David Cummings on Startups

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  • Return on Founder Equity in Startups

    Recently I was talking with a friend of mine who was thinking about raising money for his startup. He’s self-funded the business to date but is finding out that it’s going to take twice as long and cost twice as much to reach break-even. The topic of dilution and how much to sell came up, prompting me to introduce the concept of return on founder equity that I learned from a different friend.

    Return on equity, as defined by Investopedia:

    Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.

    So, the return on founder equity can be thought of as the amount of money the founder made relative to the amount of money the founder invested in the business. As an example, say you invest $5,000 and turn it into $1,000,000,000 like the Spanx founder did, you’d have a return on founder equity of $1b/$5k = 200,000. A more modest, but still very successful example would be investing $50,000 and turning it into $5,000,000 for a RoFE of 100.

    The next time an entrepreneur mentions raising money, ask about their expected return on founder equity.

    What else? What are your thoughts on the concept of return on founder equity in startups?

  • Warren Buffet’s 10 Rules from Jimmy John’s

    A few nights ago I was out with the kids and we headed over to Jimmy John’s near Terminus. As we were waiting for our sandwiches to be made I noticed a sign on the wall: Warren Buffet’s 10 Rules. Much like the Jimmy John’s sign How Much is Enough, this one is packed with wisdom.

    Here are Warren Buffet’s 10 Rules:

    1. Reinvest your profits
    2. Be willing to be different
    3. Never suck your thumb
    4. Spell out the deal before you start
    5. Watch small expenses
    6. Limit what you borrow
    7. Be persistent
    8. Know when to quit
    9. Assess the risks
    10. Know what success really means

    The next time you’re at a Jimmy John’s read the signs on the wall — they’re worthwhile.

    What else? What do you think of Warren Buffet’s 10 Rules?

  • An Unusual Entrepreneur Characteristic: Dramatic Life Event

    A few years ago I was having dinner with a successful software entrepreneur. One of his true enjoyments in life is developing deep mentor relationships with team members and partners. During our conversation he offered up something that rang true for me: some of the most successful entrepreneurs have had a very dramatic life event.

    I personally know two different entrepreneurs that had their mom die before they could vote — that leaves a serious mark. Imagine working through the death of a parent at a young age and the internal personal struggle. Conquering the pain and pushing on gives a greater level of internal strength and focus.

    Reading the Forbes article yesterday on Sara Blakely of Atlanta titled Undercover Billionaire: Sara Blakely Joins the Rich List Thanks to Spanx drives it home again. In the article it tells of her watching her friend get hit by a car and die at age 16, and then both of her prom dates died in horrible situations. Everything else seems easy after those dramatic life events.

    Successful entrepreneurs have often had a dramatic life event. The next time you’re talking with one see if you can work the idea into the conversation and if it holds true for them.

    What else? Do you know of other examples of dramatic life events for successful entrepreneurs?

  • Four Chapters of Life from a Tech Entrepreneur

    Recently I was talking to a technology entrepreneur and we got to talking about why we do the things we do and what drives us. He offered up an approach that really resonated with me by dividing things into goals based on four chapters of what he wanted to do with his life.

    Here are example goals representing four chapters of life from a tech entrepreneur whereby each chapter is approximately a decade long:

    • Chapter 1 – Learn the Startup World
      The goal is to join a startup that becomes very successful and run a team or department in it.
    • Chapter 2 – Start a Startup
      The goal is to start and run a successful technology company that goes public or has a big exit.
    • Chapter 3 – Help Entrepreneurs
      The goal is to be a super angel investor and help in multiple successful businesses as an investor.
    • Chapter 4 – Philanthropy
      The goal is to use the wealth generated in the previous chapters to give back to the local community and region.

    Creating value and giving back makes sense — I hope he’s wildly successful.

    What else? What do you think about these four chapters of life from a tech entrepreneur?

  • The Angel Investor One Year Rule

    Angel investors are a unique type of person in that they’ve been successful financially (or won the gene pool lottery) and enjoy taking more substantial risks by investing in startups as opposed to standard investment options. As angel investing is more art than science there are a number of quirks or interesting rules that angels come up with based on experience or intuition.

    Recently I heard a new angel investor rule that I hadn’t come across before: the angel must have known the entrepreneur at least one year before investing. The best time to raise money is when you don’t need it, and needing it in less than one year is the case for most entrepreneurs raising money. For this angel investor, requiring the one year minimum works well in that there’s a fair amount of time to see progress with the business, build rapport, and show value to the entrepreneur. On the other side, the opportunity to invest might not present itself again, the valuation could go up substantially, or something else might happen. There are always pros and cons.

