David Cummings on Startups

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  • No Market for Failed Startup Products

    Over the past couple months I’ve talked with several entrepreneurs that decided to shut down their startup. As part of closing the business, each one wanted to find an acquirer for their product. When asked for advice, I always said to just close up shop as there’s no market for failed startup products. Of course, in an effort to show good faith in trying to return capital to their investors, each one sought out acquirers, and each one failed to find a home.

    Here are a few reasons why there’s no market for failed startup products:

    • Most startup technology, with little-to-no customers, isn’t worth anything as a potential acquirer can build the same technology in-house (since it’s easier to build technology in general, technology alone isn’t valuable to an acquirer)
    • Reaching out to competitors, or adjacent startups, and saying the product is for sale, results in financial offers of next-to-nothing, if at all, because it’s clear the business is going to shut down (the BATNA – best alternative to negotiated agreement – is $0)
    • Acquisition costs from lawyers, accountants, etc. combined with leaving the liabilities with the seller (e.g. an asset acquisition might buy the product’s IP but not any liabilities) often results in a financial arrangement that’s not any better than shutting the business down

    Sometimes it is worth finding an acquirer for a failed startup product, even though it doesn’t make sense financially, as there’s a desire to keep the product going for existing customers for a period of time longer than could be made available otherwise. Regardless, there’s almost no market for failed startup products and entrepreneurs are better off shutting the startup down and returning any existing capital back to investors instead of spending more money keeping the lights on in an effort to find an acquirer.

    What else? What are some more thoughts on the idea that there’s no market for failed startup products?

  • Notes from the EndoChoice S-1 IPO Filing

    EndoChoice went public today on the New York Stock Exchange (NYSE:GI) raising $95 million. This is notable because it’s the first entrepreneur-lead company in Atlanta to go public in many years. Founded in 2008, EndoChoice is a medtech company focused on technologies and products for gastrointestinal conditions with their main innovation being an endoscopic imaging system.

    Here are a few notes from the EndoChoice S-1 IPO filing:

    • Serves over 2,500 GI departments (pg. 1)
    • Fuse® system enables GI specialists to see more than twice the anatomy at any one time compared to standard, forward-viewing colonoscopes and has been clinically demonstrated to detect 69% more pre-cancerous polyps than standard colonoscopes. (pg. 1)
    • 15 million colonoscopies per year in the United States (pg. 1)
    • Revenues (pg. 2)
      2012 – $34.2 million
      2013 – $50.9 million
      2014 – $61.4 million
    • Net losses (pg. 2)
      2012 – $1.2 million
      2013 – $23.9 million
      2014 – $53.6 million
    • Accumulated deficit of $112.4 million (pg. 2)
    • Sells over 50 different products (pg. 3) –  (Note: EndoChoice sells a number of basic products and then has a proprietary endoscopic imaging system that is the real growth opportunity)
    • Manufacturing facilities in the United States, Germany, and Israel (pg. 4)
    • Acquired Peer Medical, Ltd. in 2013 for $40 million, inventor of the endoscopic imaging system (pg. 70)
    • 35 employees in research and development (pg. 71)
    • 103 employees in sales and marketing (pg. 72)
    • 418 employees (pg. 126)

    I’m excited for EndoChoice and look forward to watching them grow. Congratulations to Mark Gilreath and team.

    What else? What are some other thoughts on the EndoChoice S-1 IPO filing?

  • 12 Month Startup Accelerator

    We’ve all heard about successful startup accelerators like Y Combinator and TechStars. The model is pretty straightforward: ~$100,000 investment for ~6% of the company, 90-day intensive program, and a Demo Day at the end to pitch investors. This model works well when a large number of the startups are able to raise money at the end of the program, often with little-to-no revenue. Many cities have accelerator clones of this popular model but run into the challenge that most of the participants can’t raise money and go out of business shortly after the program (failure is normal but it’d be great to see more success as well).

