David Cummings on Startups

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  • Product Stickiness Spectrum for SaaS Products

    In the Software-as-a-Service (SaaS) world one of the questions investors love to ask is, “what’s your annual renewal rate?” The idea is that products with a higher renewal rate, and thus a lower churn, are more desirable, everything else being equal. After the renewal rate question comes questions around why customers leave and under what circumstances. Not all products and markets are created equally — there’s a product stickiness spectrum for SaaS products.

    Here are some example SaaS product categories with levels of stickiness:

    • High
      Ecommerce (switching costs, SEO, payment gateways, product catalogs, etc result in many moving parts)
      Content management (especially with a high number of pages integrated and users trained)
    • Medium
      Marketing automation (CRM integration, scoring + grading rules, email templates, landing page templates, tracking code, etc)
      Payroll (the nuances of electronic deposit, vacation days, risk of error, etc make people less likely to switch)
    • Low
      Email marketing (CSV file of contacts, email templates, DNS changes, etc)
      Virtual meetings / webinars (event sign-up form, URLs, etc)

    As with anything there are tradeoffs. Typically, categories with higher levels of stickiness have higher integration and consulting costs to make the system work, so there’s going to be a heavier people component, and lower economies of scale.

    What else? What are some other SaaS categories and where do they fit on the stickiness spectrum?

  • The Four Essential Competencies of a Leader

    Recently I started reading On Becoming a Leader by Warren Bennis as several people have mentioned it as a classic. After getting through his Hollywood-style political leanings in the intro he does a good job of describing characteristics and examples of good and bad leaders.

    Here are the four essential competencies of a leader according to Warren Bennis (pg. xxv)

    • Leaders are able to engage others by creating shared meaning
    • All authentic leaders have a distinctive voice
    • All true leaders have integrity
    • The most important competency is adaptive capacity — this is what allows leaders to respond quickly and intelligently to relentless change

    Most of the leaders interviewed are somewhat dated now as the book is over 20 years old but the concepts and ideas still ring true. For leaders looking to learn and grow in their skills, this book is a quality read.

    What else? Do you agree with these four essential competencies of a leader?

  • Product Management Planning Process for a Startup

    Product management is one of the most strategic and critical components of startups. While the best products don’t always win, great products in a great market are almost always successful. Unfortunately, product management is still much more art than science, although actionable data is becoming more prevalent.

    Here’s an example product management planning process:

    • Create a simple Google Spreadsheet with sheets for different constituencies
    • Solicit requests from sales, marketing, services, support, client advocates, product management, and engineering in individual sheets
    • Review the customer idea exchange and take the top 10 most popular items and 20 other items that have the most bang-for-the-buck and add them to a new sheet
    • Analyze trends from the 100 most recent support tickets and confirm the big ones are in the Google Spreadsheet
    • Categorize every item based on priority (low, medium, high) and difficulty (low, medium, high)
    • Get a group of stakeholders together, no more than five people, and debate everything that’s been assembled and decide on the items for the next quarter
    • Share the quarterly roadmap with the team and create alignment
    • Repeat each quarter

    Product management planning and roadmaps should be fluid with 20% of the quarterly time allocation left open for new items that might arise. There’s no perfect product management planning session but with a thorough process, proper categorizing of issues based on Covey’s quad one and quad two, and hard work, the results will be invaluable.

    What else? What are your thoughts on this example product management planning process for a startup?

  • Covey’s Priorities Quadrant System for Startup Product Management

    Stephen Covey has a well-known quadrant system for priorities that is beneficial for product management in startups. Here’s how it works: there are four boxes based on not important & important up the left and urgent & not urgent across the top in order to prioritize what needs to be done. It looks like this:

    The startup urge is to work in Quadrant 1 – important and urgent. Yes, the important and urgent things need to be done but the mistake I commonly see is not enough time spent in Quadrant 2 – important and not urgent. Quad 2 is often infrastructure, big picture, or long-term items that have significant compounding effects. Whereas the general time allocation is likely 90/10 with 90% in quad 1 and 10% in quad 2, the more successful startups consciously do 80/20 with 80% in quad 1 and 20% in quad 2. The next time you look at potential product features, put them in quad 1 and quad 2 buckets and see how the time allocations stacks up.

