David Cummings on Startups

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  • Quickly Evaluating a Potential SaaS Investment

    Earlier this week a friend sent over an executive summary and financial model for a Software-as-a-Service (SaaS) startup and asked for my advice in evaluating it. While he hadn’t been an angel investor before, he was thinking about becoming one and this would be his first investment. After looking through the two PDFs, I told him that there’s nothing to evaluate other than whether or not he loves the market and the team. The startup had no revenue, no customers, and was working on building a prototype. It was simply an opportunity to bet on a market and team.

    Now, if it did have an operating history, even a modest one, there would be a number of different metrics to analyze. Here are a few items to look at when quickly evaluating a potential SaaS investment:

    • Annual Recurring Revenue (ARR) – How much money would be generated if no customers were added and no customers left
    • 12 Month Growth Rate – How does the ARR from 12 months ago compare to the ARR today
    • Monthly Churn Rate – How many customers that started the month renewed for the next month and what has churn been for each of the last 12 months
    • Cost of Customer Acquisition – How much money is spent on sales and marketing relative to a new dollar of annual recurring revenue generated in each of the last two quarters

    While there are a number of other metrics to analyze, these four quick items paint a clear picture of health and opportunity for a SaaS startup. SaaS is an amazing business model due to recurring cash flow, gross margins, and predictability of the business. And, potential investments can be quickly evaluated.

    What else? What are some more thoughts on quickly evaluating a potential SaaS investment?

  • Inevitability of Success with Near Initial Traction

    A few weeks ago I was talking to an entrepreneur about his Software-as-a-Service (SaaS) startup. After three pivots they arrived at an idea that’s taken hold and are starting to scale. While they don’t have Saastr’s Initial Traction (ARR of $1M of more, ARR growing more than 100% a year, and more than 50% of new revenue from zero-cost marketing) yet, it looks like they’ll achieve that this year.

    One of the great things about SaaS is that even with near initial traction, there’s a sense of inevitability that the business will be successful. Here are a few reasons why:

    • Signing the first 100 customers provides enough use cases to feel confident that the next 1,000 customers will be signed up
    • Engineering becomes more cohesive and stable with continued customer adoption and product development
    • Starting the marketing engine is incredibly difficult (e.g. SEO, content marketing, etc.), but once it’s working, it keeps on giving
    • Recruiting team members gets easier as the story and results are more developed

    SaaS companies with near initial traction have an inevitability of success. While it isn’t guaranteed, with continued growth and high renewal rates, the chance is very high.

    What else? What are some more thoughts on success being inevitable once a certain size and level of momentum is achieved?

  • Consulting to Fund Product Development

    Recently I’ve had the chance to talk with two different entrepreneurs who were building software consulting firms to fund product development. Software engineering is in high demand and a number of businesses, especially startups, are hiring contractors to rapidly prototype new products and ideas.

    Here are a few thoughts on consulting to fund product development:

    • Consulting work, with an emphasis on billing time and materials, is very different from product work
    • Whenever possible, team members who do product work should not also do consulting work so that they can iterate on the product and interface with customers
    • With new products, one of the most important early milestones is to decide if the product is worth continuing to pursue (e.g. a go/no go decision), and working on it part-time makes it difficult to achieve enough progress
    • Ensure that there’s not a have/have not situation where the engineers doing consulting are jealous of the engineers working on the product

    Consulting companies that turn into product companies can happen, albeit rarely. One of the most successful examples is Mailchimp, based in Atlanta (280 employees). Entrepreneurs building consulting firms to fund product development would do well to recognize the fundamental differences between the two types of businesses and plan accordingly.

    What else? What are some more thoughts on doing consulting work to fund product development?

  • Revenue Growth in the Early Startup Years

    Back in 2008 I was on a screening committee helping evaluate angel investment opportunities for a group of investors in town. Once a month we’d meet with 4-6 startups and pick two to present to the group. Well, one of the entrepreneurs delivered his pitch to the committee and did a great job.

    Everyone around the table was interested and liked the startup. Then, one of the investors raised his hand and asked about the financial projections. There, on the screen, the entrepreneur pulled up the dreaded slide: $0 in revenue today and $100 million in revenue by the end of year three. Ouch. All the excitement left the room.

    Here are a few revenue growth resources for the early startup years:

    The best financial models are built from the bottom-up based on actual metrics from an operating business. While startup metrics can be minimal early on, after a few years they become more meaningful and reasonable financial models with revenue growth can be built.

    What else? What are some more thoughts on revenue growth in the early years?

  • Triple, Triple, Double, Double, Double

    Neeraj Agrawal has an interesting article up titled The SaaS Adventure where he talks about the seven phases of go-to-market success for Software-as-a-Service (SaaS) companies that have gone public recently:

    • Phase 1: Establish a great product-market fit.
    • Phase 2: Get to $2 million in ARR (annual recurring revenue).
    • Phase 3: Triple to $6 million in ARR.
    • Phase 4: Triple to $18 million.
    • Phase 5: Double to $36 million in ARR.
    • Phase 6: Double to $72 million.
    • Phase 7: Double to $144 million.

    Of course, there’s much more nuance to startup success than hitting certain revenue targets (see 4 Startup Stages in 8 Words for the briefest example possible). Combine this with the Law of Large Numbers and Startup Growth and you can appreciate just how difficult it is to achieve that level of revenue growth and scale. See the Notes from the Marketo S-1 Filing to understand that the capital required to achieve the size and scale in that period of time resulted in investors owning 85.5% of the business, which is fine as long as that level of success is attained.

    The next time an investor asks about revenue goals, tell them about tripling two years in a row and then doubling revenue year after year beyond that so as to go public in 6-7 years.

