out if you have no plans to sell the business.” My response is that our employees are compensated at market-rate salaries and the equity component should be seen as upside that might or might not happen.

    There’s another group of entrepreneurs that have an exit strategy — e.g. when we get an offer for $25 million, we’re selling — and, of course, there’s no right or wrong. With a defined exit strategy, or at least a target exit range, it’s important to get all the founders and investors on the same page. If an offer does come along to buy the business, and the leaders aren’t aligned, it can lead to serious internal challenges (things get emotional quickly).

    Entrepreneurs would do well to think about their personal approach to the exit strategy question, and if they have a target acquisition price in mind, share it with their inner circle.

    What else? What are some more thoughts on a defined exit strategy vs the built to last answer?

  • Founder Value in a $25 Million Exit

    Recently I was talking with an entrepreneur that has a small, fast-growing startup. Things are going well and he’s debating raising a Series A. There’s a good bit of interest from venture investors but there’s one hold up: he doesn’t want to take the opportunity of a $25 million (or smaller) exit off the table. For most venture funds, if the desired exit is less than a multiple of the fund amount, it isn’t worth it (e.g. a $100 million fund needs much bigger exits to move the needle).

    Here’s what a $25 million exit might look like:

    • Entrepreneurs – 70%
      • $17.5 million
      • 3 co-founders
        • $5.775 million each
    • Employees – 15%
      • $3.75 million
    • Investors – 15%
      • $3.75 million

    For the founders, potentially having the opportunity to put away $4 million after taxes (if everything goes extremely well) would be life-changing money. Based on the entrepreneur’s goals, my advice was to figure out how to grow the business as fast as possible while minimizing dilution and keeping the option open for an exit that’s still meaningful to them (this might mean raising more angel money or trying to find a debt option). Not all entrepreneurs are trying to build billion dollar companies and it’s important to figure that out before going the venture capital route.

    What else? What are some more thoughts on founder value in a $25 million exit?

  • Entrepreneurs as Risk Loving or Risk Averse

    Recently I was talking with an entrepreneurially twentysomething. He really wants to be an entrepreneur but a) doesn’t have enough money saved and b) doesn’t have a co-founder. At this point, it’s important to tease out if he wants to be an entrepreneur because startups are cool right now or if he really wants to be an entrepreneur because it’s who he is regardless of the timing.

    Per the two things holding him back, he could easily be an entrepreneur by day and vallet by night to solve the money issue. As for the lack of a co-founder, it’s 100x easier to recruit a co-founder once the business is actually started and a prototype is in place (many people have a hard time visualizing things and are more easily convinced once they can see something). So, why isn’t he an entrepreneur now? I believe it has to do with being risk averse.

    My favorite definition of risk comes from a recent Tim Ferriss post titled How to Say “No” When It Matters Most:

    Risk – The likelihood of an irreversible negative outcome.

    When people tell me I must love risk because I’m an entrepreneur I always respond that it feels less risky to me to be an entrepreneur. Why? I have a strong locus of control and want to own my destiny. As an entrepreneur, I’m ultimately responsible if we win or lose. That’s how I like it.

    The next time someone says “that’s so risky”, ask them if there’s an irreversible component to the potential negative outcome. If the outcome is reversible, and has a reasonable chance of success, it’s likely less risky than perceived. If fact, most decisions and the resulting outcomes are reversible.

    What else? What are some more thoughts on entrepreneurs and risk?

  • More SMART Goals

    Whenever I’m talking to entrepreneurs for the first-time I like to figure out their why (see Start With Why). Why do they do this? Why be an entrepreneur? After understanding the why, I like to talk through the one page strategic plan that was required before meeting. Only, 9 out of 10 times the annual and quarterly goals are too generic. Goals like “raise money” or “sign new customers” are vague. I’m a fan of SMART goals.

    Here’s Wikipedia’s definition of SMART goals from the origination of the acronym in 1981:

    • Specific – target a specific area for improvement.
    • Measurable – quantify or at least suggest an indicator of progress.
    • Assignable – specify who will do it.
    • Realistic – state what results can realistically be achieved, given available resources.
    • Time-related – specify when the result(s) can be achieved.

    Another variation has “Achievable” for the “A” and “Relevant” for the “R” in the acronym. Regardless, SMART goals are the way to go and plain goals should be avoided.

    What else? What are some more thoughts on SMART goals?