David Cummings on Startups

Blog

  • The Culture-Oriented 7 Step Hiring Process

    As corporate culture is king, and three leading companies have published entire guides to their culture, it’s important to talk through an example hiring process. At Pardot, we spent years refining our hiring process, and were never finished. Here’s the core of the process we developed:

    1. Start with an applicant tracking system (e.g. Workable, Greenhouse, or Jazz) and require all candidates to apply through it
    2. Have an HR manager, office manager, or someone on the team do a phone screen for any candidates that meet the requirements with the goal of screening for culture fit (especially attitude)
    3. Require a written assessment of the candidates that pass the phone screen (I like a two-page essay and technical test)
    4. Bring in the candidates that pass the written assessment to meet with the hiring manager and a few members of that team (always require unanimous decision among interviewers when hiring)
    5. When there are multiple great candidates available bring the leading candidates back in to meet with the hiring manager and a separate set of team members
    6. Invite the candidate(s) that pass all steps to interview with the founders of the company and a separate culture check team purely for the purpose of assessing culture fit
    7. Send out a job offer to the top candidate by way of the hiring manager and have one of the founders also send an email expressing their excitement for the person to join the company (closing the candidate is extremely important and shouldn’t be taken lightly)

    Bonus: offer a $10,000 referral fee for anyone who brings in a candidate that’s hired for a tough-to-find position.

    This seven step process helped us scale Pardot beyond 100 employees and build an environment that was rated the #1 place to work for multiple years.

    What else? What would you add to a culture-oriented hiring process?

  • 23 Corporate Culture Ideas for Entrepreneurs

    Now that we have the 3 Must Read Culture Guides for Entrepreneurs, let’s summarize the most important ideas that every entrepreneur needs to know. Some are common sense, some don’t make sense until you’ve experienced it, and some fluctuate with time. Regardless, culture is the only sustainable competitive advantage for an entrepreneur and needs to nurtured and worked on just like anything else in a high performing startup.

    Here are 23 corporate culture ideas for entrepreneurs:

    1. Culture is the collective of people
    2. Culture’s influence permeates outside the organization
    3. Culture is the only thing completely within the control of the entrepreneur
    4. Culture starts with the entrepreneur
    5. Culture must be intentional
    6. Culture is different for every startup
    7. Culture that works at one company isn’t guaranteed to work at another
    8. Culture must be defined and nourished
    9. Cultures can be completely different between two startups and still be effective for both
    10. Culture isn’t defined by free lunches and masseuses — it’s all about people
    11. Culture needs to be defined by core people values every team member believes in
    12. Culture isn’t defined by company values placed prominently on the reception wall
    13. Culture is either strengthened or weakened with each new hire, it’s never stagnant
    14. Culture starts with the hiring process that must actively foster recruiting people that meet the values
    15. Culture check teams should be part of the hiring process to counteract short-term desires of hiring managers
    16. Culture needs to be reinforced daily/weekly/monthly/quarterly/annually through systems and processes
    17. Culture is shared through stories and emotional experiences
    18. Culture looks cultish from the outside
    19. Culture is fluid and always changing
    20. Culture changes as organizations mature (a three-person culture is different than a 300-person culture)
    21. Culture should absorb great-fit new hires and make them like they’ve found an amazing home
    22. Culture should expel poor-fit new hires within the first month
    23. Culture is king

    Entrepreneurs that make culture intentional and value it create higher performing organizations and achieve a greater level of success. Culture is more important than most people realize.

    What else? What are some other items you’d add to the list?

  • 3 Must Read Culture Guides for Entrepreneurs

    One of my favorite things to talk about, and most underrated by first-time entrepreneurs, is the importance of corporate culture. This seemingly simple idea that the people you choose to work with is that only thing you can control, and the most important thing to work on, is hard to appreciate without experiencing it first-hand. Entrepreneurs should put their anthropology hat on and study high performing cultures, not to merely copy one, but rather to learn and incorporate their favorite pieces into their own culture.

    Here are three culture guides every entrepreneur must read:

    The next time an entrepreneur mentions culture, explain the significance, and point them to these three guides.

    What else? What are some other good culture guides that you really like?

  • Expected Term Sheet Changes In A Down Market

    Recently, there have been a number of prognostications that we’re in for a market down-turn on the near horizon. Mark Suster mentions it in one of his most recent posts Here’s Why a Booming Tech Market May Fool You into Thinking You’re Successful. Of course, when the market does turn down it won’t be anything like the dot com crash as there’s significantly less capital in the tech startup community, more startups are making real money (not pyramid schemes like before), and it’s much less expensive to get a tech company started (still expensive to scale).

