David Cummings on Startups

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  • Iterating in a Startup – Part Two

    In Part One, I outlined the first iteration of the Hannon Hill business model where we built a SaaS web content management system and launched it in the summer of 2001 for $30/month/website. After realizing there wasn’t a reachable market that was large enough for us to be successful, we quickly changed to an installed model of the same product. To our excitement, we sold our first $1,000 license by the end of August and thought we had a path to growth and profitability.

    Over the next 24 months, representing the life of the application, we sold 25 licenses. That’s right, selling slightly more than $1,000/month worth of software doesn’t make for a good business. Our big break actually came in December 2001 at the Internet World trade show in New York City, and was a result of changing to an installed software model.

    At the trade show, we serendipitously met another, much larger software company that was explicitly looking for a content management system to sell to their installed client base of over one million licensees. We had several rounds of discussions with their management team at the show and eventually consummated a deal in the Spring of 2002 to license our product for them to sell under their own brand name. They would pay us money up front along with a royalty for each license sold. We had our first big break.

    Now came the next big iteration: we completely shelved our product that we had spent two-and-a-half years building in order to build The Next Big Thing. By the Summer of 2002, we knew we were never going to be successful selling installed PHP software to small businesses, and that a competitor with much greater resources would be selling a slightly modified version of our product to the same audience. It was a pretty easy decision to make.

    Our next move was to make a completely new, mid-market Java-based web content management system using the expertise we’d gained over the past few years. The special sauce of our new product was a combination of XML, search engine optimization, and distributed server publishing. Of course, building a next generation product from scratch allowed us to address all the mistakes we made in architecting the first product.

    Stay tuned for part three to learn how we made this new product successful, and the sales and marketing iterations that paid off.

  • Iterating in a Startup – Part One

    I’ve been hearing a good bit of chatter lately about how important it is to iterate in a startup. This generally refers to figuring out a product, market, and business model that will result in success. Of course, success means different things to different startups. For some, it is a large, market-disrupting company. For others, it is a profitable, growing business large enough to sustain a nice lifestyle for those involved. Let’s drill into iterating in a startup.

    Lance Weatherby values velocity and versatility in team members and has coined the term velocitile to label such a person. I believe that you need both a good market and flexible people to be successful in a startup. With both of those in place, iterating is a natural and healthy part of building a company.

    My Inc. 500 software company, Hannon Hill, makes mid-market web content management solutions for higher education and other industry verticals. It wasn’t always this way. When I first started the company in December of 2000, the vision was to provide a software-as-a-service (SaaS) application that would make it easy to update a generic, small business website, for $30 per month.

    The service worked with existing websites over FTP and provided a visual interface, similar to Windows Explorer, so that people could click on a file and edit it in a browser-based word processor. Upon saving the changes, the file would then be sent over FTP back to the web server, along with a backup version. The benefits of this model included:

    • No software to install on the web server or web browser
    • No up-front fee and a low monthly cost
    • Familiar file manager interface with word processor

    The software was as easy to use as web-based email. The only problem is that it was a complete failure. I started out working on the company part-time and eventually went full-time within six months. I learned several lessons shortly after going full-time:

    • The market wasn’t accepting of SaaS
    • $30 per month per site was much too cheap to build a business
    • Customers needed significant hand holding to get up and running

    At that point, I knew something had to change. By August 2001 we had retooled the product to be an installed server application (it was always a PHP/MySQL app) at the price point of $1,000 for a 10-user license.

    Stay tuned for part two to learn if our iterating paid off.

  • Quick Thoughts on iPhone Development

    Last quarter we started work on two separate iPhone applications. We’d been debating for a while when to jump into it, and the launch of the $99 iPhone, along with the proliferation of iPhones among our employees, made it an easy decision. I’ve picked up on several little items related to iPhone development so far:

    • The learning curve is a bit steeper when compared to picking up a language/framework like Ruby on Rails
    • Threading is a concept lots of web developer don’t have experience with
    • If the iPhone app uses web services to interface with your own API, the iPhone app will likely push the limits of your API (we had to significantly expand our API functionality)
    • People are passionate about the iPhone and developing apps for it is great for morale

    I hope this helps if you or your company is considering building an iPhone app.

