David Cummings on Startups

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  • Startups are About People, People, and People

    Tonight I was at a local awards ceremony for the top entrepreneurs in Atlanta. After an entrepreneur is nominated, they have to answer a number of questions and get their financials certified by a third-party accounting firm. Several of the questions are generic company stuff and several of the questions are around the entrepreneur’s specific philosophy and approach to business. At the awards ceremony, as part of introducing each winner, the announcer read some choice responses from the questionnaire.

    Overwhelmingly, the entrepreneurs espoused the benefits of focusing on people. In real estate, the motto is location, location, location. For startups, the motto should be people, people, people. People are what drive everything about a business. People interface with customers. People build products. People sell goods and services.

    The next time you’re talking to an entrepreneur, ask her what the most important thing is about her startup. Listen closely, because the response is everything you need to know about her philosophies for the business.

    What else? What are your thoughts on startups being about people, people, and people?

  • Advice for Tech Accelerator Graduates

    Tonight I had the opportunity to attend the Flashpoint graduation ceremony over at Georgia Tech. Flashpoint is an accelerator program in a similar vein to Y Combinator and TechStars, except with some distinct differences. One of the questions Merrick Furst asked for the mentors to answer was “What advice do you have for these startups now that they’ve completed the program?” There weren’t too many responses on the fly but with time more have come to mind.

    Here’s advice for recent tech accelerator graduates:

    • Stay connected with a tribe of entrepreneurs in your cohort or otherwise as the roller coaster of emotions only slightly flattens over time
    • Sales solves everything so remember that when the business is breakeven or profitable the amount of stress drops significantly
    • Finding investors is a sales process and should be treated as such
    • Most products die from a lack of oxygen (get users using it)
    • Err on the side of customer discovery and never build the product in a vacuum
    • Move on when you’ve realized the startup isn’t going to be successful (entrepreneurs, on average, hang on too long to an idea)
    • Mentors are invaluable — use them to increase the chance of success and minimize common mistakes

    Completing an accelerator program is a nice early step in the process of building a business. Take advantage of the peer group in the cohort and lean on each other for the challenges that lie ahead. Getting a startup off the ground and developing it into a profitable company is one of the most difficult, and most rewarding, journeys available to an entrepreneur.

    What else? What other advice do you have for tech accelerator graduates?

  • Organizational Development Takes Time in a Startup

    One of the most important aspects of a startup that can’t be easily accelerated is organizational development of the corporate culture and market understanding. Some things take time even with quick learners and hardworking people — there’s no way to rush it. Generally, it takes 12-24 months for a new startup to solidify its own personality.

    Even with extensive experience working together on the founding team, there are always new people in the startup that introduce their own nuances and characteristics. No two corporate cultures are exactly alike. One of the best things a new startup can do is be intentional about its core values and use those as a guide for decision making, especially on the hiring front. Everything starts and stops with people.

    Organizational learning about the market also takes time, like the corporate culture. Markets are always more complicated on the inside compared to how they look on the outside. Competitive dynamics are often difficult to understand until a startup gets on the front lines and goes to battle. One of the reasons I recommend startups raise less money in their seed round (see Death to the $700k Seed Round), or raise more money and make it last longer, is that it always takes more time than expected to make progress. No matter how hard an entrepreneur tries to make the right decision, the market dictates what wins, and iterating quickly is the best path.

    Organizational development takes time in a startup — there’s no way to rush it.

    What else? What are some other reasons organizational development takes time in a startup?

  • Atlanta Tech Community Goals for 2020

    Over the past month I’ve had the opportunity to talk with a number of people in the Atlanta tech startup community about what’s working and what they’d like to see improved. There’s no shortage of ideas across all categories on how to make the community stronger, more vibrant, and more successful. One thing I like to do is to set goals, with metrics, to work towards as well as work backwards from, in order to align and focus the community.

    With the year 2020 slightly over seven years away, there’s plenty of time to do great things. Here are a few goals for the Atlanta tech startup community for 2020:

    • Create 10,000 new tech company jobs
    • Have a new billion dollar, acquisitive, publicly traded anchor tech company in town (AutoTrader? AirWatch?)
    • Deliver over 100,000 square feet of startup-focused office space with 500+ people in them (ATDC currently has 40,000 square feet)
    • Participate in $1 billion in exits annually
    • Facilitate $300 million in institutional investments annually
    • Increase the number of GA Tech engineer co-ops that work at tech companies by 50%
    • Win three Inc. 500 awards annually

    Many of these are big, round numbers that are readily trackable. Data is available for Georgia for most of these categories and it will take some effort to distill the Atlanta portion of the data. We’ve made major strides in the community over the last seven years and I’m excited about the next seven.

