David Cummings on Startups

Blog

  • Physical Technology Upgrades for Startup Offices

    Modern startup offices should be forward looking and take advantage of the latest tools for the job. As an example, large LED TVs are much better to use compared to projectors due to screen resolution, warm up time, sound, and energy consumption. Here are a few physical technology upgrades startups should think about for their office:

    • 65 inch LED TVs with 1080p and VGA/DVI inputs instead of projectors and screens (will be even better with OS X Mountain Lion and AirPlay from a laptop straight to the screen via an AppleTV)
    • Dual 50 inch LED TVs for the scoreboard in the lobby/sales bull pen with one showing real-time data with a number of metrics while the other shows the three most important KPIs highlighted in red, yellow, green, and super green
    • iPads outside each conference room with Google Calendar showing room availability mounted to the wall via a PadTab
    • Entry-door cameras with night vision and a built-in DVR for security and after-hours guest monitoring

    While these technology upgrades aren’t necessarily cheap, they help make for a more efficient and productive working environment.

    What else? What are some other physical technology upgrades startups should think about for their office?

  • John Wooden’s Pyramid of Success for Startups

    Recently I started reading the book Wooden on Leadership after a recommendation from a colleague. The book’s author, John Wooden, is one of the most successful college basketball coaches ever and an amazing leader. In the book, Wooden describes his pyramid of success that he developed over the years:

    • Competitive Greatness
    • Poise | Confidence
    • Condition | Skill | Team Spirit
    • Self-Control | Alertness | Initiative | Intentness
    • Industrious-ness | Friendship | Loyalty | Cooperation | Enthusiasm

    Startups defining their core values would do well to use one or two items from Wooden’s Pyramid of Success (I’m a fan of no more than 3-5 core values otherwise there are too many remember). For entrepreneurs interested in the leadership and the study of leadership, I’d recommend the book.

    What else? What are your thoughts on John Wooden’s Pyramid of Success?

  • Scaling a B2B SaaS Startup is Expensive

    Software-as-a-Service (SaaS) is an amazing model with great recurring revenue, high gross margins, and strong industry growth. That said, scaling a SaaS startup is expensive. Very expensive.

    Once you’ve crossed the desert and reached profitability, you can control you own destiny, especially if profitable, however modest, is true profitability paying market wages, and not just ramen profitable. Now, break-even or slightly profitable is great, but scaling the business and staying ahead of the market requires significantly more investment. The real challenge is when the law of large numbers kicks in based on the size of the customer base and the renewal rate. In order to grow, the number of new customers signed monthly has to keep growing because the number of customers leaving keeps growing.

    Scaling a SaaS business is expensive because the primary expense of the business is people, and people need to be hired and trained in advance of customer acquisition. With the SaaS model, customers don’t pay a large sum of money up-front, rather they pay monthly or quarterly, often with an annual contract. The lifetime value of the customer is great but payment is spread out over years, with a decent chunk of the first year’s revenue going towards sales and marketing costs for customer acquisition, leaving little left over to staff up engineering, support, services, and back-office functions.

    To recap: first year customer revenue almost all goes to sales and marketing, payments are spread out over years, and people are the largest expense, which need to be hired and trained in advance of delivering value. To scale a SaaS startup, sales has to get out in front of churn, which is always growing on an absolute basis assuming the the churn percentage stays constant and the business is growing. Along with significant investment in sales and marketing, all other core aspects of the business need investment in advance of customer growth.

    What else? What are some other reasons scaling a B2B SaaS startup is expensive?

  • 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?