David Cummings on Startups

Blog

  • A Guide to Atlanta’s Startup Scene

    Paul Judge has a great guest post on PandoDaily titled Hip-hop, housewives and hot startups: A guide to Atlanta’s startup scene. He lays out the standard talking points around Georgia Tech talent, large number of Fortune 500 companies, recent exits like AirWatch to VMware for $1.4 billion, and hot startups like BitPay and Yik Yak.

    Beyond the prose, the real meat is embedded in a 67 page slide deck on Scribd called The Guide to Atlanta’s Start Up Scene.

    Here are a few more talking points I’d add to the deck:

    Paul did a great job on the content and I’d recommend reading The Guide to Atlanta’s Start Up Scene.

    What else? What are some other things you’d add to the Atlanta startup scene slide deck?

  • Successful Tech Entrepreneurs are as Rare as Pro Athletes

    A little over a year ago I was talking with a super successful tech entrepreneur and I asked about his thoughts on angel investing. He immediately replied that 19 out of his 20 angel investments had lost him money and that the one that made money didn’t make him whole across all his investments. Next, he offered up something that’s always stuck with me: successful tech entrepreneurs are as rare as pro athletes.

    Think about it for a second: how many pro athletes, ones that actually made/make a great living doing their sport, do you know? For me, the answer is zero. How many kids from the high school baseball/basketball/football team go on to become pros that make a good living? Nearly zero. Now, in that same context, how many tech entrepreneurs make it big (e.g. make $10 million personally within seven years)? Nearly zero.

    Perhaps the next analogy here is that the well-known tech accelerator Y Combinator is the IMG Sports Academy of the startup world. Regardless, the next time you think of successful tech entrepreneurs, consider them as rare as pro athletes — it’ll change your perspective.

    What else? What are some other thoughts on the idea that successful tech entrepreneurs are as rare as pro athletes?

  • The Valuation Disconnect Between Seed Rounds and A Rounds

    There’s a strange phenomenon in the startup world where entrepreneurs work hard to justify a valuation for a pre-revenue seed round based on the team, market dynamics, etc.. In the end, seed round valuations are often in the $1.5 to $3 million range, and there’s little rhyme or reason from one to the next.

    Now, that same entrepreneur who was able to raise a $500,000 seed round at a $1.5 million pre-money valuation goes out to raise a Series A round. Only, this time it’s different. This time the investors look at the startup’s metrics. Things like annual recurring revenue, trailing twelve months revenue, daily active users, growth rate, renewal rate, etc. become the main discussion points for valuation.

    Say, as an example, the entrepreneur has $1 million in annual recurring revenue with strong growth and renewal rates. For an institutional investor, the valuation would typically be 4-8x run rate. Competitive deals with multiple investors fighting to lead the round ultimately lead to higher valuations. So, that same company 18 months earlier with little-to-no revenue raises money at a $2 million post-money valuation now has a million dollars in recurring revenue and raises $3 million at a pre-money value of $5 million for a post-money valuation of $8 million. While $8 million is dramatically more than the $2 million from 18 months prior, in reality the business is worth many times more than the seed since it has serious revenue and customers, and is much more likely to be successful long term.

    There’s a valuation disconnect between seed rounds based on dreams and A rounds based on metrics. As an entrepreneur, it’s important to understand this and understand the psychology of investors.

    What else? What are some other thoughts on the valuation disconnect between seed rounds and A rounds?

  • Over-Communicating in a Startup

    I’ll be the first to admit it: I’m not the best at communicating. I have a ton of ideas in my head and I know exactly where we’re going, but I have a tendency to overlook the fact that just because I feel confident about things that everyone else feels confident as well. Fortunately, I recognize that communicating is critical, so I’ve come up with a rhythm and process. In general, I think entrepreneurs should err on the side of over-communicating.

    Here are a few ideas to help with developing a communication rhythm:

    For some entrepreneurs, communicating consistently and clearly comes naturally. For others, like myself, communication takes a more deliberate rhythm and process. Entrepreneurs should work hard to over-communicate with their constituents.

    What else? What are some other thoughts on over-communicating in a startup?

