David Cummings on Startups

Blog

  • 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.

  • Entrepreneur Updates as Leading Indicator of Success

    Last week, a fellow entrepreneur said something to me that really stuck in my mind: “I knew he’d be successful based on his updates.” In this case, we’re both angel investors in another entrepreneur’s venture, and we were talking about all the great progress this company is making. The comment about the updates got me thinking and reminded me of another entrepreneur’s regular updates that I receive, which are unbelievably good. Now, when describing the updates as “good,” it isn’t that the business is doing well—although in both cases here, they are—rather, it’s the style, tone, thoughtfulness, quality, and creativeness of the update. It’s about connecting the reader with anecdotes, stories, and emotion, and providing metrics and data in a way that’s easily consumable and approachable. Yes, there are a number of monthly update templates online, and entrepreneurs should default to those if they don’t have their own.

    Regular updates, as well as past board decks and strategy documents, are some of the most informative resources when doing due diligence on a startup, whether you’re a potential investor or a potential mentor. One of my favorite pieces of advice is to ask for these historical documents and use them to look for trends, thoughtfulness, and how an entrepreneur thinks. The goal isn’t to find perfect updates from the last three years; rather, it’s to look for evolution and maturation of thought. It’s to see if the entrepreneur articulates both what has gone well and what hasn’t. Too often, entrepreneurs gloss over the hard times when communicating, but those who do address them often show a greater level of experience and understand that by sharing the challenges, they also share the opportunity for others to help. Past updates and other regular corporate communications are the first place I like to start when understanding an entrepreneur and a startup.

    Entrepreneurs should always provide regular updates. The alternative—not doing any updates—is strongly discouraged. Rather, the big idea is that updates are one of the best ways to connect with all constituents, from employees to partners to mentors to investors. For some entrepreneurs, this can be a calling card that helps differentiate them from others in the market.

  • Three Personal Use Cases for ChatGPT and Grok

    Over the last couple years, I’ve been working on incorporating AI tools into my personal workflow. One of the fun questions I enjoy asking other entrepreneurs is how they’ve integrated AI into their own lives and businesses. This has provided me with a variety of ideas and use cases to experiment with and explore. Today, I want to share the three most recent ways I’ve used AI.

    1. Preparing for a Board Meeting

    Last week, I attended a board meeting with 30 other board members. Prior to the meeting, we received a PDF containing the board agenda, a list of attendees, and governance items. I uploaded this PDF to ChatGPT and Grok, asking each tool to extract all the names and companies listed, then search the web for two to three news items or recent events about each person or company. Within a couple of minutes, they generated a bullet-point list of all the attendees, their companies, and relevant recent news. As a result, I entered the board meeting much better prepared, with a variety of topics to discuss during our dinner session.

    2. Analyzing a Potential Geographic Expansion

    One of our companies is researching the next city to expand into, based on our demographic profile and the most common types of users. I fed the details into ChatGPT and Grok, explaining the situation: “We’re considering City X. Our typical users are these types of people, in these types of industries, with these characteristics. Analyze the most prominent firms in those industries in that city, identify the neighborhoods where they’re based, and rank the top 10 neighborhoods based on these parameters.” A few minutes later, I received detailed reports with citations and a strong recommendation for the best geographic location.

    3. Understanding Neighborhood Dynamics in South Downtown Atlanta 

    We wanted to analyze the neighborhood dynamics around residential units and retail use in South Downtown Atlanta. I explained the context to the AI—our neighborhood redevelopment goals, our desire to create a large, innovation-focused district for entrepreneurs and startups, and how residential units might influence the area. I asked: “How would residential units for people living in the neighborhood impact demand for restaurants and retailers?” The AI instantly returned a retail demand equation, calculated based on the number of proposed residential units. It included a range of retail square footage demand and an estimated annual spend per resident at local establishments. In moments, I had a framework and example data to work with.

    These three recent examples really highlight the power of having a thoughtful, personal assistant that can perform deep dives almost instantly. The possibilities for use cases seem endless. I’m committed to further incorporating AI into my daily life and actively seeking out more applications. For me, these examples underscore the value of having instant research and analysis always on demand.

  • Unforgettable Tech Magic Moments

    There I was in the eighth grade, riding with my friend to our baseball game in his dad’s new Infiniti. I was sitting in the backseat, just hanging out, when my friend’s dad said, “Hey, do you want to see some new technology in this car?” “Sure,” I replied. His dad then said out loud, “Volume up,” and the song playing at the time—“Bad to the Bone” by George Thorogood—got louder. Then he said, “Volume down,” and sure enough, the music got quieter. Then, he said, “Next song,” and the car stereo skipped to the following track on the compact disc. I was blown away. There was no voice interaction technology like that at the time—this was many years before Alexa and Siri existed.

