David Cummings on Startups

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  • Where Do Entrepreneurs Need Help?

    Last week, I was asked if I knew of entrepreneurs in town that had already raised some money and were having difficultly raising a second round of financing. The idea was to try and focus on this subset of entrepreneurs since they had already been vetted by investors and should have something to show. My response: I don’t have anyone to recommend at this time. After thinking about it more, this is a good way to assess the progress funded entrepreneurs are making locally, specifically ones that are trying to raise more money. One idea was to work on introducing these entrepreneurs to local businesses that might have a need for their product or service with the hope of generating cash from customers, which is often the best form of funding.

    Entrepreneurs need help in a number of areas. Here are a few ideas:

    Entrepreneurs always need help with something. More communication and collaboration in the community around these areas will make for a stronger and more vibrant ecosystem.

    What else? What are some other areas entrepreneurs need help?

  • 2015 Mercer University Commencement Address

    Earlier today I had one of the highest honors I can imagine: I had the opportunity to give the commencement address at Mercer University.

    Here’s a transcript of the speech:

    I’m humbled and honored to stand here before you today at your graduation.

    Two and a half years ago I was sitting at Fogo de Chao in Buckhead with my co-founder Adam. We had just closed the chapter on the most exciting adventure of our career. Earlier that day, October 11th, 2012, we had sold our company, Pardot, for almost $100 million and now it was time to figure out our next journey. It was a bittersweet moment. As entrepreneurs, we had always hoped, and dreamed, of being successful, but didn’t really know what form it would take. One of the most surreal parts of the experience occurred when we sold the company on a Tuesday morning but couldn’t tell anyone until Thursday afternoon. It was a great time to reflect, knowing something new comes next. Only, we didn’t know what was next.

    In five-and-a-half years, we built the company from an idea to over 100 employees, and in the process learned five life lessons.

    Lesson number one. Find mentors.

    Five years earlier we’d started Pardot to help generate sales leads on the internet. Pardot is the Latvian verb “to market or to sell”. Now, that’s Latvian, not Latin — we couldn’t afford the Latin word, so we paid $8 for the domain name and were on our way.

    With a name and a dream, I scheduled lunch with one of my mentors Bill, a technology CEO whose opinion I valued. It was a nice Spring day so we sat outside near the Chattahoochee River. I shared with him our new business idea and all the reasons why it was going to be successful. Patiently, he asked a number of excellent questions. After 30 minutes, he looked at me and said something I’ll never forget: David, have you heard of marketing automation. Like most of you, I had never heard of marketing automation. He then shared how it’s the future of marketing and something we should look into. Put simply, it’s next generation marketing software. I didn’t realize it at the time, but that lunch with a mentor, and the advice he gave, proved to be one of the most important conversations of our journey, and it wouldn’t have happened if I hadn’t asked him to lunch.

    Mentors are critical. As much as we like to believe we know it all, or can figure it out, the truth is we’ll go further, faster with strong mentors.

    Lesson number two. Invest wisely.

    It was late 2007 and we headed to our first tradeshow in Las Vegas. We arrived at the Sahara Hotel on the old Vegas strip, not to be confused with the Vegas Strip where people actually want to stay. We went to the front desk, and said we were checking in. The clerk pulled up our reservation, looked at the dates, and exclaimed, “Wow, four nights! No one ever stays here for four nights.” Not only were we staying for four nights, we were sharing a small, old room. Every business trip we went on for five-and-a-half years, we shared a room in order to save money, so that we could invest in more important areas of the business.

    Save money, delay gratification, and invest wisely — it makes a difference. Too often, we chase the next shiny object, only to realize too little, too late that it doesn’t bring us happiness. Figure out what brings you happiness and invest wisely.

    Lesson number three. Seek a place where you can grow.

    In 2010, the Atlanta Business Chronicle named Pardot the #1 fastest growing technology company in Metro Atlanta. Knowing that we were a finalist, but not knowing our ranking, I rushed over to Disco Kroger in Buckhead and bought a copy of the paper. Excitedly, I turned to the page that listed the winners. Column one had the company name and column two had the three year growth rate from 2007-2009, inclusive. There it was in big print: Pardot – 42,000% three year growth. Thankfully, the Business Chronicle didn’t have a minimum revenue amount at the time, and starting with a base of a couple thousand dollars makes it easy to grow fast.

    Pardot was well positioned for growth because of the timing, market, and technology. In the same way, position yourself in a place where you can grow. Seek out an opportunity where you’ll be challenged, where you can learn, and where you can take on greater responsibilities.

    Lesson number four. Look for people who share your values.

