David Cummings on Startups

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  • 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?

  • More Pro Rata Rights than Ownership Percentage

    Recently I heard about a new investor strategy that I hadn’t seen before: as part of the term sheet, they asked for more pro rata rights than their ownership percentage. Pro rata rights mean that whatever percentage ownership initially purchased — say 10% — can be maintained when the startup raises more money in the future, assuming additional capital is invested to reflect the new percentage.

    Here’s how it might work:

    • An angel investor offers to put in $200,000 at a $4 million post-money valuation, to own 5% of the company but requires pro rata rights for 10% of the business
    • Startup later raises $2 million at a $10 million post-money valuation, and the original angel that put in $200,000 now has the option, but not the requirement, to put in up to $600,000 (original 5% diluted to 4% by the new round but then 6% of the new business is purchased for $600,000) more money in the business and have 10% of the business, even though they had 5% after the previous round
    • Startup now has a $10 million valuation and the original angel has put in a total of $800,000 for 10% of the business

    The benefit for the angel investor is that they essentially get an option to increase their stake at a later time in the event the startup is doing well and decides to raise more money. In terms of downsides, the only challenge is that the entrepreneur now potentially has to sell more of their business in the second round of financing as many venture investors require a minimum ownership percentage for their initial investment (e.g. 15-25%) such that the entrepreneur might end up selling 35% or more of the business between the seed round and Series A (which isn’t uncommon). It’ll be interesting to see if this catches on for lead angel investors to ask for more pro rata rights than the original ownership percentage.

    What else? What are some additional thoughts on more pro rata rights than ownership percentage?

  • Ratio of Deals Reviewed to Investments Made

    Recently, I was reading the limited partner quarterly updates for a fund where I’m an investor. In the update, the author highlighted that the fund had reviewed 1,000 potential deals last year and invested in four companies. At a ratio of 250:1, it’s clear that there are many more startups trying to raise a Series A than there are Series A investments (see the Series A crunch talked about four years ago).

    Here’s how the investment process might work at a venture fund:

    • 250 deals reviewed
    • 25 one-on-one pitches (where the entrepreneur pitches a single partner)
    • 5 full partner pitches (where all the partners hear the pitch)
    • 2 term sheets
    • 1 investment

    Raising money is much harder than most entrepreneurs expect. With funds seeing so many opportunities, but only being able to invest in 1-2 companies per year per investor, it’s clear that most entrepreneurs will feel rejected when out raising money.

    What else? What are some more thoughts on the ratio of deals reviewed to investments made?

  • Video of the Week: Storyboard of the Lean Startup Introduction

    It’s the year 2015 and I still hear the same story on a regular basis: we have an idea and are confident it’s going to be a success but we haven’t talked to any prospects about it. Whenever I hear that story I immediately think about Lean Startups and Customer Discovery. This week’s video outlines the genesis of the Lean Startup movement and helps entrepreneurs understand that entrepreneurship is a process — not genius, creativity, and timing. Enjoy!

  • Staying Connected to the Team as the Company Grows

    One day after Pardot hit about 80 employees I was walking down the hall in the office and I saw this friendly face coming towards me. In an effort to engage, I stopped and asked how things were going. We chatted for a minute and walked on. Only, I had no idea this person’s name, yet I had personally interviewed and been part of her hiring process. While I’m great with faces and pretty good with names, I had hit the point where I couldn’t keep pace with remembering everyone’s name in the office — we were growing so fast that I had little interaction with many of the new team members. Wow, that was a long ways from when we started.

    A serious CEO challenge is staying connected to the team as the company grows. Here are a few ideas to help:

    • Weekly Team Email – Send out an email every week to the team highlighting a culture story, quick updates from each department, and key metrics
    • Weekly Small Group Lunch – Invite five different people to a group lunch every week and spend an hour with people you don’t normally work with — the goal is to simply build rapport and trust
    • Monthly Department Seating Swap – Continually rotate throughout departments and sit next to different people each month — physical proximity promotes interaction
    • Company Sports Team or After-Hours Activities – Get involved with the softball team, running club, or anything else the company does after-hours as a way to connect with people on teams that are further removed

    There’s no way to stay connected with every team member at scale, nor should there be. As the company grows, it’s important to grow with it, and that means finding new ways to connect at greater scale.

    What else? What are some other ways to stay connected to the team as the company grows?

  • Metrics to Raise a Series A

    Continuing with the metrics theme from yesterday’s post Most Metrics Don’t Matter at the Beginning, a logical follow-up question is “what are the ideal metrics to raise a Series A?” EquityZen has a good post from last year on just this topic: The Metrics Required for Raising a Series A Round. Here are the key metrics to raise a Series A for each type of startup from the post:

    • Ecommerce – $12 million annual run rate
    • Consumer App – 50,000 daily active users with 25% month-over-month growth
    • SaaS – $1 million annual run rate and 100% year-over-year revenue growth
    • Marketplace – $12 million gross market volume with 20% month-over-month growth

    The next time an entrepreneur says they’re going to raise a Series A, ask if they have the appropriate metrics based on their type of business.

