David Cummings on Startups

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  • Investors and Entrepreneurs aren’t Always Aligned

    Last week I was talking to an entrepreneur that was lamenting how they weren’t aligned with one of their investors, and it was causing serious challenges. It isn’t that they didn’t have a good working relationship — they have a decent relationship — it’s that the nuances of their equity, compensation, timelines, etc don’t match up.

    Here are a few items that can result in misalignment:

    • Vesting – When raising money, investors often require entrepreneurs to have some or all of their shares vest over a period of time, usually four years. This becomes a challenge if an acquirer comes forward to buy the business before vesting is done. Sometimes the acquirer wants the vesting to continue, or even extended, as part of the acquisition (accelerated vesting on change of control is something an entrepreneur can negotiate for at time of investment).
    • Timeline – Venture funds usually have an investing period of five years and a harvesting period of 2 – 5 years, such that a startup might be doing really well, but it’s the end of the fund’s life, and the investor wants to sell but the entrepreneur doesn’t.
    • Follow on Money – If a startup has a down round, or needs a bridge round on unfavorable terms, there’s a good chance the entrepreneurs get crammed down, resulting in a more difficult situation going forward.

    Even with the best intentions, investors and entrepreneurs aren’t always aligned. It’s important to keep communicating and pushing forward.

    What else? What are some other examples where investors and entrepreneurs aren’t aligned?

  • Digital Display Disruption with Android Sticks / Beyond Google Chromecast

    Yesterday I tried out the new Google Chromecast for the first time. For a $35 device, it packs a ton of power and is really useful. AirPlay via AppleTV is still much more flexible since the whole desktop display is broadcast wirelessly to the screen, but transmitting a browser window inside Google Chrome meets most of the needs in the market (as well as the custom apps like Netflix).

    I think the bigger transformational shift will come when there’s a small Android computer that plugs into any standard HDMI port, like a TV, so that you have the full computer attached to the screen. Dell is working on this now with the Project Ophelia $100 Android stick. Connecting a computer to a TV is possible now with Mac Mini or a little PC, but it’s cumbersome to maintain and configure.

    With the advent of a $100 Android stick, we’ll see more digital displays. Think of some of the common scenarios:

    • Metrics / KPI dashboards
    • Competitive leaderboards
    • Digital billboards
    • Restaurant menus
    • News / events / alerts

    Better, faster, cheaper — the digital display market is ripe for change and tiny, self-contained computers will be the catalyst.

    What else? What are your thoughts on the coming digital display disruption with Android sticks?

  • Atlanta Companies on the 2013 Inc. 500

    I love this time of year. It’s when Inc. magazine publishes the latest Inc. 500 for the 500 fastest growing companies in the United States. Hannon Hill was #247 in 2007 and Pardot was #172 in 2012.

    Here are the Atlanta companies on the 2013 Inc. 500 list:

    • #31 – Innovolt, $8 million (profile)
    • #64 – GSC Packaging, $112.6 million (profile)
    • #117 – Green Box Foods, $251.1 million (profile)
    • #142 – Cloud Sherpas, $75.3 million (profile)
    • #170 – TracePoint Computing, $4.9 million (profile)
    • #193 – S2Verify, $4.4 million (profile)
    • #237 – Xtreme Solutions, $8.6 million (profile)
    • #303 – Caduceus Healthcare, $4.1 million (profile)
    • #324 – MiLend, $14.2 million (profile)
    • #351 – Configero, $2.2 million (profile)
    • #364 – ClearLeap, $5.5 million (profile)
    • #404 – PalmerHouse Properties, $7.2 million (profile)
    • #428 – Careers in Transition, $5.3 million (profile)
    • #430 – VDart, $20.7 million (profile)
    • #440 – RePay, $12.8 million (profile)
    • #447 – StandBy Talent Staffing Services, $2.3 million (profile)
    • #470 – Mom Corps, $16.2 million (profile)
    • #479 – Hicks & Clark, $2.3 million (profile)

    Based on the list, 18 of the 500 fastest growing companies are in Atlanta. Congratulations to all the winners — great work!

    What else? What are your thoughts on the 2013 Inc. 500 award winners?

  • How it Works as an Investor in a Venture Fund

    With a great deal of focus on entrepreneurs raising money from venture capitalists, it’s important to step back and look at how it works to be an investor in a venture fund.

