David Cummings on Startups

Blog

  • Raising an Angel Round in the South

    Today, two different entrepreneurs asked me for advice about raising an angel round, and both are located in the South, making for its own unique dynamic. Even with the negative press about the Facebook IPO, which was very successful for Facebook, the startup world is buzzing with enthusiasm and opportunity. From a trends perspective, social, mobile, and local show no signs of slowing down.

    So, for entrepreneurs raising an angel round anywhere, but especially in the South, here are a few recommendations:

    • Build a simple executive summary that is shared as a PDF and no more than two pages.
      Executive summary sections:
      – Team
      – Description
      – Product
      – Market
      – Customer Benefits
      – Competition
      – Company Stage
    • Make some very basic financial projections
    • Build a working prototype (minimum viable product) and sign a couple paying customers
    • Consider the amount of money necessary to achieve a major milestone in the next 12 – 18 months (e.g. it might take $500k to hit $100k in annual recurring revenue in 12 months, so $500k plus some margin of error would be the amount to raise)
    • Think through the pre-money valuation, which is typically $1 million plus or minus 50% for most startups, with exceptional startups getting $3M – $4M pre-money valuations
    • Network through local technology groups, co-working spaces, lawyers, and accountants for intros to angel investors
    • Apply online to local angel networks (e.g. Atlanta Technology Angels)
    • Remember that the best time to raise money is when you don’t need it

    Raising money is hard. Raising money in the South is even harder. One of the best things you can do is to start developing relationships with people in the startup and technology community well in advance of raising money. There’s no sure way to raise money but the path outlined above works well.

    What else? What are some other recommendations for raising an angel round in the South?

  • Entrepreneurs Fail at Hiring Sales Reps

    As part of yesterday’s EO event on hiring, Adam spent a fair amount of time talking about hiring sales reps. Ah, the elusive sales rep that makes an entrepreneur’s life easy, or so you would hope. Previously, I advocated for entrepreneurs to hire a sales assistant to help give them economies of scale of their time before diving into a full-time, quota-bearing sales rep.

    Well, Adam articulated nicely why hiring salespeople is so difficult, especially for entrepreneurs. Here are his words why it is so challenging:

    • Great salespeople are always in demand
    • Mediocre salespeople are A-Players when it comes to selling themselves
    • Great salespeople are a product of environment
    • Entrepreneurs get desperate to fill the position

    The next time you’re out there, ready to hire your first salesperson, consider why it is so challenging, and look for someone who has the four super-elements.

    What else? What are some other reasons entrepreneurs fail at hiring sales reps?

  • The 4 Super-Elements for Startup Hiring

    Earlier today I attended the Entrepreneurs’ Organization workshop lead by Atlanta native Adam Robinson of Hireology. Adam did a great job taking us through best practices around hiring. This wasn’t a workshop for sourcing candidates, on-boarding candidates, or any other recruiting best practices. One of the segments that I really enjoyed was learning about Hireology’s so called super elements. Much like the periodic elements in nature, there’s a long list of elements to analyze for making great hiring decisions, with four being the most pervasive regardless of position.

    1. Attitude – their general feelings or disposition
    2. Sense of Accountability – the extent to which a person believes he or she has control over their own outcomes, also called the “locus of control”
    3. Prior Related Job Success – having met formal goals in past jobs that are similar to the job at hand
    4. Culture Fit – the degree to which the candidate shares similar values with the organization, and demonstrates an authentic interest in the job at hand

    Adam did a great job and entrepreneurs should pay attention to Hireology’s thought leadership content and application.

    What else? What are your thoughts on the four super-elements for startup hiring?

  • The Massive Differences Between Installed Software and Cloud Startups

    Being in the installed enterprise software world for a decade and the cloud/SaaS world for over five years now, there are massive internal differences between these two types of startups. The business models are inherently different, and should be viewed as such, even though both are full scale software companies.

    Here are some of the massive differences between installed software and cloud/SaaS startups:

    • Installed software companies typically provide releases every 3 – 18 months whereas cloud/SaaS startups push releases multiple times per day creating a different dynamic around time-to-market and scope of functionality
    • 10% – 20% of engineering efforts for installed software companies are for debugging issues that are network or environment specific compared to cloud/SaaS companies that control all aspects of the data center hardware
    • Installed software vendors often have more lock-in and higher switching costs compared to cloud/SaaS vendors  due to the heavy customization and internally managed servers
    • Getting the majority of the lifetime value of the customer up-front with installed software makes it easier to cross the desert to profitability, but creates lumpier quarterly revenue and predictability compared to cloud/SaaS startups with recurring revenue

    Installed software and cloud/SaaS startups have massive differences, and startups should think through the pros and cons of each.