    What else? What are some other thoughts on the metrics to raise a Series A round of financing?

  • Most Metrics Don’t Matter at the Beginning

    I love metrics. I love understanding all kinds of different aspects of the business. What’s improving? What’s declining? Only, for the first 12-18 months, most metrics don’t really matter. Yet, entrepreneurs are constantly fretting over them. Besides revenue and customer count, popular metrics like cost of customer acquisition and churn rate aren’t meaningful due to a limited number of customers.

    Here’s what matters in the first 12-18 months:

    • Revenue – Getting that first $100,000, or better yet $250,000, in recurring revenue, shows there’s the kernel of something meaningful
    • Unaffiliated Customers – While signing up friends and warm referrals is standard, the real test is signing the first 10 or 20 unaffiliated customers — the customers that buy the product because it solves a serious problem, and not just because someone wants to help you personally
    • Product/Market Fit – A level of usefulness and functionality that meets customers needs and truly adds value (see Initial Product/Market Fit)

    When an entrepreneur talks about metrics, and has a handful of customers, point out that the focus should be on increasing the customer count, and not analyzing things where there aren’t enough customers to be statistically significant. Most metrics don’t matter at the beginning — keep it simple.

    What else? What are some other thoughts on the idea that most metrics don’t matter at the beginning?

  • Generating Ideas for Blog Posts

    One of the most common questions about writing a daily blog is “how do you come up with new post ideas every day?” I’ll admit it — the first first 30 days were really hard. After that, my mind started paying more attention to interesting topics and ideas as they appeared, and it became second nature to put blog post ideas down in my iPhone. Now, I have a list of ideas that are constantly refined based on what I think does or doesn’t make sense.

    After reflecting on it, here are some of the most frequent ways I get ideas:

    • Conversations – Talking to other entrepreneurs and just asking the questions “What did you learn about XYZ?” and “What’s something new you’ve implemented lately?” are some of my favorite questions, and they provide great content.
    • Reflecting on the Past – One exercise I do to generate ideas is to think about people I’ve worked with in the past, and reflect on the most prominent memories and lessons learned. Of course, I try to keep their stories anonymous.
    • Current Events – Analysis of news reports and upcoming programs, like that Atlanta Startup Village, are great, fresh content sources.
    • S-1 IPO Filings – S-1s are some of the most dense documents out there, but they are also chock-full of interesting information that isn’t normally available.

    Starting a daily blog is difficult. But, like anything, after doing it for awhile it becomes easier and easier, including generating ideas.

    What else? What are some more ways to generate blog post ideas?

  • Most Popular Blog Posts

    A couple times per year I like to jump into the WordPress stats and review the most popular blog posts. Generally, the popular posts are split between high SEO rankings and large numbers of social shares. Here are the top 15 blogs for this year to date:

    1. The 9 Best Startup Blogs for Entrepreneurs
    2. How Much is Enough: A Story from Jimmy John’s
    3. Simplified One Page Strategic Plan from Rockefeller Habits
    4. SaaS Cost of Goods Sold for Startups
    5. The 9 Building Blocks of a Business Model
    6. Quantifying the SaaS Valuation Growth Rate Multiplier
    7. SaaS Financials – Cost of Goods Sold
    8. Google Spreadsheet Marketing Budget Template for Startups
    9. Uber Burning $750 Million in a Year
    10. 5 of the Top 10 Fastest Growing Companies in Atlanta are Tech Firms
    11. V2MOM Planning Process for Startups
    12. Hockey Stick Growth for Startups
    13. Costs to Furnish a Nice Startup Office
    14. 26 Lessons Learned from Investing in 26 Startups
    15. Gross Margin and SaaS

    Patterns here include lists, SaaS content, and worksheets/business tools. Enjoy!

    What else? What are some other topics to cover on this blog?

  • Morning Meetings Only

    One of the new experiments I’m trying out is only scheduling meetings in the morning. Using Calendly, I have several different types of meetings configured, depending on the context with most meetings 20-30 minutes to keep them effective. Only, I found that standard rhythm-oriented meetings (like daily check-ins) were often followed by other catch up meetings. Then, afternoons would often be filled meeting with people outside the company and ultimately killing any long blocks of time desired for extended focus.

    Here are a few thoughts on morning meetings only:

    • Jumping between doing actual work and meeting about things can be challenging, especially if there’s work that requires deeper thought
    • Grouping some or all meetings into a specific time of day is a good way to maximize personal peak energy times (e.g. if you do your best writing before 10am, you’d want to keep that time of day free of meetings)
    • Meetings like grabbing breakfast or coffee are super popular, contributing to the morning-oriented meeting schedule
    • Timezones can be a challenge with morning meetings only, especially if there’s regular dialog with people in California, so it definitely doesn’t work for everyone

    I’m going to try this out for two months and see how it goes. Of course, this strategy doesn’t exclude any afternoon meetings, it just leaves them open by default unless something urgent comes up or there’s no other morning slot.

    What else? What are some other thoughts on morning meetings only?