David Cummings on Startups

Blog

  • Evaluating New Product Ideas

    One of the on-going challenges in a startup is evaluating new product ideas. As the product achieves product/market fit and the customer base grows rapidly, more new product ideas come in from customers, prospects, partners, and all internal teams (sales, support, success, strategy, etc.). Here are a few ideas for evaluating new product ideas:

    • Overall Strategy – How does the new product idea fit in with the overall strategy? Is it consistent with the current direction or offer a different direction?
    • Existing Customer Base – Does the new product idea help 80% of the existing customers? If not 80%, then what percentage will find value from it?
    • Desired Customers – Does the new product idea help 80% of the desired customers going forward? How does the existing customer base differ from the desired customer profile (startups often go up-market over time)?
    • Request Quantity – How often has this idea come up? How many “votes” does it have from customers?
    • Backlog Priority – Where might this new idea fit in with the backlog? How would it be prioritized?

    New product ideas never stop. Entrepreneurs would do well to create a process to store, evaluate, and process new product ideas.

    What else? What are some more thoughts on evaluating new product ideas?

  • What are you solving for?

    One of the top entrepreneur-turned-investor in town introduced me to a phrase that I’ve found valuable: what are you solving for? When an entrepreneur wants to do something, like launch a new initiative, you have the common questions like “why?” and “what are the pros and cons?” but those don’t always get to the core. An entrepreneur might want to do X but misses solving for the real issue.

    Entrepreneurs should ask the “solving for” question on major initiatives, including:

    • Planning
    • Strategy
    • Fundraising
    • Recruiting
    • Product features

    Ask the “what are you solving for?” question and assess how it relates back to the original initiative.

    What else? What are some more thoughts on the “what are you solving for?” question?

  • 2017 Internet Trends

    Mary Meeker is out with with her excellent annual Internet Trends 2017 report. Mary has been publishing an influential annual report for many years, and this one doesn’t disappoint.

    https://www.slideshare.net/kleinerperkins/internet-trends-2017-report

    Here are a few sections from the slides:

    • Global Internet Trends = Solid….Slowing Smartphone Growth
    • Online Advertising (+ Commerce) = Increasingly Measurable + Actionable
    • Interactive Games = Motherlode of Tech Product Innovation + Modern Learning
    • Media = Distribution Disruption @ Torrid Pace
    • The Cloud = Accelerating Change Across Enterprises
    • Heathcare @ Digital Inflection Point

    Want to know the major Internet trends? Go read the Internet Trends 2017 report.

  • Another Publicly-Traded SaaS Company Going Private

    Earlier today Vista Equity Partners announced they were acquiring Xactly Corp (NYSE:XTLY) and taking it private for $564 million. Vista has already bought several public SaaS companies including Marketo for $1.8 billion and Cvent for $1.65 billion, among other acquisitions. Public markets are supposed to price in all known information, yet Benjamin Graham’s famous quote still rings true today:

    In the short run, the market is a voting machine but in the long run, it is a weighing machine.

    The idea is that opinions on public companies fluctuate, along with their corresponding stock price, on a regular basis. Only, over an extended period of time, their value is based on the underlying substance.

    Let’s look at info on Xactly Corp from Google Finance:

    • Xactly Corporation is a provider of cloud-based incentive compensation solutions for employee and sales performance management.
    • 450 employees
    • Current annualized run rate $97.2 million
    • Annualized year-over-year growth rate of ~20% (hence slightly less than a 6x exit valuation on run rate not including cash on hand and debt)

    For more information on Xactly, read the notes from the S-1 IPO filing.

    For Vista Equity Partners, they must believe they can generate annualized double-digit returns on the investment. Here are a few ideas how they might do it:

    • Substantially Increase the growth rate through new strategies or direction
    • Roll up a number of smaller SaaS companies in the sales performance market grow much faster through an in-organic approach
    • Do nothing and believe that the momentum and potential for SaaS over the next 10 years is greater than what the public markets believe

    My guess is that it’s a general bet on SaaS and better long term potential than markets price in. I’m interested to see how it plays out over the next 5-7 years.

    What else? What are some more thoughts on another publicly-traded SaaS company going private?

  • The Three Critical Monthly Cash Questions

    Whenever I meet with an entrepreneur that’s raising money I ask about current funding, burn rate, and the number of months of runway. Managing cash, and understanding the corresponding business unit economics, are two critical functions of an entrepreneur, yet many don’t do it. In fact, ensuring that there’s always enough cash in the bank is one of the three most important things a CEO does.

    Every month, entrepreneurs should be able to answer these three questions immediately:

    • How much cash do we have?
    • How much cash are we burning each month?
    • How many months do we have until we run out of money?

    Pretty simple, right? Only, many entrepreneurs I talk to can’t answer these three questions with confidence. Entrepreneurs need to understand the importance of cash and manage it accordingly.

    What else? What are some more thoughts on the three simple monthly cash questions?

