David Cummings on Startups

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  • Comparing Angel Investors to VCs

    c. 50
    Image via Wikipedia

    Earlier today I was talking to an entrepreneur that was thinking about raising money. His technology startup is near break-even and he sees a market opportunity to accelerate growth. We talked for a bit about his sales and marketing progress before jumping into fundraising. After I asked about pre-money valuation, current revenue run rate, and amount he wanted to raise it was clear he hadn’t thought through the differences between raising money from angel investors vs. venture capitalists. Here’s what I offered up:

    • Angels are typically more hands-off while VCs typically take a seat on the board and are hands-on.
    • Angels are typically happy with a 3-5x return while VCs focus on results with 8-10x returns.
    • Angels are typically satisfied with dividends providing some liquidity while VCs want profits reinvested to maximize growth.
    • Angels typically don’t make big investments while VCs can provide significantly more equity.
    • Angels typically don’t have as many strings attached with the investment (e.g. anti-dilution, liquidity preferences, etc) compared to VCs.
    • Angels typically want to invest an amount they’re comfortable with (say $50K) without budgeting for follow-on investment. VCs however, start with an amount (say $1M) and want to put more money to work in the same company in later rounds (e.g. plan for several rounds of financing with the VC route)

    These were most of the main points that I thought he should consider. My recommendation for entrepreneurs looking to raise money is to truly understand the differences between typical angel and VC investments.

    What else? What other differences between angel investors and VCs would you note?

  • Thoughts for Entrepreneurs from Economist Roger Arnold

    Tonight’s EO event featured the economist and TheStreet.com writer Roger Arnold pontificating on the macro economy. It was great. Here are a few of his thoughts, many of which are contrary to mainstream media opinions:

    • ABCs of the world economies:
      As the the U.S. housing market goes, so goes the U.S. economy
      As the U.S. economy goes, so goes the world economy
      What’s good for the U.S. is good for the world
    • Interest rates are going to go down to 2.5-3% for 30 year fixed mortgages in the next 2-3 years
    • Interest rates in 10 years are going to be 10-20% to inflate away some of the U.S. debt
    • China is over heating and will crash this decade
    • China will require half the world’s oil in 10 years at their current 8% compounded annually growth
    • The cost of shipping is put under overhead for many companies resulting is misunderstanding of costs
    • Oil prices in 10 years will be so high that manufacturing jobs will return to the U.S. because it’ll be too expensive to ship things
    • Quantitative easing part two is a good thing as the fed is lowering the yield on T-bills making it less desirable for banks to hold them and thus look for other ways to make money (e.g. loan the money to small businesses)
    • Housing prices still need to come down as 30% of homes are under the value of the mortgage and people will keep walking away from them
    • The current generation of kids watching their parents lose their homes will be more reluctant to purchase homes in 20 years resulting in a larger percentage of the population renting instead of buying
    • A home should not be viewed as an asset but rather a lifestyle choice and liability
    • Current income tax cuts should expire and revert to previous rates but then new tax cuts should be put in place for small business creation and growth that are even more favorable than what we have now
    • Small businesses create the majority of new jobs in the U.S.
    • All the uncertainty and change going on right now creates opportunity for entrepreneurs

    As you can see, he covered quite a bit of ground in the hour and I enjoyed hearing him speak.

  • Cold Call Ratios

    Supply and demand market curves
    Image via Wikipedia

    One of the more under appreciated sales techniques is cold calls. Yes, with marketing automation and inbound marketing there are great ways to tap into existing market demand, but often times in a startup there’s a mercenary aspect where market demand must be created. Enter cold calls.

    As you would expect, cold calling is a numbers game. For our small but fast-growing market, our numbers look something like the following, assuming four weeks with 20 business days per month:

    • A list of 333 companies that fit the ideal customer profile with three contacts at each company (1,000 contacts total found using LinkedIn and Jigsaw.com)
    • 50 calls per day, 2,000 calls per month, every contact called twice per month
    • 10 conversations per day
    • 1 voicemail and send one email per contact per month
    • 1 demo per day

    This might seem daunting at first but it you assume 12.5 calls per hour, that’s four hours of calling a day. Add in one hour a day for the web demo and that still leaves three more hours for other work, follow-ups, planning, etc. My recommendation is to consider cold calling as part of your sales and marketing strategy.

