David Cummings on Startups

Blog

  • Learning to Code

    Over the past 30 days I’ve had three different people ask me for advice on learning how to write code and build an app. Of course, that’s music to my ears as I think everyone that’s involved with a tech startup should learn to write code. Now, the goal with learning to code isn’t so that she can become a life-long professional software developer. Rather, the goal is to better understand how things work behind the scenes, to better communicate with members of the technical team, and to become more well rounded. Much like many colleges require taking a foreign language as a graduation requirement, learning to code provides many of the same benefits.

    With the new year just around the corner, learning to code, even if it’s something simple like building a small app, is a great New Year’s resolution. Here are a few ways to get started:

    Before, it was much more difficult to start due to having to install and configure a development environment on your laptop. Today, everything is available right inside a browser to learn the fundamentals without any friction. Building an app and deploying it to a web server is more involved and readily saved for a future assignment once it’s clear that more time will be devoted to learning.

    So, no more excuses – learn to code.

    What else? What are some more thoughts on learning to code?

  • The Unusual Relationship Between Revenue and Valuation Over Time

    People love to think of a startup’s valuation as readily determinable by a valuation expert based on agreed upon financial formulas. In reality, a startup is only worth what an acquirer is willing to pay. This is true because equity in a startup is an illiquid security that is very difficult to turn into cash, especially in a reasonable amount of time. Of course, valuations are set all the time based on things like public market comparables, multiples of profit (a typical company is worth 4-6x profit), combination of growth rate plus revenue, and other factors.

    For startups, there’s an even a more unusual relationship between revenue and valuation over time as there’s no-to-little operating history, no-to-little revenue, and no profits. Here are a few data points over time:

    • Month 1 – With a fresh idea and unlimited potential, the startup is actually worth more than when it starts to generate early revenue (e.g. valuation of $2M pre-money for an angel investor)
    • $50,000 in annual recurring revenue (ARR) – With a few paying customers and some product / market fit, investors will begin digging into the start of a financial model, and since there’s some revenue, will start talking about multiples of revenue or annual run rate (e.g. valuation of $1.5M pre-money even though the company is clearly further along than month one yet the valuation isn’t better)
    • $1,000,000 in ARR – With the magical seven figures market crossed, a whole new class of investors emerge (many VCs won’t invest unless the startup has at least a million in recurring revenue), valuations are discussed as multiples of revenue (e.g. a valuation of $5M pre-money based on 5x run rate)
    • $5,000,000 in ARR – With an even more substantial base of revenue, product / market fit clearly in place, and market adoption risk negated, the revenue multiple starts to expand, especially with a high growth rate (e.g. a valuation of $35M pre-money based on 7x run rate)

    So, valuation stays flat or even goes down from the initial formation of the company though the first or second year. Then, as revenue starts to grow, valuation grows at an even greater rate and really expands at a few different inflection points. Today, Software-as-a-Service is super hot and the market leaders are often trading at 13x revenue, which isn’t sustainable, but is the current state of affairs. Revenues and valuation don’t have a straight relationship over time.

    What else? What are some other thoughts about the unusual relationship between revenue and valuation over time?

  • Overestimate the Next Two Years and Underestimate the Next Ten

    One of my favorite big-picture quotes comes from the Microsoft co-founder Bill Gates:

    We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.

    I’ve seen it play out so many times with new technologies, organizations, initiatives, etc. Things start slow, as they always do, and then eventually pick up momentum such that you look back a few years and are blown away by how much has changed. Coming from the startup world, this quote is especially applicable as the first couple years are always overestimated by entrepreneurs (think about how revenue and progress is always below expectations).

