David Cummings on Startups

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  • 500 Startups Checklist for Investing in a Startup

    Last night I had the opportunity to listen to Paul Singh present the 500 Startups thesis at the ATDC. He did a great job outlining how things have changed in the tech startup world over the past 10 years as well as making a great a argument for investing in a large number of startups with a structured thesis.

    One of my favorite slides was the 500 startups checklist for investing:

    • Product solves a problem for a specific target customer
    • Capital-efficient businesses – operational @ <$1M funding
    • Primarily internet-based distribution – search, social, mobile, location
    • Simple revenue models – transactions, subscriptions, or affiliate
    • Functional prototype before investment (or previous success)
    • Small but measurable usage – some customers, early revenue
    • Small but cross-functional team – engineer, design/UX, marketing

    I think this is a great list. One item I’d add: co-founders are working full-time on the business and don’t have day jobs (if they need to wait tables at night to pay the bills, that’s fine). Also, design/UX is critical for B2C startups but Twitter Bootstrap makes it less critical for B2B startups.

    What else? What are your thoughts on the 500 Startups checklist for investing in a startup?

  • Venture Atlanta 2012 Day Two Recap

    Venture Atlanta 2012 wrapped up today with another strong session of keynote speakers and startup pitches. Jonathan Bush of athenahealth gave the most entertaining talk of the show outlining many of the absurdities of the healthcare system in the U.S. as well as how health IT is progressing (Atlanta is the health IT capital of the world).

    Here are the startups that pitched today:

    Open Solutions for Education

    • OpenSIS – student information systems software
    • OpenIntel – academic analytics and reporting
    • Open source model with a free core product and paid add-ons
    • 55,000 downloads
    • $8 per student per year for paid edition
    • Raising $3M Series A

    PMG.net

    • Service catalog suite software
    • End-to-end business process management software
    • Imagine employee onboarding and the 25 steps that need to be completed — this software enforces the process across departments
    • Customers include Wal Mart, Medo, and many more
    • Works with multiple backend systems unlike many competitors

    LSN Mobile

    • Mobile marketing and commerce opportunity
    • $9M in revenue for 2012
    • Raised $1.2M
    • Provides a mobile ad network
    • Carriers are looking for additional revenue streams

    Emcien

    • What’s your data telling you?
    • Patented solution that connects that dots of what’s going on
    • Look for pattern detection to identify gangs, fraud, etc
    • Boom in big data is a driver
    • Customers across a number of verticals including classified government agencies
    • Raised $5M
    • Raising $10 – $15M

    Kahua

    • Platform to create applications and sell on the store
    • Founders of Constructware and Compliance360
    • Design, construction, and facility operations
    • Intercompany data exchange and workflow
    • kStore is where 3rd parties post applications for sale
    • Raised $7.5M
    • Raising $3 – $5M in Q1 2013

    ScholarLab

    • 50 customers
    • Software to power required continuing education programs to associations
    • Learning desktop that brings together multiple apps
    • SaaS model at $25k/year with 2-3 year contracts
    • Raising $3 – $5M to expand sales and marketing

    AirSage

    • The power of when and where
    • Patented population analytics
    • 15 billion location data points per day
    • 25 employees in Atlanta
    • Transportation planning, target marketing, site selection
    • Raising $5 – $10M

    Meeting Consultants

    • Growing over 20% per year
    • Optimize return on event marketing spend
    • Software and services to put on marketing events
    • Managed over 10,000 events and $260M in spend
    • Raising $5M

    Delta Data

    • Solutions provider to mutual fund industry
    • 50 employees
    • Grew out of a CPA firm
    • Solve inefficiencies around securities processing and data management
    • Help meet compliance mandates and mitigate risk for mutual funds
    • Raising $7 – $10M

    Pretty in My Pocket

    • Free, social, mobile app that enables brands and retailers to drive purchase decisions inside the store
    • Consumer, brand, and retailer have pain points
    • Beauty has 1/10th of the retail space in Walgreens
    • Content, reviews, perks, redemption, analytics
    • Raising $750k

