David Cummings on Startups

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  • Three Quick Questions After Hearing a Founder’s Story

    Last week, I caught up with a very successful local entrepreneur. While I knew parts of his story, I hadn’t yet heard the origin of his idea. With enthusiasm, he shared the moment that sparked it all: a use case in the internet communications world that was becoming increasingly common but was incredibly cumbersome and tedious. That lightbulb moment led him to create a startup around a new human-centered process that eliminated friction and increased distribution, making the process super efficient.

    This story isn’t about the specifics of his idea but the value it delivered to customers. Too often, entrepreneurs chase shiny new technology or ideas that are only marginally better than existing alternatives. When hearing a new idea, consider these key questions:

    1. Is this solution ten times better than the alternative? Many new products offer only a 10% improvement, which the market often ignores. True success comes when a product addresses a real need and is exponentially better.
    2. Can this only be achieved with new technology? Too often, entrepreneurs build products whose output could still be produced manually or outsourced to a junior employee or AI. The best innovations are those that are impossible without specialized software, enabling what was previously unachievable.
    3. What are the growth prospects for this market? The most promising markets may be small today but are growing rapidly. Look five to seven years ahead and assess whether the market will become large and significant.

    I love hearing founders’ origin stories, and this one was exceptional. Entrepreneurs would benefit from reflecting on these three questions about product value, innovation, and market timing to guide their ventures toward success.

  • The Preemptive Funding Offer

    Last week, I caught up with an entrepreneur, and we discussed a preemptive funding offer. The startup is thriving, growing rapidly in a large market with limited competition. Currently, the entrepreneur doesn’t need to raise capital, especially as key business metrics continue to improve. As the company grows, potential investors frequently reach out to build relationships before funding becomes necessary. The entrepreneur has started taking these meetings to connect with the venture community. After a particularly promising meeting, one investor offered a substantial investment at a valuation significantly higher than the last round. So, what should the entrepreneur do?

    We weighed the pros and cons. On the pro side, accepting the offer provides time to assess the investor’s compatibility, ensuring the right chemistry and personality fit for a long-term partnership. The additional capital would support a more aggressive hiring plan, considering it takes three to six months to onboard and scale a team. This could accelerate growth and position the company for greater opportunities. Moreover, the extra funds could act as a financial cushion, offering flexibility to seize new opportunities without immediate spending pressure.

    On the con side, raising money now at a higher valuation, when it’s not needed, reduces optionality. It sets a higher exit bar, which could complicate a future sale. Additional capital also brings increased pressure to grow and expand, which can be beneficial but may sometimes hinder the business. Finally, if growth continues and funds aren’t immediately necessary, the entrepreneur could raise capital later at an even higher valuation, minimizing dilution.

    There’s no right or wrong answer—only an opportunity to reflect on priorities and goals. Entrepreneurs should build relationships with a select group of investors before their next funding round. Occasionally, these connections lead to preemptive offers, as in this case. When this happens, it’s an ideal time to evaluate the next round by listing the pros and cons of acting now versus sticking to the existing financing timeline.

  • Matching Funding with Entrepreneur Ambitions

    Last week, I caught up with an entrepreneur who shared an update on his company’s progress. The business has been growing steadily, boasting a critical mass of over 1,000 customers. Now, they’re contemplating their next round of financing. From a business perspective, the company checks many boxes that investors look for: high gross margin software, a solid growth rate that’s fast but not hyper-growth, and a large market with low single-digit overall growth.

    However, the challenge lies in potential scale. In its current form, the company is unlikely to grow large enough to become a standalone, publicly traded entity. To attract analyst coverage and interest from broader markets, a publicly traded company typically needs around $500 million in annual recurring revenue (ARR) and a growth rate exceeding 30%. For this business, that target feels unattainable under current circumstances.

    The startup has already raised some capital and has been relatively efficient, burning roughly $1 for every dollar of recurring revenue. Now, the entrepreneur faces a crossroads in the financing market. Growth equity investors might offer a modest valuation, aiming for a three- to fivefold return in three to five years. On the venture capital side, high-profile VCs seek moonshots with the potential for a hundredfold return—something this company doesn’t currently fit. Yet, the entrepreneur is highly ambitious and determined to build a large, standalone business.

