David Cummings on Startups

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  • 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?

  • Growth Drives Value for SaaS Companies

    Software-as-a-Service (SaaS) is hot. White hot. In fact, it’s been hot for several years now. Marketo, which IPO’d recently, now has a market capitalization of $1.23 billion (NASDAQ:MKTO), even after Salesforce.com bought ExactTarget / Pardot. With Marketo’s most recent quarterly revenue results of $22.5 million (extrapolated to $90 million annually), the stock is now trading at north of 13x revenue (not counting assets and liabilities). The big driver of SaaS value is growth and with a 62% growth rate, the market loves Marketo. Is the stock overvalued in the short-term? Absolutely. Long-term? No, as long as it can keep its growth rate up for several more years and withstand Salesforce.com’s entrance into the market.

    Now, let’s look at NetSuite. NetSuite is at its all-time high with a market capitalization of $7.35 billion (NYSE:N). Based on last quarter’s revenue of $101 million, extrapolated to $404 million annually, the stock is trading at north of 18x revenue (not counting assets and liabilities). Take out a few turns of the multiple for the Oracle premium on NetSuite, and you still have a massive multiple. What gives? NetSuite grew 35% year-over-year and shows no signs of slowing down. The markets love growth.

    As long as the leading SaaS companies continue to post impressive growth rates, look for a market premium unlike many other industries. SaaS entrepreneurs take note: growth rates drive valuation.

    What else? How long do you think the leading SaaS companies will continue to get a large premium for growth?

  • Comparing the Commercial Real Estate and Software Businesses

    For years I had wanted to buy a building for my company but it never made sense. Owning a building for a startup is like buying a fish tank for a goldfish — it’ll grow to the optimal size for the tank and no more. Startups, by their very nature, are growth-focused (see PG’s essay Startup = Growth), thus size and lease terms need to be as flexible as possible.

    Now that I’ve been in the commercial real estate business for six months with the Atlanta Tech Village, I have a few initial thoughts on how it differs from the software business. Here goes:

    • Software has infinite inventory and little marginal cost for each additional sale while commercial real estate is extremely fixed both in available space and costs
    • Real estate has many more nuances and opportunities related to depreciation, tax credits, and other items that you can tell lobbyists help put in place (e.g. put in cheap and expensive lights in the same room as a workaround so you can depreciate the more expensive ones significantly faster)
    • People-wise, commercial real estate is more fun due to the in-person customer relationships compared to software, which is mostly virtual
    • Software is much riskier with the opportunity to go out of business or go big much more likely than commercial real estate

    Overall, commercial real estate has been more fun than I expected, but in the end, I enjoy software more.

    What else? What are some other thoughts comparing the commercial real estate and software businesses?

  • Startups Need to Cross-10 Out of the Gate

    PandoDaily has a new post up today titled Seven dirty, gritty, real startup lessons that cost me $2 million by entrepreneur Pablo Fuentes where he offers some solid advice. My favorite of the seven ideas is that of Cross-10. Cross-10 is pretty straightforward: manually deliver the value of your product to 10 different customers by hand. For example, if you want to build software to do text message marketing for small businesses, get 10 small businesses to pay you to do a campaign manually on their behalf before you jump in and start building a product. As Steve Blank likes to say, get out of the building.

    Here are a few ideas around the benefits of Cross-10:

    • Getting a prospect to pay to money is incredibly hard, so doing it before product development helps improve the likelihood of success
    • It’s never too early to solicit input from potential customers
    • Most entrepreneurs build a product in a vacuum and fail (see my failure with eCrowds)
    • Sales and marketing is often more difficult and expensive than engineering, so start with the toughest thing first

    The goal of Cross-10 is to find out if the dogs will eat the dogfood before you’ve invested significant time and energy in a product. When you’re going to jump in and start your next venture, do Cross-10 right out of the gate.

    What else? What are your thoughts on startups doing Cross-10 as their first task?

  • Tech100 Talent Idea: $100k Salaries for Top 100 GA Tech Undergrads

    A few months ago I heard that somewhere in the neighborhood of 55% GA Tech graduates stay and work in Atlanta within five years of graduation. Now, that might sound like a solid number, but that leaves a tremendous amount of talent that moves out of Atlanta and adds to the talent pool of other cities. Combine the talent from GA Tech with the desire to get more GA Tech students involved in startups, and there’s a big opportunity for Atlanta.

    Here’s a modest proposal: provide $100,000 salary job offers to the top 100 engineering and computer science majors each year to work for a startup in Atlanta. Call it the Tech100.

    Of course, it’s more complicated than that. Let’s look at a few of the potential details:

    • The top 100 undergraduate students would be defined by GPA (e.g. if there are 20 different majors, it would be for the top five students in each major). Yes, there are other things to look at besides GPA, but that’s an easy place to start.
    • Many of the top students will go on to grad school or professional school, and aren’t interested in working, significantly reducing the number of students to which this applies
    • Current entry-level technical people make $55,000 – $70,000 in Atlanta as software engineers, sales engineers, technical project managers, etc, so there’s a $35k gap between $65k and $100k
    • Something like the excellent Orr Entrepreneurial Fellowship found in Indiana would have to be created to subsidize the salary difference for startups between market-rate salaries and the $100k salary along with a management training-like program where the Tech100 meet regularly, listen to guest speakers, and gain exposure to everything Atlanta has to offer.
    • Timing wise, it would be a two year program with a celebration at the end and the goal that these talented engineers would stay in the entrepreneurial community and make a lasting impact on Atlanta
    • As for costs, assume there’s room for 20 people per year, so $700,000 in direct salary cost plus a few hundred grand to run the program, for a total of $1 million per year. Add it a second cohort since there would be two running at any given time and you’d need an annual budget of $1.7 million

    The Tech100 would add 20 new talented people to the Atlanta startup community each year, who would then become many of Atlanta’s future technical and entrepreneurial leaders.

    What else? What are your thoughts on the Tech100?