David Cummings on Startups

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  • Financial Projections for Startups

    Recently I saw another one of the dreaded financial charts in a startup’s executive summary: $0 revenue today and $25 million in revenue in year three. Whenever I see this, I immediately know that the CEO either a) doesn’t have any startup experience or b) hasn’t done the appropriate homework. Can a company go from $0 to $25 million in three years from a cold start? Yes. Does it make the startup look credible in an executive summary? No.

    Here are a few thoughts on financial projections for startups:

    • Study the Inc. 500, especially technology companies. What does the revenue ramp look like there? These are some of the fastest growing companies in the country, and annual revenues like $1M to $4M to $10M are more the norm (and incredibly high growth).
    • Build a bottom-up forecast based on number of leads generated, conversion from lead to opportunity, number of trained sales reps, average sales cycle, average sales price, and conversion from opportunity to close.
    • Find a simple financial model online (e.g. here’s a SaaS metrics one) and adapt it (don’t build or use a super complicated financial model as it’s overkill without relevant operating history)

    Every startup should build financial projections. Even if there are many unknowns, it’s important to see how things might work, how gross margins make the model viable (or don’t! — see HomeJoy), and what the major drivers are for the business.

    What else? What are some more thoughts on financial projections for startups?

  • Board Decks Even Without Board Meetings 

    Over the last few years a dozen different entrepreneurs have asked me if they should put together a formal board for their startup. My response is that they don’t need a formal board but it’s still good to go through the exercise of putting together a board deck on a quarterly basis. Much like regular investor updates, a board deck is even more comprehensive in summarizing key information and metrics. 

    Here’s what a board deck might contain for entrepreneurs without board meetings:

    • KPIs – Summary of all the key metrics year to date and for the quarter as well as percent of goal
    • Department Updates – Main accomplishments for sales, marketing, services, support, operations, and engineering 
    • Strategic Initiatives – Outline the big undertakings for the quarter including any challenges or potential roadblocks
    • Financials – Semi-detailed financial metrics for the most important parts of the business
    • Challenges – Where does the company need the most help

    Like a simplified one page strategic plan but much more detailed, a board deck for entrepreneurs without a board is a good way to organize thoughts, prepare a quarterly review, and outline new initiatives. 

    What else? What are some more thoughts on board decks even without a board?

  • Developer Bootcamps

    One fairly new phenomenon in the startup community over the last few years is the rise of the developer bootcamp. While there are a variety of training programs, the general idea is that someone with a college degree wants to change careers, and instead of going back to college for two years, they go to a three month full-time program and come out with the skills to be a junior web developer. 

    Here are a few thoughts on developer bootcamps:

    • People that were already writing code on the side and building websites, yet want a more formal education and credentials, typically do the best
    • People that don’t have some minor programming exposure and prior coding initiative are often more challenged to be truly proficient after three months (this is feedback from entrepreneurs that have hired engineers from these programs)
    • Costs, ranging from $10,000 – $12,000, can be a challenge but are viewed as reasonable when the salaries of software engineers are compared to most fields (e.g. making $50,000/year then going to $75,000/year as an engineer is a much better financial decesion than doing a two year college degree and the corresponding loss of income)
    • As a business model, these developer bootcamps can be very profitable (imagine 15 students in a class paying $150,000 in tuition and the main expense being an instructor that costs $10,000/month for three months plus other staff and infrastructure overhead)
    • No major standards or credentials have emerged yet, but look for one or two to set the tone
    • Community colleges and technical schools are going to enter the market providing more competition that is government-sponsored 

    Developer bootcamps are a great addition to the startup community and much needed. Look for software engineering demand to continue to outpace supply even with additional training programs. 

    What else? What are some more thoughts on developer bootcamps?

