David Cummings on Startups

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  • Lead Generation as the #1 Challenge for SaaS

    Continuing with yesterday’s post on SaaS Company Premium Valuations, there’s an important point about the SaaS business model that isn’t well understood. With all the talk about finding product/market fit followed by building a repeatable customer acquisition process (see the 4 Stages of a B2B Startup), it’s regarded that with enough time and money, both of these tasks will be accomplished. Assuming there’s sufficient need in the market, and enough resources, product/market fit can be achieved. Only, it’s the repeatable customer acquisition process that’s also capital efficient and profitable where there’s even more difficulty. Customer acquisition that’s capital efficient and repeatable starts with lead generation.

    Here are a few thoughts on lead generation as the #1 challenge for SaaS:

    • Cost of customer acquisition relative to the first year’s customer revenue is one of the driving metrics for building a SaaS business, and lead generation is the top of the funnel for customer acquisition
    • Company size upper limits are determined by the number of new customers signed relative to customers that leave (churn) and is also accentuated by the law of large numbers that makes growth more difficult at scale
    • Acquiring customers in a manner that is scalable and profitable isn’t always possible, which is why many entrepreneurs give up on building out a sales team due to repeated failure (the lower cost and higher volume of leads can be generated, the greater the chance for a profitable and repeatable customer acquisition process)
    • Top of the funnel lead generation is the most difficult to plan and control for — once a lead is in the pipeline, automated nurturing and human selling is very controllable

    The next time an entrepreneur talks about how hard it’ll be to scale the service for a large number of users or get the user interface just right, ask the harder question about how they’ll generate a huge number of marketing qualified leads.

    What else? What are your thoughts on lead generation as the #1 challenge for SaaS companies?

  • SaaS Company Valuation Premiums

    Valuation is one of the favorite topics of conversation when it comes to Software-as-a-Service (SaaS) companies. While normal companies might be valued at 4-6x their profits, unprofitable fast-growing SaaS companies are often valued at upwards of 10-14x revenue (e.g. see ChannelAdvisor trading north of 12x revenue net of cash on hand). Jason Lemkin, a partner at Storm Ventures, highlights a number of solid reasons why SaaS isn’t a bubble, even if it’s overvalued.

    Here are a few reasons why people are paying a premium for SaaS companies:

    • Generational shifts are taking place within the software industry where everything is moving online, and the vast majority still isn’t web enabled
    • Few companies are growing fast, let alone experiencing hyper growth with no signs of slowing down
    • Subscription (recurring) revenue combined with strong gross margins and high renewal rates results in one of the best business models anywhere
    • Opportunities to consolidate competitors and create more economies of scale abound
    • Most SaaS companies spend a disproportionate amount of revenue on sales and marketing to fuel growth, and can turn it off (with some pain) such that they’d become extremely profitable

    While I believe SaaS companies are overvalued due to a lack of growth companies in general, there’s still tremendous growth ahead that bodes well for the sector. With strong growth rates and renewal rates, SaaS companies are going to get a premium over their peers.

    What else? What are some other thoughts on SaaS company valuation premiums?

  • Time to Shut Down a Startup

    Last week an entrepreneur emailed me that he’s shutting down his startup and moving on. After working hard, spending many months on the idea, and over $100,000 of personal savings, it was clear that the business wasn’t going to be successful. There were a number of signs leading up to his decision.

    Here are a few indicators to evaluate if it’s time to shut down a startup:

    Deciding to shut down a startup is a difficult decision. Once the decision is made, and the trigger is pulled, the result is a major sense of relief.

    What else? What are some other indicators when deciding to shut down a startup?

  • How to Decide if Inside Sales Makes Sense

    With all the talk about sales and cold calling, it’s important to step back and run some simple math to see if inside sales even makes sense. Most entrepreneurs fail with their first sales rep for a variety of reasons and really should just hire a sales assistant. Assuming the sales assistant is already in place, let’s run through some logic to see if it makes sense to hire an inside sales rep:

    • Take the average gross margin in the business (e.g. 30-80% based on the type of company — let’s say 70% for a Software-as-a-Service business)
    • Grab the average deal size in the first year (e.g. $1,000)
    • Evaluate the cost of salary and commission to hire the caliber person required to be successful (e.g. $35k base and $75k on target earnings)
    • Figure out how many deals are required for the gross margin to match the fully loaded costs of the sales rep
    • If the gross margin of the first year is greater than or equal to the expected output of the sales rep, hiring a sales rep makes sense
    • Here’s the math for the example above:
      $75,000 + taxes for the sales rep = $85,000
      70% gross margin times $1,000 per deal times X number of deals = $85,000
      121 deals at $1,000 per deal = $121,000 times 70% gross margin = $85,000
      121 deals are required for the sales rep to make sense.

    So, run the numbers based on educated guesses and see if it makes sense to hire an inside sales rep. Generally, as the average customer value goes up and the sales cycle goes down, inside sales makes more sense.

    What else? What are some other thoughts on how to decide if inside sales makes sense?

  • Plan for Three Years of Personal Runway

    For years I thought that entrepreneurs should plan for two years of personal runway to have sufficient time to iterate on an idea and get to break even. Looking back on it, I was wrong. After starting a few companies and investing in several more, I now believe entrepreneurs should plan for three years of financial runway.

