David Cummings on Startups

Blog

  • Video of the Week: Eric Ries Discusses “The Lean Startup”

    Far and away the most common entrepreneur mistake is building a product in isolation without first validating the pain in the market and then building the product in conjunction with the ideal customers. For our video of the week, watch Eric Ries, author of The Lean Startup, discuss the book and a methodology for significantly increasing the chance of entrepreneurial success. Enjoy!

    From YouTube: Entrepreneur Eric Ries spoke in Toronto at the Rotman School of Management as part of his book tour for “The Lean Startup.”

  • 4 Thoughts on Venture Atlanta 2015

    I spent the last two days at Venture Atlanta in the most popular aquarium in the United States. Venture Atlanta continues to be one of the top venture events in the Southeast and this year was excellent. Here are four thoughts on Venture Atlanta 2015:

    • Quality of Early Stage Companies – This year’s early stage companies were much more investable this year in that most had six figures of revenue and operating businesses. A few fell into the “science experiment” bucket (they didn’t have any paying customers) but it was rare.
    • References to the Marketing Software Cluster – Quite a few presenting companies referenced local success stories like Silverpop, Vitrue, and Pardot. It’s clear that our local marketing software exits have spurred new investments in marketing startups and that we have a cluster’s critical mass.
    • Number of Attendees – The first day was standing room only for the presenting companies and attendance is at or near an all-time high. Investors, entrepreneurs, and service providers all turned out en masse for the event.
    • Presenting Companies that aren’t Raising Money – Several companies that presented clearly weren’t raising money. Now, this is a tough one. We want to showcase great multi-million dollar revenue tech companies in Atlanta, yet potential investors are here to find a new deals, not to see what’s interesting and not raising money. It makes sense to have them present if we don’t have another qualified company to present in that slot.

    The presenting companies were well coached and did a great job on stage. I’m looking forward to Venture Atlanta next year.

    What else? What are some more thoughts on Venture Atlanta 2015?

  • Angel Capital vs Venture Capital vs Private Equity

    Last week I was talking to an angel investor that had invested in a couple idea stage startups and he mentioned that he was also interested in small private equity deals. Curious, I probed deeper and asked what a small private equity deal looks like. He responded that it might be a startup with $500k in revenue. Hmm, I realized we were talking about different things. Here’s how I see it:

    Angel Capital

    • Idea stage through seed stage
    • $0 – $1 million in revenue
    • Not profitable
    • Minority stake
    • Insanely risky
    • No debt component

    Venture Capital

    • Early stage through growth stage
    • $1 million+ in revenue
    • Not profitable
    • Minority stake
    • Very risky
    • Moderate debt component

    Private Equity

    • Growth stage
    • $20 million++ in revenue
    • At least $5 million in profits
    • Majority stake
    • Moderately risky
    • Heavy debt component

    So, the gentleman I was talking to was really looking for angel deals where the company was in the seed stage instead of the idea stage. Angel capital, venture capital, and private equity are all very different and each serves its own purpose.

    What else? What are some other differences between angel capital, venture capital, and private equity?

  • Building a Simply Irresistible Organization

    Josh Bersin of Deloitte has an excellent presentation up titled Building the Irresistible Organization.

    http://www.slideshare.net/hrtecheurope/building-the-irresistible-organization-josh-bersin

    One of my personal interests is around creating an environment for great work, including the people, environment, and culture. Josh’s ideas are some of the best I’ve seen. Here’s his integrated approach:

    Meaningful Work

    • Autonomy
    • Selection to Fit
    • Small Teams
    • Time for Slack

    Great Management

    • Agile Goal Setting
    • Coaching & feedback
    • Leadership Development
    • Modernized Performance Mgt.

    Fantastic Environment

    • Flexible, humane work environment
    • Recognition rich culture
    • Open flexible work spaces
    • Inclusive, diverse culture

    Growth Opportunity

    • Facilitated talent mobility
    • Career growth in many paths
    • Self and formal development
    • High impact learning culture

    Trust in Leadership

    • Mission and purpose
    • Investment in people, trust
    • Transparency and communication
    • Inspiration

    Want to build a great company? Find product/market fit, a repeatable customer acquisition process, and build a simply irresistible organization.

    What else? What are some thoughts on a simple irresistible organization according to this integrated approach?

  • 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?

  • Every Spreadsheet Shared is Another SaaS App

    For software and SaaS entrepreneurs out there, Patrick McKenzie is a must-follow on Twitter. Recently, he tweeted out something that really stuck with me:

    Every spreadsheet shared in a business is an angel announcing another SaaS app still needs to be built.

    Frequently, potential entrepreneurs tell me they want to start a business but can’t come up with a good idea. Well, just look at all the spreadsheets shared in a business and start there when looking for ideas. Now, the inherent scale might not be there with some of them but that’s part of the evaluation process.

