David Cummings on Startups

Blog

  • Product Focus

    One of the areas most first-time entrepreneurs struggle with is product focus. Whenever a new startup gets going, there’s a completely clean slate with which to build the application. As more early adopters and customers use the product, more ideas and feedback come in on how to enhance it. Entrepreneurs love selling and building things, so when a customer makes a product request, the natural inclination is to add that feature. Only, that’s the fastest way to build a product that’s no longer cohesive.

    Here are a few thoughts on product focus:

    • Have an opinionated vision for the future
    • Don’t assume all customer requests are the same
    • Make sure and say ‘no’ three times as often as saying ‘yes’
    • Either have a product manager on the team or great get a great advisor that has strong product management experience
    • More product code equals more technical debt, which slows down future development
    • Read the book Getting Real by 37signals as it provides a number of solid anecdotes concerning product focus

    Product focus is one of the biggest challenges for first-time tech entrepreneurs. Apply a lens to every feature request and continually asked the following question: does this apply to 80% of the customers that we want using our application.

    What else? What are some other thoughts on product focus?

  • Atlanta Startup Village #23

    Tomorrow night is Atlanta Startup Village #23 at the Atlanta Tech Village. With over 500 people already signed up, it’s the largest monthly gathering of entrepreneurs in the Southeast. Here are the presenting startups:

    • Terminus – Display advertising for B2B lead generation and nurturing
    • ROAR App – Social engagement app centered around events
    • Predikto – Predictive analytics for industrial equipment
    • RenterUp – Rental management software for residential landlords
    • Reveal Estate – Simplifying the home buying process
    • Groundfloor – Real estate microlending (think LendingClub for real estate loans)

    Atlanta Startup Village is free and open to the public. Come join us and learn more about six new startups.

  • Escape Velocity for Startups

    Once a startup achieves a certain scale and growth rate, they’ve hit what’s known as escape velocity. From Wikipedia, escape velocity is the “speed needed to break free from the gravitational attraction of a massive body, without further propulsion.” The idea is that the startup has so much momentum that they can’t be stopped. Only, there isn’t a specific size (e.g. $25 million in recurring revenue) where this happens. Rather, it has to do with a combination of size (revenue and customer count), growth rate (many SaaS companies achieve scale but then the growth rate plummets), and market dominance in their segment (a smaller player dominating a fast-growth market is often better than a bigger player in a slow-growth market).

    Here are a few benefits of escape velocity:

    • Prospects bring them into every deal, almost like an incumbent, even though it’s a greenfield market
    • New product functionality becomes the market standard, and other competitors are constantly responding
    • Investors place a premium on these firms and they often trade at a much higher multiple than their competitors
    • Press and media often cover the top player in a market more than all the other players combined
    • Growth is only limited by the growth of the overall market

    Escape velocity is one of the ultimate goals for an entrepreneur. Once achieved, nothing is slowing the company down.

    What else? What are some other thoughts on achieving escape velocity as a startup?

  • Meet 10 New People Per Week

    As I sat down at today’s weekly Startup Chowdown, another Villager promptly introduced herself. We got to talking and she shared her story of wanting to join a startup and the process that lead to her new job. After the conversation, I started thinking about the benefit of meeting new people on a regular basis and how even with all this great technology, knowing a variety of people is still incredibly important. In fact, entrepreneurs would do well to make an effort to meet 10 new people per week, especially in the early years of a new startup.

    Here are a few thoughts on meeting 10 new people per week:

    • Figure out the events you already attend on regular basis and how many people you normally meet there (e.g. two events per month, like the Atlanta Startup Village, and seven new contacts per time)
    • Attend at least one new event every month and continue to grow the circles of connections
    • Decide on an area of expertise where you’d like to improve your network (e.g. sales people, software engineers, etc) and ask friends for introductions
    • Use LinkedIn to track how many new connections you earn for a given week or month

    Meeting 10 new people per week will add tremendous value and should be on the short-list of things for entrepreneurs to do.

