David Cummings on Startups

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  • Not Everyone Wants to be an Entrepreneur

    Last week I was talking with a person that I thought would make a great entrepreneur: smart, hard working, ambitious, and successful. Only, after I brought it up, there was a thoughtful response along the lines of “I’ve thought about it and I know it’s not right for me as I want to do what I do best and leave the harder choices to someone else.” Since I’m somewhat obsessed with entrepreneurship and startups, I was taken aback as this person would do a great job as an entrepreneur.

    Here are a few more thoughts from the conversation about not wanting to be an entrepreneur:

    • Ambitious people can achieve great success without starting a company, in fact most successful people achieve success without starting a company
    • Joining an existing startup that already has product-market fit or is in the scaling phase can be immensely rewarding and much less stressful than the earlier phases (see 106 Career-Launching Technology Companies)
    • Playing to one’s strengths is the best strategy, and just because someone is successful doesn’t mean they want to run a company
    • Seeing a founder make incredibly hard decisions in the past, like who to lay off when things are going bad, was one example that drove home the feeling of not wanting to be an entrepreneur

    Being an entrepreneur isn’t for everyone. Some people need to go out and try it for themselves to figure out where they stand while others are self-aware and never need to try. Just because someone seems like they could be a successful entrepreneur doesn’t mean they want the life of an entrepreneur.

    What else? What are some more thoughts on people not wanting to be an entrepreneur?

  • Get 10 Unaffiliated Customers as Quickly as Possible

    Yesterday an entrepreneur emailed me saying he’d like to talk after he gets his app built and has 10 customers. Naturally, I like this as my personal focus is on helping entrepreneurs scale from 50 customers to 500 customers, and not going from 0 to 10. Going from 0 to 10 is so industry and market specific, that I can’t add much value. Going from 50 to 500 involves building a repeatable customers acquisition machine, scaling the organization, and a number of other aspects that are more process and team oriented.

    Only, in the entrepreneur’s email, he said he needed eight months to build the product and get the first 10 unaffiliated customers. Eight months is too long to wait to know if an idea is good or not, so it’s critical to get customers as quickly as possible. Here are a few thoughts on getting 10 unaffiliated customers after running a customer discovery process and building a simple product:

    • Users are oxygen for a product otherwise the human tendency is to enhance a product in a vacuum, and build functionality that isn’t highest priority
    • Unaffiliated customers are ones that don’t come from friends, family, or colleagues (friendly customers are fine, but focus on unaffiliated customers until there’s a critical mass of impartial customers)
    • Unaffiliated customers provide more direct feedback, aren’t worried about hurting the entrepreneur’s feelings, and will be more demanding (it’s key that money changes hands and that they aren’t a free user)
    • Implement a marketing process like Traction to systematically find 10 unaffiliated customers (e.g. use cold calling, pay per clicks ads, social media, etc to get 10 customers in the door)
    • Listen to the customer requests while maintaining an opinionated vision for the future

    One of the most common entrepreneur mistakes is taking too much time to prove they are on the wrong path. Of course, it’d be great if every new product idea was successful, but most of the time they aren’t. By getting to “no go” as soon as possible, it provides more time to pivot/iterate and try the next direction. Grinding it out is hard, but critical to achieve entrepreneurial success.

    What else? What are some more thoughts on getting 10 unaffiliated customers as quickly as possible?

  • 8 Sales Questions and Answers for Early Stage SaaS Startups

    Earlier today an entrepreneur reached out seeking help. His company has recently cleared the $1 million in annual recurring revenue milestone and he’s working on the strategy to build out a sales team.

    Here are his eight questions and my answers in the Pardot context:

    1. At what stage in the company did you hire your first salesperson (headcount, years since founding, revenue level)?
      Pardot was started March 1, 2007. Our beta (minimum respectable product) was ready at the end of the summer and we hired our first two sales people, while still be pre-revenue, at the same time on September 1, 2007 (always hire sales people in pairs, if possible).
    2. Was your initial sales team functioning as ‘explorers’ or were they repeating a process that you had already defined?
      The initial sales team functioned as explorers and worked to figure out the best places to hunt. One of the salespeople didn’t work out and was let go of quickly while the other sales person worked out incredibly well.
    3. How long before that person became profitable?
      The sales person that worked out was profitable by their second quarter with us.
    4. How long before you hired subsequent salespeople?
      Our next sales person was brought on in Q1 2008 as it was clear the first sales person was doing great. As a simplistic rule of thumb, I like the ratio of $1 in sales rep expense to $3 of new annual recurring revenue.
    5. Did you use the predictable revenue model of one SDR to three Account Execs?
      We implemented Predictable Revenue at Pardot and used the 1:3 SDR to AE ratio (we implemented an appointment setting team before the book was published). In some cases, I’ve seen a 1:1 ratio of SDR to AE.
    6. If so, did you consider other methods?
      We didn’t use a different methodology but have always liked the idea of one team to set appointments and one team to close deals.
    7. What are the biggest things that you would do differently in building a sales team knowing what you know now?
      I’d invest more aggressive in sales people once the model was proven (we could have hired many more sales people) and I’d use more modern sales acceleration tools like SalesLoft and WideAngle.
    8. How narrowly did you focus on verticals at the beginning of your sales process i.e. did your initial team sell across verticals or not?
      Early on, we realized the companies that received the most value from marketing automation were technology companies as they had more tech-savvy marketing teams and good budgets. We didn’t divide the team up by vertical but most of the proactive sales efforts were to other tech companies.

