David Cummings on Startups

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  • Recurring Revenue to Support a Line of Credit

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    The Wall Street Journal published an article three days ago titled Royalty Financing: An Alternative to Venture Funding, Bank Loans that mentions some of the challenges I talked about in my post on Junk Bonds for Startups a week ago. The general idea is that startups usually don’t have much need in the way of physical assets to take loans out against (e.g. real estate, heavy equipment, etc) and so when it comes to bank loans they really aren’t available unless you have personal collateral to cover the majority of the amount. Royalty financing is generally taking a percentage of the future revenues as a way to finance a loan.

    A line of credit is worth considering for revenue-producing startups. Most of the time it’s tied to the current accounts receivables (monies owed) to the business and a bank will provide a line of credit for 75% of those receivables. The challenge for many SaaS businesses is that they are paid monthly on a credit card resulting in little receivables relative to the size of the business.

    SaaS businesses should find a bank that understands recurring contract revenue and will set up a line of credit based on the last 90 days monies received from recurring revenue. For example, technology company-focused banks will do lines of credit for 75% of those monies for profitable companies. Thus, if $1 million of recurring revenue was collected in the past 90 days, the business might get a line of credit for $750,000. A bank line of credit or loan, especially with today’s interest rates, is often the cheapest way by far to finance a business. The challenge is getting it.

  • Pricing a SaaS App

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    Pricing is one of the areas that I see first-time entrepreneurs undersell themselves. What I mean is that there’s a tendency to price a product too low. Paul Graham says, “You’ve found market price when buyers complain but still pay.” It’s not that you’re trying to take advantage of customers but rather attempting to determine the optimum price (which often isn’t the highest). Software-as-a-Service (SaaS) is especially interesting due the rental nature of the relationship. The client isn’t buying the software but rather paying a monthly or annual fee for access to the application.

    Here are a few things to keep in mind when pricing a SaaS app:

    • Under $10/month is generally a consumer app that is fully self-service
    • $20-$100/month is more small business and self-service or limited service to get going
    • $100-$500/month is no-man’s land where it is too expensive to be self-service and it is too cheap to compensate consultative inside sales reps (the exception is products that replace existing, known quantities like VoIP services replacing phone services)
    • $500-$1,500/month is the sweet spot for having a quality inside sales team that is well compensated
    • $1,500+/month enters the territory of an expensive field sales force with significant travel and expense costs

    Pricing is one of the more difficult things to do early on and I recommend starting two or three times higher than your initial thinking and always remember that it is easier to lower prices that to raise prices.

    What else? What are some other considerations when pricing a SaaS app?

     

  • Non-Standard Employee Benefits

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    When talking about employee benefits most people think of common things like health, dental, and 401k benefits. Lately, we’ve been talking internally about what other benefits we can provide to our team to make our environment and company that much better. Here are some of the non-standard employee benefits we already have:

    • Free food and drinks (the regular stuff plus nice coffees, teas, fruit juices, energy drinks, and more)
    • Catered lunches every Friday
    • Short term and long term disability with no co-pay
    • 1% of time paid for non-profit work
    • Quarterly off-site celebrations with food and drink

    Here are some ideas we’re thinking about:

    • Company-sponsored personal financial education to help team members interested in things like paying off debt, buying a house, and planning for retirement
    • Massages and personal wellness clinics
    • More frequent catered lunches as well as breakfasts
    • More frequent Friday afternoon happy hours

    What else? What are some other non-standard employee benefits that you like?

  • Sales, Product, or Operations Entrepreneur

    Steve Jobs accepting the Entrepreneur of the Y...
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    Everyone loves to try and categorize the most common types of entrepreneurs. I’d like to throw my hat in the ring. Over the past 10 years I’ve found that there are three main types of entrepreneurs:

    • Sales – spends a good deal of time focused on selling, doing deals, and anything else related to bringing in new business
    • Product – enjoys the product management, strategy, and vision aspect of the business (I’m personally in this camp)
    • Operations – loves the organization aspect of growing a business, the metrics, KPIs, and general execution

    There’s no right or wrong answer and you can probably think of famous examples for each category (e.g. Mark Benioff, Steve Jobs, and Jack Welch). My recommendation is maximize your talents by focusing on what you’re good at and understand that it is common to excel in one or two areas.

    What else? Do you agree with these three categories for entrepreneurs?

  • Pace Product Development with Customer Input

    Sensory lab
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    With a clean product slate as a startup it’s easy to iterate and add functionality quickly. The key to remember, especially with customer driven development, is that product development should be paced with customer input. It’s too easy to keep adding features without giving adequate time and effort to solicit feedback.

    Keep these in mind when considering the pace of development:

    • Maintain a strong opinion of the product direction independent of prospects, analysts, customers, and competitors
    • When considering feature requests, always ask if it is applicable to 80% of your desired customers
    • Don’t be afraid to remove features or unnecessary complexity from the product if they aren’t adding value (this is a delicate area)
    • Keep a good pace of development and make sure clients know about new features through blog posts, dashboard updates, social media, and newsletters

    My recommendation is to pace product development with customer input while maintaining a strong internal product opinion.

    What else? What are some other things to keep in mind when considering the pace of development?