    What else? What are your thoughts on using Covey’s priorities quadrant system for startup product management?

  • Startups Don’t Lose a Deal Over One Feature

    Recently an entrepreneur was telling me about a customer he lost due to a missing feature in the product. The customer absolutely had to have this feature, and without it, wouldn’t be moving forward. Naturally, the entrepreneur was depressed thinking he needed to add this new feature right away. Hearing this I asked a few quick questions:

    • Do 80% of your ideal customers need that feature?
    •  Is that feature the highest priority?
    • Was your relationship with the customer strong enough that they were telling you the whole story?

    That last question is the most important.

    Most customers that point out a single feature for leaving are doing that as a nice way out. 

    The reality is that more times than not the customer was sold by the sales rep of a competing product. It’s true, the competing-product sales rep provided talking points to the customer and gave an easy way out with competitive intel — being outsold is never fun but it happens all the time. The next time you hear that your customer is switching because of a missing feature, remember that your company got outsold by a competitor.

    What else? Do you agree that when a customer leaves for one single feature they were sold by a competitor’s sales rep?

     

  • Sales Development Rep Pilot Metrics from Sales 2.0

    After seeing it mentioned on another blog I picked up the book Sales 2.0: Improve Business Results Using Innovative Sales Practices and Technology by Anneke Seley and Brent Holloway. The authors do a good job making the case for sales development reps, telesales, and using the web as part of the selling process. For those versed with the modern B2B SaaS customer acquisition model of the past five years it won’t be much new information but those transitioning from a traditional enterprise sale to a hybrid model or more telesales, this is a strong primer.

    One question I see frequently is around metrics for sales development reps. Here are example sales development rep (SDR) metrics from the book for a 12 week pilot period (pg 173):

    • Number of outbound calls and e-mails per day/week/pilot period including ramp: 45/135/1521
    • Contacts (connects, returned calls and returned e-mails) per day/week/month at 12 percent rate: 5/15/183
    • Percent of contacts in A lead category: 4 percent
    • Number of contacts per pilot period in A lead category: 7
    • Percent of contacts in B category: 6 percent
    • Number of contacts per pilot period in B lead category: 11
    • Average deal size: $80,000
    • Pipeline value per month (A & B leads): $1.44 million

    So, a trained sales development rep spends three months prospecting, connects with five people per day, and generates seven hot leads and 11 warm leads. These numbers are inline with what I’ve heard from other entrepreneurs and show that SDRs work if the economics of the deal make sense.

    What else? What are your thoughts on these metrics with sales development reps?

  • Leadership Development Questions from The Secret

    Continuing with yesterday’s post on the book The Secret by Ken Blanchard and Mark Miller, there were a number of good discussion questions as part of leadership development. While there were too many to list here I wanted to capture some of the key ones.

    Here are some leadership development questions from The Secret:

    • What is the purpose of your team?
    • How can you communicate your vision of the future to your team?
    • What are ten specific things you could do to engage individuals more effectively in the work of the team and the organization?
    • How are you encouraging the development of your people?
    • What systems or processes in your area of responsibility need to be changed to enhance performance?
    • How could the areas under your leadership be structured differently to enhance performance?
    • How many of your people would say that you have made a significant investment in their lives?
    • What are the ways you have expressed appreciation for work well done in the last thirty days?
    • What do I want to be true in the future that is not true today?

    These are great discussion questions for peer-to-peer learning as well as mentoring sessions.

    What else? What are some other good leadership development questions?

  • Startup Leadership Book Review: The Secret

    This weekend I finished reading the short book titled The Secret: What Great Leaders Know and Do by Ken Blanchard (of The One Minute Manager fame) and Mark Miller (a VP at Chick-fil-A). Much like the Patrick Lencioni books, it’s told as a fable with the main character going through a leadership mentoring program with an executive at her company. The main takeaway from the book is that leadership is about serving others (servant leadership) combined with the following SERVE acronym:

    • See the Future (vision)
    • Engage and Develop Others (mentoring and training)
    • Reinvent Continuously (try new ideas)
    • Value Results and Relationships (metrics and people)
    • Embody the Values (culture starts with you)

    Forcing each of the items into the SERVE acronym was a bit of a stretch but the core concepts are sound. Leadership, just like any other skill, needs constant work, practice, and development.

