David Cummings on Startups

Blog

  • Rule of 40% for SaaS Companies

    Brad Feld wrote a great piece last month titled The Rule of 40% for a Healthy SaaS Company. The idea is that growth plus profitability should be 40% or greater once at scale (double digit millions of revenue). As an example, if a SaaS company grew 100% year-over-year, and had negative margins of 60% (burning lots of cash), then those combined percentages equal 40% (yes, they’re two different percentages, but the metric is more of a gauge rather than scientific). As for another example, if a SaaS company grew 20% year-over-year, and had EBITDA (profit) margins of 20%, then those combined percentages equal 40%, and hit the mark.

    Here are a few thoughts on the rule of 40% for SaaS companies:

    • For seed stage (under $1M run-rate) and early stage ($1-$5M run-rate), the percentage should be much higher
    • Higher growth rates often equate to higher valuations (see the growth rate valuation multiplier)
    • No growth, and profit margins of 40%, would still fit this 40% metric, but not be nearly as interesting to traditional venture and growth stage investors (unless they thought significant revenue growth was possible)
    • As scale increases, maintaining high growth rates becomes much more difficult as the law of large numbers kicks in
    • Mailchimp, a rare unicorn, has double digit revenue growth and greater than 50% profit margins

    Thinking about growth rate in conjunction with profitability makes perfect sense as there’s always a trade off between the two. The Rule of 40% for SaaS companies provides a general metric that takes into account both growth and profitability.

    What else? What are some more thoughts on the Rule of 40% for SaaS companies?

  • 16 Signs You’re an Entrepreneur

    Last month I was talking to an entrepreneur that was going through a really difficult spell. No matter how hard he tried, it seemed like everything went wrong. After we talked about a number of challenges, I stopped, looked up, and said, “those are all signs you’re an entrepreneur.”

    Here are 16 signs you’re an entrepreneur:

    1. One day you’re on the top of the world and the next day you’re completely demoralized
    2. Those layoffs last year were done by you personally
    3. Dozens of investors have rejected your investment pitch
    4. In the morning you’re writing code, at lunch you’re emptying the trash, and in the afternoon you’re on the phone doing a sales call
    5. That first company credit card was really your personal card
    6. Those two employees that don’t fit the culture — you agreed to their hiring out of desperation to fill the position
    7. Every week you have a new idea to make the company better
    8. Competitors have raised way more money than you
    9. Those channel partners you expected to sell your product haven’t even hit 10% of expectations
    10. Culture is valued more than anything else since it’s the only thing within your control
    11. Everything you thought you’d accomplish took twice as long as expected and was twice as expensive
    12. After thinking you were alone, you found 10 other entrepreneurs in the same exact spot
    13. No matter how hard you try, there are never enough hours in the day
    14. The original idea for the business wasn’t the idea that ultimately became successful
    15. Making decisions with imperfect information gets you excited
    16. When things are going well, you have the best job in the world

    Being an entrepreneur is both exciting and scary at the same time. These 16 signs ring true for entrepreneurs around the world.

    What else? What are some other signs you’re an entrepreneur?

  • More Investor Emphasis on a Repeatable Customer Acquisition Process

    Over the past month I’ve talked with several entrepreneurs that are trying to raise money for their startup. Often, there’s some initial success from a couple friends or a rich uncle that will put in $25,000 or $50,000, and then, when talking to angel investors, there’s not much luck. The challenge: angel investors are requiring that entrepreneurs have the start of a repeatable customer acquisition process in place. No longer is having a product with a handful of paying customers enough. Now, more investors need to see how acquiring the first 50 customers is going to translate into acquiring the next 500 customers.

    Here are a few thoughts on investors requiring a repeatable customer acquisition process:

    • Entrepreneurs that only have a product, or a product with a limited number of customers, are going to have an increasingly difficult time raising money (it’s already hard to raise money)
    • More entrepreneurs are going to realize the importance of distribution sooner (e.g. using tools like SalesLoft to proactively reach out to prospects)
    • Investors are always looking for ways to de-risk an investment, and more proof of a repeatable process helps add confidence

    Investors are requiring more of a repeatable customer acquisition process from entrepreneurs before investing. Entrepreneurs would do well to plan for this and ensure that they have enough progress to satisfy investor requirements.