  • Customer Success for Company Success

    Continuing with yesterday’s post on Second Order SaaS Revenue, it’s important to drill into the role of customer success and how it drives company success. There’s an excellent slide deck titled How to Drive Growth with Customer Success Metrics that covers the topic well. Here are a few notes from the slides:

    https://www.slideshare.net/GainsightHQ/how-to-drive-growth-with-customer-success-metrics

    • Customer success is a growth driver on par with sales and marketing
    • Show, don’t tell, how you make money
      • Renewals
      • Upsells
      • 90 day adoption
      • Product roadmap feedback
    • One customer success manager per $2 million (hired in advance, not in arrears)
    • Second order revenue – the key to long term success
    • Why customer success is critical
      • Happy customers, better product
      • Grow faster
      • Decrease capital needs
    • How much to spend on customer success?
      • Expected value =  Save rate x Value of extension
      • Example: 30% x 12 months x $83/month = $298 or about 30% of annual contract value

    Pre product/market fit, customer success is often ad hoc. As the company grows and finds a repeatable customer acquisition process, customer success is critical.

    Entrepreneurs need to understand how customer success drives company success.

    What else? What are some more thoughts on customer success?

  • Second Order SaaS Revenue

    Last week an entrepreneur shared how they just signed a large customer that was a referral from an existing customer. This got me thinking about the importance and power of second order SaaS revenue. Second order revenue is revenue that comes from existing customer referrals as well as customers changing jobs and bringing the product to their new company. This class of revenue should grow over time as the startup builds a brand and successful customer base.

    Here are a few thoughts on second order revenue:

    • Track customer referrals over time and look for patterns or trends (e.g. certain customer referrals are much more likely to be good fits)
    • Record customers that change jobs and bring the product to their new company (this happens a good bit and is an excellent source of revenue growth)
    • Facilitate customer referrals by asking for them automatically in the app (one successful technique is doing a net promoter score questionnaire and then asking for referrals from the promoters that give a 9 or 10)
    • Consider how second order revenue plays into the customer lifetime value (e.g. if a customer is worth $50,000 over four years but refers an average of $5,000 in new business and brings an average of $2,000 in new business when changing jobs, the value of signing a new customer is higher than just the lifetime value)

    Second order revenue is an important part of the SaaS business model and really shines for startups that have happy customers.

    What else? What are some more thoughts on second order revenue in SaaS?

  • Video of the Week: Steve Jobs’ 2005 Stanford Commencement Address

    With the graduation season upon us, it’s a great time to watch one of the top commencement addresses: Steve Jobs’ 2005 Stanford Commencement Address. Enjoy!

    From YouTube:
    Drawing from some of the most pivotal points in his life, Steve Jobs, chief executive officer and co-founder of Apple Computer and of Pixar Animation Studios, urged graduates to pursue their dreams and see the opportunities in life’s setbacks — including death itself — at the university’s 114th Commencement on June 12, 2005.

  • Lifestyle Business vs Startup

    When we were building Pardot someone commented to me that it was a lifestyle business since we didn’t raise venture capital. Immediately, I respectfully disagreed. A startup, by its very definition, is a scalable, growth-oriented company.

    Much like differentiating innovative vs replicative companies, lifestyle businesses differ from startups:

    • Lifestyle businesses balance company profitability for owner income with growth targets, while startups put all the emphasis on growth
    • Lifestyle businesses rarely raise outside money while startups commonly raise money
    • Lifestyle businesses are often comfortable with the status quo while startups are constantly looking for ways to grow faster
    • Lifestyle businesses are about control and freedom while startups are about innovation and growth

    Lifestyle businesses and startups have more in common than not, but the main difference is one provides for a lifestyle and the other focuses on growth.

    What else? What are some more differences between a lifestyle business and a startup?

  • The Energy in a Values-Oriented Company

    Earlier today I was in the SalesLoft office catching up and the first thing I noticed was the energy of the company. Energetic employees were everywhere — at a table in the middle of the office having lunch, on a bean bag chair doing a sales call, and walking by on their way out the door.

    The energy was amazing.

    An energetic environment always starts with the people and their values. Here are SalesLoft’s core values:

    • Put Customers First – Of the three stakeholders — employees, customers and investors — only one pays the bills. We win by staying close to them and adding value to their day.
    • Team Over Self – We’re committed to each other. We’re always collaborative, but put the interests of the team above our personal agendas.
    • Glass Half Full – We always move forward. We work to understand the reality of the situation, then we make the decision to focus on the opportunities.
    • Focus on Results – We understand what we’re here to do and make decisions with purpose to achieve our goals.
    • Bias Towards Action – We’re motivated. We go out of our way to figure things out and present solutions, rather than problems.

    Customer-oriented people that are positive, focused, and team players sounds nice, but only works when the entire company is committed to the values. Many companies talk about values but few truly buy into them. Values set the tone and aligned cultures have a magnetic energy.

    What else? What are some more thoughts on the energy in a values-oriented company?