David Cummings on Startups

Blog

  • Bottom-Up SaaS Revenue Forecast for Startups

    Bottom-up revenue forecasts are the only way to go for startups, especially for Software-as-a-Service (SaaS) startups. Too often, entrepreneurs will take a big number, like all the people in China, and say are going to get 1% of them to buy something, and thus have a big business. Alternatively, an entrepreneur will start with a small number, like their current revenue, and forecast that it will grow at some growth rate indefinitely (if only things were like the wise man who asked the king for one piece of rice and to have that piece doubled for every spot on a chess board). Unfortunately, top-down revenue forecasts should not be used for startups.

    Here’s an example bottom-up SaaS revenue forecast approach:

    • Take the number of sales reps expected to make quota (e.g. 2)
    • Multiply by the monthly quota per rep (e.g. $25,000 in new annual contract value (ACV) per month or $75k ACV per quarter or $300k ACV per year)
    • Multiply by the monthly renewal rate (e.g. between 97% and 99.5%)
    • Add in any consulting or one-off revenue
    • Arrive at the total monthly revenue

    Bottom-up forecasts are the only way to go for SaaS startups and should be used from idea stage all the way through growth stage.

    What else? What are some other thoughts on bottom-up SaaS revenue forecasts for startups?

  • The #1 Enemy of SaaS: Churn

    Software-as-a-Service (SaaS) continues to be one of the most popular tech-based business models as evidenced by the multiples for publicly-traded SaaS companies. It’s easy to get excited about the model due to the recurring revenue, high gross margins, and general growth of the space. One area that doesn’t get the attention it deserves is the #1 enemy of SaaS: churn. Churn is when a customer leaves and is a normal part of business, but with SaaS, it takes on more importance.

    Here are some thoughts on churn:

    • A leaky bucket can quickly form if the number of new customers equals the number of customers that churn (assuming no upsells and everything else is equal)
    • A killer amount of churn is often thought of as 3% or more per month, due to the huge number of new customers required to continue growing
    • Keep detailed records around churn reasons and analyze them on a regular basis
    • Monitor customer cohorts on a monthly/quarterly/annual basis to understand how churn rates are improving/declining over time

    Churn is the #1 enemy of SaaS and deserves more publicity. The next time you think about SaaS metrics, churn rate should be near the top of the list.

    What else? What are some other reasons churn is the #1 enemy of SaaS?

  • 7 Crazy Startup Workplace and Culture Things to Do

    Yesterday I was having lunch with a group of entrepreneurs and business leaders. One of them commented on us winning an award for being the #1 place to work and asked if I’d share any secrets or tips. I love talking about all the crazy things we do, so I jumped right in.

    Here are seven crazy startup workplace and culture things we do:

    1. Bottom up daily check-ins – everyone participates in a quick meeting at the beginning of the day with their manager and answers the following questions: what did you do yesterday, what are you going to do today, and do you have any roadblocks
    2. Scoreboard – a large LED scoreboard for everyone to see how the company is doing across key metrics color coded red, yellow, green, and super green
    3. Two page essays during the hiring process – all applicants for all positions have to write a two page essay as part of the hiring process and we’ve found that ones ability to write is highly correlated with the ability to do the job for all departments
    4. Culture check during the hiring process – we have several two-person teams that interview candidates exclusively for corporate culture fit and don’t assess things like domain expertise or ability to do the job
    5. Quarterly check-ins – each quarter every team member sits down with their manager for an hour one-on-one meeting and answers the following questions: what did I accomplish last quarter, what am I going to accomplish this quarter, how can I improve, and how am I following the values
    6. Four hours of monthly housecleaning – we pay for four hours of housecleaning per month for each employee to help simplify and improve their personal life
    7. Freestyle Fridays – we don’t allow recurring meetings on Friday and discourage any meetings or interruptions so that people get longer periods of time to concentrate and get in the zone (most people work from home several days per week as well)
    8. Bonus: No vacation tracking – we don’t track employee vacation or sick time as our focus is on delivering results and meeting expectations, not on how many hours someone worked

    One of the things I tried to emphasize at the lunch meeting is that the perks and benefits side of the equation reinforces the value we place on our people, but people love the company because of the other people they work with, and the perks are icing on the cake.

    What else? What are some other crazy startup workplace and culture things you recommend?

  • Thoughts on the Trulia S1 IPO Filing

    Earlier today I saw the announcement that Trulia, a real estate listings site, had filed their S-1 with the SEC to do an IPO. Being a person that really enjoys technology, real estate, and learning how successful companies operate, I’m especially interested in the Trulia S-1.