    What else? What did you think of the leadership book The Secret?

  • V2MOM Planning Process for Startups

    In Marc Benioff’s book Behind the Cloud he talks about the V2MOM planning process he used at Salesforce.com to grow it into the largest SaaS company in the world. The goal with V2MOM is to create alignment from the CEO through to every front-line employee. V2MOM represents vision, values, methods, obstacles, and metrics.

    A key aspect of V2MOM is that it is done at the corporate level, each department, and each individual. Here are more details of each:

    • Vision – big picture idea for the next 12 months
    • Values – the main 3-5 values for the company
    • Methods – specific tactics to achieve desired goals
    • Obstacles – openly talk about things that are working against success
    • Metrics – key performance indicators

    Again, these five items are addressed by every level and every individual in the organization. Building alignment in a startup, especially as it achieves significant economies of scale is difficult. The amount of communication required grows faster than headcount. V2MOM is a great approach to addressing alignment.

    What else? What are your thoughts on the V2MOM planning process for startups?

  • Notes from the Splunk S1 IPO Filing

    Splunk, a distributed machine data indexing and monitoring application for IT departments, just filed their S-1 IPO paperwork to go public. The IPO process is fascinating, especially the detail with which companies explain their last three years in the S-1 filing. S-1 filings are some of the most detailed, factual information you can read about startups that have achieved strong economies of scale.

    For Splunk’s business model, you can think of it as traditional enterprise middleware software for storing, searching, and monitoring all the log files generated by applications. Software applications, especially web-apps in the cloud, are increasingly distributed across multiple servers making log file analysis very difficult. Splunk solves this problem and many others. It’s a Paul Graham Schlep Blindness business.

    Here are notes from Splunk’s S-1 IPO filing:

    • 3,300 customers as of October 31, 2011 (pg 2)
    • Revenues (pg 2)
      2009 – $18.2M
      2010 – $35.0M
      2011 – $66.2M
    • Key Benefits (pg 4)
      Real-time operational intelligence and visibility
      Compelling return on investment and lower total cost of ownership
      Fast time to value
      Ease of use
      Highly scalable and flexible data engine
      Open, extensible platform
    • Growth Strategy (p4)
      R&D investment
      Sales investment
      Up-sell existing customers
      Build related products
      Grow user and developer community
      Become platform for machine data
    • Perpetual license agreements most common (pg 12)
    • More than 70% of revenues recognized each quarter in 2011 were deals sold that same quarter (pg 12)
    • As of October 31, 2011, nearly half the employees have been with the company less than one year (pg 13)
    • Net Losses (pg 14)
      2009 – $14.8M
      2010 – $7.5M
      2011 –  $3.8M
    • Accumulated deficit of $52.7M as of October 31, 2011 (pg 14)
    • 21% of revenues are from outside the United States in 2011 (pg 17)
    • Splunk is a NetSuite and Salesforce.com customer (pg 21)
    • Sales and marketing offices in Hong Kong, Germany, Singapore, and United Kingdom (pg 47)
    • Splunk is a traditional enterprise software vendor and does not have a cloud/SaaS model (pg 47)
    • Professional services represent 6% of revenue (pg 47)
    • 188 orders of $100,000+ in first nine months of fiscal 2012 (pg 50)
    • $3M term loan from Silicon Valley Bank (pg 60)
    • Equity Ownership Stakes (pg 121)
      Venture capital firms owns 71.5%
      Hired CEO owns 8.1%
      Co-founders own 6.0% and 5.7%

    Overall there were no surprises and everything was representative of a fast-growing traditional enterprise software company. Traditional enterprise software companies are valued around 2-3x revenues, so I expect Splunk to trade at 4-6x revenues due to the high growth rate.

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