David Cummings on Startups

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  • 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?

  • Nobody, Nothing, Never: Confidentiality in a Mentor Relationship

    One of the things I recommend to entrepreneurs, but didn’t do well myself early on, was to reach out to mentors for help and advice. My daughter likes to say “sharing is caring” when parroting what she hears from her pre-school teacher. Sharing is caring fits perfectly with a mentor/mentee relationship — the more you give, the more you get.

    One of the oft repeated YPO lines is “nobody, nothing, never” when talking about confidentiality. The same confidentiality applies to the mentor/mentee relationship. Building a foundation of trust and confidentiality is critical to get past the high-level content and really go deep with the core challenges and opportunities.

    The next time you meet with a potential mentor or as a mentor with a mentee, bring up confidentially, in a graceful manner, and set the tone for “nobody, nothing, never.” The other person will appreciate it and likely reciprocate.

    What else? What are your thoughts on confidentiality in a mentor relationship?

  • How Do You Know if Cold Calling Will Work for a Startup

    Earlier today I had the opportunity to talk with an entrepreneur that has a successful Software-as-a-Service (SaaS) startup. He’s been at it for a few years and the business is growing nicely. Naturally, a question that’s top of mind for him is how to grow even faster. After I mentioned that cold calling works well for us, he started asking a number of questions.

    Here’s how I like to think through if cold calling will work for a startup:

    • Markets that suffer from a lack of market awareness are ripe for cold calling (e.g. the technology is ready, the ROI proven, but people just don’t know about it yet)
    • Products with a high lifetime value, and gross margin, help make cold calling more viable
    • Test cold calling on a list of prospects by hiring a college intern for $15/hour and see how many people answer the phone, how many people engage in a conversation, how many people schedule a demo — shoot for at least 50 calls per day
    • Ensure that social proof and case studies are readily available to educate the potential prospect

    Cold calling one of the most under utilized, but effective, method of B2B sales. Startups would do well to experiment with it and figure out how to make it work in their organization.

    What else? What are some other ways to know if cold calling will work for a startup?

  • How Do you Crack the Nut on Recruiting Technical Talent

    The shortage of software engineering talent is real. Not a day goes by that I don’t hear or read about a startup lamenting how hard it is to find strong technical talent to join their team. It isn’t that there aren’t people out there  looking for jobs. As a startup, it’s especially important that the engineers on staff are smart and get things done.

    Recruiting technical talent is an especially tough nut to crack as engineers are typically introverted making them less likely to reach out to people to learn about new career opportunities, talent is in such high demand that employers already coddle their IT departments, and there’s real uncertainty in the type of overall work experience when switching jobs.

    Here are some ideas to get better at recruiting technical talent:

    Cracking the nut on recruiting technical talent is a tough, long term proposition. Expect 6-12 months of hard work and serious investment to see results. In the end, the quality and quantity of talent on your team is going to seriously influence your level of success.

    What else? What are some other ideas to recruit technical talent?

  • What Scale Does a Startup Need to be Independent of the Founder

    Two weeks ago a couple of entrepreneurs were in my office asking for advice on their startup. Their revenue has really accelerated in the past six months and they’re debating between investing more in the business or putting money aside for a rainy day fund. After asking how many employees they had (less than 10) I asked if the business was dependent on them. Yes, unequivocally.

    I sensed that growing the team to the point that it wasn’t dependent on them was a near-term desire. Of course, you could do a budget and come up with that number. From my experience with software/software-as-a-service startups, the business would be spending about $1.5MM on salaries, benefits, and infrastructure (e.g. office space) to be large enough to not be dependent on the founders. Here are some items to think about with respect to size of business:

    • Gross margins will influence whether spending $1.5MM on team member occurs at $2MM of revenue or $10MM of revenue
    • Founders are often decent at multiple things and really good at one thing — that one thing is often the last type of talent brought on the team, and typically expensive because the founder has high standards for the role
    • Redundancy or scale is needed for positions that are critical to operation of the business (e.g. number of software engineers, support people, etc) so that the founders and team members can take vacation without worrying if the business will continue to operate
    • One strategy for a founder is to take a two week vacation, forcing the issue of what is, and isn’t, dependent on them (banks like to make every employee take one two week vacation per year to see if any fraud is taking place with that person)
    • Depending on the size of the startup, some investment in people will have to take place in advance of growth to be self sufficient from the founder

    Reaching a size and depth of business to be founder independent is a huge milestone. I’ve found that ensuring the business isn’t dependent on the founder (e.g. through a long vacation) provides great peace of mind and sense of progress — it should be a goal on every entrepreneur’s list.

    What else? What are your thoughts on the necessary size of a startup to be independent of its founder?