David Cummings on Startups

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  • Angel Investors that Don’t Meet the Entrepreneurs

    When you ask investors, especially venture capitalists, about what they most look for in an investment they almost always say the team. Yes, the product and market opportunity have to be great, but the team has to be awesome (my view is that the team has to be great but the market has to be awesome).

    I know an angel investor that has invested in over 20 startups. Yet, for the majority of the investments he hasn’t met the entrepreneur in person.

    Here are some reasons he doesn’t need to meet the entrepreneur in person to make investments:

    • He requires a working prototype to invest, so he gets to see what the entrepreneur was able to help build
    • He uses Skype and Skype Video to talk with the entrepreneur, creating a much larger reach for investment geographies
    • He invests small amounts in many startups, preferring a diversified portfolio approach
    • He prefers email for helping out and doesn’t spend much time with each investment, but he’s available for them

    The next time you think geographically about angel investors, remember that there’s a new breed, especially with the advent of AngelList, that will invest without meeting face-to-face.

    What else? What are your thoughts on angel investors investing without meeting the entrepreneur in person?

  • Alternative Daily Check-in Format for Startups

    Previously I’ve talked about how we do bottom-up daily check-ins. That means each morning we get together for a five minute meeting with everyone standing where each person answers the questions what did you do yesterday, what are you going to do today, and do you have any roadblocks. Well, at the Cameron Herold event earlier this week, he introduced a different format for seven minute daily check-ins:

    1. Share good news
    2. Cover numbers by department
    3. What does it all mean to the company goals and revenue?
    4. Missing systems or opportunities for improvement
    5. Sports team cheer with all hands in

    There are pros and cons to each type of daily check-in but the general benefits of daily, quick, in-person communication remain true.

    What else? What do you think of this alternative daily check-in format for startups?

  • Topgrading Interviews in a Startup

    Hiring a person that doesn’t work out hurts growth, profitability, and morale. For certain positions the outcome of a bad hire can be much worse. One method of interviewing that has a high degree of success is known as Topgrading (book on Amazon). The book is a massive tome that covers many excruciating details and is worth skimming. Overall, the concepts and methodologies are sound and should be understood by entrepreneurs.

    Here are some general comments on Topgrading interviews and process:

    • Much more time and thought should be put into the hiring process. If you’re going to potentially spend thousands of hours with a person, shouldn’t you spend more than an hour or two interviewing them?
    • The core tenet of Topgrading is the chronological in depth interview. Start from college, regardless of stage of career, and ask deep probing questions of the college experience as well as each job. Find out how the person thinks and why they moved from position to position.
    • For each and every single job, ask about the following:
      Job title
      Start and end date
      Starting and ending compensation
      Roles and responsibilities
      State of affairs when joining
      Results and accomplishments
      Mistakes and failures
      Most enjoyable and least enjoyable aspects of the job
      Circumstances that led to change of jobs
      Manager name and phone number
      Manager strengths and weaknesses
      What manager would say about candidate’s strengths and weaknesses
      Names of direct reports, their strengths and weaknesses, and rate them A through F
    • After the jobs review sections ask questions about the following:
      Analysis skills
      Judgement/decision making
      Creativity
      Continuing education
      Integrity
      Organization/planning
      Independence
      Stress management
      Interpersonal competencies
    • Plan on three to fours hours for this interview and take breaks every 90 minutes

    Topgrading is great because it forces much longer and more detailed conversations to not only understand a person’s background but to also understand more of the how and why as opposed to just the what.

    What else? What do you think of Topgrading interviews in a startup?

  • The Ultimate Formula for Startup Success

    A couple days ago I was at an EO workshop put on by Cameron Herold, the former COO of 1-800-GOT-JUNK. Cameron covered a range of topics with the emphasis being on the painted picture where the future is vividly described in words. Towards the end of the workshop he revealed the ultimate formula for startup success:

    ___% focus  x  ___% faith  x  ___% effort  =  ___% liklihood of success

    • Focus – the level of attention
    • Faith – the passion and belief
    • Effort – the amount of work
    As an example, if all three are 80%, that’s only a 51% chance of success — not good odds. Even at 90% for all three you only get a 73% chance of success. Once all three are at 97% you get a 91% chance of success.

    Cameron did a great job and I enjoyed the workshop.

    What else? What do you think of this formulate for startup success?

  • The Top 3 Things Every Entrepreneur Needs to Know

    There are three main things every entrepreneur needs to know. Yes, it’s really as simple as three little things. These don’t guarantee success, don’t address the market opportunity, and don’t address the management team. They do address things that are within your control and relate to how you run the business.

    Here are the top three things every entrepreneur needs to know in order of importance:

    1. Corporate culture is the only sustainable competitive advantage that is completely within the control of the entrepreneur. Develop a strong corporate culture first and foremost.
    2. Companies that stay closest to the customer in order to understand their needs and wants produce the best solutions.
    3. The feedback loop from new information to making a decision, if any, needs to be as short as possible. Organizational speed allows startups to beat more established organizations with extensive resources.

    Pretty simple stuff: strong corporate culture. stay close to customers, and make decisions fast.

    What else? What do you think of these top three things every entrepreneur needs to know?

