David Cummings on Startups

Blog

  • Entering New Markets Requires Different Tactics

    Recently an entrepreneur was telling me about his desire to enter an adjacent market, and that to do so, he needed a different skill set on his team. After thinking about it, I knew he was right. Several times in the past I’ve tried to push into different markets with the same sales team, same marketing message, and same product only to fail. Much like the sales rep that’s strong at selling into an established market is much less likely to succeed building a new market from scratch in startup — it’s a different skill set.

    Here are a few thoughts on entering a new market:

    • Find an advisor or mentor that’s already an expert in the new market in order to minimize some of the common mistakes
    • Treat the new market more like a startup and do customer discovery, seek out product-market fit, etc
    • Know that existing team members and skills will need to be adapted for the new market
    • Create additional messaging, collateral, etc. for the new market and treat it like a different product

    Entering a new market is difficult. Entrepreneurs would do well to recognize the challenges and plan accordingly.

    What else? What are some more thoughts on entering a new market?

  • Corporate Retreats in a Startup

    Early on in my startup career I thought corporate retreats were a waste of time. I just wanted to stay heads-down and crank away at the items on my to do list. Only after experiencing great retreats with EO and YPO did I come to understand the real value.

    Here are a few thoughts on corporate retreats in a startup:

    • Hire an outside facilitator (find one that is EO or YPO certified) as they are worth the cost (if money is available to do so)
    • Find the right balance between work time and fun activity time (depending on the group, I’ve found 60/40 works well with 60% work time)
    • Always get outside the building, and preferably outside the city, so that the usual distractions aren’t present
    • Come with an agenda and make sure that the goals are accomplished
    • Decide on a cell phone policy and enforce it (e.g. turn off all phones and leave them on the middle of the table)
    • Give homework in advance to set the tone and get the team thinking about the key topics

    Corporate retreats are a great way to bring the team together, strategize the future, and align everyone.

    What else? What are some other thoughts on corporate retreats and startups?

  • Working from Home and Startups

    With the continued chatter about Yahoo’s policy change last year where employees are no longer allowed to work from home, and HP following suit, I’ve had a few entrepreneurs reach out over the past few months asking about work from home strategies. Before talking about working from home, the discussion needs to focus on the company’s core values and how it operates. Personally, I’m interested in a culture of people who are positive, self-starting, and supportive with a results only work environment (ROWE) structure.

    Here are a few considerations regarding working from home and startups:

    • More working from home requires more communication and planning, so allocate time accordingly
    • Working from home doesn’t imply a ROWE structure, but a good way to move towards ROWE is to allow more telecommuting
    • Crystal clear expectations for employees, including results, makes it easier to assess if the employee is meeting his or her expectations, regardless of working in the office or at home
    • Tools like Google Hangouts are so good now that people working remotely can participate in meetings with a great deal of effectiveness
    • Physical, face-to-face interactions and rapport-building is still important, so people that work remotely or from home all the time should plan for getting together at least once a quarter

    More recently, discussions have emerged about holocracy and startups with 100% remote employees and no managers. My takeaway is that having a culture that encourages people to do their best work wherever they are requires a strong alignment of core values and often starts with the hiring process. Working from home works for many companies, especially ones with a strong culture and clear expectations for their team members.

    What else? What are some more thoughts on working from home and startups?

  • Seed Stage Entrepreneurs Hiring Consultants to Raise Money

    Just this week I’ve encountered two separate consultants that help seed stage entrepreneurs raise money. Of course, I’m very suspect when someone tells me they help entrepreneurs with little-to-no revenue raise money from investors. In each case I asked if they were a broker-dealer that gets a placement fee and they said ‘no’, it’s an hourly rate or project fee to consult.

    Preparing a longish pitchbook (e.g. a business plan) with comprehensive financial models requires a tremendous amount of imagination for a startup with a couple paying customers. Financial models can be built to paint any desired picture, especially when there’s almost no historical data to draw from. As an investor, I’d prefer to see the entrepreneurs spend the $25,000 validating the market or signing 10 more customers, instead of hiring a fundraising consultant. Intellectually, I understand that an entrepreneur who’s struggled raising money would resort to getting help from someone that promises them a successful outcome.

