David Cummings on Startups

Blog

  • When Freemium Works as a Business Model

    Last week an entrepreneur mentioned they were thinking about introducing a new product with a freemium business model. Freemium, where there’s a free edition of the product along with a premium upgrade, has been a mainstay of cloud software for decades now. Only, it doesn’t work for most products.

    Let’s look at when freemium works best. Here are a few characteristics:

    • 2nd or 3rd generation product – Once the market has been educated, and people know how to use that type of product, freemium works as users can jump in and be productive (e.g. Mailchimp was a 2nd generation product when it came out).
    • Fast time-to-value – Products that deliver value quickly work best for freemium such that users can understand and appreciate the product with minimal handholding (e.g. Google Docs where you can start typing immediately). Complex, complicated products don’t work well in the freemium model as there’s too much energy required to get value.
    • Viral distribution – Freemium really shines when the very nature of using the product propagates it to other users. Think about Calendly links for scheduling meetings, Dropbox sharing of files to different people, etc. Distribution is one of the most difficult aspects of B2B software, and the most successful freemium products have a heavy viral component.

    Freemium, when it meets these criteria, is one of the best business models around due to elegant product distribution and scalability. The next time freemium comes up, see if it has these three characteristics.

    What else? What are some more characteristics of the most successful freemium products?

  • Constant Course Correction on the Entrepreneur Journey

    Earlier this week I was talking to an entrepreneur and he shared that they’d just found product/market fit. With a few dozen customers, and strong sales momentum, things are looking good for the startup. Naturally, I had to ask: was this the original idea for the company? As expected, it wasn’t anything remotely related to the original idea.

    Almost every successful entrepreneur I’ve met wasn’t successful with the initial idea.

    https://twitter.com/davidcummings/status/1045451420500144128

    While some pivots are more dramatic than others, Jonathan Chambers chimed in that it’s constant course correction. Sometimes the current course needs minor tweaks (standard iteration) and sometimes a completely different direction is required (full pivot).

    https://twitter.com/jdc4jc/status/1045641407342530562

    Plan for constant course correction on the entrepreneur journey. New information, new findings, and new innovations are part of the search for success.

  • The Entrepreneur’s Chip on the Shoulder

    I’ve always had an entrepreneur’s chip on my shoulder — a sense of inferiority to other tech entrepreneurs.

    I’m not based in Silicon Valley.

    I failed at raising venture capital.

    I was rejected by the prominent tech center in town.

    Only, the constant rejection by the “superior way” fueled my motivation even more.

    It can be done anywhere.

    It doesn’t require venture capital.

    It doesn’t need approval by the community.

    Entrepreneurship is hard. The failure rate is high. Yet, success happened.

    Perhaps it was the team. Perhaps it was the market. Perhaps it was timing. Likely, it was all three.

    In reality, we’re all making it up as we go. The best we can do is look to learnings from those that have gone before us. We learn, we grow, we encounter new challenges — the cycle never stops.

    Use the chip as fuel. Find the inner motivation. Make it happen.

  • Growing the Startup Community

    One of the more popular questions I get is, “How do we grow the startup community?”

    Great question.

    While some people suggest things like more risk capital and institutional investors, I’m not convinced that’s the answer. The answer, I believe, is even more challenging.

    Here are three ideas for growing the startup community:

    1. More Ambitious Entrepreneurs – Let’s face it: most of the ideas in our community are incremental. While we aren’t suited for moon shots, we are suited for solving harder problems, building mission critical workflow systems, and driving for larger outcomes. Too many entrepreneurs are pursuing nice-to-have products instead of must-have products, and the success rate shows it. We need more ambitious entrepreneurs thinking big.
    2. More Anchor Technology Companies – While we have a number of large entrepreneurial success stories in town, we’re really missing out when it comes to anchor technology companies. Think about Dell in Austin, Amazon.com in Seattle, and other major tech companies that recruit thousands of people to the region, create tremendous shareholder value, and are deeply ingrained in the community. It often takes 20 years to build an anchor technology company — perhaps some are already in the works now.
    3. More Repeat Entrepreneurs – I often tell people that that best time to invest in an entrepreneur is after they’ve had their first full-time entrepreneurial failure and are ready to step back in the arena. Yet, to be a repeat entrepreneur you have to have started your first serious venture. We have a decent number of first-time entrepreneurs but we’re lacking when it comes to serious repeat entrepreneurs. Possibly, it just takes time but to grow the community, but we need even more first-time entrepreneurs so that the cycle starts sooner.