    What else? What are some other Atlanta tech community goals for 2020?

  • Economics of an Early Stage Venture Fund

    For tech startups out raising money, which is many of them, it’s important to understand the economics of an early stage venture fund or super angel. The model is very different from a retail investor approach where a mutual fund might focus on a specific segment of the market, e.g. large Fortune 500 companies that pay regular dividends. Early stage investing is a high risk, high reward proposition with unusual dynamics.

    Here’s how the economics of a $30 million early stage venture fund might work:

    • Receive commitments for $30 million from limited partners — usually endowments, family offices, pensions, and other sophisticated entities
    • 20% of the commitments are paid in immediately while the remaining 80% of the monies are requested as needed (capital calls)
    • Fund goal of returning three times cash on cash over the life of the fund (e.g. take $30M and turn it into $90M)
    • Timeline is to make all the initial investments in the first five years and invest the majority of the money while saving 1/4th to 1/3rd for follow-on or pro-rata participation in future financings with a goal of exiting all the investments in 10 years (usually there is an option to extend the fund an extra year a couple times for a max of 12 years)
    • Take $20M of the $30M for the initial investments, that might result in the following:
      – Five $1M investments
      – Five $3M investments
      – Remaining $10M saved to participate in the future rounds of those 10 initial investments
    • Financially, the majority of the profits would come from one of the 10 investments (e.g. hit a homerun) while a couple would return a modest amount and the majority would not return a profit
    • Compensation for the fund partners of 2% of the fund’s value annually plus 20% of the profits (carried interest)
    • Example economics for this fund with one general partner:
      – $600,000/year operating budget for the first five years then a smaller budget for the remaining years
      – $300,000/year salary and $300,000/year for expenses like legal, accounting, travel, office space, assistant, analyst, etc
      – Profits at the end of 10 years assuming returned 3x cash on cash: $90M minus $30M initial capital for a total gain of $60M. Now, take 20% of $60M and you get $12M less management fees taken out (e.g. $3M+ of management fees in five years) for a final profit for the one general partner of $9M.
    • Limited partners would receive $88M for their original $30M investment (assuming goals were met — the majority of venture funds over the past decade did not meet their goals, or make any money for their investors)

    The economics of an early stage venture fund show that it is much more difficult than many perceive for VCs to make great money. There’s a nice salary for a good lifestyle but to do really well, it’s much harder than it looks.

    What else? What are your thoughts on the economics of an early stage venture fund?

  • Next Generation Flex Office Space for Startups

    Continuing with yesterday’s post on how much money to spend per employe per month on office space, there’s a gap in the market for flexible office space that’s desirable for startups and creative companies. Firms like Regus provide a massive network of 1,200+ locations with executive offices and conference rooms for rent, but they aren’t desirable for startups due to ambiance (very traditional, plain offices), seating density (typically one desk rooms are $1,000/month), and the types of businesses already in there (mostly remote sales offices and traditional businesses).

    The best example of this type of next generation flex office space for startups and creative firms is the Cambridge Innovation Center on the edge of the MIT campus (see the TechCrunch write up). Here are some quick facts about the Cambridge Innovation Center:

    • Costs roughly $530 – $1,000/employee/month for the full service option which includes office space (shared space at the lower price and private space at the higher price), conference rooms, furniture, internet access, organic snacks, drinks, showers, etc
    • Co-working space with furniture and internet access but no postal address and fewer amenities is $250/month
    • Parking is $225/month
    • No contracts — everything is month-to-month
    • Over 450 companies and 160,000 square feet of space
    • 13 years in business and over $1.7 billion raised by companies in the facility

    Atlanta, and other up-and-coming tech hubs, would do well to emulate this type of facility. Of course, Boston is significantly more expensive compared to other regions in the country but there’s no reason it couldn’t be done in the $350 – $550/employee/month range for shared offices through to private offices with everyone having communal kitchens, conference rooms, and game rooms. For companies with 1 – 25 employees, the traditional approach to office space rarely makes senes unless the space is a great deal, and even then there isn’t the same community feel as being in a tech/creative centric facility.

    What else? What are your thoughts on next generation flex office space for startups?

  • What percentage of a startup’s revenue should be spent on office space?

