David Cummings on Startups

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  • Lessons Learned from Failed Startups

    Autopsy.io is a new site that aggregates info on failed startups. As an entrepreneur, some of my most important lessons learned came from failures. Take the eCrowds post mortem – poor customer discovery, mismatched on-boarding costs relative to monthly pricing, and slow application speed – now it’s included in Autopsy, and more accessible to entrepreneurs.

    Here are a few thoughts on failed startups:

    • Failure is a normal and accepted part of the startup ecosystem
    • Most startups will fail
    • Even if a good idea was too early, it’s still a failure
    • One of my favorite questions to ask entrepreneurs – regardless of success or failure – is “what did you learn?”
    • Running out of money is most common reason startups shut down

    Entrepreneurs would do well to research startups on Autopsy.io and learn from previous experiences. With the recent growth in tech startups over the past few years, look for an increase in failed startup post mortems as well.

    What else? What are some other thoughts on failed startups?

  • Economics of a Startup Studio

    Continuing with yesterday’s post on High Alpha Studio and Seed, let’s look at the hypothetical economics of a B2B Software-as-a-Service startup studio. Assuming $20 million to be spent over five years to build 20 startups, here’s what it might look like:

    • $4 million per year budget
    • Expenses
      • $3 million/year for 20 full-time employees plus four partners, including benefits
      • $250,000/year for office space (10,000 sq ft at $25/ft)
      • $50,000/year for office items (equipment, supplies, etc.)
      • $100,000/year for legal and accounting
      • $100,000/year for software
      • $100,000/year for miscellaneous
      • $300,000/year for marketing/advertising (this is for the products created, not the studio itself)
      • $100,000/year held in reserve for years after the five years to manage the studio’s responsibilities
    • 20 startups created
      • 10 fail (minimum respectable product built, beta customers signed on, and the plug pulled for one reason or another)
      • 10 raise outside financing (or at least raise money from the separate investment fund)
        • Average ownership stake before outside financing: 75% (assume 25% for the management team and employees)
        • Average ownership stake after outside financing: 56% (assuming 25% dilution)
    • Outcome needed to be successful
      • $80 million in aggregate equity value to generate 4 times the $20 million invested resulting in a 3x return to investors (roughly 1x of return goes to the partners in the studio – see Investor IRR on Paper to Raise Another Fund)
      • With 10 startups, that’s an average of $8 million in equity value per startup
      • With an average 56% ownership stake, that’s an average startup valuation of $14.3 million (so, $143 million in total value for the 10 startups)

    While the studio would produce a number of startups, the reality is that the financial outcomes of the startups produced are more likely to be lopsided where one or two produce the vast majority of the returns and most aren’t worthwhile. Regardless, the economics of building a studio to build SaaS companies is appealing, especially in today’s hot market.

    What else? What are some more thoughts on the economics of a startup studio?

  • High Alpha Studio and Seed

    Earlier today, Scott Dorsey, the former CEO of ExactTarget, and a great team of entrepreneurs, launched High Alpha Studio and High Alpha Seed (see Dorsey, Gravity investors raise $35M to Launch High Alpha) in Indianapolis, Indiana. The idea is a startup studio focused on building business-to-business (B2B) Software-as-a-Service (SaaS) applications combined with a separate seed fund to invest in the startups that spin out of the studio as well as other unrelated startups.

    Here are a few thoughts on High Alpha Studio and Seed:

    • Entrepreneurs are drawn to starting incubators, and this is a great way to do it with a combo incubator and fund
    • Scott and his team have already shown the ability to generate great returns by starting and selling ExactTarget to Salesforce.com for $2.5 billion in cash
    • Having the seed fund ready at the same time as the studio is smart since a number of startup incubators build products but don’t have the corresponding funding to spin the ideas out into their own standalone business
    • Hiring 15-20 people for High Alpha Studio, per the article, makes for a serious staff (assume $100k/year/person and that’s a couple million dollars per year for staff)
    • Getting anchor investments from Emergence Capital (lead investor in SalesLoft) and Greenspring Associates provides a nice institutional investor tie-in for future financings

    I’m excited for Scott, Kristian, Mike, and Eric and look forward to following their progress at High Alpha. Also, if you’re in the Indianapolis area, High Alpha is hiring for a number of positions.

    What else? What are some other thoughts on High Alpha Studio and Seed?

  • Use a Daily Process to Achieve Goals

    When talking about goal setting, there’s often a focus on SMART goals, or general, big-picture goals. One strategy I like is based on goals driven by a daily process. The idea is to distill certain goals down to a daily activity, instead of shooting for something larger that seems more difficult to attain.

    Here are a few example of goals with a daily process:

    • Goal: write a 100 blog posts. Daily process: one blog post per day for 100 days.
    • Goal: schedule 20 investor meetings. Daily process: email/call 25 investors per day (assuming a hit rate of 25/1).
    • Goal: come up with a new business idea. Daily process: write down two business ideas per day and build a list of 60 ideas over the course of a month and then choose one.
    • Goal: meet 250 new people this year. Daily process: schedule and meet a new person every business day (see Meet 10 New People Per Week).

    So, the next time you sit down to do goal setting, look at the goals and figure out which ones can be broken down into a daily process. Goals with a daily process are often more achievable.

    What else? What are some more thoughts on using a daily process to achieve goals?

  • Demo the Product to the First 1,000 Prospects

    Back in the early days of Hannon Hill, as part of my learning how to sell, we hired several inside sales reps. The reps did a great job setting demos by following a process similar to Predictable Revenue (it was more cold calling heavy and many years before the book came out). Once a demo was scheduled, I was brought in to deliver the demo and act as a joint product manager and sales engineer. In fact, I demoed our content management system to over 1,000 prospects, sometimes one-on-one and sometimes to an audience of 20 or 30 people.

    Entrepreneurs would do well to personally demo their product to the first 1,000 prospects. Here are a few reasons why:

    • Talking to prospects in-person or over the phone generates unfiltered feedback, perfect for enhancing the product
    • Excitement and passion shine through the voice, and no one cares more about the product than the entrepreneur
    • Repeatedly demoing the product results in constant refinement of the script and flow, making it better for everyone else on the team doing demos
    • Unreleased features can be shown to build awareness and assess value, while doing so in a controlled environment

    Personally demoing the product to the first 1,000 people created the shortest feedback loop possible and helped refine the product as fast as we could. I’m confident that doing those demos, over and over again, made a huge difference in the success of the business.

    What else? What are some other thoughts on the idea that entrepreneurs should demo their product to the first 1,000 prospects?

  • Transparency in a Startup

    One of the items entrepreneurs frequently debate is the level of transparency to provide within their startup. How much information does a team member need to know? When does not enough information cause problems? While there’s no perfect answer, I’ve found that it’s better to err on the side of providing more information than expected.

    Here are a few areas worth considering as part of the transparency question in a startup:

    • How much cash is in the bank?
    • What’s the monthly burn rate?
    • What are the key metrics for the business and where do things stand?
    • What are the key metrics for each department and where do things stand?
    • What goals need to be hit to raise the next round of financing (if applicable)?
    • What are the top three challenges in the business (some issues, like those that are personnel related, can’t be discussed company-wide)?
    • What’s on the Simplified One Page Strategic Plan?

    Transparency in a startup varies wildly but more entrepreneurs are providing greater levels of transparency and getting greater levels of buy-in as well.

    What else? What are some other transparency questions to consider?

     

  • 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?