David Cummings on Startups

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  • Power of an Asset’s Value Compounding Annually

    In yesterday’s The Upshot section of the New York Times, there was an article titled Sterling to Reap 15,900 Percent Return on Sale. From the article, “Sterling bought the Clippers for $12.5 million in June 1981, according to some reports, and he’ll get a tidy 15,900 percent return over 33 years, an annualized rate of 16.6 percent.” Think about that for a second: turning $12.5 million into $2 billion is amazing (assuming the sale goes through). That’s the power of an asset compounding annually over an extended period of time.

    Let’s take a look at an example startup with revenue doubling every year:

    • Year 1 – $1,000,000
    • Year 2 – $2,000,000
    • Year 3 – $4,000,000
    • Year 4 – $8,000,000
    • Year 5 – $16,000,000

    At some point the law of large numbers kicks in and it becomes much more difficult to sustain the high growth rates. If you assume it’s a technology company valued at four times revenue, the value of the company increased from $4 million in year one to $64 million in year five — impressive appreciation. The takeaway is that sustaining a high growth rate over an extended period of time is one of the best ways to build value. Albert Einstein’s famous quote rings true, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it. (source)”

    What else? What are some other thoughts on the power of an asset’s value compounding annually?

  • Community Pride Without Enough Belief

    Next to my desk at the Atlanta Tech Village I have a framed newspaper cover from a 1990 The Atlanta Journal announcing that Atlanta had been awarded the 1996 Olympics. On the cover, the headline says “Word-class! Proud city brings home the gold” and then, on a lower section, the headline reads “We finally won something!”

    The Atlanta Olympics headlines and sentiment could have been written by every startup community across the country, outside of Silicon Valley. Everyone is proud of their city, yet is surprised when they finally “win” at something in the startup scene (raise a big round, have a nice exit, build a new facility, etc). Where’s the belief? Where’s the confidence?

    One of the things I’m accused of is having too much confidence, especially when I lack information. My goal isn’t to provide false hope, rather, I have a strong internal locus of control and belief in my gut. I tell it like I see it. When it comes to the Atlanta startup community, I have tremendous pride and belief that we have all the necessary ingredients to be a top 10 city in the country. Regardless, I’d like to see more entrepreneurs with community pride also believe they can make their startup ecosystem even better.

    What else? What are your thoughts on people having community pride without enough belief?

    Here’s a photo of the newspaper cover:

    Atlanta wins the Olympics - Atlanta Journal

  • Slides for Presentations and Slides for Handouts

    Earlier today we put on a program connecting executives from Children’s Healthcare of Atlanta with health IT startups from the Atlanta Tech Village. Seven startups had 15 minutes each — five minutes to present and 10 minutes of Q&A — followed by lunch at the end. Most of the presenters used slides with limited product demos. While the event was a success and everyone received value, five out of seven startups used slides on the big screens that were designed as handouts, not for presentations.

    Here are a few thoughts on slides for presentations, as different from slides for handouts:

    • Slides should have minimal text (I like to have no more than 10 words)
    • Font sizes shouldn’t be smaller than half the oldest age in the audience (e.g. if someone in the audience is 60, the font size shouldn’t be smaller than 30)
    • Tell a compelling story while still getting to the value proposition quickly
    • Make the ‘ask’ at the end of the presentation
    • Presentations should be rehearsed to fit the allotted time (every presenter went too long)

    The next time you open Keynote on your Mac, ask yourself if it’s for presentations or for handouts.

    What else? What are some other thoughts on slides for presentations as different from slides for handouts?

  • Initial Customers Always Find Bugs

    Signing the first few customers is incredibly difficult (see The First Five Customers), yet after all that effort, the next challenge is keeping them as they inevitably find product bugs. No matter how extensively you test the software, end users always come up with edge cases and scenarios that you never dreamed of trying.