    Clinigence

    • Pay for performance in healthcare is growing
    • Difficult for healthcare providers to measure performance
    • Declarative classification, semantic understanding, normalization
    • Greater need for clinical analytics for outcomes analysis
    • Raising seed round

    Safely Locked

    • SaaS tool for security of business data
    • SafelySendIt -secure web-based “courier” service
    • SafelyShareIt – secure “dropbox” for collaboration
    • All browser based with no plugins
    • Raising $3M Series A

    Monocle Health Data

    • Healthcare price and quality for chronic illness
    • Lot of disparity in price and quality with healthcare
    • 13.5% of hospital patients experience and adverse event
    • Gold seal of joint commission doesn’t mean the hospital is good at a specific illness
    • High deductible health plans are the fastest growing
    • Aggregate multiple data sources and apply 72 quality indicators
    • $4 per employee per month

    Message Gears

    • Hybrid email service provider
    • Four employees
    • On-premise power, cloud convenience
    • Behind the firewall so it has the most complete access to company data
    • Email sending is actually from the cloud after the emails have been
    • assembled behind the firewall
    • Raising $1M Series A

    Sytheros

    • Sensing the world
    • Wireless system that’s cheap and able to send data a long distance
    • Difficult to monitor and know where water is due to need to conserve water
    • 55% of U.S. has a moderate to severe drought
    • 200 billion gallons of water used every day
    • Only 9% of farmers measure the water in the soil
    • $150k in grants
    • Raising $500k seed round

    Rigor

    • Web performance management software
    • Help companies build more efficient and faster apps
    • Slow loading sites are a real business problem
    • Slow loading pages on an ecommerce result in potential customers leaving
    • Amazon did a study that 1/10th of a second slow down results in a loss of 1% of revenue
    • Tempur-Pedic used Rigor to increase average order size 14% by decreasing load time by 1.5 seconds

    Lucena Research

    • Scientific investment strategies
    • Tech for hedge funds and other sophisticated investors
    • Proprietary decision support technology
    • Design and validate investment strategies
    • QuantDesk for $1,000/seat/month
    • Raised $400k
    • Raising $1M

    Apparity

    • The enterprise of Excels
    • Last great business process management challenge: spreadsheets
    • Hybrid server that runs on premise or in the cloud
    • Imposes workflow that’s specific to spreadsheets
    • Apparity360 – enterprise visibility, process automation, content analytics, and user control

    SalesLoft

    • Sales people suffer from a lack of fundamental understanding of prospects
    • Knowing the customer inside and out
    • 30% of sales reps time spent looking for info
    • Each sales reps gets custom stream of news and alerts on companies they sell to
    • Like a digital newspaper about the contacts in the CRM
    • Job changes are some of the best data for sales reps to act on
    • 3 million sales professionals

    Venture Atlanta 2012 was a big success again. Allyson Eman is the behind-the-scenes force and should be applauded for all her great work.

    I’m looking forward to Venture Atlanta 2013.

  • Venture Atlanta 2012 Day One Recap

    Today I had the honor of attending the first day of Venture Atlanta. The keynote kicked off with Steve Case, the founder of America Online, who did a good job extolling the benefits of entrepreneurs and the goals around Startup America. After the mayor of Atlanta talked for a few minutes it was time to hear the entrepreneurs give their six minute pitches.