    One day, I walked into the office, and I had this bad feeling in my stomach. I knew I had a 10am meeting that morning with a few team members I didn’t enjoy working with. I’m the co-founder. I’m the CEO. What’s wrong with this picture? It was at that point that I did a good bit of research and self-examination. After reading the book Good to Great by Jim Collins, it finally clicked: we didn’t have a strong culture. We had a group of people that could get the job done but we didn’t have cohesive values.

    Over the course of several years, we worked hard to build a great culture focused on people that are positive, self-starting, and supportive. As part of our quarterly check-ins, we answered four simple questions: what did you accomplish last quarter? what are you going to do next quarter? how can you improve? how are you following the values? The most important question was that last one: how are you following the values? We wanted to make our values as strong as possible.

    Pardashians, as we like to call our team members, are amazing. In fact, the AJC named Pardot the #1 best place to work in Atlanta two years in a row. In the articles, some of our amazing workplace benefits were highlighted. We had benefits like four hours of housecleaning per month paid for and administered by the company, a full-time massage therapist on staff, and a simple, two word vacation policy: be reasonable. There were no sick days, no vacation days, and no flex days. Everything was centered around the belief that any team member should be able to work anytime, anywhere, and that people should be measured on results, not time spent in the office. Only, the reason we won the best place to work awards is because of the strength of our values.

    Look for people who share your same values – at work, at church, in the community – anywhere you spend time. Shared values improve communication, trust, and quality of life. In fact, strong personal and shared values are a key component of happiness.

    Lesson number five. Make an impact.

    In late 2012, we sold our company. The day after the news was public, I was driving down the Downtown Connector to see a friend in Midtown and share with him the details of the sale. Only, half way there, I looked up and saw one of our Pardot recruiting billboards near the 17th Street Bridge. Seeing the Pardot sign caused a burst of emotion and I just started crying in the car, right there, by myself. My whole identity and self worth was wrapped up in this little company, and now we had sold it. I needed to figure out what was next.

    After talking to my amazing wife, I bought a building in Buckhead, at the intersection of Piedmont and Lenox Roads, and turned it into the Atlanta Tech Village. The Village is a way to say thank you to Atlanta, and bring together hundreds of entrepreneurs. Today, we have 240 startups and 840 people, including Mercer’s own office for entrepreneurs. It’s one of the 10 largest tech entrepreneurship centers in the country and the largest in the Southeast.

    Over the next 10 years, the majority of new jobs created will come from companies that aren’t even in existence today. Here, in Atlanta, entrepreneurship is alive and well. Entrepreneurs in town have created innovative new companies like the next major social network with Yik Yak and their millions of college users. We have the next great Bitcoin payment processing platform with Bitpay and their 50,000 merchants. Today, Pardot has over 400 employees and is one of the fastest growing marketing products in the world. Right here, in Atlanta.

    My goal is to make an impact. I want to help entrepreneurs. I want to make a difference. Whatever it is you do, figure out how to make an impact in your community.

    Conclusion

    As you set out on the next phase of life’s amazing journey, remember these five simple lessons: find mentors, invest wisely, seek out growth opportunities, look for people that share your values, and, finally, make a big impact. Incorporate these five life lessons and the journey will be even more rewarding.

    Congratulations and good luck! Thank you all very much.

  • SaaS Business Model and Metrics

    David Skok has an excellent presentation over on Slideshare about the SaaS business model and metrics with the 3 Stages of a Startup. David’s blog, For Entrepreneurs, is one of the best out there for startups, especially Software-as-a-Service ones. Here are a few notes from the 85-slide SaaS business model and metrics deck:

    • Conserve cash while searching for product/market fit and a repeatable customer acquisition process. Once found, invest heavily.
    • With SaaS, the company actually loses money for some period of time (e.g. the first 12 months) with each new customer before becoming profitable. Because of this, companies that are growing faster are actually losing more money. More growth = more losses.
    • Cost to acquire a customer needs to be less than the lifetime value of a customer
    • Customer lifetime is defined as 1/churn rate, therefore the greater the monthly churn rate, the shorter the customer lifetime
    • Negative churn is a goal whereby revenue growth from existing customers is greater than revenue lost from existing customers
    • Common variable pricing axes are features, users, and depth of usage
    • Retention rate should be analyzed both as customer retention rate and dollar retention rate
    • Customer happiness index is a way to predict the likelihood of churn as well as the business value of the application
    • Ideal cost to acquire a customer is less than or equal to the first 12 months of revenue
    • Lifetime value of the customer should be 3x or greater than the cost of customer acquisition
    • Monthly recurring revenue is the core metric for the business
    • Salesperson on target earnings should 5x less than their quota (e.g. $60,000 in compensation for a $300,000 new annual recurring revenue quota)
    • Different sales models are increasingly more complex and 10x more expensive at each stage: freemium, no touch self-service, light touch inside sales, high touch inside sales, field sales, field sales with sales engineers
    • 3 keys to SaaS success: acquisition, retention, and monetization

    If you’re in a SaaS business, go read SaaS business model and metrics with the 3 Stages of a Startup.