  • Interviewing Entry-Level Candidates

    We’re always trying to get better with our interview process. Interviewing is particularly challenging for entry-level candidates where there’s a lack of experience to draw from. In addition to our written and technical exercises, we like to do the following for entry-level positions:

    • Ask extensive personal questions like who influenced them the most outside of their parents, how many siblings they have and what was their environment like growing up, did they play sports or music, etc.
    • Present a career path, if possible, to give them an idea of how they can grow in our company
    • Schedule interviews with as many company team members as possible, with the simple message that if any interviewer says no, the candidate is removed from consideration

    Our success rate to date is about 80%. We’re working hard to continual get better, and the goal is to get over 90%. Finding entry-level candidates that will succeed in your company is hard. Good luck!

  • Personality Tests in Startups

    As part of my EO Forum we decided to take personality and values tests to learn how we can better relate to the other members of our group. We had the great pleasure of being facilitated and tested by Billy Mullins of Vikus Corporation. The process and outcome really opened my eyes to the benefits of these tests for several reasons:

    • Existing team members can better understand how other team members relate
    • Teams can identifiy characteristics missing from their group and work to recruit to fill in the gaps
    • Tests like the Hartman Values are complementary to personality tests like Myers Briggs and can address areas like work ethic and ability to incorporate new information

    Based on this experience, my company is now looking into tests to administer to existing employees as well as late-stage job candidates. In addition to Myers Briggs and Hartman Values, we’re also looking into Calipers and DISC.

    For startups, especially ones with multiple co-founders, I’d recommend taking some of these tests and looking at the outcome as part of the team building process. Team building is critical in all stages of a business, and I’m confident personality and values tests will help everyone.

  • Atlanta Startup Entrepreneurs – atlse.com

    I put up a simple Atlanta Startup Entrepreneurs (atlse.com) community site yesterday to help centralize information that’s been floating around for a long time.

    Please take a look at atlse.com and contribute. How can we make it better?

  • Rethinking PowerPoint Presentations with BBP

    A friend of mine recommended Beyond Bullet Points by Cliff Atkinson last week so I promptly bought a copy on Amazon.com. I’m only a few chapters into the book but it already resonates with me and my thinking on how to do a presentation. Here’s the advice I’ve taken away from the book so far:

    • A presentation should be like a story with a beginning, middle, and end
    • The presentation should first be built in outline form in a separate program like Word
    • After the outline has been built, each slide should be made in notes view with the slide containing the presenter’s notes followed by one sentence and a relevent picture in the slide itself
    • With each slide containing no more than one simple sentence and picture, the presentation should be timed such that each slide is used for approximately one minute

    The book also does a good job of giving some theory behind how people learn and interpret new information. I’ll do a follow-up post once I’m finished with more insights from it. If you ever do PowerPoint presentations, I’d recommend reading the book as well as visiting the BBP community.

  • Three Financial Tips for Growing Businesses

    Last week I had the opportunity to participate in the EO Accelerator quarterly education day as I’m the Champion for the Accelerator program on the EO Atlanta Board. Each quarter we have an all day education event taught by a certified facilitator that flies in for the program. The program, for entrepreneurs with revenues under $1 million, is three years long, with rolling admittance and unique content on the topics of People, Strategy, Money, and Sales. This was Money day.

    Money day was taught by Greg Crabtree, one of the most entrepreneur-minded CPAs I’ve ever met. Greg runs a firm in Huntsville, AL that charges a flat monthly fee, typically $400 – $1,000, to clients in exchange for fixed quarterly accounting services and unlimited advice. Greg provided several frameworks for thinking about financial concepts in business, that are especially helpful for entrepreneurs.

