David Cummings on Startups

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  • 5 Tips for Killer Angel Investor Pitches

    Last night I had the opportunity to hear three startups give their pitch to a room full of angel investors. Each one did a good job, but for different reasons. The angel investors and VCs in the room were attentive and asked solid questions. Towards the end of the night, the real test happened when the entrepreneurs were asked to leave for the evening so that the investors could discuss the different startups. Naturally, I paid attention to see what investors came up to talk to the entrepreneurs as they were leaving, so as to gauge interest level, which was decent.

    Here are five tips for killer angel investor pitches:

    1. Tell a compelling story — story telling is the strongest form of human communication and should never be underestimated
    2. Presentation slides and handout slides are two different things — presentation slides should be visual and nearly word-free while handout slides should be full of words
    3. The one and only goal is to get an individual meeting — the goal of the pitch isn’t to get them to write a check on the spot, but rather to get an investor excited enough that they want a meeting
    4. Provide a memorable off-line analogy — repeat a simple message multiple times that takes the digital concepts and relates them to a real-world item that everyone is familiar with
    5. Deliver objective, quantifiable metrics throughout the pitch — investors want to believe the dream, and facts provide a core foundation

    Raising money from investors is hard. Following these tips makes for a much better pitch and greater chance of raising money.

    What else? What other tips do you have for killer angel investor pitches?

  • The Pre-Money Valuation Bump from an Accelerator Program

    Startup accelerators like Y Combinator, TechStars, and Flashpoint provide great, intense programs designed to significantly increase the likelihood of success. When they first came out people seriously questioned the value provided relative to the company pre-money valuation of $15,000 for 6% of the business. Well, that point has been discredited based on the many successful exits from the top tier accelerators but there’s another related point that needs to be talked about more: the pre-money valuation bump by going through an accelerator program.

    Say you want to raise a $1M Series A angel round, without doing an accelerator program you might get a pre-money valuation of $1.5M – $2M unless you have an amazing background or prior entrepreneurial success. Well, with Y Combinator and TechStars, startups post accelerator have recently been raising Series A rounds at pre-money valuations of $4M – $7M with some north of $10M. Assuming you’re on the low end of that pre-money spectrum and raise a round at a pre-money valuation of $4M, that’s a huge jump from the $2M pre-money you might have raised without going through one of the programs. By going through the program you get national exposure as well as more social proof for things like AngelList, which makes angel investing much more open and transparent.

    So, selling 20% of your company for $1M at a pre-money valuation of $4M vs selling 33% of your company for $1M at a pre-money valuation of $2M makes up for more than the 6% dilution from the original $15,000. Top tier accelerator programs are easily worth it based on that simple math. The real challenge is to even get accepted into one of the programs.

    What else? What are your thoughts on the pre-money valuation bump from an accelerator program?

  • The First 5 Steps for an Entrepreneur with an Idea

    Entrepreneurs are a crazy bunch of people full of ideas and excitement. We talked about the 7 Characteristics of Successful Entrepreneurs as well as the 50 Things Every Startup Should Know. Now, those either assume a) you’re a successful entrepreneur or b) you already have a startup. Well, a number of first-time entrepreneurs have an idea but don’t have a startup, yet.

    Here are the first five steps for an entrepreneur with an idea:

    1. Get a co-founder – yes, you can do it on your own but it’s much more fun and you’re more likely to be successful with a co-founder
    2. Sign a customer – a customer should come before a product so that you don’t build the app in a vacuum
    3. Start building a product with the customer’s feedback – with the customer in place build a beta version in a collaborative process
    4. Sign 10 more customers – customers are oxygen for a product, but don’t let a single customer dominate the conversation
    5. Enhance the product based on your vision and customer feedback –  rinse and repeat the previous two steps signing customers and enhancing the product indefinitely

    This is obviously a simplified first five steps for an entrepreneur with an idea but it gets the point across — with a co-founder in place, start talking to customers and a build a product that adds value.

    What else? What steps would you add or change for an entrepreneur with an idea?

  • Quick Entrepreneur Screening: Are You Working Full-Time on the Startup?

    I enjoy talking to entrepreneurs about their startup, what’s working, what’s not working, and where things are headed. When entrepreneurs reach out to me I usually try to get the conversation going over email before jumping on a phone call or grabbing lunch as I want to casually gauge how much help I might be able to offer.