    Here are a few examples of overestimating the short-term and underestimating the long-term:

    • Twitter – I had heard about it for two years before I created my @davidcummings account at a Georgia Technology Summit in 2009. It didn’t seem like a big deal at the time but the early adopters loved it. Now, looking back, I clearly underestimated its potential.
    • Atlanta Tech Village – We’re still in the top of the first inning at the Village but I’m confident that the Atlanta community overestimates what we’re going to accomplish in the short-term as it takes so long to build great startups. On the other hand, I believe people underestimate the profound impact we’re going to have on the city over the next decade.
    • Marketing Automation – During the first two years of Pardot most people thought that B2B marketing tools were good enough and business buyers weren’t in the market for a whole new platform. Now, Pardot is almost seven years old and I can honestly say that I underestimated the power of marketing automation and how fast it would catch on in a major way.

    Humans are apt to repeat themselves and consistently overestimate the next two years and underestimate the next ten, and that’s never going to change.

    What else? What are your thoughts on the idea of overestimating and underestimating change?

  • What do National Lampoon’s Christmas Vacation and Netflix have in common about annual bonuses?

    With the ring of a doorbell on Christmas Eve, Clark Griswold (played by Chevy Chase) eagerly rushes to the door in anticipation of his annual company bonus check. Only, after opening the envelope, he quickly reads that there’s no bonus, and, instead he’s receiving an annual supply of jelly. Yes, jelly. Then, to the 10+ family members gathered around, he announces that he’s received a Christmas bonus for 17 straight years and is devastated to not have one.

    This scene from National Lampoon’s Christmas Vacation captures the number one problem with annual corporate bonuses: people view the bonus as part of their standard compensation and don’t see it as a bonus. If you take away the bonus, it seriously hurts morale. If the bonus is given out, people don’t think anything of it. If you make the bonus tied to individual performance, people naturally game the system to their best interests. If you tie the bonus to company performance, people don’t feel they have much control over it.

    Harvard Business Review has an article in their most recent issue titled How Netflix Reinvented HR where the author, Patty McCord, former head of HR at Netflix, talks about corporate bonuses. McCord writes:

    During my tenure Netflix didn’t pay performance bonuses, because we believed that they’re unnecessary if you hire the right people. If your employees are fully formed adults who put the company first, an annual bonus won’t make them work harder or smarter.

    McCord nails it perfectly. Bonuses don’t do what they’re intended to do and are perpetuated because that’s how it’s always been done.

    What’s the solution if you do away with annual bonuses? Pay competitive, market-rate salaries as short-term compensation and include equity or stock options as long-term compensation.

    What else? What are your thoughts on the idea that companies shouldn’t do annual bonuses?

  • Thinking About Entrepreneur Commonalities

    One of my favorite types of books is entrepreneur biographies. After reading The Everything Store: Jeff Bezos and the Age of Amazon, it drove it home to me that every entrepreneur’s style is different. There’s no one-size-fits-all. There’s no best personality type. Every entrepreneur approaches things differently and shapes the world to their style.

    While the styles are different, there are entrepreneur commonalities:

    • Persistence – Adversity and challenges are everywhere but they are especially prevalent when trying to change the world
    • Grand Ambitions – Perhaps it’s revisionist history but the stories present the entrepreneurs as having large dreams from the beginning
    • Willingness to be Misunderstood – When venturing out with a new idea most people don’t think much of it but entrepreneurs are happy to keep moving things forward even with others doubting
    • Amazing Timing – Timing is the most difficult but one of the most important things to get right

    Introverted or extraverted? It doesn’t matter. Micromanager or hands-off? It doesn’t matter. Entrepreneur commonalities are more about the big picture and less about specific personality styles.

    What else? What are some more entrepreneur commonalities?

  • Credit Lines for Software-as-a-Service Startups

    Now that Software-as-a-Service (SaaS) is mainstream and seemingly billion dollar acquisitions occur on a monthly basis (see Responsys to be acquired by Oracle for $1.5 billion from last week), it’s important to discuss the line of credit options available for these types of businesses. See, most entrepreneurs won’t qualify for a line of credit unless they have personal assets to guarantee the loan (e.g. if you want to borrow $100,000 be prepared to have $80,000 in deposits, real estate, etc. to put up as collateral). SaaS, due to recurring revenue, high gross margin, and the predictable nature of the model makes for a unique business that’s well suited to loaning money based on recurring revenue (even absent free cash flow).

