David Cummings on Startups

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  • 4 Reasons Why Startup Stock Options are Usually Worthless

    Following up with the post New Car, New House, or New Life Concept for Employee Equity Value, the reality is that almost all employee stock options in startups end up being worthless. Why? Well, 99% of tech startups never hit $1 million in revenue in a calendar year such that there’s no value in the business to begin with. Even then, there a number of reasons why startup stock options are usually worthless. Here are four:

    1. Few Exits – Compared to the number of startups out there, and even the number that get funded, there are very few exits. Then, if you look at the exits in the Bay Area vs outside the Bay Area, the number drops even more.
    2. More Capital Raised than Exit Price – Even when a company is acquired, if it isn’t acquired for a price substantially more than the amount of capital raised, the stock options are worthless. Investors structure their investment to get their money back first before anyone else in the event of a sale that’s less than the amount of money raised.
    3. Leave Before Exit – Most stock option plans require the options be exercised (turned into actual equity) within 30 days of the leaving the company. Only, it costs money to exercise the options (the number of options times the strike price) such that most people don’t do it because they’ll be paying money for something that could very well have no value.
    4. Down Round – When a startup raises money at a valuation lower than their last valuation it’s known as a down round. When this happens, common stockholders (e.g. employees, advisors, etc.) are often wiped out (diluted to where there’s really no chance of value).

    Stock options, in most cases, should be viewed as icing on the cake. The salary compensation, experiences gained, and general journey should be the core value with stock options as a nice addition.

    What else? What are some more reasons why stock options are usually worthless?

  • Video of the Week: Artificial Intelligence is the New Electricity

    For our video of the week watch Andrew Ng: Artificial Intelligence is the New Electricity. Enjoy!

    From YouTube:
    On Wednesday, January 25, 2017, Baidu chief scientist, Coursera co-founder, and Stanford adjunct professor Andrew Ng spoke at the Stanford MSx Future Forum. The Future Forum is a discussion series that explores the trends that are changing the future. During his talk, Professor Ng discussed how artificial intelligence (AI) is transforming industry after industry.

  • New Car, New House, or New Life Concept for Employee Equity Value

    Last week the topic of employee stock options and grants came up in a conversation. We got to debating the best way to talk through the potential value. I offered up my favorite way to think about them in the context of expectation setting should things go well: new car, new house, new life.

    Here’s how the new car, new house, or new life concept for employee equity value looks:

    • New Car – $50,000 – Commensurate with the position and time of joining the startup, a quality exit might result in the stock options being able to pay for a nice car (e.g. owning .15% of a $50M exit and then paying the corresponding taxes).
    • New House – $500,000 – A bigger exit, or larger ownership position, might result in being able to buy a nice house (e.g. owning 1.5% of a $50M exit and then paying the corresponding taxes).
    • New Life – $5,000,000 – A massive exit, or large ownership position, could be completely life changing and provide financial freedom forever (e.g. owning 1.5% of a $500M exit and then paying the corresponding taxes).

    The next time you’re setting expectations about the potential value of employee equity, consider the new car, new house, and new life concept.

    What else? What are some more thoughts on the new car, new house, new life idea for thinking about potential employee equity value?

  • 4 Quick Ways to Evaluate a Startup Idea as an Investor

    Earlier this week an entrepreneur casually threw out an idea he had on the side that wasn’t related to his startup. My recommendation: don’t judge an entrepreneur’s idea. Push them to do customer discovery and let the market plus their internal motivation decide if the idea makes sense or not.

    Now, as an investor, once you get past the common requirements of a great team and market, there are four quick ways I like to evaluate an idea:

    1. Must-Have vs Nice-to-Have – If the app is taken away from customers tomorrow, how much do they complain? How replaceable is the app if they just went back to email and spreadsheets?
    2. In the Path of Revenue – Where the app in the path of revenue? How clear is it that the app helps the company make more money?
    3. System of Record vs Utility – What functional category does the app fall in? Do people live in the app most of the day? Once a week? Set it and forget it?
    4. Timing – Where’s the market in the adoption lifecycle? Is it too early? Too late? Timing is 10x more important than people realize.

    Evaluating an idea is hard. These four quick ways help me develop a mental model of a startup idea to see if I should pursue it further.

    What else? What are some other quick ways to evaluate a startup ideas as an investor?

  • Evaluating a Startup Based on Cash Burned vs Recurring Revenue

    In the SaaS world, one of the common best practices is to have the cost of customer acquisition be equal to or less than the first year’s revenue (or even better would be gross margin). So, if on average it costs $5,000 in fully loaded sales and marketing expense to acquire a customer that pays $5,000 per year, things are going well. After learning that heuristic, and working with a number of entrepreneurs, I’ve come to take it one step further and judge the success-to-date of a startup based on the amount of money burned all-time vs the annual recurring run-rate today, especially if it’s one to one.

