David Cummings on Startups

Blog

  • Discuss the Ideal Exit with Investors

    While I’m not a fan of putting much time into an exit strategy (see When an Exit Strategy Discussion is Required and The Best Exit Strategy is to Not Have One), it is important to align expectations with investors around the ideal exit outcome. Now, it might seem like investors want to make as much money as possible, but the reality is that many investors, especially institutional investors, have a target rate of return (e.g. 20% per year or three times the cash invested within a few years).

    As an entrepreneur, the ideal exit needs to be discussed with investors. Here are a few questions to think about:

    • Are the investors looking for an exit that returns the entire fund?
    • Are the investors looking for a deal that will return 10 times their money?
    • Are the investors looking to return at least 10% of their fund on an exit?
    • Are the investors requiring blocking rights on the sale of the company unless they generate a certain return?

    For an entrepreneur that has a personal goal of selling the company for $25 million and pocketing $5 million, it wouldn’t make sense to raise venture money from a big firm at a large valuation. On the other hand, if the entrepreneur raises money from angel investors or a family office that wants to make 5x their money, it could be a good arrangement assuming an appropriate pre-money valuation.

    Entrepreneurs would do well to discuss the ideal exit with their investors.

    What else? What are some more thoughts on discussing the ideal exit with investors?

  • The Relationship Between Commercial Real Estate and the Media

    Recently an entrepreneur signed a lease on a new, much larger office and was surprised to learn that the media knew about the deal. Now, the media didn’t learn about the deal the following week or the following day. No, the media was leaked the deal the same day the ink dried. Crazy, right? Why is the commercial real estate industry so eager to share info with the media?

    Answer: commercial real estate brokers and the media help each other. The media wants breaking news and compelling stories. Commercial real estate brokers are one of the first people to know if a company is expanding, shrinking, or relocating. Leasing agents at buildings interact with a number of businesses as they evaluate lease options and most don’t have a non-disclosure agreement in place. When an entrepreneur is about to sell his or her company, they have to get the owner of their lease to agree to assign the lease to the new acquirer, and now a commercial real estate broker knows a deal is about to go down and passes it on to the media.

    In turn, the media shares information back to the commercial real estate brokers for the same reasons. Brokers want to know about potential deals, especially if they can get a head-start on chasing down a new prospect before the news breaks to the public. Brokers make money when a deal gets done. No deals, no money.

    Entrepreneurs would do well to understand the relationship between the commercial real estate industry and the media, especially as their business grows and goes through changes that involve office space.

    What else? What are some more thoughts on the relationship between commercial real estate and the media?

  • Corporate Culture isn’t Defined by Benefits

    The ATDC has a great interview with Craig Hyde, the CEO of Rigor, titled Strong Company Culture is Good for Employees and Business. Rigor was named the #1 best place to work in Atlanta by the Atlanta Business Chronicle and is one of the fastest growing companies in the Atlanta Tech Village (Disclosure: I’m an investor in Rigor). One of the most important things entrepreneurs struggle to understand is that companies with a great corporate culture don’t have a great culture because of good benefits. I know of several companies that offer great perks but people don’t enjoy the culture.

    Here are a few thoughts on the idea that corporate culture isn’t defined by benefits:

    • Culture is defined by the core values of the people at the company
    • Strong cultures have the most aligned core values across all the team members (not everyone is best friends)
    • Great benefits are usually a sign that the company cares about its people, but alignment of core values is more important
    • Many companies don’t have great benefits yet still have a great culture

    The next time you hear about a great culture, find out what makes it great. The answer, as expected, is that it’s all about the people.

    What else? What are some more thoughts on the idea that corporate culture isn’t defined by benefits?

  • Rise of Sales Development

    SalesLoft put on an amazing event these past two days as part of their Rainmaker 2015 conference. With over 200 sales professionals attending, it’s clear that sales development is a major growth area. Two of my favorite sales speakers, Derek Grant and Allen Nance, headlined the early afternoon session. Modern sales development was popularized by Aaron Ross in his book Predictable Revenue. The core idea — a team dedicated to setting appointments for other sales reps — isn’t new. What is new is the formal methodology Aaron introduced in his book that includes a process with email and phone outreach to set demos with key people.

