David Cummings on Startups

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  • A Series A VC Roughly Owns 1% Individually

    Recently an entrepreneur asked me if VCs get individual compensation beyond the fees and profits from their partnership for serving on the board of a startup. Normally, there’s no individual compensation (this changes if the company goes public and the VC stays on the board), but with some basic math you can come up with a rough approximation of their individual ownership position.

    Let’s work through a simple example:

    • Assume the typical venture firm targets a 20% ownership position as the lead investor in the Series A
    • Assume the typical partnership has four general partners (varies based on size and stage of firm)
    • Assume the venture firm has the standard compensation of 2% management fees and 20% carry (profits)
    • Take the 20% ownership position and multiple by the 20% of profits resulting in an effective partnership ownership position of 4% of the company (assumes a big exit where the initial investment is returned many times over)
    • With four partners and the firm owning 4% of the exit, each general partner effectively owns roughly 1% of the startup individually (this doesn’t take into account junior partners, venture partners, advisors, etc. that have different stakes in the partnership)

    So, while VCs don’t get compensated directly on an individual basis in a successful investment, they often have economic interests equivalent to roughly 1% of the startup’s value.

    What else? What are some other thoughts that a Series A VC roughly owns 1% individually?

  • 3 Reasons Local Investors Don’t Collaborate More

    Last week an angel investor asked me why local investors don’t collaborate more. We chatted about it for a few minutes and I didn’t have a good answer for him. After thinking about it for a week, I realized there are three reasons why local investors do their own thing:

    1. Unique Focus – With so few investors, there isn’t much overlap between interests. Focus areas like sales and marketing technologies, cybersecurity, media, and fin tech don’t usually intersect.
    2. Investing as Hobby – Most of the local investors are investing their own money as a hobby, and don’t treat it as a profession. Also, since it’s a hobby, the pace of activity ebbs and flows depending on other life activities.
    3. Lack of Collective Goals – Without common goals, like growing the entrepreneurial community, there’s little impetus to collaborate.

    Local investors don’t collaborate much, yet there’s a desire to build a stronger startup community, and a belief that more collaboration will help. Hopefully, with time, we’ll see more collaboration.

    What else? What are some more reasons local investors don’t collaborate more?

  • Video of the Week: Kevin Plank on Becoming a Successful Entrepreneur

    Kevin Plank, the founder and CEO of Under Armour, tells an incredible story of building one of the most iconic athletic brands of our day. Here’s a great line he repeats several times in this week’s video:

    We were always smart enough to be naive enough to not know what we can accomplish.

    Enjoy!

    From YouTube: Kevin Plank, founder and CEO of Under Armour, talks about the keys to becoming a successful entrepreneur. Plank spoke at the 2010 Cupid’s Cup for the Robert H. Smith School of Business at the University of Maryland.

  • Financial Literacy in Startups

    At Pardot we noticed that many of our team members were asking questions about whether or not to put money in the 401k plan (which even had a company match). Then, as other financial questions came up, we realized that there was a real financial literacy challenge in the company, and, no, not just with the millennials.

    To help, we hired a financial literacy coach that met individually with everyone interested and taught a six week course exclusively for employees during work hours (every Friday at 1pm). In fact, the first program was so successful that we did it again a second time. Pardot paid directly for the program and the financial literacy teacher didn’t sell any products or services.

    Here are a few thoughts on financial literacy in startups:

    • While many people focus on big exits and love to talk about the future value of equity, the reality is that the financial basics aren’t well understood
    • Financial literacy can help people for the rest of their life by helping them make better financial decisions
    • More investment in people, especially to help them at a personal level, endears them to the company
    • Company benefits come in all forms and aren’t just related to good insurance and free food

    Financial literacy is a real challenge and startups have the opportunity to help educate their employees. For many people, it’ll make a profound difference.

    What else? What are some more thoughts on financial literacy in a startup?

  • Inbox Zero and One Page Strategic Plan

    Recently I was talking to an entrepreneur and the topic of what to do next after achieving inbox zero (see Manage Email Like a Boss) came up. His answer was perfect: go straight to the one page strategic plan. For many entrepreneurs, the one pager acts as the highest-level gameplan for the business. If it’s truly the gameplan, it needs to be visited frequently. Only, too many entrepreneurs put a one pager together and then treat it like a static document to be updated once every 90 days. The best entrepreneurs treat it like a living document and use it to align the leadership team on a frequent basis.

    Here are a few thoughts on inbox zero and the one page strategic plan:

    • Inbox zero comes from reading emails once and processing them (often deleting them or putting them into folders to address later based on priorities), but it also acts as a to do list for many, and once the current to do list is done, the next logical place to go is the one pager
    • Quarterly goals and annual goals, while usually fixed for the designated time period, should have a quarter-to-date or year-to-date value so it’s easy to see where things currently stand, as opposed to only having the desired outcome
    • Priority projects should be the most frequently reviewed area of the one pager as it has the most important things to accomplish in the next 90 days (or sooner depending on where things are in the quarter), and, like the inbox acting as a pseudo to do list, the priority projects act as a high-level to do list for the company

    The next time you hit inbox zero and consider what to do next, go straight to the one page strategic plan.

    What else? What are some more thoughts on inbox zero and the one page strategic plan?