    Salary Cap

    The idea behind the salary cap comes from professional sports, like the NFL. The way to calculate it for your business is to take all your non-labor costs on a trailing 12 month basis and subtract that value from your trailing 12 month revenues. Why is this good to measure? It helps you focus on the maximum amount the business will bear for labor costs before the company won’t be profitable. Too often, entrepreneurs add new staff before the business warrants it and this provides a value to monitor. Note that looking at your trailing 12 months expenses and revenue is typically better than looking at annual values on a calendar year, for the purposes of making decisions like hiring.

    Core Working Capital

    One question I’ve asked many times, and been asked many times, is “How do I determine how much I should have in the bank before expanding/hiring?” Core working capital (CWC) is the answer to that question. CWC, according to Greg’s recommendation, is two months of monthly operating costs in cash in the bank after the following:

    • Taxes
    • Debt payments (he recommends no debt or line of credit)
    • Current liabilities

    Of course, the amount of desired working capital will vary from business to business, but this simple rule of two months of cash in the bank is a good starting point.

    Profit Margin Goals

    The third take away from Greg came in the form of profit margin goals. Greg’s advice was that businesses should strive for a 10% profit margin after fair market wages are incorporated for all principals in the business. Here are the three common profit ranges for a growing business:

    • 5% range – the danger zone
    • 10% range – the target for most businesses
    • 15% range – doing extremely well, especially if the business has scale

    I hope these three financial ideas for growing businesses are as beneficial to you as they are to me. Thanks again to Greg for doing a great job.

  • Thoughts on Amazon EC2 for Hosting

    We recently launched our free Web CallerID app using Amazon.com Web Services Elastic Compute Cloud (EC2). EC2 is a fully virtualized self-service hosting environment as compared to traditional dedicated hosting or managed hosting from companies like Rackspace, ServerBeach, or SoftLayer. We took advantage of Elastic Block Store (EBS) for persistent database storage and Elastic IP for persistent IPs. Here are some thoughts based on what we learned:

    • Setting up EC2 hosting takes more time than traditional hosting as you have to budget for creating/repackaging the Amazon Machine Images (AMI) and creating scripts to reconfigure items in the event of an instance change (e.g. remounting EBS volumes and reassigning Elastic IPs)
    • More or less being forced to make an AMI is a great exercise in packaging up your server for deployment, which actually saves time in the long run as you won’t have to rebuild a machine when a hard drive fails, like with traditional hosting, or when you are adding more of the same type server, like with traditional hosting
    • Amazon EC2 is actually cheaper than traditional hosting if you purchase Reserved Instances, but more expensive if you pay the On Demand rate
    • We haven’t had any maintence issues with the EBS volumes, as compared to our RAID hard drives on one of our other multi-server apps that requires a hard drive to be replaced once per month, incurring additional systems administration work on our part

    I highly recommend Amazon EC2 for hosting.

  • Pros and Cons of Free Product Trials

    We’ve been offering free trials of our software for years and have come to understand some of the pros and cons of doing so. 

    Pros to Offering Free Trials

    • Helps assess how serious of a prospect you have
    • Provides an opportunity for the prospect to interact with other members of your team (services, support, etc) and show them how great of a company you have
    • Sets prospect expectations of what the product does and aligns interests with the company, proving that it is a good fit
    • Provides a sense of urgency as the free trial will expire at a certain date

    Cons to Offering Free Trials

    • Usually more labor intensive, especially for more complex products as services and support teams need to be involved
    • Can lengthen the sales cycle as the prospect might have to get other people from his/her organization involved, and actually do real installation work
    • Some prospects will keep asking for free trial extensions, which can create an adverse situation with the sales person that wants to solidify the deal or walk away

    A couple other items of note:

    • The free trial is really a proof of concept project, and should be referred to as such
    • Before doing the trial, clear success guidelines must be set up and agreed to by the prospect (e.g. in the proof of concept, we will show x,y, and z working resulting in some benefit, and culminating in the prospect signing a contract)

    In almost all cases, I recommend offering free trials (proofs of concept).