    Here are a few more thoughts on every spreadsheet shared is another SaaS app:

    • Spreadsheets have some structure but lack business rules, validation (usually), processes, etc.
    • Spreadsheets are easy to create and well understood whereas most SaaS apps require training and effort to understand
    • Think of the common apps you use on a regular basis and ask which functions you used to do in a spreadsheet (e.g. accounting, project management, customer relationship management, etc.)
    • Most SaaS entrepreneurs flop due to failing at customer acquisition, not due to failing to build a workable product

    The next time a spreadsheet’s shared with you, ask if there’s a SaaS app opportunity.

    What else? What are some more thoughts on the idea that every spreadsheet shared is another SaaS app?

  • 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?

  • Video of the Week: Zappos’ Hsieh on Building a Formidable Brand

    When thinking of startups and culture, the first company that comes to mind is always Zappos. In this week’s video, CEO Tony Hsieh talks about building a formidable brand and shares a number of interesting stories along the way. Enjoy!

    From YouTube: Zappos CEO Tony Hsieh offers a compelling account of his transformation from callow Harvard student entrepreneur through his years as a dot-com wunderkind to the creator of a formidable brand.

  • One Downside of Regional Office Recruitment

    As a community, we take great pride in recruiting regional offices for tech companies — startups and large firms alike. Benefits include high paying jobs, cachet from having name-brand employers in town, and general civic pride. Only, from an innovation perspective, there’s one real downside: regional offices don’t do the most important work.

    If you want to attract the absolute best people, you need the absolute most important work. And, in the tech world, the most important work almost always takes places at the headquarters (and for companies that were acquired, headquarters here means where ever the core product is developed). The best way to grow the base of the most important work is to develop the homegrown entrepreneurial success stories. In fact, this is also the best way possible to help startup communities.

    What else? What are your thoughts on the idea that the most important work is typically done at the corporate headquarters?

  • Notes from the Square S-1 IPO Filing

    Earlier today Square, a payment processing and financial technology company, released their S-1 IPO filing to the public. Square is especially unique in that it’s CEO is Jack Dorsey, who’s also the CEO of Twitter (imagine founding and running two billion dollar tech companies at the same time!).

    Here are a few notes from the Square S-1:

    • In the 12 months ended June 2015, over two million sellers accepted five or more payments using Square (pg. 2)
    • We define a quarterly cohort of sellers as the group of sellers that are approved to accept card payments with Square in a given quarter. On average, our payback period has been four to five quarters. (pg. 2)
    • Net revenue (pg. 3):
      1H 2015 $560.6 million
      2014 $850.2 million
    • Net revenue without transaction costs and the Starbucks account, which is going away in late 2016 (pg. 3):
      1H 2015 $198.8 million
      2014 $276.3 million
    • Losses (pg. 4)
      1H 2015 $77.6 million
      2014 $154.1 million
      2013 $104.5 million
    • Combining payments, point-of-sale systems, financial services, and marketing services (pg. 7) – Note: Square is really building a small business operating system to run all aspects of the business from payroll to email marketing — that’s a big idea.
    • From Jack: I believe so much in the potential of this company to drive positive impact in my lifetime that over the past two years I have given over 15 million shares, or 20% of my own equity, back to both Square and the Start Small Foundation, a new organization I created to meaningfully invest in the folks who inspire us: artists, musicians, and local businesses, with a special focus on underserved communities around the world. The shares being made available for the directed share program in this offering are being sold by the Start Small Foundation, giving Square customers the ability to buy equity to support the Foundation. I have also committed to give 40 million more of my shares, an additional 10% of the company, to invest in this cause. I’d rather have a smaller part of something big than a bigger part of something small. (pg. 24)
    • Accumulated deficit of $473.2 million (pg. 26)
    • For example, in the three months ended March 31, 2015, we recorded a loss of approximately $5.7 million related to fraud by a single seller using our payments services. (pg. 27)
    • Mr. Morley contends that he was an equal partner with Jack Dorsey and Jim McKelvey in the business enterprise that ultimately evolved into Square, and that Mr. Dorsey and Mr. McKelvey breached their alleged oral joint venture agreement with Mr. Morley by excluding him from ownership in Square. (pg. 39)
    • Founders equity ownership (pg. 176):
      • Jack Dorsey – 24.4%
      • James McKelvey – 9.4%
    • VCs equity ownership (pg. 176):
      • Khosla Ventures – 17.3%
      • Sequoia Capital – 5.4%
      • Kleiner Perkins – 3.0%

    Square is an impressive company that’s using payment processing — handling good old fashion credit cards — as the gateway to run many aspects of a regular small business. Look for Square to become more like Intuit (owner of QuickBooks) with a variety of services and less like a credit card processing company over time.

    What else? What are some other thoughts on Square’s S-1 IPO filing?