David Cummings on Startups

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  • Requiring a One Page Strategic Plan Prior to Meeting

    Entrepreneurs love seeking feedback and help from other entrepreneurs, it’s human nature. Over time, it’s important to find an appropriate time allocation for helping others while balancing other priorities. With modest entrepreneurial success, it’s easy to be overwhelmed with requests to grab coffee.

    Now, I’m trying a new tactic with referrals to entrepreneurs requesting a meeting: complete a simplified one page strategic plan first and then we’ll coordinate a time (assuming it makes sense). Completing a one page plan in advance provides several benefits:

    • Stage of idea/startup is readily apparent
    • Area of desired help is obvious (sometimes it shows that we don’t need to meet due to inability to help)
    • Goal realism shows whether or not they have experience and/or have done their homework (too often it still says their goal is $50 million in revenue by the third year)

    Much like Jeff’s paying it forward requirement to meet with him, adding some effort and friction to the process of getting together results in higher quality meetings and more productive time. The next time you feel overwhelmed with requests to meet, figure out how to make the meetings more valuable by requiring extra effort from the other party.

    What else? What are your thoughts on requiring a one page strategic plan prior to meeting with an entrepreneur?

  • Internally Sharing the Number of Days of Cash On Hand

    Most startups are burning cash, meaning they are spending more money than they take in. Ideally, the startup will hit meaningful milestones around revenue, customer momentum, and more well in advance of running out of money. By hitting milestones, they can then raise more money from investors or achieve break-even to continue on indefinitely. One debated recommendation I’ve heard numerous times is that a startup should internally socialize the number of days of cash on hand until running out (and thus being out of business).

    Here are a few thoughts on internally sharing the number of days of cash on hand:

    • Share the number of days of cash on hand in the context of the greater mission (e.g. as part of a simplified one page strategic plan)
    • Educate the team members on how the ideal startup process works with milestones, multiple rounds of financing, value in growing faster than revenues allow, etc
    • Develop a rhythm to share the data (e.g. a real-time LED Scoreboard, weekly all-hands meeting, monthly update, etc)

    For many people, the idea of running out of cash in a certain number of days is a scary proposition. Entrepreneurs would do well to socialize it with their key team members and make it something to rally around.

    What else? What are some other thoughts on internally sharing the number of days of cash on hand?

  • Event Space for Community Building and Recruiting

    One of the best decisions at the Atlanta Tech Village was knocking down walls in prime office space and creating a 4,000 square foot event space. Over the past year, we’ve hosted hundreds of events from small 15-person meet ups to a number of large, 250-person gatherings (see the Atlanta Startup Village at the Atlanta Tech Village). Without experiencing it first-hand, it’s hard to appreciate just how important and valuable it’s been to host several thousand people in our facility.

    Here are a few thoughts on providing public event space:

    • Engineered serendipity happens when people interact with other people face-to-face, and events are one of the best forms of bringing people together
    • Community strength comes from the number of interconnected people and quality of relationships, making a large event space that much more important for building an eco-system
    • Word of mouth marketing is one of the most valuable, and difficult to facilitate, yet it happens naturally when people come into a physical space based on their own initiative
    • Talent wars for software engineers and salespeople are real, so why not provide a great facility to host events for the target audience, which will then help with recruiting and brand awareness
    • Brand, corporate culture, and style are readily apparent based on the facility, location, and ambience of the event space, so use it to reinforce a specific message

    Organizations or companies serious about long-term community building and recruiting would do well to evaluate making their facilities available for local meet ups and gatherings.

    What else? What are some other thoughts on event space for community building and recruiting?

  • Participating Preferred Stock Can Skew Valuations

    Imagine for a second that you make $50,000/year salary as an employee at a startup. Feeling the entrepreneurial itch, you make the plunge and start a company thinking that one of your first financial goals is to grow the company to the point that you can make $50,000/year in profit. Only, once you achieve $50,000/year in profit, you quickly realize that $50,000 in profit doesn’t equal your previous compensation. As a business owner, to pay a $50,000 salary, you also have to pay employer taxes (roughly 10% or $5,000 in the case of this salary) as well as employee benefits (easily $5,000 per year). Thus, to pay yourself the previous $50,000 salary, it’s really closer to $60,000 in expenses. All the taxes and extras are distortionary in that many people don’t think through the costs involved.