    Here are a few thoughts on credit lines for SaaS startups:

    • Credit lines are often based on a multiple of monthly recurring revenue (e.g. 3x) and annualized renewal rate (e.g. 80%) — an example is doing $500k/month in recurring revenue ($6 million annual run rate) with an 80% renewal rate results in a line of credit of $1.5 million * .8 = $1.2 million
    • Covenants are always required, typically around customer renewal rates (e.g. 70%+ annually), growth rates (20%+ annually), gross margins (70%+), and cash collected over the past 90 days (70% of the line of credit)
    • Banks and other lenders want some level of scale to do a deal (e.g. must qualify for at least a $500,000 line of credit as they don’t want to do smaller lines due to the lender’s business model)
    • Square 1 Bank and Silicon Valley Bank both have great programs for SaaS companies
    • Firms like SaaS Capital are emerging that offer smaller lines of credit as well as lines that aren’t as restricted as banks (but have a correspondingly higher interest rate)

    Pardot was a major beneficiary of a credit line from Silicon Valley Bank and it allowed us to significantly invest ahead of growth. Once a SaaS startup achieves enough scale to qualify for a line of credit, it’s one of the best ways to finance the business.

    What else? What are some other thoughts on credit lines for Software-as-a-Service startups?

  • The Angel Investor Dilemma

    If you ask a successful tech entrepreneur if they’ve made any angel investments, more often than not the answer is yes. Only, if you follow up that question with “have you made money”, the answer is almost always the same: no. Yet, many are still interested in angel investing as they see value in their existing investments, want to help entrepreneurs, and, of course, want to make out-sized returns.

    I’ve found that after successful tech entrepreneurs scratch the itch of making a few angel investments, they don’t make any more investments even though they are casually interested in doing so. After probing why they haven’t made more investments, it always comes down to one main reason: they haven’t made any cash on the existing investments because they haven’t had any exits and the existing investments are illiquid.

    Angel investments often take 7+ years to see a return, if any comes at all. So, after making a few investments, and not having any liquidity for a few years, angel investors get cold feet and don’t write more checks. Add in challenges like having to invest more money to maintain ownership positions for future financings (assuming pro-rata rights are respected by subsequent investors) combined with continued uncertainty about the outcome, and it’s clear that angel investing is much less glamorous than it appears.

    Angel investors have a dilemma in that there’s no cash flow and an extended horizon to see any return, as well as no liquidity. Yet, there’s such great potential, both to help an entrepreneur and make a difference. Angel investing is difficult, very difficult.

    What else? What are your thoughts on the angel investor dilemma of an illiquid financial model with a long-term horizon combined with the opportunity to help entrepreneurs change the world?

  • Updated SaaS KPIs Dashboard for Startups

    Christoph Janz, the VC that put together an awesome SaaS KPI dashboard, has an updated version available (I previously adapted it for SaaS startups with an inside sales team). This enhanced model now includes different pricing tiers and annual plans as well as more charts for analysis.

    Here are the charts in the SaaS KPI dashboard Excel file:

    • Visitors & Signups
    • Signups & Paying Customers
    • Conversion Rate By Plan
    • New MRR
    • Total MRR
    • Upgrade, Downgrade & Churn MRR
    • Customers by Plan
    • MRR by Plan
    • Churn
    • Annual Subscriptions
    • ARPA
    • M/M Growth Rate
    • Cost of Customer Acquisition
    • Time to Recover CAC
    • Cash

    Every SaaS entrepreneur should use this model, or a variation of it, when managing their business. It’s the best one on the market.

    What else? What are some other thoughts on the updated SaaS KPIs dashboard for startups?

  • This Is How I Work

    Jeff Hilimire tagged me in his most recent post titled This is how I work and I happily obliged. The idea is to share my style for working and getting things done. Alright, let’s get into it.