    Here are some notes and thoughts on the Trulia S-1 IPO filing:

    • 22 million monthly unique visitors (pg. 1)
    • 360,000 active real estate professionals use the site with 21,544 paying subscribers (pg. 1)
    • 110 million properties, including 4.5 million homes for sale or rent (pg. 1)
    • 5 million unique pieces of user-generated content on homes, neighborhoods, and real estate professionals (pg. 1)
    • Revenues (pg. 2):
      2009 – $10.3M
      2010 – $19.8M
      2011 – $38.5M
      2012 first six months – $29M
    • Losses (pg. 2):
      2009 – $7M
      2010 – $3.8M
      2011 – $6.2M
      2012 first six months – $7.6M
    • $23.7 billion will be spent on real estate related marketing in 2012 (pg. 3)
    • Agents that pay the monthly subscription fees get more than 5x the leads (pg. 4)
    • 2.8 million real estate professionals in the United States (pg. 5)
    • Trulia was incorporated in June 2005 (pg. 6) – Note: Seven years from start to IPO is impressive
    • Accumulated deficit of $43.8 million (pg. 13)
    • Percent of revenue from subscriptions (pg. 14)
      2009 – 32%
      2010 – 47%
      2011 – 58%
      2012 – 68%
    • The primary reason for the decrease of advertising revenues in 2012 was due to a large customer going bankrupt (pg. 15)
    • Dependent on a listing aggregator to supply a substantial portion of the listings (pg. 16)
    • Revenue is seasonal with spring and summer the best (pg. 18)
    • Single data center with no failover (pg. 22)
    • They are using the recent JOBS Act to not have their auditor evaluate their internal controls (pg. 25)
    • $20M line of credit with $10M used from Hercules Technology Growth Capital, LLC (pg. 27)
    • Raised $32.6M selling preferred stock to venture capitalists (pg. 60)
    • ListHub provides a substantial number of listings (pg. 91)
    • 462 full-time employes (pg. 94)
      118 in technology
      303 in sales, marketing, and support
      41 in general and administrative
      267 in San Francisco
      165 in Denver
      16 in NYC
      14 work remotely
    • The follow the I.M.P.A.C.T. principles:
      Innovate
      Make a difference
      People matter
      Act with integrity
      Customer obsessed
      Trust and respect each other
    • 41,500 square feet of office space in San Francisco (pg. 95)
    • Ownership percentages (pg. 126)
      Co-founder and CEO – 13.5%
      Co-founder – 10.6%
      Accel – 23.6%
      Fayez Sarofim Investments – 19.6%
      Sequoia Capital – 10.9%

    From starting in mid 2005 to filing for an IPO in mid 2012 is very impressive. Trulia has all the ingredients for a strong IPO and I’m looking forward to watching them grow.

    What else? What are some other thoughts on the Trulia S-1 IPO filing?

  • The #1 Goal in a Demo Day / Group Pitch Setting

    Earlier today I had the opportunity to spend a few hours at Flashpoint as part of mentors program. With demo day less than a month away on September 11th, many of the teams were asking questions about what should go in their pitch as well as any ideas or recommendations. Naturally, I asked each one what they wanted to happen 4-6 weeks after demo day so that they could work back from that (Covey: begin with the end in mind). Most referenced raising an angel round of a few hundred thousand dollars as the goal.

    Assuming the most common purpose of a demo day / group pitch setting is to raise money, there should be one major goal: generate interest for an investor to want a follow-up meeting.

    Many entrepreneurs get to a pitch session and inevitably throw up all the facts and information they know about their startup. A much better approach is to tell a story with anecdotes and social proof such that some investors resonate with the content and want to know more. Delivering a hook for the mind as well as an analog analogy is also great to incorporate.

    The next time an entrepreneur is going to give their pitch to a group, remind them that the most important thing is to generate interest for an investor to want a follow-up meeting.

    What else? What are your thoughts on the #1 goal in a demo day / group pitch setting?

  • Anatomy of an Ideal Startup Neighborhood

    Brad Feld has a new book called Startup Communities coming out that I haven’t read but I have pre-ordered. I love thinking about what goes into a startup community and how to improve it. With the success of Tech Square at Georgia Tech by way of a high density of startups at the ATDC, Flashpoint, and Hypepotamus, I think that there should be more dialogue about startup neighborhoods (Brad Feld talks about it in a post: I’m in Cambridge, not Boston), with the idea that a neighborhood is an even smaller subset of a community, where a community is generally a city or metro area.

