David Cummings on Startups

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  • Net Promoter Score and Customer Referrals

    After manually sending out customer surveys on a regular basis for years, we decided to put an automated net promoter score (NPS) question in the application. Every 90 days the user would see the question “How likely are you to recommend this product to a friend?” with numeric choices ranging from 0-10, a simple “Comments” box, and a link “I’ll pass on answering” for people in a hurry.

    Immediately, we started getting feedback from customers, including specific comments on things they liked and disliked. Many customers, even with a “Need help?” link prominently displayed in the header, wouldn’t tell us when something was bothering them. Now, once a quarter, they’d use the NPS prompt to help us help them.

    After running this new module for a few months, we had an idea internally to try and entice customers that gave a 9 or 10 (promoters) an incentive to actually recommend their friends to us. Upon entering a 9 or 10, the dialogue box showed an offer for a $100 Amazon.com gift card if they referred a friend that completed a demo of our product. This message was linked to a landing page that provided more details and had a form to capture the referral information. Then, as hoped, referrals started flowing in and never stopped.

    Casually asking customers to answer the net promoter score question and then prompting for a referral from the biggest fans is a great way to grow the business.

    What else? What are some thoughts on the idea of using net promoter score with customer referrals?

  • More Ideas to Help Entrepreneurs

    After giving a tour of the Atlanta Tech Village last week to a C-level executive of a local Fortune 500 company, he asked, enthusiastically, how he could help out. I cited the normal ways like mentoring, hearing curated pitches from startups (see One Way Government Can Help Startups), and spreading the word about the innovation taking place in their own backyard. Then, he asked something else that stuck with me: what are some other ideas you’re considering to help entrepreneurs?

    Here are a few more ideas to help entrepreneurs and startups:

    • Host a weekly/monthly AMA (ask me anything) in-person where a successful entrepreneur answers questions (straight Q&A)
    • Lead a regular webinar that’s open to anyone with a different entrepreneurship topic each week (e.g. product management, engineering, sales, marketing, fundraising, etc.)
    • Facilitate an entrepreneur bootcamp program
    • Run more programs to help founders meetup, internship fairs, and domain expert roundtables

    Ultimately, increasing the collaboration and flow of information will help more entrepreneurs succeed.

    What else? What are some more ideas to help entrepreneurs?

  • Entrepreneurs are a Little Crazy

    Fourteen years ago the dot-com crash had just finished and I went to my professor asking for $20k. He obliged, I started recruiting classmates as summer interns, and sought out my college advisor to take a leave of absence even though I was only 2.5 credits away from graduating. In hindsight, I was a little crazy, yet completely determined to succeed.

    Jason Lemkin likes entrepreneurs that are a little crazy, in a good way:

    Here are a few ideas to evaluate if an entrepreneur is a little crazy:

    • When they talk, is there a glint in their eye that what they’re pitching might actually happen?
    • Is there a feeling of determination that they’ll walk through walls to be successful?
    • Are they blissfully ignorant to the challenges ahead while levelheaded otherwise?
    • Do you get the feeling that it’s not a matter of if they’ll be successful, but rather when and at what scale?

    After thinking about it, I agree that some of the best entrepreneurs are a little crazy, in a good way. Creating something from nothing is incredibly difficult, and entrepreneurs that are a little crazy are more likely to succeed.

    What else? What are some other thoughts that entrepreneurs are a little crazy?

  • The Power of a Winning Team

    Recently I was talking with an entrepreneur that has an amazing team. He said that they paid well, but not the best. He said they had good benefits, but not great. So, naturally, I asked the next question: how was he able to recruit such a team? The answer, to him, is that people want to be on a winning team. Whether the company is winning or the local sports team is winning, people want to be a part of it.

    Success attracts more success. As an entrepreneur, one of the initial challenges is to push hard enough to get to that first level of success. The milestone might come by way of a paying customer, or a team member that joins without pay — something that’s concrete and meaningful. Then, after more hard work, the next milestone is achieved. And the next. And the next. Suddenly, the Big Mo has arrived and things get easier. Winners keep winning.

    Never underestimate the power of a winning team.

    What else? What are some more thoughts on the power of a winning team?

  • One Way Bigger Valuations Help Recruit Talent

    With all the press about startups raising large sums of money at huge valuations, especially Slack just a few weeks ago raising $160 million at a $2.8 billion valuation, one item that hasn’t been talked about much is how large valuations help when it comes to recruiting talent. In the war for talent, equity compensation plays an important role, and larger valuations make it easier to give larger dollar amounts of equity, everything else constant.

    Let’s look at how larger valuations make it easier to give more enticing equity grants:

    • Post Series A, a standard equity grant for a software engineer might be .1% (one tenth of one percent)
    • If the startup raises a $10 million Series A on a $40 million pre-money, the post money valuation is $50 million and the .1% equity grant is valued at $50,000, assuming a full, in-the-money sale of the business
    • If the startup raises a $50 million Series A on a $200 million pre-money, the post money valuation is $250 million and the .1% equity grant is valued at $250,000, assuming a full, in-the-money sale of the business
    • An equity grant of $250,000 is much more compelling than an equity grant of $50,000

    Of course, if the valuation was less, more equity can be granted to make the dollar amounts equal. Only, the amount of equity is a fixed constant (e.g. you can’t have more than 100% of the equity, but you can keep diluting existing shareholders, within reason, to create new stock option pools). While equity is fixed, the valuation has no max, so a higher valuation makes it easier to make the same stock option grant look much better because the dollar amount is much higher.