    SynkUp

    • 17 minutes spent to plan an activity
    • Scheduling to facilitate mobile commerce
    • Group scheduling
    • Rank friends in priority list
    • No new social network
    • Value from data, advertising, and context

    Aptidata

    • Ask simple, natural language questions of data
    • SMBs are drowning in data
    • Example: what were sales of wings last month at windward store vs last year?
    • Gartner: Analytics is #1 issue for retailers

    CollectorDash

    • $2.3 million spent on a single postage stamp
    • Collectors are great fans
    • Hundreds of collector categories
    • Software platform that takes holistic approach to what collectors do
    • Revenue: advertising, consumer data, and platform licensing
    • Raised $600k

    SwiftPay MD

    • Mobile payment capture for physicians
    • $6 billion problem due to lost billing cards
    • Up to 30 days to get the info from the paper insurance card to the back-end then 60 days to get paid
    • Mobile solution where info is spoken into an app and transferred to the back-end

    eCommHub

    • Automates the commerce supply chain for SMB companies
    • Movement to drop shipping by etailers
    • Virtual fulfillment where inventory isn’t actually held
    • 1,500,000 online retailers
    • Raising $750k

    LiquidText

    • Touch interface to interact with text
    • Make text more flexible and interactive
    • Problem with comprehending and understanding long documents
    • Visualization, awareness, relationships, aggregation
    • Raising $800k

    ThundrLizard

    • Go from cold lead to qualified prospect
    • Cold calling effective rate is 2-6%
    • 99% of cold leads suck
    • Help know more about your cold leads
    • Raising $500k

    Mobilewalla

    • Big data co in the mobile app analytics
    • Compute analytics and sell to ad publishers and ad networks
    • Like the Nielsen/Comscore for mobile apps
    • Audience measurement

    Lumense

    • Biological and chemical sensors
    • The 21st century will be the sensor century
    • Useful in gases or liquids
    • Competition from large lab manufacturers
    • Raised $1m
    • Raising $2m

    Badgy

    • Mark Cuban invested $600k
    • SEO for social
    • Dallas Mavericks and Landmark Theatres are customers
    • Helps fan promote things socially to increase traffic
    • Raising $1.5m Series A in 2013

    Mowgli

    • Mobile and web games to make songs
    • People love music
    • 72% of people play video games
    • Enables creation of music through games
    • Songster is the first game
    • Raising $3m Series A

    Clearleap

    • Content licensing has been resolved but the technology isn’t ready yet
    • Software platform that manages complexity around delivering content to consumer
    • Transforms video on the fly based on the receiving device
    • HBO GO powered by Clearleap
    • Raised $9m Series A
    • Raising Series B

    Half Off Depot

    • $2m angel round in 2010
    • $7m Series A in 2011
    • Daily deals platform
    • Industry growing 20% CAGR with expected $4.8B market in 2014
    • Market consolidator

    HireIQ

    • Predictive analytics and hiring software for call centers
    • 2.2 million hired per year in call centers via screening 20 million
    • Virtual interviews, tests, and assessments
    • Raised $1.5m series A

    Bridgevine

    • Focused on life events, like moving
    • Lead generation platform for the home services space
    • Match online contextual audiences with inventory (lead gen)
    • Six time Inc. 500 winner
    • Cost per action marketing
    • $50m+ revenue

    Acculynk

    • Platform for debit card transactions
    • Two sided market
    • Huge growth opportunity in India
    • Powers debit card transactions during the shopping cart checkout process

    Cirracore

    • Wholesale enterprise infrastructure as a service
    • Floor at 56 Marietta St
    • Whitelabel IaaS for other hosting providers to resell
    • Double digit revenue growth since 2009
    • Major reseller providers

    QGenda

    • Automated physician scheduling for all specialties
    • Putting the right physician in the right place at the right time
    • Sometime hundreds, if not thousands, of business rules
    • Productivity, utilization, and other types of reports
    • 800 customers today
    • Doctors and hospitals pay for the web application
    • Under 7% market adoption of this type of technology
    • Activation fees, recurring revenue, professional services fees

    Springbot

    • Ecommerce marketing for SMBs
    • $1M in seed funding
    • Part of Flashpoint program at GA Tech
    • Ecommerce is huge with 10 companies representing half of all online sales
    • 500k+ ecommerce SMBs in the U.S.
    • Integrate data from disparate tools
    • Automatically recommended marketing actions via predictive analytics
    • Focused on the Magento community

