David Cummings on Startups

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  • Raising Angel Money vs. Venture Capital

    In any given week I’ll talk to 5 – 10 entrepreneurs, on average. Many of the hey-let’s-get-together meetings are for advice on fundraising, hiring, and sales/marketing. Lately, it feels like the fundraising topic has been especially popular (a sign of the times?). Whereas a few years ago, most entrepreneurs would want to talk about raising venture capital, now more are focused on raising angel rounds, or the equivalent of a Series A round, but not from institutional investors. Naturally, I like to dig into some of the differences when thinking through the alternative financing approaches:

    • VCs will require a larger target ownership percentage (e.g. 20-33%) of the company whereas angels are often fine with 1-5% (having a large number of angels could result in the same ownership percentage as a VC)
    • VCs will require a board seat (most often) and get heavily involved in the company whereas angels are often more hands-off and passive
    • VCs will care more about the company and fight harder to see it succeed (assuming they do their job)
    • VCs will work towards and require an exit, often within 5-7 years, whereas angels will expect a return, but are usually more flexible on timing and style (e.g. dividends, exit, etc.)
    • Raising VC money makes it more likely that tech banks will provide a large line of credit whereas raising from angels often won’t help with a bank line (bank lines are still available once the startup has a few million in annual recurring revenue)
    • Raising VC money is significantly more difficult than raising angel money

    The next time an entrepreneur says they want to raise money, ask about angel money vs. venture capital and share some of the pros and cons of each.

    What else? What are some more thoughts on raising angel money vs. venture capital?

  • 2015 Inc. 500 Software Companies

    In addition to the Atlanta companies on the 2015 Inc. 500 list, I’m also very interested in the software category. As expected, it’s dominated by B2B Software-as-a-Service products across a number of different verticals and industries. Here’s the list:

    With 45 companies in the software category, it’s one of the larger areas of the Inc. 500. Surprisingly, over 20% of these software companies are marketing applications. I predict we’ll see continued growth in the marketing technology sector. Congratulations to all the Inc. 500 winners.

    What else? What are some other thoughts on the software companies in the 2015 Inc. 500?

  • 2015 Atlanta Companies on the Inc. 500

    Every year I love digging into the Inc. 500, especially Software-as-a-Service companies and general Atlanta-area companies. The Inc. 500 is one of the few places where you can see real revenue numbers for private, high-growth companies. Often, revenue can be roughly computed based on employee count, but for venture-backed companies, this becomes much more difficult. With Inc. 500 data, it’s interesting to get a feel for the scale and growth rate for a number of businesses.

    Here are the 2015 Atlanta companies on the Inc. 500:

    It’s great see five strong tech product companies on the list. Congratulations to all the winners.

  • Atlanta Startup Community Panel Takeaways

    Earlier today I had the opportunity to moderate a panel for our downtown Atlanta Rotary club (see Panel Moderator Preparation). Collectively, the three entrepreneurs have raised $250 million for their current ventures, have hundreds of employees, and represent three major areas for Atlanta: FinTech, Health IT, and Mobility. Here are a few takeaways from the panel:

    • Capital is mobile and entrepreneurs with traction can raise money from anywhere
    • Almost all the capital raised by the entrepreneurs was from outside Atlanta
    • Great front-end and back-end software engineers are available in Atlanta, but more specialized skill sets like machine learning are much harder to find
    • Align with investors on the targeted outcome before raising money (e.g. a single/double vs going for a home run)
    • Company-wide communication and alignment is more important than expected, and becomes increasingly difficult as the company grows
    • Culture is one of the most important components of a company and is driven top-down (conversely, the stronger the culture, the more painful it is to merge two companies together)
    • Developments like Ponce City Market and the Atlanta Tech Village help recruit great talent

    A big thanks to the three panelists and Atlanta Rotary for having us — it was a great event.

    What else? What are some other takeaways from the Atlanta startup community panel today?

  • Panel Moderator Preparation

    Tomorrow I have the opportunity to moderate a panel on the Atlanta startup ecosystem with three great entrepreneurs including Lynn Laube, Greg Foster, and Tyler Droll at the Rotary Club of Atlanta. As moderator, I like to go through a few simple preparation steps:

    • Develop 5 standard questions
    • Develop 2 panelist-specific questions (e.g. a question directed at a specific panelist)
    • Develop 3 recent news/events questions (the goal with the questions isn’t to get through them all but rather to have different options available based on how the conversation flows)
    • Confirm panel attendance 48 hours in advance
    • Meet 30 minutes before the panel to go over any last minute items, ensure mics work, etc.

    As moderator, I want to make sure the panel conversation is lively, interesting and worthwhile — I’ve been to too many panels that weren’t engaging. Assuming the panelists are strong, this type of panel moderator preparation helps ensure a quality event.

    What else? What are some more panel moderator preparation ideas?

  • Early SaaS Loans Before Bank Credit Lines

    Over this past year I’ve talked to several Software-as-a-Service (SaaS) startups that have over $1M in annual recurring revenue (ARR), raised an angel round, but aren’t convinced they want to go the venture capital route. On the financing side, once SaaS startups have about $3M in ARR, banks like Silicon Valley Bank and Square 1 Bank have great credit lines based on recurring revenue (e.g. 3x monthly recurring revenue times (MRR) annual renewal rate), but there are few options for companies in the $1M – $3M ARR range.