    So, what’s the next step? Should he explore new product lines to transform the company into a multi-product business, despite its modest scale and limited resources? Or should he consider finding a home for the business now, allowing him to pursue his next idea in a year or two? This is a high-class problem, as the entrepreneur has already achieved a notable level of success but aspires to do more.

    My recommendation was to align the next round of funding with the business’s current potential and evaluate whether a smaller amount of capital could maintain optionality. Too often, entrepreneurs raise as much money as the market allows, which isn’t always best for the business. Here, raising capital requires careful consideration, especially since the entrepreneur aims to build a larger business than the current market supports. He’ll need to either expand the product line, adding complexity, or temper his ambitions and consider building another company in the future.

  • Find the Community Super Connector

    Last week, I attended a startup event and met with various entrepreneurs. One of my favorite questions to ask is, “What’s going well, and what are your latest challenges?” During one conversation, an entrepreneur shared that their company had pivoted to a new product direction and was experiencing tremendous success.

    Curious, I asked what prompted this shift and what customer discovery and feedback had informed it. As we delved deeper, the entrepreneur revealed that the change stemmed from an introduction made by a local startup community leader—a “community super connector.”

    A community super connector is someone who loves people and excels at making thoughtful, value-adding introductions. These individuals are rare and incredibly valuable for nurturing and growing startup ecosystems. They might be venture capitalists, marketing or sales consultants, accountants, or lawyers. Regardless of their industry, they derive value from helping the community and are genuinely passionate about fostering connections.

    These connectors are extraordinarily talented at building relationships and are critical for pollinating new opportunities through introductions. Entrepreneurs would benefit greatly from identifying the community super connector in their city or region. A simple way to find them is to ask a friend, “Who’s the most connected person in the startup community?” Because of their natural inclination to engage, super connectors are eager to meet new people.

    Every startup community has a super connector, and their role is vital in sparking new relationships that drive innovation and growth.

  • The Power of Transferring Belief

    Last week, I listened to an entrepreneur deliver his pitch, and by the end, I was struck by how deeply he believed in his company’s vision. His conviction was contagious, transforming his belief into mine. All entrepreneurs believe in their work, but some have a unique ability to persuade others to share their perspective. I describe this as a transfer of belief from one person to another. Yes, it’s a form of selling, but it’s far more profound.

    In 2014, I met Tope Awotona, the founder of Calendly, at the Atlanta Tech Village. I asked the usual questions: Why did you start the business? Why now? What’s going well? What’s not going well? What’s next? He shared his passion for building a simple, beautiful interface to make scheduling meetings effortless. Today, we take such tools for granted, but back then, scheduling was cumbersome, slow, and inefficient. By the end of our conversation, Tope had transferred his belief that there was a better way, and that he was the best person to make it happen. Yes, I was sold, but it was so much more. I believed.

    Sales has always been a critical role for entrepreneurs. Nothing happens until someone, somewhere, is sold. However, we’ve all encountered an founder who failed to convince us of a product’s value or worth. They couldn’t transfer their belief. As an entrepreneur, I recommend reframing the concept of selling as transferring belief in your solution and vision. Belief comes from a deeper, more meaningful place, carrying greater conviction. A sale can feel superficial or transactional. Moving forward, focus on transferring belief rather than just closing a deal.

  • Everything Compounds

    Last week, an entrepreneur asked me what I appreciate now, after 25 years as an entrepreneur, that I didn’t fully grasp back then. After a moment of reflection, I replied that everything compounds. As children, we learn about compounding in the context of money, often citing Albert Einstein’s famous quote that compound interest is the eighth wonder of the world. While this is true, the principle of compounding extends far beyond finances—it applies to everything.

    For example, when I moved to Atlanta, I knew only a few people. After a year, I still hadn’t found my community. One late afternoon, I called a college friend and shared my feelings. He expressed a similar sentiment but suggested inviting people to breakfast and lunch to build connections. I took his advice to heart. For a solid decade, I scheduled business lunches three to four days a week and business breakfasts one to two days a week. As a result, I now know hundreds of entrepreneurs and community leaders, many of whom have become friends and colleagues for one or two decades. Relationships, like everything else, compound over time.

