David Cummings on Startups

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  • Better Strategies Become Apparent With Customer Interactions

    Back when Adam and I started Pardot in March of 2007, the original idea was to build a lead generation as a service product where we’d generate leads for technology companies and sell them to multiple vendors. For the business model, the goal was to spend $100 on Google PPC ads to generate one qualified lead (e.g. someone searching for the term “email marketing”) and we’d in turn sell that lead to five companies that fit the buyer’s needs for $50 each (so, turn $100 into $250).

    Within six weeks we’d built a prototype system that managed simple landing pages and had light business rules to forward leads to different companies. Google happily took our money for AdWords ads and we ended up spending several thousand dollars to get our first batch of leads in the system. With leads in hand, we then went to technology vendors and said we had a few qualified leads for them at no-charge and that we’d like to setup a conversation to talk about our new business. Quickly, within a few conversations, it was clear that the technology companies were much more interested in the system to generate the leads than to buy leads from us. After much internal discussion over the course of a week, we decided to change the business to focus on building a marketing automation platform.

    While we shifted our business to go from selling leads to selling software, we stayed in the same area of B2B lead generation. To me, this was an iteration in the startup and not a pivot since we could use the core of our existing technology and we continued to go after the same buyer (marketing managers). Here, the key takeaway is that the right strategy often reveals itself as more time is spent in the market, especially when getting honest feedback from customer interactions.

    What else? What are some more examples of better strategies emerging after customer interaction?

  • Atlanta’s Contact At Once selling for $65 Million

    Urvaksh broke the news last week that Atlanta’s Contact At Once is going to be bought for $65 million by LivePerson. Contact At Once (CAO) makes web-based chat software and tailors it to industries like car dealerships and apartment complexes. Online chat programs, like LivePerson, have been around for decades. CAO took a standard idea and built a business from the ground-up to service specific verticals, which continues the trend of vertical-specific Software-as-a-Service applications as the next wave.

    Here are a few interesting notes about Contact At Once:

    • Started in 2005
    • 2009 revenue of $2.2 million and 34 employees (per the Inc. 500 page)
    • 2012 revenue of $12.3 million and 86 employees in 2012 (per the Inc. 500 page)
    • Raised $3 million from Fulcrum Equity Partners in 2012 (went seven years without raising money and got to a $10 million+ run rate)
    • 127 employees on LinkedIn today (November 2014)
    • Using the 2012 revenue and employee count, CAO is likely in the ~$20 million revenue range based on having 50% more employees now

    Contact At Once is a great success story that shows you can take a straightforward idea, build a great business, and do it with limited capital. Congratulations to the team!

    What else? What are some more thoughts on Contact At Once?

  • Scaling Up: Rockefeller Habits 2.0

    Last week I started reading the new Verne Harnish book Scaling Up: How a Few Companies Make It…and Why the Rest Don’t (Rockefeller Habits 2.0). Verne’s version 1.0 of the book, Mastering the Rockefeller Habits, is one of the top five books I recommend to entrepreneurs. My favorite business tool, the Simplified One Page Strategic Plan, is from the book. While the first book was more of a quick read, this new one is much longer and has more of a textbook feel (I bought several hardback copies to keep for other entrepreneurs).

    Here are the sections of the book:

    The Introduction – Tools for Scaling Up

    • The Overview – People, Strategy, Execution, Cash
    • The Barriers – Leadership, Infrastructure, and Market Dynamics

    Scaling Up People

    • The Leaders – The Face and Pace of the Company
    • The Team – Attracting and Hiring
    • The Managers – Keeping and Growing (Educating) the Team

    Scaling Up Strategy

    • The Core – Values, Purpose, and Competencies
    • The 7 Strata of Strategy – The Framework for Dominating Your Industry
    • The One-Page Strategic Plan – The Tool for Strategic Planning

    Scaling Up Execution

    • The Priority – Focus, Finish Lines, and Fun
    • The Data – Powering Prediction
    • The Meeting Rhythm – The Heartbeat of the Organization

    Scaling Up Cash

    • The Cash – Accelerating Cash Flow
    • The Accounting – Driving Profitability
    • The Power of One – 7 Key Financial Levers

    I’m looking forward to digging in to Scaling Up: How a Few Companies Make It…and Why the Rest Don’t (Rockefeller Habits 2.0) and seeing what’s new.

    What else? What are your thoughts on Scaling Up and Mastering the Rockefeller Habits?