    Here are a few ideas regarding the rise of sales development:

    • Metrics and expectations for sales reps are clear and manageable, aligning the sales reps and sales management
    • Inside sales is growing faster than field sales, resulting in more emphasis on appointment setting and a lighter-touch sales process
    • Buyers have much more extensive information available online, resulting in more product understanding before even engaging a sales rep, helping reduce the need for in-person sales meetings
    • Tools like SalesLoft Cadence (for emailing and process management) make the sales development process incredibly effective (Disclosure: I’m an investor in SalesLoft)

    Sales development is incredibly effective for the right type of product and sale. Look for more conferences like Rainmaker 2015 in the future and more awareness of the Predictable Revenue methodology.

    What else? What are some more thoughts on the rise of sales development?

  • 4 Resources to Find a Tech Startup Job

    With the rise of the Atlanta Tech Village, I’ve been approached by more business and civic leaders in the community to help their children and related friends find jobs in the startup community. Naturally, I want to help point them in the right direction and be as supportive as possible. Here are three resources I like to share:

    1. Research the Venture Atlanta presenting companies (Early Stage Companies and Venture Spotlight) for job openings
    2. Browse the Atlanta Tech Village job board and ATDC resources for positions
    3. Network at the monthly Atlanta Startup Village (500+ people) and weekly Startup Chowdown (250+ people)
    4. Follow @atlantechatlbiz for the latest funding announcements (funding means the startup is hiring)

    Finding the right job always takes work, and the startup world is no different. There four resources will help job-seekers find the most current opportunities.

    What else? What are some other resources to find a tech startup job?

  • SaaS Funding Relative to Recurring Revenue

    Recently I was talking to an investor and he mentioned they were looking at a deal, liked the company, but were concerned with how much cash the startup had burned relative to current annual recurring revenue. For Software-as-a-Service (SaaS) startups, it’s especially difficult to get the business model going, and once it’s going, it’s especially cash-intensive to scale it.

    Here are some example ratios to consider when analyzing funding relative to recurring revenue:

    • Seed Round – 8:1 ratio of funding to revenue (e.g. $800k raised and $100k in new annual recurring revenue)
    • Series A Round – 3:1 ratio of funding to revenue (e.g. $3 million raised and $1 million in new annual recurring revenue)
    • Series B Round – 2:1 ratio of funding to revenue (e.g. $12 million raised and $6 million in new annual recurring revenue)
    • Series C Round – 1:1 ratio of funding to revenue (e.g. $20 million raised and $20 million in new annual recurring revenue)
    • Example Total: $35.8 million raised with annual recurring revenue of $27.1 million

    Note: this assumes the money raised has been spent, while most startups haven’t spent all their cash. Startups that are doing great would see these ratios cut in half (e.g. they are twice as efficient growing revenues relative to money spent). There’s no exact formula for the ratio of funding to new annual recurring revenue, but this is directionally correct.

    What else? What are some more thoughts on SaaS funding relative to recurring revenue?

  • Initial Product-Market Fit

    When entrepreneurs set out to build their company, they have grand visions and aspirations. The product needs to do this, and that, and the other thing. The list goes on and on. Only, product-market fit starts small. Really small.

    Here are some thoughts on initial product-market fit:

    • 10 friendly customers like the product and give friendly-focused feedback, helping move a bit closer to product-market fit
    • 10 paying unaffiliated (non-friendly) customers sorta-like the product and give tons of feedback, significantly moving towards product-market fit
    • 10 more paying unaffiliated (non-friendly) customers really-like the product and give great feedback, inching the product closer to product-market fit
    • Finally, 10 more paying unaffiliated (non-friendly) customers rave about the product and have improvement ideas, but ones that are approaching the nice-to-have category, helping assert the arrival of initial product-market fit

    Product-market fit is a continuum, and doesn’t happen quickly, but when it does happen, the types of customer responses change, and enthusiasm grows. Look for happy customers, with minimal issues, and less-critical improvement suggestions, and there’s a good chance product-market fit has arrived.

