David Cummings on Startups

Blog

  • Two Killer Questions for Entrepreneur Insight

    Earlier today I had the opportunity to speak with eight startups at GigTank in Chattanooga. We started with a talk plus Q&A session followed by 15 minute individual sessions with each team. During the group-wide Q&A one of the questions was around things to do as an entrepreneur to continue learning. I talked about standard items like Twitter, Google Reader for RSS feeds, books, EO, YPO, and conversations with other entrepreneurs.

    When it comes to entrepreneurs, there are two killer questions I like to ask:

    • What two or three new things have had the most impact on your startup in the past 90 days?
    • What are the top two or three things you are personally focused on in the next 90 days?

    With these two simple questions you’ll get a wealth of insight, ideas for your startup, and opportunities to provide advice or recommendations. Of course, reciprocating with your own answers to these questions makes for a great conversation.

    What else? What other killer entrepreneur questions do you like to ask for insight?

  • The NetSuite SaaS Valuation Outlier

    Looking at the last round of Publicly Traded SaaS Company Valuations there’s one outlier that needs more discussion: NetSuite. NetSuite is a strong Software-as-a-Service (SaaS) company with a powerful enterprise resource planning and accounting package along with a host of other tools like CRM. Whereas ExactTarget deserves to be in the 8x revenue club due to growth rate, NetSuite with a market cap of $3.2B (NYSE:N) and a run rate of $280M, is trading at north of 11x revenue, but only has a one-year revenue growth rate of 22% (source: thestreet.com).

    A 22% year-over-year growth rate is solid but a 11x revenue multiple seems like a stretch. What gives? After asking around I found a plausible answer:

    Oracle has to buy NetSuite at some point to be competitive in the cloud and investors have baked that into the valuation.

    Since there’s a suitor with deep pockets in waiting, investors have taken that into account and paid much higher than expected prices, knowing that for Oracle to acquire NetSuite they’ll have to pay a premium on the public valuation, thus there’s still money to be made for investors. The next time an entrepreneur points to the NetSuite valuation as a good example for SaaS multiplies, that outlier needs to be thrown out the window.

    What else? What are some other reasons NetSuite is a valuation outlier for SaaS companies?

  • Startup Idea: Zipcar Style Model for Supercars

    With the growth of the sharing economy, and services like Zipcar and Portico Club, people are growing more accustomed to paying a membership fee for access to a service where you then pay a per usage fee, and save money overall compared to buying the item outright. Well, there’s a startup opportunity in the same manner to serve the supercar/exotic car market.

    High end sportscars are a niche, but healthy market. These supercars and grand tourers are different from the normal car approach in two key ways: they aren’t usually the daily driver for the owner and the owner isn’t looking to have the same car for many years. Like taking a vacation and enjoying the experience of something new, the same can be said of supercars but the current economics don’t make sense. If you want to experience a car you can try to test drive one, which is a short experience and potentially not possible depending on your circumstances, or you can rent one for $500/day, which again is short and highly restrictive.

    Owning a super car is very expensive and out of reach for most people. Here’s a simple break down of costs for an example $150,000 supercar:

    • $3,000/year in lost investment income (assuming 2% return on investment, and the money spent on the car is fairly illiquid at that point) or $6,000/year in interest if the car is financed
    • $3,000/year for car insurance
    • $10,000 for sales tax, spread out over two years (assumed length of ownership), for an average of $5,000/year
    • $3,000/year for service, repairs, and tires (crazy expensive!)
    • $18,000/year for depreciation (new Porsches and Ferraris hold their value much better than Aston Martins and Mercedes, as an example)
    • Total: $27,000/year if bought outright or $30,000/year if financed

    For simple math, assume most $150,000 supercars are financed, resulting a fully loaded $2,500 monthly cost to the buyer to own and operate the vehicle. Assume the car is driven 3,000 miles per year, resulting in a cost of $10/mile, not counting gas. Surely, there’s a better way.

    Imagine a Zipcar-style service where you pay an annual membership fee and then have a variety of supercars to choose from, each assigned a point value based on their current market value, and then for a per day/week/month cost, you can take the car as long as you want. The cost to have it will be less than the fully loaded cost of ownership, capital won’t be tied up in the vehicle, and you can swap it out when you’re ready to try the next one. Even if the price of the service was similar to the cost to buy (e.g. $2,500/month) it is still much better to do the service since there’s transaction costs (like shipping, finding the right car, worrying about its quality, dealer markup, etc) and peace of mind that you can enjoy it and move on.

