David Cummings on Startups

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  • 5 Quick Steps to Go from Product / Market Fit Focused to Customer Acquisition Focused

    In a simplistic form, I view the first one to two years of a startup as building a fairly basic product and constantly refining it until it uniquely meets the needs of a target group of customers. Once it’s providing real value to 10+ paying customers, then it’s time for phase two: building a customer acquisition machine. It’s hard enough making it from phase one to phase two that many entrepreneurs don’t even realize they need to shift their focus once they’ve found product/market fit to building a repeatable customer acquisition process. Working on the product, talking to existing customers, and refining what’s in place comes much more naturally to most entrepreneurs compared to obsessing over how to acquire substantially more customers every quarter.

    Here are five quick steps to go from product / market fit focused to customer acquisition focused:

    1. Decide that at least 10+ paying customers represent a good cross section of the desired target market and that the product is providing real sustainable value (e.g. you’re ready to transition from phase one to phase two)
    2. Plan to go from spending 80% of your time and focus on the product to 80% of your time and focus on learning sales and marketing to build a customer acquisition machine
    3. Read 10 blog posts per day on sales and marketing and try out at least one new sales and marketing experiment each week
    4. Interview five entrepreneurs that have made the jump from phase one to phase two and have built both a great product and a great repeatable sales process
    5. Talk to the 10+ representative customers and find out what websites they visit, what trade shows they attend, and any other ideas on how to find similar people and organizations

    Overall, the biggest takeaway is that there has to be a serious shift on the entrepreneur’s part going from product / market fit focused to customer acquisition focused. Lack of customers, and the resulting revenue, is the number one reason startups fail (no revenue = no business). Assuming there’s a good market out there, building a customer acquisition machine after finding product / market fit is the difference between success and failure.

    What else? What are your thoughts on these five steps to go from focusing on product / market fit to focusing on building a customer acquisition machine?

  • Doers and Ideators as Entrepreneur Archetypes

    Earlier today I was talking to a successful entrepreneur and we got into detail about our backgrounds. At one point he offered up that he was a doer entrepreneur and not an ideator entrepreneur. When presented with a challenge or opportunity he plows right through it, but coming up with new products or business ideas isn’t his thing. He values the ideas founder while realizing he’s better off playing to his strength as a doer.

    Now, entrepreneurs in general are doers and love to get stuff done. Some ideator entrepreneurs are more head-in-the-clouds type people that are always dreaming up the next scheme, and for them they either need to turn on the doer switch or partner up with someone else that’s got more doer and less ideator in them. Either way, the world needs all types.

    For those interested in entrepreneur interviews, Michael Tavani has a great series of videos online called On Doers at ondoers.com. Tavani clearly understands the doer nature of founders and is great at asking sharp questions.

    The next time you talk to an entrepreneur, dig in and find out their archetype — are they more doer or ideator.

    What else? What are your thoughts on differentiating entrepreneurs as doers and ideators?

  • 1,500 Blog Posts

    Yesterday was a big milestone for this blog: post number 1,500. It’s crazy to think that a few short years ago I hit publish on the first post and slowly started documenting my thoughts on entrepreneurship and startups. Now, on a daily basis, over 10,000 people get the content. For the first couple years, most of the writing consisted of little “how to” guides and tactical information. Lately, the topics have been more big picture items, more philosophical in nature, and more community oriented.

    One of the best parts about writing a blog is feedback and comments from readers. Readers provide great insight, ask hard questions, and help me better understand topics. So, to the readers out there, and the startup community at large, thank you.

    What else? What are some ways you get value from this blog and what topics would you like covered?

  • Buy Equity in Your Startup or Loan it Money?

    Most information on bootstrapping and self-funding a startup revolves around capitalizing the business by buying equity (e.g. you and a cofounder each put in $5,000 to start it). I know one entrepreneur that insists on loaning his business money instead of buying equity in it (after an initial nominal amount).

    Here are some ideas on loaning your startup money instead of buying equity:

    • Money loaned is easier to be reimbursed, assuming the business does well, compared to the effort of having the business buy back equity (e.g. it’s easier to get your money back)
    • If other shareholders are involved, it’s easier to decide on a loan interest rate rather than an equity valuation
    • If other shareholders are involved, and a loan is in place, interest on the loan takes precedence over dividends, thereby providing an income stream to the shareholder that loaned the money, in addition to being a more capital efficient option (equity is always considered more expensive than a loan when it comes to what shareholders have to give up)

    Loaning money in lieu of buying more equity only makes sense if you’re comfortable with the ownership position (e.g. you own a good percentage of the equity or you don’t want to reduce the incentives of the other shareholders by diluting them too far) and are willing to take on more risk without a requisite increase in possible return.

