David Cummings on Startups

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  • Determining Equity Grants for Startup Employees

    Equity Silver 1996
    Image by Gord McKenna via Flickr

    An entrepreneur recently asked me for advice regarding the amount of equity to grant to a key hire. There’s a fair amount of information online with the following rough values for a Series A-stage company (the values can vary dramatically for a number of reasons):

    • CEO – 5%
    • C-level – 2%
    • VP – 1%
    • Director – .5%
    • Manager – .25%
    • Engineer/specialist – .1%

    Percent ownership is only one piece of the equation, and is best viewed in the context of a number of factors like preferred stock preferences, strike price (assuming stock options), money raised, etc.

    Instead of percent ownership, I prefer approaching it in the same manner as Fred Wilson. Here’s a quote from his post titled “Employee Equity: How Much?”

    The key thing is to communicate the equity grant in dollar values, not in percentage of the company. Startups should be able to dramatically increase the value of their equity over the four years a stock grant vests. We expect our companies to be able to increase in value three to five times over a four year period. So a grant with a value of $125k could be worth $400k to $600k over the time period it vests. And of course, there is always the possiblilty of a breakout that increases 10x over that time. Talking about grants in dollar values emphasizes that equity aligns interests around increasing the value of the company and makes it tangible to the employees.

    So, the next time you’re discussing equity with an employee, explain all the parameters but focus the conversation around dollar values and expected outcomes.

    What else? What are your thoughts on determining equity grants for startup employees?

  • 4 Quick Factors in Startup Valuations

    Greece: Judicial revenue, overprint ΘΕΜΙΣ on 1...

    Early last week I was talking to an entrepreneur about startup valuations and how for the Series A round it really depends on the amount being raised. The idea is that VCs want to own roughly 1/3 of the business, so if you raise $3 million, your pre-money valuation will be $6 million. If you raise $4 million, your pre-money valuation will be $8 million. Some VCs want 40% of the equity so the pre-money valuation, assuming the same amount raised, will be slightly lower. The valuation is based on the amount being invested and the desired amount of ownership by the investor.

    Now, once the startup starts generating revenues the valuation dynamic changes to more traditional metrics. Here are four quick factors in startup valuations:

    • Profits/earnings – the amount of money the startup makes, typically before factors like taxes, interest, depreciation, and ammortization
    • Growth rate – the faster revenues and profits are growing, the more valuable
    • Recurring revenue – the greater the percentage of revenue that’s recurring, the more valuable
    • Gross margins – the greater the gross margins, the more valuable

    So, a company that is extremely profitable, growing fast, 100% recurring revenue, and high gross margins will be the most valuable, everything else being equal.

    What else? What are some other factors in startup valuations?

  • Serial Entrepreneur Benefit: Recruiting Previous Colleagues

    WOULD THEY HAVE APPLIED FOR A SIGNATURE LOAN?
    Image by roberthuffstutter via Flickr

    Last week I was talking to a successful entrepreneur and he was updating me on great progress with his new venture. After talking for a bit about how my company is hiring a number of people and how hard it is to find the right people, he mentioned something that made me pause: he had a number of people from his previous business he couldn’t wait to hire as soon as his new business could afford them. With his non-solicitation agreement term limit about to expire, there was no negative recourse to bringing previous employees into his new venture.

    A significant benefit for successful serial entrepreneurs is recruiting previous colleagues to a new venture.

    This seems obvious in retrospect but hadn’t become apparent until I’d been in a situation where the amount of time and effort it took to find the right people was much more substantial than desired. Recruiting is hard work and to have a pool of trusted, known-quantity previous team members is a real benefit for serial entrepreneurs.

    What else? In what other ways is recruiting previous colleagues a benefit for serial entrepreneurs?

  • The Presentation Slide Fit-Words-in-a-Tweet Rule

    Audience
    Image via Wikipedia

    At every conference I attend there’s at least one presentation with slides that contain dozens of words. Inevitably, the presenter mumbles something to the audience like “you probably can’t read this” and continues right on. Whenever this happens I cringe and immediately think of Guy Kawasaki’s 10/20/30 rule of PowerPoint. Well, after this most recent conference, and seeing another slide with unbearably small words cluttering the screen, I came up with another rule:

    All words on a presenter-led slide need to fit in a single tweet.

