David Cummings on Startups

Blog

  • Startup Community Idea – Weekly Lunch

    Seven years ago we started doing a weekly Friday lunch for our employees as a way to break bread as a team and to get to know each other on a personal level. It worked so well as a small company, we thought to try it out for the entire startup community with the large event space at the Atlanta Tech Village. So, 10 weeks ago we kicked it off with a good turnout and it’s grown ever since. For the last five weeks, we’ve had well over 100 people per week attend and we’ve even branded it as the Startup Chowdown.

    Here are a few notes on the startup community weekly lunch idea:

    • Charge a nominal fee (Startup Chowdown is $10 for people that aren’t a member of ATV) so that people who sign up are more likely to attend as well as to defray some costs
    • Find a sponsor, whenever possible, to pay for the food and drink in exchange for getting to talk for five minutes in front of the group
    • Cater the food and drink to keep the quality high and effort low for the people coordinating the event
    • Provide name tags or badges with different color labels to promote interaction (e.g. random groupings of people based on their badge color to help people meet new people)
    • Make the event open and inclusive but include a strict no solicitation rule so that people aren’t trying to sell during the event

    The weekly Startup Chowdown event is a great low-key way to bring a startup community together and would be successful in many cities.

    What else? What are some other ideas on having a weekly lunch to bring the startup community together?

  • Startup Style – Open Floorplans with No Private Offices

    In two weeks we’re moving into a newly renovated suite in the Atlanta Tech Village with a number of cool features like 12 foot ceilings, exposed duct work, indirect lighting, iPads outside all meeting rooms/phone booth rooms, seven 70 inch LED TVs mounted on the walls, and an open floorplan with no private offices. I’ve been a part of a number of cool, interesting offices but this will be the first time I’ve tried the open floorplan with no private offices.

    Design wise, we’ll have 40 desks total split into two large rooms with 25 and 15 desks respectively. Then, on the interior perimeter of the suite, we have three phone booths (tiny rooms for personal calls, cold calling, web demos, etc), four team rooms that support up to four people per room, and one board room that supports 14+ people. So, seven shared rooms for 40 people. Assuming 12 people are gone on any given day working from home, on vacation, at a trade show, etc. that leaves a ratio of one shared private room per four people, which feels like plenty right now (we can squeeze in more desks in the open floor plan eventually).

    Naturally, there are concerns about noise, personal space, and interruptions. We’ll have high quality white noise machines, sound boards, rollable partitions, and plenty of furniture to help with some of the noise but a loud conversation will still carry throughout the space. Part of the process will be unwinding general tendencies to collaborate right on the spot in the open area and instead move to the one of the break out rooms (the different rooms will be equipped with white board paint and iMacs to enhance their usefulness).

    Open floorplans with no private offices are still rare but slowly growing in popularity, especially in the startup world. It’s a new change for me and I’m looking forward to it.

    What else? What are your thoughts on open floorplans with no private offices?

  • Public Company SaaS Valuations

    Periodically I like to take a quick snapshot of the public company SaaS valuations (see 2012 and 2010). With Marketo having a big IPO last week and ChannelAdvisor just pricing their IPO today, it’s a good time to see where things stand compared to my last SaaS valuations post 13 months ago.

    • salesforce.com (NYSE:CRM) – customer relationship management SaaS company.
      Market cap: $26.82 billion
      Last reported quarter’s revenues: $834.7 million
      Employees: 9,800
    • NetSuite (NYSE:N) – enterprise resource planning (accounting, inventory, etc) SaaS company.
      Market cap: $6.58 billion
      Last reported quarter’s revenues: $91.6 million
      Employees:  1,953
    • Constant Contact (NASDAQ:CTCT) – email marketing for small business SaaS company.
      Market cap: $456.9 million
      Last reported quarter’s revenues: $68.2 million
      Employees: 1,162
    • LogMeIn (NASDAQ:LOGM) – remote machine access SaaS company.
      Market cap: $601.3 million
      Last reported quarter’s revenues: $37.4 million
      Employees: 565
    • LivePerson (NASDAQ:LPSN) – live chat SaaS company.
      Market cap: $505.6 million
      Last reported quarter’s revenues: $42.5 million
      Employees: 748
    • Responsys (NASDAQ:MKTG) – email marketing SaaS company.
      Market cap: $478.8 million
      Last reported quarter’s revenues: $48.5 million
      Employees: 866
    • Demandware (NYSE:DWRE) – ecommerce SaaS company.
      Market cap: $887.5 million
      Last reported quarter’s revenues: $20.5 million
      Employees:  298
    • ExactTarget (NASDAQ:ET) – email marketing SaaS company.
      Market cap: $1.6 billion
      Last reported quarter’s revenues: $88.9 million
      Employees: 1,673
    • Marketo (NASDAQ:MKTO) – marketing automation SaaS company.
      Market cap: $882.8 million
      Last reported quarter’s revenues: $19.7 million
      Employees: 373
    • ServiceNow (NYSE:NOW) – IT asset management SaaS company.
      Market cap: $4.9 billion
      Last reported quarter’s revenues: $85.9 million
      Employees: 1,077
    • Workday (NYSE:WDAY) – HR and financial management SaaS company.
      Market cap: $10.9 billion
      Last reported quarter’s revenues: $81.5 million
      Employees: 1,750