    For cities that don’t have copious amounts of seed stage, risk loving capital, I believe there’s an opportunity for a modified version of the standard accelerator program focused on producing revenue generating businesses that are self-sustainable at the end of the program (e.g. $250k in ARR) or at least $100,000 in annual recurring revenue so that their chance of building an enduring business is high. Let’s call it a 12 Month Startup Accelerator. Here’s how it might work:

    • Calendar year based cohorts (e.g. 10 startups that start on January 1st)
    • $100,000 for 10% of the startup
    • Shared office space (collaboration amongst the entrepreneurs is key)
    • Weekly dinners for the first two months and then bi-weekly dinners for the next 10 months
    • Weekly cohort-wide email of all the startups and their recurring revenue (peer pressure!)
    • Quarterly Demo Days exclusively for angel investors and potential customers (the best type of funding is cash from customers)
    • Overarching Goal: Be financially self-sustainable at the end of the program

    A few differences with this model: 4x longer program, multiple Demo Days, and an explicit goal of generating enough revenue to be sustainable at the end of the year. Overall, the big difference is the focus on generating revenue vs raising money. Startups that generate six figures of revenue have a much greater chance of success than ones that raise a seed round.

    What else? What are some more thoughts on the 12 Month Startup Accelerator?

  • Ask Investors for Help

    Early this week I was talking to an entrepreneur about his company, market, competitors, and investors. When asking about his investors, he said they were great but super hands-off. Probing deeper, he said he has to reach out to them for help as things are very casual. After thinking about it, I think this happens more often than expected and that entrepreneurs should be more proactive about asking investors for help.

    Here are a few thoughts on asking investors for help:

    • Most investors want to add value, so asking for help isn’t imposing
    • Include asks for help in the regular investor updates
    • Before an investor writes a check, ask them how they’d like to help, if at all (if they’ve already invested, and you don’t already know the answer, ask this question)
    • Consider the area of expertise for each investor, and lean on them when a relevant question comes up

    Investors do want to help and many entrepreneurs don’t regularly seek them out even though they have a vested interest in the success of the startup. Entrepreneurs should ask investors for help more often.

    What else? What are some more thoughts on asking investors for help?

  • Equal Salaries for the First 10 Engineers

    Recently I was talking to an entrepreneur about salary and equity for early employees in a startup. After we went back and forth for a bit, he offered up something that they do in his company that I hadn’t heard: before institutional funding, the first 10 engineers all get the exact same salary. Now, the equity compensation differs based on experience and expertise, but the immediate cash compensation is all the same. Once the startup raises their first round of institutional capital, the salaries are leveled up to market rates for the respective positions (they had already raised a solid seed round).

    Here are a few reasons why they do this:

    • Requiring a pay cut for every engineer ensures that they are bought in on building a company, and not just taking a paycheck
    • Limiting pay initially creates more focus and dialogue around the equity component, resulting in greater belief that the equity will be worth a substantial amount
    • Keeping all salaries the same makes it so that everyone knows what everyone else makes, and ensures that they are pulling their own weight

    While it’s harder to build a team this way, I’m sure that once it’s assembled the team members have a greater level of commitment and work harder to achieve success.

    What else? What are some more thoughts on the idea of the same salaries for the first 10 engineers before institutional funding?

  • Timing as the Most Important Startup Consideration

    TED has an interesting new talk up from Bill Gross, founder of Idealab. titled Bill Gross: The single biggest reason why startups succeed. Bill looked at 100 Idealab companies and 100 non-Idealab companies analyzing them across these six dimensions:

    • Idea
    • Team
    • Execution
    • Business model
    • Funding
    • Timing

    From the talk:

    So what I would say, in summary, is execution definitely matters a lot. The idea matters a lot. But timing might matter even more. And the best way to really assess timing is to really look at whether consumers are really ready for what you have to offer them. And to be really, really honest about it, not be in denial about any results that you see, because if you have something you love, you want to push it forward, but you have to be very, very honest about that factor on timing.

    Personally, I favor team and execution more, but I believe timing plays a much bigger role than most people realize.

    What else? Do you believe that timing is the most important consideration in startup success?

  • More Outsourced Software Engineering Success Stories

    For years, whenever an entrepreneur asked my thoughts on outsourcing core product software engineering, my response was that I haven’t seen it work. There were too many disconnects between the startup team and the software engineering team – nuances around the actual product goals – resulting in a poor user experience and frustration during iteration while being enervating for the entrepreneur. Now, while building products in-house is most common, more startups are finding success with some or all of the core product being outsourced, especially to get started (I still think in-house software engineering is a must once the startup has traction).

