David Cummings on Startups

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  • Business Idea: SaaS Line of Credit Provider

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    There’s a void in the market for high gross margin recurring revenue businesses to get a line of credit based on the recurring revenue. Banks are designed to lend money when you don’t need it (e.g. very profitable) or when you have assets to put up as collateral (a friend of mine got an SBA-backed bank loan for $1.2M to buy some franchises and had to put up $800k of personal money into a CD that the bank held until the loan was repaid).

    The most common assets for collateral are accounts receivables, real estate, and heavy equipment. Software-as-a-Service (SaaS) companies shouldn’t have any of those. Accounts receivables, especially if the majority of customers pay by credit card, are almost non-existent as the customer payment is made on a regular, timely basis (e.g. monthly). A SaaS startup’s appetite for capital is even more acute due to the fact that the “services” part of SaaS results in effectively leasing the product over the life of customer, as opposed to receiving a lump-sum of money up-front like with enterprise software. This clearly impacts cash flow and is made more difficult due to the cost of sales commissions and providing on-boarding and training services. SaaS companies are doing well if after 12 months of having a client they break even. Typically, it isn’t until years two and three that they start turning a profit.

    The business idea is a technology fund that provides lines of credit to SaaS companies. Here are some details:

    • The amount of capital is dependent on several factors including: monies received from recurring revenue in the past 90 days, gross margin, customer renewal rate, customer contract length (if any), and more
    • The fund has a core amount of capital that is then leveraged up with a third-party loan
    • Members of the fund’s management team must have technology experience and be willing to take over a SaaS company that doesn’t meet its obligations (the SaaS companies are using their business as collateral)
    • The idea is riding two waves: lack of sophistication from traditional banks to lend against recurring revenue without hard assets and the proliferation of small SaaS companies that aren’t venture backed

    There’s a clear opportunity in the market for a business like this and I hope entrepreneurs step in and fill the void.

    What else? What do you think of the idea?

  • Entrepreneurial Desire Trapped by the American Dream

    The American Dream (Mike Jones album)
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    Two separate young professionals that want to be entrepreneurs reached out to me this past week asking for advice. In each case they’re married, have great jobs, a mortgage, and want an angel investor to invest in their idea so that they can quit their day job while maintaining their current lifestyle. The chance of that happening is slim-to-none. Yes, investment from the three Fs (friends, families, and fools) is possible, but they want to avoid that route.

    These young men have an entrepreneurial desire but are trapped by the American dream.

    Of course, the American dream I’m referring to is home ownership. Home ownership requires them to keep working on their salary since their spouse’s salary alone doesn’t cover their costs. What about selling the home? The home price has decreased so much that they can’t afford to sell it. Their remaining option, which I suggested, is to rent out their house, live in an apartment, and cut their costs such that they can live off one salary and pursue their dream. Both young professionals said they didn’t want to do that.

    What do you think? Would you invest in young professionals that want to be entrepreneurs but aren’t willing to make serious personal sacrifices to do it?

  • Business Idea: iPhone App to Make Driving a Game

    black Audi R8.
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    Earlier today I was driving to my ALTA tennis match and enjoying the beautiful day. On Roswell Road heading towards Chastain Park, I was merging into the turn lane and found myself splitting two reflectors in the road due to vering a bit too early. The precision with which I spaced the reflectors on either side of my front left tire put a smile on my face and an idea popped into my head: there needs to be an iPhone app to make driving a game.

    I’m sure someone else has already thought about it and that an app already exists (I haven’t checked yet) but here are some thoughts as to how it would work:

    • Use the GPS and accelerometer to measure the car’s location and motion
    • Develop tracks or routes like “Lenox Mall to Piedmont Park” or “GA 400 Exit 1 to Harvest on Main in Blue Ridge, GA) and have leader boards based on route time, average speed, lateral Gs pulled, and more
    • Award badges and bonus points for items like the fastest speed through turn two, night owl for doing the route after midnight, etc
    • Be able to put in your type of car for a handicap (e.g. a Ford Explorer would get an adjustment compared to an Audi R8)
    • Allow for custom routes like recording your daily commute for more badge types and categories (longest commute, most variable commute, most turns in a commute, etc)

    Yes, there are some public safety concerns with people driving too fast in attempt to set a personal best or top the leader board but I don’t think it’s anything crazier than people already on the road.