    What else? What are some other thoughts on meeting 10 new people per week?

  • Minimize Investor Risks

    Recently I was talking with an entrepreneur that’s looking to raise a Series A round. He’s already raised a small seed round and has good momentum with recurring revenue in the low-to-mid six figures. As we got to talking, the topic of minimizing investor risk came up. Of course, investors want to make a huge return, but they also want to limit their downside.

    Here are a few areas of risk minimization investors look for in deals:

    • Product-Market Fit – Does the product truly work and have happy, paying customers?
    • Repeatable Customer Acquisition Process – Does the team have a business model that’s working whereby it’s clear how an increased investment in sales and marketing will grow the business?
    • Management Team – Does the team have relevant experience (sales, marketing, engineering, support, and operations) and a track record of executing well together?
    • Unit Economics – Does the cost of customer acquisition relative to the lifetime gross margin of the customer make sense?
    • Path to Profitability – If the market or fundraising climate turns south, is there a clear route to making the business profitable and sustainable?

    Naturally, there’s no way for investors to minimize all the risk. Entrepreneurs would do well to address these areas when talking to investors and make them feel comfortable with the risks.

    What else? What are some other ways for entrepreneurs to minimize investor risks?

  • Encouraging More People to Start Companies

    Earlier today I had an interesting conversation regarding how to get more talented to people to start companies. The general consensus is that in places like Atlanta there are a number of smart, self-starting people with an entrepreneurial itch but who choose not to act on it. While entrepreneurship isn’t for everyone, I do believe there are a number of people that could do well if they gave it a shot.

    Here are a few thoughts on encouraging more people to start companies:

    • Figure out how to get more publicity and media about the local entrepreneurial success stories (the more people that see the person down the street be successful, the more likely they are to believe they can do it themselves)
    • Engage with professionals that are already attending entrepreneurial meetups, but haven’t started a company, as it’s clear there’s an interest level
    • Help professionals understand the existing technology clusters in town and explain that starting a company where there’s existing expertise can increase the likelihood of success
    • Build more entrepreneurial programs into the local universities to highlight entrepreneurship as a viable career path (encourage students to create their own jobs)

    Of course, the biggest barrier to starting a company for most professionals is being trapped in a middle class lifestyle that requires extremely hard decisions to unwind (mortgage, car payments, etc.) Regardless, we can do more to encourage people to start companies and help them succeed.

    What else? What are some other ways to encourage more people to start companies?

  • Build a Quick Financial Model

    Whenever I talk to an entrepreneur about an idea, I like to ask about the financial model. Now, I don’t expect them to have the exact pricing down (I know pricing changes a ton — see here, here, and here) or to have a complex financial model, as that’s not a good use of time. What I do want to know is that they’ve thought through things as they currently stand.

    Here’s what a quick financial model might look like:

    Column 1

    • Revenue
      – Sales reps
      – Customers added
      – Customers lost
      – New monthly recurring revenue
      – Total monthly recurring revenue
    • Payroll
      – Cofounder 1
      – Cofounder 2
      – Engineers
      – Sales
      – Commissions
      – Other employees
      – Taxes
    • Expenses
      – Office
      – Infrastructure
      – Marketing
      – General
    • Cash
      – Cash on hand
      – Total Revenue
      – Total Payroll
      – Total Expenses
      – Monthly cash flow
      – Remaining cash on hand

    With these items in column 1, the next 12 columns represent the next 12 months with the corresponding values either manually inputted (like number of sales people) or dynamically calculated (like remaining cash on hand). This entire financial model should be built in less than an hour from scratch and updated on a regular basis as new information about the business model is learned.

    What else? What are some other thoughts on a quick financial model for startups?

  • Construction Lessons Learned from the Atlanta Tech Village

    Now that construction is finished at the Atlanta Tech Village, it’s a great time to reflect on some of the construction lessons learned. As our team didn’t have any prior commercial construction experience, we learned a ton and made a number of mistakes. Many entrepreneurs will have an analogous experience when doing a customized build-out of a traditional office.