    Plus, when you buy a supercar, as opposed to leasing one, there’s the risk that you get in an accident, and even though insurance covers the repairs, the resale value of the vehicle drops by 10%-20% since it now has a blemished Carfax and there’s uncertainty as to the quality of repair, extensiveness of damage, etc. With a Zipcar-style service, that risk goes away.

    There are a number of different ideas to go along with this potential startup:

    • Example cost might be $5,000 to join, and then a monthly fee depending on the type of car you want (e.g. $1,500/month for a 2008 Audi R8, $2,000/month for a 2011 Porsche 911 Turbo S, and $4,000/month for a 2010 Ferrari 458 Italia, all paid on a credit card)
    • Opportunity to make a membership and certain number of points as a corporate benefit (e.g. the top sales person for the quarter gets a super car for the next quarter)
    • Optional: members could take a supercar that they own and let other members use it to accumulate points that they can use to rent other supercars (in general the cars would be owned by the company and not by individuals, so as to be more exclusive and not have the fate of services like HiGear, plus the $5,000 membership fee and background checks would reduce the people who joined)
    • Supercars could be very loosely defined as cars with a manufacturer’s suggested retail price of at least $100,000 USD
    • Certain cars could be designated track cars whereby you’d be allowed to take them to a track (like the new Atlanta Motorsports Park)
    • Advertising would done through local enthusiast groups like Caffeine & Octane, Google AdWords, etc
    • Free pickup and delivery of the cars to members within a 30 mile radius and service to ones further out than that at a rate of $1/mile (e.g. you live 100 miles from the local location and for an extra $100/car you can have it delivered to you and $100 to have it picked up whenever you are done)
    • High end vehicles like the Ranger Rover Signature Edition could be made available (e.g. to take to the mountains for a weekend)

    A Zipcar-style model for supercars holds tremendous promise, especially through franchising or multi-city expansion. The sharing economy continues to grow and shows no signs of slowing down.

    What else? What are your thoughts on the startup idea for a Zipcar-style business for supercars?

  • Handle Initial Partnership Requests Via Email

    Before startups say no to 99% of partnership opportunities you have to qualify and find out what it is the other company is actually looking to do. There’s a standard song and dance where a VP or co-founder from another company gets an intro through a mutual connection or sends a cold email asking to set up a phone call to talk about an integration/partnership/relationship.

    Too often, myself included, if it looks interesting and targeted, entrepreneurs jump on the phone and spend an hour finding what the proposal actually is and what an integration might look like. Don’t. When the quality request comes in simply reply back via email and ask these three questions:

    • What, specifically, is the proposed integration?
    • What 10 customers have asked for this integration and why?
    • What parts can you do via the standard API we already have and what parts do we need that are non-standard?

    These three questions will provide a wealth of information and save you a ton of time. Now, you still might jump on a call for 30 minutes after you get the answers but the quality of the call will be significantly better, saving everyone time.

    What else? What other questions do you like to ask when handling initial partnership requests via email?

  • Assessing a Business Model’s Attractiveness

    In the first issue of Build, from the team at Inc. magazine, there’s an article with the headline: One way to evaluate the strength of your business model is to assess how difficult it is for your customers to leave you. The work comes from Rita Gunther McGrath, a professor at Columbia Business School.

    The idea is to rate the business model’s attractiveness based on 10 questions with a scale of one to seven for each, with a score of one being fully aligned with the first statement and a score of seven being fully aligned with the second statement. Once each question is scored, add up your total score, and if it’s 40 or higher you’re in the preferred zone. Here are the 10 questions to assess a business model’s attractiveness:

