David Cummings on Startups

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  • Profitability Traps

    Today was the quarterly education day for Accelerator, with the topic being money. Our facilitator was Jim Ryerson of SalesOctane who brings a great deal of energy and passion to the program. We worked through a series of exercises, one of which was talking about profitability traps. Profitability traps are where you do things that aren’t profitable. Why would do something that isn’t profitable? Good question — let’s look at a few, straight from the Accelerator materials:

    1. “Falling in love with” your customers
    2. Valuing quantity over quality
    3. Creating work to keep the staff busy
    4. Failing to correctly account for costs
    5. Making up for per-unit costs in volume
    6. Taking projects at a loss to keep competitors from getting them

    My recommendation is to pay attention to these types of traps and continually ask yourself if a customer or project is going to be profitable before jumping into the work.

  • 3 Keys to a Strong Corporate Culture

    As an entrepreneur, I most underestimated the importance of a strong corporate culture when building a company. Yes, having a great office, fun toys (like Razor Scooters and a Segway), and free food+drinks set the tone, but they aren’t nearly as important the three areas both Dan Pink in the book Drive (autonomy, mastery, and purpose) and John Bogle in the book Enough (autonomy, connectedness, and competence) identify. Here’s what I view as the three keys to a strong corporate culture, and personal happiness:

    1. Autonomy – empowering team members to make and own their own decisions
    2. Camaraderie – knowing that others in the company care about each team member on a personal level, especially managers and direct reports
    3. Mastery – truly excelling at your given role and achieving a level of confidence and proficiency

    My recommendation is to spend time on your corporate culture knowing it is one of the most important things your company can do to be successful. I agree with Richard Branson when he says that employees come before shareholders, customers, and vendors.

  • The Direct Flight Challenge

    One difficulty entrepreneurs have in smaller cities is what I call the direct flight challenge. Basically, most flights go through a regional hub, and if you aren’t that hub, trips become more difficult as well as much more expensive. If you’re from the South, this quote is common:

    Whether you go to heaven or hell, you have to pass through Atlanta’s airport to connect.

    Lack of direct flights can be an issue for startups due to several reasons:

    • Many investors (e.g. VCs) want to be able to fly in and out on the same day, which is usually difficult without a direct flight.
    • Sales and business development travel costs and time will be significantly greater.
    • Potential partners and acquirers will be more reluctant to get involved, all things being equal, as it is more difficult to get together.

    My recommendation is to keep direct flights in mind when choosing a city to start a company, especially if air travel is an important component.

  • Harness One of Four Emotions in Ads

    By now most of us have heard a simplistic yet powerful piece of advice when considering a new product/company: spend $20 on Google pay-per-click ads attached to a simple landing page and generate leads before you even have a product. The goal is to validate market demand while talking to potential prospects about your plan so as to get input at the earliest stage — pre product.

    A key part of making this successful is crafting the copy of the text ad as well as the copy on the landing page. There are four main human emotions that should be considered when writing the ad and content:

    • Fear – How many times have you seen an ad for a home security system that shows a thief breaking into a house? The ad is playing off of fear by taping into human desire to protect his or her family.
    • Greed – Every get rich quick scheme plays off the secular society goal of having more money. Think of all the ads you’ve seen to become a real estate investor, double your income, and get money for free from the government.
    • Exclusivity – We’ve all seen ads where the offer is limited to the first 100 callers. Do we really think if we’re caller 101 they won’t talk to us? I don’t think so, but there’s real power in creating an artificial sense of urgency.
    • Vanity – Who doesn’t want to be more attractive? The quantity of commercials from cosmetic companies lends credibility to the success of using vanity to help sell products.

    My recommendation is to pick one of these emotions and consciously use it when creating ads and landing pages. It will help with customer acquisition and product/company success.

  • Entrepreneurs Should Find a Peer Group

    One of the most beneficial things I’ve done as an entrepreneur is to join the Entrepreneurs’ Organization (EO), and, more specifically, join a forum within EO. A forum is a small group, typically 7-9 entrepreneurs, that meet once per month in a specific format. Here are some of the benefits I’ve found from having a peer group that meets regularly:

    • Always have a group of entrepreneurs that are there to help each other and who genuinely care
    • Constantly learning how other businesses operate including what works well and what doesn’t
    • Ability to develop deeper relationships compared to other professional colleagues

    I’m the membership chair for EO Atlanta for 2010-2011, so please reach out to me for more information. We have EO for entrepreneurs with revenues over $1 million and we have Accelerator for entrepreneurs with revenues under $1 million. Our goal is to assemble the most influential entrepreneurs in Atlanta that have a thirst for learning and peer-to-peer experience sharing.

  • Will Future Venture Funds Include a Dividend Component

    There’s been quite a few articles and blogosphere discussions over the past two years about the impending decline in the number of active venture capital funds (TechCrunch, WSJ, NY Times). Several trends cited for the decline of the size of the venture industry include:

    • Negative returns for the venture industry over the past decade
    • Asset allocation size readjustment due to overall asset value decrease (e.g. if a University endowment allocates 5% of assets to venture investing, and the value of the endowment drop 20%, which has happened to many schools, the original 5% allocated to venture is now significantly higher as a percentage of overall assets resulting in a need to reduce the amount put into venture on an absolute basis)
    • Fewer liquidity events where a company is acquired or goes public (IPO)
    • Lower cost to get a web company off the ground (but still expensive to scale)
    • Longer time frame to exit a business of 7-10 years instead of the previous 3-5 years, requiring larger exits to get the same desired rate of return
    • Lack of liquidity becomes significantly less desirable during times of market turbulence

    A typical venture investment in a company is for preferred shares of stock, with protections for downside scenarios, as well a seat on the board of directors. Venture capitalists then make money for their limited partners when the company is acquired, the shares are purchased by another investor, or the company goes public. Generally, VCs will say they are shooting for an 8x-10x return on their investment (e.g. get eight times the money they put in).