    I appreciate the entrepreneur sending me the questions and I look forward to providing more information about what worked well, and didn’t work well, over our five year journey.

    What else? What are some other sales questions for a seed or early stage startup?

  • Venture Atlanta 2014 Takeaways

    Today wrapped up the 2014 Venture Atlanta conference at the amazing Georgia Aquarium. With 30 startups and 700 attendees, it’s one of the largest venture conferences in the country. The presenting companies did a great job and should be commended for their excellent work.

    Here are a few takeaways from the event:

    • Big data and predictive analytics are the popular buzzword phrases
    • Most of the venture capitalists in the audience were focused on growth stage startups (e.g. at least $3-5 million in recurring revenue)
    • Out of town investors enjoy the annual Venture Atlanta trip and have been coming for years
    • Atlanta is a B2B tech town (we already knew it but the event really drives it home)
    • ATDC and ATV were extremely well represented with over half the companies
    • Having 25 Atlanta startups and five out of state startups was a mixed bag (the out of state startups presented well but as a city we should field 30 quality startups every year)

    Overall, there’s a general level of excitement and interest around tech startups in Atlanta. Venture Atlanta acts like an annual pep rally for the city and is a worthwhile event.

    What else? What are some other takeaways from the 2014 Venture Atlanta conference?

  • SaaS Churn Rates With Early Exit Customers

    Whenever I talk with Software-as-a-Service (SaaS) entrepreneurs, the topic of growth rates, and corresponding churn rates, always come up (see Quantifying the SaaS Valuation Growth Rate Multiplier). After talking about churn rates, I like to ask the following question: how long do customers have to stay with you to know they’re in it for the long haul?

    For the first few years of Pardot, most customers were month-to-month without an annual contract. At first, we paid commissions out to our sales reps at a rate of roughly 12% of the first year’s revenue. Quickly, we realized that if customers weren’t a good fit, they’d leave within the first four months. Customers that stayed longer than four months would be customers indefinitely. To make things more aligned, we changed our commission with sales reps to be 50% of the first four months of customer revenue, paid monthly as revenue came in, so that the sales reps would sign good-fit customers.

    Now, there’s a debate in the SaaS metrics world about calculating churn. Do you count all new customers signed or do you only count new customers that have made it past the critical starting period (e.g. the first four months in the early Pardot example)? As a course of business, it’s easier to count all new customers as that makes it easy to track and measure the critical SaaS metrics. For the health and long-term view into the business, I prefer not counting customers that churn in the critical starting period. Cost of customer acquisition, renewal/churn rates, lifetime value of the customer, etc all have to take into account not counting early churn customers, if that’s the route the entrepreneur chooses to take regarding metrics.

    Some variances of this practice include analyzing cohorts on a weekly/monthly/quarterly basis as well as only counting customers if they meet certain size requirements (e.g. it’s usually the smallest of businesses that have the highest churn rates, so if you exclude any customers below a designated size when tallying the metrics, they don’t negatively affects the startup’s real numbers). Put another way, don’t assume that all new customers should be tracked the same way from a metrics perspective.

    What else? What are some more thoughts on measuring customers that churn early as part of the overall customer metrics?

  • Product-Market Fit Before Raising Venture Capital

    Andy Rachleff, founder of Benchmark Capital (one of the top venture firms), has a great new article up titled Why You Should Find Product-Market Fit Before Sniffing Around For Venture Money. In it, he argues that entrepreneurs should approach venture capitalists once it’s clear that there’s a set of users that truly value the product. Just because someone has tried a product doesn’t mean they love it.

    Here are a few choice quotes from the article:

    • Growth without value to the customer is likely to lead nowhere–or worse, to a big flameout.
    • In my experience the best enterprise entrepreneurs pull trials after 30 days to determine if customers really need their product.
    • Data tells us the ultimate size of market addressed is the single greatest determinant of outcome.
    • In contrast to the majority of VCs, the best are riveted on product/market fit and want to invest before the growth hypothesis has been resolved.

    Most startups fail to achieve product-market fit, then try to raise venture capital, and fail at that as well. Entrepreneurs should read Why You Should Find Product-Market Fit Before Sniffing Around For Venture Money and increase the chances of raising institutional capital by first achieving product-market fit.