    What else? What are your thoughts on the angel investor’s rule to have to have known the entrepreneur for at least one year before investing?

  • Quick Sales and Marketing Metrics

    One common question I get from entrepreneurs is best practices around sales and marketing. There are so many stats out there, especially vanity marketing metrics, it’s important to focus on the most important numbers.

    Here are some quick sales and marketing metrics to track:

    • What percentage of unique site visitors fill out a form and become a lead?
    • What’s the cost per lead?
    • What’s the cost per marketing qualified lead?
    • What’s the cost per marketing generated CRM opportunity?
    • What’s the return on marketing investment for the most common campaigns?
    • What’s the average sales cycle length?
    • What’s the average deal value?
    • How many demos do you need do to create a CRM opportunity?
    • What’s the close rate of CRM opportunities?

    Metrics are important to baseline results and look for ways to improve. These simple metrics should be tracked on a weekly or monthly basis and constantly evaluated.

    What else? What are your thoughts on these quick sales and marketing metrics?

  • Incorporate Personal Age in Goals

    A few weeks ago I was talking to an entrepreneur about personal goals and he said he swims his age in laps in the pool three times per week. The idea is that as he continues to age he’ll push himself further and add another lap each year. After the conversation it got me thinking that incorporating personal age makes sense for goals so that each year you stretch yourself a bit further.

    Here are some example goals that incorporate personal age:

    • Ride age number of miles per week on a bike
    • Donate age times 50 in dollars to alma mater each year
    • Spend age times 100 in dollars on vacations each year

    Age, as a changing variable, works great in personal goals.

    What else? What are your thoughts on incorporating personal age in goals?

  • What One Thing Needs the Most Improvement in Each Department

    At our most recent monthly leadership dinner I posed the question: what one thing needs the most improvement in your department? This question is designed as a conversation starter for each senior manager to answer around the table. One major benefit of doing it in a dinner setting is that there’s ample time for discussion and brainstorming. In fact, more often than not, the items that need improvement translate nicely into quarterly rocks to be addressed in the near-term.

    Here are some example issues that might come out of a discussion around what needs the most improvement in each department:

    • Marketing has saturated known advertising opportunities and needs more ideas
    • Sales opportunity-to-close rate has dropped by 3% quarter-over-quarter
    • Finance cash conversion cycle has grown by five days

    It’s also interesting to find out what each senior manager sees as most pressing in his or her department. Solving problems is part of the startup process and this exercise is especially useful.

    What else? What are your thoughts on regularly asking senior managers what one thing needs the most improvement in his or her department?

     

  • Small Changes That Have a Big Impact

    Successful startups can always point to a few pivotal decisions that made a huge difference. Maybe it was using Google pay per click ads before they became popular or maybe it was sponsoring a certain online communities that provided an enormous return. The reality is that it isn’t one or two major decisions that made the business successful but rather the numerous small decisions over time that put the startup in the position to see the big opportunity and make the decisions that led to big improvements.

    A serious challenge is tunnel vision where something is left alone because it’s always been that way, even if that way isn’t the best. Here are some small changes that might have a big impact:

    • Introducing a referral program to encourage customers to refer prospects
    • Making a corporate decision to pursue a best places to work award and truly going after it
    • Bringing on a new team member that raises the bar for everyone else

    There are so many small changes that happen on a regular basis it’s hard to tell which ones will have a big impact. What’s most important is to constantly look for opportunities for improvement and to continually pursue them.

    What else? What are some other examples of small changes that have a big impact?

  • Steve Jobs and the Weekly Project Review

    Recently I started reading the book Inside Apple by Adam Lashinsky in attempt to find new ideas about how to run a great company. The book is pretty good so far covering some well-known details of Apple as well as a number of things I hadn’t seen before. My favorite idea is the weekly project review instituted by Steve Jobs.

    Here’s how the Apple executive team weekly project review works:

    • Every Monday the senior management team meets for two hours
    • The top 4-6 highest priority projects are reviewed in minute detail with most projects being product launches (new products and updates to existing products)
    • All projects and tasks have a specific Directly Responsible Individual (DRI)
    • There’s always one DRI for a line item and never multiple people

    How many leadership teams of billion dollar plus companies get into the details on a weekly basis for a small number of most important company projects? My guess is not too many. The weekly detailed project review fits nicely with the one page strategic plan and quarterly rocks whereby the rocks represent the most important projects that need to get done.

    What else? What are your thoughts on the idea that Steve Jobs personally reviewed details of the most important projects on a weekly basis?