    Then, after a minute or two of smirks and quiet chatter, my friend and his dad burst out laughing. It turned out there was no voice control after all. The new car had buttons on the steering wheel that allowed the driver to raise and lower the volume and advance the track on the CD. While it wasn’t the voice-activated technology we take for granted today, I believed it was real in that moment. It felt like one of those unforgettable magical moments when a new technology sears itself into your brain, and you remember exactly when and where you were when you first experienced it.

    Last year, I was reminded of this when I got into a Waymo self-driving car for the first time. I was traveling to California with my family and excited to try one out. I downloaded the app, requested the vehicle, and waited seven or eight minutes. Then a white Jaguar, equipped with a variety of gadgets on top, pulled right up and stopped. The door handles popped open. I opened the door slowly, and we all sat inside. The car welcomed us in a pleasant voice, and I pressed a button in the app to take us to our destination. We looked at each other, mesmerized, as the car pulled forward and, without a hitch, took us from point A to point B. It was truly a magical moment in technology.

    Entrepreneurs would do well to think through the “magic moment” in their products—what wows people, what makes someone excitedly share their experience with a friend, and how they can reduce the time and effort it takes for a new user to encounter that magic moment. Magic moments, just as they sound, are incredible experiences. Even to this day, I vividly remember the magic moment from decades ago when I believed a driver could control the stereo in his car with his voice.

  • Recruiting on Non-Recruiting Work Trips

    Recently, I was catching up with a friend, and she shared a story that stuck in my mind. A friend of hers has a nephew who’s an undergraduate studying AI at one of the prestigious state schools in the Midwest. One day, out of the blue, he received an email from the founder/CEO of a famous AI company (you can guess which one) requesting to meet. Not thinking the email was real, he initially didn’t respond. After a day, he thought, “Well, what if it is real? I might as well respond.” So he responded, and the CEO replied that he would enjoy meeting at a certain date and time, leaving it up to the student to share whichever place works best for him. The student threw out a place and set it up.

    Now, he expected the CEO to roll in with an entourage, team members, and a whole experience. Instead, it was just the CEO, and they had a great one-hour conversation, marking the start of a relationship. For many entrepreneurs, recruiting and building a team is one of the most important parts of the job. For first-time entrepreneurs, it takes time—and sometimes even years—before it clicks that the recruiting function needs to happen in parallel across many different positions and well in advance of needing that hire.

    One way to make this actionable is to build a list of potential hires and roles the organization will need in the next 12 to 24 months. With this list in place, start sharing it with friends, colleagues, investors, and partners, working to build a pre-pipeline of potential candidates. Taking it one step further, with this example from above, every time you visit a city to meet a customer, partner, or investor, make a point of reaching out to three to five potential candidates in that market and work to get at least one in-person meeting with them. While this does take a lot of work, building a team is as important as it gets.

    The next time you hear an entrepreneur lament how hard it is to fill a role, remind him that 10 to 20% of his time should be spent on recruiting—both for roles open today and roles that will be open tomorrow.

  • Double Revenue With No Additional Employees

    For the first 10+ years of my entrepreneurial journey, I was too focused on the number of employees as a key measure of success. When meeting other entrepreneurs, one of the first questions I asked to gauge the size and scale of their business was, So, how many employees do you have now? While that question is still relevant today, it is much less so than in the past.

    Productivity per employee has increased tremendously. The ability to leverage software and other systems for scaling has improved dramatically. The nature of work has also evolved, with more remote and hybrid work arrangements and a greater reliance on contractors and freelancers. My previous belief that W-2 employees were a key proxy for success no longer holds. In fact, many predict that we will see more billion-dollar companies in the future with only a small handful of employees.

    Last week, I heard an entrepreneur say he wants to double the size of his business without increasing headcount. This doesn’t mean keeping the exact same team but rather using AI to boost productivity, outsourcing more functions, and recruiting higher-skilled employees when attrition occurs. The key idea is that as teams grow, management and leadership demands increase, and the organization tends to move more slowly. In this case, the entrepreneur operates at considerable scale, and there is also a focus on increasing annual recurring revenue per employee as a key metric for business health. The goal isn’t to build the largest team possible—it’s to build the most efficient and successful one.

    Entrepreneurs in the growth stage would benefit from considering how they could double their revenue without adding new headcount. What positions would remain? Which ones would be outsourced? Which roles would need to be filled by more experienced hires? What would be the advantages and drawbacks? Entrepreneurs should evaluate the relationship between in-house employees and scale earlier than they might have in the past.

  • Round-Two Entrepreneurs

    Last week, I was catching up with an entrepreneur who was working on his second serious startup. His previous startup started strong but ultimately wasn’t a success. After talking for a while, it got me thinking about round-two entrepreneurs.

