David Cummings on Startups

Blog

  • A Startup’s Product Roadmap

    Product roadmaps are a tricky thing in startups. As a startup, one of the most important aspects of the business is the ability to move fast and make decisions quickly based on new information. With a detailed roadmap, especially one shared with key customers, the ability to change direction can be greatly diminished.

    Here are a few thoughts on product roadmaps:

    • Consider outlining the public-facing plans in minimal detail for flexibility
    • Maintain an internal-only roadmap with more information and specifics
    • Incorporate feedback from sales, marketing, services, support, engineering, customers, and partners
    • Capture internal ideas in a simple Google Sheet with separate tabs for each constituency
    • Provide an idea exchange for customers to submit requests (e.g. tools like GetSatisfaction)
    • Constantly revisit the roadmap and question how the pieces fit together

    Product roadmaps are an important part of any tech company. In startups, roadmaps are especially sensitive and should be dynamic whenever possible.

    What else? What are some more thoughts on product roadmaps in a startup?

  • Regularly Engaging with Business Leaders Outside the Startup Community

    By way of the Atlanta Tech Village, I have the opportunity to engage with a number of business leaders on a regular basis. Common questions like “what’s the hottest startup in the Village?” are oft repeated and I enjoy sharing stories of Yik Yak and SalesLoft. Only, we don’t have a great strategy for proactively reaching out and helping keep the startup community more top-of-mind.

    Here are a few ideas for regularly engaging business leaders outside the startup community:

    • Holiday Showcase – Once a year get together in December where we invite a few hundred people to meet with a couple dozen startups
    • Tech Village Talks – Speaking at local Rotary and business groups about the Village helps spread the story to new people and repeat the message to those that have already heard it
    • Coffees / Lunches / Meetings – One-on-one time is the most impactful but difficult to scale
    • Private In-the-Know-Only Monthly Newsletter – We have a great weekly newsletter for our community but we don’t have one geared towards business leaders that want to stay apprised of what’s happening the startup community (e.g. startups that are doing well, recent deals, opportunities to invest, etc)
    • Quarterly Startup Lunch – Potentially an intimate group of business leaders that get to hear presentations from four heavily-screened startups in the community as a way to engage and provide introductions

    One of the key ideas is that we need more proactive efforts to get business leaders involved with a corresponding rhythm. While this takes time and effort, I’m confident it’ll pay dividends over time by making the startup community more accessible and sharing ways that business leaders can help.

    What else? What are some more ideas on how to engage business leaders on a regular basis with the startup community?

  • Think IPO Roadshow When Raising a Venture Round

    Companies that go public on exchanges like the New York Stock Exchange and NASDAQ have a ritual late in the process called an IPO road show. Investopedia defines a road show as the following:

    A presentation by an issuer of securities to potential buyers. Road shows refer to when the management of a company that is issuing securities or doing an initial public offering (IPO) travels around the country to give presentations to analysts, fund managers and potential investors.

    Imagine spending six months documenting and auditing every aspect of the business, distributing the information to thousands of investors, and then setting up a two week sprint to present the pitch at dozens of meetings. Assuming demand is strong, the company goes public and throws a huge party. Finally, life continues on as a newly public company.

    For entrepreneurs raising a venture round, treating it like an IPO with a corresponding road show is a good strategy. Extensive preparation followed by an intense period of pitching is the best approach to create a competitive deal environment (much like what investment bankers do when helping sell a company). Raising money is difficult, but with strong business fundamentals and fundraising process, readily achievable.

    What else? What are some more thoughts on entrepreneurs treating the venture fundraising process like an IPO road show?

  • Before Raising an Angel Round

    Lately, it feels like a number of entrepreneurs I know that are in the low six figures recurring revenue range are contemplating raising money either through an angel round or a micro VC round. Each one has already raised a friends and family round, is near product-market fit or already has it, and has a low burn rate. Now, there’s a desire to grow faster, and raising an angel round is a common next thought.