  • Early Adopter Users and Startup Communities

    When starting out one of the biggest challenges is finding early adopter users. You know, the types of people that love trying new things and are happy being the guinea pig. As part of customer discovery, it’s important to talk to as many relevant people as possible and work to find the best opportunity in the market. Even when someone says they’re interested in a potential product, it doesn’t mean they’ll actually use it. Using a product requires a behavior change and behavior changes are hard, very hard.

    One of the big benefits of startup communities, like the Atlanta Tech Village, is a built-in group of early adopters. Here are a few of the great things about startup community early adopters:

    • Desire to dive in and try out a product in the wild with minimal handholding
    • Willing to provide direct feedback and not sugar-coat things (friends are often tough early adopters due to not wanting to hurt any feelings)
    • Actively make introductions to other people outside the community that are good candidates to be early adopters
    • Eager to act as a reference to talk to other potential customers and share their experience with the product (references and testimonials are always gold, especially so in the early years)

    Early adopters are critical for entrepreneurs and the difficult process of finding users is slightly easier with a strong startup community. The larger and stronger the community, the easier the process.

    What else? What are some other thoughts on early adopter users and startup communities?

  • Angel Follow-On Funding Based on a Defined Strategy

    After my post Only Doing Seed Investments Without Follow-On Funding I received a number of interesting comments. The one that resonated the most with me was that I shouldn’t have a one-and-done investing strategy, rather, I should set up a defined strategy for follow-on funding so that it’s transparent to all the entrepreneurs and it’s more methodical. Yes, if I do it, it would partially defeat the goal of seeding as many startups as possible, but if I did follow-on funding based on a strategy, and the strategy generated greater returns in a reasonable amount of time, then there’s more money available to seed startups. Having a defined strategy also helps with the signaling problem where subsequent investors would see it as a negative if I didn’t participate in the follow-on funding, assuming I did some follow-on funding with other investments.

    Here are a few ideas around a defined strategy for follow-on funding as an angel investor:

    • Decide on an investment ratio for follow-on dollars in the 1:20 range (e.g. if the startup raises another round of $1 million, only participate pro-rata up to $50,000 since it’s 1/20th of $1 million)
    • Participate pro-rata in subsequent rounds until a defined cap is reached (e.g. no more than $750,000 total in any single company, much like venture capitalists have in their limited partner agreements that no more than a designated percentage of the fund can go into any single company)
    • Require a certain annual recurring revenue threshold of $1 million to participate, so that pro-rata rights are only exercised once the startup reaches a certain size (even if that means skipping a round where they weren’t at the threshold yet)

    Over time I’ll evaluate these ideas and others to decide if I want to do follow-on funding based on a defined strategy.

    What else? What are some ideas to incorporate into a defined strategy for follow-on funding as an angel investor?

  • Annual Run Rate and Size of Funding Round

    While it’s rare that Yik Yak was able to raise a large Series A round just seven months after launching (see WSJ article), there is a strong correlation between the startup’s revenue run rate and raising money. Too often startups, especially B2B Software-as-a-Service (SaaS) startups, go out looking to raise a large sum of money and don’t have the requisite revenue run rate, or other metrics, to warrant the target amount of capital and corresponding valuation (entrepreneurs typically sell 20-35% of the company during each round of financing, so to raise a $10 million round, the company must have a huge valuation).

    Here’s a ballpark for revenue run rate and size of funding round:

    • Annual run rate less than $20,000, raise a friends and family round of less than $250,000
    • Annual run rate between $20,000 and $100,000, raise a seed round between $250,000 and $750,000
    • Annual run rate between $100,000 and $1,000,000, raise a large seed round between $750,000 and $2,000,000
    • Annual run rate between $1,000,000 and $3,000,000, raise a Series A round between $2,000,000 and $7,000,000

    Now, the goal is to set expectations, based on recurring revenue, of what a normal-sized round might be for a competitive deal. Of course, investors can offer as much, or as little (none!), as they want. It doesn’t hurt to seek a larger round than what the annual run rate and corresponding valuation might dictate, but it’s important to be in the reasonable range to show you’ve done your homework and understand how the process works.