    What else? What are some other cold call ratios?

  • Building Your First Startup Team

    SoftwareEngineering
    Image via Wikipedia

    Many times I’ve been asked, “How did you build your first startup team?” and I don’t have a great answer: it evolved slowly over time based on the needs of the business. This is especially the case with bootstrapped startups that are customer funded. For us, we followed the GPA (growth plan assets) model and hired our next person when the GPA was high enough.

    Generally, I see this progression in building a startup team:

    • Start with two co-founders, one in charge of product management and the other responsible for software engineering
    • Add an engineer to as you work towards product/market fit, if necessary
    • With product/market fit in sight, bring on a sales rep that is more of a mercenary than an order taker to assist the product management co-founder, who also acts as a sales engineer
    • Next bring on a jack-of-all-trades that can do services/support/marketing
    • Based on the startup’s specific needs, the next hire will likely be one of sales/marketing/services/support/engineering

    The most important thing to do is to build a strong culture that stays close to the customer.

    What else? What other experiences do you have building a startup team?

  • When to Push Out New Product Features

    Continuing my post from yesterday that Usage is Like Oxygen for Ideas in Products I want to talk a bit more about the endless debate on when to push out new product features. Product, in this context, is Software-as-a-Service (SaaS) applications on the web. Generally, with installed software, new features need to be tested 10x more thoroughly before shipping as there is a much higher cost to make a mistake. As for SaaS products, here are some reasons to push out features fast and frequently:

    • No feature survives intact with contact in the real world
    • Customers appreciate innovation, even if it isn’t always perfect
    • Customers provide more input when they see a product is actively enhanced vs one that doesn’t change often
    • Programmers have a tendency to overcomplicate features, so pushing out bite-sized chunks forces a simplification of the functionality

    Now, how is fast and frequently defined? There’s a movement to do continuous deployment where every piece of code checked in goes straight to production if all the tests pass (see IMVU pushing out code 50 times a day). We don’t do continuous deployment but we do look to push code anywhere from daily to bi-weekly depending on the maturity of the product and the impact of the feature. My recommendation is to err slightly on the side of pushing out too fast knowing the trade-off that some features will not be enough for users, but will provide a strong foundation for feedback.

    What else? What are some other considerations in pushing out new product features?

  • Usage is Like Oxygen for Ideas (in Products)

    The founding developer of WordPress, Matt Mullenweg, has a great essay titled 1.0 is the Loneliest Number where he recounts similar story to my post mortem on a failed product in which he spent entirely too long adding more and more features to a release before putting it out in wild to get feedback on it. His choice quote, which is echoed by the guys at 37signals, is as follows:

    Usage is like oxygen for ideas. You can never fully anticipate how an audience is going to react to something you’ve created until it’s out there. That means every moment you’re working on something without it being in the public it’s actually dying, deprived of the oxygen of the real world.

    My recommendation is to read Matt’s essay and to create a culture of minimum viable functionality for new features so that customers can provide feedback right away. Too often, the engineering mentality is that of a perfectionist leading to more and more functionality piled onto a feature to get it just right. Only, just right for one engineer isn’t the same as just right for 80% of a product’s user base. Don’t let your product ideas suffocate.

  • Startup Progression Part Three

    Diagram of the typical financing cycle for a s...
    Image via Wikipedia

    Earlier this week I had a chance to meet with a seed stage startup here in Atlanta. The team is composed of two smart guys that have known each other since high school and went to the same ACC school. Here’s some more information on the team:

    • Working on a B2C web startup
    • Raised a mid-five figures friends and family round
    • Both co-founders have a technical background
    • Both co-founders worked for several years for big companies before starting this venture
    • Have some traffic to their site but not much
    • Thinking about doing an advertising and sponsorship driven model

    My advice for them, being in Atlanta and doing a B2C startup, was to either figure out how to get to ramen profitability immediately or move to San Francisco and take part in the angel financing bubble. They could also pivot to a B2B model and have more fundraising options in Atlanta, but it is still tough without six figures of revenue.