    While a fundraising consultant isn’t a good use of money for a seed stage entrepreneur, here are a few things that are worth investing in:

    • Investor Deck – Find someone who’s great at storytelling, build a slidedeck, and then hire a graphic designer to make it professional looking (~$500)
    • Financial Model – Grab a free financial model online (e.g. here’s a great financial model for SaaS startups) and pay a CPA for two hours of their time to help understand it (~$300)
    • Executive Summary – Write a simple two-page executive summary with all the pertinent sections and have a friend proof-read it ($50 to buy them a nice meal in exchange for their help)

    So, for under $1,000, an entrepreneur has all the tools necessary to pitch investors and speak intelligently about their startup’s potential. This doesn’t guarantee raising money but it does increase the chances of success.

    What else? What are some other thoughts on fundraising consultants for seed stage startups?

  • Entrepreneurs Deciding to Sell Their Company

    Several weeks ago an entrepreneur reached out and said he wants to sell his company. After having grown the business from nothing to a good size (> $10 million revenue) he’s tired and ready to move on to the next adventure. I’ve had a number of similar conversations over the years, and here are a few reasons entrepreneurs decide to sell their company:

    • Boredom – The journey is the fun part, and when it’s no longer fun, it can be time to sell
    • Financial freedom – Many entrepreneurs set out to make FU money — say $20 million — and when the first offer comes along that meets their goal, they sell
    • Incredible offer – My favorite response to someone asking “is your company for sale?” is to answer “no, but how much are you offering?” such that sometimes an offer so incredible comes along that you can’t say “no” (this was the case with selling Pardot to ExactTarget)
    • Industry shift – Technology moves fast and sometimes you’re on the wrong side of the curve, so it’s important to get out before things get even worse

    Selling a company is a very personal and emotional decision. Deciding to sell is just the first step in a long process and there are many reasons to exit.

    What else? What are some other reasons why entrepreneurs decide to sell their company?

  • Evaluating an Early Stage Startup to Join

    Recently an entrepreneurial leader told me he was interested in joining a funded early stage startup in a COO or CEO role. After quizzing him for a bit about what he meant as a funded early stage startup (raised a Series A round from institutional investors), I offered up a few thoughts on evaluating a startup to join:

    • Has the startup achieved product-market fit? Just because there’s institutional money it doesn’t mean that the dogs eat the dog food.
    • Has the startup built a repeatable customer acquisition machine? Customers might love the product but if customers can’t be found in a predictability, cost-effective manner, there’s still a serious amount of risk.
    • What’s the board arrangement like? Is it a functional board? Are the entrepreneurs in control? Joining a startup with a dysfunctional board makes for a poor experience.
    • How critical is culture to the entrepreneurs? Culture is important at all stages and sets the tone for how the company operates.
    • How much cash is in the bank? How much runway does the startup have? Just because the startup raised money doesn’t mean it’s in a strong financial position.
    • What’s the current division of roles and responsibilities of the management team? Some people have broad titles like COO but really specialize in one or two functional areas like product management or marketing.
    • What’s the three year plan look like? While things change all the time it’s still important to look out over several years and have a fluid game plan.
    • What are the top three priorities right now? What does the simplified one page strategic plan look like? Aligning everyone in the company is critical.

    So, with a few ideas and words of encouragement, I told him joining an early stage startup would be an awesome experience and that he’d learn a tremendous amount.

    What else? What are some other thoughts on evaluating an early stage startup to join?

  • One SaaS Application of Record Per Job Function

    Software-as-a-Service (SaaS) is entering its third phase of maturity. Phase one focused on enterprise applications that became platform products like Salesforce.com, NetSuite, and others. Phase two was about general point solutions, mostly for the small-to-medium sized business market like Pardot, Mailchimp, and Zendesk. Phase three is new vertical-specific SaaS applications as well as more specialized solutions that represent portions of more complicated products.

    One way to think about it is that there is an application of record for each job function (that is, a product that people in that job function spend a large number of hours per week to perform their job). The application of record often feeds data into a more general platform (like Salesforce.com) such that data is made available to any other product that might need it. Here are a few examples of applications for job functions:

    Disclosure – I’m an investor in SalesLoft and Rivalry.

    Think about all the different job functions in a mid-sized company. Now, think about the SaaS applications currently used. What job functions currently use a generic solution, but would be better served by a more specialized solution? Look for more SaaS solutions to emerge that help run specific job functions.