    SaaS shows no signs of slowing down as a growth sector and the market valuations reflect it. Salesforce.com continues to dominate in terms of size and scale with two of the newer entrants, ServiceNow and Workday, having massive revenue multiples and expectations of amazing growth.

    What else? What are some other thoughts on public company SaaS valuations?

  • Key Data from the Last 12 SaaS IPOs

    PandoDaily has a great piece up on how hard it is to build an enterprise Software-as-a-Service (SaaS) business that includes key data from the last 12 SaaS IPOs. Of the 12 SaaS companies, most have been profiled here including Eloqua, Rally Software, ExactTarget, ServiceNow, Marin Software, Marketo, and Bazaarvoice.

    Here are some key takeaways from the article on the last 12 SaaS IPOs:

    • Company Age at IPO: Average of 9.5 years with median of 8 years
    • Rounds of Financing: Average of 4.5
    • Amount Raised: Average of $109 million with median of $75 million
    • Revenue: Average of $71 million with median of $61 million
    • Sales and Marketing Employees: Average of 35% of the workforce
    • Employees: Average of 532 with median of 363
    • Professional Services Revenue Percentage: Average of 20% with median of 17%
    • Compounded Annual Growth Rate: Average of 59% with median of 55%
    • Gross Margin: Average of 65% with a median of 66%

    The moral of the story is that SaaS companies require substantial capital, scale, and growth to have a successful IPO.

    What else? What are some other thoughts on the data from the last 12 SaaS IPOs?

  • Management Tools Should Be Commensurate With Startup Stage

    With so many different management tools like the simplified one page strategic plan, quarterly check-ins, and board decks, it’s easy to spend an inordinate amount of time doing management stuff instead of building the business. Only, too often, I’ve seen management tools not commensurate with startup stage.

    Here are a few thoughts on management tools related to startup stage:

    • Basic management materials should be developed regardless of stage (yes to a business model canvas, no to a business plan)
    • Financials should be fairly simple with a focus on cash and burn rate at first and become progressively more sophisticated as the business matures
    • Board decks should focus on strategic issues with tactical items and standard data review done in advance on the meeting
    • KPIs and goals should always be kept as minimal, measurable, and memorable as possible

    Err on the side of simple and let the sophistication of the management tools grow as the startup grows.

    What else? What are your thoughts on management tools relative to startup stage?

  • Quick Review of Common Term Sheet Items

    Terms sheets are relatively short legal documents that outline the proposed high-level details of an investment or acquisition. Over my career, I’ve been involved in a half-dozen term sheets on both sides of the table. While term sheets can be complicated, they’ve been more standardized over the years with open source legal docs like the Series AA Equity Financing Documents from Y Combinator and the AngelList Docs.

    Here are a few thoughts on common terms:

    • Pre-Money Valuation – This is the value of the company before the investment (so, if $1 million is invested at a pre-money valuation of $2 million, the post-money valuation is $3 million)
    • Liquidation Preference – Investors with a 1x non-participating preferred liquidation preference get their money back or their percentage ownership in the event of a sale vs a 1x participating preferred liquidation where investors get their money back plus their percent ownership of the amount left over (double dip). 1x non-participating preferred is most common for seed stage investments while participating preferred is often used when there’s a discrepancy between the desired valuations of the entrepreneur and investor.
    • Dividends – Similar to interest payments for the preferred shares, these are used to improve returns. Seed and early stage investments don’t typically include a dividend component.
    • Anti-Dilution – If the company raises money in the future at a lower valuation, the previous investors get more shares to account for the new, lower per share price. Weighted average anti-dilution is the most common.
    • Option Pool – With each round of funding, investors often require new equity allocations to the employee stock option pool, usually in the 10 – 15% range. Most importantly, the option pool shuffle comes into play and it’s important to model out the difference of the option pool being formed pre or post investment.