  • Notes from Flashpoint Meeting with Sigma Partners

    Tonight we had the opportunity at Flashpoint to do a Q&A with one of the general partners from Sigma Partners. He fielded a variety of questions, primarily around venture capital, and provided candid answers. Here are a few notes from the talk:

    • A typical Series A for them involves co-leading with another investor, buying 50% of the company, and carving out 25% for founders and 25% for future employees (e.g. $6 million invested on $6 million pre-money valuation)
    • It took a week to raise their previous fund by calling on their existing LPs whereas their next fund will take significantly longer due to contractions in the market
    • Many funds from 2007 haven’t returned any money at all to LPs resulting in even more challenges for VCs to raise new funds with the expectation that many VCs will go out of business in the next five years

    Flashpoint is a great accelerator and I enjoyed listening to the Q&A with Sigma Partners.

    What else? What other thoughts do you have on VCs and the fundraising market?

  • Architecting an Infinitely Scalable B2B Web App

    An entrepreneur was recently telling me how he was worried that his B2B web app might not scale if things took off. Of course, I explained to him that that would be a high class problem to have and that he shouldn’t worry about it. Focusing on finding product/market fit and customer acquisition is much more important. With that said, I did describe a simple approach to architecting an infinitely scalable B2B web app:

    • Round robin DNS to a handful of load balancers in separate data centers
    • Databases with near real-time replication between data centers
    • Separate databases for global information (like users, accounts) and limitless shards to hold account-specific information (multiple accounts per shard, when a shard gets too large it is split into two shards)

    The benefit of most B2B web apps is that one account or user doesn’t need to know about another account, and thus the system can scale by adding more and more database shards horizontally with a global database that keeps tracks of what account is on what shard.

    What else? What are your thoughts on this approach to an infinitely scalable B2B web app?

  • Titan: The Life of John D. Rockefeller, Sr.

    Over the past few weeks I’ve been reading the fascinating biography Titan: The Life of John D. Rockefeller, Sr. I’m a big fan of biographies and autobiographies of entrepreneurs and this one doesn’t disappoint. Here are a few notes from the book:

    • Rockefeller’s dad was a fake doctor with wives and kids in different states
    • Rockefeller got his start as an accountant for a business in Cleveland that imported commodities
    • Rockefeller started his own company in his 20s importing commodities and eventually realized refining oil was more lucrative
    • Rockefeller’s company, Standard Oil, set up unfair partnerships with railroads that resulted in significantly lower shipping costs, which helped put many competitors out of business
    • Rockefeller moved from Cleveland to NYC as more and more business was being done on the East coast and internationally
    • Rockefeller had a daily lunch with his direct reports and that’s how they coordinated everything in the late 1800s
    • Rockefeller was an extremely devout Baptist, a teetotaler his entire life, and funded many Baptist causes
    • Rockefeller donated money for the original Spelman College in Atlanta and paid for many of its buildings over the years
    • The University of Chicago was founded and funded by Rockefeller and has his name in the official university seal
    • Rockefeller funded the Rockefeller Institute of Medical Research, and is credited with large scale philanthropy efforts around medical research, even though he was a devout believer in homeopathic remedies
    • Rockefeller retired in his 50s and lived well into his 90s

    Rockefeller built one of the first large-scale monopolies, was the world’s richest man, and spent decades immersed in philanthropy that truly impacted the world. The author does a great job capturing details and telling stores making for a great book.

  • To Be an Entrepreneur or a VC

    Recently I was talking to a successful entrepreneur and he was telling me that he hasn’t decided if he’s going to start another company or go the venture capitalist (VC) route. He has the skills, resources, and track record to be a full-time, professional investor. One concern he has is that things won’t be as fast paced being an investor compared to rolling up your sleeves and getting in the trenches. Another concern is that he won’t be maximizing his value to society since he’ll be coaching others as opposed to doing it himself. A third concern is that he won’t have as much influence on things and won’t be able to control his own destiny in terms of the success of the investments.

    One reason he’s really interested in being a VC is to get more economies of scale of his time by helping many entrepreneurs at once be even more successful. In addition, the day-to-day pressure of growing a business is on someone else’s shoulders likely resulting in a more relaxed quality of life for himself. A third benefit is not having all the eggs in one basket (a single startup) but rather having a portfolio approach. The entrepreneur enjoys working too much to not do anything.

    It’ll be interesting to catch up him with again in six months and see what he decided.

    What else? Would you rather be an entrepreneur or a venture capitalist?

  • Company Valuation in a Startup Buy/Sell Agreement

    One of the things I recommend to entrepreneurs formalizing their operating agreement, which spells out the rules of the business, is to define a simple formula for company valuation in addition to a buy/sell agreement that gives the startup the right, but not obligation, to buy back stock from team member no longer associated with the business. Best practices like a four year vesting schedule, one year cliff, and defining of roles and responsibilities among founders are more important, but having a defined buy/sell agreement is right up there to get in place immediately.

    Here’s a simple methodology I like to use for company valuation in a buy/sell agreement:

    • Take the comparable public market multiples of the business (e.g. 3x revenue for enterprise software companies, 5x revenue for SaaS companies, etc)
    • Divide the public market multiple in half to account for lack of liquidity and make that a fixed number in the formula in the operating agreement
    • Multiply trailing twelve months revenue times the discounted public market multiple by one plus the trailing twelve months top-line growth rate
    • So, with a public market multiple of 2.5, revenue of $1 million, and growth rate of 70%, the company would be valued as follows: (2.5 x .5) * 1,000,000 * (1 + .7) = $2,125,000
    • The formula put in the operating agreement would be as follows: 2.5 times the trailing twelve months revenue times the result of one plus the trailing twelve months revenue growth rate

    This formula is easy to calculate and takes into account the dynamics of the market, recent revenue performance, and a premium for growth.

    What else? What are your thoughts on having a defined formula for company valuation in a startup buy/sell agreement?