  • What Could Go Wrong on a Site?

    moving parts
    Image by erin m via Flickr

    In the last few days I’ve heard of several entrepreneurs having challenges with their website/webapp where unexpected things are going wrong. While it has gotten much easier to build powerful websites, there are many more moving parts, and more subtle things that can break. What could go wrong on a site? Here are some examples:

    • Network goes down
    • Hard drive failure
    • Web server failure
    • Database failure
    • Domain expires
    • SSL certificate expires
    • Page doesn’t render in a certain browser (IE is the usual culprit)
    • Broken links (e.g. link to an external URL and that site changes their link structure without redirects)
    • Slow loading pages and assets
    • Third-party JavaScript causing pages not to load
    • Third-party payment gateway fails (e.g. Authorize.net, Google Checkout, Amazon Payments, etc)
    • Application functionality breaks (e.g. login fails, conversion path fails, etc)
    • Distributed denial of service
    • Spike in traffic

    As you can see, there are many different issues that can arise with a site. One of the bigger challenges as well is that the traditional pinging services, which are very popular, only catch when the site is completely down, as opposed to when a specific piece of functionality like signing-in or a payment gateway is down. My recommendation is to recognize the complexity that goes into sites today and plan accordingly.

    What else? What are some other things that can go wrong on a website/webapp?

  • The 5 Main Marketing Areas for Startups

    Social Media Life - Workstation

    All too often, startups I meet with don’t have a good grasp on their marketing strategy, more precisely, their customer acquisition strategy. The most common response to the marketing strategy question is search engine optimization (SEO), which almost never plays out as an exclusive strategy due to the competitiveness of the industry. On a simple level there are only a few areas startups should focus to build awareness and generate leads. Here are the top five marketing areas for startups:

    • Word of mouth – where prospects and customers tell their friends and colleagues about the product (notice I didn’t say viral marketing, as so few products are truly viral)
    • Pay-per-click – yes, Google AdWords are terribly expensive, but they are also effective especially with more targeted phrases (e.g. buying competitors’ names is a great tactic for low volume, high quality leads)
    • Search engine optimization – SEO does work but needs to have a 6-12 month horizon and tons of content (e.g. publishing 1-2 blog posts a week indefinitely)
    • Cold calls – now, people generally associate cold calls with sales reps, but cold calls are also a great way to build product awareness in a marketing fashion and should be done by most startups
    • Social media – yes, people are making money off social media by monitoring industry terms and competitors’ names, then tactfully joining the conversation

    My recommendation is to employ all of these areas as part of a marketing strategy and focus in on the ones performing the best.

    What else? What are some other marketing areas for startups?

  • Startups Overcomplicate Their Product

    Overkill (album)
    Image via Wikipedia

    Technology startups, especially ones with strong technical skills on the co-founding team, have a tendency to overcomplicate their product and the necessary pieces to launch. There are several reasons why this is the case:

    • As a developer it can be fun to experiment with the most fancy of tools, even when they are overkill (premature optimization is the root of all evil).
    • There’s no code debt, so it is incredibly easy to add more features, even before a prospect has validated that there’s a need for the existing features.
    • It is more fun to innovate and add functionality, due to the immediate sense of satisfaction, as opposed to doing sales and marketing with potentially little results.
    • Without a deadline, or timeboxing the minimum viable product, there’s a normal perfectionist tendency as the product is a representation of the developers
    • The minimum viable product often slips into the minimum respectable product, which is fine only in limited circumstances

    My recommendation is to continually ask yourself if you are overcomplicating the product and necessary pieces to launch and start developing relationships with prospects.

    What else? What are some other reasons startups overcomplicate their product?