David Cummings on Startups

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  • Business Architecture Stack

    The High Museum of Art in Atlanta, Georgia.
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    At today’s EO Strategy Summit we planned the high-level goals for next year’s EO Atlanta chapter. This is the third time I’ve been through the full-day strategy summit planning session and each time the EO certified facilitators do an amazing job. Today’s event was no different.

    One of the techniques they talked about today that I hadn’t seen before was the Business Architecture Stack. I’ve seen the individual elements of it but hadn’t seen it presented in this particular manner. The idea behind the stack is that it is a concise representation of the six most important overarching aspects of a business. Here’s information on the stack straight out of the EO workbook:

    • Mission – What you want to do – your reason for “being.”
    • Vision – Why you’re doing what you do – the big-picture goal: have to be able to “see it” in your mind’s eye.
    • Core Values – Four or five beliefs you never compromised and in which you measured against.
    • Positioning Statement – A one or two sentence description of how you do what you do and for whom (i.e. what markets).
    • Value Proposition – One sentence that conveys to others the value you provide for your customers.
    • Tagline – Quick, catchy statement or phrase that embodies who and what you are.

    My recommendation is for all startups to go through this exercise within the first 12 months of their business and revisit it annually.
    What else? What do you think of the business architecture stack?

  • Vacation Policy: Be Reasonable

    Take a Vacation!
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    We have a very simple vacation policy: be reasonable. That’s it. We don’t track vacation days, sick days, or flex days. Not tracking vacation days doesn’t mean people take as much time off without getting their job done, rather it means that we track results and people make sure their work gets done on their own.

    If a team member wants to take time off we ask them to coordinate with their team in advance proportional to the amount of time off (e.g. give a week’s notice to take a day off, a month’s notice to take a week off, etc). The idea is that it’s the employee’s responsibility to make sure their results are taken care of and not the manager’s responsibility.

    When I explain to people that we have a “no vacation tracking policy” I’m inevitably asked what do we do if someone abuses it. The answer: we’d let them know they aren’t meeting our “be reasonable” goal and we’d part ways if it continues. It’s never happened.

    As part of our good work, good people, and good pay approach, we believe employees are our most important asset. Empowering team members to come and go as they please as well as take as much or little time off as needed while their work still gets done helps contribute to our strong culture.

    What else? What other thoughts do you have on this vacation policy?

  • Sales Strategy for SMB SaaS Startups

    Central Call Center - Library101
    Image by mlibrarianus via Flickr

    This morning I met with a startup in town that recently closed their Series A round and was getting ready to ramp up their sales and marketing. We talked about a number of different aspects of building a SaaS company focused on the small-to-medium sized business market.

    Here are few takeaways from the conversation:

    • Once you charge more than $100/month an inside sales team becomes necessary as people are much less likely to do a self-service credit card checkout process.
    • Pricing a product between $100/month and $500/month is usually no-mans land unless you have a really short sales cycle because prospects will require the same amount of sales engagement whether they are spending $200/month or $500/month.
    • Pricing should follow Occam’s Razor where the all things being equal, the simplest solution is best.
    • A two-tiered sales process with sales development reps and junior/senior inside sales reps works well to develop a farm system of sales reps and specialties.
    • Having more $30k base/$80k on target earning sales reps than the comparable expense with $75k base/$150k on target earning reps is better due to sheer number of activities involved to close a deal over the phone.
    • Writing skills are critical for today’s email-heavy selling environment and a written essay as part of the hiring process goes a long ways.

    The inside sales process requires a completely different approach when compared to the traditional enterprise software sales model. My recommendation is to follow these best practices as part of the sales strategy for SMB SaaS startups.
    What else? What are some other components of the sales strategy for SMB SaaS startups?

  • The 3:1 Customer Acquisition to Engineering Spend Ratio

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    First-time technology entrepreneurs repeatedly make a common mistake: they don’t budget enough for customer acquisition relative to software development/engineering costs. Over the past five years I’ve talked to plenty of entrepreneurs that raised angel money ($100k – $1m), spent 90% of the money building the product of their dreams, and realized too late that it costs serious money to acquire customers. Unfortunately, they weren’t able to show enough traction to raise more money and shut down the startup. It happens more than you think.

