David Cummings on Startups

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  • Tungle.me + Email Signature = Self-Service Meeting Signups

    I’m a fan of Tungle.me, the service owned by RIM/Blackberry, that allows for collaboratively scheduling one or more Google Calendars. With Tungle.me you can also make your personal calendar selectively available to anyone that you provide a custom link, while blocking out days / times of day, and making the contents of any already scheduled events say “busy.”

    Sales people have a killer feature on their hands: they can put a personal Tungle.me calendar URL in their email signature and say “Schedule a demo immediately.” The prospect or contact they’re emailing can click that link and schedule a time to talk, which automatically sends an email to the sales rep notifying them of the new event.

    I was skeptical at first if anyone would take the initiative and schedule a demo with a sales rep this way. Now, I’m a big believer as I’ve seen it happen many times. It works great!

    Tungle.me in an email signature results in self-service meeting signups, which is awesome for sales people.

    What else? What are your thoughts on using Tungle.me in email signatures to make it easy for people to schedule meetings?

  • Large Customers as Edge Cases with SaaS Products

    Software-as-a-Service (SaaS) is an extremely efficient model for product development since the delivery components and upgrade cycles are controlled by the vendor (an inordinate amount of time is spent supporting configuration environments with installed applications). There’s one edge case with SaaS product that isn’t talked about much: unusually large customers.

    In the installed software world, unusually large customers typically require more expensive or exotic hardware and the problem is somewhat solved. With SaaS it isn’t as easy because SaaS applications are often sharded whereby clusters of customers are grouped on the same database, but individually delineated. As the customer base of the product grows, the SaaS company adds more and more shards. This breaks down with an unusually large customer when the customer is so large as to not fit in an isolated shard or with the standardized hardware used to power the other shards is not powerful enough.

    Modern technologies like Cassandra and HBase provide amazing scalability across a cluster of machines and solve the scale problem. Unfortunately, the tools to develop against them aren’t as simple and powerful as tools for standard databases like MySQL and PostgreSQL, but they are rapidly improving.

    Some ideas to deal with the unusually large customer edge cases with SaaS products include the following:

    • Data size allotments with fees for additional storage
    • Setting upper-bound limits for certain categories of data and not allowing overages
    • Isolating the account to a dedicated shard

    My recommendation is to think through scalability limits early on and address them in advance of customers reaching them.

    What else? What thoughts do you have on large customers as edge cases with SaaS products?

  • The Value Multiplier to Only Raise Angel Money

    After the post last week outlining an example value multiplier of 5 to raise VC money, an entrepreneur pointed out to me that some startups choose a middle ground between bootstrapping and raising institutional money: exclusively raising angel money. Comparing angel investors to VCs is relatively straightforward but there isn’t much talk about startups that only raise money from angels.

    Only raising money from angels would be considered for a more capital-light business with the idea that there might be three rounds over five years raising amounts more modest than from VCs (e.g. $500k, $750k, and then $1 million for a total of $2.25 million). By raising money from angels it’s likely that there wouldn’t be the typical 1x participating preferred liquidity preference and that the angels wouldn’t require selling roughly 1/3rd of the company for each round (the 10-20% range would be more likely).

    Let’s look at the math from purely a co-founder’s financial return for only raising angel money vs bootstrapping:

    • As a co-founder you own 40% of the business with another co-founder that owns 40% and a stock option pool representing 20%
    • At the end of five years you still own 40% assuming you don’t raise money and don’t have any dilution
    • As a co-founder that owns 40% of the business, assume you raise three rounds of angel financing (roughly one every 18 months). Assume angels buy approximately 15% of the business with each round of financing and assume the option pool grows by 5% (less hiring with less money), so multiply the ownership stake by .8 (representing the amount sold to the angels and the amount for the new option pool). Here’s the math: .4*.8*.8*.8 which equals 20.5%.
    • Assume everything else is equal, which it isn’t, the value multiplier to raise angel money is 2. That is, it makes financial sense to raise angel money if the business will be significantly greater than 2 times more valuable in five years.
    • A quick example: if you can build a company worth $10 million with no angels, the same company would have to be worth $20 million for the personal gain to be financially equivalent.

    Raising angel money, depending on the terms, is likely to be slightly more entrepreneur-friendly than institutional money, but still requires the full commitment of a board and other fiduciary responsibilities.

    What else? What are your thoughts on the value multiplier to only raise angel money?

  • Maximize Upside or Minimize Downside

    I know some people that focus on minimizing the potential downside of an initiative, project, idea, etc. It isn’t that they have negative personalities, it’s that they worry about what could go wrong as part of their core being. They can’t turn it off, no matter how hard they try.

    I know some people that focus on maximizing the potential upside of an initiative, project, idea, etc. It isn’t that they are ignorant of the challenges, it’s that they focus on the potential and inherently have blinders on to all the nuances. They often hate the details.

