David Cummings on Startups

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  • 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?

  • In-House Recruiters for Startup Growth

    Fred Wilson has a great post today titled MBA Mondays: Best Hiring Practices. In it he highlights a number of quality strategies and tactics to build out the most crucial part of a startup: the team members. A couple years ago I was visiting the CEO of Appcelerator at his office in California and he told me how difficult it was to recruit great team members out there, so much so that they had brought on a full-time in-house recruiter, even though they were much smaller then.

    When we started to grow faster than we could hire, we took the next step of bringing on an in-house recruiter. Here are some of the benefits we’ve found having an in-house recruiter:

    • Focus, focus, focus — it’s awesome what one person can do when they have a single focus
    • Reach — a dedicated recruiter has the time to cast a wider net to work with more outside, contingency-based recruiters, college career centers, potential candidates on LinkedIn, and more
    • Process — many startups are averse to much structure, but hiring is the one area that you can’t cut corners, making a strong hiring process that much more important

    When company growth outpaces the capacity to bring on new team members, in-house recruiters can really help close the gap and ramp up the hiring process, while maintaining quality.

    What else? What are your thoughts on in-house recruiters for startup growth?

  • An Increase in Startup Exits in the Second Half of 2012

    With the second half of 2012 less than a month away there’s speculation that we’ll see an increase in startup exits right up until December 31, 2012. Why? Taxes. That’s right, the tax rate for long term capital gains in the United States is expected to rise from 15% to 23.8% with the expiration of the Bush tax rates and the advent of the Obamacare tax increases.

    How does an increase of long term capital gains from 15% to 23.8% play out for entrepreneurs that do or don’t sell? Here are some example scenarios:

    • Own 20% of a company that sells for $10M for a payout of $2M:
      15% of $2M = $300,000
      23.8% of $2M = $476,000
    • Own 20% of a company that sells for $30M for a payout of $6M:
      15% of $6M = $900,000
      23.8% of $6M = $1,428,000
    • Own 20% of a company that sells for $100M for a payout of $20M:
      15% of $20M = $3,000,000
      23.8% of  $20M = $4,760,000

    Of course, the potential acquirers are going to know this as well and take it into account when negotiating, so it isn’t all benefit for the entrepreneurs. Potential acquirers, taking taxes into account, will offer requisitely lower prices knowing there’s a hard and fast deadline. Most deals are emotionally driven and not as rational as you’d think, making taxes even less of any issue, but they’ll still be an issue for the entrepreneurs.

    What else? Do you think there will be an increase in startup exits in the second half of 2012?

  • The Three Parts of a Startup’s Purpose

    Continuing with takeaways from Clayton Christensen’s book How Will You Measure Your Life?, there’s another area of content I want to highlight from the book. In the epilogue, Professor Christensen talks about the benefits of defining a purpose for a family and how similar it is to defining a purpose for a startup.

    Here are the three parts of a company or startup’s purpose (pg. 196):

    • Likeness – what the key leaders and employees want the enterprise to have become at the end of the path that they are on
    • Commitment – a deep level of resolve to achieving the likeness laid out
    • Metrics – defined results enabling everyone associated with the enterprise to calibrate their work

    With these three parts of a startup’s purpose – likeness, commitment, and metrics – team members achieve clarity and alignment significantly increasing the likelihood of success. Purpose fits in with items like mission, vision, and values to paint a clear picture of the most strategic side of a startup.

    What else? What are your thoughts on the three parts of a startup’s purpose?