David Cummings on Startups

Blog

  • 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?

  • Heavy Startup: The Lean Startup’s Alter Ego

    The lean startup methodology is great and deserves the most attention. As contrasting to the lean startup, there’s the traditional heavy startup with extensive engineering along with customer discovery, large burn rates right out of the gate, and more. While the heavy startup shouldn’t happen too often, there’s still a place for it.

    Here are a few ideas when a heavy startup makes sense:

    • When an entrepreneur has extensive domain expertise in a market, running heavy can result in a fully assembled and cohesive team in a shorter period of time
    • When a market opportunity is winner take all, and it’s go big or go home
    • When a market requires more fully baked software before trying out a minimum viable product, like in healthcare or other complex areas

    Heavy startups aren’t very common, but they still have a place in the startup world.

    What else? What are some other ideas as to when heavy startups make sense?

  • Notes on Atlanta’s Startup Community for Atlanta’s Business Community

    On Thursday morning I’m honored to have the opportunity to share my personal story and thoughts on the Atlanta startup community with the Metro Atlanta Chamber. Atlanta has a strong business community that’s well-known for getting involved and making a difference. For their most recent strategic plan, fostering entrepreneurship and startups were identified as key priorities.

    Here are a few notes on the Atlanta startup community:

    • Atlanta has all the natural resources to be a top 10 tech startup city
    • Startup strengths include technical talent, low cost of living, abundant young professionals, and great quality of life
    • Startup weaknesses include experienced entrepreneurs, entrepreneurial density, and risk capital
    • Atlanta needs to focus on companies that generate revenue from outside the region thereby creating net new jobs
    • Georgia Tech has significant untapped entrepreneurial potential
    • Atlanta Tech Village is the largest tech entrepreneurship center in the Southeast with a goal of creating 10,000 jobs in 10 years
    • 2012 marked nearly half a billion in exit value for marketing software companies in Atlanta
    • Atlanta has another handful of marketing software companies currently worth over half a billion in value
    • Atlanta’s startup energy is at an all-time high with no signs of slowing down
    • Atlanta’s startup community needs more support from the large, local companies by way of mentoring, investments, and doing business together
    • Seed stage risk capital is scarce while capital for fast growing tech companies with modest scale is readily available
    • Metro Atlanta Chamber has an opportunity to help strategically with industry introductions as well as capital sources

    I’m looking forward to talking to the Metro Atlanta Chamber on Thursday and getting them excited about changing the entrepreneurial trajectory of Atlanta.

    What else? What are some other thoughts to share on Atlanta’s startup community?

  • Retire Early and Then Start a Company

    With the popular conversation about making lifestyle adjustments to be an entrepreneur, there’s another, more aggressive option: retire early and then start a company. The Washington Post recently profiled Mr. Money Mustache, a man in Colorado that retired at age 30 and now writes a popular blog on happiness and retiring early with a modest lifestyle. If you haven’t read about his approach, start with Getting Rich: From Zero to Hero in One Blog Post.

    So, the idea is to reduce lifestyle expenses as much as possible combined with saving enough money such that you can live solely off investments forever. For many people, it’s somewhere in the neighborhood of $20,000/year in expenses, and thus $500,000 in investments (assuming you live off 4% of the investments per year). In places like Atlanta, this is readily doable, even with a small family, by having an extremely modest lifestyle (own a $200,000 house with no mortgage, always cook at home, have catastrophic health insurance, share one used Honda with no car payments, etc).

    After retiring early, starting a company or joining a startup becomes easy as there isn’t pressure or a self-imposed timeline to get back to a previous salary or compensation level. There also isn’t the feeling that you have to raise money from investors before taking the plunge, as you control your own destiny.

    Retiring early isn’t for everyone, but it should be evaluated as a potential path.

    What else? What are your thoughts on retiring early and starting a company?

  • Valuing a Growth Stage Startup for Shareholder Liquidity

    After a startup has achieved $5 million plus in revenue, it is often referred to as a growth stage company. Growth stage companies have achieved product/market fit and are focused on scaling as fast as possible to capture the market opportunity. With that level of size and scale comes an opportunity for founders and early employees to sell some of their shares as there are many funds designed to provide liquidity for companies growing fast (> 40% YoY) with scale (> $5mm revenue).

    Now, the next question is how to value the company for shareholder liquidity. Here are a few ideas:

    • Software as a Service (SaaS) companies are often valued at 2 – 5x trailing twelve months revenue, depending on gross margin, growth rate, and growth opportunity
    • Recent transactions (deals from similar companies) as well as publicly traded companies are often used for comparisons
    • Private companies usually have a discount of 40 – 50% for a lack of security marketability (meaning it’s hard to sell private stock compared to stock in a public company)
    • Non-controlling shareholders usually have an additional discount to their value since they don’t have as much power in the business

    So, there’s no exact answer, but a simple approach is to find the most similar publicly traded company, determine the revenue or profit multiple, cut that value in half for being private and non-controlling, and you have a decent approximation.

    What else? What are some other ways to value a growth stage startup for shareholder liquidity?