David Cummings on Startups

Blog

  • Sell Before Optimizing

    Today I was talking to an entrepreneur that’s working on a physical product that solves a specific issue within a traditional industry. After describing the idea, he started asking questions about patents, low-cost manufacturing options, and state-related tax laws. Naturally, I asked the logical next question: how many paying customers do you have? Answer: 0. How many customers do you have lined up that will pay as soon as the product is ready? Answer: 0.

    Without people interested in buying, most entrepreneurial efforts result in premature optimization. Here are a few reasons why:

    • Product/market fit and entrepreneurial instincts differ, so listen to the market and act accordingly
    • Messaging, positioning, value propositions, etc. all become much stronger with customer feedback
    • Optimizing is a neverending thing, so get in the habit of selling before optimizing
    • Nothing happens until something is sold

    Don’t let entrepreneurs start optimizing their business without first getting potential customers engaged. Too much time is wasted on premature optimization.

    What else? What are some other thoughts on sales as a prerequisite before optimizing the business?

  • What Percentage of the Company Should Entrepreneurs Sell to Investors?

    When I talk to entrepreneurs that are in the process of raising money I always like to ask “what percentage of the company are you looking to sell to investors?” Inevitably, the answers come back all over the board, often ranging from 20%-35%. Entrepreneurs also like to quote a range when it comes to how much money they’re raising e.g. we’re raising $2M-$3M at a $4M pre-money valuation.

    Here are a few thoughts on what percentage of the company entrepreneurs should sell to investors:

    • Entrepreneurs should raise enough money to run the business at a certain scale for 12-18 months in order to hit a major milestone so as to raise more money or achieve modest profitability
    • Startups often require multiple rounds of financing, so it’s best to think about selling part of the company at each step in the process, and what that looks like in terms of dilution
    • Some investors will “require” a certain percentage of the business to be worthwhile for them to invest — this is a game that should be avoided, if possible, as investors are flexible as to what percentage of the business they’ll buy if they believe they make a large return
    • One school of thought is to raise as much money as possible, whenever possible, as you don’t know when fundraising will dry up, and to not worry about dilution (I don’t subscribe to this but others do)

    The best answer to the question is that entrepreneurs should sell as little as possible to investors while still raising enough money to hit the next major milestone. In reality, entrepreneurs usually sell between 1/5th and 1/3rd of the business with each round of financing.

    What else? What are some other thoughts on how much of the company entrepreneurs should sell to investors?

  • Large Growth Companies Create Sizable Startup Opportunities

    Jason Lemkin wrote a great post last month titled The Simple Reason Why There Will be 10-20 Great CRM IPOs in the Next Few Years. The idea is awesome: when a company like Salesforce.com hits $10 billion in run rate, the bottom 10% of the customers get neglected, creating $1 billion in revenue opportunities for startups. Here are a few thoughts on large growth companies creating sizable startup opportunities:

    • Market reinventions happen every 10-15 years, so it’s inevitable everyone will be disrupted at some point (think mainframes, PCs, Internet, mobile, etc)
    • Opportunities come in the form of a vertical-specific offering, a lower priced offering, and/or a better solution
    • Better solutions in CRM will come in the form of more fully integrated marketing and sales platforms that aren’t tied to traditional conventions
    • Disruptive vertical-specific offerings will be the most prominent (e.g. CRM for real estate, CRM for legal, CRM for accounting, etc.)
    • Startups that can hit $5 or $10 million in run rate will have nice, solid businesses whereas ones that can get to $75-$100 million in run rate will be homeruns, and the market will support several of these

    Go read Jason’s post on why there will be 10-20 great CRM IPOs in the next few years. Large growth companies create sizable startup opportunities and entrepreneurs should capitalize on it.

    What else? What are some other thoughts on large growth companies creating sizable startup opportunities?

