David Cummings on Startups

Blog

  • Look for Startup Ideas that Aren’t Unique

    One of the most common refrains from people interested in being an entrepreneur, but haven’t taken the entrepreneurial plunge, is that they don’t have a good idea. My immediate response to the “I don’t have a good idea” statement is “what ideas do you have?” Almost always, an idea is presented followed by the fact that they looked around and someone else was already doing it, so they gave up on it.

    Here a few things to keep in mind regarding startup ideas:

    • A startup idea that is truly, completely unique is likely a bad idea
    • Other companies working on the same or similar idea validates the idea (still might not be a great one but at least someone else thinks it’s a good one)
    • Ideas are plentiful, it’s the execution of the idea that’s much more difficult
    • Many times it takes the second or third generation startup with the same idea to be successful (being too early with an idea is a failure)

    Ideas are important, but they shouldn’t be unique. Find an idea that has great founder fit and out execute the competitors.

    What else? What are your thoughts on looking for startup ideas that aren’t unique?

  • Rolling out Roadmaps in a Startup

    One of the more delicate, and demanding, documents in a startup is the product roadmap. After getting feedback followed by buy-in from the different constituents, it becomes time to rollout the roadmap to customers, team members, analysts, and prospects (some pre-sale engagements sell the vision of what’s to come in the product).

    Here are some ideas for rolling out a roadmap:

    • An annual formal presentation on what to expect over the next 12 months at the user’s conference
    • A quarterly customer advisory council that meets via GoToMeeting and gets a private walk through as well as Q&A of the roadmap
    • A quarterly webinar for existing customers combined with a blog post summarizing what can be expected in the next three months
    • A monthly employee-only product show-and-tell that gives a preview of progress for each item on the roadmap

    So much time goes into building and managing the product roadmap that often there isn’t enough effort put in to rolling it out to constituents. Communicating the vision is a critical part of successful startups and should not be underestimated.

    What else? What are some other ideas around rolling out roadmaps in a startup?

  • Favorite Cloud-Based Web Apps for Startups

    One thing I like to stay current with is web-apps that are popular among startups. It’s amazing how good and how powerful apps have gotten over the past five years.

    Here’s what I believe to be the most popular cloud-based web apps for startups:

    What web apps are on your list? Which ones do you like?

  • Financial Projections for Startups Hurt More Than They Help

    Last week I received an executive summary from an entrepreneur and it showed financial projections for the next four years. Guess what the projected revenues were for year four? $3 million? Nope. $100 million? Nope. Projected revenues for the fourth year of operations were almost $1 billion — I’m not making this stuff up.

    I’m not a fan of financial projections for idea stage startups. Yes, I like big round numbers to see if a financial model generally makes sense, but I’ve found that they hurt more than they help. If you put tiny numbers, which is much more realistic, you turn off some investor’s imagination as to how big the idea can become one day. If you put massive numbers, you show you don’t know how startups progress, even if they are successful.

    Here are the ballpark revenues for the first four years of Pardot:

    • Year 1 – Under $50k
    • Year 2 – ~$400,000
    • Year 3 – ~$1.1 million
    • Year 4 – ~$3.2 million

    I consider those Pardot numbers to be exceptionally high, and not the norm for Software-as-a-Service startups. Now, if it’s a consulting business or something with small gross margins, those could appear to be small numbers. The next time an entrepreneur includes financial projections for their idea stage startup, compare them to this simple example of Pardot’s numbers and ask if they hurt more than they help.

    What else? What are your thoughts on financial projections for startups hurting more than they help?

  • Temporary Labor Intensive Efforts are Fine in Startups

    One area I find entrepreneurs constantly talking about, especially tech savvy entrepreneurs, is that of automating everything and having a “touchless” process whereby humans aren’t involved. A common example of this is having a web app with a self-service sign up and provisioning process complete with payment processing via credit card. Now, as awesome as this sounds, it’s incredibly rare in reality. Most startups are working on innovative, non-replicative ideas that are in their first or second generation — generations that require extensive handholding and education.

    Temporary labor intensive efforts are fine in startups as long as the economics eventually make sense. Here are a few examples:

    • Cold calling is labor intensive and not nearly as elegant as online marketing, but it often makes sense if the gross margins, lifetime value of the customer, and cost of customer acquisition are all inline (cold calling doesn’t have to be a temporary effort as some startups do it indefinitely)
    • Manually parsing of data, even large quantities of data, can be done with Amazon Mechanical Turk via Smartsheet.com such that a core amount is handled in a crowd-sourced manner, before investing the effort to fully automate it
    • Billing always starts out as a manual process, and there’s a desire to spend engineering time to automate it or use a SaaS billing tool, but it’s easy to do by hand so that engineering can work on higher value projects

    The goal isn’t to do labor intensive efforts indefinitely if there are better solutions, rather the goal is to focus on the most high value work at the time, especially if a manual workaround is possible. It’s also important to pay attention to what enables economies of scale vs what doesn’t (e.g. lots of consulting work that is labor intensive).

    What else? What are your thoughts on temporary labor intensive efforts in startups?

  • Minimize Technical Complexity in a Pre-Revenue Startup

    Early on in a startup, especially a pre-revenue one, it’s super easy to add technical complexity to the product since there’s a clean slate. With no existing users and no lock-in, there’s nothing slowing the engineering team down from incorporating a variety of programming languages, best-of-breed open source components, and more. My advice: minimize technical complexity and moving parts as much as possible, even while sacrificing elegance to solve challenging problems.