    Now, there is a major qualifier included in there: presentation slides delivered live before a group should follow this rule whereas slides that are designed to be handouts should have much more information. If a presenter is taking the audience through his or her slide deck, each slide should have no more than 140 characters, just like a tweet. There’s elegance in brevity. Audience members should focus on the presenter, not read the extensive text on the slide.

    What else? What do you think of the presentation slide fit-words-in-a-tweet rule?

  • Notes from the Yelp! S-1 IPO Filing

    Image representing Yelp as depicted in CrunchBase
    Image via CrunchBase

    Yelp! Inc. just filed their form S-1 to go public, likely by mid-2012 if the IPO market stays open. Yelp is the #1 business reviews platform for consumers to talk about what they like, and don’t like, in a public setting. Since launching in September 2004, they’ve amassed over 22 million reviews.

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

    • #1 free listed travel app on the Apple App Store (pg 1)
    • 61 million unique monthly visitors (pg 2)
    • 19,000 active local business accounts paying for their premium service (pg 2)
    • $58.4 million in net revenue for the first nine months of 2011 with a net loss of $7.6 million (pg 2)
    • Shopping and restaurants represent 46% of the reviews (pg 3)
    • Growth strategy: growth in existing markets, expand to new geographic markets, platform expansion, and enhance monetization (pg 5)
    • 43 Yelp markets in the U.S. and 22 Yelp markets internationally (pg 6)
    • Revenues (pg 10)
      $12.14M (2008)
      $25.81M (2009)
      $47.73M (2010)
      $58.38M (first nine months of 2011)
    • Losses (pg 10)
      $6.23M (2008)
      $2.33M (2009)
      $9.51M (2010)
      $7.41M (first nine months of 2011)
    • Accumulated deficit of approximately $32.1 million (pg 15)
    • CEO recently testified before the U.S. Senate Committee on the Judiciary, Subcommittee on Antitrust, Competition related to Google (pg 19)
    • Currently a defendant in seven patent infringement suits (pg 22)
    • In the process of settling a suit that alleges violation of labor laws for up to $1.3M (pg 22)
    • Advertising contracts are typically 3, 6, or 12 months (pg 24)
    • Going to spend approximately $15 million internationally in 2012 (pg 53)
    • Strengths: passionate community, leading brand in local, powerful network effect, proven market development strategy, local-focused sales force, proprietary technology, and attractive business model (pg 80)
    • As of September 30, 2011, Yelp had 852 full-time employees globally (pg 89)
    • CEO 2010 salary was $210,000 (pg 102)
    • COO 2010 salary was $235,000 (pg 102)
    • Venture capitalists own 74.9% of the company (pg 118)
    • The CEO/co-founder owns 11.1% of the company (pg 118)

    The Yelp S-1 was straightforward and didn’t provide any suprises.

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

  • The Waterfall or Cohort Model for Marketing Measurement

    WaterfallAt today’s Pardot User Conference Elevate 2011, Scott Voigt did a great job talking about a number of topics, one of which was marketing measurement. One example that he presented, and I thought was especially valuable, was that of the waterfall model, also known as a cohort or vintage model. The idea is simple but has several parts:

    • Time is a challenge for marketing data as it is hard to attribute marketing-contributed value in an exact manner
    • One of marketing’s most important KPIs is the number of opportunities created from marketing-generated leads
    • Marketing-generated leads often don’t turn into opportunities immediately so it’s important to look at time series analytics
    • A waterfall model takes the number of leads generated in a specific month, then tracks the number of opportunities generated from those leads in that month as well as subsequent months on a monthly basis

    Here’s an example waterfall/cohort model for tracking marketing-generated leads that turn into pipeline opportunities:

    Jan Feb Mar Apr
    Leads 50 52 49 55
    Opportunities
    Jan 2
    Feb 3 2
    Mar 2 2 1
    Apr 1 3 3 3

    In the table above, note how leads generated in one month turn into opportunities over the course of time. Without this type of analysis it’s difficult to understand marketing’s on going effectiveness.

    Scott did a great job with his presentation and I enjoyed hearing his theories on marketing.

    What else? What are your thoughts on the waterfall method for marketing measurement?

  • Developing Customer-Centric Content

    Centric
    Image via Wikipedia

    At today’s Pardot User Conference the marketing agency Brainrider gave a great presentation titled Developing Customer-Centric Content. The big takeaway for me was that too many sites organize content based on how marketers think about types of resources (e.g. PDFs, Case Studies, etc) as opposed to how the potential customers think about what they want. Have you ever gone to a site and generically said that you want a PDF? I didn’t think so.