    Driving is fun. An iPhone app with a community makes it even more fun.

    What do you think of the idea? Will it work?

  • College Loans to Finance Entrepreneurship

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    Earlier this week I was talking to an entrepreneur at the TiE VISTA conference and he made a statement that made me pause. He was telling me about his company and I asked one of the most telling questions: are you working full-time on the business? That’s a real litmus test to see how serious and committed the entrepreneur is to the startup. Quickly, he replied that he was working on it full-time but that he was in grad school. Grad school? How much harder is it to build a startup and be in grad school at the same time? Creating a startup is hard enough without extra work on top of it.

    After the full-time question I asked how he was financing the business. He told me of a shady angel investor in Florida that had offered $200k for 70% of the business, which they declined, but only after serious consideration and an attempt to increase the valuation (tech startups in the Southeast that raise more than $100k in financing typically have a $500k – $1M post money valuation). He then offered up that he was using college loans to finance his company. Not directly, of course, but rather he was getting a second master’s degree, with classes only at night, and his low-cost taxpayer subsidized loans were also covering his living expenses (grad school type living expenses without a mortgage, etc). Now, large college loans for degrees that don’t have the requisite earning potential might not make sense but this is an intriguing idea for a tiny percent of the population — something to think about.

    What else? What are you thoughts on college loans to finance entrepreneurship?

  • TiE VISTA Conference Day Two – Dharmesh Shah

    Image representing Dharmesh Shah as depicted i...
    Image by Dharmesh Shah via CrunchBase

    The TiE VISTA Conference wrapped up today with day two being as excellent as day one. Tim Draper of DFJ kicked off the morning but the real highlight for me was Dharmesh Shah’s keynote at the end of the day. Dharmesh covered many different topics in his keynote and it’s scary how much I agree with him and how I’ve written short blog posts about many of his points.

    Here are a few bullets from Dharmesh’s slides:

    • Starting is more important than the idea
    • Write a blog, not a business plan
    • Stealth mode is for fighter jets, not startups
    • A sub-optimal price today beats a perfect price tomorrow
    • Sales velocity, acquisition cost, lifetime value – improving one often degrades another (the only thing that improves all three is the customer experience)
    • Transparency trump secrecy
    • The path of truth and justice is often paved with profit

    If you don’t follow Dharmesh on Twitter, do so now @dharmesh.

    Again, congratulations to TiE for putting on a great event.
    What else? What did you enjoy about the TiE event?

  • TiE VISTA 2011 Conference Day One

    Midtown Atlanta, Piedmont Park
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    Today I had the opportunity to attend the TiE VISTA 2011 Conference in Atlanta. TiE, if you don’t know, is one of the best entrepreneurial groups originally focused on Indian entrepreneurs but since expanded to all entrepreneurs. Day one of the conference was a keynote speech followed by a collection of panel discussions culminating in a night Gala with awards. Everything was well executed.

    Pete Kight, founder of multi-billion dollar CheckFree corp, was the morning keynote. He shared several thoughts and insights:

    • The equivalent amount of information created in the world from the dawn of man to 2000 is now created every 48 hours.
    • The highest form of personalized service is where no human interaction is necessary (think self-service web and mobile apps).
    • Industries with idle equipment times and inferior logistics are ripe for technology-based middleman applications (think limo service that doesn’t own any limos but contracts on-demand with other limo companies).
    • Betamax was superior to VHS in every technical way but VHS won because the consortium of companies behind it gave away all the necessary recording equipment and rights to making the tapes for five years to a dozen porn companies. They did this knowing people would prefer watching porn from the comfort of their home as opposed to being seen at a theater.
    • When he started the first electronic check company in his grandmother’s basement in 1981 everyone thought he was crazy in that no one would trust electronic payments. Now it is the most pervasive form of payment.
    • Smart phones are going to be the new credit card.

    The TiE community did a great job putting on the conference and Gala and I’m looking forward to day two tomorrow.

  • Startup Project or Company

    Indy Startup Weekend
    Image by kmakice via Flickr

    Have you ever talked to an entrepreneur that said he or she was working on some startup projects? I have, way too many times. Startup projects and startup companies are two different things. Yes, one can lead to the other but the vast majority of the time it leads nowhere.