  • Startup Theatre

    Over the past four days I’ve attended three different startup events. Each event served a slightly different purpose and had overlap in attendees. One of the benefits of a medium-sized tech startup community, like what’s found in Atlanta, is that there are a tremendous number of events and get togethers. Only, there’s a real risk in people attending events and equating that to making progress as an entrepreneur.

    Attending events is for learning, networking, and helping each other. If someone’s repeatedly attending startup events, and not actually in the startup game, it becomes startup theatre: a form of entertainment and enjoyment with no advancement. Even worse, it can bring a sense of accomplishment that you’re doing something, when, in fact, no progress is being made.

    Here are a few thoughts on startup theatre:

    • Entrepreneurship is best learned by doing and accelerated by the quality teaching, mentoring, etc
    • Attending events is a great way to get to know people in the community, but shouldn’t be a substitute for actually working on something (see 3 Next Steps for an Entrepreneur Without an Idea and Finding a Startup Idea)
    • Accountability is an important component of a health startup community, and starts with repeatedly asking direct questions like “what have you accomplished in the last 30 days?” and “how close are you to product/market fit?”

    Startup theatre is a very real challenge for startup communities around the world. Startup communities should work hard to maintain a bias towards action and not theatre.

    What else? What are some other thoughts on startup theatre?

  • Loss of Control of Personal Schedule

    Earlier this week I was talking to a successful entrepreneur that had recently sold his company. After the normal conversation topics I asked, “What’s changed the most for you after selling your business?” Without missing a beat he said it was loss of control of his personal schedule.

    Before, he set the agenda and dictated where he would spend his time. Now, he’s part of a much larger organization that puts required events on his calendar and more time is spent in meetings. All of this is part of a process to integrate the respective companies and make sure that the acquirer receives the desired value from the acquisition.

    As an entrepreneur, one of the things I greatly value is control of my schedule and where I choose to spend my time. Once you’ve experienced that level of freedom, it’s tough to go back to a style that’s less in control. Entrepreneurs love control.

    What else? What are some other thoughts on loss of control of one’s personal schedule?

  • Common Complaints in Atlanta’s Startup Community

    Yesterday I was talking with a visitor at the Atlanta Tech Village who moved to Atlanta recently. After covering a number of subjects, he brought up several common complaints he’d heard about Atlanta’s startup community. We spent 10 minutes talking through them and I offered up an insider’s perspective.

    Here are some common complaints about Atlanta’s startup community and ideas about them:

    • Lack of Talent – With Georgia Tech (one of the largest engineering schools in the country and top five academically), there’s a tremendous amount of technical talent in town. When large companies complain about a lack of talent, it’s a function of culture and desirability of work environment (large companies find it easier to open an innovation office in a different city as opposed to making the harder changes at their headquarters).
    • Dearth of Capital – Capital is still scarce but the cost of building a product and signing the first 10 customers has gone down by 90% over the past 10 years, making limited capital a non issue to get started (see Assembling a Minimum Viable Product for Market Validation). Scaling a startup is still capital intensive, but once revenue is growing nicely, even at a modest scale, it’s easy to raise money as capital is much more mobile (see AngelList).
    • Disconnected Community – Community cohesiveness is stronger than ever with a number of regular events, entrepreneurship centers, and leaders committed to strengthening the community (check out the open-to-the-public Atlanta Startup Village with 350+ attendees every month).
    • Limited Number of Exits – Every year Atlanta has 3-5 $100M+ exits (see AirWatch and Silverpop already this year). Atlanta startups do have a higher bar for an exit, but there’s a steady flow of success stories.

    I’m sure these complaints aren’t unique to Atlanta and are applicable to most regions of the country. So while there’s plenty of room for improvement and growth in Atlanta’s startup community, many of the common complaints are outdated and not as relevant.

    What else? What are your thoughts on these common complaints in Atlanta’s startup community?

