David Cummings on Startups

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  • Employee Equity Value at Time of Exit

    Joelle Fox asked a question earlier today about reasonable expectations for the amount of money a startup employee might make at time of exit based on their equity or stock options:

    https://twitter.com/joellefox7/status/451436670198759424

    Of course, there’s no exact answer, but there are several good examples to talk through. Generally, when talking about equity for startup employees, I like to set expectations that if we do well, this will pay for a nice new car (e.g. $40k). If we do great, it’ll pay for a new house (e.g. $400k), and if it’s a once-a-decade company, it’ll pay for a new life (e.g. $4M). The reality is that most of time the equity isn’t worth anything because the startup goes out of business or doesn’t sell for an amount that’s greater than the amount of money invested.

    Typical equity grants in a startup are in the .1 – 1% range, assuming fewer than 10 employees and some funding. In the example above with the new car, house, and life, if you assume .4% fully diluted ownership of the business, the company would have to sell for $10M, $100M, and $1B to achieve those results. Very few startups ever sell for $100M or more, so the common outcome, assuming there’s any success at all, is in the new car range (e.g. .2% and sell for $30M, results in $60k for the equity).

    So, equity should be viewed as icing on the cake and the salary and benefits should be the main financial compensation. Of course, there are stories of winning the lottery, and it’s definitely possible to hit it big in a startup, but that shouldn’t be the main driver.

    What else? What are some other thoughts on employee equity value at time of exit?

  • Time to Wow

    David Skok has a great new article up on his blog titled Growth Hacking Free Trials: Time to Wow! is the key to success. The idea is that whenever a startup has a free trial, the most important thing is getting the prospect to use enough of the product that they achieve a sense of satisfaction and level of success so that they come back. Now, this doesn’t mean they have to use every feature. What it does mean is that there’s often a critical module or function that provides a tremendous amount of value, and once the lead successfully uses it, the chance of converting into a customer goes up considerably.

    Here are five questions David asks:

    • How long does it takes to get to Wow!? (Time to Wow!)
    • What is the drop out rate of trial users on their way to Wow!?
    • Is the Wow! moment clear and strong enough?
    • Are different buyers interested in seeing different Wow! moments? (This is often the case in a product that has several modules.)
    • Are we providing the buyer with clear guidance on how to get to Wow!?

    Everyone in the business of signing up and converting prospects would do well to go read David Skok’s post.

    What else? What are some other thoughts on time to wow for products?

  • Atlanta Startup Village March 2014

    Tonight we have the monthly Atlanta Startup Village at the all new Atlanta Tech Village conference center. With 450+ people already signed up, it’s easily the largest monthly gathering of entrepreneurs in the Southeast. Here are tonight’s presenters:

    • Yik Yak – Location-oriented mobile messaging app that’s super popular on college campuses (see the TechCrunch write up)
    • Siftit – Marketplace connecting restaurants and vendors
    • cubic.fm – Music discovery platform that connects with Spotify and other apps
    • Abate Solutions – Restaurant management system including table-side tablet ordering tools
    • Dragon Army – Mobile game studio — launching their new game Robots Love Ice Cream

    The event is free and open to the public. Please come out and support Atlanta entrepreneurs.

  • Get 10 Paying Customers and Let’s Talk

    Last week an entrepreneur approached me after an event and said he wanted to get together and talk about his business idea. Having experienced a similar encounter many times before, I knew the next question to ask: how many paying customers do you have? Now, I’m not trying to make a statement that I know he likely doesn’t have any paying customers (he didn’t), rather I’m trying to focus the conversation towards an area that I can add real value.

    See, I’m almost certainly not his ideal customer and I don’t think he’s looking to do customer discovery with me. Entrepreneurs want validation and positive reinforcement from anyone, even if that person isn’t relevant to the target market. I want to help, I really do. With so much great content online about customer discovery and the cost to build a minimum viable product so low, the bar is higher now.

    For entrepreneurs requesting a meeting, requiring a one page strategic plan in advance makes for a much more efficient conversation. Taking it further, requiring a one page strategic plan and at least 10 paying customers really applies a strong filter and results in even better conversations.