    While burning $1 to get $1 of recurring revenue might not sound like much, it’s actually really good. Think of a company that’s growing fast at $5 million recurring on $5 million burned all-time. In today’s market, that company is likely valued at $30M .- $40M (6-8x run-rate). Spending $5M to build a company worth that much is likely a good scenario for everyone involved including founders, employees, and investors. A common phrase in the startup world is “if the company sells for 10x the amount of money raised, everyone does well.” While a valuation of 10x the capital raised is excellent, consider the ratio of capital burned all-time to current recurring revenue as another metric to evaluate the success of a startup.

    What else? What are some more thoughts on evaluating a startup based on cash burned vs recurring revenue?

  • The Startup Rat Race

    Josh Pigford has an excellent post up titled Getting Out of the Startup Rat Race where he talks about the pressure and grind of trying to build a hyper growth SaaS startup. After spending three years comparing himself, and his startup, to the high flyers we read about, he realized that it’s not all about being the next billion dollar thing. Rather, there are many other ways to define success.

    The highlights from the post:

    • Our revenue was definitely growing month over month, but my eternal optimism believed that it’d magically start really growing in “just a few months”.
    • We were treating our company like we were in some race for time. But there is no race. There isn’t another runner we could lose to and we can’t “come in first”.
    • Do not obsessively think about your startup “every single moment of the day”.
    • Because doing things your own way, on your own terms, is where you’ll find fulfillment. And really, that’s what we’re all after.

    There is a real rat race element to the startup world and entrepreneurs would do well to step back and objectively think through what’s important to them.

    What else? What are some more thoughts on the startup rat race?

  • Settling in for the Grind

    At some point during the startup process the shine of a new venture starts to wear off. Some call it the Trough of Disillusionment and some just call it a normal part of being an entrepreneur. When I hear entrepreneurs talk about what they’re working towards, and the tone of their voice is optimism wrapped in fatigue, I know that they’re feeling the grind.

    Here are a few thoughts on settling in for the grind:

    The grind is real. Every entrepreneur goes through it. The key is to recognize it in the moment and stay focused on the mission.

    What else? What are some more thoughts on settling in for the grind?

  • Atlanta Startup Village #44

    Tonight, the Atlanta Tech Village is hosting Atlanta Startup Village #44. The Atlanta Startup Village is a free, monthly gathering of 400+ people to hear startup pitches and ask questions. There’s one simple goal: build the startup community.

    Here are the four presenters tonight:

    • TechStars Atlanta – Michael and Tyler will provide an update on last year’s cohort and the upcoming class.
    • Locate Your Care – Your on demand health app.
    • ScrubPay – Pain free patient pay.
    • SalesLoft – The modern sales engagement platform.

    Join the Atlanta Startup Village Meetup group and stop by the Tech Village tonight at 7:30pm.

  • Selling Products Through Resellers

    Last week the topic of selling a product through resellers came up in two separate conversations with entrepreneurs. Historically, I haven’t had much success selling through third-parties but I know of plenty of other startups that have done it well. From what we’ve tried and what I’ve seen others do well, here are a few thoughts on startups selling through resellers:

    • Ensure Credit Towards Quota – One of the most important things in a reseller relationship is that the sales reps of the reseller get credit towards quota. Without quota credit there’s little, if any, incentive to sell the other product. Alignment is key and it starts with credit towards quota.
    • Monthly Champion Calls – The champions of the relationship in both organizations need to talk monthly about what’s going well and not going well. Too often, the reseller partnership is signed and everyone goes back to what they were doing before and nothing happens. Regular, recurring communication is key. Go head, put it on the calendar now.
    • Regular Training – Products, especially technology ones, are complex and nuanced. For the sales and marketing teams of the reseller to feel comfortable selling a new product they need to be trained initially as well as on a recurring basis when new functionality comes out. Ask a sales person if confidence is an important part of selling something and they’ll all say yes. If a product isn’t well understood, the sales rep isn’t going to be as confident, and that hurts the chances of success.

    Selling through resellers is tough as most of the sales and marketing is outside your control. Increase the chance of success by aligning interests through programs like quota credit as well as recurring communication and training.

    What else? What are some more thoughts on selling products through resellers?

  • Video of the Week: Machine Learnings Intros

    Continuing with the earlier machine learning posts (here and here), our videos of the week are several introductions to machine learning. Enjoy!

    Hello World – Machine Learning Recipes #1

    Machine Learning: Google’s Vision – Google I/O 2016

    Lecture 1 | Machine Learning (Stanford)