    So, assuming a neighborhood has a much smaller geographic footprint, here are some ideas on what the anatomy of an ideal startup neighborhood looks like:

    • Great outdoor walkability to promote unplanned interaction with other community members
    • Excellent event space options (e.g. simple things like a small room in a coffee shop to larger options like big rooms that can accommodate 100 people)
    • High density of startups per capita
    • Food, drink, and entertainment options right within the area
    • Positive vibe that this a place people creative people want to be (likely a given if it has the above items)

    Areas like Tech Square in the Midtown area of Atlanta meet these requirements whereas places like Buckhead in Atlanta are super nice, but don’t meet the walkability component (hopefully the new Buckhead Atlanta development in the old Buckhead Village does with all its outdoor space, restaurants, retail, and office space helps with walkability). Startup communities would do well to start narrowing in on startup neighborhoods and figuring out ways to make more focused areas successful.

    What else? What are some other pieces that you’d add to the anatomy of an ideal startup neighborhood?

  • Sales Department Management Structures for Startups

    As product/market fit is achieved and a repeatable customer acquisition process found, it becomes necessary to start scaling out the sales department. A sales department, like any department, requires strong leadership with a combination of customer-first thinking and metrics-oriented actions. After you’ve avoided the early VP of Sales temptation, hired and trained a couple sales reps that are making quota, it becomes time to recruit the sales management. Always remember that the best sales reps don’t usually make the best sales managers.

    Here’s an example sales department structure:

    • VP of Sales
    • Two sales directors
    • Eight sales managers
    • 64 sales reps

    In this growth stage startup example, the sales department has 75 people (not counting sales assistants, sales engineers, etc) with a pretty standard hierarchy. Building a sales department is hard but having great leadership and managers makes it much easier.

    What else? What are your thoughts on sales department management structures for startups?

  • Professional Services in Startups

    Startups should focus on finding product/market fit and building a repeatable customer acquisition process. While building new and innovative technologies, prospects will regularly ask for professional services. Professional services is a fancy way of saying custom or one-off consulting work. Assuming the bills can be paid and the lights kept on, professional services should generally be avoided until the core business is performing well so as to maintain focus on the product.

    Here are a few considerations around professional services in startups:

    • Some products require professional services for on-boarding clients or customizing functionality and that’s standard, but most should stay away from them when possible
    • Startups would do well to develop a network of other companies to provide professional services for the startup’s customers
    • Professional services can be a great way to help with client satisfaction and retention by offering a more comprehensive solution (again, when necessary)
    • Quality control with third-party professional services providers is another reason to offer them in-house

    Professional services are a standard part of the technology world but can get startups in trouble when too much work is custom and not part of the core product vision. Finding a balance is tough but it’s best to focus on the product and steer clear of one-time consulting work, if possible.

    What else? What are your thoughts on professional services in startups?

  • Informational Interviews in Startups

    Talent is one of the most important, and most difficult, aspects of a startup. The right person does make a huge difference. Just read the post last month from Joe Kraus, of Excite.com fame, titled If You Don’t Think You Need Greatness, You Haven’t Seen It where he talks about how people that haven’t worked with an amazing person with a particular skillset then view that position as one of lower importance. I’ve seen greatness first-hand and it’s helped me appreciate things I didn’t appreciate before.

    Most of the time top talent isn’t actively looking for a position since they are in such high demand and their skills are well understood. One thing many talented people like to do is to meet with other talented people and share stories and experiences: enter the informational interview. An informational interview isn’t a full-on job interview but rather getting to know someone with the goal of understanding their background, skillset, and where they are in their career and personal goals. Think of an informational interview as regular getting to know someone new but with an eye towards possibly wanting to recruit them in the future.

    Entrepreneurs need to do informational interviews on a regular basis.

    Building a strong network on professional colleagues as well as a pipeline of talent is invaluable for entrepreneurs. Informational interviews should be a regular part of an entrepreneur’s life.

    What else? What are some other thoughts on informational interviews in startups?

  • Another Cold Calling Benefit: Market Intelligence

    Cold calling and hiring an army of awesome sales people seems crazy to many entrepreneurs that haven’t seen that side of successful technology startups. Google does an amazing job of putting its engineers front and center as the all-stars while having thousands of sales people behind the scenes selling stuff. Neil Patel just put up a post talking about competing with Omniture in web analytics and how he underestimated the importance of sales people.

    Another big benefit of cold calling is gathering market intelligence.

    Here are some examples of market intelligence from sales cold calls:

    • Competitor customers (e.g. what companies are using your competitors)
    • Existing vendor contract terms (e.g. when the competitor’s contract is up)
    • Product functionality (e.g. features that are most important to a prospect as well as features missing from competitive products)
    • Non-public industry news (we once learned a competitor was going out of business from one of the competitor’s customers before news hit the industry)

    Cold calling doesn’t work for all industries but for ones that are fast growing and suffer from lack of market awareness, cold calling works great.

    What else? What are some other types of market intelligence gained from cold calling?