    What else? What are some other thoughts on more investor emphasis around a repeatable customer acquisition process?

  • Atlanta Tech Village Job Board as #1 Benefit for Startups Hiring

    Earlier this week I was talking with a few entrepreneurs in the Atlanta Tech Village and I posed the question: what’s the best benefit of the being the community? Naturally, I was thinking I’d hear things about cool office space or the opportunity to work with a number of other like-minded entrepreneurs. Two entrepreneurs immediately chimed in that the best benefit was the Atlanta Tech Village Job Board. Now, in this case, they both had recently filled open positions, so hiring was top of mind, and some of their highest quality candidates came from the job board.

    Here are a few thoughts on the Atlanta Tech Village Job Board as the #1 benefit for startups that are actively hiring:

    • Recruiting talented people that fit the values is the most important thing an entrepreneur does, so increasing the pool of quality applicants is invaluable
    • Costs for recruiters to place candidates can easy run 20-30% of the first-year salary, thus finding one $100k/year team member through the job board can cover the cost of office space for the whole year
    • Job boards are everywhere, thereby making it hard for startups to standout while the Village job board helps self-select people that are actively looking to work at a startup (just like SaaStr.Jobs)

    Entrepreneurs in the Village would do well to list on the Atlanta Tech Village Job Board and job-seekers looking to get in with a startup would do well to browse the openings. Many startups are hiring and finding some of their best candidates through the job board.

    What else? What are some other thoughts on finding candidates through a job board as a major benefit of being in a large tech entrepreneurship center?

  • Time is the Great Equalizer

    Recently I was talking to an entrepreneur about competitors and market strategies. Then, he said something that stuck with me: time is the great equalizer. That is, all of us only have 24 hours in the day. Competitors don’t get more time. Markets don’t get more time. Yes, some firms have more resources, but they don’t have more time.

    Here are a few thoughts on time as the great equalizer:

    • No matter how hard I work, there’s always more that I want to accomplish, and I’m not alone
    • Software engineering, unlike most other creative efforts, has some of the most incredible economies of scale (one small team’s product can be used by millions of people as readily as it can by 10 people)
    • Teams with the best people can run circles around teams with regular people, and time compounds the quality of work the best people perform
    • While resources are important, most startups that win do so with limited resources in their first few years

    Entrepreneurs would do well to realize that everyone is constrained by time and that it’s the great equalizer.

    What else? What are some more thoughts on the idea that time is the great equalizer?

  • When a Product Works but a Business Doesn’t

    An entrepreneur emailed me recently asking for advice about his Software-as-a-Service (SaaS) business. After several years of working on it, and signing up hundreds of customers paying a small amount of money, it became clear that it wasn’t a viable business. That is, by all accounts, product-market fit was reached but no matter how hard he tried, there wasn’t a repeatable customer acquisition process that could scale it to a multi-million dollar revenue business and make it worthwhile. This is one of the most challenging cases: years have been invested, customers clearly want it, and there’s no sustainable business in its current form.

    Here are a few questions to ask when a product works but a business doesn’t:

    • Are there any adjacent markets or opportunities that can use the expertise developed with the first product?
    • How excited is the team about the opportunity? Has any fatigue set in from the current product?
    • Is the product a must-have or a nice-to-have? What would it take to make it a must-have?
    • Can you sunset the product or wind it down such that customers have time to switch to a different product?
    • How much effort does it require to keep it running while moving to a different product? Can focus truly be put on something else without worrying about the first product?

    Products that work with business models that don’t actually happen more often than expected. Inevitably, some ideas aren’t economically viable even though they look great from the outside looking in. Even though it’s hard, sometimes the best approach is to stop throwing good money after bad and pivot or iterate into a better opportunity.

    What else? What are some other questions to ask when a product works but a business doesn’t?