    There’s a distinct 3:1 ratio for customer acquisition (sales salaries, sales commissions, marketing salaries, and marketing expense) costs relative to engineering (software development, architecture, quality assurance, etc) costs. A typically software company budget might look like the following:

    • 60% – customer acquisition (sales and marketing)
    • 20% – software development/engineering
    • 20% – general and administrative

    Yes, some rare products have a self-service model resulting in the percent of budget to customer acquisition swapping with engineering but the majority of B2B software companies follow the 3:1 customer acquisition to engineering ratio. My recommendation is for entrepreneurs to pay close attention to these ratios when planning and building their company.
    What else? How you seen this 3:1 customer acquisition to engineering ratio in your experience?

  • Not Everyone Should be an Entrepreneur

    Diverging Paths

    Yesterday’s post on lifestyle modification to be an entrepreneur touched off a series of interesting comments. One thing I want to clarify is that as much as I talk about entrepreneurship I do want to make one thing clear: not everyone should be an entrepreneur. Everyone that wants to be an entrepreneur, and makes whatever necessary sacrifices, should have the opportunity.

    Here are some reasons why not everyone should be an entrepreneur:

    • The high highs and low lows of the entrepreneurial roller coaster make for an exciting, but stressful environment
    • The level of uncertainty and lack of information when making decisions is uncomfortable and disconcerting at times
    • The high chance of failure is scary (failure should not be frowned upon and 90% of companies fail within five years and 95% of companies never reach $1 million in annual revenue, ever)

    Each one of these reasons can be turned around as a reason why it is great to an entrepreneur due to the thrills of success, thriving on uncertainty, and beating the odds. Not everyone should be an entrepreneur but they should have the chance, if they want it.

    What else? What are some other reasons why not everyone should be an entrepreneur?

  • Lifestyle Modification to be an Entrepreneur

    The Statue of Liberty front shot, on Liberty I...
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    Last week I spent some time talking to the entrepreneur that I mentioned before that has his entrepreneurial desires trapped by the American dream of home ownership. This young professional has a business idea, two co-founders, a mortgage, and a finance background with no software development experience. I asked him where he’s spending his time outside his day job and he said there wasn’t much for him to do since he wasn’t a developer. Naturally, I told him that he should roll up his sleeves and learn HTML, CSS, and PHP or Ruby and get to work on developing his skills since software engineering is just like finance where you solve logic puzzles according to given rules.

    The real heart of the conversation came when he said he was going to continue helping out part-time on the business until they made enough progress to pay himself a salary and go full-time. I said that wasn’t a good approach because his goal is to be an entrepreneur noe and building a business on the side is going to significantly prolong the amount of time it’ll take before he makes enough progress for it to be his full-time job. A startup isn’t a part-time job (see Rob Kischuk’s comments on trying to get funding while still having a day job). I said he should view it like wanting to be a doctor — plan for four years of med school and a couple years of residency and you’ll have the right mindset. That’s right, he needs to modify his lifestyle now by cutting back his expenses and selling his house so that his spouse can support him without his income and plan for working full-time for the next six years, likely on multiple business ideas or pivots, before he’ll be back to where he is now in terms of income and ability to go on vacation for a week and not have to worry about anything. That’s a serious commitment, and not one to be taken lightly.

    What else? Do you agree a serious lifestyle modification will help him be a successful entrepreneur sooner?

  • Migrating Models from Enterprise Sales to Inside Sales

    Software as a Service
    Image by Jeff Kubina via Flickr

    Yesterday I had lunch with a successful entrepreneur in town to talk about our inside sales model. His business has raised a fair amount of institutional capital, been growing nicely, and realized it has a customer acquisition problem. His SaaS product sells in the mid five figures with a handful of six figure deals and he has an enterprise sales team resulting in a cost of customer acquisition that is twice the first year’s revenue.

    For SaaS companies, a good rule of thumb is that the fully loaded cost of customer acquisition (sales salaries, commissions, marketing salaries, and advertising) should be less than than the first year’s new client revenue of all new clients combined. The thinking was to move to an inside sales model with a lower average deal size and a significantly lower cost of customer acquisition.

    Here are some thoughts on migrating from an enterprise sales model to an inside sales model:

    • The type of sales management for an inside sales team needs to be more activity focused (calls, demo, and pipeline opportunities) and less relationship focused due to the shorter sales cycles
    • Enterprise sales reps are typically $70-90k base while inside sales reps are typically $30-$45k base resulting in the need to hire a new team
    • More focus needs to be on marketing and lead generation to build a steady flow of qualified prospects for the sales team (lead generation drives SaaS)

    Moving from an enterprise sales model to an inside sales model will be a difficult transition but appears to be the right move based on market dynamics and pricing.