    One of my favorite questions for screening entrepreneurs is: are you working full-time on the startup? It might seem obvious that the entrepreneur would be working full-time on their startup if they’re reaching out for help but a decent percentage of the time the entrepreneur isn’t and one of the reasons for reaching out is that they want third-party validation of the idea. Of course, customer validation is a much better route to take but it still isn’t mainstream.

    Not everyone can go full-time on their startup idea due to financial challenges, and I understand that. If they aren’t full-time (part-time entrepreneurship isn’t ideal), I look to help more via email and referring to programs like Flashpoint and mentors at the ATDC. I prefer working with full-time entrepreneurs since they are 100% committed to the venture and make significantly more progress than the part-timers.

    What else? What are some other ways to do quick entrepreneur screening besides the full-time question?

  • 7 Characteristics of Successful Entrepreneurs

    Everyone loves to pontificate about what it takes to be a successful entrepreneur, myself included. There’s no one “right” answer but rather many different traits, that when combined, result in great outcomes. Here are the seven most common characteristics I’ve observed about successful entrepreneurs:

    • Forward-looking – able to anticipate trends, opportunities, and future organizational challenges
    • Hard working – they love putting in the hours and realizing a sense of satisfaction when accomplishing goals
    • Passionate – true enthusiasm and energy around the work that they do
    • Opinionated – ready and willing to take a stand for how they believe things should be done
    • Confident – when someone looks you in the eye and tells you they can do it, even if it’s far fetched, you’re more likely to believe them
    • Resourceful – when there are so many unknowns, it takes unique talent to put everything together on the fly
    • Positive – with the roller coaster ride that is entrepreneurship, staying positive helps the team get through very low lows

    Notice I didn’t say smart, high integrity, or any number of other common characteristics that might be thrown around. Those are often present but I’ve seen cases where some items were less than desired. These seven characteristics have proved to be the most common in successful entrepreneurs I know.

    What else? What are your thoughts on these seven characteristics of successful entrepreneurs?

  • Remote Inside Sales Reps vs Dedicated Inside Sales Offices

    With the rise of Software-as-a-Service (SaaS) comes a growth in the inside sales model for B2B technology vendors. Inside sales has always been part of the software industry but a common approach was to sell expensive, installed enterprise software with territory field reps and use inside sales primary in an appointment-setting function or for low-dollar deals. Well, many SaaS products act like lower-dollar deals because bills are paid monthly or quarterly and contract terms are often for one year so the deal value and structures don’t support an expensive customer acquisition process — enter inside sales as the dominant sales approach.

    As the startup grows and expands it can be difficult to build out the inside sales team fast enough internally. The next logical step is adding remote inside sales reps or opening up a separate inside sales office in a different geographic location. Here are some considerations to keep in mind:

    • Inside sales is often a more junior position, so the camaraderie and peer pressure from team members can be important
    • If the criteria for the inside sales position is extremely specific, having a larger geographic area to draw from provides more options
    • A popular strategy for inside sales departments is to have sales development reps that just set appointments, and also act an in-house farm system/minor leagues
    • As the compensation for the inside sales position becomes more lucrative, remote sales reps with experience become more available

    In general, either approach is difficult but startups I’ve talked to have had more luck with a separate, dedicated inside sales office where teams of reps can work together compared to having remote inside sales reps. For remote inside sales reps to be successful, the reps should be strong, independent self-starters and additional effort should be placed on collaboration tools like video conferencing (I like Google Hangout with video).

    What else? What are your thoughts on remote inside sales reps vs dedicated inside sales offices?

  • Look Out for Harvest Mode SaaS Startups

    Software-as-a-Service (SaaS) startups should have great revenue growth with companies buying more cloud-based tools, the layering of recurring revenue on top of recurring revenue, and the strong investor appetite to fund money-losing businesses. Unfortunately, things aren’t always so rosy. In fact, when a SaaS company’s growth stalls, and has outside investors with a timeline on the business, there’s a serious chance the company will be sold to a non-strategic buyer and put into harvest mode.

    What is harvest mode you ask? Good question. Harvest mode is when a significant percentage of staff is cut, typically 30-80%+, for the purposes of maximizing profitability and milking the recurring revenue.