    What else? What are your thoughts on the idea of asking for at least having 10 paying customers before meeting?

  • 5 Things Entrepreneurs Should Do Every Month

    Over time, I’ve found that having a rhythm and process actually makes things easier. Similar to the old adage that it’s important to set aside aside time for thinking and personal reflecting, I also believe it’s important to set aside time to work on the business.

    Here are five things entrepreneurs should do every month:

    1. Review and update the Simplified One Page Strategic Plan
    2. Walk through the key metrics in the SaaS Metrics dashboard
    3. Facilitate a monthly strategic dinner or meeting with the senior team (most important once the startup has at least 15 people)
    4. Meet with one advisor or mentor and walk through the most important issues at hand
    5. Attend an EO/YPO forum with a group of like-minded peers

    Entrepreneurs would do well to find a monthly rhythm that empowers more strategic thinking and analysis. After running the process for several months it’ll begin to feel like a habit and commonplace.

    What else? What are some other things entrepreneurs should do every month?

  • One Way Government Can Help the Startup Community

    One of the regularly debated topics is government’s role in the startup community. According to the Bolder Thesis, successful startup communities have to be entrepreneur-led, and not government- or nonprofit-led. A common government initiative is to try and help with capital (see the Invest Georgia Fund). Except more capital doesn’t create more investable opportunities. More successful startups creates more investable opportunities.

    There’s one immediate way government can help the startup community: connecting local businesses with entrepreneurs. Customer acquisition is the number one challenge for startups. Local businesses, especially larger employers, actively work to maintain strong ties with the government to help keep the region moving forward. These relationships between government and influential employers are perfect to parlay into a “Buy Local” campaign.

    Imagine events similar to the ATDC Industry Connect whereby select businesses are assembled to hear pitches from a curated group of startups. Much like Y Combinator’s Demo Day, a combination of product demos and networking enables a more efficient exchange of information so that buyers and sellers can connect. Even a tiny percentage of the purchasing power of local businesses has the potential to create more jobs and help successful startups.

    What else? What are your thoughts on government helping connect local businesses with local entrepreneurs so as to help the startup community?

  • Power of Scale: Internship Fair at Atlanta Tech Village

    Tonight we had our largest college internship fair yet called Startup + Student Connection: Spring 2014. Over 300 students signed up to attend from all over Atlanta, including a number from Georgia State and Georgia Tech.

    Internship Fair at Atlanta Tech Village

    When thinking about the program, it occurred to me that this exemplifies one of the major benefits of having a large tech entrepreneurship center: event scale. Putting on a standard internship fair is a ton of work, let alone one that has 300 students and dozens of startups. Our awesome staff and facilities make it possible.

    Having 150+ startups in the same building makes it so that we can reach a large audience through email, Twitter, and word of mouth. More students and more startups means that there’s a wider variety of internships and an improved likelihood that a connection will be made. Finally, more students seeing the Atlanta Tech Village will result in increased awareness of the growing startup scene in Atlanta.

    Thank you to everyone that participated in the event and made it happen.

    What else? What are some other thoughts on the power of scale with the Atlanta Tech Village?

  • Tech Square Labs: Billion Dollar Startups

    Paul Judge set the stage earlier this week with Unicorns in Atlanta: A Look at Atlanta’s Billion Dollar Exits and Current Promising Startups. Atlanta has had a number of billion dollar exits over the years but there’s a desire to have more. Many more. Today, Urvaksh announced that Paul Judge and Allen Nance are launching Tech Square Labs in his article Atlanta techpreneurs launch “studio” to turn ideas into billion-dollar exits.

    Tech Square Labs, no relation to Tech Square Ventures, is a hybrid incubator and private coworking space. It’s an Incubator in the true sense of the word where Paul and Allen role up their sleeves and help other entrepreneurs commercialize and launch their ideas. As compared to the dot com days, this model is different in that it’s only capital from Paul and Allen, combined with serious sweat equity. With up to six companies at a time, it’ll be an exclusive group.

    From a coworking perspective, it’s a free hacker space with the twist that the software engineers have to prove they are super talented as a prerequisite for admittance. Smart people want to hang out with other smart people. Overall, the goal is to get the best technical people together and start companies.

