David Cummings on Startups

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  • 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?

  • Entrepreneur Acquisition Interest Anxiety

    So, you’re cruising along, growing your company at a nice clip, and an email pops in your inbox with a vague subject line saying “Potential Interest.” Normally, you’d immediately delete the email but out of curiosity you open it and read the contents. It’s from a corporate development person at a potential acquirer asking to set up a conference call. With a big smile on your face, you quickly reply back saying that sounds great and proposing a few times to talk.

    The initial call goes well. Now, there’s a request to come on site for a few hours and talk more. After the first in-person meeting, things start to get serious. A request is made to visit the exec team of the potential acquirers at their headquarters and, if it goes well, a formal acquisition offer will be issued.

    As an entrepreneur, especially an entrepreneur that hasn’t gone through an exit, this process is filled with incredible anxiety. When a potential acquirer comes knocking, most entrepreneurs start seeing dollar signs in their eyes. It’s human nature to dream about all the different scenarios, possibilities, and, of course, valuation. The challenge is that you still have a business to run and there aren’t many people you can talk about it with. More anxiety.

    Here are a few recommendations when you run into the acquisition interest anxiety zone:

    • Remember that most acquisition encounters don’t turn into anything
    • Run your business as if a deal isn’t going to happen
    • Never go out and buy anything until after the deal has been signed, and even then wait a few months to let things settle in (I heard of a guy going out and buying a Bentley the day before he was to sign the closing documents the afternoon of September 11, 2001, and the deal fell through)
    • Find something to distract you during your personal time so that you don’t keep replaying everything over and over in your head (e.g. go on more walks, do yard work, etc)
    • Seek out a trusted advisor or peer group and use them as a sounding board
    • Write out everything you can think of related to deal terms, cash, stock, etc at the earliest signs of acquisition interest, so that when things get more emotional and heated, you’ve already grounded yourself when you had a clear head (this is especially important to do with your cofounder)

    The acquisition dance is fraught with anxiety. Make sure you have a peer group like EO or YPO to be a sounding board and continue growing your business as if a deal wasn’t going to happen.

    What else? What are some other thoughts around entrepreneur acquisition interest anxiety?

  • Wouldn’t it be cool if…

    Recently I was talking to an entrepreneur about a conference he’d attended in Chicago. After hearing some of the event details I asked about his biggest takeaway. He said that one of the speakers had a “wouldn’t it be cool if…” program at his startup where he’d solicit ideas from team members as well as present his own on a weekly basis at their all hands meeting. Every week, five “wouldn’t it be cool if…” ideas had to be presented.

    Sure, anyone can ask for ideas, but the key for “wouldn’t it be cool if…” is to ingrain trying new things into the core of the culture. Most companies are risk averse, and as the business grows and scales, risk aversion grows as well. Every day team members come up with new ideas to change and improve things, but without the right ethos, many ideas are never shared. Incorporate a “wouldn’t it be cool if…” program and increase idea sharing.

    What else? What are your thoughts on using the phrase “wouldn’t it be cool if…” more frequently as a preface to sharing ideas?

  • Atlanta Tech Village as Instant Community

    Recently I was talking to an entrepreneur that was excited about moving into the Atlanta Tech Village. Me being naturally curious, I asked the entrepreneur what made it so exciting. Immediately, the entrepreneur said that it provided instant community for their employees. I probed deeper and quickly found that by having a small number of employees, it’s hard to have a critical mass to do programs, events, and build community.

    Here are examples of instant community at the Atlanta Tech Village:

    • Weekly Friday lunches at Startup Chowdown
    • Running club
    • Weekly huddle groups for subjects like sales, marketing, and software engineering
    • Frequent happy hours
    • Regular office hours with subject matter experts
    • Multiple events and programs each week

    The idea is that when you join a larger company, there are so many people and resources that help create community. Startups don’t have the same luxury, until now — Atlanta Tech Village provides an instant community.

    What else? What are your thoughts on an instant community for startups?

  • Finding Your Focus

    One of the biggest challenges for entrepreneurs is finding their focus. Entrepreneurs, by their very nature, are full of ideas and energy, which works well to get things going, but can be a liability as the organization grows.

    Two weeks ago I was talking to an entrepreneur that had built a small business in a hot market but didn’t have the kind of growth that would be expected based on the success of several competitors. Tactfully, I asked him about this and he immediately chalked it up to trying to be all things to all people. Put more simply, he didn’t find his focus.

    We’ve all read stories of entrepreneur CEOs asked or pushed aside to be replaced by a professional CEO. Typically, if they don’t leave their company, they often become head of their area of expertise e.g. technical, marketing, etc. This act of going from CEO to department leader is a focus forcing function.

    The next time you are considering a new idea for your business, ask if it is increasing or decreasing focus. Activities increasing focus should happen with much great frequency than activities decreasing focus.

    What else? What are your thoughts on entrepreneurs finding their focus?