    What else? What are some more thoughts on one SaaS application of record per job function?

  • Whiplash from Pitching VCs

    In the second half of 2009 we pitched Pardot to 29 different VCs. Over the course of four months we met with a number of VCs in Atlanta and flew to Silicon Valley twice, Boston once, and Washington D.C. once. Pitching VCs is great in that you get a chance to engage with really smart people, share the vision, and hear feedback.

    Only, the feedback is driven by their view of the world and personal experiences. After the 15th conversation whiplash starts to set in from all the different recommended actions — target this market, make this pricing change, think bigger, etc. Ideas get tossed around at a rapid clip, and as an eager entrepreneur seeking capital, the instinct is to look on fondly and nod ‘yes’ to each suggestion.

    When going into conversations with VCs, have a clear opinion and vision (no different than talking with customers and prospects), so that any suggestions can be put against the plan with a clear head. More ideas and recommendations will stress test the vision, which is fine, but try not to get caught up in the whiplash of different recommendations. Make improvements as necessary and carry on.

    What else? What are some other thoughts on the whiplash from pitching VCs?

  • The Difficulties in Getting a SaaS Startup Off the Ground

    Continuing with yesterday’s post on SaaS and Barriers to Entry, if it seems like Software-as-a-Service (SaaS) products are easy to reproduce from a functionality perspective, why are there so few successful ones? Software development and delivery costs have dropped 10x over the past 15 years due to the rise of open source software and cloud computing. Technically, it’s easy to take one product and make a barebones reproduction of the most basic functionality. Only, there’s so much more than that.

    Here are a few reasons why it’s so difficult to get a SaaS startup off the ground:

    • Initial minimum respectable SaaS products still require years of continuous development to reach maturity and broad applicability (while it might cost a few hundred grand to get a decent product to market, it’ll take several million over a few years to get a robust product to market)
    • SaaS products are often billed monthly, with the occasional annual pre-pay, meaning SaaS companies are really in the financing business as it takes years before a customer is profitable (compare this to enterprise software companies that get paid upfront for the license fees and are immediately profitable, but become much more difficult to maintain growth)
    • Most SaaS products have retail prices in the sub $1,000/month price range, requiring thousands of paying customers to build a meaningful business (at $1,000/year per customer, 5,000 customers are required to build a $5 million/year business, which is a huge amount of effort)
    • Repeatable customer acquisition at a reasonable cost is always the limiting factor (best practices are that the cost of customer acquisition should be equal to or less than the first year’s revenue e.g. spend $1,000 or less to acquire a customer that pays $1,000 per year — see Why Lead Velocity Rate is the Most Important Metric in SaaS)

    SaaS companies are extremely difficult to get off the ground. Once up-and-running with some modest scale (>$2 million in revenue) and modest burn rate, they are a thing of beauty and typically grow fast for several years.

    What else? What are some other thoughts on the difficulties of getting a SaaS company off the ground?

  • SaaS and Barriers to Entry

    Earlier today Zaid Farooqui tweeted that some of his hedge fund friends think Software-as-a-Service (SaaS) companies are over-valued due to low barriers to entry:

    While I agree that some SaaS companies are priced to perfection due the expectation of massive growth, I don’t believe low barriers to entry plays much of a role. Here are a few thoughts on SaaS and barriers to entry:

    • Once a software product works well, especially at a reasonable price, people are reluctant to switch (look at how many people are still using antiquated Microsoft software)
    • Set-it-and-forget-it SaaS apps are more commonplace than realized, such that credit cards keep getting billed and no one notices unless something goes wrong
    • App marketplaces, like Salesforce.com’s AppExchange, create a network effect of other products that integrate (products like the Kevy integration platform are working to decrease this network effect)
    • Achieving scale in a market results in significant sales and marketing resources that only grows as the company grows
    • If SaaS was susceptible to low barriers to entry, more upstarts would have to have successful businesses in the same market as category leaders

    The hedge fund partners would do well to talk to their B-school classmates that have started SaaS companies and hear first-hand just how difficult it is to get one off the ground.

    SaaS startups encounter a number of barriers to entry, especially in markets with dominate category leaders.

    What else? What are some other thoughts on SaaS and barriers to entry?