    Here’s a simple example harvest mode scenario:

    • SaaS company is break-even on $10M in revenue and 70 employees
    • Growth stalls and investors, controlling the company, decide to sell to highest bidder
    • Company is bought for $30M and 50% of the 70 employees are immediately laid off
    • Employee costs represent 80% of the expenses, so a 50% staff reduction results in $4M in annual profits
    • Company continues to improve the product and sign up new customers, while revenues and profits slowly shrink
    • The financial buyer of the company is able to fund the acquisition with the $4M/year profits

    This is a hypothetical example of a harvest mode SaaS startup. I’ve personally seen it happen a few times and it’s important to look out for them, especially if you’re a potential customer thinking about choosing a vendor.

    What else? What other thoughts do you have on harvest mode SaaS startups?

  • Costs of Amazing Startup Benefits and Perks

    Earlier this week I was talking to an entrepreneur and he exclaimed that we must be spending a fortune on the amazing benefits and perks that we offer. After pausing for a minute I thought about and realized that I didn’t know how much it cost for an individual employee for benefits and perks.

    Here’s the cost for the different monthly items we pay for for each employee:

    • Full individual-only health and dental benefits – $270/month
    • Full short term and long term disability insurance – $20/month
    • Free lunch Fridays – $30/month
    • Catered daily breakfast – $60/month
    • 401k with 50% match up to 6% off salary with $3,000 max – $150/month (avg across company)
    • Unlimited drinks and snacks – $60/month
    • Weekly Friday massages – $15/month
    • Month car wash and detailing – $25/month
    • Free Braves tickets (2 per season) – $5/month
    • Total: $620/month direct expense of benefits and perks for the standard employee

    Yes, ~$7,500 per year is a fair amount extra on top of the 10% employer tax on wages but in the grand scheme of things it’s priceless to have such a great team of people with an awesome corporate culture.

    What else? What are your thoughts on the costs of amazing startup benefits and perks?

  • Startup Expansion Via an Office in Europe

    After successfully getting a Software-as-a-Service (SaaS) startup off the ground in North America, one of the natural tendencies is to start thinking about world domination, starting with an expansion office in Europe. London, due to its large population center, English speaking people, and easy transportation is a common choice for a European office. Startups often make the mistake of trying to launch a European office too soon and are better off waiting until they can fully fund it.

    Here are a few things to keep in mind with setting up an office in Europe:

    • A SaaS company should typically have $10M – $30M in recurring revenue to have enough scale and resources to fully invest in European expansion
    • Ideally a handful of customers will already be in Europe pre-expansion so that they can help out by acting as references to future clients as well as be case studies for the region
    • An easy way to get started is to hire one or two full-time contractors to work remote from London and have them be part of a department, just like a team member in the office
    • Many entrepreneurs in London and other cities specialize in helping North American software companies expand through a joint venture or via a subsidiary
    • One approach is to find a team member that’s been on your team at least year that wants to move to London for one to two years and set up the office, as well as ensure a consistent culture develops (most important!)
    • Sales, marketing, and support are the most common functions for an office in Europe with sales being the dominant one

    We’d had a London office now for almost 18 months and it’s worked out well following some of the ideas listed above. Europe is a huge market that’s ripe for startup expansion.

    What else? What are some other things to think about when opening an office in Europe?

  • Traffic Growth for a New Blog With Frequent Content

    Recently two entrepreneurs in town started new blogs to document their thoughts, share their theories, and help other people. As part of that process one of the common questions is how many people will read it? I don’t have many sources of data but I’m happy to provide some monthly visitor stats from this blog as a baseline for others to get a feel for how things might work.

    Monthly stats at six month intervals since the start of this blog:

    • Jan 2009 – 739
    • Jul 2009 – 1,115
    • Jan 2010 – 2,565
    • Jul 2010 – 3,591
    • Jan 2011 – 6,197
    • Jul 2011 – 8,628
    • Jan 2012 – 13,430

    So, from a standing start with a clean slate, this blog went from less than a thousand visitors in the first month to over 13,000 visitors exactly three years later with 1,072 blog posts published in the interim. I don’t know how this compares but assuming it’s average then it takes an impressive amount of time and effort to get a modest of regular traffic (most traffic comes from Google with social media being the second major source).

    What else? What other traffic growth pattens have you seen from blogs and sites with frequent content?