    Here are a few reasons to minimize technical complexity in a pre-revenue startup:

    • With a limited engineering team it’s important to keep things simple so that everyone on the team can substitute for anyone else (once the team grows having more specialization works well)
    • Complexity is much harder to take out than add in, so start simple, even if it isn’t elegant
    • Getting something working that customers love is much more important in the early days than having the most scalable back-end
    • More moving parts and different types of systems create more complexity for sys admin work, especially upgrades and on-going maintenance

    Some technical complexity is unavoidable, but whenever possible, it should be minimized. Keep things simple, move fast, and stay close to the customer.

    What else? What are your thoughts on minimizing technical complexity in a pre-revenue startup?

  • Thankful for So Much

    Today is Thanksgiving in the United States and a great time to reflect and give thanks. As an optimistic and positive person, I try my hardest to give thanks and be appreciative on a regular basis. It’s so easy to get caught up in day-to-day life that I forget to take a step back and pause for reflection.

    I’m thankful for so much, including:

    • Family, friends, faith, and health
    • A love of technology and the opportunity to be in a rapidly changing industry
    • Entrepreneurship, especially as a force for change and disruption
    • Freedom on many different levels
    • Amazing co-workers, both past and present

    My hope is that everyone takes time for reflection and pauses to acknowledge what they are thankful for in all aspects of their life.

    What else? What are you thankful for in your life?

  • Outfitting a Great Creative Tech Office

    One area I enjoy obsessing over is the physical office environment and office space. The people component of any business is much more important than the actual office that people work out of but the physical environment is often a manifestation of the company’s culture. So, if you had unlimited budget to outfit the ultimate office, what would you include?

    Here are some ideas for outfitting a great creative tech office:

    • iPads outside each conference room
    • 80″ LED TVs inside each conference room
    • High quality chairs (e.g. Herman Miller Aeron chairs)
    • Mixture of open workspaces with many ad hoc meeting rooms and phone booth rooms for calls
    • Tons of glass and natural light
    • Great lighting
    • Exposed duct work with high ceilings throughout
    • Rooftop patio
    • Coffee shop with indoor and outdoor seating
    • Pool table and ping pong table
    • Sleeping pods
    • Fireman’s pole or slide to go between floors
    • Zen garden
    • Climbing wall
    • Massage room

    Most of these are practical items with a few out there. A great office, like a great company, has its own identity and sets the tone for everyone.

    What else? What other things would you do to outfit a great creative tech office?

  • Standard Term Sheet Terms from Recent Venture Investments

    The most recent Silicon Valley Venture Capital Survey by Fenwick & West LLP just came out for Q3 2012. In it, the authors provide a great snapshot of anonymous financing terms for 117 companies based in Silicon Valley that raised money in the third quarter of 2012. Now, these companies are based in Silicon Valley where terms are usually more entrepreneur friendly, on average, compared to other parts of the country where capital is more sparse.

    Here are some of the more interesting, high level notes taken from the report:

    • 61% of deals were up rounds compared to 22% flat and 17% down
    • Software continues to lead as the number one category with the most venture deals
    • 33% of deals had senior liquidation preferences
    • 17% of deals had multiple senior liquidation preferences
    • 33% of deals had participating preferred liquidation preferences
    • 11% of deals had cumulative dividends as a component
    • 97% of deals had weighted average anti-dilution provisions

    Overall, the report showed financings were happening on even better terms than I expected with the majority of deals being clean (e.g. no liquidation preferences, not participating preferred, etc) — it’s a great time to be in technology. Please read the report for more information.

    What else? What other interesting information did you take from the report?

  • The Road to a $1M Recurring Revenue SaaS Startup

    One of my personal goals is to help more Software-as-a-Service (SaaS) startups reach $1 million in annual recurring revenue while raising less than $1 million in money from investors. As part of that goal, it’s important to help paint the picture for what that looks like so that it’s more readily visualized by entrepreneurs. Sure, it’s easy to say sign up 83 customers paying $1,000/month and you’ll be there but the reality is that most SaaS startups can’t command $1,000/month per customer, especially in the early days.

    For Pardot, it took 2.3 years from start of the business to hit $1M in annual recurring revenue (ARR). We started at roughly $150/month on average per new customer and were up to $500/month on average per new customers by the time we achieved a seven figure run rate (side note, it took 4.7 years to hit $10M in recurring revenue, so the first million really is the hardest). Pardot was an exceptional experience and not normal.

    For most startups, I would expect three to fours years before getting to $1M in ARR, assuming the business is going well (with SaaS it’s fairly easy to see if a business is going to succeed based on how the recurring revenue layers on top of itself each year). So, if it takes four years to get to $1M recurring, and the goal is burn less than $1M all-time to get there, that only leaves $250k/year for the annual burn — much less than most startups that raise a full seed round burn (see Death to the $700k Seed Round).

    In the end, the moral of the story is to plan for a long, hard path to get to $1M in recurring revenue, and as part of achieving that milestone, be scrappier than anticipated by being more capital efficient and burning less than $1M in investor money.

    What else? What are some other thoughts about the road to $1M in recurring revenue for SaaS startups?