    For over 15 years, I’ve read dozens of blogs and information-aggregation sites like Techmeme and Hacker News. For the past decade, I’ve listened to numerous podcasts on business, technology, and startups. By consistently consuming information in these areas, my knowledge, pattern matching, and mental models have compounded. While AI and large language models (LLMs) may accelerate information retrieval and analysis, the value of compounding knowledge will always remain relevant.

    Everything compounds—from money to relationships to knowledge and beyond. The key is to start investing time and energy now. Build a process through consistent inputs and habits, and after many years, you’ll reap the rewards. The best time to start is today.

  • The Rise of AI-Powered Vertical SaaS

    Over the past few weeks, I’ve spoken with several entrepreneurs who are developing all-in-one, AI-powered vertical SaaS applications and making significant progress. In contrast, the previous generation of SaaS companies typically consisted of horizontal platforms that excelled in one market segment, such as marketing automation or sales engagement. These products were comprehensive, serving a wide range of industries. Over time, many of these applications moved upmarket, focusing on mid-market and enterprise clients.

    In addition to horizontal players, numerous vertical SaaS applications have emerged over the last two decades. These typically followed a playbook of targeting small to midsize businesses in specific segments before gradually moving upmarket. They focused on delivering the most valuable features for their target audience while avoiding overly broad functionality.

    With the rise of AI-powered software development, including low-code platforms and vibe coding, robust cloud computing resources, and mature open-source ecosystems, building large-scale software quickly has never been easier. As a result, entrepreneurs are now creating AI-powered vertical SaaS products that combine the functionality of multiple horizontal tools into a single, purpose-built solution for specific industries. Instead of small business owners needing separate tools for their website, social media, marketing automation, CRM, and sales engagement, a single system now provides everything they need, tailored to their vertical. These solutions are offered at a significantly lower price point with greater ease of use. Moreover, because these products are directly tied to revenue through lead generation, proposals, and new business, their ROI is clear.

    My recommendation to entrepreneurs is to identify a vertical they or a colleague know intimately and consider building a comprehensive application that replaces multiple existing tools for that target customer. By leveraging AI, cloud infrastructure, and open-source technologies, they can deliver a fully integrated solution at a fraction of the cost.

  • Entrepreneurs Selling Equity in a Financing Round

    Last week, I caught up with an entrepreneur who shared his plans to raise a round of capital. Toward the end of our conversation, he asked my thoughts on selling some of his shares during the round to take chips off the table (sell his own equity). “Absolutely,” I said. “I’m a big proponent of entrepreneurs diversifying a bit, especially when it helps them sleep better at night knowing they have some savings.”

    Of course, the challenge is balancing this with the belief that the best person to bet on is yourself, especially when you’ve built a business to the point where investors are willing to buy your personal sharing. After discussing fundraising and personal diversification with numerous entrepreneurs, I’ve seen that selling some personal shares often brings a sigh of relief and a sense of satisfaction. Yes, you might leave some money on the table, and as an entrepreneur, you may feel compelled to go all in. But you never know what lies ahead, and having a financial cushion can be valuable in any scenario.

    From an investor’s perspective, I also support selling some secondary shares. Investing in startups is inherently illiquid with an unpredictable timeline. When the opportunity arises to sell shares—especially if you can recover your initial investment while letting the remaining position ride—it should be taken seriously.

    This point hit home recently when I reflected on a group discussion about investing in an anonymous social network over a decade ago. The business grew rapidly to millions of daily active users, and a prominent venture firm led the next funding round. To achieve their target ownership, they asked existing investors if they’d be interested in selling. I said yes, locking in a return on my angel investment. Ultimately, the business didn’t succeed, but I’m glad I secured a small win while letting most of my investment stay in the startup.

    For entrepreneurs raising a funding round or achieving enough scale to consider a secondary sale, my recommendation is to take some cash off the table and diversify. The future is bright, and a little savings can go a long way.