  • More Venture Capital vs More Local Venture Capital

    One of the commonly repeated phrases by city leaders is that we need more venture capital in the region. Partly, the statement is conflating the desire for more money to come to the region (presumably from the limited partners in the fund that invests) with the desire for more of the financing in successful local startups to be local money (e.g. local VCs are more likely to have local limited partners). So, a) we want more successful startups, b) we want more venture capital, and c) we want the venture capital to be local, if possible, so that more of the proceeds from the winners stay local.

    Here are a few thoughts on more venture capital vs more local venture capital:

    • More venture capital, in general, will come with more successful startups (entrepreneurs need to come before the money comes)
    • Venture capitalists can be shown good startups in a region, but they’re only going to invest if they believe that a startup is going to deliver the best return compared to all other startups evaluated (e.g. if a VC from California invests in a startup in Atlanta, it’s because the Atlanta startup is going to make them more money than the startups they looked at in California)
    • Local venture capital is going to be smaller dollar amounts as firms build up their track records, and only after many years (decades?) of success, will local firms be able to raise and invest the much larger sums we’re seeing growth and late stage startups raise

    Wanting more venture capital invested in a region is different from wanting more local venture capitalists. Regardless, both will happen with more successful startups and outsized returns from investments in those startups. More venture capital starts with more success stories.

    What else? What are some more thoughts on more venture capital vs more local venture capital?

  • Evaluating if a Startup Idea is Good

    If someone asks if their startup idea is good, and it’s not a good idea to tell them one way or another, what to do? Easy, help them by asking key questions for them to consider, so that they can make the assessment on their own, based on feedback from people in the market. Here are a few potential questions to ask:

    • How many potential customers have you talked to about the idea?
    • How much did the potential customers say they’d pay for the solution?
    • How many potential customers are out there?
    • How expensive will it be to acquire customers?
    • How will potential customers justify the ROI for the solution?
    • Is the solution a must-have or a nice-to-have?

    Clearly, it requires time and a number of conversations to evaluate if a startup idea is good. The best place to start: potential customers.

    What else? What are some other questions to ask to help an entrepreneur evaluate if a startup idea is good?

  • Asking if a Startup Idea is Good

    Recently an entrepreneur was walking by in the hall and asked if I’d listen to the latest idea he was working on. Sure, I said, and we talked for a few minutes. Upon asking me if I liked the idea, I immediately thought on Fred Wilson’s tweetstorm and said that it doesn’t matter if I think it’s a good idea because they’re investing their time in it and I’m not. Finding out what the market and potential customers think is much better than what some entrepreneur thinks.

    Here’s the end of the tweetstorm:

    The next time an entrepreneur asks if their idea is good, tell them what matters is that they think it’s good as they’ll be spending time on it. Entrepreneurship starts with believing in oneself as a prerequisite to getting others to believe.

    What else? What are some other thoughts on asking if a startup idea is good?

  • What if the Atlanta Tech Village were Free?

    In an effort to make the Atlanta Tech Village the best place for entrepreneurs to go to increase their chance of success, we’re always brainstorming ideas to make it better. One idea was “what if the Atlanta Tech Village were completely free?” Of course, it costs a million dollars a year just for things like property taxes, utilities, security, maintenance contracts, and more, not including staff salaries, to keep the building open. Absent the financial questions, here are a few things that might change:

    • Stricter Entrance Criteria – The Village requires that startups have proprietary technology and meet our core values (be nice, dream big, pay it forward, and work hard/play hard). With more demand, entrance requirements could include having a working product, paying customers, or other milestones.
    • Stricter Exit Criteria – Right now, there’s no timeframe on being in the Village and startups graduate out once they have a few dozen employees. The greatest need for office space is in the 2-8 person range, so startups would graduate sooner to ensure room for the smaller firms.
    • Ongoing Metrics Tracking –  Individual startup progress isn’t measured, so there would need to be more focus on metrics and results to ensure that startups not meeting expectations are moved out to make room for new startups to come in.
    • Longer Waiting List – With no cost, demand would grow and a longer list of startups would want to be in the community.

    If the Village were free, it would fundamentally change the dynamics and require more focus on results. While the Village isn’t free, we’re continuing to work hard to make it the best place for entrepreneurs to succeed.

    What else? What are some other changes that would happen if the Atlanta Tech Village was free for startups?