    Here are a few things we’ll start see changing with investor term sheets when the market sours:

    • Valuations will go down (super-fast growth stage startups will still command great valuations but pre-revenue and early stage valuations will take a big drop)
    • Participating preferred liquidity preferences will become more common (and they’ll be more aggressive e.g. 2x and 3x liquidity preferences)
    • Cumulative dividends will be more standard (again, downside protection becomes a big theme)
    • Anti-dilution provisions will be stronger and more punitive to doing down rounds in the future

    Entrepreneurs will keep starting companies and investors will keep writing checks. Raising money will be more difficult and the terms won’t be as entrepreneur-friendly as now. I hope we don’t have to see a down market again soon but I do believe things are still cyclical and it’ll come back around.

    What else? What are some other thoughts on expected term sheet changes in a down market?

  • More Thoughts on Tracking Week Over Week Growth

    While I haven’t historically paid any attention to week over week growth, the more I think about it the more I like it. Why? Because in a startup it’s so hard to get things going and the numbers are so small in the early years. A few dollars of revenue here, a few qualified leads there. On an absolute basis the numbers are tiny. Continuing with yesterday’s post on Recurring Revenue and Week Over Week Growth, here are a few more thoughts on tracking week over week growth:

    • Watching revenue go from $1,000 to $1,500 isn’t too impactful, but seeing 50% growth is more reassuring
    • Small, measurable goals (like 5% per week growth) are easy to understand and get buy-in from team members (e.g. we need to add $500 of recurring revenue this week and everyone will understand it)
    • A focus on weekly growth sets a metrics-driven tone for the culture
    • Consistent growth gets much harder as the numbers get larger, but it should be achievable in the first one to two years
    • Once the startup is larger, tracking growth on a monthly basis and then a quarterly basis becomes more normal

    Entrepreneurs would do well to track week over week growth for their key metrics and share the information with everyone via an LED scoreboard.

    What else? What are some other thoughts on tracking week over week growth?

  • Recurring Revenue and Week Over Week Growth

    Recurring revenue is incredibly powerful for startups. On the Software-as-a-Service (SaaS) front, recurring revenue gets combined with strong gross margins, strong renewal rates (hopefully!), and strong predictability. Only, it’s incredibly difficult to get the engine going. Paul Graham says growth of 5-7% per week is good (see his Growth essay).

    Let’s look at how a 5% per week revenue growth rate looks from a base of $5,000:

    • End Year 1 – $63,000 (based on 5,000*1.05^52)
    • End Year 2 – $800,000 (based on 63,000*1.05^52)
    • End Year 3 – $10,100,000 (based on 800,000*1.05^52)

    As an example, Pardot’s revenue growth rate was solid, but no where near those numbers. Is 5% per week growth great? Absolutely. Is it realistic after the first year or two? Not likely. Over time the law of large numbers kicks in and growing 5% per week becomes nearly impossible.

    Another way to look at it would be start with 5% per week in year one and then lower to 4% per week in year two, and 3% per week in year three. Here’s how that would look from a base on $5,000:

    • End Year 1 – $63,000 (based on 5,000*1.05^52)
    • End Year 2 – $485,000 (based on 63,000*1.04^52)
    • End Year 3 – $2,250,000 (based on 485,000*1.03^52)

    Still a great growth rate, and beyond Pardot’s numbers, but much more reasonable.

    The takeaway is to focus on growing at least 5% per week when starting out and to slowly lower the growth rate requirement over time.

    What else? What are some other thoughts on recurring revenue and week over week growth?

  • A Better Experience to Grow a Market

    One of more interesting stories to emerge lately is around Uber and how it’s grown the market for taxis and black cars. In San Francisco, the entire spend on taxis and limos was $120 million per year and now people spend much more than that just on Uber in that one city, and the rest of the taxi and limo industry didn’t go away (from Bill Gurley’s excellent post An Alternative Look at Uber’s Potential Market Size). Uber is so easy, efficient, and high quality that they significantly grew the market for black cars and taxis (personally, I’m a big fan of the service).

    On the local front, this past weekend we used Instacart to order all our groceries from Whole Foods. Normally, we’d go to Publix, which is much closer than Whole Foods, but doesn’t have as large a selection of organic food. Instacart is growing the market for organic food by making it easy and efficient to have groceries delivered to a larger geographic area compared to what was previously served.

    At home, we rarely listened to music until Pandora came out several years ago. A few months ago we put in a Sonos wireless speaker system and now we listen to music 10x more than previously. The Sonos experience took Internet-delivered music services like Pandora and made them substantially better by disconnecting the device (e.g. iPad or laptop) from the delivery of the music (e.g. the sound system). Now, we choose a Pandora station for the Sonos speakers and forget about it. The result is more music with less effort and a better experience.

    Historically, business owners have focused more on making their product or service better, faster, and cheaper than their competitors in order to grow their market share, and in turn grow their business. Yes, the market overall was likely growing, but not in a dramatic way. Now, technology is helping deliver a better experience and even traditional slow-growth markets are growing at astounding rates. I’m looking forward to seeing more markets grow due to a better experience.

