David Cummings on Startups

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  • Ideas for Angel Investor Groups in the Startup Community

    Recently I met with one of the angel investor groups in town to catch up on the startup community and the Atlanta Tech Village. One of the questions posed was “how can we become more top-of-mind for entrepreneurs in the community?” Easy, I said, the best form of marketing is education. Meaning, go out and help educate entrepreneurs, which in turn will result in more mindshare and more deal flow.

    Here are a few ideas for angel investor groups in the startup community:

    • Develop a program to help entrepreneurs learn the basics of building a business (e.g. run an event every Wednesday night for eight weeks like the Kauffman FastTrac program)
    • Start a monthly breakfast series that’s open to the public for entrepreneurs to learn about the fundraising process as well as ask questions (e.g. the BCVP Entrepreneurs’ Breakfast program)
    • Provide clear expectations around the desired types of investments, stage of business, level of traction, etc. so that entrepreneurs can quickly ascertain if they are a good fit
    • Host an investor summit once a year where CEOs of portfolio companies present updates on their businesses and invite a small group of entrepreneurs to attend along with the members

    Angel investor groups are an important part of the startup ecosystem. Groups that help educate entrepreneurs through events and mentorship will also see the best investment opportunities.

    What else? What are some other ideas for angel investor groups in the startup community?

  • Product and Company Name Should be the Same

    Back when we started Pardot in 2007, we didn’t know any better and decided that our product needed a separate name from our company. After tons of brainstorming we finally arrived at a name that we liked and was available: Prospect Insight. Since Pardot didn’t mean anything to anyone, we felt that our product name needed to be more descriptive, hence the name. Also, being a little nerdy, we liked that Prospect Insight could be abbreviated PI, hence lots of jokes about pi (3.14159…).

    After several years of trying to build brand equity in both the company Pardot and the product Prospect Insight, all our customers would call up and ask for help with Pardot, not Prospect Insight. Customers didn’t care what we called the product as everything was simply Pardot. Instead of trying to fight it, we embraced it and rebranded our product as Pardot. That is, the company and the product were one and the same. To this day, you can go to prospectinsight.com as well as pi.pardot.com and see remnants of a disconnected product name and company name.

    For startups, the product and company name should be one and the same.

    What else? What are some more thoughts on keeping the company and product name consistent?

  • Product or Sales Startup CEO

    Earlier today I was talking with a startup executive that’s worked for several successful CEOs. Towards the end of the conversation I asked how he would characterize the CEOs and their styles. Easy, he said, there are the product CEOs and the sales CEOs.

    Here’s a simple generalization of the product and sales CEO in a startup:

    • Product CEOs – They love the thrill of inventing new things and new ways to help customers while generally spending most of their time with the R&D team. Often, they have an engineering or analytical degree.
    • Sales CEOs – They love the thrill of closing a new customer and figuring out how to win more deals while generally spending most of their time with the sales team (see the SaaStr post on Hyperaggressiveness). Often, they were a sales executive before becoming a startup CEO.

    The next time you meet with a startup CEO, see if you can figure out if they’re generally product focused or sales focused. Most fall into one of these two buckets.

    What else? What are some more thoughts on product or sales focused startup CEOs?

  • 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?