    Here are a few questions to think through before raising an angel round:

    • How close is the product to initial product-market fit? How do you know?
    • How repeatable is the customer acquisition process? When will you feel confident that it’s repeatable?
    • What does the spreadsheet math say about growing without more outside capital vs raising an angel round (e.g. growth rates, co-founder dilution, etc)?
    • What are the expectations for ongoing investor involvement (e.g. hands-on, passive, non-existent, etc.)?
    • What milestones will be achieved with the new money?

    Entrepreneurs would do well to think through these topics before setting out to raise an angel round. While raising an angel round isn’t as involved as raising a venture round, it still takes significant time and effort.

    What else? What are some other questions to think through before raising an angel round?

  • Escalating Carried Interest for Venture Investors

    In a typical venture fund, the venture capitalists (VCs) have a 2% annual management fee and earn 20% of the profits (called 2 and 20). That is, 2% of the value of the fund (e.g. $2 million per year for a $100 million fund) is used for salaries, office space, administration, and other expenses for a period of time (e.g. seven years) before shrinking and eventually disappearing. Then, assuming the fund is successful, the VCs receive 20% of the money generated after the investors get their principal back, including the money spent on management fees (e.g. turning a $100 million fund into $300 million in returns results in the VCs getting $40 million in profits, or carried interest).

    Now, the ultra successful VCs know that there’s much more opportunity in earning a larger piece of the profits, and they often command 30% of the carried interest, while waiving management fees because they’re confident and have already been successful (e.g. this would be 0 and 30). Well, last month I heard of another wrinkle that I hadn’t encountered before: escalating carried interest for clearing higher return hurdles. Meaning, if the VC returns even more money, they’d get an even higher percentage of the profits. In the example I heard, the institutional investor received 70% of the profits after the fund returned five times the capital (e.g. a once a $100 million fund generates $500 million in returns, the VCs would get 70% of everything past that instead of 20 or 30%).

    For venture investors with a strong track record, and amazing returns, the opportunity to make even more money comes from escalating percentages of carried interest based on results.

    What else? What are some more thoughts on escalating carried interest for venture investors?

  • Creating a Competitive Fundraising Process

    Continuing with yesterday’s post Market Clearing Valuation for Entrepreneur’s Raising Money, the logical next question is “how do you create a competitive fundraising process?” That is, without a competitive fundraising process, there’s no way to know if the current leading investment option is truly the best one. Here are a few thoughts on creating a competitive fundraising process:

    • Ensure a sufficiently large number of investors are contacted (e.g. 100+)
    • Treat the process like a sales engagement and track everything in a CRM or Google Spreadsheet
    • Develop as many investor relationships as possible well in advance of needing to raise money (the best time to raise money is when you don’t need it)
    • Create all the necessary fundraising collateral like an executive summary, pitch deck, and financial model (if an operating business) before starting the process
    • Build a timeline, and once it’s officially investor fundraising time, work to coordinate as many pitches as possible in a short timeframe so as to generate interest simultaneously

    Raising money is hard, and it’s even more difficult to do it in a way that creates a competitive environment with multiple potential investors at the same time. Entrepreneurs would do well to create a competitive fundraising process to find the best investment partner.

    What else? What are some more thoughts on creating a competitive fundraising process?

  • Market Clearing Valuation for Entrepreneur’s Raising Money

    Earlier this month I was talking with an entrepreneur that needed to raise money. His startup was running out of money, and with almost no revenue, it was a matter of either raising more money or laying everyone off. As he went out to the market and pitched investors, there was some demand and a couple investors offered up term sheets. Only, the valuations came in much lower than desired.

    While the entrepreneur had one valuation in mind, the market clearing price was something entirely different. Unfortunately, as an entrepreneur in that position, there aren’t any other options. Of course, more investors can be pitched in an attempt to get a higher valuation, but there’s limited time before things fall apart.

    Entrepreneurs would do well to recognize that valuations offered by investors represent the market clearing price for the startup, and if time and money runs out, there aren’t any other options. Meeting with a large number of investors (100+) well in advance of needing the cash (e.g. > six months) is one of the best approaches (unfortunately this is a full-time job to create a competitive process).