    Here are a few thoughts to keep in mind with initial customers and bugs:

    • Product bugs are normal and it’s best to budget development time in advance for fixing them
    • Apologize whenever a customer finds a bug and set expectations that it will be fixed quickly
    • Find a balance between automated testing (unit, integration, etc) and human testing
    • As the product matures, new customers will stop finding as many bugs

    Product bugs are commonplace. With customers it’s critical to communicate and get things fixed quickly, especially for the early adopters. Over time things will settle down and the product will become more stable.

    What else? What are some other thoughts on initial customers always finding bugs?

  • Slowly Letting Go of Some Scrappiness

    Until a startup achieves product/market fit, has a repeatable customer acquisition process, and enters scaling mode, it’s important to be as scrappy and cost effective as possible. Every dollar wasted is another dollar of dilution and a dollar closer to not having enough runway to figure out how to make things work (see Figure Out How to Stay in the Game Long Enough to Win). Once the business is scaling and is focused on maximizing growth, it’s important to slowly let go of some (not all!) of the scrappiness.

    Entrepreneurs that have bootstrapped the business have an especially hard time letting go of some of the scrappiness as the business starts scaling. With so few resources to begin with, there’s no choice but to make every dollar count, such that scrappiness is deeply ingrained within all the team members. Only, as more and more market opportunity is presented, the tendency is to continue using the same approach when it’s better to ease up a bit and try new things to grow faster.

    As an example, at Pardot we were having a hard time finding software engineers. We had always stayed away from using recruiters because we wanted to save money and figured that we’d eventually find great team members. After not having luck for several months we decided to hire recruiters (see Working with Recruiters in Startups) and offer a $10,000 referral bounty to anyone that sent a new hire our way (the bounty was for anyone, not just employees). By investing in ways to broaden our search for talent, we were able to bring on more engineers and grow the business faster. It was the right move to let go of some of our scrappiness.

    What else? What are some other examples of slowly letting go of some scrappiness to grow faster?

  • Eliminate the Trivial Work and Delegate Tasks

    Last week I was talking to an entrepreneur that was lamenting how he has to filter all the resumes that come in for a new position they just created. Inquiring further, I found out that he has 26 employees, has been in business for almost a decade, and is growing at low double digits each year. After hearing this, I asked why he’s still filtering resumes and screening candidates. He thought about it for a second and said that he still does it because he’s always done it since the beginning. Hmm, I thought, tasks like that should be handed off so as to focus on the areas of highest value.

    Here are a few thoughts on eliminating trivial work and delegating tasks:

    • Go on vacation for two weeks and require that someone else do all your standard tasks
    • Think about every task that isn’t strategic and assign it as a responsibility to someone else
    • Find an ambitious up-and-comer in your organization and hand off some of the “harder” tasks to him/her
    • Spend a week jotting down everything that you spend time on, review it, and decide on what you should start/stop/continue doing

    Making the entrepreneurial transition from working in the business to working on the business takes time and is often uncomfortable. An easy process is to slowly relinquish all trivial tasks that are readily accomplish by another team member.

    What else? What are some other thoughts on eliminating trivial work and delegating more tasks?

  • Assessing Market Demand

    Earlier this week I was talking to an entrepreneur about his new idea. He was selling me hard on how it was such a great idea and that it’d be super easy to sell. I then asked about competitors and who else was in the market doing it. So, I asked, “If you were a buyer, what search terms would you use on Google to find this service?” We tried a half dozen searches and had no luck finding anything related to this idea. Do I believe competitors exist? Absolutely. Could I find anything? No. Without being able to research the idea more by way of competitors, I recommended he assess market demand.

    Here are a few ideas on assessing market demand:

    • Browse LinkedIn for 50 people with the pain and send them an InMail message asking to talk
    • Ask 20 friends for introductions to any of their friends or professional contacts that can help
    • Visit five relevant trade shows and talk to 100 people
    • Attend five local networking groups and share the idea with 20 people to get referrals to more people

    As with any customer discovery, it’s hard to get in front of the right people and assess market demand. With the appropriate effort and time it’s readily accomplished, and invaluable.