    Here are a few thoughts on the rise of outsourcing core product software engineering:

    • Open source provides more reusable components, both for the frontend (e.g. Bootstrap) and backend (e.g. Rails)
    • General collaboration tools are stronger and more widely used (e.g. Slack, Basecamp, etc.)
    • Product management-specific collaboration tools are stronger (e.g. Balsamiq, Aha, etc.)
    • Certain software development firms have come to specialize in building products, as opposed to most that do one-off consulting projects
    • Non-technical entrepreneurs are more technical, on average, due to the more pervasive use of technology, and thus are better at communicating product needs

    When entrepreneurs ask me about building their product in-house, or outsourcing it, I still recommend building it internally, but outsourcing it is much more viable, and thus deserves some attention.

    What else? What are some more thoughts on outsourcing core product software engineering?

  • The $250,000 Annual Revenue Run Rate Milestone

    While there is much discussion around the large multi-million dollar seed rounds for pre-revenue startups, the reality is that most startups, especially ones outside California, won’t be able to raise any money. For those that haven’t raised any money, or raised a small seed round, one of the first substantial revenue milestone goals should be hitting the $250,000 annual revenue run rate mark. Here are a few reasons why:

    • Assuming strong gross margins (e.g. 80% or higher), the startup should be able to support 3-5 employees, making for a solid core team
    • With 3-5 employees and $250,000 in revenue, the business can be cash flow breakeven, resulting in infinite financial runway and the opportunity to grow indefinitely without outside financing
    • Investors are always looking to mitigate risk, and $250,000 in recurring revenue shows there is the basis of a more substantial market, making it easier to raise a larger seed round (to raise a Series A, investors often want at least a million in revenue)
    • Product/market fit is likely achieved and the start of a repeatable customer acquisition process in place, making the chance of continued success high (see the 4 Stages of a B2B Startup)

    Entrepreneurs would do well to make $250,000 in annual revenue run rate one of their first major financial goals as it represents a level of freedom and progress.

    What else? What are some more thoughts on $250,000 in revenue run rate as an important milestone?

  • Opportunistic Hiring

    One of the most important responsibilities for an entrepreneur is recruiting great people. Only, most entrepreneurs exclusively focus on recruiting people for open positions (e.g. ones that have a job listing on the site). Instead, entrepreneurs would do well about being more proactive with opportunistic hires. Yes, financial considerations are incredibly important, but so is getting the best people possible, even if the order of hiring differs from the current plan.

    Here are a few thoughts on opportunistic hiring:

    • Let team members know that the company is open to opportunistic hiring (most people don’t even consider it yet referrals from employees are often the best candidates)
    • Hold the potential opportunistic hires to an even higher standard, and ensure that they’re great culture fits
    • Evaluate how bringing on an opportunistic hire now affects the hiring plan and communicate how it would change things to team members
    • If the timing doesn’t work, let the candidate know and work hard to maintain a good relationship in the event of a future opportunity

    Opportunistic hiring is the most challenging in the seed and early stages. As the company grows, and there are more resources, opportunistic hiring becomes easier and more commonplace. Regardless, entrepreneurs would do well to be proactive about opportunistic hiring.

    What else? What are some more thoughts on opportunistic hiring?

  • Learn How to Sell

    Late in the summer of 2001 I was seriously frustrated. After raising money from a professor, hiring several friends as programming interns, and taking a leave of absence from college, we had built a good product, but only had two customers. Eagerly, I reached out to a mentor of mine I met earlier that year when he was on sabbatical from Microsoft.

    As he was back in Seattle, we scheduled a time to talk. Even today, I clearly remember that I was standing on a campus tennis court using my cell phone (a flip phone!) for the conversation. After sharing our progress, and my frustrations, he quickly diagnosed my problem: I needed to learn how to sell. Everything I did was focused on building the product, and not on acquiring customers. It was time for a change.

    Most entrepreneurs are in love with their product. Unfortunately, most products don’t sell on their own. One of the most difficult, and important, challenges for product entrepreneurs is to learn how to sell. When an entrepreneur reaches out for help, it’s almost always because they haven’t figured out to grow sales.

    What else? What are some more thoughts on entrepreneurs needing to learn how to sell?