David Cummings on Startups

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  • Hockey Stick Growth for Startups

    cartoon field hockey stick and ball
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    One of the most common terms used to describe growth in a startup is a hockey stick. The idea is that things like users, page views, or revenue starts growing at a normal linear pace and then, once an inflection point is hit, growth takes off at an exponential rate. Here are a few things to keep in mind regarding hockey stick growth for startups:

    • The initial phase of linear growth can be for years before the right product/market fit is found and the market is ready
    • Startups with a network effort or strong viral nature are more likely to experience this type of growth
    • Growth will start to level off at some point and it’s important to be cognizant of when that’s on the horizon as high growth and slow growth present different types of challenges

    Being part of a startup with hockey stick growth is an amazing experience that doesn’t happen too often. Startups should pay attention to their growth pattern and understand when the linear growth turns into exponential growth as well as when it turns back into linear growth.

    What else? What are some other things to keep in mind about hockey stick growth?

  • When to Pivot in a Startup

    Runway
    Image via Wikipedia

    Continuing with yesterday’s post on The Search for a Business Model it’s also important to think through when to pivot in a startup. A pivot, or iteration, is when you take information learned and make a change to the business model, some changes more dramatic than others. Here are a few items to keep in mind when considering a pivot:

    • Think through the core strengths of the startup and consider pivots that play to those strengths as well as experience already gained
    • Talk to as many people as possible about the current thesis and pivot when it’s clear it isn’t working (e.g. talk to five companies and consider pivoting if you don’t pick up any new clues or meet milestones)
    • Ask yourself if you’re making enough progress in your current direction and if you’ve encountered any related ideas that are more promising
    • Don’t be afraid to keep your current offering up while you explore new ideas, you never know what information you might learn in the interim

    In general, I’ve seen that people don’t pivot soon enough and continue down a path that isn’t working. My recommendation is to pay close attention to progress, or lack of progress, with the current business model and don’t be afraid to make changes quickly based on new information.

    What else? What other tips do you have when thinking through pivoting in a startup?

  • The Search for a Business Model

    magnifying glass on an 17th century table
    Image via Wikipedia

    When an entrepreneur starts telling me about their business I always try to tactfully ask a few qualifying questions like the following:

    • What’s going well?
    • What isn’t going well?
    • Who’s your ideal customer?
    • What vendors do you replace or is it a greenfield/unvended market?
    • How long is the sales cycle?

    That last question “How long is the sales cycle” starts to get at the maturity of the business as well as if it is a revenue generating company or a startup in search of a business model. Most are in search of a business model. The search for a business model is one of the most difficult parts, hence an area most entrepreneurs get stuck, and go out of business if they don’t break through. Note: I’m talking about innovative businesses and not replicative businesses.

    Here are a few thoughts on the search for a business model:

    • It takes time — if you do it under 12 months you’ve done an amazing job
    • Expect several pivots/iterations as you collect more information
    • Pick a small, fast-growing market if you want more room for error as a great market makes up for many mis-steps
    • Don’t be too tied to your original thesis but do pay attention to the core of what you’re good at doing
    • Pretend like you’re a detective and need to talk to as many people as will listen, but know that only once you’re paid for something will you start to get deeper insight

    The search for a business model is filled with high highs and low lows. Know what you’re getting into and keep an open mind throughout.

    What else? What other tips do you have during the search for a business model?

  • Understand Competitor Metrics and Resource Allocation

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    Image by J. McPherskesen via Flickr

    How many times have your heard someone say “that technology would be easy to build in a weekend”? My immediate response is that most technology companies aren’t successful based on their technology alone. In fact, it is a useful exercise to understand potential competitor metrics and resource allocation when thinking about getting into a market. Here are some items to consider:

    • How many employees does the company have and what percentage are allocated in areas like sales and engineering (use LinkedIn to find this out)?
    • Where does the company advertise and how much are they spending (do a Google search and see how high their ads rank as well as use a service like SpyFu to understand more metrics)?
    • How much traffic does the site have (use compete.com, quantcast.com, and alexa.com)?
    • How many Twitter followers, Facebook fans, and RSS subscribers do they have?