    Yesterday’s post titled Example Founder Dilution Over Multiple Financing Rounds didn’t touch on an important topic: participating preferred stock. Much like the example above with salaries, taxes, and benefits, where it isn’t what it seems at first glance, participating preferred stock is also distortionary. The idea behind participating preferred stock is that at time of sale the investors get some multiple of their money back first, typically 1-3x, and then also get their percentage ownership as well. Also known as a double dip, investors with participating preferred equity really own more of the economic interests of the business than their ownership percentage reflects.

    Here’s a participating preferred stock example:

    • Entrepreneur wants to raise $10 million at a $40 million pre-money valuation
    • Investors think it’s worth $30 million pre-money, but want to do a deal, so they offer $10 million with a $40 million pre-money, and a 1x participating preferred liquidity preference
    • Entrepreneur accepts the deal and is happy for the perceived $40 million pre-money valuation and investors are happy that they now get $10 million plus 20% of the business in the event of a sale
    • If the business ultimately sells for $50 million, investors nearly double their money ($10 million as part of the preference and $8 million as part of the 20% of $40 million after the preference is removed)
    • If the business sells for $10 million, investors get all $10 million as the preference are stacked in front of the other equity holders
    • If the business sells for $510 million, investors get $10 million plus 20% of the remaining $500 million, for a total of $110 million

    In the end, it doesn’t matter too much if the business is sold at several times the original valuation, otherwise, participating preferences significantly skew the perceived valuation. When talking valuations, always clarify if there are any participating preferred preferences.

    What else? What are some other thoughts on how participating preferred stock can skew valuations?

  • Example Founder Dilution Over Multiple Financing Rounds

    Continuing with yesterday’s post titled Dilution With Every Round of Financing, it’s instructive to walk through an example as a founder. Before the example, I like to highlight the stories of ultra-successful entrepreneurs that have taken their company public, and the vast majority own less than 20% of the equity at time of IPO (e.g. Marketo’s founder had 6.6% and Cvent’s founder had 16%) . Now, 20% of $500 million is still a massive number, but it’s a far cry from what people might otherwise think the entrepreneur owns.

    Here’s an example walkthrough of dilution over several rounds of raising money:

    • Two entrepreneurs come together and start a company, splitting the equity in half (so, each has 50% of the equity)
    • Angel investors are excited about the working product and early customers, deciding to invest $300,000 for 20% of the business (the entrepreneur now owns 40%)
    • Recruiting great early employees requires equity, so 10% of the shares are set aside for an employee stock option pool (the entrepreneur now owns 36%)
    • Venture capitalists buy into the big vision, value the $1 million in recurring revenue milestone, and purchase 30% of the business for $3 million as part of a Series A round (the entrepreneur now owns 25%)
    • Expansion of the employee base requires a new stock option plan, diluting everyone further by 15% (the entrepreneur now owns 21%)
    • Growth is explosive and investors compete to be part of the $10 million Series B round, buying 25% of the business (the entrepreneur now owns 16%)
    • Sales are skyrocketing and the paradox of more growth consuming more capital sets in requiring a $30 million Series C for 30% of the business (the entrepreneur now owns 11%)

    So, after an angel round, three rounds of venture capital, and a couple employee stock option pools, the entrepreneur owns 11% of the company, and they haven’t gone public yet. Of course, the company is doing great and it’s better to own a slice of a watermelon than the majority of a grape.

    What else? What are some other thoughts on founder dilution over multiple rounds of financing?

  • Dilution With Every Round of Funding

    Every time a startup raises money there’s a parade of announcements and media coverage. Raising money isn’t a sign of inevitable success, yet it’s treated as one of the ultimate achievements. For the entrepreneurs and employees, a round of funding results in dilution. And, more and more rounds of funding equals more and more dilution.

    Here are a few thoughts on dilution and funding:

    • Dilution, of course, depends on amount of money raised and pre-money valuation (the amount the company is valued at before the money is invested)
    • Equity isn’t static as stock options can be granted multiple times (e.g. existing options might be diluted by a new round of funding but could be partially off-set by the granting of additional options)
    • As a percentage, dilution is often in the 20-50% range, depending on how well the startup is performing and how many investors competed to win the business
    • Companies on the hyper growth track often raise a tremendous amount of money, and dilution is a normal part of the process

    Whenever funding, and fundraising is mentioned, dilution should also come to mind as the two go hand in hand.