    1. The cost to a customer of switching to another provider is relatively low
      1 – 7
      The cost to a customer of switching to another provider is relatively high
    2. The model is based on individual transactions that must be repurchased each time
      1 – 7
      The model is based on a series of transactions (such as subscriptions) subject to renewal
    3. The user interface for the model is nearly the same for all providers (for instance, an ATM)
      1 – 7
      The use interface differs among providers (it’s easier for users to stick with one system)
    4. The benefits provided by the model are optional or discretionary
      1 – 7
      The benefits provided by the model are mandatory
    5. There are few network effects in this business, we are a late mover
      1 – 7
      We have the potential to create positive network externalities in this model
    6. This model solves the customer’s problem once and for all
      1 – 7
      The customer’s problem is ongoing
    7. The model is arm’s length or transactional
      1 – 7
      The model establishes some kind of relationship
    8. The model has little impact on the customer’s experience, or the impact is negative
      1 – 7
      The model changes the customer experience significantly, and the impact is positive
    9. The model operates on a stand-alone basis
      1 – 7
      The model creates a platform others can use to accomplish their goals
    10. We create the offer
      1 – 7
      The offer is to some extent cocreated

    This is a great methodology for quickly assessing a business model’s attractiveness. As you can see, Software-as-a-Service with strong customer service and high renewal rates score very high in this model.

    What else? What are your thoughts on this methodology of assessing a business model’s attractiveness?

  • 3 Unconventional Steps for the Hiring Process

    Hiring great talent that’s a strong corporate culture fit is one of the top responsibilities of a CEO, regardless of being a startup or established company. As part of hiring great talent there are three main areas to think through: casting a wide net to get candidates into the recruiting pipeline, assessing their culture fit and ability to do the job, and finally convincing the select few to join the team. For many types of positions there are plenty of quality candidates and the hiring process becomes the challenging area.

    Here are three unconventional steps for the hiring process:

    1. Written essays for all positions – a candidate’s ability to write correlates with the ability to do the job, regardless of position, more than anything else
    2. Culture checks by the founders and/or culture team – have people in the hiring process that are exclusively assessing corporate culture fit to build the strongest culture possible and to add checks and balances for hiring managers that get anxious to fill a position
    3. Unanimous approval – require 100% yeses from everyone involved in the hiring process regardless of seniority or position

    The idea isn’t to make the process as burdensome as possible but rather to build the best team. Spending more time in the hiring process makes sense considering the extensive amount of time you’ll spend with the person once they’re hired.

    What else? What are some other unconventional steps for the hiring process?

  • Consider Hiring Speed When Raising Money

    Many times over the past two years I’ve been asked why we haven’t raised money from VCs. There are a number of answers to that question but one of the big reasons is that once money is raised it has to be put to work as the goal is to grow revenue as fast as possible. For us, that involves hiring tons of people and spending more money on lead generation. It’s easy to spend money on lead generation but much harder to significantly increase our hiring rate and still maintain our corporate culture standards, which we’re going to maintain at all costs.

    Startups need to consider their hiring speed when raising money and building an expected budget for investors. Too often the model shows hiring numbers for each department (e.g. X engineers, Y sales people, Z support people, etc) with too short of a time horizon to hire the right people. A financing round is often viewed as raising enough money to last 18 months with the idea that 12 months will be for reaching the next milestone and the final six months will be used for raising the next round. Well, if the round is large, and you plan on hiring 50 new people, and it’ll take at least six months to find those people, six months for them to ramp up, and then six months to see results, you’re already 18 months out, thus you need to adjust the model and expectations with investors.

    Entrepreneurs need to consider their hiring speed when raising money, especially when raising money from institutional investors.

    What else? What are your thoughts on paying more attention to hiring speed when raising money?

  • Build a Minor Leagues System for Sales Reps

    Continuing with yesterday’s post on Sales Rep Training Programs for Startups, it’s also important to build a farm system where you can nurture and train junior outbound cold callers (business development reps) into polished senior account executives. I like to think of this as a minor leagues system whereby reps have an automatic promotion to the next level based on results, not timelines.

    Here’s an example minor leagues farm system progression for sales reps:

    • Try outs – Business development rep that does outbound calling and sets appointments — makes the team once a certain number of appointments have been completed
    • Single A – Account executive with entry-level salary and quota while continuing to refine the skills and working towards a goal (e.g. $3M in bookings or $1M in annual recurring revenue)
    • Double A – Nice salary, quota, and on target earnings increase with a new, incremental goal (e.g. additional $3M in bookings or $1M in annual recurring revenue)
    • Triple A – Additional incremental bump in salary, quota, and on target earnings with a new sales target to reach the highest rank
    • Major leagues – Senior account executive title for the most successful reps with the highest salary, quota, and on target earnings

    As you can see, the model isn’t that complicated since it has a series of promotions based on results, often with the increase in quota making the increase in salary functionally equivalent financially for the company. Plus, junior people trying to get into sales like seeing a 5 – 10 year career path laid out in front of them that’s based on performance, and not time or seniority.

