David Cummings on Startups

Blog

  • Evaluating the Purity of a SaaS Business

    Recently I was talking to an entrepreneur that has sold his last company and is actively looking for a new business to either start or join. As we got to talking, it became clear that his goal is to get involved with a pure Software-as-a-Service (SaaS), as opposed to a tech-enabled business service where there’s a hybrid between proprietary technology and human-powered services. Some of his drivers for a pure SaaS business include higher valuations at the same revenue levels, greater economies of scale, and perception that there are better opportunities.

    Assuming a pure SaaS business is the goal, here are a few financial model considerations to contemplate:

    • Gross margin (especially at scale e.g. > $20mm in revenue)
    • Cost of customer acquisition
    • Lifetime value of the customer
    • Renewal rates
    • Scalable lead generation

    The ideal SaaS business will have high gross margins (> 80%), low cost of customer acquisition (< first year’s revenue), high lifetime value of the customer (many times the acquisition cost), high renewal rates (> 90% per year), and copious amounts of leads.

    When thinking about SaaS metrics, it’s important to review Insight’s Periodic Table of SaaS Metrics and Omniture’s Magic Number.

    What else? What are some other ways to evaluate the purity of a SaaS business?

  • Pitching Atlanta’s Strong Tech Clusters to TechCrunch

    Last week I had dinner with several writers and team members from TechCrunch. TechCrunch was in Atlanta for their meetup at the The Fabulous Fox Theatre and invited several members of the community out to dinner in advance of the event. At dinner, I pitched Atlanta’s strong tech clusters:

    Atlanta has over 125,000 high-tech jobs and is growing at a nice rate. When pitching TechCrunch, or anyone else, it’s important to tell a story. Atlanta’s story is that of success across a number of sectors with no signs of slowing down.

    What else? What are some of the next strong tech clusters emerging in Atlanta?

  • Atlanta’s Pitch to West Coast VCs

    Today, 10 people from Atlanta, including Mayor Kasim Reed, are heading out to Silicon Valley to meet with several venture capitalists and large tech companies in order to espouse the benefits of Atlanta. All the great benefits of Atlanta will be highlighted including strong technical talent from Georgia Tech, massive airport with direct flights around the world, low cost of living, and growing population of educated young professionals. It’s important to convey this message as there’s real value to it.

    Only, this isn’t going to get VCs excited. VCs get excited about the prospect of making huge amounts of money for their limited partners, which in turn makes huge amounts of money for themselves. If they don’t do that, they can’t raise another fund, and they go out of business.

    A great city with strong fundamentals doesn’t incite the fiery capitalist function in an investor.

    Instead, what’s needed is a conversation that accomplishes two things:

    1. Builds confidence that Atlanta has good people that care about making the city great, and
    2. Reveals the investors’ sweet spots in terms of stages, industries, growth rates, revenue run rates, etc. and everyone makes a commitment to talk to entrepreneurs that meet these specifications.

    With this in place, city leaders then organize a program to continually stay apprised of startups in town and qualify them against the necessary parameters provided by the VCs. Finally, introductions are coordinated for good fits and an annual trip is facilitated to maintain rapport and continually calibrate the quality of deals.

    Great startups that make investors a ton of money will put Atlanta on the map. Let’s start with a tactical plan that produces more success stories and everything else will fall into place.

    What else? What are some other thoughts on Atlanta’s pitch to West Coast VCs?

  • Assembling a Minimum Viable Product for Market Validation

    After repeatedly talking about customer acquisition, and the idea that startups are no longer required to build an amazing product upfront, the natural next question is how to assemble a minimum viable product to validate the market. Ideally, it’s getting something into the hands of prospects and figuring out the value and potential scalability of the business as quickly as possible. The days of needing hundreds of thousands of dollars to build a software prototype are done.

