David Cummings on Startups

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  • 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?

  • Not All Angel Investors are Created Equal

    Recently I was talking with an entrepreneur that was looking to put together a seed round of angel investors. We talked about the normal strategies and halfway through the conversation I asked “What type of angel investor would be ideal?” Without missing a beat he said that he’d like a couple angel investors that have been CEOs of fast-growing companies. I probed deeper and he offered that he was confident he could raise the modest amount of money based on his network, but that he preferred to hold out for angel investors that had experience running companies and wanted to help mentor him.

    Here are a few things to consider when it comes to angel investors:

    • Do you just want money or do you want something more like a mentor relationship?
    • What areas of expertise do you need the most help with (e.g. sales, marketing, product management, finance, etc.)?
    • Do you have any geographic preference for where the money comes from?
    • Do you want to plug into a certain circle or group (e.g. alumni from a company or industry)?

    Not all angel investors are created equal. Some want to simply write a check and others want to write a check and roll their sleeves up and help out in a serious way. The world needs all kinds to operate but entrepreneurs would do well to think through what they want, and don’t want, in their angel investors.

    What else? What are some other thoughts on angel investors and the idea that they aren’t all created equal?

  • City Leaders and Tech Entrepreneurship

    Nationwide there’s a real push right now among city leaders to brand their region as a tech entrepreneurship hub. Tech has been hot for several years and every city can point to a local success story within the past 24 months. As tech becomes more pervasive and more industries are affected by it, it only makes sense that cities want to capitalize on it.

    Here are a few thoughts on why city leaders are so excited about tech entrepreneurship:

    • Cities are either growing or shrinking, so it makes sense to focus on a growth industry
    • The internet provides for amazing distribution, collaboration, and innovation anywhere, so the need to be in a major hub has been greatly diminished
    • The majority of new jobs created over the next 10 years will come from companies that aren’t in existence today
    • Tech jobs are much higher paying than normal jobs
    • Tech entrepreneurs that are successful often create significant wealth which can be used to help the community
    • Many city leaders are also business owners and want to see more opportunities for their own companies (e.g. growing populations and growing incomes are critical to growing many businesses)

    Like anything, I think this focus on branding tech entrepreneurship cities will pass as the next thing comes along, but I hope that enough awareness and understanding is developed such that city leaders will continue to value entrepreneurship, tech or otherwise.

    What else? What are some other thoughts on city leaders and tech entrepreneurship?

  • Tradeoffs for Angel Investors in Seed Deals vs Series A Deals

    I know angel investors that only like to do seed deals and I know angel investors that only like to co-invest in Series A deals. Now, writing a $250k check as part of a $5 million Series A might not seem very angel-like, but it happens more often than people realize, especially when it’s from a family office with a generic name (e.g. XYZ Capital). I’m finding more angel investors want to see traction and a higher score on the Investor Readiness Level such that the requirements are approaching that of a Series A round.

    Here are a few thoughts on the tradeoffs for angel investors between seed deals and Series A deals:

    • Seed deals come in at a lower valuation, so the same amount of money buys a larger percentage of the company
    • Seed deal terms are often simpler, so there aren’t as many protections for the investors as with Series A deals (e.g. participating preferred, cumulative dividends, board seats, etc)
    • Seed investments have a higher chance of becoming worthless (e.g. the startup goes out of business) compared to Series A rounds (even the startups that raise a Series A have a high chance of going out of business)
    • Series A deals make it easier to deploy a more substantial amount of capital (e.g. if you have $2 million allocated to angel investing, it’s easier to write a few $250k checks than it is a bunch of $50k checks)

    Another hybrid option is angel groups syndicating with a number of investors in lieu of a venture firm leading the deal, but that doesn’t happen as often (we’ll see more of it with AngelList). Regardless, I believe we’ll see the trend of more angel investors investing alongside institutional firms as part of later rounds instead of that same capital deployed in seed deals (we’ll still see plenty of seed deals).

