David Cummings on Startups

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  • Quarterly Simplified One Page Strategic Plan

    Once a startup has product/market fit, one of the best things they can do is a Simplified One Page Strategic Plan and update it on a quarterly basis. The concept is easy: put the most important high-level things about the business on one side of one sheet of paper and ensure everyone in the organization understands all aspects of it. Nothing more, nothing less — make it a simple doc.

    Here are the contents of the Simplified One Page Strategic Plan (Google Doc template and example plan):

    Purpose

    • One line purpose

    Core Values

    • General – fit on one line
    • People – fit on one line

    Market

    • One line description of your market

    Brand Promise

    • One line brand promise

    Elevator Pitch

    • No more than three sentences for the elevator pitch

    3 Year Target

    • One line with the goal

    Annual Goals

    • 3-5 annual goals in table format with the start value, current value, and target value

    Quarterly Goals

    • 3-5 quarterly goals in table format with the start value, current value, and target value

    Quarterly Priority Projects

    • Three one-line priority projects with the percent complete for each

     

    Entrepreneurs would do well to implement the Simplified One Page Strategic Plan (Google Doc template, example plan) and update it on a quarterly basis.

    What else? What are some more thoughts on the Quarterly Simplified One Page Strategic Plan?

  • The Option Pool Shuffle

    Whenever a startup raises money, one aspect of the conversation is around employee stock option plans and equity. Investors want to know that the company has equity set aside for employees while founders often want to delay their ownership dilution until they know they’re going to hire new employees and need to allocate new equity grants.

    When raising money, investors will often require an increase in the size of the stock option pool to ensure there’s equity for new hires that are part of the funding plan. Only, some investors aren’t clear upfront whether the dilution for this additional option pool comes from the existing shareholders prior to financing or if it’ll come post financing and be shared across the new and old investors. The option pool shuffle is when new investors ask for an increase in option pool size, recommend a target size (e.g. add 15% of the company of the option pool), and then make the existing shareholders take the dilution for this increase (effectively reducing the pre-money valuation).

    Entrepreneurs should think through their hiring plans and only increase the option pool based on their projected needs (e.g. add 10% of the company to the option pool instead of 15%). When lower than what the investor requests, the pre-money valuation effectively increases, and if the option pool is increased in the future, everyone shares in the dilution.

    Increasing the option pool size and requiring it prior to funding is normal and shuffles the dilution to the existing shareholders. The key is to make the increase in size reasonable and to calculate that dilution when thinking about the effective pre-money valuation for the round.

    What else? What are some more thoughts on the option pool shuffle?

  • Encouraging Institutional Investors to Buy 10% of the Angel Investor Equity

    In last month’s post Why Not More Startup Success Stories, reader Jeff offered an interesting idea where institutional investors would be encouraged to buy 10% of the equity from the angel investors, assuming they’d be interested in selling. For most startup communities, there are very few exits resulting in long/indefinite delays before angel investors receive a return on their money and thus the rate at which returns are recycled back into the community is limited. If institutional investors more routinely bought a small stake from the angel investors — say 10% — that’d generate angel returns faster and allow institutional investors to buy a larger piece of the startup.

    Here’s how it might look:

    • Angel investor buy 10% of the startup for $150,000 resulting in a $1.5 million post-money valuation
    • Startup achieves strong traction and raises a $3 million Series A at a $7 million pre-money ($10 million post-money)
    • Institutional investor that’s buying ~30% of the company (less the pro-rata from any existing investors that want to invest more) is willing to increase their investment up to $3.14 million such that the existing investor that owns 10% before the financing round can sell up to 20% of their stake which represents up to 2% of the company (10% ownership of the $7 million pre-money represents $70,000 for one percent) for $140,000 thus nearly recouping their initial investment while still having 8% of the company remaining (pre Series A investment)
    • Post Series A investment, and after selling 20%, the angel investor now has 5.6% of the company (8% diluted by 30%, not counting a potential increase in option pool)

    The institutional investor would want the angel’s equity reclassified as the same type of equity as the Series A otherwise there might be a discount.

    By encouraging institutional investors to buy a small piece of the existing equity held by the angel investors, angels are more likely to invest in other startups and capital will be recycled faster in the community. Entrepreneurs should consider asking institutional investors about this when raising capital.

    What else? What are some more thoughts on the idea of encouraging institutional investors to buy a small amount of equity from existing angel investors?

  • $100M ARR or $5M EBITDA Target for Strong Exit Opportunities

    With exits for tech startups rare, especially outside of the largest tech startup hub, most entrepreneurs anticipating a great exit are going to be disappointed unless they are on pace for $100 million in annual recurring revenue (ARR) or $5 million in earnings before interest, tax, depreciation and amortization (EBITDA). Why those numbers? $100M in ARR is often the requirement for a successful IPO and $5M in EBITDA is often the minimum to get private equity firms interested in buying the company.

    Strategic buyers are often the most desirable buyer for startups as they’ll have both a complementary product or service that’s much larger and they’ll pay a much higher price, all things considered. Only, there are so few exits to strategics. In order to have options, the startup has to reach significant scale (> $100M ARR) or significant profitability (> $5M EBITDA). Most startups won’t achieve either and need to recognize the financial benchmarks required, especially in the context of fundraising.