    What else? What are some other thoughts on dilution with every round of funding?

  • Ideas for Researching a Market

    Earlier this week I was talking with an entrepreneur who was thinking through a new idea. In addition to customer discovery and working to assess the market need for the product, we also talked through a few different ideas for researching a market.

    Here are a few tactical ideas to gather information on a market:

    • Find at least five competitors and build a spreadsheet of data points like number of employees in LinkedIn, amount of money raised via CrunchBase, and approximate site traffic via Compete
    • Evaluate three competitive products (sign up for a free trial or find a referral to a customer)
    • Interview 10 customers of the competitors and figure out three things they like and three things they don’t like about the product and company
    • Read at least 10 white papers and/or blog posts from industry analysts like Gartner, Forrester, or an independent researcher
    • Attend two industry tradeshows, walk the show floor talking to all the vendors, attend the sessions, and network in the hallways

    Market opportunity, especially timing and size, are some of the most important considerations when deciding on an idea and starting a company. Customer discovery is critical, but it’s also worthwhile to do other types of market research.

    What else? What are some of your favorite ways to research a market?

  • Starting vs Scaling a Startup

    When people think of joining a startup, they often think of tech companies with cool offices and lots of chaos. While that’s often true, I think it’s even more important to distinguish between startups starting out and startups scaling, as they are incredibly different.

    Startups starting out have much more uncertainty, are tiny in size, and need to pivot or iterate a number of times before figuring out product/market fit and a corresponding repeatable customer acquisition process. It’s hard to forecast and accurately plan without operating history and metrics, which further contributes to challenges, and potential excitement.

    Startups scaling are executing against a proven plan, have product/market fit with a repeatable customer acquisition process, are well capitalized (or could be if they so choose), and are focused on maximizing growth. Every little process is an opportunity for improvement and overall energy is spent optimizing, rather than discovering.

    The next time someone says they want to join a startup, coach them on the differences between a startup starting out and a startup scaling up.

    What else? What are some other differences between a startup starting and startup scaling?

  • Mentor Comment: I’m in it for the money

    Recently I was talking to someone that reached out to meet and learn how to get involved helping startups in the community. We did the standard introduction talk for 15 minutes about our respective backgrounds and established some of our views on technology and markets. Finally, I made the ask, “So, why do you want to help startups?”

    Normally, the response is something along the lines of “I enjoy giving back” or “I want to stay current and relevant.” In this case, the answer was “I’m in it for the money.” Hmm, I thought. Being in it for the money makes sense for some people but most of the community that I interact with on a regular basis is in it to help other people and make a positive impact on society. Yes, money is important, but potential mentors that lead with wanting to make money aren’t going to support the type of culture we’re promoting. Paying it forward without an ulterior motive is something we believe in strongly and I’ve seen it play out many times in positive ways.

    Mentors can add tremendous value but make sure their values are aligned with your values.

    What else? What are your thoughts on mentor values?

  • Example Hiring Plan at Different Startup Stages

    Let’s say you have this great working prototype assembled with a few early paying customers and just raised $250,000 in seed money. Now, assuming things go well, and you’re thinking big, you’re on a path to raise money every 12-18 months and (hopefully) build a huge company.

    Here’s an example of how things might go at each stage:

    • Idea Stage – Two co-founders (one with domain expertise and one technical) come up with an idea, scrape some money together, and get a prototype built
    • Seed Stage – Hire a lead developer and employ some contractors to help polish a few elements as part of the search for product/market fit
    • Series A – With product/market fit in place and 100 paying customers, the multi-million dollar Series A is secured and it’s time to hire two more engineers, a marketing manager, customer success manager, sales manager, and two sales reps (always hire sales reps in pairs, if possible)
    • Series B – Now that a repeatable customer acquisition process with solid metrics is in place, it’s time to maximize growth and scale out sales, marketing, services, support, engineering, and operations
    • Series C and D – Grow, grow, grow — achieve enough scale to go public and raise money from the public markets to fund more growth as well as provide liquidity and a return to shareholders

    Of course, this follows The Four Stages of a B2B SaaS Startup, but has application to a wide variety of startups. Hiring plans vary from startup to startup with sales and marketing expenses often rising faster than everything else.

    What else? What are some thoughts on this example hiring plan at different startup stages?