David Cummings on Startups

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  • Proprietary Customer Acquisition Strategies

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    One of my favorite questions to ask startups is “How are you going to generate leads?” Inevitably the answer comes back along the lines of SEO, SEM, blogs, social media, etc. The major challenge, naturally, is that’s everyone else’s strategy as well. Oh, and the well financed and/or established companies have significantly more money to spend, especially when it comes to PPC ads.

    I get most excited when a company has a proprietary customer acquisition strategy. Here are a few examples:

    • Exclusive relationship to co-market their product with a complementary solution that already has great distribution
    • Exclusive relationship with one or more lead generation sites that specialize in their industry (one company in town has done a great job with this approach)
    • Proprietary method of generating prospect lists based on non-generally available data

    Customer acquisition is hard and fiercely competitive. My recommendation is to think through proprietary customer acquisition strategies as a pre-requisite to starting a business.

    What else? What are some other example proprietary customer acquisition strategies?

  • How Much is Enough: A Story from Jimmy John’s

    Two weeks ago I was at Jimmy John’s in Buckhead near my house and there was a sign on the wall with a parable (see photo I took from iPhone to the right). Here is the story titled How Much is Enough:

    The American investment banker was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked. Inside the small boat were several large fin tuna. The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.

    The Mexican replied, “only a little while.”

    The American then asked why he didn’t stay out longer and catch more fish?

    The Mexican said he had enough to support his family’s immediate needs.

    The American then asked, “but what do you do with the rest of your time?”

    The Mexican fisherman said, “I sleep late, fish a little, play with my children, take siesta with my wife, Maria, stroll into the village each evening where I sip wine and play guitar with my amigos, I have a full and busy life.”

    The American scoffed, “I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat, and with the proceeds from the bigger boat you could buy several boats. Eventually, you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually NYC where you will run your expanding enterprise.”

    The Mexican fisherman asked, “But, how long will this take?”

    To which the American replied, “15-20 years.”

    “But what then?”

    The American laughed and said that’s the best part. “When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions.”

    “Millions?” asked the fisherman, “Then what?”

    The American said, “Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evening, sip wine and play your guitar with your amigos!”

    (Author Unknown)

  • 14 Trout or a Giant Marlin Startup

     

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    A few nights ago we saw the movie The Social Network and really enjoyed it. One of my favorite anecdotes came when the characters were debating the potential of Facebook. I’ll paraphrase the story without giving away too many details of the movie. One of the main characters poses a question to the founder of Facebook: Have you ever seen a photo of a fisherman with 14 trout caught in one day? Of course he hadn’t as fishermen like to show off the pictures of a giant marlin. The character’s point in the movie was that the entrepreneur needs to decide if Facebook is going to be a trout or a marlin.

    There’s no right or wrong answer but I think it’s important for entrepreneurs to think through the question of what they want to be in the future.

    What else? What are your thoughts on the trout vs marlin question? What did you think of the movie?

  • Manufacturing Sales as a Relationship-Oriented Consultant

    Earlier this week I was having lunch with an entrepreneur that has a successful consulting business. He’s been in business for four years and has 10 full-time consultants. The big challenge for him now is that he’s both selling new deals and coordinating the delivery of work on existing deals — working 80 hours a week in the business. If he doesn’t sell new deals the business goes under, and if he doesn’t sell even more deals than last year, the business doesn’t grow.

    The goal right now is figuring out how to train the consultants to sell and make it so that he’s not the only person bringing in new business. We talked for over an hour and this is what I suggested to him:

    • Figure out how to get economies of scale with his sales abilities
    • Consider having an inside sales person call on target accounts to set up appointments for him as well as offer events like “my CEO is going to be in town on xyz date and would enjoy grabbing breakfast or lunch with you”
    • Build regular value-added content to stay top-of-mind with prospects and outsource this work to a markting person
    • Look for other ways like lumpy mail and industry speaking events to stay in front of prospects

    My biggest recommendation for him was to lean on junior sales and marketing people to help him maximize his reach.

    What else? What are some other ways to help sell more as a relationship-oriented consultant?

  • International Product Distribution

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    Recently I was talking to an entrepreneur about international product distribution. The company already had a few clients overseas, mainly in the UK and Western Europe, and was looking for ways to proactively grow the base. To date, customers had come in as inbound leads from regular marketing campaigns. Here are a few considerations when thinking about international product distribution:

    • It is expensive to open a physical office and staff it with management, sales, marketing, and support.
    • Plenty of international companies specialize in reselling products, especially from American software companies, and are a good starting point.
    • If the international partner does product support, expect to do a more aggressive revenue split along the lines of 50/50 instead of the usually 10%-30%.
    • Look to sign up at least 10 international clients on your own to better understand any details or nuances of customers in foreign companies.
    • Product support including hours of operation become a much tougher issue with international clients.

    I think international expansion is a great way to grow but should be taken slowly unless you are already a $10MM – $20MM business and have the resources to make a major push.

    What else? What are some other considerations for international product distribution?

  • Community-Facing or Inward-Facing CEO

    "Castle Beach" – Singapore
    Image by williamcho via Flickr

    Earlier this week I was having dinner with a successful technology founder/CEO in town. After talking about what local activities he’s involved in it became clear that he’s much more involved with the community than I am. That’s when I asked, “Do you spend more time working with non-profits in the community than in your company?” Without missing a beat he said “yes” and outlined how he allocated his time.