    So, there you have it. More ambitious entrepreneurs, more anchor technology companies, and more repeat entrepreneurs are how we grow our startup community in a meaningful way. None are easy; all are important. Growing a startup community is hard, and we’re going to keep working at it.

    What else? What are some more ideas to grow the startup community?

  • Characteristics of the Ideal SaaS Startup

    Earlier this week I was talking with an entrepreneur about the ideal characteristics for a SaaS startup. Some characteristics can be identified at ideation and many of the characteristics emerge once the product is in market with customers. As more of the characteristics emerge, they drive how fast the startup grows and ability to raise capital (if desired).

    Here are characteristics of the ideal SaaS startup:

    • Product Value – It can’t be repeated enough: every successful SaaS startup either helps the customer make more money in a quantifiable way or runs a function of the business that’s mission critical. Most startups fail and most startups have nice-to-have products.
    • Product Distribution – Getting the product into the hands of customers in a financially justifiable manner is one of the biggest challenges post product/market fit. Ideal go to market is either viral (like Calendly), high volume inside sales (like Terminus), or a combination of inside and enterprise sales (like SalesLoft). The more complicated the sales model, the higher the average order needs to be otherwise the business won’t scale efficiently.
    • Total Addressable Market (TAM) – Ideal startups serve small, fast growing markets that are going to be large (billions) in a few years but are too small currently for big incumbents to care. Tomorrow’s TAM should be dramatically larger than today’s.
    • Gross Margins – As the startup scales, margins should be in the 70% range at a minimum with 80%+ as the long term target. If the margins can’t be in the 70% range long term, the business likely isn’t SaaS.
    • Renewal Rates – Two of the most important metrics for SaaS startups are gross renewal rates (how many customers or dollars renewed in a time period divided by how many were up for renewal) and net renewal rates (how many dollars renewed and expanded in a time period divided by how many were up for renewal). Gross renewal rates should be in the 80% range, at a minimum, and net renewal rate should be above 100%.

    The ideal SaaS startup has both great market fundamentals and excellent metrics across key categories. Most startups won’t achieve all the desired characteristics, but the ones that do have the opportunity to create large, enduring companies.

  • Raising Venture Capital Isn’t Right for Most Entrepreneurs

    Earlier this week I was on a panel at the excellent 36|86 Entrepreneurs Festival in Tennessee talking about bootstrapping vs venture capital. Reflecting on the panel discussion, and other conversations at the event, it’s clear that raising venture capital is still viewed as too much of a default path for tech entrepreneurs. In reality 99% of entrepreneurs, tech or otherwise, shouldn’t raise venture capital.

    Here are some of the common reasons raising venture capital isn’t right for most entrepreneurs:

    • It limits exit opportunities
    • It puts a timeline on the business
    • It requires a 5x greater exit for the founder to make the same money
    • Most markets aren’t winner take all

    Beyond the common reasons, the reality is that most entrepreneurs can’t raise venture capital because they don’t have enough traction (revenue!), growth (much be growing super fast), unit economics (strong gross margins and profit possibility), and market opportunity (must be a huge market). Too many entrepreneurs spend time trying to raise institutional money when that time is better spent building the core business.

    The solution: find a trusted advisor or mentor in the community to help think through financing options. Most of the time venture capital isn’t the right path, and isn’t even an option due to the business characteristics.

    Entrepreneurs would do well to better understand venture capital and know that most of the time it doesn’t make sense.

  • Develop a Specific Ideal Customer Profile

    Recently I was reading The Mom Test about customer discovery and there was a section on the ideal customer profile. Generally, entrepreneurs approach the market with an ideal customer profile that is much too broad (find a niche to get rich!). Instead, start with a narrow slice of the market, go deep, and then expand or shift the focus as new information is learned.