    The world needs all types of people. Startups often do well having both types of people on the co-founding team, with a healthy give and take relationship. Someone needs to think big and maximize the upside while someone else needs to counterbalance and look for ways to minimize the downside. Dreamers and worriers go well together.

    What else? What are your thoughts on maximizing the upside and minimizing the downside?

  • Publicly Traded SaaS Company Valuations

    In December of 2010 I wrote a post titled Publicly Traded SaaS Companies detailing the companies, market cap, quarterly revenues, and number of employees. Since that post the numbers have moved upwards nicely along with a couple being acquired (SuccessFactors and Taleo) and a few new ones going public (Responsys, ExactTarget, and Demandware). Let’s take a look at the current numbers:

    • salesforce.com (NYSE:CRM) – customer relationship management SaaS company.
      Market cap: $21.52 billion
      Last reported quarter’s revenues: $631.9 million
      Employees: 7,785
    • NetSuite (NYSE:N) – enterprise resource planning (accounting, inventory, etc) SaaS company.
      Market cap: $3.45 billion
      Last reported quarter’s revenues: $64.09 million
      Employees:  1,265
    • Constant Contact (NASDAQ:CTCT) – email marketing for small business SaaS company.
      Market cap: $873.79 million
      Last reported quarter’s revenues: $57.53 million
      Employees: 926
    • SuccessFactors – human resources SaaS company.
      Bought by SAP for $3.4 billion
    • Taleo – human resources SaaS company.
      Bought by Oracle for $1.9 billion
    • LogMeIn (NASDAQ:LOGM) – remote machine access SaaS company.
      Market cap: $846.84 million
      Last reported quarter’s revenues: $32.32 million
      Employees: 482
    • LivePerson (NASDAQ:LPSN) – live chat SaaS company.
      Market cap: $899.43 million
      Last reported quarter’s revenues: $36.51 million
      Employees: 524
    • Responsys (NASDAQ:MKTG) – email marketing SaaS company.
      Market cap: $587.27 million
      Last reported quarter’s revenues: $37.24 million
      Employees: 693
    • Demandware (NYSE:DWRE) – ecommerce SaaS company.
      Market cap: $774.98 million
      Last reported quarter’s revenues: ~$15 million
      Employees:  215
    • ExactTarget (NASDAQ:ET) – email marketing SaaS company.
      Market cap: $1.62 billion
      Last reported quarter’s revenues: ~$50 million
      Employees: ~1,100

    The companies that get the largest premium are the leaders in their space and have the fastest growth rates. In almost all cases market cap, quarterly revenues, and employees have grown since the last report 16 months ago. Software-as-a-Service continues to be hot.

    What else? What are your thoughts on publicly traded SaaS company valuations?

  • Existing Markets and New Markets for Startups

    Some startups operate in existing markets where they take customers from a legacy vendor and migrate them to a new solution. Some startups operate in new markets where customers don’t have a vendor (they’re unvended) and the solution is the first one they’ve used. It’s important to be cognizant of the differences when building a startup.

    Here are some ideas to keep in mind when thinking through existing markets vs new markets:

    • Unseating an existing vendor is going to be more difficult and require a longer sales cycle than new markets
    • Startups in new markets are often dependent on how fast the new market grows whereas existing markets have a more predictable market size
    • New markets require more of a missionary sales process where the prospect has to be educated why they need it at all vs an existing market where the conversation is more on why one thing is different and better than something else
    • New markets benefit more from agressive sales and marketing as those efforts help grow the market whereas existing markets still need sales and marketing but it’s more about positioning and differentiation

    Existing markets and new markets each present their own challenges and opportunities. Startups need to recognize their type and play to their strengths.

    What else? What are your thoughts on existing markets and new markets for startups?

  • Notes from the ServiceNow S1 IPO Filing

    Yesterday ServiceNow, Inc. filed their Form S-1 with the SEC to go public. ServiceNow provides Software-as-a-Service (SaaS) technologies for managing and deploying IT infrastructures — think software that keeps track of what software and hardware is being used as well as facilitating adding and removing of IT systems. SaaS is well suited for this type of product since it’s a combination of inventory management and project management that’s readily repeatable from company to company.

