David Cummings on Startups

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  • What Lifestyle Sacrifices Should An Entrepreneur Make?

    One the challenges I see on a regular basis is potential entrepreneurs trapped by their middle class lifestyles. You know what it looks like: nice house with a mortgage, good cars with car payments, great vacations, oh, and anything the kids want for school and sports. The money adds up quickly.

    I was reminded of this recently when hearing the background of Clark Howard. Growing up, he attended elite private schools in Atlanta and went to an expensive private college, all the while thinking his family was wealthy. Only, at Thanksgiving dinner his sophomore year of college his dad said he had bad news: he lost his job. Clark thought no problem since they had plenty of money. Only they didn’t. His family spent all the money they made living an upper middle class lifestyle and now Clark was on his own to pay for college. This changed the course of Clark’s life. After graduating from college and working a few years for IBM, he started a company, sold it at age 31, made enough money to retire to the beach, and then found his true calling as a personal finance guru, which he’s been doing for 25 years.

    When talking to entrepreneurs that need to make lifestyle sacrifices to start a company, there are a number of ideas:

    • What lifestyle changes can be made to make it so that you and your family can live with half the income (e.g. if they made $100k/year, how can they live on $50k/year)?
    • How long will it take to save up 24 months of personal cash reserves, assuming a reduced lifestyle?
    • What immediate changes can be made now, regardless of becoming an entrepreneur, that will make for greater financial security in the future?
    • How supportive is the spouse / partner to make significant lifestyle changes to facilitate a startup endeavor?

    Lifestyle sacrifices are never a fun topic but they are a critical one for entrepreneurs coming from the trappings of a middle class lifestyle. There’s a balance in there but it’s often directed towards very limited spending so as to maximize runway.

    What else? What are some other lifestyle sacrifices an entrepreneur should consider to start a company? For more personal finance ideas, check out Mr. Money Mustache.

  • Giving Thanks in a Startup

    Here in the U.S. we’re celebrating Thanksgiving today. As part of our family tradition we like to talk about what we’re thankful for and spend time with each other. On the startup front, I think it’s just as important to give thanks on a regular basis.

    Here are a few ideas for giving thanks in a startup:

    • Have a quarterly celebration where the entire team gets out of the office together for an afternoon and does something fun (baseball game, picnic, whirly ball, etc)
    • Recognize a team member as the hero of the month based on feedback from their peers
    • Send a handwritten thank you note every time a client provides a referral or testimonial to a prospect
    • Take time at weekly team meetings to highlight a recent success story and give thanks to everyone involved
    • Volunteer as a company on a regular basis to give back to those that are less fortunate

    Giving thanks is a healthy and powerful part of building a successful startup.

    Happy Thanksgiving to you and yours.

    What else? What are some other ways to give thanks in a startup?

  • Personal Lifetime Value Instead of Customer Lifetime Value

    Inc. magazine’s latest edition has a great article up titled How to Sell to Humans where the author Jeff Haden interviews HubSpot’s Dharmesh Shah. Here’s one of my favorite passages:

    A delighted B2B customer is a long-term customer: He will tell friends and colleagues (boosting your algorithmic brand), and if he leaves his job, he’ll take your business with him. But forget about Customer Lifetime Value. Person Lifetime Value matters most.

    Over the years I’ve seen the power of a happy person repeatedly occur in three common use cases:

    1. Referrals – Word of mouth referrals are the best sales introduction possible, and happy people are most likely to make referrals
    2. Job Changes – When a happy customer changes jobs, it’s one of the best opportunities to earn a new customer
    3. Account Cancellations – Even with a seemingly successful account, everything can change when the cheerleader for the product leaves, demonstrating that people drive decisions, not companies

    The next time someone brings up customer lifetime value, take it up to an even higher level and think about personal lifetime value.

    What else? What are your thoughts on personal lifetime value instead of customer lifetime value?

  • 3 Startup Books to Read Over Thanksgiving Break

    With the Thanksgiving break right around the corner it’s a great time to settle in and read a few startup books. While there are a number of great entrepreneur books, let’s choose three geared toward startup entrepreneurs:

    • The Art of the Start – Guy Kawasaki is the king of startup stories and sayings, and this is one of the best books on the market in terms of wisdom and energy.
    • Getting Real – The 37signals guys know what they’re doing and this book lays out a great approach to building a strong company with an opinionated product.
    • The Advantage – Patrick Lencioni is my personal guru when it comes to strategy and culture and this book doesn’t disappoint by building a case that corporate culture is an entrepreneur’s most precious asset.

    So, there you go. Three quick startup reads for the Thanksgiving break.

    What else? What are some other good startup books to read over Thanksgiving break?

  • Luck’s Role in a Startup

    Luck plays an important role in successful startups. Whether it’s serendipitous interactions, amazing market timing, or coincidences that are just too good to be true, luck influences things more than people would like to admit. I was reminded of this today when reading Allen Nance’s excellent post titled Startup Grind: Allen Nance @ATLTechVillage. Near the end of the post Allen delivers an excellent line:

    Luck doesn’t see an opportunity, luck doesn’t build a team, luck doesn’t deliver value to a customer, and luck has never taken a risk: people do.

    Well said. Luck is critical, but without taking a risk, there’s no luck.

    What else? What are your thoughts on luck’s role in a startup?

  • Mobile Apps Preferred Over Hybrid Marketing Web Apps

    Quick, what are some common tasks you do regularly on both a native mobile app and in a standard web browser? Now, do you favor one interface over another? I’ve found myself using the native mobile apps more frequently than the web apps, even when sitting in front of my laptop.

