David Cummings on Startups

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  • Legacy Customers and Pricing Increases in Startups

    The United Kingdom Pavilion
    Image by IceNineJon via Flickr

    Recently I received an email from a sales rep for a service we’ve been paying a couple thousand dollars a year for over three years. He politely informed me that we’ve been going over our monthly allotment resulting in overage fees, but more importantly, our current pricing is significantly out of date and the plan we’re on now, even when adding in overages, is more than twice as much for new customers. Since we were one of their first paying customers they are offering to cut their published price in half in exchange for us signing their new terms of service, which are more strict and less desirable (changes to SLA, number of items that can be used, etc).

    So, a summary of the situation:

    • Early adopter customer of three years paying slightly less than half the new pricing
    • Vendor desires the customer to be on the current pricing plan with more strict terms of service and pricing model but better support hours
    • Vendor offers customer 50% off published pricing to move to current plan so as to standardize contracts, pricing, and lock in rates for future customer growth

    This is a fair approach and we’ll go with the new pricing. My recommendation is to grandfather in existing customers letting them keep their pricing as long as they want. If a legacy customer requires a serious change to their plan, the new pricing should take effect with a long-standing customer discount. It is time consuming to have customers on different plans but the goodwill and continuity of consistent pricing helps keep happy customers, which are the lifeblood of a business.

    What else? What are your thoughts on legacy customers and pricing increases in startups?

  • White Labeled Software Strategies for Startups

    Mr Dreamforce
    Image by Simple Fox via Flickr

    Recently I was talking to an entrepreneur with a B2B SaaS startup and the topic of white labeling his product came up. White labeling is a term to describe making the software brandable by a reseller (e.g. a reseller wants to make the product look like their own product to their clients). When the entrepreneur brought up the idea I immediately said that he should think really hard about it before doing it as there are serious long-term implications.

    Here are some considerations when thinking about offering a white labeled product:

    • If you want to build a large, standalone brand, white labeling is likely not the way to go, although co-branding works well (e.g. some pieces like the logo and colors of the app are customizable but the URL, documentation, etc refers to the core product name much like salesforce.com does)
    • White labeling often works well if resellers are the primary distribution channel as well as having big companies resell it (in this case you’re helping others build their brand and you’re fine with being the behind-the-scenes provider)
    • White labeling also works well if you offer an affordable product that goes on a credit card and brand doesn’t play a role (e.g. 37signals and Campaign Monitor have great products that can be white labelled)

    In general, most startups that are considering a white labeled version of their product should start with a co-brandable version and see if that meets the market demand as most of the time it does.

    What else? What are your thoughts on startups offering a white labeled version of their product?

  • Defining a Qualified Lead for a Startup

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    Continuing with yesterday’s post on The Value of a Qualified Lead for a Startup, the next logical question is how to define a lead as qualified. Most leads aren’t qualified, and treating unqualified leads as qualified often results in contention between sales and marketing. At a base, I like to think of it as startup-specific criteria that often incorporate Budget, Authority, Need, and Timeline (BANT).

    Here are startup-specific criteria I like to look at when defining a qualified lead:

    • Specific job titles or functional responsibilities (usually related to Authority)
    • Specific verticals/industries along with number of employees or amount of revenue
    • Specific pain points or situations that are present (usually related to Need)
    • Ability to make a purchase within a specific period of time (usually Budget and Timeline)

    Defining the criteria for a qualified lead, and having everyone in the startup agree on it, results in better communication and results. Instead of pointing to the number of leads generated on a daily/weekly/monthly basis, the metrics should be the number of qualified leads generated in a time period.

    What else? How do you define a qualified lead?

  • The Value of a Qualified Lead for a Startup

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    Determining the value of a qualified lead is difficult for most companies, especially startups without historical data to draw from. The value of a qualified lead should be approximated early in the life of a startup as it is essential to understanding where to invest money and resources.