    What else? What other thoughts do you have on migrating from enterprise sales to inside sales?

  • Business Idea: Content Marketing as a Service – Part 2

    All Marketers Are Liars
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    Continuing with yesterday’s business idea on Content Marketing as a Service, I wanted to flesh out the concept a bit more as the post generated a number of good comments and tweets. As the idea isn’t hard technically, the real challenge is customer acquisition and execution. Let’s look at some pros and cons of the potential business model:

    Pros

    • Broad, growing market need to deliver fresh content for inbound marketing
    • Readily available market of journalists and marketers that can produce high quality work as freelancers (potential for stay-at-home moms and dads as well to be part of the content contributors)
    • Economies of scale, expertise, and proprietary technology will enable delivery of the service significantly cheaper and more effectively compared to doing it in-house (think about the SecureWorks model)
    • Marketing departments have budgets with discretionary spend
    • Proliferation of online marketing tools is overwhelming for many marketers

    Cons

    • Difficult to convince marketers and executives that the content marketing as a service startup will be able to speak intelligently about a specific business and industry due to potential jargon and lack of domain expertise
    • No barriers to entry
    • Potential 3-6 month time period required to see value (visitors will come right away but marketing qualified leads could take time)
    • Trust issue with giving access to WordPress account, Twitter account, Facebook Page, etc for the outsourced service provider to execute the work

    Marketers and business executives need this type of service. I expect to see it on the market within 12-24 months, if not sooner.
    What else? What are some other pros and cons of the content marketing as a service idea?

  • Business Idea: Content Marketing as a Service

    DSC00768
    Image by Hao-Zhong Wang via Flickr

    More and more companies are buying into the inbound marketing approach of providing fresh, original content on a regular basis to attract visitors to their site. Unfortunately, understanding and believing in the idea doesn’t mean most marketing departments spend the time to make it happen. There exists a need in the market for a company to provide content marketing as a service.

    Here are some details around the idea:

    • A typical plan might be $1,500/month for one blog post/week, three tweets/week, and one email newsletter per month (based on the blog posts) as well as managing the tools to publish the content
    • The price point would be significantly lower than a full-time person in-house to do it
    • The price point allows for a marketing manager to put it on his or her credit card without having to get approval from others
    • Technology would be used to facilitate the workflow with approval process, coordination of freelance writers, and phone integration so that subject matter experts could talk for a couple minutes about a topic to have that content put into a blog post by a writer
    • The project managers and some of the editorial team would be in-house while the writers would be freelancers
    • Available up-sells include white papers, video publishing to YouTube, slide publishing to SlideShare, and coordinating webinars

    Yes, a PR or marketing agency would be happy to do these things but agencies are typically not set up to get economies of scale with this level of specialization and aren’t good at building proprietary technology.

    Inbound marketing works and the market needs content marketing as a service.

    What else? What do you think of the idea? Pros and cons?

  • The Real Estate Equation for Fast Growing Startups

    Bangalore Properties - Real Estate India - Vas...

    Real estate is tough for startups. There’s the unpredictability with where you’ll be in 24-36 months combined with one of the last remaining old boys network (at least in Atlanta). The best thing for startups to do is go the sublease route. Unfortunately, with the sagging commercial real estate market many of the subleases have dried up as companies that went out of business turned their space back over to the landlord and the macro economy has been soft for several years now resulting in enough time for many subleases to be rented by tenants.

    Subleases are most plentiful right after the economy turns downward and companies put excess inventory on the market. When things are starting to pick up, even so slightly like now, companies hold on to excess space longer in the event things do continue to improve and the space is needed. Fast growing startups have an even bigger challenge because they are hiring people so quickly they need an even larger amount of unused space on hand to accommodate the growth. There’s no easy equation.

    The best thing to do, absent a sublease, is to look for flexible landlords and build into the contract things like an option to break the lease early if you out grow it, right of first refusal on adjacent spaces, and flexibility to move into other spaces in the same complex without penalty. Yes, flexibility is the most important consideration for direct deals.

    What else? What other thoughts do you have on real estate for fast growing startups?