    At Pardot, our ideal customer evolved over time and was as follows at time of exit:

    • 20 – 200 total employees in the company or division of a larger company (typically a small-to-medium sized business)
    • 5 – 50 employees in sales and marketing (shows a dedicated team for acquiring new customers)
    • At least one full-time marketing manager (shows they have a person to run a marketing automation system)
    • Sales people listed in LinkedIn (shows they have a complex sale involving consultative sales reps)
    • Email newsletter signup on website (shows they are doing traditional email marketing)
    • Ads on Google (shows they are spending money on direct response lead generation)

    Now, finding companies that meet this profile required effort through a combination of buying data, developing scripts to crawl sites, and manual labor. In the end, the results were tremendous.

    Entrepreneurs should develop a specific ideal customer profile and continually refine it.

  • Top 10 Atlanta SaaS Startups on the 2018 Inc. 5000

    Every year I enjoy jumping in and reading the Inc. 5000. The 2018 awards just came out and there are a number of excellent Atlanta SaaS startups on the list.

    When reading the list, always remember that growing fast becomes much harder with scale (doubling revenue every year is hard!).

    Here are the top 10 Atlanta SaaS startups based on growth rate:

    Congrats to all the winners! Onward and upward.

  • Growth Connection for Leading CEOs

    One of the areas I’ve been interested in for many years is how to help CEOs/presidents of the fastest growing companies. Organizations like YPO and EO are amazing for peer learning and personal development, but don’t have a component for high growth companies. Inc magazine has the excellent Inc. 500/5000, and a corresponding conference focused on these fast growing companies, but it’s an annual thing, not a local, on-going program.

    Cities have programs like Leadership Atlanta that connect high potential people across all types of organizations from non-profit to business to government to religious in an effort to build community, and train the leaders of tomorrow. These are important programs, but not focused on CEOs during the most crucial period of exceptional business growth.

    Over the years, I’ve hosted a number of dinners for CEOs of the fastest growing local companies in order to build relationships, share learnings, and help grow our community. These are worthwhile, and very fun, but sporadic in nature. There’s an opportunity for deeper peer learning, connecting with more experienced leaders that have already gone through hyper growth, and more structured events.

    My brother, CEO of SpanishDict, went through the MindShare program in D.C. and felt it was valuable. MindShare bills itself as “an exclusive forum of CEOs from high growth technology companies designed to foster collaboration and innovation among its Alumni Network.” MindShare has been around for nearly 20 years and has had over 1,000 CEOs in the program.

    Some questions:

    • Are there programs like this in other cities? Are they worthwhile?
    • What would be the ideal Growth Connection program? Class size? Meeting frequency and format?
    • Should it be limited to just technology companies or is it better to have CEOs from all types of fast growing companies?
    • How do you define fast growing? Minimum revenue in the millions and trailing three year growth rate over certain amount?

    Growth Connection is simply a non-profit idea to help the CEOs and presidents in the community connect, grow, and learn while in the crucible of hyper growth. All feedback and ideas are much appreciated.

  • Why Product/Market Fit Often Takes Years

    Last week I did an informal poll asking several entrepreneurs how long it took to get to product/market fit. Consistently, the response was two years. I took this feedback and shared it on Twitter, resulting in a large conversation:

    Now, the big question is “why does product/market fit often take years?”

    Great question. Let’s dive in.

    Most entrepreneurs start with an idea and no customer discovery. After building a product — usually much more than a prototype — they get it in the hands of a few customers only to learn that there’s a major flaw. Perhaps the customer doesn’t really care (a nice-to-have product). Perhaps the customer doesn’t actually need it. Perhaps it’s too early for the market. Regardless, it’s time for a pivot and 6-12 months has already elapsed.

    Now, for round two, the entrepreneur employs customer discovery and spends several months talking to potential customers, listening to feedback, and honing in on a new direction. With a direction chosen, the new product is built using regular feedback and input from potential customers so that when a quality prototype is done, the prospect starts using (and paying!) for it right away. After several more months signing up dozens of happy customers, it’s clear product/market fit has been achieved.

    Quite often, this research-test-pivot process has to be repeated several times. One of the top entrepreneurs in town did this process four times over several years to find product/market fit, and ultimately it worked out in a big way.

    Product/market fit often takes years as it’s mostly trial and error, even with all the great methodologies out there. Settle in for a long journey and know that it’s a critical step in the process.