David Cummings on Startups

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  • Rigor and Zoompf Unite

    Yesterday Rigor announced their acquisition of Zoompf combining a leading web performance monitoring system with a great performance improvement system (disclosure: I’m an investor in Rigor). Now, Alan Patricof says “never trade your cat for somebody else’s dog” (source), but there are times where combining two complementary startups makes sense, and this is one of those times.

    Here’s the quick explanation of each company:

    • Rigor – Cloud-based software the runs real web browsers from a variety of geographic locations to ensure that critical paths work correctly in SaaS products, verifies buyers can complete the checkout process on ecommerce sites, and continuously tests the speed of media sites.
    • Zoompf – Cloud-based software that analyzes web performance and provides prescriptions and solutions to improve performance bottlenecks (e.g. ways to tune the server, optimized images, etc.)

    So, Rigor is constantly monitoring critical web apps (including mobile app end-points) and Zoompf takes performance issues and provides solutions to fix them — a great combination.

    Read more about the acquisition on the Rigor blog.

  • The Best Thing Possible to Help Startup Communities

    One of the most common questions I get on a weekly basis is “what do we need to do to help our local startup community?” People expect me to talk about more local funding options, more national press, and more local talent. While all of those things are great, the best answer is also the hardest answer: produce more huge success stories. Now, small success stories are fine but they don’t move the needle. What’s needed is huge success stories, the kind that changes the trajectory of the region.

    Here are a few benefits of big success stories:

    • More success stories — whether exits, IPOs, or jobs created — creates more attention and reasons for the media to cover the community.
    • More wealth creation provides capital to fund the next generation of entrepreneurs and enables investors in the region to make riskier bets.
    • More people starting companies because they’ve seen it work and much of the process has been demystified.

    The next time someone asks what’s the biggest thing the startup communities needs to get better, tell them the best thing possible is big success stories.

    What else? What are some more reasons why big success stories are so important for startup communities?

  • Recapitalize or New Entity After a Pivot

    Last week I talked to an entrepreneur that had recently gone through a pivot where they identified a new, better opportunity and had an early product in the market. Next, they mentioned they were raising money for the new product, but that it was under a new company. Interested, I asked what happened to their old company. Did they shut it down? What happened to the paying customers? Nothing. The old company was still in business, but the team was focused on the new business.

    Of course, this poses challenging questions:

    • Do you shut down the original business and tell investors their investment is worthless?
    • Do you recapitalize the original business to work on the new idea and dilute the existing investors (or create a situation where the founders have limited equity in the event of anti-dilution)?
    • Do you give the investors in the original business some equity in the new business or do nothing?
    • What obligations exist in the original business that aren’t being fulfilled if the entire team is working on a different business?

    While every situation is different, a pivot typically requires difficult decisions. Most often, a pivot results in a new direction for the same company, but sometimes a new entity makes more sense.

    What else? What are your thoughts on recapitalizing the original business or creating a new entity as part of a pivot?

  • Notes from the Netflix Culture Deck

    As mentioned in yesterday’s Video of Week: Reed Hastings on Netflix, Netflix published one of the most powerful culture manifestos ever seen in Netflix Culture: Freedom & Responsibility. With 124 slides, it’s comprehensive, but not overwhelming.

    Here are notes from the Netflix culture deck:

    • Seven aspects of the culture
      • Values are what we Value
      • High Performance
      • Freedom & Responsibility
      • Context, not Control
      • Highly Aligned, Loosely Coupled
      • Pay Top of Market
      • Promotions & Development
    • Values the following nine behaviors and skills
      • Judgement
      • Communication
      • Impact
      • Curiosity
      • Innovation
      • Courage
      • Passion
      • Honesty
      • Selflessness
    • Adequate performance gets a generous severance package (meaning, people that are OK get fired)
    • A team, not a family
    • The Rare Responsible Person
      • Self motivating
      • Self aware
      • Self disciplined
      • Self improving
      • Acts like a leader
      • Doesn’t wait to be told what to do
      • Picks up trash lying on the floor
    • Netflix Vacation Policy and Tracking – there is no policy or tracking
    • Netflix Policies for Expensing, Entertainment, Gifts & Travel: Act in Netflix’s best interest
    • Managers: When one of your talented people does something dumb, don’t blame them. Instead, ask yourself what context you failed to set.

    Anyone that cares about culture, or is working on establishing a strong culture in their startup, should study the Netflix culture deck.

    What else? What are some more takeaways from the Netflix culture deck?

  • Video of Week: Reed Hastings on Netflix

    Netflix, while often viewed as a media company, is one of the most iconic tech companies of our time. Ever since Netflix published their incredible Netflix Culture: Freedom and Responsibility deck in 2009, I’ve viewed them as a much more powerful force than people realize. Now, with 65 million subscribers (source), and a market cap of almost $50 billion (NASDAQ:NFLX), it’s one of the most successful companies in the world. The video of the week is Reed Hastings accepting an award for the 2014 Entrepreneurial Company of the Year. Enjoy!