    In the public markets, a really simplistic way to think about the types of companies is to divide them into two camps: one type of company is focused on growth, doesn’t pay a dividend, reinvests profits, and is valued on its future potential whereas the other type of company pays a dividend, and is based on the value of future dividends. Usually technology companies are valued on future potential and companies that have a dividend, like banks, are valued on dividends (e.g. here’s a history of BB&T bank paying dividends).

    Venture capitalists often invest in technology companies and the investment is based on the potential growth and eventual sale of the business. Therein lies the challenge: if fewer companies are exiting for nice returns, it doesn’t take as much money to build a technology company, and exits are taking twice as long, something has to change. Thinking about the two simplistic types of public companies outlined above, it makes sense for some future venture funds to take a hybrid approach where they have a dividend component on investments in order to provide smaller amounts of liquidity back to the limited partners earlier than normal, while still generating the majority of their returns from the sale of portfolio companies.

    Let’s a take a look at an example:

    • The VC invests $1,000,000 into a company for preferred shares representing 20% of equity and a 15% dividend starting after 12 months that can be converted to equity at investor’s discretion but is assumed to paid annually.
    • If the company is growing fast, the dividend is converted to equity.
    • If the company isn’t growing as fast as desired, a $150,000 per year dividend is paid. As an example, after five years, with no dividend in the first year, $600,000 would be paid, and 20% of equity still owned (assuming no new investors).
    • If the company is sold for $20 million after the fifth year, the 20% is worth $4 million, plus the $600,000 dividend, results in a $4,600,000 aggregate return on the $1 million invested.
    • The $600,000 dividend doesn’t move the needle for the total return but does provide liquidity and mitigates complete write-off potential for the investors.

    My guess is that we’ll continue to see the trends that caused the decline in the size of the venture capital industry and by providing new approaches, like this one, investors will be more interested in participating.

    What do you think? Will a hybrid venture capital approach that provides dividends make it more appealing for some investors?

  • Best Exit Strategy Response

    People like to ask entrepreneurs “what’s your exit strategy”  as a nice conversation question. In fact, I like to ask it to get a gauge for an entrepreneur’s approach to the business. An exit strategy is simply what someone wants to do with the business when/if they are done with it. A typical exit strategy would be to get bought out by a larger, complementary company or to go public with an IPO (rare these days).

    My preferred exit strategy response is neither of the above. Here’s my favorite exit strategy response:

    My goal is to build the coolest, most innovative and profitable company I can. If an acquirer comes along I will consider it, but I’m focused on making something that is built to last.

    I believe that building a sustainable, enduring company is the highest form of entrepreneurship.

  • Employee 1% Community Time

    We value our corporate culture as one of the most important aspects of the company, and one way we give back is by employing 1% community time. What that means is all employees get to spend 1% of their time helping a non-profit in the community, fully paid for by the company. With a typical 50 week year, and 40 hours per week, for a total of 2,000 hours, 1% comes out to 20 hours, or 2.5 days of community service time. Yes, it is optional, but a good number of team members take advantage of it.

    What are some advantages of 1% time? Let’s take a look:

    • Great for employee morale
    • Powerful for team building and cross team rapport building
    • Positive impact for the community
    • Helps put things in perspective

    We’ve had events with Junior Achievement, helped clean up a park in South Atlanta, and have an event with the Boys & Girls Club coming up.

    My recommendation is to consider 1% community time for your company.

  • What Percentage of Startup Success is from What

    My views on the ingredients for startup success have changed significantly over the years. Originally, I believed that the management team was the overriding force. Now, the management team is still important, but I believe the market, including timing, for the idea is even more important. Here’s my gut allocation on how important different factors are for how I define a successful company:

    • Market – 40%
    • Team – 30%
    • Timing – 20%
    • Idea – 10%

    Notice that a great market with great timing represents the majority of the opportunity for success and that the actual idea is the least important. We’ve all heard the saying that ideas are a dime a dozen and that it’s the execution that counts. Combine all the pieces together and you have a winner.

  • Salespeople Should Live in Fear of Delete

    This morning I had the opportunity to attend an EO workshop on sales taught by Jill Konrath, author of the successful books Selling to Big Companies and SNAP Selling. Jill did a great job articulating how the sales process has changed over the past 20 years and effective techniques for today.

    One of the big takeaways from the event is that salespeople should live in fear of delete. What does Jill mean by delete? The biggest enemy for salespeople is having a suspect/prospect click the Delete button on a voicemail or email. She highlighted several strategies to get a “save” instead of a delete:

    • Don’t worry about mentioning your company name or job title as no one has heard of you
    • Show value immediately by referencing a pain point, competitor name, relevant customer, or referral
    • There’s a short amount of time to catch someone’s attention: 2.7 seconds for email and 20 seconds for voicemail
    • Cut out the jargon and complicated phrases
    • Pretend like you’re talking to a friend, not a prospect

    Much like the number one enemy of web customer acquisition is the browser’s Back button, salespeople should keep the Delete button top of mind when prospecting.

    What else? What do you do when prospecting for new customers?