    Now, there are a number of additional items like pro-rata rights, information rights, preemptive rights, registration rights, and more, but they are fairly standard. Term sheets are best reviewed by experienced startup attorneys and not general practitioners.

    What else? What are some other thoughts on the common term sheet items?

  • Consider Investor Involvement When Raising Money

    Money, money, money — that’s the focus when entrepreneurs are raising money. Only, talk to any entrepreneur who’s raised money from multiple investors and he’ll tell you that no two investors are created equal. One area that doesn’t get the requisite level of attention is amount of investor involvement.

    As with anything, the level of involvement varies dramatically. Here are a few thoughts:

    • Many investors take a hands-off approach and don’t add value (the opposite of smart money)
    • Some investors are very collaborative with regular phone calls and even attend weekly staff meetings to help out (reportedly, several of the most successful VCs in the world are on-site at their portfolio companies every week)
    • Certain investors are more top-down and prefer to give direction at board meetings while staying out of the details and minutiae
    • All investors pitch providing introductions and rolodex-related help as one of their value-adds — ask them to help before they invest and test out the value before you buy the whole thing

    Investor involvement is a serious consideration and it’s best to do due diligence before taking money.

    What else? What are some other thoughts on investor involvement when raising money?

  • Atlanta Startups Have a Higher Exit Bar

    In Atlanta there’s an ongoing discussion about the lack of early stage risk capital for startups. One side argues that if more capital is present, more deals will get funded. The other side argues that there aren’t enough talented entrepreneurs yet, and that when the entrepreneurs are here, the money will follow. From my perspective, capital is mobile and entrepreneurs with a good market, team, and idea will be able to get funding, locally or otherwise.

    There’s another tightly related topic that needs more discussion as well: startups in Atlanta and other places outside the major startup centers have a higher bar for an exit. Here are a few thoughts on exits in Atlanta:

    • Historically, 4-6 total tech startups get acquired per year for more than $10 million, meaning it’s a rare occurrence
    • Strategic acquirers, in order to have a new remote office, need to have meaningful scale to be worthwhile (e.g. 50+ employees)
    • Press and PR is harder to come by when bootstrapping or raising limited capital, making awareness by potential acquirers less likely
    • Acqui-hires, regardless of being good or bad, almost never happen

    For a startup, the best approach is to build a successful, sustainable business and not focus on an exit. As for exits, in Atlanta and most other places, the bar for an exit is much higher than expected.

    What else? What are your thoughts on Atlanta startups having a higher exit bar?

  • Marketo IPO Priced

    As a follow up to the Notes from the Marketo S-1 IPO Filing, Marketo priced their IPO at $13/share earlier today. At the $13/share price, Marketo has an enterprise value of $435 million and a market cap of $540 million (the enterprise value plus cash on hand). Of course, the stock is likely to have a nice run up tomorrow when the markets open due to the high demand for fast-growing Software-as-a-Service companies.

    Here are a few thoughts and some speculation:

    • Raising $107 million in venture capital and having an enterprise value of $435 million at time of IPO feels low
    • With an $80 million run rate, and a fast growth rate, my guess is that the stock goes up 20 – 30% tomorrow (~$17/share)
    • Existing investor Battery Ventures bought 500,000 more shares at the IPO price, showing a belief that the stock has significant upside (source)
    • Within 18 months a large tech company will buy the company for north of a billion (e.g. Adobe, Salesforce.com, SAP, etc)

    It’s great to see that Marketo successfully went public and further validated the marketing automation space. I look forward to tracking their progress.

    What else? What are your thoughts on Marketo going public and their future?

  • Entrepreneur Guidelines for Starting a New, Second Company

    Many entrepreneurs love the thrilling of starting something new, and get bored easily. All too often, when talking with entrepreneurs, I hear stories of working on the second or third company, in parallel with the first company. Naturally, entrepreneurs should only focus on one idea and startup at a time, but there are times when a second entrepreneurial itch needs to be scratched.

    Here are some entrepreneur guidelines for starting a second company:

    • Ensure that the first company has achieved your definition of success (my definition of success)
    • Create an environment in the first company where a CEO and/or management team run the business
    • Remove any personal day-to-day responsibilities
    • Say no to all meetings and interruptions for a month to find any weaknesses or deficiencies
    • Focus exclusively on the new venture full-time, with only minimal time allotted for a weekly check-in with the first company

    The vast majority of the time, the first business isn’t independent enough from the entrepreneur for the entrepreneur to successful start a second company. With time, effort, infrastructure, and money, entrepreneurs can make their first business independent such that they can focus on their new, second company.

    What else? What are some other entrepreneur guidelines for starting a new, second company?