David Cummings on Startups

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  • 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?

  • 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?