    The typical term is “serial entrepreneur,” implying that you start one company after another. However, this term isn’t fully descriptive, as there is a significant amount of side-hustle entrepreneurship—important, but different from being a full-time, all-in entrepreneur for multiple years.

    Round-two entrepreneurs are those who have been full-time entrepreneurs, experienced a poor outcome, and then stepped up to do it all over again. Having that failure under their belt, along with a tremendous number of lessons learned, creates a different dynamic when starting anew.

    Here are a few thoughts on round-two entrepreneurs:

    1. Appreciation for the Game

    Entrepreneurship is incredibly difficult and filled with high highs and low lows. After going through the experience once—especially when it doesn’t work out—the challenges don’t necessarily become easier, but there is a deeper understanding and perspective that differ from the first time around.

    2. The Importance of Mentors

    Often, during round one, it’s easy to believe you can figure everything out on your own and that you have all the answers. Of course, this isn’t the case. At some point, most entrepreneurs realize they need help, and that’s where mentors and coaches come in. Round-two entrepreneurs are much more likely to seek out expert advice and bring in mentors from the start.

    3. Researching for the Best Idea

    In round one, entrepreneurs often chase the first good idea they come across. Sometimes, the idea is great, but often, it isn’t. Round-two entrepreneurs have a greater appreciation for the importance of the market they’re targeting and the idea within that specific market. This typically translates into spending more time finding the best idea possible—not just a good one. If you’re going to spend 10 years building an amazing business, why not spend an extra 6 to 12 months making sure you’ve found the best possible idea?

    4. Speed in Building a Team

    After working as a first-time entrepreneur for many years, you naturally come across a variety of people—employees, partners, vendors, investors, and others involved in the industry. Through this process, you develop a sense of the types of people you enjoy working with, the skill sets that complement yours, and relationships that can be beneficial down the road. 

    As a round-two entrepreneur, you get the advantage of tapping into these connections, which translates into building teams and forming partnerships more efficiently.

    5. Stronger Opinions on Financing

    After going through a startup that doesn’t work out, most entrepreneurs learn valuable lessons about angel investors, venture capital, and other types of financing. In many cases, this leads round-two entrepreneurs to be more resourceful, more efficient, and more focused on customer-funded growth. They also become more strategic about preserving ownership while maximizing opportunities to bring key team members or co-founders into the fold with appropriate equity.

    Round-two entrepreneurs tend to value people equity more appropriately than first-time entrepreneurs.

    6. Lower Ego and Greater Humility

    After the first round of entrepreneurship doesn’t work out—and after countless lessons learned—I typically see round-two entrepreneurs with a lower ego and a more humble approach.

    When a startup doesn’t work out, it’s incredibly painful. There’s a lot of soul-searching and reflection on what worked and what didn’t. This experience translates into round two in several ways: the entrepreneur is more open to feedback, more focused on customer discovery, and generally approaches the business with a more refined mindset.

    Final Thoughts

    Round-two entrepreneurs are some of my favorite types of entrepreneurs to work with. After years of effort that didn’t result in success, they still want to pursue the entrepreneurial journey again. That resilience separates casual entrepreneurs from those who are truly committed.

    Failure is normal and often the most common outcome. But just because you’ve been knocked down doesn’t mean you can’t get back up. Round-two entrepreneurs step back into the arena with a newfound perspective—and a little extra spring in their step.

  • The Entrepreneur’s Passion

    Last week, I was talking to an entrepreneur, and one of the things that stood out was the passion in his voice. You could tell he was fired up and committed to building a business with a strong sense of customer empathy.

    When talking to entrepreneurs, I always enjoy asking questions like: Why did you start this business? Why is now the right time to create this company? What makes you uniquely suited to succeed? While these are important questions, a key nuance is the passion exuded by the entrepreneur. Does he really care? Does he truly want to make this happen? What sacrifices is he willing to make?

    The challenge with discussing passion is that it can be subjective. Different personality styles express passion in different ways. Some people get excited, talking fast and with high energy. Others become serious, showing a deep conviction. While passion comes in different forms, it’s ultimately one of those things you recognize when you see it.

    One final note is about the intersection of entrepreneurs searching for a great idea versus being passionate about that idea. This can be a tough balance. Great ideas are hard to find, and while some entrepreneurs are passionate about anything and everything, others struggle to get excited even when they find a strong idea. For many, that lack of excitement is a dealbreaker.

    From my experience, most things that move society forward, help others, or solve meaningful problems provide a foundation for passion. Of course, it’s ideal to find a need in an area you’re already passionate about, but I wouldn’t limit the search for a great idea to things that are immediately exciting.

    The next time you talk to an entrepreneur, listen to his voice. Pay attention to the excitement around the idea. After the conversation, do a mental analysis of his level of passion. Some of the most successful entrepreneurs I know are also the most passionate about their mission.