    What else? What are your thoughts on the tradeoffs for angel investors between seed deals and Series A deals?

  • Wins Come in Clumps

    One of the strange phenomenons I’ve seen, and have a hard time explaining, is that big wins often come in clumps. Big wins like closing new customers, securing new hires, and signing new partners. Things go quiet for a few weeks and then boom, five new customers sign on the exact same day. It’s the most dumbfounding thing.

    Here are a few thoughts as to why wins come in clumps:

    • Calendar timing and the associated sense of urgency spurs people to action (e.g. end of the month, end of the quarter, end of the fiscal year, etc.)
    • Momentum comes in a variety of forms and can really help push things through (e.g. a new product release, pricing changes, messaging tweaks, etc.)
    • People’s tone, mood, and morale really come through subconsciously and affect the negotiation (It sounds fuzzy but intangibles are more important than many people realize)

    No matter how much effort and strategy is put into it, I still find that wins come in clumps. It’s a normal part of the startup world and the process of growing a company.

    What else? What are some other thoughts as to why wins come in clumps?

  • The Genius(.com) That Is No More

    Mid-way through the Pardot days one of our more serious competitors was Genius.com. Genius.com started out as a tool for sales reps to send emails where all the links were tracked such that sales people could understand what links prospects were clicking on and what web pages they were viewing. The novelty was that it didn’t require tracking code on the resulting website as all the rewritten links routed to a Genius.com proxy server that would serve up the appropriate page, and subsequent pages. Of course, this worked well for the first or second click but broke down quickly with dynamic websites and web applications. Regardless, sales reps love understanding what links are clicked in an email and what pages are visited on a website.

    As an individual sales rep-oriented tool, Genius.com was able to sign up thousands of users and raise 10s of millions of dollars of venture capital. A couple years into the sales rep tool they realized that sales rep email link tracking was quickly becoming a mere feature within marketing automation systems. Genius.com did a pivot and built a full blown marketing automation tool while reducing the focus on the sales rep tool. Only, they could never get the product quite right and after a noisy start we stopped seeing them in the market. Finally, the company fizzled away to be picked up by a large software vendor.

    A few lessons learned:

    • Even with $40+ million in venture capital it doesn’t mean that the company will build a successful product in a competitive market
    • It’s tough to have minor success with an initial product, raise huge amounts of money, and then pivot in a new direction (going from software for sales teams to software for marketing teams)
    • Heroic efforts and tapping out personal networks can get enough sales to look like there’s something substantial when there really isn’t (Genius.com was known for working its team extremely hard and delivering amazing results until people quickly started burning out)

    Two days ago it was announced that RapGenius had acquired the domain name Genius.com and rebranded itself Genius. The Genius.com we battled many years ago is truly no more.

    What else? What are some other thoughts on a once high-flying competitor quietly going away?

  • The Two Year Rule When It Comes to Acquisition Offers

    After reading about yesterday’s Salesforce.com proposed acquisition of RelateIQ, and the speculation that the purchase price was in the range of 100x run-rate, it reminded me a piece of advice I received when we were considering selling Pardot:

    If you executed perfectly for the next two years, how much would the business be worth under normal market conditions? If you don’t want to sell, but would sell for an aggressive price, make it for what you think the business will be worth in two years.

    At Pardot, we had about $10 million in trailing months revenue at time of acquisition. Based on our growth rate, not taking in outside capital, and our guess as to market conditions, we felt we could be at roughly $25 million in trailing twelve months revenue in two years. A normal Software-as-a-Service company, depending on a number of factors, is often worth 3-6x revenue. So, take $25 million in trailing twelve months revenue in 24 months and a 4x revenue multiple and you get $100 million. When the negotiated offer finally got to that price range we knew it was time to sell.

    What else? What are your thoughts on the two year rule when it comes to considering acquisition offers?