    What else? What are some other differences between installed software and cloud/SaaS startups?

  • Sales and Marketing Should be Separate Functions in Startups

    Sales and marketing are tightly linked, complementary disciplines. Too often in startups I hear that the one sales guy also does the marketing. Now, if the startup can’t afford to separate the functions that’s one thing, but sales and marketing are two distinct functions. When I see a single person with the title VP of Sales and Marketing it often means the company takes a German approach — beat down the door with sales people and don’t bother with marketing.

    Here are a few reasons sales and marketing should be separate functions in startups:

    • Lead lifecycles are so complicated with visitor, prospect, marketing qualified lead, sales qualified lead, opportunity, and closed deal stages that it requires specialized knowledge to optimize each one
    • Marketing is often more measured in their approach which provides a nice yin to the yang of sales people that tend to embellish what can be done
    • Sales managers tend to be more sports-coach-like with an emphasis on motivating sales people while marketing managers tend to be more creative with an emphasis on project management
    • Marketing should be charge of messaging, content, events, positioning, etc while sales should be in charge of helping leads through the sales process

    Historically marketing was viewed as a sales support function, but with the advent of marketing automation, marketing has all the accountability and credibility of other major departments. Sales and marketing should be separate functions in startups.

    What else? What are some other reasons sales and marketing should be separate functions in startups?

  • Notes from AutoTrader.com’s S-1 IPO Filing

    AutoTrader Group, Inc., one of Atlanta’s biggest technology success stories over the past decade, filed their S-1 for an IPO yesterday. After massive organic growth from 1997 – 2010, they brought in a private equity group in 2010 and acquired several companies for nearly $1 billion in cash.

    Here are notes from the AutoTrader Group, Inc. S-1 filing:

    • 29 million average monthly unique visitors and 3.4 million car listings (pg. 1)
    • Has the largest dealer sales force in the U.S. automotive industry, with over 1,400 sales and support people (pg. 1)
    • Owns Kelley Blue Book (kbb.com) and reaches 60% of online car buyers (pg. 1)
    • 20,000 car dealers pay a monthly fee to list their cars (pg. 1)
    • Last quarter generated 86% of revenue from Digital Media business (advertising) and 14% of revenues from Software Solutions (dealer inventory management tools) (pg. 2)
    • 9% overlap in visitors between AutoTrader.com and KBB.com (pg. 4)
    • 75% of revenue is recurring (pg. 6)
    • Revenues (pg. 12)
      1997 – $1M
      2009 – $629M
      2010 – $730M
      2011 – $1,025M
    • Net income (pg. 12)
      2009 – $10M
      2010 – $49M
      2011 – $68M
    • Most Digital Media revenue comes from dealers advertising used cars (pg. 17)
    • Spent $111 million on TV and radio ads in 2011 (pg. 20)
    • Aren’t allowed to do anything with motorcycles, RVs, heavy trucks, etc due to license agreement for trademark of the name (pg. 21)
    • Google sends ~1/3 of all traffic to AutoTrader.com and KBB.com (pg. 23)
    • $884M in debt (pg. 37)
    • Drew $400M from their line of credit in 2012 and paid a $400M dividend to their shareholders (pg. 46)
    • Raised $316M from existing shareholders in 2010 (pg. 64)
    • Acquisitions (pg. 65)
      vAuto – $192.8M in cash and $34.5M in earn out
      HomeAuto – $61.6M in cash
      Kelley Blue Book – $532.4M in cash
      VinSolutions – $134.6M in cash and $13M in earn out
    • Kelley Blue Book added $125.7M in revenues in 2011 (pg. 72)
    • For new car dealers, new car sales represent 16% of gross profits, used cars represent 33% of gross profits, and the remainder comes from services and parts sales (pg. 92)
    • Have spent $780M on marketing initiatives since inception (pg. 97)
    • 3,200 full or part-time employees (pg. 114)
    • Chip Perry, the President and CEO, was the first employee in August 1997 and has lead the company the whole time (pg. 119)

    AutoTrader Group is an impressive growth story and I hope their IPO is very successful.

    What else? What are your thoughts AutoTrader Group’s S-1 IPO filing.

  • Sabbaticals as a Startup Benefit

    Recently we rolled out a new program for team members to take a two month paid sabbatical for every four years of employment. Four years of employment seems like a long time, especially in the startup world, but we already have team members that have passed that and our goal is to be the best place to work and the best place to be a customer, so amazing benefits for our team members fit in nicely.

