David Cummings on Startups

Blog

  • The Power of Recurring Revenue

    Early in my entrepreneurial career I sat down with one of the most successful entrepreneurs in town and he said something I’ll never forget: figure out how to build a recurring revenue-based business as it’s the best model. Ever since then, I’ve kept that in mind and focused my efforts on Software-as-a-Service (SaaS) and other types of recurring revenue businesses.

    Here are a few benefits of recurring revenue:

    • Cash flow is predictable and timely
    • Critical metrics like cost of customer acquisition, lifetime value of the customer, and renewal rates are well understood
    • Every year starts with a base of recurring revenue making it much easier to grow indefinitely
    • Banks have credit lines specific to recurring revenue businesses that are much more favorable than standard business credit lines
    • Recurring revenue businesses are significantly more valuable than non-recurring revenue businesses, on average, when comparing ones with similar revenue amounts

    The next time you’re analyzing potential business models, consider the power of recurring revenue. While recurring revenue is harder to get started, it’s an amazing business model once running.

    What else? What are some more thoughts on the power of recurring revenue?

  • Making Work Great

    I’ve always been a fan of Dan Pink and his book Drive where he talks about the importance of autonomy, mastery, and purpose in work. This weekend in the NY Times, there was a piece titled Rethinking Work by Barry Schwartz where the author espouses an extended set of beliefs that are similar to Dan Pink’s but broadened by adding a few more categories.

    Here’s a choice piece from the article:

    We want work that is challenging and engaging, that enables us to exercise some discretion and control over what we do, and that provides us opportunities to learn and grow. We want to work with colleagues we respect and with supervisors who respect us. Most of all, we want work that is meaningful — that makes a difference to other people and thus ennobles us in at least some small way.

    So, people want work that is challenging, engaging, some level of autonomy, opportunities to learn and grow, co-workers and bosses that care, and work that matters. Much like autonomy, mastery, and purpose, this expands the concept with challenging, engaging, and being surrounded by people who care. In the end, it’s about making work great, and when it meets these criteria, it’s an amazing thing.

    What else? What are some thoughts on making work great?

  • Entrepreneurs Need a Strong Locus of Control

    Continuing with the idea that entrepreneurs need a killer instinct to succeed, there’s also another critical element: a strong locus of control. From Wikipedia:

    In personality psychology, locus of control refers to the extent to which individuals believe they can control events affecting them.

    How many times have we heard excuses as to why an entrepreneur didn’t succeed? Yes, sometimes the market timing isn’t right or the technology isn’t feasible, but when that happens, the best entrepreneurs pivot into something new and keep at it until they succeed.

    Some of the more common gripes from entrepreneurs include “we couldn’t raise any money because local investors didn’t understand our idea” or “we couldn’t recruit any team members because we couldn’t pay market rate salaries.” Do those comments sound like they’re from someone with a strong locus of control? While they might be serious challenges, entrepreneurs with a strong locus of control figure out solutions.

    The next time you’re talking to an entrepreneur, figure out if they believe they can control events affecting them or if they feel that they’re at the mercy of whatever happens. Entrepreneurs need a strong locus of control.

    What else? What are some more thoughts on the idea that entrepreneurs need a strong locus of control?

  • Video of the Week: TED Conference Richard Branson

    One of the world’s most famous, and entertaining entrepreneurs, is Sir Richard Branson. After reading a number of his books including Losing My Virginity and Business Stripped Bare, I’ve become a big fan. For this week’s video, Richard Branson is interviewed by Chris Anderson as part of the TED conference. Enjoy!

     

  • Entrepreneurs with the Killer Instinct

    Whenever I talk to successful entrepreneurs, I like to hear the origination story. Why did you start the company? What lessons have you learned along the way? Any near death experiences or crazy things you had to do to make it succeed? That last question is especially interesting in that it almost always reveals incredibly difficult times entrepreneurs have to go through before achieving success. Part of it is grinding it out, part is making personal sacrifices, and part is doing whatever it takes to make things work.

    I like to call these collective traits the entrepreneurial killer instinct. Here are a few questions to potentially discern the killer instinct:

    • How many companies have you started that didn’t work out? What happened to them?
    • What personal sacrifices did you make to help the business succeed?
    • What are you willing to do to make this new startup successful?
    • Why are you the one that’s going to win?

    Building a successful company is incredibly hard. After talking to a number of entrepreneurs that have succeeded, the most common element among them is this killer instinct.

    What else? What are some more thoughts on this idea that successful entrepreneurs have a killer instinct?

  • People, Process, and Technology for New Products

    Entrepreneurs love building products. An idea comes to mind to solve a big problem and it’s off to the races to get it developed and in the hands of potential customers. Only, the hard reality sets in once prospects see it. There are actually three challenges that must be overcome: people, process, and technology.