    Entrepreneurs would do well to think through what success looks like for them and plan accordingly when evaluating different funding opportunities for the company.

    What else? What are some more thoughts on the $100M ARR and $5M EBITDA targets to have strong exit opportunities?

  • Video of the Week: Where good ideas come from | Steven Johnson

    For our video of the week watch Where good ideas come from | Steven Johnson. Enjoy!

    From YouTube: People often credit their ideas to individual “Eureka!” moments. But Steven Johnson shows how history tells a different story. His fascinating tour takes us from the “liquid networks” of London’s coffee houses to Charles Darwin’s long, slow hunch to today’s high-velocity web.

  • Scaling Culture in a Fast-Growing Startup

    Culture is one of my favorite topics as it’s so critical to successful organizations. I’ve seen OK cultures and I’ve seen amazing cultures — the amazing ones always grow faster and outperform their peers. Only, scaling a strong culture is hard as there’s much more complexity.

    Here are a few thoughts on scaling culture:

    Once the team grows beyond the co-founders, it’s time to start thinking about culture. As the startup finds product/market fit and a repeatable customer acquisition process, culture needs to be intentional.

    What else? What are some more ideas for scaling culture in a fast-growing startup?

  • 3 Trends in Marketing Technology

    Earlier today I had a chance to talk at the Geek Out on Marketing Technology event and one of the topics was MarTech trends. With 4,000+ marketing technology companies, there are a number of excellent trends in the market.

    Here are three trends discussed:

    1. Machine Learning – Take large amounts of data and find patterns and actionable insights that just weren’t possible before. Machine learning is the ability for computers to learn without being explicitly programmed. Think of all the applications in marketing from improving campaigns to targeting the best-fit accounts.
    2. Account-Based Marketing – Target named accounts with the right message at the right time. With account-based marketing, marketers are able to proactively engage with accounts that haven’t come through the traditional channels.
    3. Customer Data Platforms – Marketing is more than campaigns to attract prospects. Marketers are now expected to help guide the entire customer experience from first touch to signing as a customer to renewing at a future date. Customer data platforms pull in data from all the customer facing functions — sales, marketing, support, customer success, etc. — and provide a holistic view of the account as well as next actions to take.

    It’s a great time to be in marketing technology and look for these three trends to grow in importance over the coming years.

    What else? What are some more trends in marketing technology?

  • 4 Quick Ideas on Building a Tech Startup Center

    Several times a month I’m asked for advice about building a tech startup center based on experience at the Atlanta Tech Village. Entrepreneurs from cities in both the metro region and the Southeast are interested in creating stronger entrepreneurial communities with a higher density of startups.

    After four years at the Tech Village, here are four quick ideas on building a tech startup center:

    1. Community First – Everything starts and ends with the community. From the entrepreneurs to the mentors to the people in different roles, it’s all about community. Ensure there’s a critical mass of community and the rest will follow.
    2. Location, Location, Location – The old adage still rings true that location is key. People want to be in a great location that makes it easy to recruit from the surrounding region.
    3. Lots of Spaces – Create lots of little spaces. Four-person offices are the most popular offering at the Tech Village. Incorporate phone booths, meeting rooms, and a variety of breakout spaces. Then, combine those with a large, central community area.
    4. Success Stories – Build a culture of success. Celebrate success. Get successful, serial entrepreneurs to start their next venture in the building. The faster success stories emerge from the community, the greater the halo effect and others will want to join.

    Building a tech startup center is just like building any other type of community. Find people that are passionate about it, create a cool physical space, and work to nurture and grow the community.

    What else? What are some more ideas on build a tech startup center?

  • Due Diligence for an Angel Investment

    When raising money from angel investors, they often require a fair amount of due diligence to ensure the startup is what the entrepreneurs say it is and that it has proper record keeping. If the startup raises money from Institutional investors, like venture capitalists, the amount of due diligence increases substantially. Here are a few commonly requested items as part of due diligence from angel investors:

    • Operating agreement
    • Founder legal agreements like non-compete, non-solicitation, etc.
    • Cap table with any equity grants, stock sales, etc.
    • Customer contracts
    • Employee IP assignments
    • Financial forecasts
    • Financial statements
    • Recent bank statements

    Entrepreneurs would do well to keep their legal and financial affairs in order generally, but especially so when close to the term sheet phase of the fundraising process.

    What else? What are some more thoughts on due diligence when raising money from angel investors?

  • Atlanta Startup Village #47

    Tonight is Atlanta Startup Village #47 at the Atlanta Tech Village.

    Follow the conversation on Twitter (https://twitter.com/atlsv) and Instagram (https://www.instagram.com/atlstartupvillage/).

    Here are the startups presenting:

    • SkilRoute: Online learning reinvented.
    • Reech.io: The Instagram analytics you’ve been waiting for!
    • Netify: Prototype development and business strategy consulting
    • inSITE: Fundamentally changing the way organizations share information
    • Shotzy: Pro Photographers On-Demand

    Admission is free and all are welcome. Come join us.