    Here are some thoughts around sabbaticals:

    • Even though we have no vacation tracking with a policy of “be reasonable”, that means that people are free to do what they want, when they want, as long as their responsibilities are still being met — a sabbatical means that the responsibilities don’t have to be met for that period of time, thereby creating a different dynamic
    • Sabbaticals are meant for our people to pursue projects or trips that really clear their mind of responsibilities at the startup and enable them to fulfill dreams or check off items on their bucket list
    • Making sabbaticals fully paid is key so that team members actual use and take advantage of them

    Much like college professors have had sabbaticals for years, startups should consider have them as well so that team members have an opportunity to step away for an extended period of time.

    What else? What are some other thoughts or anecdotes around sabbaticals for startups?

  • Startups Playing to Win or Not to Lose

    There are two general buckets you can put entrepreneurs, especially ones who have achieved some level of success: playing to win or playing not to lose. If you think about it, this approach or strategy, whether explicitly identified or not, plays out in many different activities and actions.

    Some areas that differ when playing to win vs trying not to lose:

    • Aggressiveness with hiring, especially in the fight for talent
    • Willingness to lead a market and innovate vs being a follower
    • Timeliness of decision making and the speed with which new information is received and a decision is made
    • Internal culture with a propensity to try new things vs a fear of sticking one’s neck out on a new initiative

    There’s no right or wrong answers when it comes to playing to win or not to lose but it’s important to identify which is which and how your startup operates.

    What else? What are some other differences between startups that play to win instead of not to lose?

  • Employee Housecleaning as a Startup Benefit

    After reading the interview with the Evernote CEO in which he mentions housecleaning as a benefit for every one of his employees I thought to myself that we should do that as well. Done. Housecleaning, when first mentioned, elicits a more dramatic response compared to the more standard benefits. It isn’t that housecleaning is so weird that a company shouldn’t offer it as a perk, rather, it’s that it is so unusual, yet desirable, that it resonates well with people.

    Here are a few reasons why we decided to offer four hours of housecleaning per month for each employee as a benefit:

    • All of our employees can afford to pay for it on their own, but many do not because they think it is frivolous since they can do it themselves, but the experience of cleaning provides negative utility for most people
    • We want to be the absolute best place to work
    • As a company, we get economies of scale to negotiate a corporate rate that’s better than an individual rate
    • Paying for the benefit for everyone, since it is a pre-tax expense, results in even more savings compared to paying employees, taxes coming out on the employer side and employee side, then an individual paying for it with after-tax money

    Over time we’ll develop more experience with the housecleaning-as-perk initiative but so far so good. It’ll be interesting to see if it catches on with more startups.

    What else? What are your thoughts on employee housecleaning as a startup benefit?

  • Startups are Broken After a Down Round

    Recently an article that I read quoted the interviewee as saying startups are broken after a down round. After reading that statement I thought to myself that yep, startups are broken after a down round. A down round is when a startup raises a round of financing at a lower valuation than the previous round of financing. With the high seed and Series A valuations in the Bay Area (e.g. $6M – $14M pre-money), the prospect of more down rounds in the future increases as not all of those startups are going to be able to generate enough traction to warrant an increase in valuation.

    On the surface it might not seem that big of a deal, raising money at a lower valuation than the previous round. In reality, most investments have anti-dilution provisions such that if another round of capital is raised at a lower valuation, then the previous investor gets their original number of shares increased to equal out to the previous investment amount but at the new, lower per share price (there are different formulas to calculate how the anti-dilution provision works like weighted-average and this example is to keep it simple).

    So, here’s what happens in a down round:

    • Previous investors get a larger number of shares due to anti-dilution provisions, which comes out of the entrepreneurs’ stake
    • New investors buy a chunk of the company, which comes out of the entrepreneurs’ stake at a lower valuation than the previous round
    • Existing employees with stock options get more serious dilution because the startup has sold new shares and increased the number of shares existing investors have
    • Entrepreneurs and stock-option-holding-employees get more disillusionment due to dilution and things not going as well in general, as opposed to raising an up round with more excitement and less dilution

    So why is a startup broken after a down round? Well, the entrepreneurs, depending on the type of anti-dilution provisions, are often so diluted that they no longer have a meaningful stake in the startup, and are better off leaving. Once the entrepreneurs leave, and the startup already isn’t doing well, it doesn’t bode well that bringing in new leaders will make things successful. Often times the economics no longer make sense and the capitalization table is forever challenged.

    What else? What are some other reasons startups are broken after a down round?