  • Notes from Brad Feld’s Atlanta Tech Village Talk

    Today Brad Feld did a great video chat with 50 entrepreneurs at the Atlanta Tech Village. Kyle Porter ran the event asking a number of questions directly as well as coordinating audience questions. Here are a few notes from Brad Feld’s talk:

    • Corporate culture should simply be called culture and the word “corporate” should be dropped
    • Culture is paramount to everything and is one of the reasons Gnip was able to execute so well and get acquired by Twitter for a large sum
    • Culture isn’t one size fits all — it’s critical that’s it’s defined and consistent in a company (some companies have a strong culture of nice people and other companies have a strong culture of people who routinely yell at each other)
    • Startup communities must be lead by entrepreneurs and not government or universities
    • Startup communities need to be inclusive of everyone and let all types of events and groups form (plant a thousand seeds and some will take root while others don’t)
    • Foundary Group takes a thematic approach to investing and will invest anywhere geographically
    • Brad has published a number of books including Ventures Deals, Startup Communities, and Do More Faster

    A big thanks to Brad for doing the event and to the Metro Atlanta Chamber for providing lunch to all the attendees.

    What else? What are some other thoughts on Brad Feld’s talk at the Atlanta Tech Village?

  • Culture Drives How You Feel

    Tonight we had a Technology Executive Roundtable event in the new Atlanta Tech Village conference center. Tom Noonan, one of the panelists, made several excellent remarks (as well as memorable ones — ask about the purple shoe). One of his comments really stood out to me: corporate culture drives how you feel.

    Think about the following:

    • Culture drives how employees feel about the business
    • Culture drives how customers feel about the business
    • Culture drives how partners feel about the business

    Culture is representative of the values and social contracts within the company. Ultimately, culture is about people, and people drive how you feel. As much as business is about numbers and metrics, it’s also about experiences and emotions. The next time you interact with a company, ask yourself how the company’s culture affected how you feel about the business.

    What else? What are some other thoughts on culture and how it drives how you feel?

  • Entrepreneurs Should Tell a Compelling Story

    Recently I was talking to an entrepreneur and he was giving me his elevator pitch. After hearing it, and asking a few clarifying questions, I didn’t feel moved. I wanted more. I wanted a compelling story. I wanted a raison d’être. Thinking about it further, I realized that entrepreneurs are trained to provide short, simple talking points.

    Yes, entrepreneurs should be able to deliver an elevator pitch, but entrepreneurs should also tell a compelling story. Think about the following questions:

    • Why are you doing what you’re doing?
    • Why are you passionate about it?
    • Why are you going to change the world?
    • What compelled you to action?
    • What gets you excited in the morning?
    • What unfinished business do you have?

    Find a storyteller to help with the message. Craft a narrative. Get people excited. And, most of all, tell a compelling story.

    What else? What are your thoughts on entrepreneurs needing to tell a compelling story?

  • Think About The Market As Much As The Product

    Entrepreneurs spend a tremendous amount of time focused on specific product ideas and not enough time evaluating the overall market and trends. Most successful startups pivot at least once before finding the idea that turns out to be the one, so picking a good market increases the likelihood of developing knowledge in an area that has multiple opportunities.

    Back in March of 2007, Pardot started out as a Pay Per Click (PPC) bid arbitrage platform whereby we would generate leads and sell them to companies. Much like LendingTree.com where you fill out a form one time for a mortgage and get several responses, we wanted to do the same thing for B2B technology leads. Add in some industry analysis like Gartner or Forrester and you have a pretty good idea of Pardot 1.0.

    After 45 days of Pardot 1.0 we realized that we’d picked a good market (helping tech companies with lead gen) but didn’t pick the best product offering. At that point we pivoted and decided to offer the tools we’d built to help generate, track, and disseminate leads as a standalone marketing product instead of selling leads. We then spent the next four months fleshing out the product and did a soft launch in September 2007. After six more months of finding product/market fit, the business took off and the rest is history.

    In the end, our original idea wasn’t successful but we picked a great market and had impeccable timing. Entrepreneurs would do well to spend time thinking about the market in addition to the product.

    What else? What are your thoughts on the importance of picking a good market?