David Cummings on Startups

Blog

  • 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?

  • Physical Atlanta Startup Village Idea

    Atlanta has an amazing resource in Tech Square, on the outer edge of Georgia Tech’s campus in Midtown. Tech Square has all the amenities wanted in a startup hub: highly ranked engineering school, great walkability for serendipitous interactions, easy proximity to public transportation including a subway station, many restaurants, tons of creative-class jobs, Starbucks, Barnes and Noble, the ATDC incubator, and the co-working space Hypepotamus (more Midtown benefits from @rkischuk).

    ATDC, the Advanced Technology Development Center (not the Atlanta Technology Development Center as many people think), has great office space that’s subsidized by the university and month-to-month leases — perfect for startups. In addition, the Tech Square area is an empowerment zone meaning it qualifies for a $2,500 tax credit for each new employee hired with a salary ~30% higher than the county average (a salary of approximately $65,000 or higher qualifies). With all this said, there’s a high quality problem in that there’s no office space left, a waiting list for future space, and you can’t get on the waiting list unless you’re an ATDC Select company (based on company progress and likelihood of building a sustainable business). Also, the space isn’t designed for startups that have broken through and are starting to scale (e.g. once you hit reached a certain employee size or have been there three years, whichever comes first, you usually have to leave).

    The solution is to buy the large, empty lot next to the parking deck that serves Tech Square and turn it into a physical Atlanta Startup Village. Much like an Olympic Village, this would be custom designed to help foster the goal of building a larger, more vibrant startup community.

    Here are some ideas for the physical Atlanta Startup Village:

    • Large multi-story complex like the American Tobacco Campus in Durham, NC
    • Loft-style space with tall ceilings and exposed bricks and beams
    • Communal outdoor space with a park-like setting
    • Several multi-purpose event facilities
    • Roof top balcony for tenants and events
    • Octane coffee shop
    • Mellow Mushroom restaurant
    • General Assembly-like education and co-working space
    • A mix of seed stage, early stage, and growth stage companies
    • Affordable gigabit fiber internet access and WiFi

    The physical Atlanta Startup Village is a complement to Tech Square and sets the stage for an even stronger and more vibrant tech startup community.

    What else? What would you add or change about the physical Atlanta Startup Village idea?

  • Entrepreneurs That Ride Major Trends

    Recently I was talking with a successful serial entrepreneur and he commented that he looks for major trends when deciding on his next business. He described it as finding a big sand box that he likes and digging around in it until he finds a great opportunity — I agree completely. I like to think about it as focusing on a small, fast-growing market doing a zig zag until you find the best wave to ride.

    Here are some big trends right now:

    • Cloud computing
    • Crowdsourcing
    • Social media
    • Mobile
    • Location-based services

    Those are some very generic trends. The idea is to find an angle or leading edge component within a trends and get ahead of the market. As for timing, 2-4 years early is often optimal.

    What else? What are your thoughts on entrepreneurs that look to ride major trends?

  • Employee Loyalty is a Strong Non-Valley Benefit

    Recently I’ve heard increased talk from entrepreneurs and venture capitalists that employee loyalty and retention is an even more serious issue in the Valley that isn’t as top-of-mind for entrepreneurs considering where to locate their startup. The idea is that in the Valley there’s a culture of people moving jobs every year to try and get in early at the next pre-IPO startup, and, of course, most startups don’t make it, so people keep changing jobs quickly.

    For us, we have over 100 employees, have been in business five-and-a-half years, and have only had five people voluntarily leave us (along with ~10 that have involuntarily left). Building a strong corporate culture and great place to work is an incredible competitive advantage anywhere, but especially powerful is markets outside the Valley that have greater employee loyalty and less turnover.

    The next time you think through pros and cons of your startup’s city, add employee loyalty as an important factor.

    What else? What are some other thoughts on employee loyalty as a strong non-Valley benefit?