David Cummings on Startups

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  • Inside Sales Rep Comp Model for Startups

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    Most B2B SaaS startups should start with an inside sales rep model. The idea is that a consultative inside sales model is significantly less expensive when compared to a traditional enterprise field rep model. Prospects still need to talk to a knowledgeable sales person to help them make a decision.

    When thinking about the inside sales rep compensation model, I like to have the majority of the comp be the commission with a common split being 40% salary and 60% commission. Here are some ideas when thinking about the inside sales representative compensation model in a startup:

    • Base salaries in the range of $25k – $50k
    • Commissions in the range of $25k – $60k (e.g. $40k base salary and $60k in commission for an on-target earnings of $100k)
    • Commissions would be 10% – 20% of first-year’s revenues (e.g. $1,000/month SaaS product is $12,000/year with a 15% commission would be an $1,800 commission)
    • Commissions should be paid out after the customer’s payment has been received by the startup

    Sales rep comp should align closely with the interests of the startup and be win-win for everyone.

    What else? What are some other thoughts on inside sales rep comp models in startups?

  • Equity Best Practices for Co-Founders in a Startup

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    Image by Sum_of_Marc via Flickr

    An entrepreneur approached me recently to ask for advice around equity sharing with his co-founder. There’s no “right” answer for percent ownership but there are a few general best practices that all co-founders should follow.

    Here are equity-related best practices all co-founders should follow:

    • Require a four year vesting schedule where the equity vests monthly (another option is milestone-based vesting, which is also worthwhile — the key is to always have vesting)
    • Require a one year cliff where if any co-founder leaves in the first year they get no equity
    • Incorporate a buy/sell agreement that spells out what happens to equity owned by a co-founder once an owner leaves the business, if anything (e.g. does the startup have the option to buy back the equity? at what price?)
    • Document what each co-founder brings to the table in terms of time commitment, IP, networks/contacts, etc

    These best practices help set ground rules in the event things don’t go well or a co-founder decides to leave. People have the best of intentions when starting a company but it’s hard to know how personality styles and work ethics match or don’t match.

    What else? What are some other equity-related best practices co-founders should follow?

  • Determining When a Startup is Financially Ready for a New Hire

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    At today’s EO Accelerator accountability group, one of the discussion topics was centered around how to determine when a startup is financially ready for a new hire. Many entrepreneurs are concerned with increasing their cost structure and want to be prudent when adding new people, especially if they are bootstrapping the business. It isn’t always obvious when the financial wherewithal is in place for that next hire.

    There are two simple ways to determine when a startup is financially ready for a new hire:

    • Growth Plan Assets (GPA) – for companies that sell products or services with limited or no recurring revenue, growth plan assets is the ratio of current assets (e.g. money in the bank plus accounts receivable) divided by the average monthly operating costs over the past 90 days (e.g. all expenses in the past 90 days divided by three). The GPA should be in the three or four range (like a good GPA in college) to know that the business is ready to hire (the GPA can be lower as the percent of revenues that are recurring go up).
    • Recurring Revenue Greater than Expenses – for companies with most or all revenue recurring things are much simpler: once the recurring revenues are greater than the current expenses plus the expenses of a new hire, then the startup is good to go. This equation changes slightly if the startup has a bank line of credit and is able to hire in advance of revenue knowing that it will quickly catch up and surpass expenses.

    Determining when a startup is financially ready for a new hire is a combination of current financials, sales pipeline, and gut instinct.

    What else? What other factors should be included when determining financial ability for a new hire?

  • What’s in a Feature Name

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    After the startup’s name and the product’s name (which should usually be the same as the startup’s name) the next most important thing to name is individual features/modules in the product. Coming up with great names for features is critical because that value carries over into several areas like:

    • User experience / ease of use
    • Marketing content, especially for search engine optimization purposes
    • Other marketing content like blog posts, white papers, and social media
    • Sales demos and support

    The next time you go to name a new feature/module, stop and think through the many different ways it’ll be used and get feedback from a few people as to the best available name.

    What else? What are some other reasons the name of a feature/module is important?

  • Candy, Vitamins, or Painkillers for Startups

    This is a picture i took for the Candy article.
    Image via Wikipedia

    At a Flashpoint event several weeks ago one of the startups was giving their pitch. After the pitch was done there was two minutes for questions. Not quite understanding what they did I asked a simple question: is your product like candy, vitamins, or pain-killers for your market?

    After a long pause with no response, I volunteered a quick definition of each:

    • Candy – a nice-to-have that people enjoy and can be wildly successful if it becomes a fad (like Beanie Babies)
    • Vitamins – used to help augment and improve things but sometimes harder to quantify
    • Pain-killers – critical problems that need to be alleviated

    Startups need to think through this question early on and incorporate thoughts around it in their strategy and marketing.

    What else? What do you think of the candy, vitamins, or pain-killers analogy for startups? Read Stephen Flemming’s post on painkillers from four years ago.

