David Cummings on Startups

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  • 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?

  • Beware Lawyers Charging to Edit Business Plans

    Slightly more than 10 years ago I was living in Durham, NC working full-time on my startup on Ninth St. right near the edge of Duke’s East Campus. I was actively involved in the fledgling Research Triangle startup scene with the Council for Entrepreneurial Development (CED) as the heart. At the CED I participated in a great program called FastTrack that came from the Kauffman Foundation (side note: one of my goals is to start a Cummings Foundation one day that is similar to the Kauffman Foundation with a focus on entrepreneurship) and through the program I had the chance to meet several entrepreneurs as well as startup-focused service providers in the area.

    One of the lawyers that spoke at the program did a great job and was very approachable. After his talk at the class I went up and introduced myself and what we were doing. He said he liked what he heard and that we should get together and talk more. I diligently followed up and we met for an hour to talk about my startup. At the end of that conversation he asked if I had a business plan, so I naturally said yes (that was the thing to do then although I recommend against business plans now). He said if I’d like he take a look at it and give me feedback. Wow, I was thinking, this guy is super helpful.

    After our meeting I promptly emailed him the latest version of my business plan hoping to get some great insight from him. Well, two weeks later I received a fax from his assistant where he had taken a printed version of the business plan and handwritten a few number of comments and questions in the columns. Hmm, I thought, that’s an interesting approach to feedback, but I was anxious for any third-party thoughts on what I was doing. I quickly sent a thank you email and commented on his comments.

    A week later I received a bill for $500 for his time commenting on the business plan. I was stunned. It wasn’t the $500, although that was a ton of money for a bootstrapped startup that did $15,000 in revenue that year, but rather that he would charge for it without clarifying in advance it was billable hours. It was a good lesson learned early on. My advice: always ask the cost for any services up front and beware of lawyers charging to edit business plans.

    What else? Have you had any experiences like this?

  • Think of Startup Employees as Volunteers

    Earlier today I was having lunch with an entrepreneur and we were talking about corporate culture when she said something that really stuck with me: the newest generation of employees are best thought of as volunteers like at a non-profit. Now, this isn’t volunteers in the sense of not getting paid but rather volunteers in the way they want to be treated and the way they approach things.

    Here are a few reasons why startup employees should be viewed as volunteers:

    • Mission and purpose is more important than the money
    • The best work is done when you care deeply about something
    • Volunteers often need praise and encouragement to feel appreciated
    • Length of tenure is shorter

    Treating startup employees as volunteers makes sense as the employer is beholden to the creative, mobile, sought-after employee. With the creative class, the volunteer mindset is very prevalent.

    What else? What are some other reasons why startup employees should be viewed as volunteers in the non-profit sense?

  • Picking a Startup Idea

    Most entrepreneurs looking to start a new business have a limited number of startup ideas and eventually pick one from a small list. Some entrepreneurs on the other hand have a gift for coming up with startup ideas, but then like having too many choices of cereal at the grocery store, run into analysis paralysis and get bogged down making a decision. Of course, picking a startup idea is a huge decision, so it shouldn’t be taken lightly.

    Here are a few things to consider when picking a startup idea:

    • Market Timing – Is this an idea that’s going to be successful some day but timing the market will be critical to success or is clear that the opportunity is in the short run (e.g. next 1-2 years)?
    • Domain Expertise – How much experience do you need to be productive for this startup? Does not having experience help so that you have a fresh perspective?
    • Capital – How capital-light or capital-intensive is the startup idea and what are you comfortable with?
    • Passion – How passionate and committed are you to the industry and opportunity vs something that you think will be successful but aren’t that interested in?

    Picking a startup idea is a big decision but picking a market to be in is a monumental decision. I’ve never met an entrepreneur that was successful with their original idea — the idea always changed but their market rarely did.

    What else? What are some other things to consider when picking a startup idea?

  • Culture Checks to Help Scale a Startup

    One of the changes we made recently was to put in culture check teams to help us scale our interviewing process. As we add more and more team members it becomes difficult for the founders to personally interview everyone (although we still do it currently). Here’s how the culture check idea works:

    • Teams of two people do culture checks together (we have two teams for a total of four people)
    • People on a culture check team strongly embody our culture and can identify culture fit with candidates
    • The culture check interview is only done at the very end of the process when the candidate is in the finalist stage
    • The culture check interview isn’t for assessing domain expertise but for fit with core values (candidates that don’t make it through are great people that just don’t quit fit our culture)

    Culture checks are working out well and we plan on expanding the number of teams as the number of people we’re hiring grows.

    What else? What are your thoughts on culture checks for scaling in a startup?

  • 10 To Do Items from Jim Collins

    Today I had the opportunity to hear Jim Collins at a workshop in Atlanta courtesy of EO Atlanta. Jim was amazing, truly amazing — so much energy, passion, and enthusiasm. At the very end he gave a list of 10 things leaders should add to their to do list.

    Here are the 10 to do items courtesy of Jim Collins:

    1. Change your next big ‘what’ question into a ‘who’ question
    2. Double your questions to statements ratio
    3. Try to embrace the Stockdale Paradox – going along in life and get knocked down, and it happens over and over again
    4. Discover your personal hedge hog and focus on it
    5. Set your vision on three components: 100 year core values, purpose that answers question who would miss you if you disappeared, 25 year BHAG
    6. Set your 20-mile march
    7. Start a stop doing list (and have no more than 3 priorities)
    8. Turn off electronic gadgets and create pockets of quietude for one day every two weeks
    9. Get a huge return on next luck event
    10. Change from striving to be successful to being useful

    I’d recommend reading his books as well as attending his events.

    What else? What are your thoughts on the 10 to do items from Jim Collins?

  • Being Too Early with a Startup Idea is a Failure

    Last week I was on a panel at the Digital Summit conference with well over 1,000 attendees. One of the panelists with me was Todd Sawicki, an entrepreneur in a high growth startup that recounted how his previous seven ventures were a failure. One of the comments that he made really stuck with me:

    If you’re too early with a startup idea, that’s a failure just like any other.

    Many entrepreneurs don’t realize that after running out of money, being too early with an idea is one of the most common reasons for failure. Todd told how he worked on a startup that was similar to YouTube, only it was 1997. He also talked about working on a startup that was similar to Dropbox/Carbonite/Mozy, but that it was 1996. Being too early with a startup idea is a failure and happens all the time.

    What else? Do you think being too early with a startup idea is a failure?

  • 9 Ways to Assess Angel Investor Tech Savviness

    Recently I saw a tweet about an entrepreneur that was pitching a new mobile app startup idea to an angel investor, and at the end of the conversation the investor pulled out a Blackberry to check email. If an investor carries around a Blackberry and no other device, is he or she tech savvy enough for you?

    Here are 9 things to assess angel investor tech savviness:

    1. Owns and uses an iPhone (an Android phone gets partial credit)
    2. Has a LinkedIn profile with 500+ connections
    3. Has an AngelList profile with at least one investment
    4. Has a Twitter account more than three years old — whendidyoujointwitter.com (bonus points if their Twitter username is their first name)
    5. Sends at least one tweet per day, preferably about topics relevant to you
    6. Has at least 1,000 followers on Twitter
    7. Has a blog and publishes blog posts on a regular basis
    8. Uses Gmail or Google Apps for Your Domain for email (the more cloud-based apps, the better)
    9. Has a MacBook (preferably a MacBook Air or MacBook Pro)

    Of course, angel investor tech savviness isn’t nearly as important as the quality of their advice and introductions but tech savviness is often correlated with how current they are on the latest trends.

    What else? What are some other ways to assess angel investor tech savviness?