    • People – As much as we like to think companies are rational actors doing their best to maximize profits, the reality is that humans make the decisions and aren’t nearly as rational as we like to believe. With people, there’s a tremendous amount of subjectivity and it’s difficult to get them to act.
    • Process – Even if the people are bought in, there’s almost always a process change that’s required for one or more employees in the company once they’ve bought the product. People are creatures of habit and changing the way they do things is hard. Many entrepreneurs underestimate the importance of change management and getting a new process implemented.
    • Technology – Building a simple, standalone application is easier than it’s ever been. Technology challenges really start to emerge when having to integrate with a number of disparate systems, supporting a variety of mobile devices (especially Android), and providing a great experience for all end-user skill levels. The technology is never done.

    The next time an entrepreneur makes it sound like a new venture is going to be easy, ask the hard questions, especially around people, process, and technology.

    What else? What are some more thoughts on people, process, and technology for new products?

  • Comparing SaaS Startup Funding to Revenue

    After last week’s post on 2015 Inc. 500 Software Companies, I wanted to dig in and see how funding for Software-as-a-Service (SaaS) startups compared to revenues. Here’s the data for the five fastest growing SaaS companies on the 2015 Inc. 500 list:

    With this tiny sample size, there doesn’t appear to be much correlation between revenue for small, fast-growing SaaS startups and funding. What is clear is that it requires a tremendous amount of capital to grow quickly, since scaling a SaaS startup is expensive.

    What else? What are some more thoughts on startup funding relative to revenue?

  • 16 Startup Metrics for Entrepreneurs to Master

    A16Z has a great post up titled 16 Startup Metrics that outlines many of key metrics investors look for and entrepreneurs often get incorrect. I’m guilty of this: when I went into one of my first investor pitches 10 years ago, I talked about revenue when it really was bookings, and the VC politely corrected me.

    Here are the 16 metrics to test your knowledge before reading 16 Startup Metrics:

    1. Bookings vs. revenue
    2. Recurring revenue vs. total revenue
    3. Gross profit
    4. Total contract value vs. annual contract value
    5. Lifetime value
    6. Gross merchandise value vs. revenue
    7. Unearned or deferred revenue … and billings
    8. Customer acquisition cost … blended vs. paid, organic vs. inorganic
    9. Active users
    10. Month-on-month growth
    11. Churn
    12. Burn rate
    13. Downloads
    14. Cumulative charts (vs. growth metrics)
    15. Chart tricks
    16. Order of operations

    Every entrepreneur should read 16 Startup Metrics and understand the metrics applicable to their startup.

    What else? What are some more startup metrics that are important?

  • Revenue-Based Financing for Startups

    After last week’s post on Early SaaS Loans Before Bank Credit Lines, a couple people mentioned Lighter Capital as an alternative lender that does revenue-based financing. The idea is that instead of the normal venture debt model, which is interest plus warrants in the business, revenue-based financing takes a percentage of revenue over a certain period of time, typically five years.

    With a starting point of $1 million in revenue, an annual growth rate of 30% per year, and a fee of 10% of revenue for a $500,000 loan, here’s how it might look:

    • Year 1 – $1,300,000 in revenue, fee of $150,000
    • Year 2 – $1,690,000 in revenue, fee of $169,000
    • Year 3 – $2,197,000 in revenue, fee of $219,700
    • Year 4 – $2,856,000 in revenue, fee of $285,600
    • Year 5 – $3,713,000 in revenue, fee of $371,300
    • Total fees (which includes repayment): $1,195,600

    Simply doubling the initial money over five years results in a 15% internal rate of return, so borrowing $500k and repaying $1.2 million is just a bit higher when thinking of interest rates for a normal loan. I don’t know if this is exactly how Lighter Capital works, but I believe it’s directionally correct.

    The next time an entrepreneur asks about alternative lending options, mention revenue-based financing as an option.

    What else? What are some more thoughts on revenue-based financing for startups?

  • Central Non-Profit for Entrepreneurs

    Back in college I’d routinely jump in my old Jeep Wrangler and make the 10 mile drive down the Durham Freeway to RTP for events and programs at the Council for Entrepreneurial Development (CED). CED bills itself as “the network that helps Triangle entrepreneurs build successful companies” and has 700+ member companies with 4,000 members. In Atlanta, we have a number of strong entrepreneurial non-profits:

    Only, we don’t have a central entrepreneur organization that encompasses both tech and non-tech startups. As expected, there are a tremendous number of non-tech entrepreneurs in town. EO has a strong Atlanta chapter with over 100 members, but that’s limited to companies with at least $1 million in revenue. Where do non-tech entrepreneurs go?

    Last week I had the chance to learn about Endeavor, which is a non-profit for helping high impact entrepreneurs (defined as ones that have the potential to scale and create a large number of jobs). Endeavor has chapters all over the world and focuses on mentorship, connections, talent, education, and capital. As different from most non-profits for entrepreneurs which are broad, Endeavor is extremely hands-on with a limited number of entrepreneurs in each city (e.g. 10).

    Strong entrepreneur organizations are important for great startup ecosystems.

    What else? For Atlantans, does Atlanta need a central non-profit organization for entrepreneurs? For non-Atlantans, is there a central non-profit organization in your city?