    Here are a few ideas on assembling a minimum viable product for market validation:

    • Build a seemingly-functional mobile app using Fluid UI and then let potential customers click around on the app
    • Create web app wireframes and map out the most salient pieces for a software engineer (wireframes are one of my favorite ways to map software ideas before a product is built)
    • Recruit a developer to moonlight and build a prototype after hours (most developers have side projects) and be ready to pay $50 – $100/hr
    • Explore freelancers and outsourcing firms on Elance, paying special attention to references that you can contact and verify quality
    • Incorporate tools for rapid prototyping and deployment like Ruby on Rails, Bootstrap, and Heroku

    Cost wise, expect to pay between $5,000 and $20,000 to get something built and published. While it might not be a minimum respectable product, it should be functional and suitable to put in the hands of users. Assemble a minimum viable product and search for market validation before spending too much money.

    What else? what are some other thoughts on getting a product into the hands of potential customers as quickly and affordably as possible?

  • Why are there more startups now?

    Two of the more common questions I hear include “Are we in a tech bubble?” and “Why are there more startups now?” Yesterday, @semil tweeted a great response to the second question:

    Let’s look at each of these ideas:

    • Generational attitudes – Millennials don’t ever entertain the idea of lifetime employment and want to get to the top as soon as possible.
    • Cheap to build – Open source software plus cloud computing and a lower learning curve to use the modern tools make it dramatically cheaper to build a product compared with 10 or 15 years ago
    • Weak job market – Outside of sales and software engineering, it’s still a tough job market, especially for recent college grads with little to no experience
    • Romanticized in pop culture – Every time Mark Zuckerberg is referenced on the news or in a movie like The Social Network, more people are inspired to start their own company
    • $ flying around – Money is still hard to come by outside Silicon Valley, but angel investors are more active everywhere due to the inflated stock market and recent tech success stories

    Much like it used to be cool to be in a band, it’s now cool to be in a startup. And, on the whole, that’s a good thing.

    What else? What are some other reasons there are more startups now?

  • Atlanta Tech Village as Perceived Startup Employment Stability

    Yesterday I was meeting with a very successful entrepreneur in town at the Atlanta Tech Village. As we were talking about the facility and community, he cited an important observation I hadn’t previously heard: people who join startups at the Village feel they have more stable employment, all things equal, compared to working for a startup in a traditional building. Right or wrong, there’s some truth to it. One of the more difficult things to do is to recruit someone from a non-startup to a startup, especially if it’s an area of the country that has a limited startup scene (which is most of the country).

    Here are a few thoughts on the perceived startup employment stability in an entrepreneurship center:

    • Strength in numbers provides comfort with the idea being that if the hundreds of people around me are working for startups, there must some societal acceptance to it
    • High highs and low lows are a routine part of startup life, and mentally removing some of the stability nervousness also helps with modulating the other fluctuations
    • Relationships and personal networks still drive the majority of startup hires, so being in a large community of like-minded individuals increases the size and growth of individual connections, making the prospects of finding another job higher in the event the current startup doesn’t work out

    Time will tell if startups at the Atlanta Tech Village have a higher success rate and therefore more employment stability. Regardless, I’m confident in the importance of inter-personal relationships to find a new job, and the Village will result in a shorter time and more opportunities for someone when a startup doesn’t work out.

    What else? What are some other thoughts on the Atlanta Tech Village as perceived startup employment stability?

  • The Indirect Revenue Model App

    There’s a popular web pundit quote, “If you don’t pay for the product, you are the product.” Think about a company like Twitter or Facebook — they don’t charge to use the app but they make money by turning you, the user, into a product to market ads on behalf of the the advertiser. While this makes sense, there are actually a number of apps out there that aren’t what they seem when it comes to their primary revenue stream. Here are a few app examples:

    • Lead Gen Apps – Often micro-apps, these are simple services that provide some value in exchange for personal information for a sales rep to follow up and sell something else (see Micro Apps as Next Generation Content Marketing)
    • Transaction Apps – Even if an app has a monthly fee, there are many products out there that actually make more money off of transaction fees (e.g. pay $50/month to be a customer and then pay 10% for each payment collected resulting in more revenue from the transaction fees than the recurring monthly fee)
    • Secondary Apps – Some apps are built and sold as stand alone products, but they are really designed to fill in the gaps for a complementary app. This often happens when a technological shift has occurred and the original app can’t be adapted with the required changes, making it more cost effective and less painful to build a new app that takes advantage of the improved technology while supporting the original app.

