David Cummings on Startups

Blog

  • When Growth Stalls

    Things were going well. The startup was making good progress over the course of several years and had reached a point of modest self-sustainability. Then, what had been steady 30-50% per year growth rates, stalled completely and turned into a revenue decline. For Software-as-a-Service (SaaS) companies, growth is the biggest driver to earn a premium valuation for the business.

    Here are a few ideas when growth stalls:

    • Evaluate how much of the change in business growth is due to market dynamics (e.g. new entrants or competition) vs. macro economic factors (e.g. a recession that hits all players)
    • Review expenses, cash burn, and runway, especially if the business isn’t profitable (venture investors are going to be extremely concerned when a portfolio company stops growing)
    • Consider adjacent products, verticals, geographies, etc. and how that will help/hurt the core business vs. the overall business
    • Reach out to mentors and advisors and get feedback and advice — you never know who’s already experienced this first-hand
    • Engage with key team members as the most talented people are going to start looking for other opportunities if the business isn’t growing

    Remember that a startup is a scalable, growth-focused company. If growth stalls or a decline sets in, the dynamics of the business can change dramatically.

    What else? What are some more thoughts on growth stalling in a startup?

  • Consulting Services Within Product-Based Startups

    Recently I was talking to an entrepreneur that had a working product and a handful of paying customers. We got to talking about the market and amount of custom, one-off services required to on-board a new customer. Halfway through the conversation, he paused, looked down, and said something to the effect of “I wish we could automate more of our functionality but it’s going to require serious consulting services for each new account.” Without missing a beat, I responded that there’s nothing wrong with needing a services component to make customers successful. While entrepreneurs dream of everything being automated, self-service, and high margin, plenty of super successful companies have a required services component.

    Here are a few thoughts on consulting services within product-based startups:

    • Productize the services whenever possible to ensure consistency and scalability
    • Make sure the consulting fees relative to monthly fees are inline (see our lessons learned with Post Mortem on a Failed Product)
    • Consider partnering with other consulting firms or independent contractors to grow services capacity without more in-house staff
    • Allocate product engineering cycles to add functionality that reduces the amount of consulting effort over time, if possible

    Consulting services are common even within product-based startups. Entrepreneurs would do well to embrace services to make customers successful and find a balance between consulting and product revenue.

    What else? What are some more thoughts on consulting services within product-based startups?

  • Atlanta Startup Village October 2014

    Tonight was Atlanta Startup Village #22 at the Atlanta Tech Village. With over 500 signups, it’s the largest monthly gathering of entrepreneurs in the Southeast. Every month five entrepreneurs deliver a five minute pitch followed by five minutes of audience Q&A.

    Here are the Atlanta Startup Village October 2014 presenters:

    • WeCareCard – Like a Kickstarter platform to raise money from friends and family (the example given was raising money for a funeral)
    • SwipeLoyalty – Loyalty programs built around a debit card for retailers to move consumers away from credit cards
    • Farrago Comics – Imagine an App Store for comics where everything is free and advertiser-driven
    • Campus Bubble – Take the best of social networks and make it private to the college
    • Rivalry – Automate the sales coaching process and grow faster

    Join the Atlanta Startup Village Meetup Group and come next month — it’s an awesome event.

    What else? What are some thoughts on tonight’s startups?

  • 4 Best Sales Books Every Entrepreneur Needs to Read

    It took me three years as a full-time entrepreneur before I started to realize the importance of sales. My original thinking was that if I built a great product, customers would find me and I’d be successful. The reason I was even able to get to three years was that we found a company to license our first product and earn pre-paid royalties that provided more runway. When that money ran out, I really had to figure something out, and that’s when I dove into sales (if I would have done a better job pursuing mentors, I would have figured it out sooner).

    As a solution, I decided to read every sales book I could find. Over time, I read more and more sales books and now recommend these four:

    Entrepreneurs would do well to educate themselves on sales and the importance of selling when building a company. These four books provide a strong sales foundation.

    What else? What are the best sales books for entrepreneurs?

  • 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?