David Cummings on Startups

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  • 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?

  • Things We Could Have Done Better at Pardot

    Continuing with yesterday’s post Key Moments in the Life of Pardot, it’s also important to address some of the things we could have done better. Over the course of five and a half years we had a number of opportunities, many for which the appropriate response was saying “no” (see the post Startups Should Say No to 99% of Partnership Opportunities).

    Here are some things we could have done better at Pardot:

    • At one point we went almost an entire year without adding a net new salesperson, while our business and market continued to grow super fast (we subsequently invested heavily in our sales team and sales recruiters)
    • Hosting costs grew significantly faster than revenue for a period of time before we realized that we needed to change our approach, which we addressed and brought inline after six months
    • When we hit our stride and started growing fast on an absolute and relative basis, we ramped up hiring slower than possible (it took us time to realize we should be hiring for all major positions, all the time so as to always be opportunistically hiring)
    • Our London expansion turned out well but needed much more money than we budgeted to be successful

    All issues were high class and great learning experiences. We never strove to be perfect, rather, we worked hard to make the best decisions possible based on the information available.

    What else? What are some learning experiences from your startup where you could have done things better?

  • Key Moments in the Life of Pardot

    One of my goals is to document what worked well, and didn’t work well, in the life of Pardot leading to our acquisition by ExactTarget. Looking back, there were a number of key moments and decisions that turned out great and really shaped the growth trajectory of the business.

    Of the thousands of big decisions in the first 5.5 years of Pardot, these were some of the most important (dates will be approximate but they are directionally correct):

    • December 2006 – Started brainstorming the idea with my co-founder and bought the domain name Pardot.com for $8
    • March 2007 – Co-founder and I started working full-time on the business with the original model being a pay per click bid arbitrage platform to generate leads from potential technology buyers and then sell them to technology vendors (like LendingTree for technology leads)
    • May 2007 – Pivoted into marketing automation software using most of the code we’d already written for the original product (we were already 60% of the way to a minimum respectable product) and built the product focused on serving the needs of a 25 person software company
    • June 2007 – Hired our amazing lead engineer that did an unbelievable job (he was a colleague I’d worked with before)
    • August 2007 – Soft launch of our product with a key partner that specialized in SEO and SEM
    • September 2007 – Hired an incredible sales leader that did everything we could hope for and more (he replied to our job posting for a junior sales rep on Craigslist even though he had 10 years of experience)
    • December 2007 – Signed our first customer, via a partner introduction, and we were off to the races
    • April 2008 – Raised prices from $65/user/month to $325/account/month to encourage more user adoption in the organization and to capture value based on other usage params (number and types of modules)
    • October 2008 – Signed our 100th customer and knew the business was going to be successful (roughly 1.5 years after starting)
    • January 2009 – Added email marketing to the native product functionality after religiously staying away from it (previously we’d connect with third-party email marketing tools to do email but were too limited in functionality)
    • July 2009 – Passed $1M in annual recurring revenue and decided it was time to raise venture capital so that we could significantly accelerate our growth (took 2.3 years to get to a $1M run rate)
    • November 2009 – Participated in our first Salesforce.com Dreamforce conference (startup sponsorship level with a modest kiosk for a booth)
    • December 2009 – Decided to not raise money after talking to 30+ VCs and doing five full partner pitches (sales really took off in Q4 2009 such that it didn’t make sense to raise money based on how fast we could grow organically)
    • March 2010 – Raised our prices to $1,000/account/month and included a free quick start services package to on board customers (this was a major game changer since we previous required a $2,500 quick start services package for new customers that created too much friction in the sales process)
    • April 2010 – Atlanta Business Chronicle named Pardot the #1 fastest growing technology company in Metro Atlanta with a 42,000% growth rate (it’s easy to grow fast on a relative basis when the first year’s revenues are almost $0)
    • June 2010 – Published our company book Think Outside the Inbox, which proved to be more successful than I ever expected
    • August 2010 – Participated in our second Salesforce.com Dreamforce conference as a silver sponsor, and, more importantly, at the end of the conference, committed to a $400,000 Dreamforce Platinum sponsorship for 2011, representing a full 50% of our 2011 marketing budget (huge risk but completely worth it)
    • December 2010 – Launched our London office through a joint venture
    • December 2010 – Passed $5M in annual recurring revenue
    • August 2011 – Participated in our third Salesforce.com Dreamforce conference as a platinum sponsor, with one of the best positions on the entire floor, and gave notice to the entire marketing automation market that we were a serious player with strong momentum
    • January 2012 – Passed $10M in annual recurring revenue
    • April 2012 – Atlanta Journal Constitution named Pardot the #1 place to work in Metro Atlanta
    • August 2012 – Inc. magazined named Pardot to the Inc. 500 as the 172nd fastest growing company in the United States
    • October 2012 – ExactTarget acquired Pardot

    Companies, like everything, have a story to tell and follow an arc that builds on previous experiences. Thousands of important moments occurred over the 5.5 years, with these being some of the most important.

  • Continuous Deployment in Startups

    Continuous deployment is a methodology whereby software code checked into a repository for a web application is automatically sent to the production server after all automated tests pass with no other human intervention. While not being an easy process to describe, it’s revolutionary in how it affects software development. The traditional software development process, even if agile, often involves bottlenecks around manual QA, a limited number of engineers empowered to push a release, and numerous issues when major changes are pushed.

    Here are some thoughts on continuous deployment:

    • Software releases go from big productions to non issues
    • Small changes result in small issues and large changes result in large issues (bugs are inevitable, so keep them small)
    • Automated testing becomes a critical part of the development process and no longer an after thought (there’s no right answer to how much code coverage is necessary other than it needs to be suitable to the product)
    • New developers should push code to production on their first day, setting the tone for a culture that moves quickly and isn’t afraid to make mistakes
    • Config flags are an important part of continuous deployment such that code that’s being worked on, but not ready to be seen by end users, is still pushed to production during development

    Software-as-a-Service, whereby programs are delivered over the internet, makes continuous deployment possible (continuous deployment doesn’t work for installed software). With time, continuous deployment will become more prominent, especially when firms like Etsy espouse its benefits.

    What else? What are your thoughts on continuous deployment in startups?