    What else? What are some more thoughts on annual run rate and size of funding round?

  • Growth Metrics Matter and Capital is Mobile – Yik Yak and BitPay

    Earlier today Yik Yak, based in Atlanta, announced a $10 million Series A lead by DCM (see the WSJ article). Last month BitPay, based in Atlanta, announced a $30 million Series A lead by Index Ventures (see the Entrepreneur article). Both the founders of Yik Yak and BitPay moved to Atlanta last year from outside of Georgia. Both raised huge amounts of money in a short period of time from investors thousands of miles away.

    What gives? Why were they able to do it from whatever city they chose to build their company? Why didn’t they have to be in Silicon Valley?

    Growth metrics matter and capital is mobile.

    According to Distimo, Yik Yak has more iOS downloads than Whisper and Secret combined. According to Fortune, Bitpay processes more than $1 million per day of Bitcoin. Investors want to see strong traction in a large market — growth metrics matter.

    DCM is based in Silicon Valley. Index Ventures is based in London. Each is a serious plane ride and many timezones from Atlanta. Investors want to generate the best returns for their limited partners regardless of where the startup is based — capital is mobile.

    When entrepreneurs complain about a lack of funding, point them to Yik Yak and BitPay and show them that capital is mobile with the right growth metrics.

    What else? What are some other thoughts on growth metrics and capital being mobile?

  • Multiple Entrepreneurship Centers in a Major City

    One of the most popular questions I get when people see the Atlanta Tech Village is “when are you going to do the next one?” Quickly, I respond that it’s a one-and-done but that I think within 24 months we’ll see an entrepreneurship center in each of Atlanta’s major sub-markets, and that’s a good thing. Just in the past few weeks we’ve seen announcements for Switchyards in Downtown and Industrious in Midtown. I know of at least three others that are in the planning phase right now and expect more to come.

    Here are a few reasons why having multiple entrepreneurship centers makes sense in a major city:

    • Areas of town already cater to different types of people, so it makes sense to play to a sub-market’s strengths with a corresponding entrepreneurship center
    • Founders and funders of the entrepreneurship centers have their own unique strengths and expertise, which is often a theme for the startups in the facility (e.g. B2B software is strong at the Village)
    • Traffic and commuting is a serious challenge for major cities, thus having multiple centers makes them more accessible to a larger number of entrepreneurs (commute time is a big driver for where entrepreneurs choose to work)
    • Entrepreneurial density helps increase the likelihood of success for all entrepreneurs in an area, so if more entrepreneurship centers create more pockets of density, the city is going to benefit from more job creation

    Multiple entrepreneurship centers make sense for major cities and I’m looking forward to many more forming in Atlanta.

    What else? What are your thoughts on multiple entrepreneurship centers in a major city?

  • Time Off After Selling a Company

    One of the more popular questions I get is “how much time did you take off after selling Pardot?” My situation was unusual in that I wasn’t personally part of the deal post-sale, so I didn’t have an employment agreement or earn-out. After selling the company I promptly started looking for a building to buy for the Atlanta Tech Village and I started Kevy (a cloud integration startup). Personally, I enjoy working on new ideas, so I just went right to the next item on my list (see Keep a Google Spreadsheet of Business Ideas).

    Over the past 18+ months I’ve talked with a number of other entrepreneurs and asked them a similar question about amount of time off. The most common response is that they thought they’d take 1-2 years off only to find that after nine months they got bored and started looking for the next gig. After helping run a successful company, working with a number of great people, and building something special, life post-sale can be less exciting. Sure, having financial freedom is great, and pursuing personal projects is fun, but the thrill of a fast-growing company is truly special.

    Another response I’ve heard talking to successful entrepreneurs is that they took time off and got so engrossed in the life of their kids and community that they won’t ever start another company. One entrepreneur even described it to me that his entrepreneurial muscle had withered and he can’t see himself running another company — the entrepreneurial drive was no more.

    Based on my informal poll, I’d recommend entrepreneurs plan for nine months off after selling their company. Of course it’s an individual decision, but this was the most common timeframe to enjoy things and refresh before finding the next thing.

    What else? What are some other thoughts on time off after selling a company?