David Cummings on Startups

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  • Business Idea: Next Generation Business Contacts Data Service

    Some of the big challenges for inside sales teams include finding quality data for cold calling, augmenting existing data, and targeted list building. There exists a business opportunity for a next generation business contacts data service. Let’s dig in and look at some characteristics of the business idea and market.

    Established companies like Jigsaw.com / Data.com from Salesforce.com, NetProspex, and ZoomInfo have good products with thousands of paying customers and millions of contact records. Only, when you talk to sales reps that use these products there’s always pushback that the data isn’t current.

    Several factors are driving the need for business contact data services:

    • Macro trend of inside sales replacing field sales
    • CRM growth among sales teams
    • Sales tools like auto dialers becoming more commonplace
    • Marketing automation adoption

    How it might work and differentiate from competitive services:

    • Better use of web scraping and web crawling for publicly available information
    • Deep integration of social media info, including analysis of Twitter, Facebook, YouTube, message boards, etc
    • Automated crowdsourcing of data using Mechanical Turk and other third-party services
    • Algorithmic review of existing customers and recommendation of similar companies / people

    LinkedIn is the one wildcard as they have the best, most current data, but don’t resell or allow programmatic access to it.

    Data service companies have been around for decades with Dun & Bradstreet being the most well known. The market is ready for a next generation service that takes advantage of the most modern techniques and delivers great data.

    What else? What are your thoughts on the opportunity for a next generation business contacts data service startup?

  • New Jobs Come from New Companies

    Several months ago I first heard the following statement and it’s really stuck with me:

    The majority of new jobs created over the next 10 years will come from companies that aren’t in existence today.

    Think about that for a minute. As a country, we have a real unemployment problem on our hands, one which many people believe is more structural than temporary. Yes, existing businesses will create some new jobs but it’s critical for entrepreneurs to step up and build great companies. Our country depends on it.

    The next time you think about entrepreneurship, think about job creation and how important it is for our future.

    What else? What are your thoughts on the statement that most new job creation over the next 10 years will come from companies that aren’t in existence today?

  • Announcing Dragon Army Mobile Games Studio

    Urvaksh broke the news about the new Dragon Army mobile games studio Jeff Hilimire, Ryan Tuttle, and I are starting at the Atlanta Tech Village. Jeff and I met briefly in 2005 when I was trying to get his company Spunlogic to resell the Hannon Hill content management software. We first had a chance to work together running Shotput Ventures back in 2009 and ended up investing in nine startups together. After the Shotput Ventures experience, I knew Jeff would be awesome to work with again in the future.

    So, what is Dragon Army? Dragon Army is a mobile games studio where we’ll be building casual games and apps for tablets and smart phones. Mobile is the next major wave of computing and games are a big part of it. It’ll be a new experience for us and we’re super excited.

    Read Jeff’s great post on Dragon Army.

    Oh, and please sign up to be notified when our first Dragon Army title hits the App Store.

    What else? What are your thoughts on mobile games and opportunities for a new games studio?

  • Sublease Adventures: Touring the Executive Floor

    Several years ago we were playing the real estate roulette sublease game where every 18 – 24 months we’d go shopping around to find an affordable and flexible lease suitable for our startup. In the first seven years of my entrepreneurial journey, we were in five different offices (one of the reasons the Atlanta Tech Village was started).

    Well, we were out in the market looking for a new office and there was an option across the street in a nice building. Looking at the floor plan and the existing layout, it was unlike ones I’d seen before in this part of town due to several large, open rooms. Perfect, I thought, as we wanted to have a more open, shared environment.

    Excited, we headed over to review the space. We met the listing broker and he explained that this was a beautiful space previously used by a publicly traded pharmaceutical company. Oh, and it was their executive floor. Coming from the startup world, I hadn’t ever seen an “executive floor”, but I quickly understood what that meant.

    Here are some characteristics of the executive floor:

    • Massive private offices in the neighborhood of 300 – 500 square feet each
    • Closets and fine built-in shelves in each of the excutive rooms
    • Mahogany wood paneled walls in the main conference room
    • Large reception area for the floor followed by smaller, private reception areas for each of the large offices
    • Internal, over-the-top bathrooms that were much nicer that the standard building bathrooms

    Basically, it was the antithesis of how startups operate. Ultimately, we were able to negotiate a sublease-type rate due to tough market conditions and stayed in our same space. It was an experience to tour an executive floor and see how some other companies operate.

    What else? Have you seen an executive floor and what are your thoughts on them?