    Over the last few months I’ve received the following question two times: what percentage of our revenue should we be spending on office space? Rarely do I like top-down approaches, rather I prefer doing a bottom-up approach whereby the most basic ingredients are analyzed to come up with a number. For office space costs, focus on the type of environment you want to have and the projected number of employees. Here are some examples:

    • Co-working environment or scrappy sublease — $100 – $250/employee/month (most desirable if it works for your startup)
    • Creative office or decent class B office building — $300 – $500/employee/month
    • Swanky office building with nice finishes and great views — $500 – $1,000/employee/month

    Generally, I like to recommend budgeting $500/employee/month for a nice office as I’m a big proponent of the office being a direct reflection of the company and its corporate culture. So, for a startup with 30 employees, $6,000/employee/year results in an office space budget of $180,000/year. There’s no perfect fit for all companies but for technology startups that are growing, I like investing in a great office.

    What else? What are your thoughts on the percentage of a startup’s revenue that should be spent on office space?

  • Thinking Through the Costs of an Initial Startup Office

    After an entrepreneur signs a critical mass of customers or raises a seed round of angel funding, it often becomes time to get a formal office and start hiring. Only, getting a traditional office is usually a big time sink and expensive. Here are some of the standard costs for a 3,000 square foot office designed to accommodate up to 15 people (e.g five people in year one, 10 people in year two, and 15 in year three):

    • Three year lease at $18/ft/year for a monthly rental cost of $4,500 resulting in a total lifetime cost of $162,000 (disregard a 3% annual rent escalation)
    • $10/ft tenant improvement allowance resulting in a $30,000 budget for paint, carpet, and moving a wall or two (paid for by the landlord and amortized over time)
    • 7% commission with 2% going to the building leasing agent ($3,240) and 5% going to the tenant leasing agent ($8,100) all paid for by the landlord
    • Wiring for ethernet and electrical at a cost of $3,000 (assume $200 per employee)
    • Fiber internet access providing 100 mb/sec for $1,000/month (so, $36,000 over three years)
    • Furniture and chairs at a cost of $15,000 (assume $1,000 per employee for desk, chair, and collaboration areas like conference room furniture)
    • Total for three years: $216,000
    • Optional: parking at $60/employee/month for a cost of $900/month or $10,800/year when at full capacity

    Now, this is a nice, semi-custom office designed in a relatively high density manner to support five employees per 1,000 and it costs over $200,000 for a small startup over three years. Costs, plus a serious amount of work over a 90 day period of time to put it all together, makes for a situation less than ideal in the volatile and time sensitive world of a startup.

    What else? What are your thoughts on this breakdown of costs and what would you add/change about it?

  • Startups and Financial Audits

    Annual financial audits are a cost of doing business for many tech startups. While they aren’t the most fun, they do provide great third-party validation of the books and oversight for how the business is being managed financially. Most entrepreneurs should not spend the $10k – $30k on an annual audit.

    Here’s when an annual financial audit makes sense:

    • Institutional investors (like VCs) or other sophisticated investors are involved — they’ll require it
    • A bank line of credit or senior debt in the business requires it
    • There’s a business goal to be able to sell the business in the next three years — most buyers will require three years of audited financial statements

    Most of the time an annual financial review, which acts like a lightweight audit, but without all the guarantees by the accounting firm, is a much more affordable way to engage a third-party to review the books. Entrepreneurs should understand when it does, and doesn’t, make sense to pay for an annual financial audit.

    What else? What are your thoughts on startups and financial audits?

  • The Learning and Earning Phases of an Entrepreneur

    Most entrepreneurs I know that have been successful tell me that their real success came on at least their second venture, and well after their learning phase. Phase one is learning from another successful entrepreneur or business leader and gaining serious domain expertise. This could be in the form of starting a company that doesn’t succeed or it could happen working with someone else — it doesn’t matter. What matters is that the entrepreneur works hard and learns as much as possible.

    Mark Suster has a great post up titled Is it Time to Earn or Learn where he outlines this phenomenon in greater detail. The earning phase of being an entrepreneur is when you co-found a company and have a serious equity stake. Most employees, even in a wildly successful startup, don’t make enough money to retire. As a co-founder that owns a meaningful chunk of equity, raises a modest amount of money, and the startup turns into a base hit or double, there’s a very real chance of making enough money to never have to work again. Now, making money isn’t always the goal, but it’s an important component for many people.

    The next time you talk to an entrepreneur, ask if they’re in the learning phase or the earning phase as there can be a serious disconnect between reality and wishful thinking.

    What else? What are your thoughts on the learning and earning phases of an entrepreneur?