    What else? What are your thoughts on buying equity in your own startup vs loaning it money?

  • Entrepreneurs Giving Back to Help Other Entrepreneurs

    Entrepreneurs have always had a history of giving back to society and other entrepreneurs. Step into any public library in America and there’s a good chance it was initiated by the entrepreneur Andrew Carnegie (2,509 libraries). Step into the Georgia Aquarium, the largest in the world, and know that it came from a $250 million donation via Bernie Marcus, the cofounder of Home Depot. Step into an entrepreneurship program and there’s a good chance it is from or influenced by the Kauffman Foundation, a multi-billion dollar foundation dedicated to fostering entrepreneurship.

    With more societal focus on social entrepreneurship, initiatives like the Giving Pledge where billionaires give away at least half their fortune, and more focus on small businesses as the net new job creators in the country, we’re going to see even more entrepreneurs giving back to help others, especially other entrepreneurs.

    Here are some examples I’ve seen of entrepreneurs giving back to help other entrepreneurs:

    • At the ATDC and Flashpoint, there are always a number of volunteer entrepreneur mentors available
    • The Nashville Entrepreneur Center is getting ready to open after raising $5 million from public and private groups, including many entrepreneurs
    • The Greenville Next Innovation Center came about from a small group of entrepreneurs that wanted a facility to be around each other and to help future entrepreneurs
    • Members of EO Accelerator are mentored by EO members and consistently say that’s one of the best parts of the program

    I expect entrepreneurs giving back to help other entrepreneurs grow to increase and become more commonplace.

    What else? What are some other examples of entrepreneurs giving back to help other entrepreneurs?

  • Pardot Valuation Milestones and Compounding Growth

    One of the biggest fallacies about last night’s post on Compounding Growth vs Investing Residual is that equity value doesn’t increase at a constant rate over five years. In reality, the valuation of a startup fluctuates dramatically based on internal and external factors, with two of the most common drivers being growth rate and scale for a Software-as-a-Service (SaaS) company (EBITDA is more important for most businesses).

    Let’s take Pardot as an example startup, that while not normal, does demonstrate that growth in company value is not constant and compounding growth is amazing:

    • March 2007 – Personally invest money at a $1.2 million pre-money valuation with only a business idea and a great cofounder (at this point, with a new business, the valuation is often more than it’s worth once it starts generating early revenue since there’s still a gap between reality and the dream of what could be)
    • December 2007 – With a few paying customers and minimal revenue, the value was likely barely more than what it was at founding earlier in the year
    • December 2008 – With about $400,000 in trailing twelve months (TTM) revenue, good progress was being made, but there weren’t any signs of breakthrough success. I’d peg the valuation at $2 – $2.5 million.
    • December 2009 – With about $1.2 million in TTM revenue, great growth rate, and passing the magical seven figures of recurring revenue milestone, the valuation really jumped to somewhere in the $6 – $8 million range.
    • December 2010 – With about $3.2 million in TTM revenue and all the desired metrics of a great SaaS business around gross margins, renewal rate, growth rate, lifetime value of the customer, etc, the valuation continued grow fast to somewhere in the $15 – $18 million range.
    • December 2011 – With about $7.4 million in TTM revenue, growth on a relative basis had slowed but on an absolute basis had still grown, and the business was now past the next magical milestone of $5 million in revenue, and the valuation was likely in the $35 – $45 million range.
    • October 2012 – With about $10 million in TTM revenue, clear separation of the market leaders from the rest of the pack, and absolute and relative growth rates increasing due to significant investment in sales and marketing at the beginning of the year, Pardot was acquired for almost $100 million by ExactTarget.

    In this example, which is purely educated guessing using SaaS revenue as a basis, you can see the valuation not grow much in the first two years, then triple for a couple years in a row, then double yearly until the exit. Here, the amazing power of compounding growth is really at work.

    What else? What are your thoughts on these Pardot valuation milestones and compounding growth?

  • Compounding Growth vs Investing Residual

    Several weeks ago I was talking to a friend that’s thinking about making the entrepreneurial plunge. One of his main concerns was taking a big pay cut, especially when thinking about the bonus he expects to get at the end of this year since the year is going so well. Of course, that’s likely a red flag that he’s not risk-loving enough to dive into something, but you never know.

