David Cummings on Startups

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  • 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?

  • Reduce Friction to Improve Product Adoption

    Recently I was talking to an entrepreneur about his product. The market already had a couple of inferior solutions to the problem he was solving, each with their own pros and cons. His new product provided a more elegant platform, but also increased the friction for product adoption. Product adoption is a major challenge to building a successful business.

    Here are a few thoughts on reducing friction to improve product adoption:

    • Research the most commonly performed tasks
    • Figure out how to reduce the number of steps required to get the most value
    • Ask users if they could wave a magic wand, how would the product work
    • Find out what users like and dislike most about the product
    • Track the time to wow

    Minimizing product adoption friction is one of the best ways to maximize customer success. An unused product is an unsuccessful product.

    What else? What are some more ideas on reducing friction to improve product adoption?

  • Favoring Entrepreneurs That Have Already Failed

    Recently I was talking to an entrepreneur that was trying to figure out the next step for his startup. After digging into things, I realized it was him and some outsourced developers working on the business. There really wasn’t a team since all the programming was contracted with a third-party and he was only person pushing the business forward. My advice was that he needed to find a co-founder that complemented his skills. He then asked what else he should look for in an entrepreneur.

    I told him I like entrepreneurs that have already failed at one startup and are still eager and ambitious to do the next one.

    Failure shouldn’t be celebrated, but it also shouldn’t be shunned. I don’t like failing, but whenever I fail, I learn a tremendous amount and it helps keep me humble. Entrepreneurship has high highs and low lows, so when an entrepreneur weathers the difficult times, and gets back up again, successes are that much more gratifying.

    I favor entrepreneurs that have already failed and try again, all else being equal.

    What else? What are some other thoughts on favoring entrepreneurs that have already failed?

  • Atlanta Startup Village May 2014

    Tonight is Atlanta Startup Village #18 at the Atlanta Tech Village. The Atlanta Startup Village is the largest monthly gathering of entrepreneurs in the Southeast with well over 300 attendees at each event. As a pitch event, the format is simple: five entrepreneurs give five minute product demos followed by five minutes of Q&A. That’s it.

    Here are the five startups pitching tonight:

    • Social Foundary – Automatically build and publish APIs based on existing databases
    • CrowdVested – Crowd-funding platform for real estate
    • Motivedeals – Digital fundraising platform for non-profits
    • MyChefsTable – Marketplace connecting chefs with consumers for in-home experiences
    • PivotDesk – Office sharing marketplace (think AirBnB for offices)

    Atlanta Startup Village is free and open to the public. Come out and meet hundreds of entrepreneurs.

  • Recent Zendesk IPO and More Thoughts

    After all the talk of Software-as-a-Service companies losing some luster, Zendesk had a successful IPO last week rising 49%. Now, Zendesk has a market cap of over $1 billion according to Google Finance (NYSE:ZEN). Back in April, when the Zendesk S-1 IPO filing was released and covered here, many of the basics were covered like financial information, capital structure, and more. Zendesk is one of the more interesting public SaaS companies and deserves more coverage.

    Zendesk is interesting for several reasons:

    • Age – Zendesk is the youngest of the publicly traded SaaS companies and represents a new wave of second-generation SaaS companies (newer tech stacks, more customer centric, less of a corporate feel, etc.)
    • Market – Zendesk has a huge opportunity with millions of help desk workers using out-dated software (or no software!), and has shown that there’s an opportunity to build a large, fast-growing standalone business even when competing with Salesforce.com
    • Design – Zendesk is one of the most design, and delight, centric companies at scale (along with Mailchimp) — just compare the interface of Zendesk with Netsuite and you’ll the difference between first-generation and second-generation SaaS companies
    • Customer Acquisition – Zendesk spends a tremendous amount of money on sales and marketing but is still a freemium model where most of their leads try before they buy, and do so in an entirely self-service manner (there are plenty of free trial products out there but many are too difficult to use without help)
    • Platform – Zendesk is well positioned to be the platform company of the help desk space where other companies build add-ons and integrations (see Kevy Connectors), much like the AppExchange eco-system for Salesforce.com

    The big takeaway is the Zendesk will grow and scale in a different way compared to the majority of public SaaS companies (which are more enterprise-focused). Overall, I think Zendesk will do well and be the dominate player in the help desk market.

    What else? What are some more thoughts on Zendesk?

  • Atlanta Tech Village and Community Pride

    Whenever I give a tour of the Atlanta Tech Village, the most common question I receive is “where are you going to do the next one?” Quickly, I explain that we’re a “one and done” and that we’re not building more. The Village is designed to be a showpiece for Atlanta and the tech community, so the quality of fixtures and furnishings as well as the amenities are much higher-end than expected. My follow-up response is that I believe we’ll see several tech entrepreneurship centers emerge around town over the next 24 months and that other commercial real estate developers will take note of this specialty model.