    From YouTube: At the 37th annual ENCORE Award event on September 23, 2014, Stanford Graduate School of Business honored Netflix, and Netflix Founder and CEO Reed Hastings, MS ’88. Reed Hastings speaks on the history of the company, the challenges they faced, and how Netflix became the innovative leader it is today.

  • Impact Builders

    Continuing with yesterday’s post on Empire Builder or Lifestyle Builder, Alok offered up a third type as a variation of the Empire Builder: the Impact Builder. Here’s how Alok describes it:

    The Impact Builder wants to impact a specific issue or group and believes building a business (for profit or non profit) is the most sustainable way to drive that change. They’re not really in it for the ‘sport’ or goal of building a company but, instead, look at that process as a means to an end. Impact Builders want scale, profitability, etc. — primarily because it enables them to impact more people.

    Alok is absolutely right that Impact Builders are incredibly important and make a huge difference in our society. Many entrepreneurs are Impact Builders and use their gifts and talents to help other people. The next time you think of Empire Builders and Lifestyle Builders, think of Impact Builders as well.

    What else? What are some more thoughts on Impact Builders?

  • Empire Builder or Lifestyle Builder

    When meeting entrepreneurs, one of the mental questions I like to ask myself is whether or not this person is an empire builder or a lifestyle builder. An empire builder wants to build a massive company, or collection of companies, and yearns to play the great sport that people call business forever. A lifestyle builder wants freedom to be both financially independent and to do what they want with their time, but doesn’t aspire to having an empire. There’s no right or wrong approach, and people can switch between the two, though that’s usually rare.

    Here are a few questions to discern empire builder vs lifestyle builder:

    • When do you want to retire? What are you going to do during retirement?
    • If you won the lottery tomorrow, what would you do?
    • How big do you see your startup getting? Why?
    • What’s your desired exit (my favorite exit strategy)?

    Again, there’s no right answer. Only, there’s more insight into the entrepreneur and his or her desires. The next time you talk to an entrepreneur, see if they’re an empire builder or a lifestyle builder.

    What else? What are some more thoughts on this idea of empire builder vs lifestyle builder?

  • 6 Ways to Improve Executive Summaries After Reviewing 32

    Earlier today I read through 32 executive summaries of startups that are presenting at Venture Atlanta later this month. Most were good, a few were sub-par, and several were excellent. After reading the executive summaries, here are six things entrepreneurs should do to make them better:

    1. Minimize Jargon – Every industry has jargon and terminology that is cumbersome and alienating to outsiders. Figure out how to minimize the jargon and provide a clear message.
    2. Don’t Cram Too Much – Two pages is never enough to cover every important point. Regardless, don’t shrink the font and try to cram so much in that the most important points get lost in the verbiage.
    3. Be Visual – If there’s a visual element to your story — chart, diagram, etc. — incorporate it into the executive summary to break up the monotony of text. Customer logos are a great visual.
    4. Use Strong Words – Investors need to believe that the startup will be wildly successful. Words that are weak like “plans”, “hopes”, and “wants” should be left out.
    5. Reasonable Revenue Forecasts – Too many executive summaries showed sales of $20M+ only a few years after founding. While it’s technically possible, the reality is that revenue forecasts should be more reasonable and less inflated.
    6. Keep it Balanced – Spending one paragraph on the market and four paragraphs on the competition doesn’t make for a balanced executive summary. Find a rhythm and keep it throughout.

    Executive summaries are a key part of the startup world and should be crafted with care. Follow these six ideas and make them even stronger.

    What else? What are some more ways to make executive summaries better?

  • Limited By the Best You’ve Personally Seen

    One of the challenges of being an entrepreneur is that you’re expected to be functionally OK in a wide range of areas — sales, marketing, services, support, operations, engineering, etc. Only, entrepreneurs are typically great at one thing and not good at the other stuff, especially if it doesn’t interest them. Now, this gets even more difficult in that you’re often limited by the best person you’ve personally seen in a specific role.

    Seen a good sales leader in action but not a great one? How do you know? What does a great sales leader do that a good one doesn’t do? This is especially tough if you’re in a city or area without a strong startup ecosystem as it’s even harder to find a great person to learn from, even if they aren’t on your team. As much as we like to read blogs (including this one!), there’s a very real human element that comes from seeing greatness in action. One of the best resources to help is a strong mentor, advisor, or investor that’s worked with great people in the desired area. Leaning on someone who knows what greatness looks like is the next best thing to knowing it yourself.

    How do you meet more people? Put yourself out there. As Byron Wien says in his life lessons:

    Network intensely. Luck plays a big role in life and there is no better way to increase your luck than by knowing as many people as possible. Nurture your network by sending articles, books and emails to people to show you’re thinking about them. Write op-eds and thought pieces for major publications. Organize discussion groups to bring your thoughtful friends together.

    The more people you know, the more likely you are to encounter greatness or meet people that are one degree moved from greatness in the area you need the most. While it’s difficult to appreciate without experiencing it, once you’ve worked with a great person in one area, you’ll want a great person for every area.

    What else? What are some more thoughts on the idea that entrepreneurs are limited by the best they’ve personally seen?

  • 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?