  • Common Mistakes for First-Time Product Managers

    Voltaire's chateau at Ferney-Voltaire, France.
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    One of the co-founders of a startup should take ownership of the product management role. Product management encompasses everything from customer discovery, feature planning, roadmaps, QA, strategy, wireframes, documentation, and more. After building several commercial products personally, as well as helping other startups, I’ve seen a number of mistakes first-time product managers make repeatedly. Here are a few of those mistakes:

    • Overcomplicating the product (I still have a tendency to do this) knowing that Voltaire’s quote “the perfect is the enemy of good” holds true
    • Waiting too long to deploy changes out to the production server (startups should do continuous deployment or at least daily deployment otherwise it leaves room for a culture of monolithic development)
    • Inconsistent capitalization in button and link labeling (e.g. “Edit user” in some places but “Edit Object” in others)
    • Not appreciating that window dressing and subtle niceties in a UI contribute toward the user experience
    • Creating complicated interfaces that don’t employ progressive disclosure of advanced functionality

    My recommendation is for first-time product managers to pick up a book like Designing Interfaces and really be a student of the art of building a great product.

    What else? What are some other common mistakes for first-time product managers?

  • Spray and Pray to Find Potential Customers

    He spent too much time squawking about how his...
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    Testing a thesis and iterating quickly is one of the central tenants of lean startups. One of the ideas that lean startups should also employ is reaching out to many different potential types of customers while they build the product with feedback from a core group. Spraying and praying, based on educated guesses, isn’t employed as much as I would have expected.

    The idea is pretty simple. Take the core value proposition of the product, with feedback from the potential prospects who’ve helped guide development, and start reaching out to other groups that might be a good fit. Ideas to try include:

    • Related industries/verticals
    • Different job titles within those industries
    • Factors like revenue size, number of employees, and geography

    The idea is to pick out chunks of 25 contacts, pulled from LinkedIn/Jigsaw, in each potential area and start talking to people. Over time, patterns and fruitful opportunities will emerge. Once momentum has been achieved in an area, double down on it and maximize the value.

    What else? What are some other ways to find potential customers?

  • Junk Bonds for Startups

    Cover of "Liar's Poker"
    Cover of Liar's Poker

    After reading Michael Lewis’ latest book, The Big Short, this weekend it got me thinking more about junk bonds. Michael Lewis referenced his first book, Liar’s Poker, which chronicles the rise of the junk bond industry at Solomon Brothers, several times in the new book. Ted Turner’s autobiography, Call me Ted, talks about how junk bonds were the only way he could finance the growth of his empire without giving up control of his namesake business.

    Why don’t we see the equivalent of a junk bond industry for startups?

    Financing for startups typically revolves around angel investors (three Fs – friends, family, and fools) and venture capitalists with the occasional bootstrapper thrown in. I don’t see junk bonds working for pre-revenue companies as bonds are predicated on the ability to pay interest as well repay the whole amount at maturity. But for startups that have moved from the seed stage to early or growth stage (e.g. at least $1 million in revenue), knowing the gross margins for software and SaaS companies are typically north of 70%, there should be opportunity for junk bonds (e.g. high interest loans) to finance growth. The bonds would be senior debt such that failure to repay or refinance the bonds would potentially turn ownership of the company over to the bond holders, there’s sufficient collateral in the form of company equity to back the financing.

    Here are a few reasons why we don’t see a junk bond market for startups:

    • Reporting, auditing, and other controls for startups are typically weak giving little transparency to potential financiers
    • Many technology startups that reach $1 million in revenue already have investors and are on the investor train (e.g. once you raise institutional money, and things are going well, you’re going to likely raise more and more rounds of equity financing)
    • There are so few startups looking for this type of financing that connecting the buyers and sellers would be prohibitively expensive

    We’re not going to see a junk bond market for startups anytime soon but I believe there’s a need in the market for profitable, fast-growing startups to be able raise debt financing without collateral (e.g. real estate or physical assets) backing it up.

    What do you think? Is there a market for startups to do debt financing with asset-lite businesses?

  • What’s your Net Promoter Score?

    Several years ago a friend of mine gave me the book The Ultimate Question as a colleague of his at Bain had written it. After reading the book we immediately started to implement it as part of our quarterly client check-in calls. The Ultimate Question, according to the book’s author Fred Reichheld, is as follows:

    Would you recommend this product/service to a friend or colleague?

    The theory is that it isn’t whether or not a customer is happy but rather how likely they are to rave about you to others. Too often people will say they are satisfied when they are indifferent or don’t actually care. The most profitable and successful companies, like Apple and Google, have the most rapid fans.

    Calculating the net promoter score is fairly easy (see this online calculator). Ask customers to answer The Ultimate Question on a scale of 0-10 with 10 being the highest. Once you have the scores, categorize the responses into promoters (9-10), passives (7-8), and detractors (0-6). To determine the score, take the percentage of promoters and subtract the percentage of detractors (the percentage that are passives are ignored). That’s it. Companies that score above 75 are considered excellent, and yes some companies have negative scores.

    My recommendation is to consider using net promoter score as way to measure how successful your company is with your customers.

  • Defining a Great Corporate Culture

    tape measure from Sweden.
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    Several times now I’ve said that a great corporate culture is the only sustainable competitive advantage. How do you define a great corporate culture? Here’s how we define and measure our culture to determine if we are doing a good job:

    • We measure ourselves against the core foundation of good work, good people, and good pay:
      Good work – fun, interesting, and challenging
      Good people – positive, self-starting, and supportive
      Good pay – well above average compensation with strong benefits
    • We have an anonymous quarterly survey sent to all employees asking if they agree or don’t agree that we meet the core foundation (last quarter we had 100% somewhat agree or agree and we typically have 92%+ agree) as well as asking the Ultimate Question (how likely are you to recommend this as a place to work to your friends)
    • We measure employee turnover and typically only have one or two employees leave per year
    • We require unanimous consent for any new hires (anyone in the hiring process can say ‘no’ and the candidate will not move to the next round)

    Defining a great corporate culture is hard. We’ve set out our own standards and methodology and feel confident we have an awesome corporate culture.