  • Sales and Marketing Drives Successful SaaS Startups

    One of the ongoing debates is the balance between the sales and marketing teams and the engineering team. Often, the startup is a reflection of the CEO’s passion. If the CEO is product-oriented, the startup will be more product-oriented. If the CEO is sales-oriented, the startup will be more sales-oriented. Only, for the most successful B2B SaaS companies, there’s a repeated trend: sales and marketing drives the business.

    Here are a few thoughts on sales and marketing driving the business:

    • Recognize the constant tension between the teams, especially the desire for engineering to produce new functionality faster
    • Know that sales and marketing can get too far out in front of engineering, and figure out how to slow one down or speed one up
    • One common strategy is presenting a demo of new product functionality at an annual user conference, knowing full well that it’s vaporware and might not be generally available for many months, if ever (this happens all the time)
    • Another common strategy is taking prospects through a multi-year roadmap (e.g. a visioning session) only to not be able to guarantee that the proposed functionality will actually be available at designed dates, if ever
    • Ensure that sales and marketing paints a picture of the future but doesn’t promise things that can’t be done (harder than it sounds)

    Sales and marketing is always ahead of the engineering team at the most successful startups. Finding a balance and not being reckless is a real challenge for ambitious CEOs. Sales and marketing should drive the business, while maintaining a healthy tension with engineering.

    What else? What are some more thoughts on sales and marketing driving the business?

  • The Institutional Investor Challenge for Local Venture Funds

    Continuing with last week’s post on The Conundrum for Regional Venture Investors, there’s another element of the message that needs further clarification. First, there’s the concept of More Venture Capital vs More Local Venture Capital where many business leaders express the desire for more venture capital in the region and they’re really saying that they want more locally-based venture firms in the region. Second, and the topic for today’s post, is that to have large local venture funds, institutional investors like pension funds, university endowments, and foundations are required. Unfortunately, tapping into local high net worth individuals will only support small-to-medium-sized funds.

    Here’s the ideal lifecycle to raise a large venture fund:

    • Raise a $15M fund from local high net worth individuals and family offices
    • Deploy the capital over 3-4 years and show great paper returns (30%+ IRR)
    • Raise a $75M fund from local investors and some institutional investors and repeat the deployment timeframe and success
    • Raise a $150M fund from local investors and a number of institutional investors and repeat the deployment timeframe and success
    • Raise a $300M fund from mostly institutional investors and build an enduring top-tier partnership

    Starting from scratch, and executing perfectly, this is a 9-12 year journey to have the necessary success to then raise a large venture fund from institutional investors. Without a substantial track record, most institutional investors aren’t interested. Communities that want larger, local pools of venture capital have to understand how institutional investors play a major role. 

    What else? What are some more thoughts on the institutional investor challenge for venture funds?

  • Traction: Get a Grip on Your Business

    In the entrepreneurial world there are three popular books that outline a full suite of strategies and techniques to efficiently run a company. Two of them have been discussed here previously: Mastering the Rockefeller Habits / Scaling Up and The Advantage (including the Six Critical Questions). Another, popular how-to startup book is Traction: Get a Grip on Your Business.

    Here are the six key components from Traction that make up the Entrepreneurial Operating System:

    • Vision – Do they see what you are saying?
      • Answering the eight questions
      • Shared by all
    • People – Surround yourself with good people
      • Right people
      • Right seats
    • Data – Safety in numbers
      • Scorecard
      • Measurables
    • Issues – Decide!
      • The issues list
      • The issues solving track
    • Process – Finding your way
      • Documenting your core processes
      • Followed by all
    • Traction – From luftmensch to action!
      • Rocks
      • Meeting pulse

    Entrepreneurs looking to run a more productive startup would do well to read the book Traction: Get a Grip on Your Business and implement the ideas.

    What else? What are some more thoughts on the book Traction?

  • The Conundrum for Regional Venture Investors

    Yesterday I was talking with a local angel investor that had a nice exit this year. One of the comments that came out of the discussion is that the vast majority of capital raised by the successful startup came from the usual money centers (CA, NYC, and Boston). I then pressed why the startup went out of the region to raise capital and the expected response came back: the valuation and terms were much better than local options. VCs outside the Valley play a different game.

    Here’s the conundrum for regional venture investors:

    • By focusing on deals where they “can’t lose money” and requiring terms like participating preferred, the only entrepreneurs that are going to sign on are the ones that can’t raise money on better terms from the money centers
    • Entrepreneurs that can’t raise money from the money centers aren’t as likely to have big exits (see Build a $300 Million Pie So Everyone Can Get a Big Helping) and so the regional funds aren’t going to have outsized returns
    • Without outsized returns, regional venture investors will only be able to raise modestly larger funds (assuming still top quartile returns but not top decile), and if they have a fund that does poorly, it’ll either kill the partnership or significantly reduce the size of the next fund

    Regional venture investors often follow a playbook that’s geared towards ensuring a return, which limits potentially outsized returns. Only with outsized returns will a regional venture partnership be able to achieve the scale and size found in California and the Northeast.

    What else? What are some more thoughts on the conundrum for regional venture investors?

  • Video of the Week: Howard Schultz Talks Business

    Several years ago I read the book Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time and really enjoyed the stories and background. Regardless of whether or not you personally like Starbucks, any entrepreneur that builds a socially-conscious company with 200,000 employees and a value of $86 billion is incredible. The video of the week is Howard Schultz: Starbucks CEO Talks Business. Enjoy!