  • Atlanta Tech Village Shrank the Traditional Buckhead Real Estate Submarket

    One interesting detail of the Atlanta Tech Village is that it actually shrank the commercial real estate submarket in Buckhead. Let me explain. Real estate submarkets, like Buckhead, are tracked based on available Class A, Class B, and Class C space. The Village, before renovation, is a Class B mid-rise, representing 103,000 square feet. After renovation, it’ll be a Class A building with over $80/ft invested (counting items like the new courtyard and rooftop patio).

    From a market perspective, the Class B space is being taken off the traditional market, making things less competitive for the buildings nearby. The vast majority of the tenants in the Village wouldn’t choose a space in Buckhead so early in their startup journey, and would likely be in subleases or Class C space for cost and flexibility reasons.

    Buckhead has officially lost 100,000 square feet of Class B space, and it’s great for the future of tech startups in the city.

    What else? What are your thoughts on Atlanta Tech Village shrinking the amount of space in the Buckhead submarket?

  • SaaS Companies Losing Money to Grow Recurring Revenue

    When talking about recent IPO filings and SaaS growth rates, there’s often a reaction that because XYZ company lost millions of dollars last year, it isn’t well run. Inherently, people understand having to lose money to get a startup off the ground as there’s a disconnect between expenses and revenue. Only, once the business has scale, say $50 million in revenue, it seems that the company should be profitable going forward. Often, the SaaS company is choosing to invest in sales and marketing to grow faster.

    Losses in a single year are one-time while the recurring revenue added continues indefinitely.

    Let’s look at a SaaS company with almost all revenue recurring. If, as an example, you could invest $10 million into a business, and then spend that $10 million on additional sales and marketing all at once (assume other costs like support, R&D, administration, etc wouldn’t go up), and that the additional sales and marketing would generate an incremental $5 million in new annual revenue, that’s a great deal. The $5 million in incremental recurring revenue would make the company $25 million more valuable (assume a 5x revenue multiple for a SaaS company with a good growth rate) and it would add $3 – $4 million of gross margin to the business each year (assume 60% – 80% gross margins and a 100% renewal rate).

    When reading about heavy losses due to expanded sales and marketing, it’s important to remember that the losses are one-time, sales and marketing can be easily cut back, and that the recurring revenues generated are indefinite.

    What else? What are your thoughts on the relationship between losses from heavily investing in sales and marketing vs the recurring revenues that are indefinite?

  • Notes from the RingCentral S-1 IPO Filing

    RingCentral, a provider of cloud-based phone systems and communications tools, just filed their S-1 to go public. This is interesting from a Software-as-a-Service (SaaS) perspective because RingCentral has a heavy telecom component to the business due to phone numbers, long distance minutes, etc in conjunction with the software component. I’m curious to see what the market values the business on the telecom to SaaS valuation continuum.

    Here are notes from the RingCentral S-1 IPO filing:

    • Over 300,000 business customers (pg. 2)
    • Revenues (pg. 2):
      2010 – $50.2 million
      2011 – $78.9 million
      2012 – $114.5 million
      2013 1H – $73.2 million
    • Key benefits (pg. 3):
      Location independence
      Device independence
      Instant activation; easy account management
      Scalability
      Lower cost of ownership
      Seamless integration with other cloud-based applications
    • An original dot com business incorporated in February 1999 in California (pg. 5)
    • Losses (pg. 8):
      2010 – $7.3 million
      2011 – $13.9 million
      2012 – $35.4 million
      2013 1H – $23.9 million
    • Accumulated deficit of $107.5 million (pg. 10)
    • Level 3 Communications and Bandwidth.com provide the IP and phone networks (pg. 12)
    • Some support in the Philippines and some research and development in China (pg. 38)
    • Up to 10% of revenue comes from selling pre-configured phones (pg. 56)
    • Measures “Annualized Exit Monthly Recurring Subscriptions” as a key business metric defined as the monthly recurring revenue times 12 at the end of a given month (pg. 58)
    • Believes gross margins will grow as the business grows due to more pricing leverage with telecom costs (pg. 60)
    • Legal settlement costs of $1.1 million (pg. 67)
    • Overall gross margin is 58% (pg. 69)
    • Several patent lawsuits (pg. 88)
    • 399 full-time employees including 89 in China (pg. 105)
    • 1,050 contractors (pg. 105)
    • Co-founder / CEO owns 19.6% of the business (pg. 132)
    • Sequoia Capital owns 17.2% and Khosla Ventures owns 16.7% (pg. 132)

    Public markets love growth and this is a strong growth story. RingCentral won’t receive the same multiple as a SaaS business due to lower gross margins but it’ll trade at a healthy premium regardless.

    What else? What are your thoughts on the RingCentral S-1 IPO filing?

