David Cummings on Startups

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  • 4 Reasons to Attend Flashpoint Demo Day 2012

    Flashpoint, the startup engineering accelerator associated with Georgia Tech, has its second Demo Day on Tuesday, September 11, 2012 at 2:30pm in Tech Square at the Flashpoint offices. With this being the second cohort of startups, Flashpoint is still in its early days but off to a great start under the leadership of Merrick Furst.

    Here are four reasons to attend Flashpoint Demo Day:

    1. Get a chance to hear from 14 of the most promising seed stage startups in Atlanta
    2. Learn more about lean startups, customer development, and startup engineering
    3. Meet investors, entrepreneurs, and executives in the Atlanta community
    4. Stretch your mind with some of the coolest and most interesting startup ideas

    If you can’t make the Atlanta Demo Day, Flashpoint will be in NYC and San Francisco later this month. I’m looking forward to Tuesday’s Demo Day.

    What else? What are some other reasons to attend Flashpoint Demo Day 2012?

  • SaaS Apps Can Learn from Casual Game Engagement Techniques

    One of the more common techniques to increase engagement and usage of casual games on the iPad is to provide goals or challenges each time the game is played. As an example, the three active goals in a game might be to beat your previous high score, get to level five, and purchase a digital item in the store. Some, like beating your high score, are context-sensitive and straightforward. Others, like purchasing a digital item in the store, are designed to increase the user’s engagement with different parts of the game, and set the foundation for in-app purchases.

    Software-as-a-Service (SaaS) apps should learn from this approach. In SaaS apps, it’s easy to automatically track what features are, and are not, being currently used. With this information, as well as analytics around what’s going on with usage of active features, the software could recommend new features to take advantage of as well as ways to get more value from existing features. Even better, data across multiple customers of the SaaS app can be anonymized and used for benchmarking, so that the recommendations give a context as well (e.g. you’re 5% below the average for this category and here’s what you should do to improve).

    Here are some example goals or challenges that a SaaS app might provide:

    • Create a new page called ‘about’ in WordPress
    • It takes you an average of 40 days to get paid, and for your type of business the average should be 35 days, according the QuickBooks app, so here is a best practices guide to improving payment turnaround
    • Try out our new commenting feature in a cell in one of your Google Spreadsheets

    The next time you’re contemplating ways to increase engagement and reduce customer churn, consider goals and challenges on the main application screen of the SaaS app.

    What else? What are some other things SaaS apps can learn from casual game engagement techniques?

  • Atlanta History: Notes from the ISS S-1 IPO Filing

    Internet Security Systems, easily the most famous and successful B2B Atlanta tech startup of the past 15 years, filed to go public in late 1997 with a target IPO date of January 20, 1998 (SEC filing for ISS Group, Inc. IPO). After a successful run as a public company, IBM bought ISS in late 2006 for $1.3 billion in cash (source: IBM.com). Being a connoisseur of the Atlanta startup and technology community, I wanted to learn more about ISS. SEC documents, like an S-1 filing, are some of the most honest and transparent business documents you’ll ever read.

    Here are notes from the 1997 ISS Group, Inc. IPO filing:

    • Proposed raising $31.6M (pg. 1)
    • Over 1,500 customers (pg. 3)
    • First product was distributed as shareware in 1992 and the business wasn’t incorporated until 1994 (pg. 4)
    • Selling 2,500,000 shares out of 15,878,428 shares total (pg. 4)
    • Revenues and employees (pg. 8)
      1995: $257,000 / 7
      1997: $13,467,000 / 141
    • 80% of revenue from the Internet Scanner product (pg. 9)
    • VCs bought 3,650,000 Series A shares (pg. 18) representing 23% of the business
    • VCs bought 2,086,957 Series B shares (pg. 18) representing 13.1% of the business
    • Channel partners receive discounts ranging from 35% – 50% off list price (pg. 21)
    • Accumulated deficit of $5.2M (pg. 21)
    • Gross margins (pg. 22)
      1995 – 98.4%
      1996 – 99.6%
      1997 – 95.0%
    • Strategy (pg. 29)
      – Continue leadership position in security technology
      – Expand domestic sales channels
      – Promote professional services capabilities
      – Expand international operations
      – Create category awareness
    • Field sales reps focus on opportunities that have at least $200,000 in deal value (pg. 36)
    • Management age at time of IPO (pg. 41)
      Tom Noonan – 37
      Christopher Klaus – 24
    • Christopher Klaus founded ISS in April 1994 and Tom Noonan joined in August 1995 (pg. 41)
    • VCs owned 31.1% of the equity after the offering (pg. 50)

    The ISS S-1 is fascinating to read as it is an example of a company that went public with a small amount of venture capital raised in a short period of time, something that’s no longer possible due to the much larger revenue requirements to be public along with costs related to Sarbanes-Oxley. Entrepreneurs interested in the history of the Atlanta technology community should read the ISS S-1.