    What else? What are some other key components of the SaaS business model and metrics?

  • More At-Bats for B2C Startups in the Community

    An entrepreneur recently asked me why we don’t have more B2C startups in town. Consumer startups, as opposed to business ones, have a lower success rate. Much like the movie business, even experts have a hard time telling what’s going to do well financially and what isn’t — it’s a “hits” business. With the continued success of Yik Yak here, there’s a renewed interest, and hope, in more B2C startups locally. What’s the solution? More at bats. More swings. More strikeouts. More hits.

    Here are a few thoughts on more at-bats for B2C startups:

    • Incubators like Switchyards are working on developing institutional knowledge around what does, and doesn’t work, while catalyzing the community
    • More local success will result in more local hires that get exposed to consumer startups, and in turn they’ll start their own companies (success breeds success but there’s a chicken and egg problem to get it going)
    • More meetups, experience sharing, and public startup funerals will help give people confidence to take more at-bats, and if it doesn’t work, closure to move on

    When someone asks about creating more B2C startups, tell them it’s a numbers game and that we need more at-bats.

    What else? What are some more thoughts on at-bats and B2C startups?

  • Thiel’s Paradox

    The New Yorker has a fascinating piece on Marc Andreessen, a well known entrepreneur and venture capitalist, titled Tomorrow’s Advance Man. In addition to a number of excellent stories, the author mentions Thiel’s Paradox from early Facebook investor Peter Thiel:

    When a reputable venture firm leads two consecutive rounds of investment in a company, Andreessen told me, Thiel believes that that is “a screaming buy signal, and the bigger the markup on the last round the more undervalued the company is.” Thiel’s point, which takes a moment to digest, is that, when a company grows extremely rapidly, even its bullish V.C.s, having recently set a relatively low value on the previous round, will be slightly stuck in the past. The faster the growth, the farther behind they’ll be. Andreessen grinned, appreciating the paradox: the more they paid for Mixpanel—according to Thiel, anyway—the better a deal they’d be getting.

    Generally, entrepreneurs want to bring in new investors for each round of funding so that they can create an auction-like environment to get the best combination of valuation and value-add. Thiel’s Paradox is that for entrepreneurs of fast growing companies, an insider round from existing investors, no matter the valuation, results in a good deal for investors. The next time you read about a startup raising another round of funding exclusively from the existing investors, think about Thiel’s Paradox.

    What else? What are some more thoughts on Thiel’s Paradox?

  • Learning More Now than While in School

    Recently I was talking with an entrepreneur and he made a comment that really stuck with me: I’m learning more now than while in school. Yup, that’s right. The best entrepreneurs I know are the fastest, and most voracious, learners. Every time I talk with them, they’re sharing some new lesson learned or idea gleaned.

    Here are a few thoughts on learning more now than while in school:

    • While in school there might be more new facts learned weekly, but as an entrepreneur there are many more real-world, applicable insights and strategies learned weekly
    • Make a goal to learn something new every day (see one new insight per day)
    • Find a peer group of like-minded people that share your desire to learn
    • Surround yourself with team members that enjoy learning and want to share ideas

    Entrepreneurs would do well to make sure they’re always learning and instill continual learning as a value within their organization.

    What else? What are some more thoughts on learning more now than while in school?

  • The 27x Rule for Venture Fund Aggregate Investment Exits

    Jason Lemkin has a great post up titled Why VCs Need Unicorns Just to Survive. The idea is that even with a standard-sized venture fund, say $100 million, the aggregate exit values of the investments needs to be $2.7 billion. Here’s how the math works, from his post:

    • $100M fund
    • Goal is $400M in returns before fees
    • Average ownership stake of 15%
    • Roughly 15 investments
    • $400M / 15% = $2.7 billion

    So, the 15 companies need to sell for an aggregate of $2.7 billion with the fund holding a weighted average equity position of 15% to generate $400M in returns. The 27x rule for venture fund aggregate investments means that whatever the venture fund size, multiple it by 27 to get the rough scale of all exits combined required for the fund to do well. If it’s a $50M fund, it needs $1.35 billion in aggregate exits. If it’s a $200M fund, it needs $5.3 billion in aggregate exits. The big wildcard is the average ownership stake, but the 27x rule is directionally correct

    What else? What are some more thoughts on the 27x rule for venture fund aggregate investment exits?

