David Cummings on Startups

Blog

  • 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?

  • Customer Success and Retention Software

    We’ve all heard the old adage that it’s much more cost-effective to keep an existing customer than it is to sign a new customer. Well, there’s a relatively new class of Software-as-a-Service (SaaS) products known as customer success / customer retention software. This class of software is similar to marketing automation software (like Pardot) in that it has tools to track and communicate with users, but it’s much more focused on the unique needs of existing customers as opposed to generating prospects and turning them into customers. Imagine analyzing user behaviour in the application, correlating it with activity data in the CRM, and making recommendations as to customers that are likely to churn (e.g. if the user doesn’t sign into the application regularly, doesn’t use the most popular features, doesn’t interact with the support or customer success teams, etc).

    Here are a few vendors in the space:

    Customer success and retention software is going to be a major category. While not as large as marketing automation, it’s a good market and will have big winners.

    What else? What are some more thoughts on customer success and retention software?

  • Inventory of our Current Business Apps

    Every year I like to take an inventory of the tools and products we use on a regular basis within our startups. Most products stay the same from year to year, but there are always a few new break-out products that catch on quickly.

    Here’s what we use day-to-day:

    This list applications shows the rise of Software-as-a-Service (SaaS). My prediction is that three years from now we’ll be using 50% more applications.

    What else? What are some other business apps you use on a regular basis?

  • Atlanta Tech Village Stats

    It’s official! Construction is done at the Atlanta Tech Village (see our press release). While we have a few punch list items left, all the primary work is done. After 15 months of nonstop construction, we have one of the coolest tech startup buildings I’ve ever seen. Here are some stats about the Tech Village:

    • 103,000 square feet total in the building
    • 10,000 square feet of event and meeting space
    • 50 coworking desks
    • 63 private offices
    • 44 multi-room suites
    • 4 kitchens
    • 2 nap rooms
    • 2 game rooms
    • 1 rooftop patio
    • 200+ companies
    • 700+ people

    Here are some of the top Village startups:

    The stats are only a part of the Atlanta Tech Village. Our real value lies in the community of passionate people building great companies. I’m incredibly proud of the Atlanta Tech Village and can’t wait to see the impact over the next 20 years.

  • Billion or Bust

    Recently I had the chance to watch the On Doers interview of Allen Nance and hear him talk about the quest to build billion dollar businesses. Silicon Valley has averaged one new billion dollar tech company per quarter for many years now while most cities, Atlanta included, are lucky to have one billion dollar tech company every five years (Air Watch was the last Atlanta one and sold for well over a billion in 2014). Allen’s new venture, Tech Square Labs, aims to create two billion dollar tech companies in the next 10 years.

    Earlier today @danprimack tweeted a billion or bust comment from a corporate development person:

    To me, most entrepreneurs don’t set out to build a billion dollar business. Most want to solve a problem, build a great lifestyle, create jobs, and control their own destiny. I’m a fan of thinking big and shooting for a billion dollar company, but realize it’s not commonplace. Entrepreneurs would do well to outline their goals as early as possible in the entrepreneurial process and make them known to anyone that will listen.

    What else? What are some more thoughts on having a stated goal of building a billion dollar company?