    By making the Village a showpiece, it taps into something I hadn’t expected: Atlanta pride. It’s only natural to want to be proud of your city and community. With a massive tech entrepreneurship center filled with hundreds of startups, Atlantans have something to point to that highlights the emerging tech startup scene. When the physical space, amazing community, and success stories like Bitpay are combined, it represents a complete picture of progress.

    The Atlanta Tech Village serves as a showpiece for tech entrepreneurship centers everywhere and a source of pride for Atlantans. Once we have even more success stories, the pride will also grow.

    What else? What are some other thoughts on the Atlanta Tech Village and community pride?

  • 4 Reasons for Startups to Avoid Big Partnerships

    We’ve all heard the story: an entrepreneur spends a tremendous amount of time and energy signing a big partnership only to have it result in nothing. Every. Single. Time. Personally, I’ve done the big partnership thing multiple times and never had it work out. Do as I say, not as I’ve done.

    Here are four reasons why big partnerships fail:
    1. Loss of Sponsor – When one person is driving the partnership, and that person leaves, there’s a good chance that the replacement person won’t feel as strongly about the relationship
    2. Change in Strategic Priorities – While the partnership might be important when the deal was signed, that could change at any time as the company is continually changing strategic direction
    3. Limited Early Results – Big companies operate with a shorter horizon, so if the partnership doesn’t yield great results immediately, there’s a good chance the partnership will be cut or downsized
    4. Lack of Resources – While big companies have extensive resources and often talk about the possibilities of the partnership, many times resources are already committed to other projects and are in fact limited

    So, the next time an entrepreneur wants to bet the business on a big partnership, make sure it’s crystal clear to them that most big partnerships fail.

    What else? What are some other reasons big partnerships don’t work out?

  • 3 Key Times to Talk to Investors

    Entrepreneurs are always talking about talking to investors. There are so many pitch sessions, angel investor events, and venture conferences that entrepreneurs are constantly saying they want money. In reality, there are three key times for entrepreneurs to talk to investors:

    1. When you don’t need money: this is the best time as investors want to fund successful businesses that don’t need financial help
    2. When the business has hit a major milestone: whether it’s a new revenue achievement (e.g. $1M in annual recurring revenue) or a major new relationship, investors love to hear about results
    3. When you’re building a relationship in advance of raising money in the future: investors invest in people they know, so it’s important to build relationships well in advance of needing money (if you’re going to start raising money in six months, now is the time to start building relationships)

    Entrepreneurs would do well to be more intentional about how and why they talk to investors. Talking to investors when you need money right away and don’t have an existing relationship is what most entrepreneurs do, and it’s the least effective.

    What else? What are some other key times to talk to investors?

  • Never Settle on New Hires

    As an entrepreneur with a vision and a dream, it’s tempting to hire the first good candidate that comes along. Entrepreneurs love building things, and it’s necessary to assemble a team to get things done fast and execute the plan. Only, all too often, I see entrepreneurs settle with their first few hires. Never settle on new hires. Here are a few things to think about:

    • Culture is set by the founders and team members, so ensure each hire is a great culture fit
    • After interviewing several people, and not finding a great candidate, it’s tempting to hire a decent candidate — don’t do it (continue to hold out until the right person is found)
    • Hire for aptitude and culture fit, not purely based on experience (we look for people who are positive, self-starting, and supportive)
    • People associate with other people like themselves, so if you hire great fits early on, they’re going to recruit their friends, and the talent pipeline will grow

    In the end, entrepreneurs should never settle on new hires. This is true throughout but especially true early on when resources are so limited.

    What else? What are some other reasons entrepreneurs should never settle on new hires?

  • SaaS Valuations Driven By More Complicated Metrics

    Andreesen Horowitz has a great new piece up titled Understanding SaaS: Why the Pundits Have It Wrong. The idea is that SaaS valuations are under intense scrutiny due to the recent run up and down in the public markets. In reality, SaaS companies have financial models and metrics that are more difficult to understand when compared to traditional software companies. With a traditional software company, you spend a ton of money, close a deal, and collect the majority of the lifetime value of the customer immediately. With a SaaS company, you spend a ton of money, close a deal, and then collect a small portion of the lifetime value every month for (hopefully) several years. Financial statements for SaaS companies look worse compared to traditional software companies, yet the business model is significantly better.

    Some key points from the Andreesen Horowitz article on SaaS:

    • More growth requires more capital as money is spent to acquire and onboard customers, yet customer payments are spread out over an extended period of time
    • R&D is much more efficient for SaaS companies due to having a single code base as opposed to lots of different versions of a product
    • Metrics like lifetime customer value, cost of customer acquisition, churn, and billings are critical for SaaS companies, yet difficult to discern from financial statements

    SaaS and subscription-revenue entrepreneurs would do well to read Understanding SaaS: Why the Pundits Have It Wrong.

    What else? What are some other takeaways from the article and reasons SaaS companies aren’t as well understood?