    Product pricing and the main revenue stream for an app aren’t always what it seems. Pay attention to indirect revenue model products and figure out the true strategy.

    What else? What are some other examples of indirect revenue models?

  • Customer Acquisition, Customer Acquisition, Customer Acquisition

    As I talk to entrepreneurs, it’s apparent that the #1 challenge far and away is customer acquisition. The days of needing to raise serious cash to build a product are over. The days of worrying about scaling an app are over (see WhatsApp supporting 450 million users with 32 engineers). That’s right, if an entrepreneur shows up and hasn’t been able to get a simple prototype built and some people using it, they aren’t meeting the new minimum expectation.

    As building a prototype has dropped to a few thousand dollars, it puts even more pressure on customer acquisition. If anyone can build a product, it makes sense that more products will get built, and more competition will emerge for the same potential customer.

    Looking back, there are so many customer acquisition related posts that it makes sense it’s the most difficult problem to solve. Whether it’s Pick a Customer Acquisition Model that Make Sense, Lead Generation as the #1 Challenge for SaaS, or Double Inside Sales Rep Productivity in a Week, there’s no shortage of ideas to try.

    Customer acquisition is much harder than entrepreneurs expect. In fact, it’s the hardest thing to master.

    What else? What are some other thoughts on customer acquisition?

  • Pick a Customer Acquisition Model that Makes Sense

    Earlier today I was talking with an entrepreneur who was trying to figure out a repeatable customer acquisition process. After digging into his model, I asked the question, “How do you want to acquire customers?” He replied that he preferred an inbound marketing model with self-service customer onboarding and paying. In other words, he wanted a model that didn’t require humans selling to other humans. After thinking about it further, it gave me more clarity around the importace of playing to the strength of the founding team and/or the talent available to bring on to the team. If the model requires building an amazing inbound marketing engine, and the talent’s not on the team, it either needs to learned, recruited, or the idea needs to change.

    Thinking about it, there are three commmon customer aquisition models:

    1. Pure Marketing – Tons of storytelling, content marketing, brand building, and campaigns to generate customer sign-ups. No humans selling. Minimal product customization. Self service as much as possible.

    2. Inside Sales – Heavy phone, email, and web-oriented sales people — both lead follow-up and outbound prospecting (see Double Inside Sales Rep Productivity in a Week). Inside sales is labor intensive and requires a product price point and sales cycle to warrant people selling to people.

    3. Field Sales – Large deal size and complexity often warrant face-to-face selling. As a model, it’s very expensive and often capital intensive to get started. Few SaaS startups employ this model, although many have tried and failed.

    The next time an entrepreneur starts talking about an idea, inquire as to the expertise around customer acquisition models — especially marketing-based, inside sales, and field sales — and see if the shoe fits.

    What else? What are some other thoughts on picking a customer acquisition model that makes sense?

  • Four Takeaways from the Atlanta TechCrunch Meetup

    Tonight over 800 people turned out for the TechCrunch meetup at the The Fabulous Fox Theatre. While there were some sound difficulties, overall the event was a big hit with a ton of networking, pitching, and excitement around startups. After talking with a number of entrepreneurs and people in the local community, I left with four takeaways:

    1. Atlantans love the city and truly want to put our region on the map for tech startups and entrepreneurship
    2. Startups and entrepreneurship are slowly making progress towards mainstream adoption as a viable career path
    3. Pitches need to highlight some progress and execution as most ideas tonight sounded far-fetched
    4. Human relationships matter even more in the age of pervasive technology, and the entrepreneurs that get the most value from the writers and editors are the ones that connect on a personal level

    TechCrunch has such a broad reach that it helps bring people together that don’t normally attend the startup events in town, and that’s a good thing. I look forward to future events.

    What else? What are some other takeaways from the Atlanta TechCrunch meetup?