    There exists a gap in the market for high interest loans to SaaS companies to help them grow faster without raising outside capital. Here’s how it might work:

    • $750,000 fixed-rate two-year interest-only loan at 20% annual interest rate for a total of $1.08M payable at the end of two years
    • $1M+ ARR startup hits $4M ARR at the end of year two, thereby qualifying for a $1M bank line of credit (assume 3x MRR), and then pays back the high interest loan
    • High interest loan provider makes a good return, the tech-focused bank gets a new customer, and the entrepreneurs create more wealth without giving up more equity

    With this model, that startup has the opportunity to grow faster than it would otherwise and avoids more dilution. The high interest loan provider would need to be very comfortable with the SaaS model and a plan would need to be in place in the event the loan couldn’t be paid back after 24 months.

    Look for more models like this to emerge that provide funding for SaaS startups that have the start of a great business but don’t have the scale to qualify for a bank line of credit.

    What else? What are some more thoughts on early SaaS loans before bank credit lines?

  • Video of the Week: Marc Andreessen on Big Breakthrough Ideas and Courageous Entrepreneurs

    Marc Andreessen, besides having one of the best Twitter streams @pmarca, and an incredible blog, has a stellar track record as both an entrepreneur and investor. In this video of the week from the Stanford Graduate School of Business, Marc covers a number of excellent topics and provides a genuinely optimistic view of the continued disruption by technology.

    From YouTube: Marc Andreessen, Co-Founder & Partner at Andreessen Horowitz, discusses his philosophy on investing in technical founders and the role of technology in today’s startups. Andreessen also addresses the kind of entrepreneurs and ideas his venture capital firm look for: “Big breakthrough ideas often seem nuts the first time you see them.”

  • A Viewpoint Against Angel Investing

    Tucker Max has a new piece up titled Why I Stopped Angel Investing (And You Should Never Start) outlining some of his theories and lessons learned as a successful angel investor. With so much excitement and exuberance in the tech startup world, especially for angel investing, it’s important to understand some of the counter points.

    Here are a few notes from the article against angel investing:

    • 2 reasons he stopped angel investing:
      • There aren’t enough good people to invest in (and too much money is already chasing bad deals)
        • Poor education on going from tested idea to scalable company
        • Young and inexperienced founders thinking they know everything
      • Angel investing is a poor use of time
        • Majority of time should be spent on the best and highest use of skills, with everything else delegated or outsourced
    • The biggest thrill in angel investing is that people flatter you and beg for your resources, and that makes you feel powerful and respected
    • The entrepreneur is doing the important work, not the investor
    • 2 reasons no one should be an angel investor:
      • The economics of angel investing work against all but a select few
      • The structure of angel investing works against all but a select few
    • If you have to be an angel investor, do it as a syndicate on AngelList

    I agree that most people should approach angel investing as a way to help entrepreneurs and to stay engaged or learn something new. As a way to make money, most people are better off staying away from direct angel investments and instead syndicating through a successful investor.

    What else? What are some other reasons against being an angel investor?

  • Second Investment Strategy for a $20 Million Fund

    After yesterday’s post Investment Strategy for a $20 Million Fund, several people reached out and said it was crazy to limit the fund to only eight total investments. After pointing out that if the desired ownership percentage is 20%, and the expected post-money valuation is in the $5 million range, mathematically there’s only room for eight investments. The general consensus was that the fund needs to invest in many more companies to get better diversification and an increased chance of finding a few winners where the capital reserves can be used to participate in future rounds. So, either the target ownership percentage or target post-money valuation needs to go down to increase the number of investments.

    Here’s a potential second investment strategy for a $20 million fund:

    • Allocate 40% of the fund ($8 million) for new investments and reserve 60% for follow-on investments ($12 million in reserves)
    • Invest an average of $500,000 per company with a target ownership percentage of 10% for a total of 16 investments with an average post-money valuation of $5 million
    • Of the 16 investments, take the top four companies and participate heavily in the follow-on rounds using the reserves
    • To achieve $70 million of exit value, the majority of the returns come from the top four investments (e.g. ~$60 million in returns at an average of ownership stake of 10% for a total aggregate exit value of $600 million) and the remaining investments deliver more modest returns (e.g. ~$10 million in returns at an average ownership stake of 5% for a total aggregate exit value of $200 million)

    This approach casts a much wider net and then goes deeper with a handful of portfolio companies. It still requires substantial exits but has more opportunities to find winners.

    What else? What are some more thoughts on this second investment strategy for a $20 million fund?

  • Investment Strategy for a $20 Million Fund

    Urvaksh broke the news about Valor Ventures last week with his article New Atlanta VC Fund Will Invest in Women’s Companies. I’m an investor in the fund and excited about helping female founders build large companies. Thinking about a $20 million venture fund, here’s a common investment strategy:

    • Allocate 40% of the fund ($8 million) for new investments and reserve 60% for follow-on investments
    • Invest an average of $1 million per company with a target ownership of 20% (results in an average post-money valuation of $5 million) and eight total investments
    • After dilution in subsequent rounds, and participating pro rata in the “winners”, own an average of 10% across the eight investments
    • To achieve a 17% IRR (needed to be top quartile), the fund needs to return 3x cash on cash, which is ~$70 million of cash (inclusive of management fees)
    • Owning an average of 10% of eight companies means the portfolio of investments needs to have an aggregate exit value of $700 million

    The venture model is predicated on finding startups that have the opportunity to become large, meaningful companies. Picking great entrepreneurs in great markets is the key to any successful fund.

    What else? What are some other thoughts on the common investment strategy for a $20 million fund?