David Cummings on Startups

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  • 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?

  • Figure Out How to Stay in the Game Long Enough to Win

    One aspect of entrepreneurship that’s taken me years to grasp is the importance of staying in the game long enough to win. What I mean by that is it’s incredibly hard to time a market, and timing is one of the most important aspects for major success. If it’s hard to time a market, and timing is so important, it follows that it’s best to pick big markets and give yourself enough runway to zig and zag within the market to find the greatest opportunities. In a sense, the goal is to experiment in a large target market so as to create your own timing for whatever is the best path.

    Here are a few thoughts on staying in the game long enough to win:

    If this sounds like a tough situation, that’s because it is. Startups are incredibly hard and figuring out how to survive so that you can be at the right place at the right time makes all the difference.

    What else? What are some other thoughts on figuring out how to stay in the game long enough to win?

  • The Tech Square Ventures Model

    Urvaksh broke the news on Friday about a new $10 million seed fund called Tech Square Ventures run by Blake Patton. Atlanta has a dearth of seed stage, high risk capital, so this is great for the city. Blake is an experienced operator who is well-regarded in the startup community, having run several venture-backed companies, making him an ideal person to lead a new fund.

    From an entrepreneur perspective, I think it’s important to understand how a $10 million seed fund typically works:

    • Capital is committed but not sitting in the bank (it has to be called from the investors, often at a rate of 20% per year for five years)
    • 99% of the capital is from investors and 1% is from the partners
    • 2.5% of the total fund amount is made available for the first five years for operating costs (e.g. $250,000/year to pay for salaries, office space, legal, accounting, travel, etc.) with a reduced amount for the next five years and nothing beyond 10 years
    • Partners receive 20% of the profits (carry) after the fund and all money used for annual operating costs have been returned
    • 1/3 of the money for initial investments and 2/3 of the money for follow-on investments (e.g. when a $1 is invested, $2 needs to be saved to invest in some of the companies at a later date as they grow)
    • Example investment approach:
      15 initial investments of $250,000 each = $3,750,000
      5 of the 15 investments show promise and an additional $6,250,000 is invested in those five
    • Target investor return is three times cash on cash in seven years, meaning take the $10 million invested and turn it into $30 million

    So, my guess is Tech Square Ventures will make somewhere in the neighborhood of 15 investments over an initial 3-4 year period, with most investments providing little to no return and 2-3 investments providing almost all the returns.

    I’m excited for Blake and want to see Tech Square Ventures become a successful establishment in Atlanta.

    What else? What are your thoughts on the $10 million seed fund model?

  • Walkthrough of the 2nd Floor at the Atlanta Tech Village

    Yesterday we opened our new 2nd floor at the Atlanta Tech Village. The 2nd floor is different from our standard floor in that it is almost entirely private offices with no multi-room suites whereas floors three, four, and five are mostly 2-6 room suites. In addition, the 2nd floor has a few additional amenities not found elsewhere in the building (see below).

    Here are highlights from the 2nd floor:

    2nd floor floorplan

    Floor Plan

    • 37 private offices
    • 16 coworking desks
    • 8 phone rooms
    • 3 conference rooms
    • 2 huddle rooms
    • 2 standing desks
    • 1 usability testing lab
    • 1 nap room
    • 1 staircase to Octane Coffee

    2nd floor glass rooms

    2nd floor room interior

    Private Offices

    • Fully furnished
    • All rooms have glass and can see outside
    • Most rooms can see out two sides of the floor

    2nd floor hallway with idea paint

    Hallways

    • Dry erase paint throughout the interior walls

    2nd floor lockers

    Lockers

    • Storage for hot desks and reserved desks

    2nd floor coworking2

    Coworking

    2nd floor phone room

    Phone Rooms

    • Perfect for conference calls, cold calls, and personal calls

    2nd floor observation room

    Usability Testing Lab

    • Combination huddle room and conference room with one-way glass

    2nd floor nap room

    Nap Room

    • No windows
    • Schedule it like a conference room
    • Look for a hammock and future accessories soon

    2nd floor glass rooms2

    Next up is the 1st floor which opens later this month with an Octane Coffee, coworking space, community center, game room, classroom, conference center, and two board rooms.

    Every week we have a public tour, so please signup online.

    What else? What are your thoughts on the walkthrough of the 2nd floor of the Atlanta Tech Village?

  • A Gap in the Market Doesn’t Imply an Absence of Competition

    I love when entrepreneurs come in saying that there isn’t any competition for their idea. No competition? No way. There’s always competition. And, competition is a good thing. If there wasn’t competition, there wouldn’t be other people that believe in the opportunity as well.

    Now, just because there’s competition, it doesn’t mean that there aren’t gaps in the market. Look at the marketing automation market six years ago. Strong companies like Eloqua were doing well addressing the mid-to-high end segment of the market, but when it came to the small-and-mid sized segment of the market, there wasn’t much activity. Yes, you could buy Eloqua Team Express Light (that’s really what they called it at the time) and get a product for $1,500/month, but it wasn’t feature rich since it wasn’t the market they really cared about. Pardot filled a gap in the market for SMB companies that wanted a complete solution in the $500 – $1,000/month range.

    A gap in the market doesn’t imply an absence of competition. Rather, competitors exist and are focused on a different segment that they find more appealing. With time, many large, meaningful markets actually have several winners that carve out their own segment and dominate.

    What else? What are your thoughts on gaps in the market and competitive dynamics?