David Cummings on Startups

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Goal Directed Startup Advice Meetings
Earlier today I met with the sole founder of a startup that will release their app in three months. Of course, three months from now after already working on it for a month being too long is beside the point. The entrepreneur did a great job of having specific questions and areas she’d like advice. Too often entrepreneurs ask to meet and then have broad questions like What do you think of my idea, How much money do I need, etc.

Here are some tips for goal directed meetings when seeking startup advice:
- Do your homework and read everything you can about the person on their blog, LinkedIn, Twitter, etc
- Prepare a list of five specific questions related to tangible issues you’re working through
- Ask for introductions to one or two other people that might be able to help
My recommendation is make the most of meetings where you are seeking advice by being prepared and thoughtful.

What else? What are some other tips for goal directed meetings when seeking startup advice?
June 13, 2011
Best Practices for Incubating a Product in a Services Company
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Continuing with yesterday’s post Repeatable Customer Acquisition Process to Raise Money, I wanted to address the first question that I’ve received several times over the last month: What are some best practices for incubating a product in a services company? Personally, I have more experience building product companies compared to service companies but I did the transition with my first company.

Here are some best practices for incubating a product in a services company:
- Don’t have employees split time between their traditional services and product work — inevitably the services work will continue to get done because it pays the bills and enough progress won’t be made on the product
- Dedicate a product manager/jack of all trades and a software developer to work on the product full-time — these two people should complement each other well and have the capabilities to do everything necessary to get the product off the ground
- Consider making the product a separate company so that it can receive the dedicated attention it needs
- Employ lean startup best practices throughout
- Have everyone involved read Getting Real by 37signals – the best web app product management book available
There’s no sure fire way to make the product successful but by following some of these best practices the chances of success increase substantially.

What else? What best practices do you recommend for incubating a product in a services company?
June 12, 2011
Repeatable Customer Acquisition Process to Raise Money

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In the past month I’ve had three different co-founders of digital marketing agencies approach me for feedback on their idea for a SaaS marketing product. All three product ideas have been different but the questions they ask were the same: what are some best practices for incubating a product in a service company, how should I staff it, and do you think I can raise money for the idea if I make it a separate business? My answer to the last question is always the same:

Don’t raise money for the idea until you have a repeatable customer acquisition process.

Now, this sets the bar extremely high but it gets people thinking in the right mindset. To have a repeatable sales process means you have customers and you have patterns as to how you acquired those customers. It also means that you figured out how to make ends meet before you take someone else’s money, which bodes well for delivering a nice return on a potential investor’s money. A big benefit of this approach is that if you’re an entrepreneur without a successful track record you’ll be able to raise money at a much better valuation. Also, if things go really well, you might be able to bootstrap indefinitely.

What else? What do you think of developing a repeatable customer acquisition process before raising money?

June 11, 2011
Developing a Weighted Sales Pipeline
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Continuing the sales pipeline theme from yesterday, I wanted to take the pipeline concept once step further and talk about a weighted sales pipeline. A weighted sales pipeline is a much more detailed pipeline where each prospect opportunity is given a specific value based on where they are in the buying process. So, instead of saying that we have 20 prospects, you might say we have 20 opportunities at 50% or greater likelihood of closing with a weighted pipeline value of $100,000.

Here’s how the values of a weighted pipeline might look with the percentage being the chance of closing the deal:
- 10% Prospecting/Qualification
- 20% Needs Analysis/Value Proposition
- 30% Proposal Sent
- 50% Identifying Additional Decision Makers
- 60% Second Demo (Post Proposal)
- 70% Negotiation / Review
- 75% Acceptance Sent
- 90% Acceptance Reviewed
- 90% Proof of Concept
- 100% Closed Won
- 0% Closed Lost or Deal Dead
Developing a weighted pipeline gives you a much better proactive view into the future health of the business. I recommend weighted pipelines for all entrepreneurs.

What else? What are your thoughts on weighted sales pipelines?
June 10, 2011
Startups Should Differentiate Suspects/Prospects/Customers
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When I talk to seed stage entrepreneurs and co-founders one of the things they love to tell me about is how many “customers” they have in their pipeline. I love startups that have customers! At that point I like to pause for a second and ask how many of these customers have signed a contract. It gets quiet. Well, these are actually prospects. I ask if they’ve identified the BANT (Budget, Authority, Need, Timeline) sales requirements for these prospects. Hmm, they don’t have that so they are actually suspects.

There’s nothing wrong with getting them confused but I think it’s important for entrepreneurs to understand the difference. Here’s a quick recap of the three categories:
- Suspect – a contact that you’ve had an initial discussion about your product or service
- Prospect – a contact that has budget to buy your product, authority to make a decision, need for what you’re offering, and a timeline to get a deal done (never forget BANT)
- Customer – a contact that has signed a legal agreement in which you’ve been paid or will be paid money for your product or service
My recommendation is to use this terminology when discussing your startup’s sales pipeline.

What else? Have you seen entrepreneurs mis-use the words suspect, prospect, and customer?
June 9, 2011
Dark Features as a Product Management Best Practice
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In the most recent issue of Inc. Magazine there’s an article about the Tumblr founder titled The Way I Work: David Karp of Tumblr that mentions one of the things I’m a big proponent of — dark features. The idea of a dark feature is that it is a feature added to a webapp that only certain users like your employees and a few early adopter customers can see. Web technologies are great in that it is easy to try out new functionality in production while locking it down until it has been refined and polished.