    Here’s a simple way to think about the value of a qualified lead for a startup:

    • Average monthly customer fee (e.g. $500/mo or $6k/yr)
    • Times the gross margin of the business (e.g. 70%, so $6k*.7 = $3,200)
    • Times the discount for sales salaries, sales commissions, and marketing salaries (e.g. 20%, so $3,200*.8 = $2,560)
    • Times the discount for the cost of capital (e.g. 10%, so $2,560*.9 = $2,304)
    • Divided by the number of qualified leads needed to close a sale (e.g. 10 leads to close one customer, so $2,304/10 = $230 for a qualified lead)

    In reality, you should also take into account the average life of the customer (e.g. 48 months) and factor that into the value of a qualified lead but from a startup efficiency point of view it is best to acquire a customer for less than the first year’s gross margin revenues, and the cost of a lead is only one piece of that equation.

    What else? What do you think of this method to calculate the value of a qualified lead for a startup?

  • SignUp4 – Event Management System

    One thing I want to start doing more of is highlighting successful Atlanta startups on a regular basis. The first one I want to talk about is SignUp4 event management systems. Now, you’re probably thinking EventBrite or 123Signup. Those event management tools are nice but are designed for more consumer type events or less customizable business events. SignUp4 is for businesses that need extremely customizable event management delivered as a SaaS product.

    Here are some SignUp4 fast facts:

    SignUp4 is a solid SaaS success story that pioneered event management software in the cloud.

    What else? What are some other successful Atlanta startups to cover?

  • Start Startup Lead Gen Efforts on Day One

    "Trees are the earth's endless effort to ...
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    Generating quality leads is the main barrier to growth for most B2B startups. As such, startups should start lead generation efforts on day one knowing it takes a significant amount of time to build a customer acquisition machine.

    Here are a few things to keep in mind with lead gen efforts on day one:

    • Talk with all team members about customer acquisition efforts and reiterate that quality leads are almost always the bottleneck to growth for startups — everyone should get involved
    • Plan on a combination of inbound and outbound marketing
    • For inbound marketing, publish at least two blog posts per week, one tweet per day, one white paper per month, participate in online community conversations, and plug in an inbound marketing tool
    • For outbound marketing, start building a newsletter email list, potential prospect calling list, available sponsorship opportunities (like a community of potential prospects), and plug in a marketing automation tool

    Building a customer acquisition machine is the difference between success and failure for many startups. Start focusing on lead on day one and incorporate in into all aspects of the startup.

    What else? What other ways do you incorporate lead gen efforts on day one?

  • Naming a Startup

    Domain Name Extensions

    Naming a startup should not be difficult. While the days of getting a good domain name for $8 are over, a decent startup name, and corresponding domain name can be had for $1k – $2k. Starting out with a strong name is important as it is a) a pain to change it later and b) powerful for making the startup idea more concrete when selling, recruiting, etc.

    Here are a few tips for naming a startup:

    • Keep the name short, preferably 10 characters or less
    • Look for one industry relevant word and a catchy word to go with it (e.g. PlacePunch) or a made up word that is pseudo relevant (e.g. Clickscape)
    • Require a .com domain name and plan to spend $1k – $2k to buy an existing domain (e.g. using sedo.com) if you can’t find an unregistered domain name (buying an existing name can help with SEO if it has been registered for an extended period of time)
    • Do a simple trademark search on USPTO.gov to make sure it or something similar (like a plural form) isn’t already registered
    • Check for the Twitter and Facebook name availability

    Naming a startup can be a long, drawn out effort. Don’t do it. Make it a simple process with a spreadsheet and quickly narrow down five viable options. Take the options to your friends for feedback (not consensus!), make a decision, and move on.

    What else? What other things do you like to do when naming a startup?

  • Economics of a Partner in a VC Fund

    Capital Crescent Trail
    Image by Kevin H. via Flickr

    Two weeks ago I started reading Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist. The book, which I’ll write about in a future post, has a section on the economics of a venture fund. Many entrepreneurs that haven’t been around the venture capital and venture-backed startups world don’t have a good understanding of how venture funds work.