    What else? What are some other thoughts on Internet Security Systems and their IPO?

  • 4 Reasons to Raise Venture Capital

    At last night’s Venture Atlanta reception I had the opportunity to talk with a number of entrepreneurs that are out trying to raise venture capital. Naturally, I enjoyed asking the question “why are you raising venture capital?” The common refrain was that their business was doing great and that if an investor saw the potential in it, and bought in at a nice valuation, they’d raise money. Hmm, I thought to myself, that’s not a good answer.

    Here are four reasons to raise venture capital:

    1. 5x Exit Value Increase – You’re focused on making a significant amount of money, and believe the company will be worth at least 5x the value compared to what you can build without venture money (the 5x amount comes from expected dilution after several rounds of financing e.g. if you start with 50% of the business you’ll likely end up with 10% at the end of the process, thus needing a significantly greater exit to have a financial gain compared to what you can do on your own)
    2. Winner Take All – It’s a winner take all or most market such that the 2nd or 3rd place company is nearly irrelevant (think about eBay dominating the online auction market in the U.S.), which often requires raising a substantial amount of money and spending it ahead of growth
    3. Anchor Company – You want to build a large, anchor company in your city, as quickly as possible, and need to raise a substantial amount of money for the business to achieve escape velocity so that it can get big quickly
    4. Accountability – You value the accountability that having a board of institutional investors brings to the table on a regular basis helping you to execute at a higher level than you might do otherwise

    Other reasons for raising venture capital you might hear include wanting money to do a tuck-in acquisition, taking money off the table (that’s really growth equity or private equity and not traditional venture capital), or to help attract talent. These, along with raising money because of a good valuation, are not ideal as raising venture capital significantly changes the timeline and trajectory of the business.

    What else? What are some other reasons to raise venture capital?

  • Security Ideas for SaaS Apps

    Software-as-a-Service (SaaS) apps have the same security challenges as any other web-based products. The good news is that many SaaS apps are more secure than installed enterprise apps due to more timely roll outs of security enhancements and better economies of scale for vulnerability testing.

    Here are some simple best practice security-related ideas for SaaS apps:

    • Require more complicated passwords for users (e.g. at least eight characters with upper case, lower case, and numbers included)
    • Enforce two-factor authentication for any power users
    • Audit the application quarterly with vulnerability scans, cross site scripting scans, and SQL injection scans
    • Limit server access to as few people as possible and enforce IP address white listing
    • Authorize individual machine access after email confirmation
    • Expire user passwords on a regular basis

    SaaS security best practices are well known at this point and should be implemented early on for apps that contain confidential information.

    What else? What are some other security ideas for SaaS apps?

  • Startups Should Simplify Everything

    A few weeks ago I was talking to an entrepreneur and he was showing me his web-based product. After 10 minutes of eagerly demoing functionality, I stopped and asked how much customization went into what he just showed me. Answer: 60 minutes. Not bad for B2B Software-as-a-Service (SaaS) application. I then asked to show me the behind-the-scenes admin section of the product to see exactly what customization looked like — it was painful.

    For a product with a free trial, there was no way their target audience was going to do a self-service signup and get value from the application without extensive hand holding and support. My recommendation was to simplify the product and have logical defaults such that with as little effort and friction as possible the end user could get value. It needs to be as close to zero configuration as possible.

    Here are some common things startups should simplify:

    • Customer sign-up and on-boarding process — use defaults that deliver 80% of the value
    • Bonuses — don’t have any
    • Commissions — make it so simple that the commission plan fits on a single page
    • Vacation — give unlimited vacation time and make it a results only work environment
    • Laptops — use MacBook Airs for everyone
    • Employee reviews — do them quarterly and only ask no more than four questions
    • Pricing — make it so easy it doesn’t require an Excel spreadsheet and publish the pricing online

    Startups win by staying closest to the customer with the quickest decision making process possible. Startups should simplify everything.

    What else? What are some other common things startups should simplify?

  • Startups Should Have a Structured Discount Policy

    Recently I was talking to an entrepreneur and he asked how discounts worked for our sales team. I explained we have a structured system to remove ambiguity and maximize autonomy for sales reps (how often have you heard the refrain “let me go ask my manager for a discount”).

    Here’s how an example structured discount policy might work:

    • For every $12,000 in annual contract value (ACV) sold, the rep gets $600 ACV discount for future deals
    • Discounts are accrued in a discount bank and don’t expire
    • No deal can be more than 25% off the retail price
    • No deal can be below a certain floor
    • If a customer pre-pays for a year, they get an extra 10% discount
    • If a customer commits to a longer contract, each additional year gets a 10% discount

    So, the star reps that sell more deals get more money for their discount bank. Interestingly, the higher producing reps, with more discounts at their disposal, actually offer fewer discounts. Most startup discount policies are too vague and result in ambiguity (should I wait until my boss is in a good mood after his coffee to ask for this discount?). Startups should implement a structured discount policy and make everything easier for their sales team.