Here are a few benefits of using dark features as a product management best practice:
- Encourages broader testing of new functionality by stakeholders
- Feature testing is done in the production environment providing for a greater chance that more edge case are found
- Improves engineering by promoting new functionality to production more frequently for real-world feedback (feedback is oxygen for a product)
My recommendation is to incorporate dark features as a product management best practice.

What else? What do you think of incorporating dark features in the development process?
June 8, 2011
The Groupon Name Recognition IPO Bump
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There have been a number of good posts theorizing about Groupon’s sustainability and upcoming IPO. @lance has a nice collection of links with his Groupon S1 post. One of the areas that I haven’t seen much commentary on is the bump IPOs get when they have strong consumer name recognition. We saw this recently with LinkedIn (NYSE:LNKD) and a few years ago with Constant Contact (NASDAQ:CTCT). The idea is that if the company is known by large number of potential personal investors, even without knowing the fundamentals of the business, there is going to be more demand than for most companies that go public.

Constant Contact was a great example of this a few years ago. Constant Contact did an amazing job of viral marketing, which is unusual in the B2B SaaS world, by having their powered by logo in the footer of billions of emails. When they did their roadshow and talked to investors, during the process of going public, more people had heard of them than a typical company. As Warren Buffet has said he likes to invest in things he understands, Constant Contact is easy to understand (small business email marketing) and investors have been exposed to the brand (the footer of their local small business and non-profit emails).

Here are companies that IPOed in May according to Renaissance Capital’s Growth Stories Lead IPO Surge in May 2011:
- LinkedIn
- Yandex
- Jiayuan.com
- RPX Corp
- Freescale
- Lone Pine
- China Zenix
- Spirit Airlines
Which one performed the best on opening day? Which ones have you heard of and used personally? LinkedIn is the only one for me personally. In the same manner that LinkedIn and Constant Contact had much more demand than expected (based on the opening price of the stock shooting up), I believe we’ll see the same for Groupon due to casual, personal investor buying the stock because they’ve used the company, and not because of the underlying fundamentals.

What else? Do you believe the name recognition theory causing certain IPOs to outperform others?
June 7, 2011
Accrual vs Cash Basis Accounting for Startups
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Entrepreneurs over the years have asked me whether or not they should do accrual or cash basis accounting for their startup. The general idea for accrual accounting is that as income or expenses are signed for they should be put on the books whereas with cash basis accounting you only worry about it when money changes hands. So, with accrual based accounting as soon as you receive the purchase order from a client you put the revenue on your books (assuming it is all recognized at once). With cash basis accounting you don’t count the money until you receive payment for it — even if that is 60 days after you received the purchase order.

Here are some quick tips to keep in mind regarding accrual and cash basis accounting for startups:
- Almost all startups should be cash basis as that most aligns with the nature of trying to get a business off the ground and being cash strapped (the number one reason startups go out of business is that they run out of money)
- If you get prepaid for your service or service component of a product sale (like support), accrual is the way you should go since you can use the capital without paying taxes on it until it is recognized via the obligation being completed (e.g. it is December and you just got prepaid $12,000 for 12 months of your SaaS product, you only recognize $1,000 for the month of December for the purposes of the IRS for the year, yet you still have $11,000 in the bank to start the new year that you haven’t recognized yet)
- The IRS requires the accrual method if you average more than $10 million in revenue and have inventory, so there’s no choice at that point
Accrual and cash basis accounting are easy to understand once you go through a few scenarios with your accountant. Most startups should do cash basis accounting as cash coming in and going out most closely align with a business in the seed to early stage.

What else? What other thoughts do you have on accrual vs cash basis accounting for startups?

Update: See the comments for several people that recommend accrual accounting instead of cash basis accounting.
June 6, 2011
Startup Valuation Drivers over Time
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Today’s TechCrunch post Why Startups Should Raise Money at the Top End of Normal has a great segment in it talking about the startup valuation drivers over time. Every entrepreneur should study and understand these drivers:
- Product Risk – will the product work? how long will it take it to build?
- Market Risk – will the market adopt it? will they love it?
- Growth / Scale Risk – will the business scale? can the management team execute?
- Monetization / Competition Risk – are the margins sustainable? what are the barriers?
At each phase in the process the startup’s valuation increases substantially. Think through these when considering raising money and the potential valuation.

What else? What do you think of these startup valuation drivers?
June 5, 2011
Go Deep or Wide with Product Feature Set
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Most startups should pick one or two things and do them extremely well. I’ve seen more startups fail trying to be all things to all people than ones that have picked a narrow set of features and gone deep with the functionality. Now, there is a place in the market for products that are broad but lack depth, especially in the small-to-medium sized business segment. It’s important to make a conscious decision when developing the product around the direction and opinion of the application.

Let’s look at a few examples:
- Bronto – great email marketing platform with a deep feature set targeted towards online retainers (large but specialized market)
- HubSpot – leading inbound marketing platform geared towards small businesses under 10 employees with solid features, but not as deep as specialized tools like SEOmoz.org or AWeber
- Salesforce.com – largest SaaS CRM provider by far with a deep salesforce automation feature set and massive ecosystem of third-party apps facilitating a best-of-breed approach
My recommendation is to make it clear early on whether you’re going to go narrow and deep (preferred) or broad and shallow (more difficult).

What else? What do you think about going deep or wide with the product feature set?
June 4, 2011