    Often, the size of the equity grant to a new employee goes down with each round of financing as the number of employees to be hired from the pool of equity goes up (e.g. after Series A, hire 25 people, after Series B, hire, 75 people, after Series C, hire 150 people, etc). So, assuming a bigger valuation early in the multi-round fundraising process, talent is easier to recruit as the same percentage of ownership results in a much higher dollar amount.

    What else? What are some more thoughts on bigger valuations helping to recruit talent?

  • Scaling Culture in a High Growth Startup

    With corporate culture being the only sustainable competitive advantage completely in the control of the founders, it’s critical to be proactive about nurturing and enhancing it. Only, as the startup grows, scaling culture can be a real challenge. More people. More personalities. More challenges.

    Here are a few thoughts on scaling culture:

    Scaling culture is hard. With the necessary time and attention, the culture at 100 employees can be even stronger, and more sustainable, than at 10 employees.

    What else? What are some other ideas for scaling culture in a high growth startup?

  • Understanding Investor Pro-Rata Rights

    One area that doesn’t seem well understood is how investor pro-rata rights work. When an investor buys a portion of a startup, whether as an angel or VC, they almost always also get the right to invest in subsequent rounds to maintain their same percentage of ownership. If the investor doesn’t continue to put in more money each time the company raises a round, the percentage of ownership in the business goes down. Here’s how it might look:

    • Angel investor puts in $100,000 for 5% of a startup as part of the seed round ($2 million post-money valuation)
    • Startup raises a $3 million Series A at a $7 million pre-money valuation and a $10 million post-money valuation
    • If the angel investor doesn’t invest any additional money at the Series A, the 5% ownership is reduced to 3.5%
    • If the angel investor does want to participate pro-rata, the angel investor has to put in $150,000 (5% of the $3 million), and thus still own 5% of the company, but has now invested a total of $250,000

    This process of needing to invest more money in each subsequent round to maintain ownership continues until the company goes out of business, is acquired, or goes public. Additionally, ownership, as a percentage, is still likely to be reduced, regardless of subsequent rounds, by things like new stock option pools. Ownership, as a percentage of a startup, is a moving target, and investors participating pro-rata, or not, is an important component.

    What else? What are some more thoughts on investor pro-rata rights?

  • Bronto and the Big Bootstrap Exit

    Back in 2002, a year after I started Hannon Hill for content management software, I was introduced to Joe Colopy, CEO of Bronto, as he had just started a new email marketing company with Chaz Felix. Both of us were based in Durham, NC, and even with the Duke/UNC rivalry, entrepreneurs enjoy connecting with entrepreneurs. After talking briefly on the phone then, we connected again in 2008 as Bronto was one of the first Pardot customers.

    Well, last week, Bronto announced that NetSuite was acquiring them for $200 million, making it a huge exit, especially for a bootstrapped company.

    Here are a few notes on Bronto:

    • 271 employees on LinkedIn (source)
    • 2013 revenue of $27 million (source)
    • 2014 revenue of $38 million (source)
    • 18 billion emails sent per year (source)
    • Definitive agreement signed but actual closing of deal not expected until end of 1H 2015 (source)

    It’s awesome to see another big bootstrap exit and congratulations to Joe, Chaz, and the whole Bronto Nation!

  • Atlanta Startup Village #27

    Atlanta Startup Village (ASV) #27 will be held this Monday night at the Atlanta Tech Village. The Startup Village is a monthly event where five entrepreneurs give five minute pitches followed by five minutes of audience Q&A. Overall, the goal is to bring the community together and share what’s going on with fellow entrepreneurs in the area.

    Here’s are ASV’s presenting companies for Monday:

    • MotoBrain – Hardware devices that make the smart phone more connected with cars, bikes, and boats
    • AnswerRocket – Natural language queries for business intelligence questions
    • TimeCue – Online employee time clock
    • SafelyStay – Guest screening for vacation properties
    • REscour – Automated market research for commercial real estate

    Please join the meetup and come out to the event. ASV is the largest monthly gathering of entrepreneurs in the Southeast and worthwhile for anyone interested in getting involved in the startup community.

  • Angel Liquidity Fund Idea

    Continuing with yesterday’s post on the Pooled Angel Investor Liquidity Fund Idea, there’s another variation that’s more focused on making money as a fund while still helping with the liquidity problem that angels have in the market. Instead of angels putting a small portion of their equity into a pooled fund, the idea is for a dedicated fund that buys stakes at a discount from angel investors once their investments have raised money from institutional investors.

    Here are a few ideas for an angel liquidity fund:

    • Focused on startups that raise institutional capital (much like Silicon Valley Bank and Square 1 Bank generally do for lines of credit)
    • Purchases equity at a discount to the most recent funding round (e.g. a 50% discount due to limited rights, lack of liquidity for the asset, etc.)
    • Only partial liquidity for the angel investor as it’s important for the angels to still have a stake in the startup
    • Geographic and/or industry/vertical specific (e.g. B2B Software-as-a-Service startups)

    Here’s how an ideal example might work. An angel puts $100k into a startup for 5% of the startup, thus a $2 million post-money valuation. Then, 18 months later, the startup raises $3 million from institutional investors at a $10 million post-money valuation. The angel investor wants some liquidity and owns roughly 3% of the $10 million company after dilution (assuming the angel didn’t participate pro-rata in the round). On paper, the angel’s investment is worth $300,000, and the angel would like to get their original principle back, so they sell $200,000 of paper value for $100,000 in cash to the fund, while still owning $100,000 of paper value in the startup. Now, the angel investor is more likely to invest in additional startups and still has good upside from the existing investment.

    Providing liquidity to angels and making money as a fund are both attainable, especially when more of the angel investments raise institutional rounds. This method might reduce the rate of return for the angel investors, but that’s expected due to increased liquidity.

    What else? What are some more thoughts on the angel liquidity fund idea?