  • Startups Need Bottom-Up Forecasts

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    A startup last week told me their goal was 100,000 active users in three years. Great, I told them, that sounds like a nice round number. Then, I asked where the number came from. Naturally, they pulled it out of the air with no basis. Wrong, I told them — a bottom-up forecast is the way to go.

    Here’s how a bottom-up forecast might look:

    • 1% conversion rate from unique visitors (so, 100 visitors to get one user)
    • Publish three blog posts per week with 100 unique visitors per post (so, three users per week)
    • Send two tweets per day with 50 unique visitors per tweet (so, one user per day)
    • Earn one PR placement per month that drives 5,000 unique visitors (so, 50 users per month)
    • Assume this is constant for one year and you have about 1,100 new users (~150 + 365 + 600)

    With this brute force inbound marketing approach it’s going to take a significant amount of time to reach 50,000 users (note there’s no word of mouth, viral co-efficient, etc).

    Startups needs to do bottom-up forecasts for sales, users sign-ups, etc to better understand what it takes to be successful.

    What else? What do you think of bottom-up forecasts?

  • 3 Ways to Develop Focused Focus Groups for B2B Startups

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    I’m not a fan of focus groups — I’m a fan of focused focus groups. Steve Jobs famously said that he didn’t use focus groups or market research because customers don’t know what they want. Well, for B2B tech startups that are solving customer problems (ideally providing the equivalent of pain-killers) the good news is that customers do know what they want.

    Most focus groups are an assembled set of semi-filtered people (e.g. people in IT) whereas a focused focus group is one where relevant leads are generated and those leads are used as a focus group (e.g. CIOs in healthcare companies with over 10,000 employees deploying iPads to doctors).

    Here are three ways to develop focused focus groups:

    • Buy Google AdWords and drive the visitors to a simple landing page
    • Reach out to your LinkedIn network and ask for one referral from each contact to someone in a relevant industry and position
    • Ask your friends on Facebook and followers on Twitter for recommendations of people that can help
    • Bonus: Go to the most applicable networking or professional association event for your audience and start talking to people

    Building a focused focus group to ask questions is hard, just like acquiring customers is hard. Doing the extra work to talk to these people on the front-end significantly increases the likelihood of startup success.

    What else? What are some other ways to develop a focused focus group for B2B startups?

  • Stop Building and Start Learning

    Flashpoint (TV series)
    Image via Wikipedia

    Recently, one of the Flashpoint teams was telling me that their most recent revelation was that they need to stop building and start learning. Think about it: stop building and start learning. Most startups that are just getting started would benefit from this advice. Human nature, especially for entrepreneurs, is to think you know what the market needs, and start building something without external input.

    Instead of spending time building the product, startups are better off learning what the market needs and what potential customers want — stop building and start learning. Unfortunately, learning takes more effort and energy because you have to get out there and talk to people. Finding the right people to talk with, and getting rejected along the way, isn’t as fun as brainstorming features on a whiteboard or hacking out some code. Instant gratification it isn’t.

    The next startup idea you have, resist the urge to start building the prototype and instead use that energy to talk to potential customers. Learn first then build second. It’ll actually save you time in the long run by focusing the startup on the core functionality and avoiding extraneous features.

    What else? What are your thoughts on stop building and start learning?

  • Grinding it Out in a Startup

    Tennis Campus
    Image by CROG Tennis Trieste via Flickr

    Today I had the opportunity to spend an hour with a startup that is working on a B2C internet-based startup. Being in the early stages of the process, they had tons of energy and excitement. One of the points I wanted to emphasize was that they need to pace themselves as it’s going to take at least two, if not three, years to achieve a modest level of success (I have no idea how long it’ll take but I was trying to set expectations).

    In tennis, a popular term is “grinder” meaning a player that is steady and plays to outlast their opponent, as opposed to going for winners to get the point over quickly. Grinders are known for intense endurance training and their ability to stay in the game by continually getting the ball back. Startup co-founders need to be grinders.

    Some notes for grinders in a startup:

    • Play for the long haul and don’t expend your energy too early
    • Set bottom-up goals with short-term milestones that meet your long-term goals
    • Get everyone else involved in the mindset that it is going to take twice as long and cost twice as much to achieve success

    Success in a startup is elusive but expectations should be set early-on that grinding it out improves the odds. Be a grinder.

    What else? What do you think of grinding it out in a startup?

  • 4 Criteria for Angel Investment in a Startup

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    Earlier today I had a chance to give a 30 minute talk about my limited experiences as an angel investor for Angel Lounge. The theme was lessons learned from Internet startups, so I had a few stories to share. At the end of the presentation I summed up my four personal criteria that I look for when considering an angel investment in a startup:

    • Coachable entrepreneur
    • Small, fast-growing market
    • Opportunity for cash flow break-even in 24 months
    • Scalable way to generate leads

    Notice there’s nothing in there about potential return on investment or timeline to business exit. Angel investing is as much about helping aspiring entrepreneurs and mentoring as it is making money. Now, if you don’t make money the chance of continuing to do it goes down significantly but when you do it allows you to help even more entrepreneurs. My four criteria for angel investment in a startup are straightforward and practical.

    What else? What other criteria would you have for making an angel investment?