  • Unicorn Valuations aren’t the Same as Public Market Valuations

    Fenwick & West, one of the top law firms for high growth tech companies, has a great new post up titled The Terms Behind the Unicorn Valuations. With so many tech startups raising money at valuations of a billion or more, it’s clear we’re in boom times, but it’s also clear that many people don’t understand that the valuations of these unicorns aren’t the same as the valuations we see in publicly traded companies. Why? The investors in these companies get special preferred stock that has a number of additional protections, and in exchange, they invest at a higher valuation. Put another way, if the stock was common, like is normally associated with a publicly traded company, the valuations would be significantly lower.

    Here are a couple terms that make the preferred stock more valuable than common stock, according to the survey:

    • Acquisition Protection Terms – If the company is sold at a value lower than the investment valuation, the investors get all their money back, even if their percent ownership represents a smaller amount of money (e.g. if an investor puts in $100M at a $1B valuation and owns 10%, then the company is sold for $500M, instead of getting $50M in the sale, the investor gets their $100M back, even though that’s 20% of the sale).
    • Future Financing Protection Terms – If the company raises money at a lower valuation in the future, the existing investors get an increased ownership position in the company that represents the previous investment amount relative to the new valuation (e.g. if the company raised $100M at a $1B valuation, that’s 10%, but then if they went out and raised another $50M at a $500M valuation later, the investors that put in the $100M in the previous round would now have 20% of the company instead of 10%, and the non-investors like the entrepreneurs and employees would be diluted).

    For a great story that shows how deal terms matter more than valuation, read Heidi Roizen’s How to Build a Unicorn from Scratch – and Walk Away with Nothing. Due to these specials terms, and others, the valuations for unicorns aren’t the same as public market valuations as the investors get a number of protections that aren’t normal.

    What else? What are some other terms tech startup investors often get that make the valuations between private and public companies difficult to compare?

  • The Value of Skipping a Financing Round

    A topic that’s been mentioned several times recently is the value of “skipping” a financing round. Generally, the idea is that every time an entrepreneur raises money, their equity is diluted, so “skipping” a round is basically achieving a greater revenue/user/valuation milestone without raising money in the interim.

    Let’s look at the math for four hypothetical financing rounds assuming two co-founders each have 50% and ignoring employee equity and option pools:

    • Seed Round – Raise $1 million at a $3 million pre and sell 25% of the business
      Entrepreneurs – Diluted from 50% to 37.5%
    • Series A – Raise $5 million at a $15 million pre and sell 25% of the business
      Entrepreneurs – Diluted from 37.5% to 28.1%
    • Series B – Raise $15 million at a $45 million pre and sell 25% of the business
      Entrepreneurs – Diluted from 28.1% to 21.1%
    • Series C – Raise $50 million at a $150 million pre and sell 25% of the business
      Entrepreneurs – Diluted from 21.1% to 15.8%

    As an example, if the entrepreneurs were able to get to the Series C equivalent funding amount and valuation, without having the equivalent Series B in the interim, they’d have each have 21.1% of the company instead of 15.8% — that’s a major difference. More success with less capital invested is always a great formula.

    What else? What are some other thoughts on the value of “skipping” a round of funding?

  • Product Pricing

    Earlier today I got into a pricing discussion with a fellow entrepreneur. We were talking about all the usual topics like number of plans, positioning in the market, and competitor pricing. Then, I shared the biggest pricing mistake we made at Pardot in the early years: our pricing model didn’t grow well with the account. Meaning, as our customers became more successful, and got more value from the product, there was little opportunity to capture more revenue. Eventually, we shifted from pricing based on email volume to pricing based on the size of the database, and that made a huge difference.

    Here are a few thoughts on product pricing:

    • Consider having two value axes: one based on functionality/modules and one based on usage (e.g. seats or metered)
    • Err on the side of being too expensive as it’s easier to give a discount to win a deal and customers are more likely to give pricing feedback when things are more expensive (no one ever tells you your product is too cheap and they’d pay more)
    • Balance capturing the most value with the pricing plans vs making them easy to understand (lean towards keeping things simple)

    Pricing is an area many entrepreneurs struggle with, especially if the product isn’t in the market yet or only has a few customers. As the business develops and more prospects consulted, pricing becomes more obvious. Even then, make sure and capture more value as product usage grows.

    What else? What are some more thoughts on product pricing?