    Tech Square Labs has an audacious stated goal: produce billion dollar exits. The kernel of the thesis is that most of the billion dollar exits come from companies with serious, sophisticated technology at their core combined with massive, fast-growing markets. Billion dollar companies are difficult to build, but there’s clearly been a pattern in the past.

    Tech Square Labs is great for Atlanta and I can’t wait to see it succeed.

    What else? What are your thoughts on Tech Square Labs?

  • Notes from the Box S-1 IPO Filing

    The much anticipated Box S-1 IPO filing was just released and it’s filled with a ton of interesting data. Box was co-founded by Aaron Levie, purveyor of the some of the most astute 140 character quips Twitter has ever seen (see 10 Awesome Startup Tweets from Box’s Aaron Levie). Another reason the S-1 is so interesting is due to how it lays out how a Software-as-a-Service (SaaS) company can raise $400+ million in capital and already burn through $300+ million of it in pursuit of amazing growth.

    Here are a few notes from the Box S-1 filing:

    • Box provides a cloud-based, Enterprise Content Collaboration platform (pg. 1)
    • 34,000 paying organizations and 225,000 total registered organizations (freemium model, so they have an astounding 15% conversion rate at the organization level to go from a free user to a paid user – pg. 2)
    • Revenue (pg. 2)
      2011 – $21.1 million
      2012 – $58.8 million
      2013 – $124.2 million
    • Losses (pg. 2)
      2011 – $50.3 million (wow!)
      2012 – $112.6 million (wow!!)
      2013 – $168.6 million (wow!!!)
    • Industry trends (pg. 2)
      Shift from On-Premise to Cloud-Based Applications
      Increased Functionality and Proliferation of Mobile Devices
      Explosion of Content and Data
    • Accumulated deficit of $361.2 million (pg. 14)
    • Grew from 369 employees as of January 31, 2012 to 972 employees as of January 31, 2014 (pg. 15)
    • Retention rate calculated as of a period end by starting with the annual contract value (ACV) from customers with contract value of $5,000 or more as of 12 months prior to such period end (Prior Period ACV) and a subscription term of at least 12 months (pg. 48)
    • Non-U.S. customers represented 20% of revenue (pg. 50)
    • Interesting quips from Aaron Levie’s letter (pg. 75)
      So with some free time and online poker winnings, we set out to change how people could access, share and collaborate on information…
      Neither Dylan nor I had storied careers at IBM or Oracle (though I did use Lotus Notes once in an internship)…
      We’ve seen companies that were once wildly successful become shadows of their former selves.
    • Current ownership (pg. 126)
      Named VCs – 63% (VCs own more than this but weren’t explicitly named)
      Co-founder/CEO – 4.1% (5.7% if you count unexercised stock options)
      Co-founder/CFO – 1.8%

    Outside the amazing amounts of money burned and the growth rate, the S-1 filing was pretty vanilla. No patent trolls. No private jets. Nothing. Box is growing incredibly fast in a massive market which will result in a successful IPO.

    What else? What are some other thoughts on the Box S-1 IPO filing?

  • The Difference Between a 3x and 10x Multiple for SaaS

    Software-as-a-Service (SaaS) valuations continue to be high, and I believe they’ll be cut in half over the long run. Now, some SaaS companies, even in our current climate, trade in the 2-3x revenue multiple range (see Constant Contact). As startups pitch institutional investors, the inclination is to shoot for the big valuations, as that’s human nature, often referencing the public market multiples as a basis. Only, when making the comparisons, and thinking about valuations, there’s one major driver: growth.

    Think about it this way. If a startup is growing at 9% per year, according to the rule of 72, it’ll take eight years for the business to double (72/9 = 8). If a startup is growing at 40% per year, it’ll take almost two years for the business to double. So, the valuation multiple is driven by the historical and expected future growth rate, all else being equal. With a super high growth rate, it doesn’t take long for the business to be substantially larger, and thus significantly more valuable.

    When an entrepreneur talks about valuations in the 10x revenue range for SaaS companies, find out the growth rate and see if the math makes sense. Big multiples require big growth rates.

    What else? What are your thoughts on growth being a major driver for SaaS valuations?