  • Quantifying the SaaS Valuation Growth Rate Multiplier

    We know that Software-as-a-Service (SaaS) companies with a higher growth rate are much more valuable than other SaaS companies with a lower growth rate, all things equal, based on research of publicly traded companies. When looking at the value of a business internally for the purpose of raising money or selling the business, it’s an interesting exercise to quantify just how valuable growth is to the overall valuation of the business.

    Now, making the assumption that gross margins are in the 70% – 80% range, renewal rates are in the 80% – 90% range, and that there’s nothing else abnormal about the business from a SaaS perspective, here’s the proposed formula:

    Valuation = (2*ARR) + (ARR*(1+(GRM*GR)))

    ARR = Annual Recurring Revenue
    GRM = Growth Rate Multiplier = 2.5
    GR = Growth Rate

    So, if growth rate is 0 (e.g. the company isn’t growing), the company is worth two times revenue, which makes sense. Assume a business with 75% gross margins can have profit margins of 33% if it doesn’t invest heavily in sales in marketing. Take the 33% profit margins and multiple by six to roughly approximate the six times EBITDA valuation assigned to an arbitrary business (the common value of a private company is usually 4x – 6x profits). With .33 (for 33%) times six, you get a business value of two times revenue (e.g. .33 * 6 = 2).

    Here are some more examples with growth rates:

    • $300,000 annual recurring revenue
      100% growth rate
      Valuation = (2 * 300,000) + (300,000 * (1 + (2.5 * 1) = 600,000 + 1,050,000 = $1.65 million
    • $1,000,000 annual recurring revenue
      50% growth rate
      Valuation = (2 * 1) + (1 * (1 + (2.5 * .5) = 2 + 2.5 = $4.5 million
    • $1,000,000 annual recurring revenue
      200% growth rate
      Valuation = (2 * 1) + (1 * (1 + (2.5 * 2) = 2 + 8 = $8 million
    • $5,000,000 annual recurring revenue
      100% growth rate
      Valuation = (2 * 5) + (5 * (1 + (2.5 * 1) = 2 + 8 = $27.5 million

    Of course, these are the theoretical valuations for a strategic buyer or an investor with preferred shares. For a shareholder with common shares, there would be a 50% discount for lack of liquidity and other issues related to not having control. In the end, growth rates drive SaaS valuations and (2*ARR) + (ARR*(1+(GRM*GR))) is an example to think through a valuation.

    What else? What are your thoughts on quantifying the SaaS valuation growth rate multiplier into a simplistic formula?

  • Assessing Achievement of Product / Market Fit

    Yesterday I was talking to an entrepreneur about product / market fit. His startup is making good progress and has a minimum viable product in the hands of a couple friendly, paying customers. After getting an overview of the market opportunity, and digging deeper into the business, the question of assessing product / market fit came up. I asked if every customer so far has found bugs and run into issues. Yes, the friendly customers are happy, but they’ve all run into problems, which is normal.

    So, if a handful of friendly customers are using the product and getting value from it, how do you know when product / market fit has been achieved? Here’s what I recommended:

    • Sign up as many friendly-introduction customers as possible as they are key for helping identify issues, providing feedback, and acting as references for future customers
    • Start acquiring traditional customers that aren’t from warm intros and assess customer engagement (daily active users, breadth and depth of module usage, etc)
    • Calculate the net promoter score for both your friendlies and your traditional customers
    • Look for a pattern of 10+ new customers signing on to the system, receiving significant value, and not encountering any bugs or problems

    Product / market fit doesn’t happen immediately, but by paying attention to context clues it’ll gradually emerge that fit has been achieved and it’s time for stage 2 (building a repeatable customer acquisition machine).

    What else? What are your thoughts on assessing achievement of product / market fit?

  • Local Angel / VC Investing for Returns or as Civic Duty

    A few days ago I was part of a number of discussions around angel / VC investing and supporting local entrepreneurs. One of the recurring themes was between the desire to generate risk-adjusted returns vs investing as a civic duty to help grow the local economy with an understanding that returns might not be strong.

    Here are a few ideas on angel / VC investing for returns vs civic duty:

    • Generating market-rate returns with angel investing, regardless of scale, is difficult
    • One idea is to do a fund of funds where money is invested in angel funds as well as VC funds to diversify the money by spreading it across a much larger number of investments
    • Local economies with successful startups benefit from more high paying jobs, diversification of employment base, and wealth creation
    • Foundations, which usually can’t invest in startups with their grant making money, can invest their endowments in funds, which could be locally focused

    There’s no clear answer as it’s up to the goals of the investor. Regardless, investment returns and civic duty should be allowed parts of the conversation.

    What else? What are your thoughts on local angel / VC investing for returns or as civic duty?