    What else? What are some more thoughts on initial product-market fit?

  • 3 Atlanta Startup Community Themes

    Earlier this week we hosted a panel discussion on current Atlanta startup community themes as part of the monthly the YPO breakfast series. We had a great discussion with three passionate entrepreneurs and a number of business leaders. Here are three major themes we discussed:

    • Rise of the Entrepreneurship Center – Not just the Atlanta Tech Village, there are a half-dozen facility in the works from Downtown to Midtown to Buckhead and several of the suburbs. Entrepreneurship is cool, and Atlanta, as a real estate town, is building out a number of awesome spaces.
    • Risk-Loving Capital is Absent – Even with the recent success stories, there’s at most a dozen people in town who write checks for pre-traction startups on a regular basis. The good news is that capital is mobile, especially due to communities like AngelList, such that entrepreneurs with working products and happy customers can raise money globally.
    • Yik Yak as the B2C Breakthrough – Atlanta is a B2B tech town, with almost no consumer success stories. Now, with the Yik Yak sensation, and the big funding round from Sequoia, Atlanta entrepreneurs are emboldened to start more B2C companies. Brett Hurt is right that it’s a hits business and more swings are necessary to have more hits.

    It’s a great time in the Atlanta startup community and we’ve made tremendous progress over the past 10 years. Entrepreneurship centers and a major B2C mobile-first startup are real progress. While local, risk-loving capital is never going to be prevalent, capital is mobile and finds the best opportunities.

    What else? What are some more Atlanta startup community themes?

  • SaaS Value Creation is Back-Loaded

    One interesting aspect of Software-as-a-Service businesses is that most of the value creation is back-loaded. What I mean is that the majority of the valuation growth occurs in the later years, assuming the startup makes it there and has a rapid growth rate. Here’s an example five year trajectory with amount of recurring revenue and corresponding (hypothetical) valuation:

    • Year 1 – $20,000 annual run rate with a valuation of $2 million (valuation isn’t based on revenue but rather based on the market for a seed-stage SaaS startup)
    • Year 2 – $200,000 annual run rate with a valuation of $4 million (valuation is based on the market for a late seed-stage SaaS startup)
    • Year 3 – $1,000,000 annual run rate with a valuation of $8 million (valuation is based on the market for a Series A SaaS startup)
    • Year 4 – $3,000,000 annual run rate with a valuation of $15 million (valuation based on 5x run-rate)
    • Year 5 – $8,000,000 annual run rate with a valuation of $40 million (valuation based on 5x run-rate)

    So, assuming the startup is sold at the end of five years for $40 million, $32 million of that value was created in the last two years and over 50% of the value was created in the final year. In reality, value is created all along, but the premium paid for growth rate (even with modest scale) really emerges at the end as the revenue is ramping up.

    What else? What are some more thoughts on the idea that SaaS companies create most of their value at the end before being acquired?

  • Losing Product-Market Fit

    One of the hot topics in startups is around product-market fit. Whether it’s how to know if you’ve achieved product-market fit or how product-market fit relates to raising money, there’s plenty of information available. Well, there’s another aspect of product-market fit that’s almost never talked about: losing it. Just because product-market fit is achieved, it doesn’t mean it’s going to stay.

    Here are a few thoughts on losing product-market fit:

    • When churn rates increase, product-market fit is likely slipping away (if churn hits 3% per month, you don’t have a business)
    • When the sales team loses the majority of competitive deals, it’s a bad sign
    • When the growth rate of the business stalls at modest scale, it’s likely the customers’ needs have changed

    Markets move quickly and many startups that had a good thing going for a while get passed by when the next wave of innovation comes through. Don’t assume that achieving product-market fit also means that it will be maintained.

    What else? What are some more thoughts on losing product-market fit?