    What apps/software/tools can’t you live without? Doesn’t have to be tech.

    I use Gmail, Google Calendar, Google Drive, Pardot, Twitter, Github, and Digg Reader on a daily basis — I’m pretty basic.

    What’s your workspace like?

    My workspace is super simple: MacBook Air. That’s it. No monitor, no mouse, nothing. On the furniture front, I love my 3M adjustable footrest and my Herman Miller Aeron chair.

    What’s your best time-saving trick?

    I like the only-read-it-once strategy with email where I either respond to it quickly, file it to handle later, or schedule a time on my calendar if it needs more extended focus. I’m not perfect at only reading email once, but I’m very good at it.

    What’s your favorite to-do list manager?

    I use Google Calendar Tasks and the Notes app on the iPhone to keep track of less important tasks and then I schedule important tasks as calendar events.

    Besides your phone and computer, what gadget can’t you live without?

    Besides my MacBook Air and iPhone 4s, I love my iPad Air (I know, I’m an Apple Fanboi). I also enjoy the Logitech Ultrathin Keyboard for iPad.

    What everyday thing are you better at than anyone else?

    I’m not better than anyone else at this but I’m really good at seeing trends and patterns in technology and getting great people excited about building solutions around opportunities.

    What do you listen to while at work?

    I like listening to Slacker Radio in my car but I don’t listen to anything at work.

    What are you currently reading?

    I’m almost done with The Everything Store: Jeff Bezos and the Age of Amazon and recommend it. Jeff Bezos is the Steve Jobs of our generation.

    Are you an introvert or an extravert?

    Introvert.

    What’s your sleep routine like?

    I love sleep. I usually read before bed and sleep 8.5 hours a night.

    Fill in the blank: I’d love to see ______ answer these same questions.

    I’ll pass the baton over to Johnson to answer these questions.

    What’s the best advice you’ve ever received?

    Figure out what you love, figure what you’re good at, and find the intersection of the two. And, of course, I’m very fond of saying corporate culture is the only sustainable competitive advantage for companies.

    Is there anything else you want to add?

    I find peace in having a routine and structure to have time for tactical items, strategic planning, catching up, etc. I find myself doing more tactical work during the day and more strategic items after hours or off-site.

  • The Atlanta Tech Village’s One Year Anniversary

    Exactly one year ago today I purchased 3423 Piedmont Rd and announced it to the world as the new Atlanta Tech Village. Everything about the Village has exceeded my expectations. Entrepreneur support has been incredible. Community support has been incredible. And, support from city leaders has been incredible. I truly didn’t know what to expect and looking back it was one of the best decisions I’ve ever made.

    Here are a few observations after a year at the Atlanta Tech Village:

    • Our staff at the Village is amazing and creates the magic
    • Startup demand continues to exceed expectations, and is most concentrated in companies with 1 – 6 employees
    • Hosting community meetings has been one of our best marketing vehicles and we’ve had over 150 events (our original goal for this year was to do 50 events, which we blew past)
    • Startup Chowdown has taken on a life of its own and is the largest weekly gathering of entrepreneurs in the Southeast with 200+ people every Friday
    • Atlantans have great pride in the city and having one of the 10 largest tech entrepreneurship centers in the country enhances the excitement
    • Renovation costs are way higher than originally budgeted, especially with soft costs factored in (our goal is to be the best and the location, finishes, and amenities reflect that)

    As part of sharing more background on the thinking and documenting some of the findings, I’ve written over 25 blog posts on the Atlanta Tech Village lessons learned and observations. Some of the most popular posts include the Economics of the Atlanta Tech Village, Mission, Vision, and Core Values for the Atlanta Tech Village, Translating Per Person Costs to Standard Commercial Real Estate, and 5 Goals for the Atlanta Tech Village.

    Here’s to the next 10 years and everything in store for the future of Atlanta’s startup community.

    What else? What are some other Atlanta Tech Village observations after one year?