    As a startup CEO, the more success you have the more requests there will be for your time, especially from the community. Here are a couple questions to think through:

    • How do I want to balance my time between industry activities, community activities, and company activities?
    • Do I want to be the face of the company like Steve Jobs of Apple or more behind-the-scenes like Jim Goodnight of SAS?

    My recommendation is to consider how your spend your time and balance community requests.

    What else? What other questions should CEOs consider regarding time allocation?

  • Considering Stock Options in Employee Compensation

    Stock options have been a part of the startup world for decades. We’ve all read how the receptionist and chef at Google became millionaires from their stock options that multiplied in value 100s of times by the IPO. Unfortunately, there’s a problem: most employees of startups over-value stock options in their compensation.

    I know of a startup in town that asked everyone on the team to take a serious pay cut when times were tough in exchange for many more stock options. Well, stock options are not well understood by most people and for the options to be in the money at this startup (e.g. worth more than the strike price), the startup needed to be valued at 15x the revenue. That’s right, the strike price was ridiculous. Most companies are valued at a multiple of profits (e.g. 4x-6x) or in the software business usually 2x-5x revenue. Thus the bar was crazy high and the employees were focused on the number of options as opposed to the percent ownership of the company. Having 100,000 options in one company could be less ownership than having 1,000 options in another company as it depends on how many total shares the company has and how many of those shares have been issued.

    For my company we generally don’t do stock options and instead focus on having our average compensation across all employees be in the 75th percentile as well as providing exceptional benefits (health, dental, 401k, disability, food, drinks, etc). People understand the value of a salary and benefits. Now, many startups would disagree with this approach but it has worked well for our culture.

    If you are an employee considering stock options as part of compensation I would ask the following questions:

    • How many total shares are there and how many outstanding? What percentage ownership of the company does this represent?
    • If the company sells for $5MM, $10MM, $25MM, or $50MM how much money would I get? Liquidity preferences of preferred shareholders can significantly affect how much money you take home e.g. even though you own 1% of the company you don’t get 1% of the proceeds.
    • What is the likelihood of raising more money and what would the dilution of shareholders look like?

    Stock options, or more commonly restricted stock now, represent a part of the startup world. My recommendation is to really understand them when considering overall compensation.

    What else? What other tips do you have when considering stock options as part of compensation?

  • Ask People to Accomplish Tasks for User Testing

    Building high-quality software is still more of an art than science, especially with the preponderance of different opinions to accomplish even the simplest of functionality. With the rise of open source software, great web development frameworks (e.g. Rails), and lighter languages (e.g. Ruby) it is cheaper and faster to build web applications. It’s hard to make an app easy. It really is difficult.

    One of the best ways to do user testing is to grab a person who hasn’t used the software before, give them a gift certificate or pizza, and ask them to accomplish tasks in the product. That’s it. Don’t ask about the color scheme, positioning of icons, or arrangement of navigation links. Simply ask for some deliverables and get out of their way.

    A critical part of this process is to not lead them on asking “what did you think about X” while they’re in the middle of the process. Too often product managers and co-founders are so excited about the product that they can influence the activities of the tester. It is best to make the desired tasks black and white and put them in front of the tester and have he or she go to town.

    What else? What other recommendations do you have for user testing?

  • Published Prices Aren’t Always the Main Business Model

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    Whenever I come across a pricing page on a site I immediately think “Oh, OK, that’s how they make money and where they fit in the market.” Well, recently, I came across a company that I knew how many employees they had, how many customers they had, and saw their published pricing. After some simple mental calculations, and knowing they hadn’t raised money, I quickly realized the math didn’t make sense. They couldn’t support that many employees with that little revenue, even in Atlanta (great Fast Company interview of Alan Taetle).

    After asking around I found the answer. The monthly fee for the web service is what everyone pays, and it is very competitive for what they offer, but if you choose to use their “free” payment processing option, they charge an additional 1% of the transaction fee as an additional commission. Yep, that’s right, they generate more annual revenue on that 1% transaction fee than from the monthly service for their product. Only, you wouldn’t know it from browsing their site.

    My recommendation is to think through ways to generate multiple revenue streams, and consider ones that aren’t always as obvious as a monthly subscription fees (yes, recurring revenue is the best form of revenue).

  • Google Docs and Gmail Canned Responses for Process

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    Image via CrunchBase

    As a startup grows from a couple co-founders to small team and eventually to departments, it becomes important to add more process while not stifling innovation. One of the best ways to start adding more structure is to document activities in Google Docs and create Gmail canned responses to go with them. Here are some tips:

    • Use Google Documents for unstructured content, canned response emails, and any other documentable information
    • Use Google Spreadsheets for processes that are linear and structured
    • Use Google Drawings for Visio-like drawings that have conditionals and dependencies
    • Use Gmail canned responses for as many steps as possible (e.g. sales process, recruiting process, accounts receivables process, etc)

    My recommendation is think through processes that are repeated and document them as well script out canned email responses. In addition to saving time and providing greater consistency, another benefit is more efficient delegation to new team members.