    What else? What are some other thoughts on assessing market demand?

  • The First Two Years of Startup Grind

    The first two years of a startup are a grind, and that’s if it’s successful. If things aren’t going well, the grind can continue on indefinitely. Startups take a tremendous amount of time and energy to get off the ground, and it isn’t glamorous.

    Here are a few things that are part of the first two years of the startup grind:

    • Repeated customer discovery interviews
    • Multiple pivots and iterations in the search for product/market fit (see Pivoting is More Common Than Expected)
    • Tons of administrative tasks like getting a business license, health insurance, general liability insurance, and interfacing with lawyers
    • Finding an office and getting furniture, internet, phones, and more (it’s a strange rite of passage many entrepreneurs go through dealing with the challenges of finding a good office with a short lease and flexible terms)
    • Fundraising trials and tribulations to raise money from investors (raising money by selling products to customers is always best but sometimes it isn’t possible)
    • Signing the first 10 paying customers that didn’t come from friendly introductions (think about doing Cross 10 Out of the Gate)
    • Hiring a sales assistant and acting as the lead sales person, product manager, and CEO
    • Achieving product/market fit and having confidence that it’s possible to build a repeatable customer acquisition process

    This doesn’t include any personal challenges, hiring/firing issues, and more. Startups are a grind and the first two years are especially difficult.

    What else? What are some other things that are part of the first two years of startup grind?

  • I Love Business Software

    When people think of cool tech companies, firms like Google and Facebook come to mind. You know, consumer-facing tech companies. Personally, I love business software. Business software isn’t glamorous but it’s still great. How cool is it that you solve problems for people and companies pay you?

    Here are a few reasons why business software is so great:

    • Companies pay good money to solve problems and increase productivity
    • Users provide direct feedback and suggestions for improvement (see Get Satisfaction)
    • There’s an endless supply of new software needed
    • New customers have little incremental cost (provides for great economies of scale and gross margins)
    • Successful B2B startups follow a clear four stage path

    After being in the business software world for 14 years, I can honestly say I love it. I enjoy building software, helping other people, and growing companies.

    What else? What are some other reasons why business software is so great?

  • Cash Requirements for a Broad Angel Investment Portfolio

    Three weeks ago a friend reached out to me about investing in tech startups. Now, he’s a corporate guy and has never been involved in startups, yet he wants to put some of his hard-earned savings into risky tech upstarts. His question reminded me of Jason Lemkin’s great post Why You Almost Certainly Shouldn’t Be Doing Seed Investments. The idea is as follows: an angel needs a broad portfolio of angel investments to do well (the same reason Vanguard is such a great product for public equity investors), seed investments of $25k or $50k also need follow-on dollars, so to do angel investing right, you need at least $1 million of cash.

    Let’s look at the math:

    • 20 investments at $25,000 each results in $500,000 (so, a portfolio of 20 startups)
    • 5 of the 20 make good progress, so an extra $50,000 is invested in each, resulting in another $250,000 (important to reserve at least $2 for every $1 invested for pro-rata participation in future rounds — many people recommend reserving $3 for every $1 invested)
    • 1 out of 20 is a rocket ship and another $250,000 is invested in it to maintain pro-rata
    • $500,000 of initial investments plus $250,000 for first follow-ons plus $250,000 for a second follow-on results in a requirement of $1,000,000 in cash for a broad angel investment portfolio

    Most people don’t have $1,000,000 in cash ready to invest in startups, and those that do don’t like the idea of little-to-no liquidity for 7-10 years (see Lack of Liquidity with Angel Investing). The cash requirements for a broad angel investment portfolio is much larger than people think.

    What else? What are some other thoughts on cash requirements for a broad angel investment portfolio?