David Cummings on Startups

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  • Coworking as a Business Opportunity

    As the coworking space continues to gain attention, especially with the growth of the tech industry and reports of WeWork raising $335M at a valuation of almost $5B, more potential investors are drawn to the market. With the Atlanta Tech Village, we’ve had the chance to learn first-hand about coworking and flexible office space for over two years now, and have several thoughts on the market.

    Here are a few pros and cons of coworking as a business opportunity:

    Pros

    • Fulfills a growing desire for freelancers, entrepreneurs, and creative class employees to have a sense of community
    • Capitalizes on millennials entering the workforce and their expectations of a different office environment
    • Allows repurposing of existing office space into a higher value offering
    • Provides greater efficiency for business expenses like internet access, conference rooms, break rooms, etc. (e.g. with a direct lease, many items are dedicated that don’t need to be dedicated)

    Cons

    • No barriers to entry as office/retail space is abundant
    • High customer turnover due to a less stable target audience
    • Expensive renovations required for a high-quality, creative feel
    • Prevalence of hobby and labor-of-love coworking space providers (e.g. many coworking spaces are subsidized and have a social mission)
    • More labor intensive than traditional office space

    As a business opportunity, I don’t think coworking is a good place to make strong returns unless there’s a unique, differentiated brand whereby people are willing to pay significantly above market rates for the space. Most professional investors getting into the coworking market will fail. Coworking, in order to build community, is an amazing opportunity.

    What else? What are some other thoughts on coworking as a business opportunity?

  • When to Pitch at Startup Events

    With a number of startup pitch events scheduled over the next few weeks, it’s a good time to think through when it’s best to go on the pitching tour. Most events have an element of startup theatre, so the first thing to do is to evaluate the opportunity cost of attending another event vs. making more progress on internal goals and priorities. Assuming there’s an overall fit, here are a few items to think through when considering applying to pitch at a startup event:

    • Fundraising – Is there a desire to raise money and the corresponding metrics to warrant investment? Too often, entrepreneurs head to pitch events in an effort to raise money, but don’t have the corresponding business metrics. If the metrics are strong, pitch events are a good way to showcase them and tell a compelling story.
    • Lead Generation – With a broadly applicable product, pitch events can be a great way to generate leads. Similar to the idea of asking VCs for intros to portfolio companies, ask the audience for leads.
    • Recruiting – Finding great talent is always a challenge, especially during high growth stages. Pitch events can be a good way to spread the word and find new candidates.

    If you ask an entrepreneur why they do pitch events, outside of trying to raise money, the most common answer is networking. Entrepreneurs, generally, are pretty social and want to meet other people, especially other people that can help them achieve their dreams. Naturally, there are a number of other networking events beyond pitch competitions.

    For entrepreneurs considering pitch events, evaluate the current business goals, and make sure that the time commitment is worthwhile.

    What else? What are some other thoughts on when to pitch at startup events?

  • Comparing SaaS Against the 7 Better Business Model Ideas

    Continuing with yesterday’s post 7 Ideas for Better Business Models, I wanted to take it one step further and compare Software-as-a-Service (SaaS) to the seven ideas and see how it stacks up. I’ve been a huge fan of SaaS for 8+ years now since the co-founding of Pardot, and want to help other entrepreneurs understand why it’s such a great model.

    Here’s how SaaS compares to the seven better business model ideas:

    1. Switching Costs – This varies depending on the type of product. Basic email marketing tools have low switching costs whereas heavily customized enterprise resource planning products have high switching costs. Generally, this is neutral for the average SaaS product.
    2. Recurring Revenues – SaaS, by its very definition, has recurring revenue, making for tremendous predictability. This is a strong positive for SaaS.
    3. Earning vs Spending – Most SaaS products are monthly pre-pay with a good number of annual pre-pays. Monthly pre-pay is a slight positive for SaaS and annual pre-pay is a strong positive for SaaS.
    4. Game-Changing Cost Structure – Having one version of the product that’s automatically updated for all customers is more cost effective compared to installed software for engineering. But, most of the revenues are spent on sales and marketing, so it isn’t a large cost structure difference from the overall point-of-view. This is neutral for the average SaaS company (the cost structure for the buyer is much better for SaaS as it’s more of a pay-as-you-go model as opposed to a large lump sum up front).
    5. Get Others to Do the Work – This isn’t applicable for SaaS.
    6. Scalability – The nature of the SaaS is that it’s massively scalable and there are minimal marginal costs to add more customers. Market scalability is driven by the actual product and target audience, so this is neutral for the average SaaS product.
    7. Protection from Competitors – Products that have more customization and/or more of a network effect have greater protection from competitors. This is neutral for the average SaaS product.

    SaaS really excels in the recurring revenue and earning vs spending categories, and is often very scalable. Other better business model ideas are hit or miss depending on the actual product and market.

