David Cummings on Startups

Blog

  • When Growth Slows

    Since a startup is a scalable, growth-focused company, what happens when growth slows? Growth slowing often happens as the law of large numbers starts to set in when the startup moves from the early stage to the growth stage. Only, if growth falls below 50% when sub $25 million ARR, the chance of building a large, enduring company drops dramatically.

    Here are a few thoughts when growth slows:

    • Market – Understand the dynamics in the market. Is the overall market still growing fast? Is this startup’s segment underperforming or is there something else at play? Is there a new competitor that’s making a ton of noise?
    • Team – Review the team and their roles and responsibilities. The team that got the startup to A is often not the team to get to B. What changes need to be made?
    • Execution – Sometimes things just aren’t going well. There’s a feeling internally, and people really know it, if things are going well or aren’t going well. How’s morale? How does everyone feel they’re executing?
    • Valuation – As growth is one of the major determinants of valuation, valuation is often reduced substantially (see 3 Quick Ways to Value SaaS Startups). What does the forecast look like? How do things look projected multiple years out?

    Growth slowing isn’t fun but it happens all the time. Entrepreneurs would do well to acknowledge it and figure out how to get the team focused on doing the things needed to grow faster.

    What else? What are some other thoughts on growth slowing?

  • Video of the Week: Stefanos Zenios – Design Thinking is About Doing

    For our video of the week, watch Stefanos Zenios: Design Thinking is About Doing. Enjoy!

    Stefanos Zenios explains how design thinking and the lean startup methodology can help entrepreneurs quickly take their big idea from a rough sketch on the back of a napkin to a real world product. In this “mini lesson”, he provides tips on how to get customer feedback, create effective prototypes, and facilitate more productive brainstorming sessions. Zenios is director of the Center for Entrepreneurial Studies at Stanford Graduate School of Business, where he teaches the popular Startup Garage course and serves as Charles A. Holloway professor of Operations, Information and Technology.

    Why is brainstorming a good way to generate new ideas? 0:05
    How do you facilitate brainstorming among different personality types? 1:00
    What’s the best way to find out what your customer needs? 1:41
    Why are immersion and empathy critical to the design thinking process? 2:52
    What are the benefits of building a prototype? 3:31
    How do you prototype a business model? 4:28
    Does design thinking generate better ideas? 7:04
    Can anybody be creative? 7:34

  • The Value of Being Top 3 in a Market

    Recently an entrepreneur asked me why we didn’t raise venture capital at Pardot. My immediate response is always that we did the spreadsheet jockeying to see if was worth it, and it wasn’t (the Value Multiplier to Raise VC Money is 5 and 99% of Entrepreneurs Shouldn’t Raise Venture Capital). Only, in hindsight, there was another element that we achieved, yet I didn’t understand the importance: we needed to be one of the top three vendors in the market to stay relevant. Luckily, we were able to stay relevant without venture capital, but for SaaS startups that need to be in the top three of a market, venture capital is often required.

    Here are a few thoughts on the value of being top three in a market:

    • Growth – The top vendors grab a disproportionate share of the market, and grow faster than the market. Ultimately, growth is what defines a startup, so being in the first tier of vendors is required (see A Startup is a Scalable Growth-Focused Company).
    • Brand – More customer wins results in more word of mouth referrals, more customer stories, and more money for marketing, all critical to building a brand. Success and scale help the virtuous cycle of building a brand.
    • Acquirers – If the entrepreneur does decide to sell, acquirers, of which there are very few (see Odds of Raising Venture Money and Selling for $100M+) want a leader in the market. Being in the top flight of vendors significantly increases the odds of a successful exit.

    Entrepreneurs would do well to figure out how to be one of the top three vendors in the market. Most markets aren’t winner-take-all or winner-take-most, but the top three vendors often win an out-sized share of the market.

    What else? What are some more thoughts on the value of being in the top three in a market?

  • Gaps in Marketing Technology

    Recently I was talking with an entrepreneur about marketing technology — a space he knows well — and he said that because of so much capital going into the space, there aren’t that many gaps. Hmm, I thought, there are a number of gaps where leaders haven’t emerged. Most segments have vendors in them but that doesn’t mean a group of tier 1 vendors have emerged.

    Here are some big picture gaps in marketing technology:

    • Simple Marketing Automation – Marketing automation is powerful, valuable, and too complicated for many marketers. There’s plenty of opportunity in certain segments.
    • Full Account-Based Marketing – Lots of vendors are doing parts of the puzzle but there’s not a comprehensive solution. This market is harder than it looks but there are still big gaps.
    • Deep Online Behavior Understanding – People are tracked online much more than they realize. Only, beyond the basics (which are 100x better than no data), there isn’t deep understanding of user behavior and patterns.
    • Marketing Orchestration – Marketing has an incredible number of tools (see 27 SaaS tools in the marketing department). What system orchestrates them all?

    These are a few of the gaps in MarTech that I expect to be addressed over the next five years.

    What else? What are some other gaps in the marketing technology landscape?

  • Monthly Sales Quotas

    Historically, sales reps were assigned quarterly quotas and expected to hit their number. Only, as inside sales and web-based sales have grown in popularity, the quota time frame hasn’t changed with it. Today, high velocity sales reps need monthly, not quarterly, quotas.

    Here are a few benefits of monthly sales quotas:

    • Monthly quotas keep the focus on a steady stream of deals, not the more common lumping of deals at the end of the quarter
    • Monthly quotas keep the activity volume high as there’s a need to ensure open opportunities at all stages of the funnel
    • Monthly quotas make it clear where every rep stands, every week, with regard to deals won, not just weighted pipeline, resulting in a more predictable revenue stream

    Entrepreneurs would do well to implement monthly sales quotas and develop a modern sales team.