    Here are notes from their presentation:

    Things to define:

    • Driven by objectives
    • Customer-focused
    • Demonstrating subject matter expertise
    • Supporting your programs
    • Measuring performance

    Checklist for better content:

    • Be customer-focused
    • Start with light content
    • Make it findable
    • Measure what works

    What business are you in?

    • Target
    • Needs and pain
    • Value proposition
    • Content categories

    Start with light content:

    • Leverage “as is” content
    • Repurpose existing content
    • Use light formats
    • Curate and share 3rd party content

    Leverage as-is content:

    • Existing brochures
    • Resource center
    • Slideshare
    • LinkedIn

    Repurpose existing content:

    • 1-page download
    • Checklist
    • Resource post
    • Blog post

    Make it findable:

    • Use keywords in your title
    • Describe why it’s worth reading
    • Use images and graphics for key concepts
    • Headers and lists to be scannable
    • Include more information links at the bottom

    Measure what works:

    • Track content by category in Google Analytics by segments
    • Pageviews, Avg. time on site, Pages per visit, Gated downloads

    Brainrider argued their case well that marketers need to develop customer-centric content and provided great examples.

    What else? What are your thoughts on customer-centric content?

  • A String of SaaS Pearls

    Jewelry set with pearls
    Image via Wikipedia

    A month ago someone mentioned to me that Citrix’s acquisition of seemingly random Software-as-a-Service (SaaS) was their “string of pearls” strategy. The idea is that it’s a collection of fast growing businesses that operate on their own. Citrix has acquired GoToMeeting (it has grown into one of the largest SaaS businesses in the world), ShareFile (founded by a Duke ’99 grad), and Cloud.com, among others. VMWare, in a similar fashion, has acquired seemingly unrelated SaaS companies like SlideRocket, SocialCast, and more. A string of SaaS pearls.

    While driving home tonight there was a commercial on the radio for South Walton beaches in Northwest Florida. The area, known as 30A for the highway it’s on, has a number of cute little communities with Seaside being the most famous. In a similar fashion, the voice on the commercial used the same phrase “string of pearls” to describe the adjacent communities.

    SaaS represents such a great business model with strong recurring revenue, high gross margins, and an efficient delivery method. The string of pearls approach makes perfect sense precisely because of the business model and value brought to the customer. Next time you see a series of seemingly unrelated acquisitions, ask yourself if it is a string of pearls.

    What else? What are your thoughts on the string of SaaS pearls approach?

  • Startups Should Provide Maximum Value with Minimum Customer Effort

    AMG Affalterbach DaimlerChrysler customer serv...
    Image via Wikipedia

    There’s a natural tendency with startup founders to offer solutions that are very customizable in an effort to meet everyone’s desires. This is a dangerous approach. Startups should provide maximum product value with minimum customer effort and customization.

    Think about it: do you want to turn on a product and have it just work or do you want to spend three hours configuring things to see results? Of course, seeing results without customization isn’t always possible but it should be tried. In a similar fashion to progressive disclosure where advanced features are hidden by default, product value should be shown by default and then customization over time to get more value.

    The next time a feature is proposed with nobs and dials to tweak it, ask the team how this feature could add value with little/no customization and what would that look like. Push hard to provide maximum value with minimum customer effort.

    What else? What are some other thoughts around startups providing maximum value with minimum customer effort?

  • User Conferences and Startups

    Grand Canyon, Grandview Point
    Image by Laughing Squid via Flickr

    As we finished up our last minute preparations for next week’s user conference I’m reminded why they are such great events. One of the most important aspects of building a great startup is developing a passionate community of users and partners. Even with the advent of great technologies like email, screen sharing, message boards, blogs, and social media there’s an element of human connectedness that can only take place face-to-face. User conferences provide just that: the strongest level of community possible.

    When in the course of a startup, there comes a time where customers want to gather together, whether as a simple user group or as a large annual user conference, the startup should facilitate and embrace it. User conferences represent the largest and most complex user events, and also the best. User conferences, much like pep rallies before a football game in high school, are filled with tremendous energy and excitement as everyone comes together around a common cause.

    User conferences require significant time and effort but are worth every ounce of energy.

    What else? What are your thoughts on user conferences and startups?