David Cummings on Startups

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  • Bessemer 5 Cs of SaaS Finance

    Continuing my series of posts of on software as a service (SaaS) financials from yesterday, let’s take a look at Bessemer’s great set of slides online titled the 5 Cs of SaaS Finance. SaaS really is a very different business model when compared to traditional software and Bessemer highlights some of the critical metrics. The Bessemer 5 Cs of SaaS finance include the following:

    • CMMR – Committed Monthly Recurring Revenue
    • Churn
    • Cash
    • CAC – Customer Acquisition Costs
    • CLTV – Customer LifeTime Value

    My recommendation is to pay close attention to these key performance indicators and to read through Bessemer’s slides for all the details.

  • SaaS Financials – Cost of Goods Sold

    After reaching out to one of our company advisors today about advice on software as a service (SaaS) financial metrics, I felt it would be prudent to start documenting them in a series of posts. SaaS, being a newer delivery model, when compared to traditional, installed software, isn’t as well understood with regard to financial metrics.

    Generally, cost of goods sold (CoGS) for SaaS companies will include:

    • Hosting and monitoring of the application
    • Licenses and royalties for products embedded in the application
    • Services related to on-boarding the customer
    • Support and account management
    • Credit card fees and commissions to partners

    For more SaaS CoGS info, please see the Dealer Ignition post or the LinkedIn Q&A.

  • Establish a Critical Launch Trigger

    I had lunch with a successful Atlanta tech entrepreneur today and he filled me in his current startup. After drilling into the business for 30 minutes he made a comment I didn’t expect: he’s only going to launch if he has seven key partners on board with signed contracts. He has a critical launch trigger where he’s requiring key distribution partners be in place before completing the product.

    This is a variation on lean startups and customer driven development whereby customers are incorporated into the development process — not after the product has already been built.

    My advice: consider critical launch triggers when starting a new company.

  • Startups Should Practice Direct Marketing

    I was talking to a successful entrepreneur this afternoon and he made a statement that I agree with: most startups should emulate direct marketers and focus on customer acquisition costs from the out set. Companies like Capital One and American Express set the bar for being extremely effective direct marketers. So, why direct marketing for startups?

    Direct marketing, as different from generic marketing, is centered around advertising with specific calls to action, like calling a phone number or filling out a form, and measuring the effectiveness. Most entrepreneurs get caught up in building a great product, which is critical, but there are more stories of inferior products with better sales and marketing teams beating out superior products. Building the direct marketer mindset into the DNA of the company from the beginning helps ingrain the importance of a metrics-driven approach to acquiring customers.

    The product is the marketing. Sales are the lifeblood. Every entrepreneur needs to be a direct marketer.

  • Videos for Entrepreneurs

    Recently, I’ve enjoyed watching entrepreneurial videos online from several different sources. To me, video captures more of the passion and excitement, when compared with more static, text-based content. I’d recommend taking a look at the following:

    I hope these are insightful — my position is that you can never learn enough.

  • Two More Entrepreneurial Blogs

    I’m always looking for new blogs on technology and entrepreneurship to add to the list that I scan daily. Recently, I’ve found two more that I recommend:

    • Derek Sivers — Founder of CDBaby.com, publishes a great blog with thought-provoking entries
    • Fred Destin — VC in Europe, gives great insight into and anecdotes into the venture world

    If you don’t already, I’d start following bloggers on topics near and dear to you as a way to stay up-to-date on trends as well as to glean insight from others.

  • When to Hire

    One of the challenges of running a bootstrapped business is determining when to make the next hire. Funding, being severely limited, must come from banks (including credit cards) or customers buying the goods or services. Banks, as we know, aren’t in the market of lending money without collateral to back it up. So, when do you increase the monthly nut and hire a new employee?

    My recommendation varies based on the type of business. Let’s look at a few:

    • Traditional installed software — start hiring once current assets are equal to the three times the trailing 90 days monthly average (known as the GPA)
    • Software as a service — this one is easy due to the recurring nature of the business (just hire once the cash is coming in)
    • Hybrid with part up-front and part recurring — look at the percentage of revenue that is recurring and discount the GPA value by that percent

    Determining when there’s enough momentum and cash to hire more people is difficult. I hope this advice helps.

  • Too Much Money Chasing a Market

    A phenomenon in the technology startup community I hadn’t read about until recently is that of too much money chasing a market resulting in lower than expected investor returns. Bill Gurley reiterated this recently in his recent talk at the AlwaysOn conference. Of course, supply and demand in any market should work itself out over time.

    My advice to entrepreneurs is to evaluate this potential in their market as part of determining their growth prospects as well as evaluating raising money from investors.

  • Work Life Balance

    Work life balance is something that I take seriously. My typical weekday work hours are as follows:

    • 8 – 8:30am at home
    • 9:30 – 6pm at office
    • 9 – 10:30pm at home

    I usually work 5-10 hours over the weekend.

    In addition, I have the following goals, which I do a good job of keeping:

    • No more than two business trips per quarter
    • No more than an average of one evening business event per week
    • No more than an average of one morning business event per week

    This week has been more hectic than a typical week due to holiday parties and events. Generally, setting up these rules makes it easy for me to make sure I maintain the work life balance I’ve chosen. My advice, especially if you have a spouse, is to do something similar so that both people are on the same page.

  • Reserve Usernames

    One simple piece of advice I recommend to entrepreneurs is to reserve their company name as a username on popular services like Twitter, Facebook, Flickr, etc. The username has to be unique to the service and acts much like a domain name where it is first come, first serve. Registering the name now doesn’t cost anything, so reserving it is a good move even if there aren’t plans to use it anytime soon.

    So, head on over to usernamecheck.com and start reserving a username.