    What else? What are your thoughts on building a minor leagues system for sales reps?

  • Sales Rep Training Programs for Startups

    Hiring and training sales reps is one of the more difficult challenges for entrepreneurs that aren’t experienced sales managers. I’ve talked to a number of entrepreneurs over the years that have tried hiring their first sales person only to have it fail multiple times, so much so that the entrepreneur continues to be the lone sales person in the company. Now, the sales assistant should be an entrepreneur’s first sales hire but most entrepreneurs, after deciding they want someone to come in and sell for them, want it to be completely taken care of and watch revenue magically come in the door.

    SaaS startups in early adopter markets are even more dependent on developing a great sales team due to the nature of early adopter markets whereby there’s a lack of market awareness such that people aren’t even searching Google for the product because they don’t know it exists (this is one case where inbound marketing doesn’t work). As the SaaS startup grows, the need to scale out the sales team grows even faster, creating an acute need for sales rep training programs. Most companies, and especially startups, don’t train their sales people enough.

    When developing a sales rep training program internally or evaluating outsourced ones, here a few things to keep in mind:

    • Soft skills like presence on the phone need to be taught, in addition to more formal methodologies like Solution Selling or SPIN Selling
    • Quality sales training with have some in-person training, some e-learning, and continual professional development indefinitely with the first year being the most critical
    • An intense first week of hard core training is often a great way to set a foundation
    • Mentoring from and shadowing of a senior rep is a great way to get some of the fuzzier, harder to document items transferred to a new hire
    • Sales managers and executives are often the best to train new reps but their time is actually more valuable working with proven reps to help them be even more successful

    Startups should outsource most sales training and focus on what’s core to their business while continually investing in their people. Sales rep training is hard to do well and it’s often not done, contributing to the hire failure rate of sales reps.

    What else? What are your thoughts on sales rep training programs and what training firms do you recommend? Does anyone have a sales rep finishing school they’d recommend?

  • SaaS Recurring Profit Margin Metric

    The CEO of Zuora has a nice slide deck online titled The Only 3 SaaS Metrics that Matter where he talks about the subscription economy, gives the three metrics, and provides benchmarks from publicly traded companies. The three metrics are straightforward and make sense:

    • Retention Rate – How much of your Annual Recurring Revenue (ARR) you keep each year
    • Recurring Profit Margin – ARR less churn less non-growth spend (growth spend is money spent on sales and marketing)
    • Growth Efficiency – How much does it cost to acquire $1 of annual contract value?

    Retention rate is a common one as is growth efficiency in the form of the SaaS Magic Number, although I like that growth efficiency is much easier to understand than the ratio of sales and marketing spend from one quarter compared to recurring revenue growth in the next quarter.

    The middle metric, recurring profit margin, is a great idea and not mentioned enough. One of the reasons successful SaaS companies have such great valuations relative to other companies with similar revenues and profits is that many SaaS companies could be much more profitable and still retain their revenues if they cut back on sales and marketing — recurring profit margin represents this number.

    Here’s a quick SaaS startup example for recurring profit margin:

    • $1 million in annual recurring revenue
    • 85% renewal rate
    • $50,000 profits (so, $950,000 in annual expense)
    • $300,000 spent annually on sales and marketing
    • Recurring profit margin: 1,000,000 times .85 minus the difference between total expenses and sales and marketing expense (950,000 – 300,000) = $200,000 or 20%

    Another way to calculate recurring profit margin is by taking away the sales and marketing expense (e.g. $300k), subtracting out the annual recurring revenue amount from customers that leave based on the churn rate (e.g. $150k), and adding in existing profits (e.g. $50k). Startups that spend an unusually large amount on sales and marketing, have high renewal rates, and still break even, will have excellent recurring profit margin metrics.

    What else? What are your thoughts on SaaS recurring profit margin metric?