    Here are a few generalities of the economics of a partner in a VC fund:

    • Funds are often setup in a 2/20 manner meaning 2% of the fund annually goes to the management fee and 20% of the profits (carry) go to the partners (after the principal and management fees are paid back)
    • Most partners in VC funds in the last decade haven’t received a carry check since funds have had a negative return on average
    • With a $100 million fund, and 2% management fee, the firm has $2 million per year to operate during the first seven years of the fund, and a lower amount in the later years as the fund (hopefully) wraps up
    • With a $2 million/year management fee, four partners (usually one partner for every $25 – $50 million in fund size), the partners might each take home $300k salaries and have $800k left for associates, admins, office space, legal, travel, etc
    • Funds that do well, put their money to work quickly, and raise another fund because of quality investments, can have their management fees and salaries stack up (imagine raising a $100 million fund, investing the majority in four years, raising a second $100 million fund, and now have $4 million/year management fees to work with, $600k in individual salaries, etc)
    • Carry (profit) from a fund might work as follows: invest a $100 million fund ($20 million went to management fees over 10 years and hopefully $20 million in exits occurred early enough to also be invested before the fund ended), generate $300 million in proceeds from successful investments (3x cash on cash), return the first $100 million back to the investors, earn 20% of the remaining $200 million ($40 million) as profit, and split it amongst the partners ($10 million each). Another bonus is that carry is taxed as long-term capital gains and not regular income.

    As you can see, the economics of being a successful venture capitalist are very desirable, hence the high demand for the limited number of positions. Most VCs come from a banking background and a decent percentage come from an entrepreneurial or operating experience background.

    What else? What do you think of the economics of a partner in a VC fund?

  • Atlanta’s Great for Idea Stage Startups

    75 5th Street, Midtown Atlanta
    Image by MikeSchinkel via Flickr

    Yesterday’s post Atlanta Great for Early Stage Startups but Not Idea Stage? prompted a flurry of comments and tweets. Today I’d like to take the other side of the argument and outline why Atlanta is great for idea stage startups. Startups in this context are capital light web businesses with little-to-no funding and little-to-no revenues.

    Here’s why Atlanta’s great for idea stage startups:

    • The low cost of living means the threshold for saving enough money to start your own business is lower than other parts of the county. In Atlanta, a person with no mortgage or kids can readily live on $1,000/mo (assuming no taxes). I know an entrepreneur that worked 60 hours a week on his startup and valeted cars at night to cover his living expenses — that shows serious determination.
    • While there aren’t a ton of potential co-founders in town that can go with no salary, there are a number of entrepreneurially minded business people and software developers that will freelance part-time in exchange for a reduced hourly rate and stock options (full-time co-founders are the way to go, but sometimes that isn’t always possible).
    • People in the Atlanta startup community are eager and willing to help entrepreneurs at no charge. The startup community in general is medium-sized compared to most cities, and the people in Atlanta are nicer on average, resulting in more opportunities to get help and guidance from people who enjoy giving back.
    • Startup groups, with ATDC being the heart of the community, readily provide peers and mentors to work with during the often challenging journey that is building a company (don’t get caught up in going to events so often that you aren’t making enough progress on your venture)

    In the end, an idea stage startup can be successful anywhere. Atlanta, like every other city, has its strengths and weaknesses. When it comes to startups, especially bootstrapped startups with some revenue traction, I believe it is the best place to be in the country.

    What else? Do you think Atlanta is or isn’t a great place for idea stage startups?

  • Atlanta Great for Early Stage Startups but Not Idea Stage?

    Montage of Atlanta images. From top to bottom ...
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    Recently I was talking to an entrepreneur about the Atlanta startup community and I was arguing that it’s a hidden gem for reasons I’ve mentioned before (here, here, and here). He brought up a different opinion that I hadn’t heard: Atlanta is great for early stage startups but not idea stage. One way to think about the stage of startups is that idea stage startups are pre-revenue to a few hundred thousand in revenues while early stage startups are a few hundred thousand to a few million in revenues.

    Here are a few reasons why idea stage startups struggle in Atlanta:

    • There aren’t anchor technology companies like Google and eBay that acquire startups and recruit talent to the region
    • The lore of local college drop outs building billion dollar companies doesn’t permeate the regional universities
    • Regional universities focus on job placement at Fortune 500 companies and continue the culture of big company = safe employment
    • The number of technical and business co-founders that can keep their lifestyle and not take a salary due to a previously successful exit is tiny
    • The access to extremely risky capital for idea stage startups is minimal

    So, the theory goes that even though Atlanta has the largest engineering school in the country with great technical graduates, a low cost of living, direct flights at an affordable cost to almost anywhere in the world, and a huge population of ambitious young professionals, if your startup can’t afford to pay market-rate salaries, you’re going to have a hard time taking the idea stage startup to early stage startup.

    What else? Do you think Atlanta is great for early stage startups but not idea stage ones?