    So, the next time you think about creating a product or pivoting into a different market, use some of these techniques to better understand competitor metrics and resource allocation.

    What else? What are some other tools you use to analyze competitors?

  • Focus on Enterprise or SMB Accounts

    Street at SMB
    Image via Wikipedia

    For B2B technology startups one of the first questions they need to answer is whether or not they are going to focus on larger enterprise businesses or small-to-medium sized (SMB) companies. It is too difficult to service both enterprises and SMB with few companies ever successful at both. Companies like salesforce.com started almost exclusively with SMBs but now hunt large enterprises as well, and they are a rare exception.

    Here are some things to think through when considering a focus on enterprise or SMB accounts:

    • Enterprise products are typically much more expensive and require a larger amount spent on customer acquisition
    • SMB products are typically cheaper and sold through a self-service or inside sales model
    • Enterprise deals often involve long sales cycles and RFPs with SMB deals being shorter
    • Enterprise focus can be better with missionary product sales where the prospect has to be educated and closed as the sales cycle is more complex
    • SMB focus can be better when the enterprise segment has more advanced and entrenched competitors

    There’s no right or wrong answer for focusing on enterprise or SMB accounts but it’s important to acknowledge the difference and pick one battle.

    What else? What other ways do you differentiate enterprise and SMB focus?

  • How Can a $10 Million in Revenue Company be Worth More than a $100 Million Revenue Company

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    Image by danielbroche via Flickr

    Among entrepreneurs there are two common ways to show off: how many employees you have and how much revenue you have. Of course, neither way perfectly accounts for the success of the business. That’s right, a business with $10 million in revenue can be more valuable that a business with $100 million in revenue. Here are some factors that determine company value:

    • Gross margins (the higher the better)
    • Net margins (the higher the better)
    • Equitability of revenue distributed across customers (e.g. a small number of customers representing a large percent of revenue is less valuable)
    • Percent of revenue that is recurring (the higher the better)
    • Length of contracts (the longer the better)
    • Growth rate (the higher the better)
    • Barriers to market entry (the higher the better)

    So, a high growth and ultra profitable recurring revenue $10 million company can be worth more than a no profit, declining $100 million revenue company.

    What else? What are some other factors in company value?

  • Expand When Growth Plateau is on the Horizon

    Ernst & Young Entrepreneur of the Year award
    Image via Wikipedia

    Last month I talked to an entrepreneur who’s company was hitting on all cylinders and growing fast. I asked him about his product and how he started the business. He quickly recounted how this was actually their second product as the first product did well but that they expanded into this newer product once he saw a growth plateau on the horizon. Now, growth isn’t the most important thing to all entrepreneurs but many view growth as new challenges and adventures that make the journey fun.

    Here are a few questions to think through when there’s a growth plateau on the horizon:

    • How important is growth relative to profitability and stability?
    • Does growth mean 5% a year or 50% a year to me?
    • Is it time to expand geographic markets, new industry verticals, or a new product completely?
    • What risks and opportunities come with these changes?

    My recommendation is to consider expanding when a growth plateau is on the horizon.

    What else? What other considerations should be taken into account with a growth plateau?

  • Publicly Traded SaaS Companies

    Software as a Service
    Image by Jeff Kubina via Flickr

    Software-as-a-Service (SaaS) continues to be a hot area in the technology world. Partly because it has only really started to flourish in the past five years and partly because it is more geared towards SMB companies with a lower ticket price therefore requiring to sign many thousands of clients to reach scale, there aren’t very many publicly traded SaaS companies. SaaS companies are characterized by great recurring revenue, gross margins, predictability, and growth. Here are a few publicly traded SaaS companies and information about them as of December 12, 2010:

    • salesforce.com (NYSE:CRM) – customer relationship management SaaS and cloud computing company. They are the largest SaaS company and the first to reach $1 billion in recurring revenue.
      Market cap: $19.53 billion
      Last reported quarter’s revenues: $429.09 million
      Employees: 4,758
    • NetSuite (NYSE:N) – enterprise resource planning (accounting, inventory, etc) SaaS company.
      Market cap: $1.66 billion
      Last reported quarter’s revenues: $49.74 million
      Employees:  1,022
    • Constant Contact (NASDAQ:CTCT) – email marketing for small business SaaS company.
      Market cap: $872.21 million
      Last reported quarter’s revenues: $44.83 million
      Employees: 625
    • SuccessFactors (NASDAQ:SFSF) – human resources SaaS company.
      Market cap: $2.36 billion
      Last reported quarter’s revenues: $51.54 million
      Employees: 967
    • Taleo (NASDAQ:TLEO) – human resources SaaS company.
      Market cap: $1.29 billion
      Last reported quarter’s revenues: $58.74 million
      Employees: 916
    • LogMeIn (NASDAQ:LOGM) – remote machine access SaaS company.
      Market cap: $1.11 billion
      Last reported quarter’s revenues: $25.35 million
      Employees: 387
    • LivePerson (NASDAQ:LPSN) – live chat SaaS company.
      Market cap: $524.75 million
      Last reported quarter’s revenues: $28.22 million
      Employees: 349

    Personally, I’m a big proponent of SaaS and am very optimistic about the future. It should be an interesting market to watch.

    What else? What other publicly traded SaaS companies would you add to the list?

  • My Innovation Rejection at IBM

    The eight-striper wordmark of IBM, the letters...
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    Twelve years ago I did a summer internship at IBM in RTP. I was an undergrad at Duke and excited about the opportunity to work for a large technology company writing Java code . My role was to build example apps for what would eventually become WebSphere. At the time, my department was writing components and infrastructure objects for a big beta client: the State of Connecticut.

    IBM was a study in contrasts. Every morning when I came in and every day when I left I had to log in to a mainframe app on a green screen to record my time. That’s right, I used a mainframe app as a time keeping system while building web-based apps in Java. At the end of each payroll period I’d log in to the same green screen app and double check my hours. I had never used a green screen app before and have never used one since.

    One of the initiatives IBM had that summer was asking employees for ideas and ways to innovate. Funny enough, I’m never short on ideas so I submitted what I thought to be an obvious idea: enhance printer drivers to prompt users to not include the last page of the print out if it came from the web and had less than 5% ink coverage. The annoyance that I had encountered many times was printing a web page and having the last page be the copyright date or footer links — something of no value that wasted a piece of paper.

    I typed up several pages of examples and rationale around the idea. After submitting the idea I didn’t think anything of it until a month letter I received a letter thanking me for the idea and letting me know it was rejected due to not being useful. Oh well, I tried. The consolation prize was a lanyard to hold my serial number badge. My days of innovating at IBM were over.

    Interestingly, I read about a company in Portland last year that was generating millions of dollars a year in revenue by saving companies money on paper by doing the very thing I’d proposed at IBM. This is a small example that shows many ideas are too small for big companies, but big enough to be a small company.

  • Salesforce.com Dreamforce 2010 Wrap-up

    Salesforce.com put on another impressive Dreamforce show this week at the Moscone Center in downtown San Francisco. We’ve been doing the show now for three years and it continues to grow fast. Last year had 17,000 attendees and this year there were 30,000. That’s impressive growth, especially at scale. Some of the key takeways from the show for me include:

    • The cloud is becoming more and more pervasive with salesforce.com leading the way
    • Salesforce.com Chatter is now freemium whereby companies can use it for free and then pay a premium if they need more advanced functionality. I think Chatter is nice but won’t be the game changer that transforms salesforce.com, as they claim it will.
    • Salesforce.com launched database.com as a database-in-the-cloud service (side note: imagine how expensive that domain name was — I’m guessing at least $1 million). I don’t think database.com will be successful as long as the per user pricing model remains. The other big challenge it has is lack of drivers and code to make it work seamlessly in popular languages like PHP, Ruby, and Python.
    • Salesforce.com bought Heroku for upwards of $250 million and finally has a credible strategy to significantly expand beyond their traditional user base and per seat pricing. It’s going to take many years to see if this acquisition was worthwhile but my guess is that if they can get the corporate culture alignment right it’ll prove to be brilliant.

    Salesforce.com is one of the best sales and marketing machines in the world and the show didn’t disappoint.