    Here’s how it works as an investor in a venture fund:

    • Venture capitalists can’t (yet) publicly advertise to solicit money so it’s done as a traditional sales process through the usual channels like warm introductions, cold calls, and emails
    • When an investor commits to invest in a fund there’s substantial paperwork to become a limited partner, especially regarding the type of accredited investor
    • Money committed to the fund by the limited partner, say $250,000, is requested in increments via capital calls over the life of the fund (typically 5 – 7 years)
    • Capital calls are usually once or twice a year, depending on frequency and size of investments as well as credit facilities (venture funds can usually borrow a limited amount of money to fund a deal while they wait for money from capital calls to come in)
    • Money committed by the investor isn’t always paid in if the fund has one or more exits early in the life of the fund as the money generated via the sale of a portfolio company can be used for future investments
    • Money invested in the fund is illiquid for the life of the fund until there are exits or dividends (rare)
    • Ultimately, the goal is to be completely done with the fund after 10 years, but some go on much longer than that

    As you can see, investing in a fund is very different from investing in the public markets. In return for a lack of liquidity for an extremely long period of time, the goal is to receive returns that are greater than and uncorrelated with the public markets.

    What else? What are some other thoughts on how it works to be an investor in a venture fund?

  • Big Numerical Goals for the Atlanta Startup Community

    Allen Nance tossed out some new ideas for the Atlanta startup community yesterday and John Melonakos followed it up with his thoughts on each of Allen’s ideas. Combine that with the Twitterverse commentary and comments on each of the posts and there’s been some healthy dialogue.

    To complement Allen’s post, I’d like to offer up some big numerical goals for the Atlanta startup community:

    • $1,000,000,000 of annual VC investment in the state
      According to the NVCA, VCs invested $383 million in GA in 2011 leaving tremendous room for increased investment and involvement in Georgia.
    • 1,000,000 square feet of startup-friendly office space
      Between the Atlanta Tech Village, ATDC, Hypepotamus, and others, Atlanta has about 150,000 square feet of startup-friendly office space. With a goal of one million square feet, the idea isn’t to have a big number for bragging rights, rather it’s to have much greater density of startups for serendipitous interactions.
    • 10 growth-stage startups on the annual Inc. 500
      In a good year Atlanta will have two tech startups on the annual Inc. 500 list of the fastest 500 growing private companies in the U.S. There’s no reason 10 isn’t achievable on a regular basis once the Atlanta startup community matures.
    • 1 eight or nine figure exit per month
      Currently, there’s about one eight or nine figure exit per quarter reported, so there’s probably one or two more that happen but aren’t reported. With a much larger, stronger community, one solid exit per month is attainable.

    Of course, this is in addition to Atlanta having 1,000 active startups at any given time. Atlanta has tremendous opportunities ahead and I’m excited to be involved.

    What else? What are some other big numerical goals for the Atlanta startup community?

  • 10 Ideal Customers are More Important than 30 Random Customers

    Earlier this week I was talking to founders of a local startup about finding product / market fit (stage 1). They had a minimum viable product that was rapidly approaching minimum respectable product but didn’t have any active users yet. We were talking through goals for the next six months and it was emphasized to me that they were going to do everything in their power to sign up 30 paying customers.

    After hearing the customer goal, I emphasized that signing 10 customers that fit their ideal customer profile was more important than signing a large number of random customers in the near-term. Here are a few reasons why quality is more important than quantity at the earliest of stages:

    • Customers will always ask for product enhancements, so it’s key that requests align with the entrepreneur’s vision of the future
    • Signing non-ideal customers is fine as long as you are prepared to say ‘no’ to feature requests that don’t fit the vision
    • Live customers represent oxygen for the product, so clean air is better than the alternative
    • Ideal customers are going to be happier customers and happier customers are going to provide testimonials as well as references for future customers

    Of course, some customers are better than no customers. As co-founders working hard to find product / market fit, it’s critical to bring on ideal customers as well.

    What else? What are your thoughts on focusing on signing ideal customers instead of random customers at the beginning of a startup?

  • Product Reports in Board Decks as Importance Indicator

    It was four years into the life of Pardot and I was talking to a local venture capitalist I didn’t know too well. The conversation went something like this:

    Me: Hey, how are things going?

    VC: Great, I was at a board meeting earlier today and Pardot kept coming up.

    Me: Pardot? What was the context?

    VC: Well, it’s completely transformed our sales and marketing. Everyone keeps referring to it. In fact, Pardot reports are now part of every board deck.

    Me: Wow, that’s great. Please let me know if I can ever help with anything.

    Of course, it’s flattering to hear a compliment about a product. What really excited me is that the product’s reports were so critical to the business that they were included in the package of materials supplied to the board of directors at every meeting.

    In the continuum of minimal importance to maximum importance, product reports that are used as part of board meetings indicate high product importance. Products can be important and have nothing to do with board decks but product reports found in board decks almost always indicate an important product.

    What else? What are your thoughts on board reports as an indicator of product importance?

  • Notes from the Benefitfocus S-1 IPO Filing

    Benefitfocus, a technology-enabled business services company in Charleston, SC, just filed their S-1 to go public. I enjoy reading these documents from technology companies due to all the detailed information. In this case, it’s especially interesting as the company is based in the Southeast, which doesn’t happen that often.