    Here are a few construction lessons learned from the Atlanta Tech Village:

    • Make sure it’s clear that the budget includes both hard costs (like actual construction costs) and soft costs (like architect fees) —  we went way over budget due to not understanding this and communicating that our budget was for hard and soft costs
    • Allocate a significant portion of the budget to furniture (quality commercial furniture is more expensive than expected) and technology equipment (routers, access points, ethernet ports, etc)
    • General contractors aggressively bid for the primary work and make much more profit off of change orders, so work hard to get the plans right the first time (we made way too many change orders as we didn’t know what we didn’t know)
    • Never renovate the building during the day while having it occupied at the same time (construction noise was louder than expected and had to be moved to nights and weekends, which was a significant premium)
    • High density seating environments, as is popular with tech companies, requires a complete overhaul of the heating and air systems to support the increased number of people, which adds significant cost
    • Older buildings often have deferred maintenance, which results in unexpected expenses during a renovation (we had to replace the main water pipes and elevators)

    Renovating the Atlanta Tech Village was a great learning experience and I’m pleased with how everything turned out. I have a greater appreciation for commercial real estate developers and the process.

    What else? What are some other construction lessons learned from the Atlanta Tech Village renovation?

  • 2x Growth Likely but 10x Requires Innovation

    Jason Cohen, founder of WP Engine, has a great new post up titled The Lindy Effect on Startup Potential. I had dinner with Jason a few years ago before a Capital Factory Demo Day and he’s as thoughtful and passionate in person as he is in his writing. The idea in this most recent post is that the Lindy Effect, understood as the expected lifespan increases according to the length of its current age, directly applies to startups. Said another way, the longer you’ve been doing something, the longer it’s going to last.

    My favorite part of the post is where Jason applies the Lindy Effect to startup growth when he says:

    You can probably double your size, doing roughly what you did to get to this point, but 10x will require innovation.

    I’ve seen this happen several times. A startup achieves product-market fit and a solid repeatable customer acquisition process. Everything looks great, and then at a certain point, the growth stalls as the primary lead generation channel only has so much capacity, no matter how hard it’s pushed. Just like the lead velocity rate is the most important metric in SaaS, if the primary lead source peaks or additional quality lead sources aren’t found, growth won’t continue.

    Doubling the current size is likely but getting to 10x the size requires innovation.

    What else? What are some more thoughts on Jason’s post and the idea that 2x growth is likely but 10x growth requires something new?

  • Always Hiring Sales Reps

    Jason Lemkin has an awesome guest post on his blog by Nick Mehta, CEO of Gainsight, titled The Second-Timers: Nick Mehta, CEO of Gainsight – “Never Stop Hiring Reps”. Nick’s learning #6 is that once the repeatable customer acquisition model is working, Software-as-a-Service (SaaS) startups shouldn’t stop hiring sales reps.

    At Pardot, we made this exact mistake. We’d ramp up sales rep hiring, hire a few reps (always hire reps in pairs, if possible), and then six months later we’d be ready to hire more reps. Only, now it’d take a couple months to ramp up hiring again, so it would be several more months before we had our newly desired number of sales reps. Instead, the better approach is to always be hiring sales reps, even if you have to say that the start date is a few months out.

    Here are a few thoughts on always hiring sales reps:

    • Just like sales reps have a pipeline of prospects, recruiters and hiring managers should have a pipeline of sales candidates
    • If the hiring plan calls for hiring a certain number of sales reps per quarter, try and have all the sales reps already signed well in advance to start the following quarter
    • Depending on the annual contract value and lifetime value of the customer, if a sales rep can bring in enough revenue, there’s an argument to hire as many sales reps as possible until diminishing marginal returns set in
    • Sales reps often have friends that are sales reps, so include referral bonuses for employees to refer potential employees

    After product-market fit has been achieved, and the unit economics are proven, SaaS startups should always be hiring sales reps.

    What else? What are some other thoughts on always hiring sales reps?