    What else? What are some more thoughts on comparing SaaS to the seven better business model ideas?

  • 7 Ideas for Better Business Models

    Strategyzer has a great blog post titled Why Some Business Models Are Better Than Others. 10 years ago I had a coffee meeting with one of the most successful tech entrepreneurs in town. At that meeting, he emphasized the importance of recurring revenue and suggested that I figure out how to build a business with a subscription element. I took it to heart and have been working on Software-as-a-Service companies ever since. Recurring revenue is one of the seven ideas for better business models.

    Here are the seven ideas for better business models from the article:

    1. Switching Costs – Higher switching costs decrease the chances of a customer leaving to go to a competitor
    2. Recurring Revenues – More predictable cash flow and easier to grow the business (assuming good renewal rates)
    3. Earning vs Spending – Models that collect payment before having to spend money to produce the goods or services are more desirable and valuable
    4. Game-Changing Cost Structure – Something priced 5% less than established incumbents isn’t that compelling. Something that’s priced 95% less than the established incumbents, and also sustainable, is incredibly compelling.
    5. Get Others to Do the Work – Think about the rise of the on-demand marketplaces and the ability to tap into under-utilized labor
    6. Scalability – Global reach and distribution provide for greater opportunities
    7. Protection from Competitors – Network effects, moats, and other strategies that make it difficult to enter the market

    The next time you hear an entrepreneur’s pitch, run through these seven ideas and see how well it stacks up in each area.

    What else? What are some other ideas for better business models?

  • Gestalt Protocol

    Back in 2008 I attended a new member forum training class for the Entrepreneurs’ Organization (EO). Being a little arrogant, and completely clueless, I thought it was crazy to go to a six hour training event just to join a group of entrepreneurs. Entrepreneurs are smart. Entrepreneurs are fearless. Entrepreneurs don’t need training. Naturally, I was wrong.

    Turns out, the training class was really a leadership and communication program, and was worth every bit of the six hours. One of my favorite takeaways was the Gestalt Protocol. With Gestalt, relevant first-hand experiences are shared in an effort to offer what worked, and didn’t work, in a manner that’s fact-based, as opposed to opinion-based.

    Often, entrepreneurs, when working with team members, provide advice and direction, regardless of whether or not it’s based on prior experience. From there, the team members, wanting to be supportive, run off and do it, even if they don’t have buy-in or context. Over time, the team members become less likely to offer their own suggestions, and rely more and more on the entrepreneur to make decisions. Not good.

    Instead, with Gestalt Protocol, the entrepreneur shares experiences, including what worked, and didn’t work, about a similar situation in the past. If no relevant experience is available, the entrepreneur simply says, “I don’t have any relevant experience. What do you think we should do?” Now, the team member will provide ideas and suggestions, thereby increasing buy-in and creating a culture of independent thinkers.

    If, when providing advice, the word “you” is used instead of “I”, think twice, and ask if that’s the best way to give the advice. Statements like “I found x when I did y” are much more powerful compared to “You should do x.” Gestalt Protocol works and is effective.

    What else? What are some more thoughts on the Gestalt Protocol?

  • The Non-Valley Valuation Discount

    One of the more frustrating concepts for entrepreneurs outside of Silicon Valley is the non-Valley valuation discount. With numerous high-profile valuation announcements, especially the excitement around unicorns (startups with a valuation of $1 bill or more), it feels like everyone is getting amazing valuations, especially as a multiple of current revenues. Only, if you peel back the layers, the startups outside the Valley that are getting the big valuations have either a) a successful, serial entrepreneur that’s already had a big exit (e.g. Josh James of Domo), or b) insanely fast growth and market adoption (e.g. Yik Yak).

    Here are a few reasons why there’s a non-Valley valuation discount:

    • Plane Travel – VCs usually invest in one or two companies per year, meaning the bar is already extremely high to do a deal, and getting on a plane, especially multiple planes (e.g. a city without direct flights to SFO), results in less competition for a deal, and thus a lower valuation
    • Talent Networks – VCs want to be value-add, in addition to money, and a major benefit is their network of potential employees, advisors, and industry connections, most of which are where they live
    • Swinging for the Fences – VCs that aim for homeruns pay higher valuations compared to ones that play more for singles and doubles, because the total addressable market weighs heavier in their decision making process

    Will every non-Valley startup get a valuation discount? Like my favorite economics professor at Duke, David Johnson, would always say: the answer is Bob Dole’s underwear — Depends. Like it or not, there’s a real non-Valley valuation discount that most entrepreneurs experience first-hand when out raising money.

    What else? What are some other thoughts on the non-Valley valuation discount?

  • Front-End Only Minimum Viable Product

    Steve Blank and Eric Ries helped popularize the concept of the minimum viable product (MVP) as a way to get a functional prototype into the hands of potential customers as quickly as possible. Previously, too many entrepreneurs built complex, elaborate products without incorporating customer feedback, resulting in failure.