    Here are some notes on the Benefitfocus S-1 IPO filing:

    • Provider of cloud-based benefits software solutions for consumers, employers, insurance carriers, and brokers (pg. 1)
    • Two target markets: insurance companies and employers with over 1,000 employees (pg. 1)
    • 823 employees (pg. 2)
    • Employer benefits (pg. 2):
      – Simplify benefits enrollment
      – Transition to defined contribution benefits model
      – Reduce cost and increase ROI
      – Attract, retain, and motivate employees
      – Streamline HR processes
      – Integrate seamlessly with other related systems
    • Revenue (pg. 8):
      – 2010 – $67.1M
      – 2011 – $68.8M
      – 2012 – $81.7M
      – 2013 1H – $48.2M
    • Losses (pg. 8):
      – 2010 – $2.4M
      – 2011 – $14.9M
      – 2012 – $14.7M
      – 2013 1H – $15.2M
    • Average sales cycle for employers is four months and for insurance carriers is 15 months (pg. 18)
    • 10 largest customers account for 58.6% of revenue in 2012 (pg. 16)
    • Benefitfocus is a controlled subsidiary of The Goldman Sachs Group (pg. 29)
    • Accumulated deficit of $186.5M (pg. 41)
    • Goldman Sachs spent $105.7M in 2007 to buy what is now 66% of the business (pg. 124)
    • Oak Investment Partners bought $30M of equity from the two founders in 2010 representing 11.5% of the business (pg. 124)
    • The two founders own the Benefitfocus headquarters building and had the company sign a 15 year lease with an aggregate of $47.8M in lease payments (pg. 126)
    • Executive Chairman owns a jet charter business and Benefitfocus spent $400,000 on chartered jets through it over the past three years (pg. 126)
    • The two founders own roughly 13% each of the company (pg. 131)

    This is the popular Software-as-a-Service story: fast growth, high gross margins, and a big market. I believe the stock will do well and the public markets are happy to fund massive losses as long as growth is there. I’m looking forward to watching Benefitfocus go public.

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

  • Measuring the Number of Active Startups in Atlanta

    After yesterday’s post on the Number of Startups for Atlanta to be a Top 10 Startup City, I received the ideal response back from the community: let’s track them. Startup Atlanta is working on putting a program together to do just that. Startups, unlike something more common (e.g. restaurants), are more difficult to track. So, how do we measure the number of active startups in Atlanta?

    Here are a few ideas to measure active startups in Atlanta:

    • Provide a public, community-editable Wiki powered by Google Sites or SquareSpace
    • Track specific metrics like founders, number of employees in LinkedIn, amount of money raised (if applicable), names of investors, names of advisors, etc (or link back to CrunchBase and make sure CrunchBase is kept current)
    • Decide on a common definition of a startup e.g. a business with a proprietary product focused on growth
    • Create standards for what’s an active vs inactive startup e.g. at least one, full-time person is dedicated to the business
    • Coordinate with local events in town like meetups, networking groups, etc to get the names of startups that attended to cross reference
    • Use the list of companies from startup community centers like ATDC and the Atlanta Tech Village

    Measuring both the number of active startups and their progress helps us understand how we’re doing as a city as well as how we’re tracking against our goals.

    What else? What are your thoughts on measuring the number of active startups in Atlanta?

  • Number of Startups for Atlanta to be a Top 10 Startup City

    Thinking about Atlanta over the next 10 years, we’ve talked about the goal of making it a top 10 startup city in the U.S. When thinking about the context of a top 10 city, it’s naturally derived by stack ranking it against other cities in terms of money raised, dollar amount of exits, etc. Of course, we don’t know where other cities will be in 10 years, so it’s also a moving target.

    As an exercise for today, let’s guess regarding the number of startups for Atlanta to be a top 10 startup city.

    Number of Startups

    With ATDC having 300+ member companies and the Atlanta Tech Village having 100+, there’s likely 2-3x that number of startups in the rest of the city. So, if we take 400 startups and multiply it by 2.5x we get 1,000 startups in Atlanta. Adding the requirement that the startup has to have at least one full-time person actively working on the venture to qualify, that number is probably cut in half to 500. To be a top 10 startup city in 10 years, it’s likely that Atlanta needs 1,000 living startups.

    Net of churn, we need to add 50 active startups per year. Is that doable? Absolutely. With the thousands of startup employees in Atlanta between the main clusters alone like internet security, marketing software, mobile device management, logistics, health IT, etc, we’ll easily have 100+ new ventures per year (assume 10% die each year, so the number of new ventures required will also grow each year).

    From a talent perspective, we already have tons of amazing people in Atlanta and many more are moving to the city on a daily basis. At Pardot, the vast majority of our 100+ people had never been involved in a startup before, meaning that the right talent is already here that can shift from being in the non startup workforce to being in the startup workforce.

    There’s no right number of startups to shoot for but I believe 1,000 active startups is a noble goal that we can work backward from and start tracking against.

    What else? What are your thoughts on the number of active startups needed to be a top 10 startup city?