    What else? What would you use more of if you had an experience that was 10x better than before?

  • Build a $300 Million Pie So Everyone Can Get a Big Helping

    Reading about RelateIQ’s $390 million exit to Salesforce.com reminded me of an idea I heard many years ago: it typically takes an exit greater than $300 million for everyone to do extremely well. For RelateIQ, with their last round less than a year ago valuing them at $245 million (again, amazing to think about considering people estimated their revenues as less than $5 million), one of the drivers that likely lead to the $390 million dollar amount was that their most recent VCs wanted at least a 50% return on investment (50% would be a small target for VCs but the timeframe was super short).

    Going back to the $300 million exit target so that everyone makes good money, here’s how it might break down depending on how much capital went into the business:

    • Venture capitalists own 50% – $150 million (it’s common for VCs to own the majority of the business after several rounds of financing)
    • Founders own 30% – $90 million
    • Employees own 18% – $54 million
    • Advisors and bank own 2% – $6 million

    Even very early employees that might own 1% of the company would make $3 million, which is a life-changing event. Based on my limited experience, this logic of a $300 million exit being the huge target for everyone to earn good money makes sense to me.

    What else? What are some other thoughts on the goal of a $300 million exit so that everyone can make good money?

  • Ultra High-Net-Worth Angel Investors Require More Than ROI

    Wikipedia defines an ultra high-net-worth individual as someone with more than $30 million of assets. As an entrepreneur out raising money from angel investors, it’s important to consider their motivations, especially if they’re in the ultra category.

    Consider the case of the ultra high-net-worth angel that puts in $100,000 for 3% of the startup. The company does well, raises more money such that the 3% stake is diluted down to 1.5%, and eventually has a nice exit for $50 million (exits of that size are rare outside the Valley). That $100,000 was turned into $750,000, then taxes are taken out, and the investor is left with ~$600,000. Turning $100,000 into $600,000 over a five year period doesn’t move the needle for the ultra high-net-worth investor. It doesn’t change their lifestyle, doesn’t buy them a jet, etc. Add in the fact that they need to make 10-20 of these angel investments to get some that have nice wins and the net result is a return on investment that’s not worth it when adjusted for risk and lack of liquidity.

    So why do they do it? Three main reasons come to mind:

    • Fun – Entrepreneurs are an enthusiastic group that want to change the world. It’s fun to hang out with crazy people that believe they can conquer anything.
    • Lottery Ticket – If one does pop and turn into the next Google or Facebook, the return will be material and life changing.
    • Give Back – The most common reason is that these investors want to help the next generation of entrepreneurs and give back by helping both financially and in a mentoring/advising capacity.

    Entrepreneurs would do well to consider angel investor motivations, especially with ultra high-net-worth individuals, as even a good return on investment financially won’t do much for their personal balance sheet.

    What else? What are some other thoughts on the ROI of angel investing for ultra high-net-worth individuals?

  • The Back Story on FullStory

    Atlanta-based FullStory just announced that they raised $1.2 million in a seed round led by Google Ventures. FullStory offers an amazing SaaS-based product that records every user interaction with a website/web application so that marketing, support, and user experience teams can play it back to see precisely what a user did — it’s a game changer, especially when plugged into help desk products like Zendesk.

    Only, this great team didn’t start out doing what they’re currently doing. Like most startups, their original vision was something completely different. The core team had worked together many years ago building a web application front-end toolkit that was acquired by Google. After deciding to leave Google a few years ago, they originally set out to build a marketing project management system based on agile principles. Generally, the idea was that the same way that agile software development replaced the waterfall model, so too was that change going to take place for marketing teams.

    After building a very slick project management tool for marketers, and working closely with end-users, they finally reached the conclusion that marketers weren’t looking for new project management tools and that the agile process was many years away from becoming mainstream. Many marketing departments were happy with Basecamp or Google Spreadsheets to coordinate projects. They had built a vitamin and not a pain-killer.

    While talking to end-users, and doing consulting work to keep the lights on, they realized that a huge pain in the market was understanding how people interacted with websites and web applications. Sure, things like Google Analytics will show macro data of site visits and user flows, but it doesn’t show individual user sessions and how the user moved the cursor around the screen. Web analytics tools don’t provide the full story that marketing, support, and user experience people desperately want to see.

    Now, the startup is doing great, signing customers, and raising money from institutional investors. Even an early amount of success requires a tremendous amount of effort and many twists and turns. I’m looking forward to watching the company grow and building a great business. If you know anyone in marketing, support, or user experience that wants to truly understand how their end-users use their site/application, send them over to FullStory.

    What else? What are some other thoughts on FullStory?