David Cummings on Startups

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  • 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?

  • Time for Tactical and Strategic Work

    Most entrepreneurs are doers, meaning they enjoy rolling up their sleeves and working directly on whatever needs to get done. Similar to the idea that if you want to something done, ask a busy person to do it. Only, there’s all this talk that entrepreneurs should work on the business instead of in it. One challenge that comes up repeatedly is making time for tactical and strategic tasks.

    Here are a few thoughts on making time for tactical and strategic work:

    Constantly switching between tactical and strategic work is a real challenge for entrepreneurs. Naturally, human nature is to go towards the easiest tasks — tactical in nature — and to put off strategic items. Entrepreneurs need to make time for strategic work.

    What else? What are some more thoughts on time for tactical and strategic work?

  • SaaS Metrics Cheat Sheet

    ChartMogul has a nice new PDF online called The Ultimate SaaS Metrics Cheat Sheet where they’ve consolidated many of the key SaaS metrics from thought-leaders like David Skok, Christoph Janz, and Tomasz Tunguz.

    Here are a few key items from the SaaS Metrics Cheat Sheet:

    • Monthly Recurring Revenue (MRR) – Amount of money billed monthly for existing customers (or the appropriate pro-rated amount for customers that pay annually)
    • Customer Churn Rate – Number of customers who left in a period divided by number of customers at the start of the period
    • Customer Lifetime Value (LTV) – Total value of a customer subscription over the expected life of the customer
    • Average Revenue Per Customer (ARPC) – Average MRR across all the active customers
    • Cohorts – Different groups of customers for comparing over time
    • Customer Renewal Rate – Total number of customers who renewed their contract divided by the total number of contracts up for renewal
    • Custom Acquisition Cost (CAC) – Sum of all sales and marketing expenses divided by number of new customers added in a time period

    Every SaaS entrepreneur should go read The Ultimate SaaS Metrics Cheat Sheet.

    What else? What are some more thoughts on the SaaS Metrics Cheat Sheet?

  • VCs Outside the Valley Play a Different Game

    , the founder of Benchmark Capital and Wealthfront, has a new article up titled Demystifying Venture Capital Economics, Part 3. The main point of the post, which isn’t well understood, is that many technology markets are winner-take-all such that most of the venture capital returns flow to the firms that invest in the market winners — most other investments result in a loss or modest gain. Here are a few choice quotes from the article:

    • In fact, first to market seldom matters. Rather, first to product/market fit is almost always the long-term winner.
    • The premier venture capital firms compete vigorously to back the Gorilla because they know the market leader is ultimately worth more than all the Chimps and Monkeys combined.
    • Every market appears overfunded, but the ultimate value of the Gorilla consistently swamps the total capital invested in the space.
    • Not only will that Gorilla generate huge returns for its investors but its ultimate market value will be far greater than all the money you feared had been invested in a bubble.

    So, the name-brand VCs in the Valley are looking for the Gorillas/Unicorns (billion dollar companies) and rarely do billion dollar startups emerge outside the Valley, VCs outside the Valley must be playing a different game. That is, VCs outside the Valley aren’t looking to have one investment return the fund. Rather, the goal is to generate a 15-20% rate of return each year by investing in startups that exit for significantly less than a billion dollars at much lower initial investment valuations.

    When people talk about recruiting top-tier VCs to open an office in their city, they likely don’t understand their city doesn’t play the same type of VC game as the Valley. Now, one type isn’t necessary better than the other — they just have different priorities.

    What else? What are some more thoughts on the idea that VCs outside the Valley play a different investing game?

  • Make a Good Decision, Learn from It, and Move Forward

    Recently I was talking to a friend and he said he had no interest in being an entrepreneur. Curious, I asked why. There was one simple reason: he didn’t like to make decisions with limited information. As an entrepreneur, so many decisions have to be made with little or no data and lots of gut instinct. For many people, especially perfectionists, making those kinds of decisions over and over is terrifying.

    For me, I like to keep in mind that I’m trying to make a good decision, learn from it, and move forward. Here are a few thoughts on entrepreneurial decision making:

    • Perfect information never exists, never
    • Limited information is normal, and often good enough to make quality decisions
    • Almost all decisions aren’t permanent (thankfully!)
    • Constantly learning and adapting is key to get to the right answer
    • Moving forward is better than standing still

    When the next decision is required on limited information, make the call, learn from it, and move forward. As General Patton said, “A good plan violently executed now is better than a perfect plan executed next week.”

    What else? What are some more thoughts on making decisions, learning, and moving forward?