David Cummings on Startups

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  • Annual User Conference to Catalyze Internal Departments

    With the Amazon Web Services annual conference last week (see the TechCrunch article), and all the great enhancements they announced, it reminded me of the power of an annual user conference to catalyze internal teams. There’s nothing like a hard and fast date to sharpen the focus and rally the team. Once a critical mass of customers is reached — say 200 — every software company should run an annual user conference.

    Here are a few thoughts on different internal departments and an annual user conference:

    • Sales – Annual conferences are a great event for prospects and partners to both build rapport and close more deals. The human element of hearing success stories and meeting happy customers is incredibly powerful.
    • Customer Success – Most customer success teams help customers over the phone and the Internet without a face-to-face component. The annual user conference provides a mechanism to connect the sound of someone’s voice to the actual person, and build the relationship further.
    • Product Development – Engineering teams often struggle the most with hard deadlines and deliverables as product development is part art and science. An annual user conference is one of the best ways to get the engineering team focused on a major upgrade.

    Annual user conferences are a great way to build community and focus the internal departments with a firm deadline. Entrepreneurs would do well to incorporate an annual user conference once they have modest scale.

    What else? What are some thoughts on annual user conferences to catalyze internal departments?

  • The $15 Million SaaS Revenue Plateau

    One of the challenges for SaaS startups that hit the growth stage is stalling revenue right around $15 million. After finding product/market fit and a repeatable customer acquisition model, things look great. Only, the $15 million recurring revenue milestone turns into a plateau, and not another simple number on the way towards serious scale ($100+ million). What gives?

    Here are a few reasons why SaaS startups stall at $15 million in revenue:

    • Leaky Bucket – As the customer base grows, the number of customers that churn each month grows as well. Eventually the amount of new revenue signed will equal the amount of revenue lost unless the renewal rates are high and the customer expansion rate is strong.
    • Lead Velocity – Often, when starting to scale, there are a small number of lead sources that provide the bulk of the leads. Only, as the business grows, the lead volume from these sources don’t scale resulting in growth challenges.
    • Market Size – While entrepreneurs talk about the amount of money spent in a market, the reality is that a much, much smaller percentage is spent on new software each year in that market. Most markets are smaller than what people think.
    • Internal Challenges – Organizational health is much harder than it appears. Once the organization passes 150 employees (Dunbar’s number) things get even more complicated internally, and that affects growth.

    SaaS startups in the growth stage often hit a $15 million revenue plateau and don’t recover. Recognize the impending challenges and work to minimize them.

    What else? What are some more thoughts on why certain SaaS startups stall at $15 million in revenue?

  • Video of the Week: How to make hard choices | Ruth Chang

    For our video of the week, watch How to make hard choices by Ruth Chang. Enjoy!

    From YouTube:
    Here’s a talk that could literally change your life. Which career should I pursue? Should I break up — or get married?! Where should I live? Big decisions like these can be agonizingly difficult. But that’s because we think about them the wrong way, says philosopher Ruth Chang. She offers a powerful new framework for shaping who we truly are.

  • Most Second Product Initiatives Fail

    Recently I was talking with some entrepreneurs and the topic of second products came up. Here, a second product would be an additional product offering that’s a true, standalone product and not an add-on to the original product. Without missing a beat, everyone went around and said that every second product they launched failed.

    I’ve been there. I’ve tried launching a second product multiple times and they all failed. Why?

    Here are a few thoughts:

    • Lack of Product/Market Fit – Inevitably, a new product doesn’t accurately meet the needs of the customers. Even with one product that does have product/market fit, it’s incredibly hard to build a second one.
    • Must-Have vs Nice-to-Have – Very few products are a must-have. The chances are high that while the first product was a must-have, the second product was a nice-to-have.
    • Best People Challenge – With one product working, the likelihood that the very best people are assigned to a new product is low. And, if they are assigned to the new product and the first product starts to have issues, they’ll be pulled back to the first product immediately.

    Second products can work but entrepreneurs would do well to maximize every element of their core product before expanding.

    What else? What are some other reasons why second product initiatives fail?

  • Funding Dynamics for Modest Growth SaaS Startups

    Continuing with the discussion around SaaS funding valuations and forward multiples, I was talking with a growth equity investor out of the Northeast yesterday and the topic of valuations came up. Now, growth equity typically targets startups with $10 – $25 million in annual recurring revenue and makes a sizable investment ($10+ million). For this particular firm, they focus on SaaS startups with modest growth between 10% and 30% where they believe the companies can continue to grow for a number of years, but are often overlooked by the larger funds because they don’t have a high growth rate (e.g. 60%+ growth per year).

    Here’s how they think about these investments:

    • Growth rate still drives valuation with typical valuation range being 3 – 5x current annual recurring revenue (but usually closer to 3 – 4x)
    • Return expectations are targeted at 3x cash on cash in 3 – 5 years (imagine buying in at 4x run rate, the company doubles in size over a few years, and a buyer comes along that pays a higher multiple)
    • Forward multiples are less relevant as there’s not as much competition among investors driving valuations up
    • Metrics like gross margins and renewal rates, as well as the management team and market size, also play an important role in valuation

    Entrepreneurs looking to raise institutional capital at a large multiple need to have a great growth rate to go with it. Otherwise, the valuations are a much lower multiple of a run rate.

    What else? What are some more thoughts on funding dynamics for modest growth SaaS startups?