  • Market A or B for a Startup

    Last week, I spoke with an entrepreneur who shared his elevator pitch. I then asked a few questions and learned more about his business. He mentioned that they have two early adopter customers: one in Industry A with a unique use case, and another in Industry B with a completely different use case. He then asked which market I thought he should focus on. After posing more questions about the product being a must-have versus it being a nice-to-have, and trying to understand the mission-critical nature of the application, it became clear that there wasn’t enough information available yet. I explained that I couldn’t provide any recommendations on which direction to pursue. Instead, I suggested that he either sign more customers and evaluate which use cases are most valuable or spend time with the existing two customers, diving so deeply that he could make a gut decision about which market is better for his business overall.

    In this example, my recommendation is to acquire at least 10 unaffiliated customers to create a broader sample set. This would allow him to learn how, why, where, and when they use the product. From there, the best direction forward would likely become obvious. Back in our time at Pardot, we debated this for years. We initially targeted very small businesses, then small businesses, followed by small-to-medium-sized businesses, and ultimately settled on medium-sized businesses, as well as emerging-growth small businesses. Over time, we honed in on three characteristics that our most successful customers shared.

    First, they had an email newsletter sign-up box on their website. This indicated that they used email marketing in their business and likely engaged in regular communication, such as a monthly newsletter. Second, they ran Google Ads for their product. When we searched the company name or product name and found Google Ads, it showed us that they were investing in lead generation, implying a certain level of marketing presence. Third, we would search the company name on LinkedIn to see if they had any sales reps listed as employees. If they did, it suggested they had a consultative sales process, making a B2B marketing automation platform like ours a worthwhile investment.

    Naturally, we wrote some code to automate the process of finding companies that met these three criteria and used that as our prospecting mechanism for cold outbound to companies that fit our profile. While this example focuses more on identifying common criteria for an ideal customer rather than choosing a specific market, it’s instructive. The ideal customer might not be tied to a particular market or vertical. In our case at Pardot, it was a very horizontal product, and these three criteria were strong indicators of whether a company would succeed with it.

    My recommendation for entrepreneurs is to sign at least 10—if not more—unaffiliated customers and spend a tremendous amount of time with them, either in person or over a Zoom call. Talk to the customers and learn every minute detail possible about why they bought the product, how they use it, and what value they derive from it. Choosing a market, a vertical, or even criteria for the ideal customer is a critical step in an entrepreneur’s journey and should not be taken lightly.

  • From Speed Alone to Speed + Quality

    Most beginning entrepreneurs suffer from the same problem: chasing too many shiny objects. With a clean slate or in the early stages of a new venture, there’s no shortage of ideas to pursue. When a prospect asks for something, the response is often, “Let’s do it.” If a different prospect requests something completely unrelated, the answer is, “Sure, why not?” The goal is to build a business, so responding to customer requests seems logical, right? However, this approach quickly breaks down due to finite resources and limited time. I often say that more startups have died from indigestion rather than starvation.

    In the early days of Pardot, we were building what is now known as marketing automation software, but it didn’t have a term back then. At one point, we called it lead generation software, then lead management software, and eventually, the term that stuck was marketing automation. The fact that we called it lead management software was indicative of what we started doing at the beginning. However, I made the rookie mistake of trying to do too much too fast. While we needed to offer forms, lead routing, lead scoring, and basically an intake system for leads generated on the website that could then be connected to a CRM, we kept building and building. We wanted to have the most feature-rich system, but we lost sight of maintaining a level of quality control at the same time. Being small and nimble, we had to move fast and build out our system, but the lack of quality was driven home one day when I came into the office and customers started reporting that they were seeing leads in their system that they didn’t generate themselves. That’s right; we were cross-contaminating data. Leads generated from one customer were being put into other customers’ systems. Uh-oh, we had moved fast and broken things. It’s one thing to have little bugs that affect the user experience or annoy a customer for a bit; it’s an entirely different thing to corrupt one customer’s data with another’s.

    After quite a bit of work, we had cleaned up the data and addressed the issues in the system. Thankfully, we had learned our lesson: speed creates an early advantage, but speed plus quality is the sustainable advantage.

    Entrepreneurs should use speed to their advantage and iterate as quickly as possible for the customer. Yet, within this context, it’s critical to maintain a strong opinion of where the market is headed and regularly say no to requests that are outside of the vision. Over time, pure speed gets replaced with speed and quality. Pay attention to the signs and be ready to add more efforts around quality as the customer count grows.