  • 7 Engineering Startup Lessons from Netflix

    Om Malik, journalist and entrepreneur, put up a slide on his site titled Startups lessons from Netflix where he highlights a presentation from Adrian Cockcroft, previously of Netflix. Adrian highlights 7 startup lessons he learned from his time at Netflix:

    1. Speed wins in the marketplace
    2. Remove friction from product development
    3. High trust, low process, no hand-offs between teams
    4. Freedom and responsibility culture
    5. Don’t do your own undifferentiated heavy lifting
    6. Use simple patterns automated by tooling
    7. Self service cloud makes impossible things instant

    Product and engineering-oriented entrepreneurs would do well to read all the slides in Adrian’s Fast Delivery presentation.

    What else? What are some more takeaways from Adrian’s presentation?

  • 5 Happy Customers With No New Bugs

    Being a part of the Atlanta Tech Village enables me to spend a good bit of time with entrepreneurs that have a working product and are seeking product-market fit. As a product-oriented entrepreneur, I enjoy talking about the software, how it works, how customers use it, and how the customer on-boarding process works. After writing about 5 Ways to Identify Product-Market Fit, I’ve come to the following conclusion:

    Product-market fit is achieved when five new customers are immediately happy and don’t find any bugs.

    Before, I was leaning towards a certain number of customers, or level of value received from the service. Now, I believe product-market fit is all about signing a small number of successful customers that don’t run into rough edges. Some startups sign new customers, but the customers aren’t happy and don’t end up seeing enough value in the product (there was more selling than buying). Also, the new customers might be happy, but they immediately run into bugs, and so don’t have a great experience (bugs are normal but need to be squashed quickly).

    Product-market fit is difficult to achieve but readily apparent when new customers are successful and have a bug-free experience. Once fit has been achieved, the next step is shifting attention to building a repeatable customer acquisition model (see The Four Stages of a B2B Startup).

    What else? What are some more thoughts on the idea that product-market fit has been achieved once five new customers are successful and don’t find product issues?

  • Growth-Stage Startups Should Have In-House Recruiters

    In early 2012 it was clear we needed to significantly grow our Pardot employee base and we weren’t bringing in new team members fast enough. From an organization perspective, we were growing the business from 70 employees to 110+ by the end of the year, with an expectation of even more hiring the following year. In an effort to scale to 200+ employees, we hired four full-time recruiters in-house to focus on engineering, sales, and services. Four recruiters, plus two additional people on the HR team, is a huge HR department for a 70-person company. In hindsight, it was a great move.

    Here are a few thoughts on having in-house recruiters for growth-stage startups:

    • In-house recruiters learn the mission, vision, values, and culture at the deepest level
    • In-house recruiters spend all their time recruiting just for the company, and don’t split their time with other accounts like an outsourced recruiter
    • In-house recruiters can identify and nurture a “virtual bench” such that candidates are lined up and ready as soon as the position needs to be filled
    • In-house recruiters are typically in the $40,000 – $70,000/year range with commissions, depending on how many team members they bring on board
    • Contingent outside recruiters can be great, but with fees representing 20% of the first-year salaries, adding $4 million in new payroll in a year equals $800,000 in fees (vs. less than half that for an in-house team)
    • Referral fees for different types of hires are still encouraged (e.g. a $10,000 bonus for referring an engineer)

    Growth-stage startups that plan on hiring a large number of people would do well to hire an in-house recruiting team and make it a company-wide priority to become excellent at recruiting new team members.

    What else? What are some more thoughts on growth-stage startups hiring in-house recruiters?

  • 3 Ways to Increase Sales Rep Productivity

    Entrepreneurs are always looking for ways to grow their business faster. Whether it’s improving the marketing message, rolling out an updated version of the product, or launching a new partnership, there’s no shortage of ideas. One area that’s often easy to implement, and get a great return, is increasing sales rep productivity. In terms of productivity, the most common areas to improve are sales cycle length, deal size, and volume of deals (e.g. close more deals in less time for larger amounts of money).

    Here are three ways to increase sales rep productivity:

    1. Implement Predictable Revenue – Develop specialists on the sales team that respond to inbound leads, make outbound calls to set appointments, and support the account executives that close deals
    2. Develop a culture of sales coaching – Ask a sales manager what their primary responsibility is and they’ll say it’s to bring in revenue, which is wrong — their primary responsibility is to grow their sales people, which requires coaching and mentoring (see Rivalry’s sales coaching platform)
    3. Incorporate sales acceleration tools – CRM is tablestakes now and there’s a whole new class of sales acceleration tools like SalesLoft Prospector and InsideSales.com PowerDialer that complement the CRM.

