David Cummings on Startups

Blog

  • When to Kill an Idea and Move On

    Not all startup ideas work. In fact, most don’t. One of the more difficult things to do is to quickly determine if an idea isn’t going to work and to kill it. Almost always, entrepreneurs wait too long to admit failure and give up. In my post mortem on a failed product, I share a number of mistakes that I made. Of course, I waited at least six months too long to shut down the product.

    Here are a few indicators that it’s time to kill an idea and move on:

    • Repeated customer discovery interviews with no product interest
    • Prospect needs are too inconsistent resulting in no way to productize an offering
    • Personal passion and interest has seriously waned
    • Product value is treated too much as a nice-to-have instead of must-have

    It’s never easy to admit an idea is no longer worth pursuing but each experience provides an opportunity to learn and grow. Most ideas won’t work and it’s critical to find out as soon as possible.

    What else? What are some other indicators that it’s time to kill an idea and move on?

  • Ideas to Promote Entrepreneurship on College Campuses

    Earlier this year I had a chance to give a talk at the Duke Startup Challenge, Duke’s annual $50,000 startup competition. As part of the program, I talked with several students to learn about entrepreneurial initiatives on Duke’s campus. Locally, I’ve been thinking about Georgia Tech and how to get more startup activity on campus (albeit I don’t have a good feel for Georgia Tech since I never attended but I do it as a big opportunity for Atlanta).

    Here are some ideas to promote entrepreneurship on college campuses:

    Infusing startups into the fabric of college life poses a great opportunity for helping our future entrepreneurs.

    What else? What are some other ideas to promote entrepreneurship on college campuses?

  • Ideal Investor Mix for a $300k Seed Round

    With the budgeting for the $300k seed round finished and the equity pre and post financing understood, it’s time to think through the ideal investor mix for the round. Most entrepreneurs just want to raise the money and move past it while others are more strategic about who they want to get involved with their startup.

    To me, the ideal investor mix represents domain experts that you think will be most important over the next 12 – 18 months to both accentuate strengths and shore up weaknesses. Here’s an ideal investor expertise mix for a B2B Software-as-a-Service startup (assume a mix of $25k and $50k investments):

    • Product – someone who understands how to build a scalable SaaS product as well as the intricacies of product management
    • Sales – someone who loves figuring out a sales process and signing the first 10 customers (signing up the first 10 customers is a different skill set than managing a team of 50 sales reps)
    • Marketing – someone who knows SEO, SEM, social, and marketing automation
    • Startups – someone who’s versed in building teams, raising money, and general startup functions

    Other important areas include engineering, services, finance, etc. When raising money, investors like to hear you’ve thought through the types of experts you want as investors and why. There’s no perfect mix of investors but putting together an ideal investor mix makes sense.

    What else? What are your thoughts on the ideal investor mix for a $300k seed round?

  • Equity Pre and Post $300k Seed Round

    Continuing with yesterday’s post on Budgeting for the $300k Seed Round, let’s now look at the equity side of the startup. Some of the biggest components of equity include founder shares, employee shares (restricted stock or stock options), investor shares, and advisor shares. On the investor side, that’s driven by how much money was raised and at what valuation.

    Here’s an example equity structure pre seed round (50/50 split is the easiest but not usually the best way to go):

    • Founder 1 – 50%
    • Founder 2 – 50%

    Now, let’s assume the startup raises $300k at a $1.2 million pre-money valuation, and thus sells 20% of the business ($300k of the $1.5 million post-money valuation is 20%). Add in an employee stock option plan and some advisor shares and we have the pieces ready to model it out:

    • Founder 1 – 32%
    • Founder 2 – 32%
    • Investors – 20%
    • Employee Option Plan – 15%
    • Advisors – 1%

    Notice the option pool equity was taken out of the founders’ equity. Another way to do it is to put in the employee option pool after the funding so that it dilutes the founders and the investors (this is less common). On the financing side, each round of funding will typically dilute everyone that doesn’t participate pro-rata an additional 20 – 30%.

    What else? What are your thoughts on this example equity structure pre and post seed financing?

  • Budgeting for the $300k Seed Round

    So, you’re about to close on a $300k seed round and investors are asking for a first-year budget. Not having started a company before, the $300k number seemed right since other startups were raising a similar amount. Time to allocate the $300k and come up with a plan.

    Here’s an example $300k budget for the first 12 months of a startup:

    • Salaries
      – Two founders with $40k salaries = $80,000
      – Lead engineer @ $70k salary = $70,000
      – Employer taxes = $15,000
    • Benefits
      – High deductible health insurance for the individual only @ $200/month times three people = $7,200
    • Legal
      – Help with closing, operating agreement, and other standard docs = $5,000
    • Domain Name
      – Great domain name = $5,000
    • Design
      – Logo and simple branding = $1,000
    • Office Space
      – Three team members plus an un-paid intern for a total of four people @ $300/month = $14,400
    • Equipment
      – Used MacBook Airs for four people @ $1,000/each = $4,000
    • Web Hosting
      – $1,000/month on Amazon Web Services = $12,000
    • Web Apps (CRM, marketing automation, help desk, accounting, etc)
      – $1,000/month = $12,000

    Adding up each of these items comes to a total of ~$225,000. Thus, the $300k seed round pays for a small team to work 12 months to find product / market fit with a healthy cushion to experiment on more items or stretch the runway out six more months (things always take longer than expected).

    What else? What are your thoughts on this $300k budget and how would you change it?