    Pindrop Security

    • Phone identification technology
    • Unique fingerprint for each type of phone
    • Caller ID is easily spoofed
    • Phone fraud is faster growing than internet fraud
    • 30% of bank fraud involves a phone
    • $10 billion wasted per year asking phone questions
    • $3.2 billion addressable market

    Endgame Systems

    • Repositioning the company to target commercial markets
    • Government primary customer over the past few years
    • Nation states sponsored cyber attacks against U.S. financial institutions
    • Endgame provides a cyber warfare security and attack system
    • Raised $29M Series A from Kleiner Perkins two years ago
    • Raising a Series B round

    Day one was a big success and I’m looking forward to day two tomorrow.

  • Thinking About the Value of a Startup at Exit

    One of the more popular questions I’ve received after selling our startup to ExactTarget (see ExactTarget and Pardot Join Forces) is how we arrived at the valuation. Valuation, especially in the context of a strategic acquirer, is much fuzzier than a financial buyer that pays a multiple of profits. Pardot, according to the Inc. 500 awards site, reported 2011 revenue of $7.4 million on a cash basis (source), which is far lower than the acquisition price.

    Here are some factors when thinking about the value of a startup at exit:

    • What are the growth rates like?
    • How much faster will the business grow with expanded resources?
    • How are the gross margins now? Are they expanding with scale?
    • How cost effectively does the startup acquire customers?
    • What’s the renewal rate for customers?
    • What are public market multiples for similar companies?
    • How strategic or complementary is the startup to the core business?

    Answering these types of questions can result in valuations that are 1x revenues to 20x revenues, in rare cases. There’s no correct answer — a startup is only worth what someone will pay for it.

    What else? What are some other factors in thinking about the value of a startup at exit?

  • Corporate Culture Alignment in a Company Acquisition

    As mentioned in the post ExactTarget and Pardot Join Forces, the majority of acquisitions fail due to poor corporate culture alignment. While it seems like companies win or lose on the basis of their technology, more often than not it’s due to their corporate culture behind the scenes. A strong corporate culture doesn’t mean that everyone is nice and likes each other, rather, it means that the people who work at the company are aligned around core values that are consistent. The core values could be that people are aggressive and assertive or that people are positive and self starting — there’s no judgement on the actual values, only that they are consistent.

    Here’s ExactTarget’s core values:

    • Treat people well
    • Be easy to do business with
    • Stay true to permission
    • Make clients look like heroes
    • Empower marketers through software
    • Make decisions like an owner
    • Have an entrepreneurial spirit
    • Pursue our goals as a team

    Here’s Pardot’s core values:

    • General: be the best place to work and the best place to be a customer
    • People: positive, self-starting, and supportive

    While the words used to describe the two different company’s core values don’t overlap, for all intents and purposes, they attract the same people. With people of similar personal values brought together through an acquisition, the chance of success is significantly improved.

    What else? What are your thoughts on corporate culture alignment in a company acquisition?

  • Notes on the Letter of Intent in the Sale of a Business

    After a potential acquirer has built a serious level of interest in the business, and is ready to attempt to get a deal done, they will provide a letter of intent (LOI) outlining the characteristics of the proposed deal as a starting point for negotiations. LOIs are like being almost pregnant — it really doesn’t mean much. It is an understanding of the deal two parties are working towards, much like a term sheet, but slightly more detailed and involved.