    What else? What are some more thoughts on product-market fit before raising venture money?

  • Have an On-Going Dialogue with VCs

    Even if there’s no short-term desire to raise venture capital, it’s still important to develop relationships with venture capitalists if you eventually plan to raise institutional money. The best relationships with potential investors start well in advance of a financial desire. Much like any sales process, it’s best to come up with a plan and iterate as necessary.

    Here are a few thoughts about an on-going dialogue with VCs:

    • First, figure out how to start the relationship (this is often the hardest part — see Getting Access to the Old Boys’ Club)
    • At the end of the first meeting, ask permission to keep them abreast of the progress of your startup
    • Decide on an update rhythm (e.g. every 60 days or every quarter) and reach out like clockwork on that schedule
    • Create a potential investor update template and send the update as part of the rhythm (see the Monthly Advisor Update Email as an example)
    • Ask to catch up in-person or over the phone at least twice a year, or more frequently as appropriate
    • Remember to pay it forward and seek out ways to provide value to the investor (see VC Access Via Helping a Portfolio Company)

    Entrepreneurs would do well to have an on-going dialogue with VCs so that when they do want to raise money, a relationship and track record is already in place.

    What else? What are some other thoughts on the best ways to build relationships with investors?

  • Settling in for at Least Five More Years

    Recently I was talking to an entrepreneur that was starting to make some early progress in his startup. With several dozen paying customers, it was clear that product-market fit was in place (see 5 Ways to Identify Product-Market Fit). The next step, a repeatable customer acquisition process, was still a ways out, but deals were coming in at a steady pace, albeit in low volume. Then, he said something that stuck with me:

    I now know this business is going to work, and I’m settling in for at least five more years.

    Steve Blank defines a startup as a “temporary organization searching for a repeatable and scalable business model.” For this entrepreneur, achieving early traction and gaining visibility into a repeatable sales model gave him the confidence to know the business is going work. Oh, and it’s taken over two years to get to this point. Only now, he knows it’s time to settle in for the long haul.

    What else? How do you know when you’re on to something special that’s going to take many more years to materialize?

  • The Market Opportunity for Marketing Automation in 2009

    Back in 2009 we tried to raise venture capital for Pardot. While we didn’t end up raising any money, we did pitch dozens of venture capitalists and had a great experience doing it. One of the things potential investors were most skeptical about was the market opportunity. Even though we had over $1 million in annual recurring revenue and customers said it was a must-have (a painkiller), investors didn’t think it was a big enough market opportunity. Now that the space has three unicorns (billion dollar companies), it’s clear the market is massive.

    Here’s how we presented the market opportunity for marketing automation in 2009:

    • Marketing teams don’t have a central platform to run their campaigns and track ROI (e.g. accounting has QuickBooks, sales has Salesforce.com, etc)
    • B2B online marketing, while smaller than B2C online marketing, is growing fast and benefits from the shift in offline to online advertising
    • Roughly 150,000 companies pay for a modern, web-based CRM (Salesforce.com, SugarCRM, Netsuite, and Microsoft Dynamics)
    • The vast majority of companies that pay for a modern, web-based CRM need a marketing automation system, yet less than 3% of the market is vended (we cited publicly available customer counts from each CRM vendor and marketing automation vendor)

    Thankfully, our market analysis proved to be correct and marketing automation is now a huge market that’s still growing fast.

    The next time investors ask about the market opportunity, figure out how to present it in a way that’s compelling and incorporates social proof beyond something written in a Gartner report.

    What else? What are some more thoughts on framing a market opportunity and the marketing automation example?

  • 7 Questions Every Entrepreneur Needs to Answer

    Earlier this week I finished Peter Thiel’s new book Zero to One (see my previous post Creative Monopolies on the Mind). My favorite part in the book is where he talks about the seven questions every entrepreneur needs to answer. He provides details for each question and then goes through a few example companies with one that can positively answer the majority (Tesla) and one that can’t (Solyndra).

    Here are the seven questions every entrepreneur needs to answer:

    1. The Engineering Question
      Can you create breakthrough technology instead of incremental improvements?
    2. The Timing Question
      Is now the right time to start your particular business?
    3. The Monopoly Question
      Are you starting with a big share of a small market?
    4. The People Question
      Do you have the right team?
    5. The Distribution Question
      Do you have a way to not just create but deliver your product?
    6. The Durability Question
      Will your market position be defensible 10 and 20 years into the future?
    7. The Secret Question
      Have you identified a unique opportunity that others don’t see?

    While it isn’t critical to be able to answer every question in the affirmative, it is critical to answer a majority of the questions in the affirmative. One of my favorite lines from the book:

    If you don’t have good answers to these questions, you’ll run into lots of “bad luck” and your business will fail.

    Entrepreneurs would do well to answer these seven questions and revisit them on a regular basis.

    What else? What are some more thoughts on the seven questions every entrepreneur needs to answer?