  • Putting $1 Million to Work in the Startup Community

    WorldPay, in Atlanta, recently pledged $1 million to fund a financial technologies accelerator at Georgia Tech’s ATDC. It’s great to see a local company make a substantial investment in the community and it got me thinking about other ways $1 million could be put to work. Here are a few ideas:

    • Generic Startup Accelerator – Much like the financial technologies accelerator but for any type of tech startup. With $1 million, there’s enough funding for two 10-team cohorts that receive $25,000 each along with office space, legal, accounting, and a managing director to run it for one year.
    • Tech Entrepreneurship Center – $1 million is plenty of money to rent a nice office space for 4-5 years along with a great community manager to run the facility and coordinate programs (startups would still pay rent but the $1 million would go towards subsidizing everything).
    • Partially Endow an Entrepreneurship Education Chair – $1 million could be put into the local community foundation to pay a non-profit, school, or college in the area to partially fund a dedicated entrepreneurship teacher that runs programs like the Kauffman Foundation FastTrac program as well as other classes geared towards high potential new businesses (see the Ideal Entrepreneur Bootcamp Program).
    • 100 Programming Bootcamp Scholarships – $1 million would pay for 100 people to go through an intensive three month software engineering bootcamp program where they are trained to be a professional programmer (this is a way for people with college degrees to switch careers quickly). Take a look at Tech Talent South, Iron Yard, Digital Crafts, and General Assembly.

    $1 million still goes far, especially outside the expensive coastal cities. and can fund a major startup community initiative. As tech innovation and entrepreneurship continues to be a hot area, look for more tech startup community initiatives.

    What else? What are some other ways $1 million can be put to work in a startup community?

  • Better Naming Delineation for Seed Stage Startups

    Continuing with yesterday’s post on Startup Stages by Revenue, one stage that can can use better naming delineation is the Seed Stage. The Seed Stage, while still early, represents a huge range, especially when considering the difference between a startup with $50,000 in annual recurring revenue (ARR) and one with $500,000 in annual recurring revenue. At $50,000 ARR, the startup might only have 10 customers paying $5,000/year whereas the $500,000 ARR startup might have 100 customers paying $5,000/year. 100 customers implies product/market fit, many elements of a repeatable customer acquisition process, and close to a sustainable level of success. So, what’s a better name for these Seed Stage startups that are much farther along, but still tiny? And what’s a good revenue cut-off? $100,000? $250,000? $500,000?

    Here are a few naming ideas for Seed Stage startups that have at least $250,000 in revenue (a big startup milestone):

    • Six Figure Seed Stage
    • Late Seed Stage
    • Product/Market Fit Seed Stage
    • Sustainable Seed Stage

    Seed Stage startups with hundreds of thousands of dollars of revenue are very different from Seed Stage startups with a working product and a couple customers. In startup communities, especially emerging communities outside the major startup centers, better naming delineation for Seed Stage startups will help identify high potential companies, engage more investors, and result in more success stories.

    What else? What’s a better naming convention to differentiate between Seed Stage startups?

  • Startup Stages by Revenue

    In any given week I’ll receive 1-2 emails from venture capitalists asking for an intro to an Atlanta Ventures startup. Naturally, I ask what stage startup they target, especially if it isn’t explicitly stated on their website (this assumes it isn’t the proverbial associate call). Most of the time, the investor is looking for the startup to be at a later stage, and so the intro isn’t a good fit (most venture firms have moved up market and look for businesses that are further along).

    Here are some common startup stages by revenue (investors will also expect to see growth rates above 30% as well):

    • Idea Stage – No revenue or product, but lots of energy and enthusiasm.
    • Seed Stage – Under $1 million in revenue (often under $100,000), working product, and paying customers with some early metrics (seeking product/market fit).
    • Early Stage – Between $1 million and $5 million in revenue with solid metrics and a repeatable customer acquisition process.
    • Growth Stage – $5 million or more in revenue, strong team, and working on scaling all aspects of the business.

    The next time an investor reaches out, one of the easiest qualifying questions is to ask what stage company they look for, and to have them give a revenue range as part of the answer.

    What else? What are some more thoughts on startup stages by revenue?

  • Presenting the Possible Value of Equity Over Four Years

    One of the questions that came up from yesterday’s post on The 5x Rule for Salary vs Equity Trade-off is how to present the value of the equity in a thoughtful manner. Potential team members want to see, in detail, how the equity compensation is calculated. 