    Here are a few issues with doing a startup project instead of a startup company:

    • Projects are typically part-time, and while some people on the team can be part-time, to move fast enough and make progress the team needs to have full-time people
    • Project implies less commitment when you’re better off doing a startup company and pivoting if the original idea doesn’t work out
    • A project can be a way to see if you and some potential co-founders work well together, but the intensive full-time experience is a much better test (have buy/sell agreements, vesting schedules, and more)

    It’s extremely tough to do more than one thing at a time, let alone do a bunch of things part-time unless you have an amazing team staffed for each one. My recommendation is to focus on a startup company instead of multiple projects, and start your next one once you have the resources to hire a great team.

    What else? What other thoughts do you have on startup projects vs startup companies?

  • The Cult in Culture

    Who owns culture
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    Corporate culture is only the sustainable, controllable competitive advantage for startups. It really is. Think about it: what other factors in business can you control? The market? Nope. The economy? Nope. Tsunamis or civil war? Nope. Corporate culture? Yes.

    There’s a reason cult is the first part of culture. Many of the most famous corporate cultures are like cults, like Zappos. When I did a summer internship at IBM after my freshman year at Duke there was another intern there from Northwestern who kept saying she wanted to work at the SAS Institute. I asked why? She said people love it and never want to leave. I asked why again. She said it was a cult she wanted to join. True story.

    Here are some ideas to put the cult in culture:

    • Require unanimous consent for new hires so that everyone has a vested say in the hiring process
    • Measure your employee Net Promoter Score each quarter and score above 70
    • Create the best environment you can afford (great office space, snacks, equipment, etc)
    • Find the right balance between good work, good people, and good pay

    Creating a strong corporate culture is hard work. Do it, and the rewards and results will be profound.

    What else? What other ways can you put the cult in culture?

  • iPad 2 with Verizon 3G for a Week

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    Last week I took my family to Florida for a trip near Rosemary Beach. We enjoyed the new Panama City airport and a quick 37 minute flight from Atlanta (yes, driving is only slightly longer counting airport interaction but our two little kids don’t like long car trips). Our beach house was supposed to include Internet access, but alas there was none. Thankfully, I had a new iPad 2 with Verizon 3G.

    Here are my thoughts on using the iPad 2 with Verizon 3G  for a week as my primary computing device:

    • The Verizon 3G bandwidth was much faster and more reliable than my iPhone 4 AT&T 3G bandwidth (at Santa Rosa Beach, FL) — Verizon 3G was surprisingly usable for most activities.
    • Writing these blog posts each night took longer than normal, but by the end of the week I didn’t think anything of it. I used the WordPress iPad app, had to code the HTML for the bullet points by hand, and didn’t put in many hyperlinks.
    • Web apps I use on a regular basis worked great (there were a few limitations like with Google Spreadsheets but nothing that slowed me down).
    • Flipboard became my primary means of using Google Reader and Twitter
    • Angry Birds Rio proved to be tons of fun and had nice UX enhancements over the original, but I would have liked to see a new type of bird or two introduced.
    • My total bandwidth was only 465MB, which is much lower than I expected and well within my 1GB/month plan.

    Will my iPad 2 replace my MacBook Air 13″? No. Is is a viable device on its own in lieu of a laptop if necessary. Absolutely. It was a great week and the iPad 2 did its job nicely.

    What else? What are your thoughts on the iPad?

  • Announcing New Product Features to Clients

    No Software: Getting Ready For the Dreamforce...
    Image by paul_houle via Flickr

    Communicating new product features to clients, especially in a fast moving SaaS application, is critical to help them maximize the value of the application and to appreciate that the monthly or annual fees are not only for the current product but also for enhancements. Many customers will be comfortable with the current functionality, or have a feature or two they really crave, but some customers, especially the raving fans, want to stay abreast of all the latest functionality. It’s important to have a multi-pronged communication approach to try and educate as many clients as possible without being overly intrusive.

    Here are a few communication strategies:

    • Write a short blog post introducing each new feature (save it mostly for features and not little tweaks)
    • Tweet the blog post and provide a Facebook Page Wall post
    • Include a link to it on the homepage of the product or on the sign-in screen (this is the most effective as you have a captive audience)
    • Include the content in a monthly newsletter
    • Recap the major new features of the past 12 months at the annual user conference

    The key is to communicate the information to users currently in the system, on Twitter/Facebook, and so and so forth. One size doesn’t fit all.

    What else? What are some other ways to announce new product features to clients?