    What else? What are some more thoughts on monthly sales quotas?

  • 3 Quick Ways to Value SaaS Startups

    Recently an entrepreneur was asking about SaaS valuations for startups. Valuations, especially in startups, are often all over the place as there isn’t a liquid market and the value is generally whatever the most someone is willing to pay. With that said, here are three quick ways to gauge the value of a SaaS startup:

    • 3 – 5x Annual Run Rate – Assume that the terminal valuation for a SaaS company is a multiple of cash flows, and that a true SaaS company can have 50% net margins if sales and marketing were significantly cut, resulting in this simple valuation range.
    • 3 – 5x Annual Run Rate in 12 Months – For startups growing > 50% per year, there’s a big premium and the common way to do it is based on a multiple of the expected run rate 12 months from now (by being forward looking, it takes into account the growth rate).
    • Typical Investor Check Size Times 4 – When raising a round, take the size of check the investor typically writes — say $3 million — and multiple it by four resulting in a post-money valuation of $12 million, reflecting the investor owning 25% of the business. Early institutional investors typically target an ownership of 20 – 30%, so that valuation is driven more so by the check size and target ownership rather than a multiple of run rate.

    Valuations rarely go lower than this and sometimes go much higher for unique circumstances. Valuations, especially in startups, are much less scientific than it appears.

    What else? What are some quick ways to value a SaaS startup?

  • Local, Fast-Growing Million Dollar Revenue SaaS Startups

    Earlier today I was talking with an entrepreneur and the topic of the $1 Million Annual Recurring Revenue Milestone came up. After thinking about it more, I realized I could name 10 Atlanta B2B SaaS startups that had hit this milestone in the last 18 months, and every one is still growing fast. As a community, this bodes well for several reasons:

    • Some small percentage of these startups are going to scale and turn into large companies (hopefully, even an anchor technology company)
    • Look for some really nice exits from this group over the next 3 – 5 years creating more success stories and local wealth
    • More successful startups will train more of the next generation of entrepreneurs contributing to the virtuous cycle
    • More institutional capital will come to the region since traction is one of the key elements for this type of investor

    There’s a great class of local, fast-growing million dollar revenue SaaS startups that are going to make a real impact on the Atlanta startup community — I’m excited for the future.

    What else? What are some more thoughts on the benefits of fast-growing million dollar revenue SaaS startups on a local community?

  • Predictive Sales and Marketing Data Sources

    Continuing with yesterday’s post on Predictive Sales and Marketing Technologies, one of the areas to go deeper is the sources of data that can be used for scoring lead/contacts as well as building out the lookalike companies for targeting. One of the reasons predictive sales and marketing technologies are so good now is that number of quality data sources available is much larger than 10 years ago.

    Here are a few of the predictive sales and marketing data sources:

    • Demographic – Different personas with attributes like job title are valuable when building predictive models
    • Firmographic – Characteristics of the company like size, industry, and location are key data points
    • Social – Significant amounts of publicly available information on social media include location, frequency, interests, and more
    • Technographic – Technologies implemented in a company and on their website (e.g. web server, CMS, marketing automation vendor, etc.) provide a unique profile of the business
    • Digital Behavior – Marketing automation tracks page views, email opens, ebook downloads, and every other digital fingerprint — all useful for understanding the ideal buyer

    Modern data sources combined with machine learning make predictive sales and marketing possible. Look for the quality and quantity of data sources to grow making predictive technologies that much better.

    What else? What are some more data sources for predictive sales and marketing technologies?

  • Predictive Sales and Marketing Technologies

    One of the sales and marketing technologies I’m most excited about (along with account-based sales and marketing) is the whole predictive area. At a simple level, predictive takes existing contacts and opportunities and scores them against a dynamic model based on other contacts and opportunities that became customers. Put another way: find great-fit companies that look like our existing customers so we can target them.

    Account-based sales and marketing platforms (see SalesLoft and Terminus) solve the major problem of running programs in a scalable manner against hundreds (or thousands) of target accounts. Traditional marketing, and sales as the opportunity progresses through the funnel, casts a net, sees what is caught, and then works the qualified leads. Now, as a more modern approach, account-based sales and marketing goes spear fishing and proactively seeks out best-fit accounts based on a number of dimensions. Only, there’s often not an easy way to find and refine best-fit accounts — enter predictive technologies.

    Here are a few thoughts on predictive sales and marketing technologies:

    • As more companies implement account-based sales and marketing platforms, predictive systems become more important to find and analyze best-fit accounts.
    • Predictive sales and marketing systems are clearly in the path of revenue.
    • Machine learning, a subset of artificial intelligence, is now more accessible with the advent of systems like AWS Machine Learning, making predictive systems more powerful.
    • Finding lookalike companies requires technology. Combing through billions of records by hand simply isn’t possible.

    Look for the category of predictive sales and marketing systems to grow fast as the technology crosses the chasm and becomes more well known.

    What else? What are some more thoughts on predictive sales and marketing technologies?

  • Video of the Week: Marc Andreessen on Change, Constraints, and Curiosity

    Last month Stanford GSB hosted Marc Andreessen to talk about Change, Constraints, and Curiosity. Marc is one of my favorite thinkers in the tech and startup world. Enjoy!

    From YouTube: If you want to be successful as a venture capitalist, you need to be ruthlessly open-minded, constantly re-examining your assumptions, shared Andreessen Horowitz Cofounder and Partner Marc Andreessen. Read more leadership lessons from his Stanford GSB View From The Top talk on Tuesday, November 8, 2016: stanford.io/22fGCxZ