    What else? What are some other thoughts on the market clearing valuation for entrepreneur’s raising money?

  • Why No Equity Component at the Atlanta Tech Village

    Earlier today I was talking to a business executive about the Atlanta Tech Village. He was asking a number of questions and got to the most popular one: is there an equity component at the Village? My answer, of course, is that there isn’t an equity component. The response is always “why not — you should get a piece of the action.” At that point I nod and change the subject as it can be hard to explain.

    There’s no equity component at the Village because we want to attract all types of entrepreneurs. Imagine a successful serial entrepreneur evaluating office space options for his or her next company. Since they have personal resources and a track record, there are a number of quality office buildings that would enjoy having them as tenants (assuming a personal guarantee on the lease). If there was an equity component, it would seriously increase the friction to attracting successful entrepreneurs. In turn, this would lessen the opportunities for successful entrepreneurs to help first-time entrepreneurs.

    In a similar manner, imagine there’s an entrepreneur that has a successful early stage startup (e.g. $500,000 in recurring revenue and a handful of employees), we also want them at the Village (assuming a good culture fit). Once a business is working and product-market fit has been achieved, the equity is worth significantly more, and an entrepreneur is less likely to part with it for a tech entrepreneurship community.

    At the Village, our goal is to bring together all types of entrepreneurs that want to increase their chances of success by helping each other. With a straightforward business model (see the pricing) and not having an equity component, we increase the odds of attracting the best entrepreneurs.

    What else? What are some more thoughts on not having an equity component at the Atlanta Tech Village?

  • Metrics Consistency in Conversations

    Two weeks ago I was talking to an entrepreneur about his startup. Early in the conversation he said that they had $200,000 in annual recurring revenue. We covered a variety of subjects and towards the end of the meeting he said that next week they’ll hit $150,000 in annual recurring revenue. Hmm, I thought, I just heard him say a different number 20 minutes ago, and I’m pretty good at remembering details.

    In fact, this isn’t the first time I’ve heard different key metrics in the same conversation with an entrepreneur, and that’s a problem. Here are a few thoughts on metrics consistency in conversations:

    • Don’t offer up a key metric unless you’re confident about it and have a good enough grasp to reference it consistently
    • If a metric was incorrectly referenced, explain that the wrong number was offered previously (as opposed to assuming the person didn’t realize that two different numbers were mentioned for the same metric)
    • Memorize the key metrics for your type of business (e.g. here are four important Software-as-a-Service metrics)
    • Citing different values for a key metric in the same conversation seriously diminishes credibility

    Entrepreneurs would do well to know their key metrics and not say two different things for them during a conversation — people listen and pick up on inconsistencies.

    What else? What are some more thoughts on metrics consistency in conversations?

  • The Push and Pull Between Sales and Engineering

    Early on in the life of a startup things are pretty straightforward: everyone in the company either builds stuff or sells stuff. As the business grows and starts to scale there’s an interesting push and pull that occurs between the sales team and the engineering team. On the sales front, there’s always a desire for more features and functionality with which to show prospects and close more deals. On the engineering front, as the customer base grows, so too does the desire to refactor code and re-architect subsystems of the product to accommodate new use cases as well as enhance scalability.

    Inevitability, the end result is a few months of what appears to be little to no new customer-facing features followed by a couple months of what appears to be heightened engineering activity with a variety of new customer-facing features. The engineering effort is the same but the areas of focus can make it seem like productive times and non-productive times. Sales continues asking for new functionality and engineering continues balancing time between new functionality and reworking existing functionality. It never ends.

    Entrepreneurs would do well to recognize the push and pull between sales and engineering and know that each team means well. Healthy discourse is required as there’s a tendency for each party to feel that the other group doesn’t understand what they do and how hard they work. This tension is normal and part of life in a tech company.

    What else? What are some more thoughts on the push and pull between sales and engineering?