    When talking about salary, I tried to make the point that compounding growth of equity is far superior to investing the residual of income less tax. I gave him the simple example of $100,000 in equity growing 40% per year vs an extra $100,000 income that you pay taxes on (assume 50% tax rate), then invested and earning 5% per year:

    • Year 1
      Equity -> $140,000
      Savings from Income -> $55,000 based on $50,000 + $5,000 from investing it
    • Year 2
      Equity -> $196,000
      Savings from Income -> $107,750 based on $57,750 + $50,000
    • Year 3
      Equity -> $274,400
      Savings from Income -> $163,137 based on $113,137 + $50,000
    • Year 4
      Equity -> $384,160
      Savings from Income -> $221,293 based on $171,293 + $50,000
    • Year 5
      Equity -> $537,824
      Savings from Income -> $282,358 based on $232,358 + $50,000

    Again, this is example shows taking a $100,000 annual pay cut in exchange for a one-time grant of $100,000 in equity that grows at a rate of 40% per year. Without selling it and paying taxes in year five, the equity is worth almost double the value of saving and investing the residual income each year. Compounding growth is an amazing phenomenon.

    What else? What are some other thoughts on compounding growth vs investing residual?

  • Keep a Google Spreadsheet of Business Ideas

    Some entrepreneurs come up with ideas at a rapid rate while others struggle on the ideation side and are amazing at execution. Regardless of entrepreneur type, there’s a little idea I’m a big fan of: keep an ongoing Google Spreadsheet of business ideas. It could just as well be in Evernote or some other system, but I like Google Spreadsheets for quickly glancing at ideas and sorting them by different categories.

    Here are some situations that are great for generating business ideas:

    • When you’re shopping for a good or service and get price quotes that are significantly higher than what you expected, there could be an opportunity
    • When you find a business problem and can’t find a solution (this is how Pardot came about)
    • When you encounter a business challenge where there are solutions but they aren’t elegant
    • When you see a trend emerging that is clearly going to have a major impact, especially if you’ve seen a pattern before (e.g. analytics are a big deal for web sites and with the rise of mobile apps, analytics wil be a big deal for them as well)

    Yes, keeping a spreadsheet of ideas is common sense, but most people don’t do it. If you are an entrepreneur or want to be an entrepreneur, start recording your ideas now.

    What else? What are some other situations that are great for generating business ideas?

  • Core Values Aren’t a New Concept

    I love talking about core values. You know, the essence of the people in an organization. At the Atlanta Tech Village, we can’t pick good ideas from bad, but we can create an environment that follows these four core values: be nice, dream big, pay it forward, and work hard/play hard. Some people don’t understand the importance of strong core values, and that’s fine. I’ll keep preaching anyway.

    Yesterday I was listening to a colleague tell the story of Mindspring/Earthlink in the early days. The Mindspring founder, Charles Brewer, was fanatical about their core values, and rightly so. Back in 1994, when he started the company, the first thing he did is define the core values, before he even decided the nature of the business! At it’s peak, Mindspring had over 1,000 people, and hired in a way that kept their culture strong and customer service great.

    It took me seven years to appreciate the importance of strong core values. In retrospect, core values aren’t a new concept and I just needed to experience things not working to feel the pain and search for a solution. Well, for the entrepreneurs in the audience, core values are a proven concept and they really matter. Trust me.

    What else? What are some other examples of companies that have had strong core values for decades?

  • Eat the Dogfood You Serve Customers

    In the book American Icon: Alan Mulally and the Fight to Save Ford Motor Company (referred to me by a talented local entrepreneur), Mulally was mentioned as commenting how the Ford headquarters executive parking lot was filled with Jaguars and Range Rovers when he started as company CEO. Ford owned those brands at the time, but they were a small product line and not core to the business. Ford executives weren’t eating the dogfood they made for their customers.

    For the first two years at Pardot we had separate production versions of our product for customers and product demos. The original thinking, which was my fault, was that we needed separate instances so that it would be easy to reset the database to have a consistent sales demo and test drive experience. It was the typical “data in the system will be reset every hour” type demo configuration. Only this proved to be a poor idea since it created more core engineering headaches (the code base had specific checks to see if it was in production or demo) and dev ops headaches (different databases, one had a load balancer and one didn’t, etc). Eventually, the two systems were updated on different schedules with production being a high priority over demo, resulting in demo constantly being behind. We didn’t let the sales team eat the dogfood we served customers and things suffered as a result.

    Only when you’re living with the same experience as your customers can you deliver the best product. For the organization to achieve it’s full potential, it’s critical that you eat your own dogfood.

    What else? What are some other examples of companies not using their own core products or services?