    Here are a few notes from the ServiceNow S-1 IPO filing:

    • Customers (pg 1)
      2010 – 602
      2011 – 974
    • Revenues (pg 1)
      2010 – $43.3 million
      2011 – $92.6 million
    • Loss / Profits (pg 1)
      2010 Net Loss – $29.7 million
      2011 Net Income – $9.8 million
    • Grew sales and marketing team from 140 people as of June 30, 2011 to 242 as of December 31, 2011 (pg 4) — impressive they added over 100 people to sales and marketing in six months
    • Growth strategy (pg 4)
      Expand customer base
      Up-sell existing customer base
      Expand internationally
      Add new products
      Increase customer renewal rates
      Develop partner ecosystem
      Promote platform as a service
    • Accumulated deficit of $68.1 million (pg 9)
    • 603 employees as of December 31, 2011 and plan on adding 500 more in 2012 (pg 9)
    • Average customer subscription length is 30 months but some deals are for 10 year terms (pg 16) — I’ve never heard of 10 year SaaS contracts
    • As of December 31, 2011 had $68.1 million in cash (pg 52) — seems high and makes me wonder why they took on that additional dilution
    • 242 out of 603 employees are in sales and marketing (pg 70)
    • In 2H 2011 the majority of the management team was replaced (pg 99)
    • In December 2009 the founding CEO took $35.5 million off the table (pg 112 and TechCrunch article)
    • In February 2012 the founding CEO took $7 million off the table (pg 113)
    • VCs own 78% of the business, the hired CEO owns 5.5%, and the founding CEO owns 13.5% (pg 114)

    Overall, ServiceNow represents another impressive SaaS growth story that’s likely to do well in the public markets.

    What else? What are your thoughts on the ServiceNow S-1 IPO filing?

  • Startups Need a Weekly Cash Review

    Cash is king when it comes to young startups. The only reason startups go out of business is because they run out of cash. Because cash is so important, one of the startup’s co-founders needs to be responsible for reviewing the cash in the bank on a weekly basis. Yes, it’s that important.

    What I like to do is to get a report, either manually or automated, every Friday afternoon, that shows our cash in the bank, the amount of our short-term accounts receivables, and the amount of our short-term liabilities. This helps me assess where we are as a business from an operational perspective.

    If you aren’t profitable, and have a burn rate, it’s also important to review the number of months you have left until you run out of cash. Some startups use the number of months left as a motivator and put it up on a big screen or big whiteboard so that everyone can see and rally around it. Some startups aren’t as open with their burn rate for fear it’ll scare some of their less risk-loving employees (perhaps the startup environment isn’t right for them?). Regardless, the co-founders need to know where they stand with cash, burn rate, and amount of runway left on a weekly basis.

    What else? What are your thoughts on startups needing a weekly cash review?

  • Successful SaaS Startups Grow Slower Than a Hockey Stick Curve

    The proverbial hockey stick-like growth curve for startups has been talked about many times, including yesterday. That growth curve is rare, and even more rare over extended periods of time. In reality, startups that experience the hockey stick growth curve often do so for a limited period of time, while the market adoption is at it’s peak, and then the growth abruptly slows down or goes away. So, instead of a hockey stick over a short period of time (< 7 years) it is really an ‘S’ like curve slanted to the right where there’s slow growth, hyper growth, and finally slow/no growth.

    Crazy hockey stick-like growth is more often attributed to companies with truly revolutionary products or strong network effects where the value of the system keeps building on itself indefinitely (e.g. Facebook). Software-as-a-Service (SaaS) or cloud-based software products that are successful have growth curves flatter than a hockey stick. Here are a few reasons why:

    • SaaS revenue layers on itself year after year which makes it easier to keep growing but harder to keep accelerating growth due to the law of large numbers.
    • SaaS contracts are often annual with the payments made quarterly, making payments of the lifetime value of the customer stretch out over several years whereas installed software products get most of the value up-front, and thus installed software products can have a sharper revenue growth curve, everything else being equal.
    • Customer churn for SaaS companies (read about the leaky bucket number) eats away at growth and even if the renewal rate stays constant, the number of new customers needed to grow at the same rate continues to increase.

    SaaS companies that break out are likely to have a growth curve flatter than a hockey stick but continue to grow as a business for longer periods of time due to the layering of recurring revenue.

    What else? What are your thoughts on successful SaaS startups growing slower than a hockey stick curve?

  • Escape Velocity for Startups

    Hockey stick growth curves are a desirable path for startups. The idea is that growth is slow and steady, much like the base of a hockey stick, and then at some point it really starts to take off, much like the long part of a hockey stick. There’s another concept, escape velocity, that isn’t talked about as much but is still important.

    According to Wikipedia, escape velocity is the speed at which the kinetic energy plus the gravitational potential energy of an object is zero. You can think of it as the point where something breaks free from whatever is holding it back, and thus  carries on indefinitely. For startups, escape velocity has to do with becoming the dominant vendor and growing indefinitely. All too often, a startup goes through the hockey stick growth path, only the fast growth eventually plateaus and the startup has slow or no growth. The startup didn’t fully achieve escape velocity.

    A company like Salesforce.com that’s still growing at double digit rates, even with billions of dollars of recurring revenue, achieved escape velocity and shows no signs of slowing down. Few startups achieve the hockey stick growth curve and even fewer achieve escape velocity. Pay attention to the growth paths of other startups and ask yourself if it achieved escape velocity.

    What else? What are your thoughts on escape velocity?