David Cummings on Startups

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Focus on Enterprise or SMB Accounts
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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?
December 15, 2010
How Can a $10 Million in Revenue Company be Worth More than a $100 Million Revenue Company
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?
December 14, 2010
Expand When Growth Plateau is on the Horizon
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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?
December 14, 2010
Publicly Traded SaaS Companies
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?
December 12, 2010
My Innovation Rejection at IBM

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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.

December 11, 2010
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.
December 10, 2010
The Time and Money Relationship for Startups
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Time and money have a unique relationship in the startup world. The vast majority of startups have significantly more time than money. If you don’t have any money, every penny potentially spent gets scrutinized, as it generally should, and time is sacrificed to save money. Once a startup raises significant capital, the two suddenly flip flop. If you raise $10 million dollars in venture capital, expectations immediately change and the bar for success is significantly raised. The expectation is clear: spend the money to grow the business as fast as possible with the goal to achieve escape velocity and dominate the market.

Some items to keep in mind when thinking about the time and money relationship:
- Is this a winner-take-all-market like eBay or is more like email marketing where there are many successful companies
- Shifting the mindset from scrappy to putting money on the line faster is hard to do and shouldn’t be taken lightly, especially for bootstrapped companies
- Startups that don’t raise money but reach multiple millions in revenue will start to see the time and money relationship change as they make hard decisions around maximizing profits vs maximizing growth
There’s a distinct relationship between time and money in startups. Accordingly, it’s important to understand and be cognizant of it.

What else? What other considerations between time and money should be considered in startups?
December 9, 2010
Thoughts on salesforce.com and Heroku
At today’s Dreamforce show the big news was that salesforce.com has acquired Heroku for $212 million in cash. Heroku is a Platform-as-a-Service offering for Ruby on top of Amazon Web Services. This is salesforce.com’s largest acquisition ever, and is more dramatic considering that it is estimated that Heroku has less than $10 million in revenue.

Here are a few thoughts on the acquisition:
- salesforce.com has the Force.com platform for building apps but it requires a non-standard Java-like language that hasn’t had much adoption.
- salesforce.com has the VMForce.com initiative in private beta which will run Java apps but Java apps are much more cumbersome to write compared to Ruby, PHP, and Python.
- salesforce.com just launched database.com for a true cloud database offering but has a $10/user/month pricing in addition to storage costs which make it unlikely to catch on.
- Heroku offers a true PaaS with pricing inline with the normal hosting industry making it the first real initiative that will grow salesforce.com outside their current core uses.
- Heroku is built on Amazon Web Services which offers virtual private servers in the cloud. Heroku takes the Amazon cloud instances and sub-divides them further into even smaller instances as well as takes away much of the complexity. It is brilliant.
My take is that this is a credible move requiring at least three years to prove worthwhile. It is super risky and brilliant at the same time.
December 8, 2010
Where’s the SaaS App Market Headed?
After spending a day at Dreamforce it is clear that the SaaS app market, as well as associated salesforce.com AppExchange eco-system, is growing like gang busters. The top sponsorship slot for Dreamforce this year was Platinum for a whopping $250,000. Next year they’ll have two even more expensive slots: Diamond and Titantium. Imagine what those will go for.

Here are a few SaaS app trends I see:
- More connectors and off-the-shelf integration between SaaS products (who’s going to win the generic app marketplace e.g. a marketplace that isn’t the Google Apps Marketplace and isn’t the salesforce.com AppExchange marketplace?)
- Integration and migration of legacy data continues to be a big challenge (garbage in, garbage out, regardless of industry)
- Ease of use continues to be a major focus (design for the novice, customize for the pro)
- Pricing and complexity of contracts is starting to decrease, making things better for the customer
All in all, the SaaS market continues to grow fast and I’m very bullish about it. We’re only scratching the surface of SaaS apps changing how businesses operate.
December 7, 2010
Thoughts on salesforce.com on the Flight to Dreamforce
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This blog posts comes from 30,000 feet in the air courtesy of free WiFi for the holidays from Google Chrome on Delta. Right now, I’m flying to San Francisco for my third consecutive annual salesforce.com conference known as Dreamforce. As one of our main partners and the leader of the SaaS industry, I pay close attention to salesforce.com. Dreamforce never disappoints.

Here are a few thoughts on salesforce.com:
- They are a brilliant sales and marketing machine with reportedly 50% of their employees in sales (which represents thousands of people).
- They were the first SaaS company to reach $1 billion in recurring revenue.
- They are extremely focused on selling seats of their software, with sales reps and support reps being the majority of their users. Because there’s typically a 10-to-1 relationship between sales reps and marketing people, and they want to sell seats, salesforce.com has stayed out of the marketing automation market.
- They have a great product but the real value comes from the AppExchange eco-system of other products that integrate with their API. This creates a network effect resulting in exponentially more value.
- They have been promoting “no software” as their mantra for years now, which is brilliant to position SaaS against traditional installed apps. Yes, they sell software.
Every year the salesforce.com CEO gives a keynote presentation announcing their results as well new features or products to much fanfare. Last year they introduced Chatter to allow companies to run an internal Facebook-like community. It’ll be interesting to see what they announce this year. Stay tuned for an update later in the week.
December 6, 2010