    Now, with some of the latest JavaScript frameworks, the minimum viable product is even simpler: a front-end only MVP. Here’s how it might work:

    Really, the key difference with traditional web-app MVPs is putting more logic and data storage on the client side (the browser). Functionally, to the end-user, it feels and operates like a fully-functional application, only long-term persistence and back-end processing isn’t present. Much like Parse provides a flexible backend with little work for mobile apps, these modern, MVC-based JavaScript frameworks make for a front-end only minimum viable product.

    The next time the minimum viable product topic comes up, consider a front-end only MVP as a simpler starting point.

    What else? What are some more thoughts on a front-end only minimum viable product?

  • Review of the Previous Quarter

    With Q1 2015 wrapped up, now’s a great time to reflect on the previous quarter. Did anything dramatic happen? Why, yes, there were some serious ups and downs. From a rhythm, data, and priorities perspective, there are several items to review:

    • Simplified One Page Strategic Plan – The one pager is the overall business alignment doc. Priorities change every quarter, along with the basic metrics, but much of the document stays the same. 
    • Quarterly Check-ins – Whether it’s monthly sit-downs or quarterly, it’s critical to spend time with team members and constantly calibrate. With tiny startups, it’s more ad hoc and formalizes as the business grows.
    • Monthly SaaS Metrics – While the one pager has great high-level info, the monthly SaaS metrics sheet breaks it down into dozens of data points and provides a fine-grained view into the performance of the business.
    • Start, Stop, Continue – What’s working well, not working, and needs to change in the business? Just like a scrum meeting, it’s important to evaluate the overall business functions as well.

    The quarterly review of rhythm, data, and priorities feels frequent enough to be useful and infrequent enough to not be burdensome. Entrepreneurs would do well to implement a personal quarterly process whereby key aspects of the startup are reviewed.

    What else? What are some more thoughts on a review of the previous quarter?

  • High EQ, High IQ, and Strong Work Ethic

    A few days ago I got into a conversation about what makes for a great founding team. Of course, we hit the normal topics like passion, resourcefulness, and vision. Then, I heard it summarized in a way I hadn’t heard before: amazing founding teams have high EQ (emotional quotient), high IQ (intelligence quotient), and a strong work ethic. Now, if the founders have all three characteristics, that’s incredible, but founding teams typically have more variability around EQ, and, ideally, all have high IQs and a strong work ethic.

    Here are a few thoughts on each:

    • High EQ – Excellent soft skills are critically important, especially for founders that are in an executive role with direct reports. Leading other people isn’t easy, and there are many fuzzy, human elements that are difficult to master.
    • High IQ – Smarts. Understanding how to build things and being able to ask the right questions is hard. While it isn’t a requirement to be the smartest person in the room, it’s still important for founders, especially technical founders, to have a high IQ. In fact, it takes a level of intelligence to realize someone else is smarter, and to create an environment where each new hire raises the IQ of the whole company.
    • Strong Work Ethic – With high EQ and IQ, the final piece of the equation is a strong work ethic. I’ve seen teams out-execute much more heavily funded competitors because they worked harder and smarter. No matter how much talent a team has, a tremendous amount of effort is required for success.

    The next time you meet a team of entrepreneurs, evaluate where they fit on the EQ, IQ, and work ethic scale. If they have all three, the chance of success increases dramatically.

    What else? What are some more thoughts on high EQ, high IQ, and strong work ethic as key founding team characteristics?

  • The Gap Between Selling a Company and Telling the World

    At 11:05am on Tuesday, October 9th, my co-founder and I finished digitally signing all the legal documents. Pardot was officially acquired by ExactTarget. At lunch that day, with three other senior leaders from the team, I looked up, smiled, and commented that we were all unemployed.

    See, as part of the selling the company, each member of the executive team signed a legal agreement resigning from Pardot. Then, after the deal went through, everyone but myself signed an employment agreement to be a part of ExactTarget. For a period in the middle, technically, we were unemployed.

    More important than being unemployed, we had sold the company, but we couldn’t tell the staff until 3pm on Thursday, and couldn’t tell the world until the public markets closed at 4pm on Thursday. For 51 agonizing hours, we tried to continue on as usual, all the while knowing that we’d sold the business and huge changes were imminent. Life was never going to be the same.

    What would our team members say? Were we a sell out? Would we really be able to grow faster with more resources? How would the culture, the thing we valued the most, change? What’s next? We didn’t have all the answers, but we knew that there was a huge opportunity to lock in a “win”, and have a chance at becoming the most widely used B2B marketing automation platform in the world.

    Selling a company is an incredibly emotional experience, and, one of the most anxiety-ridden parts is the time between closing the deal and telling the world.