    Here are a few notes when thinking through the letter of intent:

    • Standard due diligence and no shop periods should be of reasonable length (e.g. 30 – 45 days) to promote focused work by both parties (if things are going well, and more time is needed, it’s easy to ask for an extension)
    • Financial considerations around the cash and stock mix, if applicable, are very important, especially if there’s a lock up on the stock where it can’t be sold for a period of time (in this current market of uncertainty, cash is much more desirable)
    • Net working capital adjustments (e.g. the price goes up or down based on current assets) are always present, and should be considered carefully, especially if there’s serious deferred revenue (it’s a liability! — also note that debt will reduce the purchase price)
    • Escrow funds (the amount set aside in the event of an issue) as a percentage of the deal and how long they are held should be aggressively negotiated (e.g. 7% of the deal held for 12 months might be normal depending on the industry)
    • Other important, but less commonly discussed, items include things like indemnification where you agreed to defend the potential acquirer against future lawsuits for a period of time related to aspects of the business they are acquiring

    A letter of intent is a major milestone in the process to sell a business. Once signed, both parties should work hard to get a deal done. The key is to not rush into signing the LOI, rather take your time and get the terms right up front, resulting in a much smoother process going forward.

    What else? What are some other thoughts on the letter of intent process in the sale of a business?

  • Notes on the Due Diligence Process in the Sale of a Business

    Continuing with the theme of selling a business (see ExactTarget and Pardot Join Forces) I wanted to spend some time talking about the due diligence process. Due diligence is the time after the letter of intent (LOI) is signed until the deal actually closes. For us, we signed up for a 60 day due diligence period (usually there is a no shop clause which means once you enter due diligence, you can’t talk to other potential acquirers) but it only took 45 days until we closed.

    Here’s how the six week due diligence process went (roughly 1-2 days per spent spent on each thing):

    • Start – 250 item due diligence Excel spreadsheet requesting every piece of information you can imagine (e.g. all legal documents of any sort, employees, customers, partners, financials, source code, etc)
    • Week 1 – accounting review on-site with finance people from the potential acquirer talking through the audited financials (note: AICPA independent audits are different from SEC independent audits), discussion of our financial models for next calendar year including key drivers, and review of areas needing more investment
    • Week 2 – technical review on-site with engineering, infrastructure, and product management from the potential acquirer talking through the product architecture, database schema, hosting infrastructure, and source code
    • Week 3 – HR review on-site with the head of HR from the potential acquirer talking through every single employee on staff, hiring process, corporate culture, and how to bring the companies together
    • Week 4 – the most senior leadership from the potential acquirer come on-site and talk about the shared vision, potential, and alignment
    • Week 5 – iron out the purchase agreement, employment agreements, disclosures, releases, and timing of everything for close
    • Week 6 – close the deal!

    All this while still running the business, and, unfortunately, not being able to talk about it with all but a handful of employees. Coordinating and delivering the necessary information for the due diligence process is nearly a full-time job. So, if you’re thinking about selling your business and are serious, go ahead and start getting everything that’s ever happened in the business in order and digitize anything in paper form.

    What else? What are your thoughts on the due diligence process in the sale of a business?

  • Emotions from the Process of Selling a Company

    Yesterday I wrote the post ExactTarget and Pardot Join Forces detailing how we had just sold our company and were super excited about the future. Today, I want to talk a bit about the human side of selling a business — it’s incredibly emotional. With Pardot, we never set out to build a company and sell it. In fact, I believe the best companies are bought and not sold (e.g. a buyer approaches you). Our goal for years now has been to work hard at being the best place to work and the best place to be a customer.

    Looking back over the past several months, here are some of the emotions from the process of selling a company:

    • Excitement – an email out of the blue saying that a large, public company is interested in talking about “partnerships” (look at the person’s title and if it says “Corporate Development” that’s code for mergers and acquisitions).
    • Frustration – the initial conversations went well but there’s little activity and visibility as things usually don’t move very fast while the potential acquirer is reaching out to a number of different companies.
    • Intrigue – the potential acquirer reaches out again and wants you to come on site and meet their executive team (I hope they like us!).
    • Anxiety – the potential acquirer says they want to make an offer. What will it look like? Will it be a good valuation?
    • Anxiety – the offer is good but we can do better. How many times do we get to say ‘no’ before we cross the line and are no longer desirable?
    • Anxiety – negotiations continue for a couple weeks (high quality sleep at night is no more as the mind is racing with tossing and turning becoming the norm).
    • Anticipation – a deal is struck! Now, for the hard part: due diligence.
    • Anxiety – due diligence means incredibly detailed audits of all aspects of the business, not just accounting, and it isn’t the most fun.
    • Relief – due diligence is almost done and there’s light at the end of the tunnel for the deal to close.
    • Worry – now that the deal is going to close, what will the employees think?
    • Panic – what happens if the press finds out about the deal and publishes reports on it before it closes? That will make conversations with employees, partners, customers, etc. very awkward.
    • Excitement – the deal has closed and it’s done. Time to party? Not quite yet.
    • Anxiety – it’s big announcement time for the employees and other constituents.
    • Relief – the announcement went well and the secrecy of everything is finally gone.
    • Anticipation – it’s time to get to work integrating the teams, products, and companies.
    • Sadness – like a child going off to college, it’s sad knowing that chapter one is done and it’s time for chapter two to begin.
    • Nostalgia – what we did was pretty special and we’re super proud of it.

    Selling a company is a very emotional process. As much glamor and excitement is presented in press articles, behind the scenes it’s an emotional roller coaster.

    What else? What are your thoughts on the emotions from the process of selling a company?

  • ExactTarget and Pardot Join Forces

    Over the past 45 days I’ve been working hard on a special deal, codenamed Project Duke, and I’m thrilled to reveal it today: Atlanta’s Pardot Acquired by ExactTarget for Almost $100M. Seeing the headline is still surreal to me, as is the whole experience and journey.

    The Pardot team has the most amazing people and I’ve been honored, blessed, and humbled by the opportunity to work with them, especially my co-founder Adam Blitzer. Corporate culture comes first and Pardot lives it everyday. Walking around the halls I see people who are positive, self-starting, and supportive — exactly our goal. We believe that in providing the best place to work and the best place to be a customer everything else takes care of itself. It really is that simple.

    ExactTarget, of which I’ve written about many times (Notes from the ExactTarget S-1 Filing, A Theory on the Amazing ExactTarget Success Story, etc) is unlike any 1,000+ person company I’ve ever worked with. The Orange Culture is as pervasive and strong as any culture I’ve seen. And, with 1,400 employees, they’ve scaled it to a massive level. ExactTarget is the only company I’ve ever read about that listed their corporate culture as a competitive advantage in their filings with the SEC — it’s an unbelievably good company.

    Most acquisitions fail for one simple reason: lack of corporate culture alignment. With ExactTarget and Pardot, the corporate cultures couldn’t be more aligned and the growth opportunities more dramatic. People like to talk about complementary technologies, gaps in product portfolios, etc when it really comes down to the simplest thing — people.

    The future is bright and I couldn’t be more thrilled that ExactTarget and Pardot have joined forces.

  • The Enterprise Value of Compounding Growth in a Startup

    Albert Einstein said, “Compounding is mankind’s greatest invention because it allows for the reliable, systematic accumulation of wealth” (source). This statement is often used in the context of investing in public company stocks with a set-it-and-forget-it approach. Money compounding annually at a single digit percentage rate (e.g. 5%) will generate a significant return, especially in the context of decades (invest $100 at a 9% interest rate and it’ll double in value in eight years based on the rule of 72).

    Now, for fast growing startups, the stakes are even higher. If the business is growing at a sustained 50%+ per year over an extended period of time (e.g. 5 – 10 years), the scale and enterprise value of compounding growth becomes even more dramatic. Want to see what crazy growth rates look like at super scale? Load up Google Finance for Apple’s stock and set the timeframe to 10y (10 years).

    Compounding is an impressive phenomena for regular growth assets. For startups with traction and explosive growth, the increase in enterprise value is unbelievable. Pay close attention to growth and don’t forget the power of compounding over time.

    What else? What are your thoughts on the enterprise value from compounding growth in a startup?