    Here are a few reasons why entrepreneurs should plan for three years:

    • Pardot took three years and Hannon Hill took four years to clear $1 million in revenue ($1 million is a great milestone for sustainability as well as the ability to pay a decent salary for the founders)
    • Almost all successful companies go through at least one pivot (see examples)
    • Finding product/market fit often takes 1-2 years and building a repeatable customer acquisition process often takes 1-2 years, making the prospects of solid revenue in less than three years unlikely (see the 4 Stages of a B2B Startup)

    So, when thinking about taking the entrepreneurial plunge, budget for three years of personal runway. Building the base of a successful business is a long, hard process.

    What else? What are your thoughts on planning for three years of personal runway?

  • The 10x Improvement Challenge

    Entrepreneurs have an innate ability to solve problems and continuously find ways to make things better. I, like many entrepreneurs, have a tendency to look for incremental improvements e.g. let’s figure out how to shorten the sales cycle from 43 days to 42 days. Instead, entrepreneurs need to challenge themselves to find 10x improvements.

    Here are a few examples of potential 10x improvements:

    • Cold Calling – Say your reps are doing 30 dials per day and getting three conversations per day. What if you implemented a service like ConnectAndSell and did 300 calls per day and had 30 conversation per day per rep?
    • Marketing – Say your cost per marketing qualified lead (MQL) is $200. What if you truly invested in great content (not average content) for inbound marketing and drove the cost per MQL to $20?
    • Support – Say your customer support team processes 100 tickets per day. What if you revamped the product’s user experience and associated help/training materials such that customers had a much better experience and support tickets dropped to 10 per day?

    The next time you want to improve something, stretch your brain and look for ways to make it 10x better and not 10% better.

    What else? What are your thoughts on the 10x improvement challenge and what are some more examples?

  • Why hasn’t an idea been marketed to me?

    Whenever I add a new entry to my ideas spreadsheet, one of the first questions that comes to my mind is “Why hasn’t the idea already been marketed to me?” Most ideas aren’t original, and with Google it typically takes about two minutes to find 10 other companies already doing it. So, if it’s a decent idea, and the market needs it, why haven’t I heard about it?

    Here are some thoughts on why an idea might not have been marketed to you yet:

    • Vertical Rollout – Certain verticals have greater need and they haven’t gotten to your market yet
    • Job Title – Similar to verticals, there’s a good chance select job titles are preferred and receive more attention
    • Early Adopters – Market penetration could be light such that only early adopters actively seeking a solution encounter the marketing campaigns

    If the idea is sound, and you’re the target, startups will find a way to get you the message. The next time you come up with a new business idea, ask the marketing question.

    What else? What are some other thoughts on why an idea hasn’t been marketed to you yet?

  • When an Exit Strategy Discussion is Required

    When asked about an exit strategy, my favorite response is that we don’t have an exit strategy — we’re building the company to be successful over the long-term and aren’t building it to sell. Of course, if someone comes by and offers a number that’s too good to be true, naturally we’d look at selling the business. Now, some investors will want a more detailed discussion of an exit strategy, so it’s important to have a plan when raising money. Here are some thoughts on an exit strategy discussion:

    • Pick five transactions in the same or similar space that have happened in the past 24 months and be prepared to talk about the financials for each (e.g. revenue, profitability, number of employees, value at time of exit, etc)
    • Choose five likely acquirers and explain why they’d pay a strategic multiple to acquire the business
    • Articulate the startup’s special sauce that makes it desirable (e.g. unique technology, great execution, amazing culture, etc)

    Exit strategies are an important discussion topic when talking with investors that want to understand the perceived value of the business down the road. What else? What are some other thoughts on an exit strategy?

  • Benefits of the $1 Million Recurring Revenue Milestone

    In my mind, $1 million in annual recurring revenue is a massive milestone for startups. There are many milestones along the way like signing the first 10 customers and getting to profitability to go along with a $1M run-rate, but it’s right near the top.

    Here are a few benefits of the $1 million recurring revenue milestone:

    • Approaching critical mass where the business can operate independently of the entrepreneurs
    • Enough members on the team where people can take vacations without worrying about things falling apart
    • Nice bump in valuation if there’s a desire to raise outside capital and a larger pool of available institutional investors (most VCs aren’t interested in businesses with less than a million in revenue)
    • Qualification for the Entrepreneurs’ Organization
    • Predictability of future cash flows and easier budgeting / planning

    $1 million in recurring revenue is a huge milestone for entrepreneurs and I recommend adding it to the list of goals.

    What else? What are some other benefits of the $1 million recurring revenue milestone?

  • Startup Review: CallRail

    Back in February 2012 I was at Startup Riot Atlanta and had a chance to hear Atlanta-based CallRail pitch their phone call tracking, recording, and analytics software. At the time, I didn’t pay too much attention to it as I was heads-down focused on Pardot. Well, fast forward a couple years and CallRail is one of the top bootstrapped startups in Atlanta with well over 5,000 paying customers.

    Here are a few notes on CallRail:

    • Experienced co-founders with strong technical skills
    • Idea came from one of the co-founder’s previous experience running an automative lead generation site and wanting to track how many phone calls each listing generated
    • Riding the wave of online and offline advertisers wanting to track inbound calls on a per ad basis so as to measure efficacy and return on investment (think banner ads, pay per click ads, websites, print ads, etc)
    • Self-service model whereby everything is done in a browser with limited hand-holding
    • Pricing in the $30 – $360/month range plus per phone number and per minute fees
    • Strong internal expertise around lead generation and online marketing
    • Powered by Twilio’s cloud-based telephony platform

    CallRail plays to many of Atlanta’s strengths including cloud-based B2B marketing software and a capital-light business model. If you know anyone looking to implement phone call tracking, point them to CallRail.

    What else? What are some other thoughts on CallRail?