    Here’s an example of presenting the possible value of equity over four years:

    • Year 1 – Startup is valued at a $10M post money valuation. Potential new team member to receive stock options for 1%, which has a current value of $100,000 (ignore strike price and 409a valuation for now). 
    • Year 2 – Startup raises $5M at a $25M post money valuation selling 20% of the company. The 1% is diluted to .8% and is now worth $200,000. 
    • Year 3 – No fundraising and no valuation change. 
    • Year 4 – Startup raises $15M at a $75M post money valuation selling 20% of the company. The .8% is diluted to .64% and is now worth $480,000. 

    This is an example scenario to show how an equity grant now might be worth close to $500,000 at the end of four years, assuming everything goes according to plan. Of course, things could go much better or much worse, and that’s part of the excitement in the startup world. 

    What else? What are some more thoughts on presenting the possible value of equity over four years?

  • The 5x Rule for Salary vs Equity Trade-off

    Recently an entrepreneur was talking with me about recruiting a new, key team member from a big company. When it came down to compensation, the startup couldn’t afford the same salary, and so the entrepreneur was working on quantifying the value of the equity component. To determine the equity piece, I recommended following the 5x rule where the expected value of the equity is 5x more valuable than the salary given up. 

    Here’s how it works:

    • Potential employee currently makes $100,000
    • Job offer at the startup is for $75,000
    • Equity has four year vesting
    • Over four years, the potential employee is giving up $100,000 in salary, so the equity at the end of four years should be worth $500,000

    Intuitively, it makes sense that the potential value of the equity needs to be much greater than the salary reduction since there’s a good chance the equity is worth nothing or something substantially less than 5x. Follow the 5x rule and use it as part of the recruiting process. 

    What else? What are some other thoughts on the 5x rule for the salary vs equity trade-off?

  • Customer Success Managers

    One role in B2B tech startups that is incredibly important, but not talked about as much, is that of the customer success manager. Several years ago at Pardot we called them client advocates, and tasked them with making our customers successful, knowing that a comprehensive software product, no matter how cool the interface, still requires on-going training and help. Whereas the support team is reactive with customer issues, the customer success team is proactively reaching out to customers to make sure everything is going well and helping customers get more value out of the product.

    Here are a few thoughts on customer success managers:

    • A customer “touch” cadence should be used whereby customers are pinged once a month/quarter/year
    • Analytics and engagement tools should be used to track which customers are actively using the critical features in the product and which customers are at risk of leaving due to little/no usage
    • The old adage “It’s cheaper to keep an existing customer than sign a new one” is even more true for SaaS businesses
    • As major new product features are released, the customer success team should help customers incorporate the new product functionality
    • Some of the best customer success managers are sales people that loved helping prospects but didn’t like asking for the sale
    • Upselling and cross selling is usually part of the customer success team, so it’s often a revenue-generating function

    Customer success managers are critical and should employed earlier than expected in B2B tech startups. As a proactive, customer-facing team, they often develop some of the strongest customer relationships and add tremendous value.

    What else? What are some more thoughts on customer success managers?

  • Separating a Cash Flow Business from a Venture Backable Startup

    One of the on-going debates is whether a particular company is a cash flow business or a venture backable startup. Often, investors will pass on a startup because they feel the market is not big enough. Just this past week, Airbnb released seven rejection letters they received from investors when they were trying to raise $150,000 at a $1,500,000 valuation (today, that same 10% would be worth $2 billion). Here are a few thoughts on venture backable startups as different from cash flow businesses:

    • Small, fast growing markets can be the best when it’s clear that there’s a big opportunity ahead
    • Large, established markets work well if the product is truly 10x better, faster, and cheaper (if it’s only 2x better, the friction to switching is often too high to get much traction)
    • VCs want to believe that their portion of a potential exit is big enough to return at least 10% of their fund (so, the market opportunity must be 10x larger when taking investment from a $50M fund vs a $500M fund assuming the same round of financing)
    • Almost all new companies are not venture backable as the market size and dynamics aren’t conducive to the scale and value creation needed

    The next time you hear an entrepreneur say they want to raise venture capital, ask if the business truly warrants it based on the market opportunity and current traction. Most companies are cash flow businesses, and those are often some of the best out there.

    What else? What are some more thoughts on separating cash flow businesses from venture backable startups?