    What else? What are some other thoughts on a structured discount policy for startups?

  • Notes from the Workday S1 IPO Filing

    Workday, one of the largest and fastest growing Software-as-a-Service (SaaS) companies, just filed their S-1 to go public. Workday was co-founded by the founder of PeopleSoft, David Duffield, who fought the PeopleSoft acquisition by Oracle and lost. Workday’s equity control was set up such that it would not be subject to any hostile takeovers in the future.

    Here are notes from the Workday S-1 IPO filing:

    • Provides software for human capital management (HCM), payroll, financial management, time tracking, procurement and employee expense management (pg. 1)
    • Deliver a new product update three times per year (pg. 1)
    • 325 customers (pg. 2)
    • 1,450 employees (pg. 2)
    • IDC estimates that the SaaS market will grow at a compound annual growth rate of 24%, from $23 billion in 2011 to $67 billion in 2016 (pg. 2)
    • Native iOS app for iPhone and iPad combined with an HTML5 app for Android and Windows Mobile (pg. 4)
    • Growth strategy (pg. 5)
      Expand customer base
      Strengthen and extend the suite of applications
      Expand internationally
      Deepen relationship with existing customer base (a.k.a. up-sell)
      Develop partner ecosystem
      Leverage corporate culture
    • Incorporated in March 2005 as North Tahoe Power Tools, Inc and in July 2005 changed name to Workday, Inc (pg. 6)
    • Revenues (pg. 9)
      2009 – $25.2M
      2010 – $68M
      2011 – $134.4M
    • Losses (pg. 9)
      2009 – $49.9M
      2010 – $56.2M
      2011 – $79.6M
    • Accumulated deficit of $329.5M (pg. 10)
    • Customer contracts are typically 3-5 years (pg. 14)
    • The co-founders/co-CEOs control a majority of the voting stock (pg. 29)
    • Professional services revenues (pg. 45)
      2009 – $11.5M
      2010 – $31.4M
      2011 – $45.8M
    • Sales and marketing expense (pg. 45)
      2009 – $20.9M
      2010 – $36.5M
      2011 – $70.4M
    • $325M in subscription backlog as of July 31, 2012 (pg. 53)
    • Workday HCM product modules (pg. 72)
      Workday HR Managment
      – Workday Lifecycle Management
      – Workday Organization Management
      – Workday Compensation Management
      – Workday Absence Management
      – Workday Benefits Administration
      – Cloud Connect for Benefits
      Workday Talent Managment
      – Workday Onboarding
      – Workday Goal Management
      – Workday Performance Management
      – Workday Succession Planning
      – Workday Career and Development Planning
    • The relationship with Salesforce.com does not include any revenue sharing arrangements (pg. 81)
    • VC ownership (pg. 105)
      Greylock – 11%
      NEA – 10.1%

    Workday’s S-1 paints a fascinating story of building a multi-billion dollar SaaS company in seven years by burning over $325M in capital, and no signs of slowing down. Workday’s management team is in it for the long-haul and will be extremely successful.

    What else? What are some other thoughts or comments on the Workday S-1 IPO filing?

  • Atlanta Needs More Startup Exits to Grow the Community

    One of the key tenants of a healthy startup community is successful entrepreneurs investing some of their capital gains from an exit into more startups. The idea is that capital needs to be recycled in the community to help the community grow and prosper.

    As for Atlanta, here are the exits I know of  2/3rds of the way through 2012:

    At a rate of one tech startup exit every two months in Atlanta, there isn’t much volume. Without much exit volume, it’s tough to attract more outside capital and recycle more local capital. The long term solution is to devote more resources and community support to the early stage ($1M – $4M in revenue) and growth stage ($5M+ in revenue) startups in the area, which will result in more exits.

    What else? What are some other startup exits this year in Atlanta? What are some other ideas to grow the community?

  • An Exit Value Premium With VC Investors

    There’s a refrain I’ve heard several times from venture-backed entrepreneurs: successful startups will command an even greater premium at time of sale if the company is venture-backed, everything else being equal. Some might argue that it’s self-serving for the venture community to promulgate the idea but it makes sense considering an entrepreneur might do one or two transactions in their lifetime whereas a successful VC will be a part of dozens of exits in their career.

    Here are a few exit value premium examples:

    • A VC has a relationship with a strategic acquirer whereby the VC is able to build a case for a larger valuation than otherwise expected
    • The startup closed a round with a VC, a strategic acquirer comes along shortly thereafter, finds out where the VC is in their fund lifecycle, and offers a valuation that meets the VC’s desired returns, while being significantly higher than what other acquirers would pay
    • Raising money from a high profile, top tier VC increases the startup’s awareness with corporate development teams at potential acquirers, helping their exit valuation

    Venture capitalists work hard to add value to their investments and one of the direct benefits is an exit premium.

    What else? Do you think venture-backed startups get an exit value premium?