  • 2017 Simplified One Page Strategic Plan

    Continuing with yesterday’s post Time for 2017 Budgets, it’s also time to get the 2017 Simplified One Page Strategic Plan ready. The goal with the plan is to align everyone in the company around a simple, straightforward document that outlines the most important things in a concise manner. Too often, the entrepreneur runs around with a number of great ideas in his or her head and doesn’t realize that everyone else in the organization doesn’t see what they see. Communication and alignment takes work; start with a simple plan.

    Here are the contents of the Simplified One Page Strategic Plan (Google Doc template, example plan, and the free SimpleStrategicPlan.com):

    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

     

    That’s it — simple yet powerful. Check out the Simplified One Page Strategic Plan Google Doc template and take a look at an example plan. Good luck!

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

  • Time for 2017 Budgets

    With the end of 2016 almost upon us, it’s a great time to start planning for 2017, and that means making budgets. Budgeting, especially for seed and early stage startups, is more about outlining the costs to execute a plan and defining a not-to-exceed number as things are fluid and change rapidly with new information.

    For budgeting, I like a simple Google Spreadsheet (see this budget example) as follows:

    • One tab for XYZ Budget Detail and one tab for XYZ Budget Summary
    • One column for each month “Budget” and one column for each month “Actual” followed by the corresponding quarter “Budget” and “Actual”
    • A concluding column for the year “Budget” and the year “Actual”
    • In the “Detail” sheet, a line item for each thing in the category followed by a summary row for the category
    • In the “Summary” sheet, a line item for each category summary followed by a row total for the month, quarter, and year

    Here’s an example budget Google Sheet that works well for a department and can be copied and customized.

    Budgets aren’t the most fun project but are an important part of a startup when scaling the organization.

    What else? What are some more thoughts on budgeting?

  • SaaS Funding Valuations Based on a Forward Multiple

    Continuing with last week’s post on 3 Quick Ideas When Thinking about SaaS Valuations, there’s another common way to determine a SaaS valuation for funding purposes based on a multiple of what the revenue or run-rate will be in 12 months. This approach is known as a “forward multiple”, and because the valuation is based on an expected amount in the future, it effectively takes into account the current growth rate, which is one of the largest, if not the largest, drivers of valuation, everything else being constant.

    Long term, SaaS companies will likely trade at 4-6x revenue based on strong recurring revenue, great gross margins, and excellent economies of scale. As a simple example, if a SaaS company was put into harvest mode, it could generate 60-80% profit margins and get an EBITDA multiple of 6 – 10x, resulting in the same value as 4-6x revenue.

    So, if a startup is doubling year over year, and expects to double again next year, a funding valuation could be 4-6x the expected run-rate in twelve months. If a startup is at $5 million today, and will clearly be at $10 million in 12 months, asking for a pre-money valuation of $40 – $60 million might get funded, assuming a great team and market. Investors would be willing to “pay up” for a fast-growing startup as they believe it’ll continuing growing fast and has the opportunity to be a large, meaningful business.

    For entrepreneurs raising money, use the idea of a forward multiple when discussing valuation.

    What else? What are some more thoughts on SaaS funding valuations based on a forward multiple?

  • 3 Reasons Founders Might Not Make Any Money After Raising Venture Capital

    Yesterday’s post on Most Founders that Raise Venture Capital Don’t Make Any Money prompted a number of comments and questions. One of the popular questions was “why?” If a startup raises millions of dollars of institutional capital, why would a founder not make any money? Here are three reasons:

    1. Stacked Preferences – Most venture investments are either participating or non-participating preferred equity such that investors get their money back first in the event of a sale. For example, if the startup raises $25 million in capital and ends up exiting for $20 million, the $20 million would go to the investors and the founders wouldn’t make anything (unless there was a carve out or incentive plan to join the new company). The more money the startup raises, the higher the bar to sell where everyone is happy.
    2. Down Round – If a startup raises a round at a valuation lower than the previous round, a variety of anti-dilution clauses kick in that “true up” the previous investors’ quantity of shares to reflect their previous investment in the context of the new, lower valuation. Depending on how much lower the valuation, these anti-dilution measures can completely wipe out the common shareholders including the founders.
    3. Bankruptcy – Not all venture-backed startups succeed, and a small percentage go bankrupt even after raising institutional capital. With a bankruptcy, shareholders are wiped out, including the founders.

    A general rule is that if the startup sells for 3x the amount of money raised, things are usually OK for the founders. If the startup sells for 10x the amount of money raised, things are great for the founders.

    Most founders don’t make any money after raising a venture round and these are a few reasons why.

    What else? What are some more reasons founders might not make any money after raising venture capital?

  • Most Founders that Raise Venture Capital Don’t Make Any Money

    TechCrunch has a great article up titled A longtime VC on the virtues of not swinging for the fences where the author interviews Jodi Sherman Jahic. Jodi’s fund, Aligned VC, focuses on capital efficient B2B startups where the entrepreneurs aren’t trying to build the next unicorn. From the post:

    The majority of the time — something like 75 percent of the time, according to [the benchmarking company] Sand Hill Econometrics — founders who take venture money get not a dime.

    Think about that for a minute: with all the focus and hype around raising venture money, the majority of founders that go that route don’t make any money at all. Of course, entrepreneurs choose to raise institutional capital for a variety of reasons, primarily to grow faster and build a large, valuable business. Only, the majority of entrepreneurs that go down this path don’t make a dime when the company sells.

    The next time an entrepreneur says they want to raise venture capital, let them know that the majority of entrepreneurs that do so don’t make any money.

    What else? What are some more thoughts on the idea that most entrepreneurs that raise venture capital don’t make any money?