    What else? What are some other thoughts on the revenue growth pattern of recent SaaS companies that have gone public?

  • Let’s Talk Over Email

    One of the new initiatives I’ve been trying lately is pushing more intros into email conversations. That is, when people reach out and ask to talk or meet, instead of setting up a fixed time in the future to talk, just start the conversation now. Yes, it’s easier to go deeper and cover more topics when talking in person, but there’s significant overhead to stop everything at a fixed time vs conversing asynchronously over email.

    Here are a few thoughts on talking over email:

    • Requiring a Simplified One Page Strategic Plan to start the conversation still works well
    • Most introduction requests are for specific reasons, which are readily conveyed over email (e.g. I want advice on a problem, what do you recommend for X, how did you handle Y, etc)
    • Email is much easier to share links to specific information and relevant resources
    • Some people won’t like conversing over email as it feels like it takes more effort and isn’t as personal

    Dharmesh put it eloquently in his post Dear Friend: Sorry. My heart says yes, buy my schedule says no. When time doesn’t permit a meeting, talking over email works well.

    What else? What are some more thoughts on talking over email in lieu of a meeting?

  • The Law of Large Numbers and Startup Growth

    Revenue growth is always a hot topic for entrepreneurs. Growth is tied to company valuation, career paths for team members, and requiring significant amounts of cash. Investopedia defines the Law of Large numbers as “a large entity which is growing rapidly cannot maintain that growth pace forever.” The Law of Large numbers really hits startups as they start to scale from the early stage to the growth stage. Let’s look at it a bit more:

    • Say a company grows from $1 million to $3 million in 12 months — that’s huge growth. Now, say a different company grows from $10 million to $12 million in 12 months — the same amount of growth on an absolute basis — but only 20% top line growth.
    • For many tech startups, the goal is to grow 50-100% per year. Here’s how 75% per year growth plays out over five years starting at $5 million:
      Year 1 – $5 million
      Year 2 – $8.75 million
      Year 3 – $15.31 million
      Year 4 – $26.79 million
      Year 5 – $46.88 million
      Achieving this level of growth in later years is especially difficult.
    • If it costs $1 to achieve $1 of revenue growth above a modest amount, it’s easy to see how maintaining a high growth rate at scale becomes incredibly expensive

    The Law of Large numbers applies to every startup that achieves some level of success. Entrepreneurs would do well to recognize how much more difficult growth becomes at scale and to plan accordingly.

    What else? What are some other thoughts on the Law of Large numbers and startup growth?

  • Raising Money vs Growing Organically

    Earlier this week I had the opportunity to talk with an entrepreneur who’s considering raising money. His company is doing well at a small scale and getting close to breakeven. Now, he’s in the process of building financial models and mapping out different scenarios regarding raising money vs growing organically.

    Here are a few thoughts on raising money vs growing organically:

    There’s no right or wrong answer when it comes to raising money or growing organically as every situation is different. What’s important is that it’s carefully thought through and that the decision is made intentionally.

    What else? What are some more thoughts on raising money vs growing organically?

  • Creating a Great Environment for Software Engineers

    Continuing with yesterday’s post on Recruiting Software Engineers, Kevin Strasser of TribeBoost offered a great comment that software engineers are looking for more than just money — the environment must also be attractive. Here are some thoughts on creating a great environment for software engineers based on Kevin’s thoughts and others:

    • Autonomy, Mastery, and Purpose – Encourage autonomy, mastery, and purpose for all team members (straight from Dan Pink’s book)
    • Results Only Work Environment – Have a Results Only Work Environment where team members can work where they want when they want
    • Unlimited Vacation Policy – Don’t track vacation days, sick days, or flex days, rather, focus on the required results for that position
    • Great Equipment – Provide the latest MacBook Pros, Thunderbolt monitors, Herman Miller Aeron chairs, and anything else that helps maximize productivity
    • Workspace Variety – Offer different shared and private areas to work as some tasks are more collaborative and some are more heads-down
    • Big Picture Understanding – Share a Simplified One Page Strategic Plan with everyone so that there’s a greater understanding of the entire business and direction

    Creating a great environment for software engineers and team members takes work and continual refinement. Following these best practices and working hard to create one of the best places to work makes it easy to attract great talent.

    What else? What are some more thoughts on creating a great environment for software engineers?

  • Recruiting Software Engineers

    Just this past week I’ve received two separate requests for help recruiting software engineers. I think it’s a sign of the times with technology continuing to be hot and the corresponding shortage of software developers becoming more acute. So, as someone who’s trying to recruit developers, what are some best practices?

    Here are a few ideas for recruiting software engineers:

    • $10,000 referral bonus – Offer a $10,000 referral bonus to any employee that refers a software engineer that is hired and stays with the company for six months
    • Twitter – Build a brand online through social media and use it as part of the recruiting process
    • LinkedIn – Use LinkedIn, both on the job posting side as well as directly soliciting employees of other companies, to find great talent
    • Alumni Career Fairs – Sponsor both student career fairs as well as alumni career fairs (e.g. GA Tech has an alumni career fair)
    • Technical Meetup Groups – All the major programming languages have regular meetup groups (e.g. the Atlanta iOS Developers meetup) and engineers that attend them are interested in honing their craft
    • Recruiters – External recruiters are a way of life in the technology world and the key is to find ones that understand the importance of culture and fit when placing candidates

    Recruiting great software engineers is a real challenge, and with serious effort, readily achievable. Build a methodical process and try a number of different avenues to find the right candidates.

    What else? What are some more thoughts on recruiting software engineers?