    At the end of the day, getting more productivity out of the sales team is one of the best ways to increase growth. Entrepreneurs would do well to invest in improving sales team performance.

    What else? What are some other ways to improve sales team productivity?

  • Write Out the Strategy

    While the Simplified One Page Strategic Plan is an amazing business tool to align the team and track the most important metrics, there’s still an opportunity to write out the strategy in greater detail, especially when things are more complicated or in flux. At Amazon.com, Jeff Bezos likes to start the executive meetings with 30 minutes of reading six-page memos prepared by each of the leaders. The idea is that long form writing captures more detail and nuance as compared to PowerPoint presentations, which often focus on numbers with limited color commentary.

    Here are a few thoughts on writing out the strategy:

    • Take each of the main ideas from the Simplified One Page Strategic Plan and write a paragraph explaining why it’s important and anything of note
    • Consider the audience (e.g. all team members, just executives, etc.) and make sure the strategy is understandable and cohesive
    • Review the written strategy with advisors and investors in advance of sharing it with other team members so as to get at least one round of feedback and advice
    • Make the most important takeaway from the strategy document abundantly clear and memorable

    Thoughtful prose adds more depth and context to the company’s strategy. When a Simplified One Page Strategic Plan isn’t enough, write out the strategy and share it.

    What else? What are some thoughts on writing out the strategy?

  • Product Price Point Personality Parity

    Recently I was talking to an entrepreneur and I asked about his typical customer, sales cycle, and price point. Immediately, his eyes lit up and he talked about how he only wants to sell large deals — deals that are at least six figures, preferably mid-six figures. I drilled in further and learned as much as I could. Then, it dawned of me: entrepreneurs need to build products that have a price point inline with their personality style.

    Here are a few thoughts on product price points and personality styles:

    • Some entrepreneurs want to be out hunting whales and on the front line with the sales team, thus a very high product price point makes sense
    • Some entrepreneurs want to have a large number of customers and employ an inside sales team with customer interaction over the phone, thus a moderate price point makes sense (typical for Software-as-a-Service products)
    • Some entrepreneurs want a completely self-service sales process and product, thus a freemium model or easy-to-get started product makes sense

    When evaluating business models, entrepreneurs would do well to take into account their own personality styles and the ideal product price point. Product price point drives a great deal of how the business works.

    What else? What are some more thoughts on product price point personality parity?

  • 5 Financial Best Practice Metrics for SaaS Masters

    One of the great things about Software-as-a-Service (SaaS) is the level of predictability it provides, especially on the financial side. Over the past 10+ years, as SaaS has hit the mainstream, a number of financial best practices emerged. Here are five financial metrics every SaaS entrepreneur should know:

    1. SaaS Magic Number – The ratio of last quarter’s new recurring revenue relative to the previous quarter’s sales and marketing expense should be less than one (if < 1, then spend more on sales and marketing, otherwise if > 1, then figure out how to make sales and marketing more efficient)
    2. 3x Recurring Revenue to Sales Compensation Rule – The fully burdened cost of an inside sales rep should be 1/3rd, or lower, of the new annual revenue required by quota, and field reps should be even lower (e.g. if a rep makes $50,000 all in per year, they should bring in over $150,000 in new annual recurring revenue, with some models going up to 8x recurring revenue to sales compensation)
    3. 3x MRR Lines of Credit – Banks that understand the SaaS model will often lend money at a rate of 3x the monthly recurring revenue (e.g. $500,000 per month in recurring revenue results in a line of credit of $1.5 million)
    4. 2.5x Growth Rate Valuation Multiplier – The growth rate of a SaaS company drives the valuation at approximately 2.5x the growth rate on top of a base valuation that’s double revenue (this is highly subject to the whims of the market and timing).
    5. 3%+ of Monthly Churn is Deadly – The hidden killer for SaaS startups is churn, and churn above 3% on a monthly basis is considered deadly (assuming the startup has some modest scale and accounts for the early exit customers)

    Over time, more financial best practice metrics will emerge as the industry matures. Regardless, these five metrics are a great place to start.

    What else? What are some other financial best practice metrics for SaaS masters?