    Here are some example services where I prefer the mobile app over the browser interface:

    Looking at the apps, the main reason I prefer the native mobile version is due to the streamlined nature of the user experience. The web apps work fine but they’re a combination of full application and marketing site, making it more cumbersome to complete the most common tasks. With a native mobile app, there are fewer features compared to the corresponding web app and use of context-aware features like the phone’s GPS improve the experience even more. Over time, look for mobile apps to grow even more important as the go to way to get things done.

    What else? What are some native mobile apps you prefer over the web version?

  • Can’t the Software Just be Knocked Off

    Last week I was talking to an ambitious young professional that wants to get into the startup world. We were discussing ways to evaluate the potential of a startup — how big and successful it might be. In terms of evaluating startups, he offered up a serious concern of his saying that it’s easy for a big company to just knock off the software once a startup proves the need. With a background in real estate, he had seen ideas and strategies knocked off repeatedly.

    Building a product that offers similar functionality to another product is straightforward. Building a successful startup or product line based on another successful startup is incredibly difficult. Here are a few reasons why software can’t just be knocked off to have a successful business:

    • Switching costs and the network effects of using a product are significantly more important than one can appreciate without being in the industry and seeing it play out (think of salesforce.com as an example with high switching costs and Snapchat as an example that benefits from massive network effects)
    • For each visible feature there are hundreds of behind-the-scenes features that can’t be seen or accounted for unless you have hundreds or thousands of customers (think of the iceberg example where only a small amount of the iceberg is above water and the majority of the iceberg is below water — unseen functionality)
    • The Mythical Man Month still holds true whereby adding new software engineers to a project to speed it up actually slows it down (e.g. if a big company threw a bunch of engineers at a new product to get it done quickly, it would be worse off than a smaller team working in conjunction with customers over a much longer period of time, which is what a startup does)

    So, it’s very difficult to copy a product and make it as successful as an already successful product with the same market and buyer.

    What else? What are some other reasons why it’s so difficult to just knock off a successful software product?

  • Entrepreneur With an Idea but No Software Engineers

    Earlier this week I talked about the 3 Next Steps for an Entrepreneur Without an Idea. Now, the next logical topic is what entrepreneurs should do when they have an idea but don’t have any software engineers to help with a minimum viable product (assuming market demand has already been confirmed with eager prospects ready to sign up).

    With an idea, committed prospects, and no software engineers, an entrepreneur should build wireframes using Google Drawing with Morten Just’s wireframe kit template (Balsamiq and Mockingbird are good choices as well but more specialized). Here are some items to keep in mind:

    • Make a Google Spreadsheet with all the product screens including hierarchy, links, notes, etc
    • Consider the minimum viable product and keep the screens simple
    • Include as much detail as possible on each wireframe via notes but don’t clutter the user experience
    • Share the wireframes with potential prospects to get their feedback
    • Don’t set anything in stone and make changes in an iterative process

    So, as a next step, an entrepreneur with an idea should start building product wireframes in Google Drawing and make the idea more tangible.

    What else? What are your thoughts on next steps for an entrepreneur with an idea and no software engineers?

  • Understanding Bookings as Different From Revenue

    One of the financial questions investors are fond of asking, and entrepreneurs often struggle with, is that of bookings. Bookings are related to revenue but are at the front-end, before cash comes in. Bookings are best thought of as the amount of money committed to be paid to the company in the future, where the time frame can be any amount of time.

    Let’s look at a few examples:

    • A customer signs up for a one-year contract with $50,000 up front and $50,000 over the next twelve months but hasn’t paid anything yet — that’s $100,000 in bookings with no cash received and revenue to be recognized on a monthly basis as the solution is delivered
    • A customer signs up for a two-year contract paying $2,000 per month with no up-front fees, making for $48,000 of bookings (the total contract value over the life of the arrangement)
    • A customer is signs up paying $1,000 month with no contract and just pre-paid their first month, resulting in no change to bookings

    Recurring revenue is the most important startup metric as it shows how much revenue the business will generate assuming no churn and no upgrades. Recurring revenue doesn’t take into account how much of the revenue is contractually obligated, whereas bookings is driven by contractually obligated revenue.

    So, when an investor asks a question like “how much do you have in bookings”, be ready to answer it, especially for a specific timeframe (e.g. we have $500,000 booked for the next 12 months based on signed contracts).

    What else? What are some other thoughts on bookings and how it relates to revenue?

  • Investors Look For Personality Fit

    There’s a rumor going around that investors write checks only based on the likelihood of making money. While making a good return is a high priority, there’s an equally high priority of enjoying the ride, and that comes down to personality fit. That’s right, investors are gauging how much they like the entrepreneurs as well as ability to generate a return.

    In addition to personality fit, here are some entrepreneurial characteristics investors look for:

    • Leadership – Startups require great people and great people require strong leadership
    • Perseverance – Startups are hard, very hard, and everything takes twice as long as expected
    • Confidence – With so many unknowns, it’s important to have visible belief in the direction and approach
    • Work Ethic – Startup often require long hours and it takes a few years to develop a work / life harmony

    Another way to describe it is that the entrepreneur has to pass the canoe test: would you enjoy spending a day with the person in a two person canoe on an open lake?

    Never forget that personality fit is as important as making a great return.

    What else? What are your thoughts on the importance of personality fit for investors?