  • Rise of the Atlanta Startup Bloggers

    There have been a number of solid advancements in the Atlanta startup community over the past few years. Highlights include more success stories, more facilities, and more local founders offering their perspective through regular blog posts. Blogging is great because it provides an individual vantage point on startups, the city, and brings more transparency to other founders.

    Here are some of the regular Atlanta startup bloggers:

    It’s awesome to see so many people contributing to the community and the greater startup eco-system through regular blogging. Keep up the great work!

    What else? What are some other blogs that I missed?

  • Holacracy as the Next Startup Corporate Structure

    Ev Williams, the co-founder of Twitter, has a new company called Medium where there are no managers. This idea of a leaderless organization isn’t new but it’s also far from commonplace. Perhaps the best known organization without managers is Valve Software, which published an amazing employee handbook that describes how it works. FRC Review has a new post up where they outline how it works at Medium without managers using this idea of a Holacracy approach to corporate structure.

    Here are some of the key takeaways for Holacracy from the FRC Review article:

    • No people managers. Maximum autonomy.
    • Organic expansion. When a job gets too big, hire another person.
    • Tension resolution. Identify issues people are facing, write them down, and resolve them systematically.
    • Make everything explicit – from vacation policies to decision makers in each area.
    • Distribute decision-making power and discourage consensus seeking.
    • Eliminate all the extraneous factors that worry people so they can focus on work.

    Instead of top-down, command-and-control structure, everything is composed of nested circles. A circle can be one person that owns some aspect of the business or it can be a group of people that own it. If a Holacratic organization sounds familiar, it’s because it’s a blend of two things I’m a big believer in: results only work environments (ROWE) and the value of autonomy, mastery, and purpose. Only, it takes it one step further and gets rid of the concept of a traditional hierarchy and instead makes it so that circles, composed of one or more people, make any and all decisions.

    Holacracy is a great idea and I’m looking forward to watching it evolve.

    What else? What are your thoughts on Holacracy as a corporate structure?

  • Powerful Perks: Annually Pay for an Industry Conference

    One of the more interesting perks to offer in a growing startup is to provide a stipend for each team member to attend a conference of their choosing once a year. By paying for a conference, it promotes employees learning new things, meeting new people, and gaining exposure to new ideas. It also shows that the company values individuals progressing in their career and advancing their craft.

    Here are a few ideas to keep in mind when offering a paid annual industry conference trip:

    • Budget wise, keep it simple and offer a set allotment like $2,000 to empower the person to take a quality trip to an interesting conference (the goal isn’t to spend all the money but rather to have good options)
    • Consider not having a set budget and simply expensing reasonable costs
    • Make it clear that the money should be treated as if it’s their own and isn’t designed to pay for flying first class and staying at the Ritz Carlton
    • Don’t have the money roll over if it isn’t used as the goal is to annually get away and better one’s craft
    • Don’t require that the conference be perfectly aligned with what the person currently does, but do require that it be at least relevant (e.g. a Java developer might want to attend a Ruby conference to learn more about the language)
    • Don’t put too many rules around the program as it’s important people use it and not feel it’s too much effort

    When evaluating potential perks for a growing startup, consider offering an annual stipend to attend a conference. Team members value the perk and that the company is investing in their future.

    What else? What are your thoughts on the perk of paying for an annual industry conference?

  • Culture First or Find Customers First

    Recently there was a local debate around the importance of corporate culture in the earliest days of seed stage startups. From the debate, there was contention about whether or not a focus on culture at the start was important before the business had many employees and was viable. Put another way, should you spend any time on culture when it could be spent acquiring customers?

    My answer: absolutely, culture matters from the beginning. Culture is more than just the founders and people hired. Yes, the people are the most important part, but culture is reflected in the core values, processes, and the way the company chooses to act. The same exact team with different core values, assuming the values are truly cared about, will act differently because the priorities are different.

    The culture won’t last long if the startup goes out of business but it also won’t be nearly as fun if things are successful and the culture isn’t strong and cohesive. Culture also sets the tone and foundation for the future of the startup. Entrepreneurs should be intentional about culture from the beginning while not using it as a crutch to avoid working on the hard problems to build a sustainable business. As with anything, there’s a balance between working on the business vs in the business.

    What else? What are your thoughts on focusing on culture first or finding customers first?

  • Rise of the $10 Million VC Seed Fund

    With the massive drop in cost to start a tech company, combined with successful VCs raising larger funds requiring bigger investments, there opened up an opportunity in the market for super angel / VC seed funds. In Atlanta alone we’ve seen several new funds within the past 12 months in the $10 million – $20 million range including Mosley Ventures, BIP Early Stage Fund, and Forté Ventures.

    Here are a few characteristics of the $10 million VC seed fund:

    • Sole general partner that makes the decisions and runs the fund
    • Ability to move faster than both angels and traditional VCs since they have committed capital and don’t have a consensus decision making process
    • Invests $200k – $500k and can go up to $2 million
    • Example investment strategy might be 10 $400k investments ($4 million) and six $1 million follow-on investments (it’ll likely be more nuanced with varying levels of initial investment as well as pro-rata participation)
    • Goal to return 3x cash on cash in seven years (e.g. return to investors three times their money after management fees)
    • Management fees in the 2 – 2.5% range (e.g. $10 million fund with a 2.5% management fee would have $250k/year to pay for salaries, office space, expenses, etc)

    The model makes sense and I’m optimistic that it’ll play out well. In the end, it’s about entrepreneurs building great companies, and more funds with money to invest in the riskiest of stages will only help.

    What else? What are your thoughts on the rise of the $10 million VC seed fund?