David Cummings on Startups

Blog

  • More Entrepreneurs Need to be Told to not Raise Money

    Seth Godin has a great post up titled The Struggle to Raise Money where he outlines a number of entrepreneur issues around raising money, including:

    • When things aren’t working, raising money seems like the answer
    • Raising money is a huge distraction and takes away from the core business
    • Most people won’t tell an entrepreneur to stop trying to raise money and instead help with executive summaries, pitches, and introductions
    • Investors want to invest in the company that can be worth billions, yet most won’t ever be worth millions
    • Investors want to see a working, scalable business where investing X will lead to 10X, and X is proven with hard data

    My take: more entrepreneurs need to be told to not raise money. Now, that doesn’t mean they should never raise money. Rather, the majority of entrepreneurs that are trying to raise money don’t have their business to the point that it’s investable, thus it isn’t a good use of time.

    Every entrepreneur should read The Struggle to Raise Money.

    What else? What are some more thoughts on the idea that more entrepreneurs should be told to not raise money?

  • Customer Cohort Analysis for SaaS

    One of the terms I had never heard before getting into the SaaS business is cohort analysis. As you might expect, a cohort is a set of customers grouped together by common characteristics. The most common types of customer cohorts are by time (e.g. customers that signed up in a given month) and size (e.g. customers based on how much they spend). Cohort analysis is primary used to understand patterns and trends of customer groups over time with the most important metrics being renewal rates and account expansion.

    Here are a few thoughts on customer cohort analysis in SaaS:

    • Keep cohorts simple while there’s limited data and add complexity as the customer base grows
    • Remember that not all customers are equal and the cohorts should reflect a reasonable level of segmentation (e.g. customers by month by size divided into small, medium, and large)
    • Consider cohorts on longer tail metrics to see if any insights emerge (e.g. # of logins, module usage, NPS, etc.)
    • Look for the “smile” where the revenue expansion of a cohort is expanding (turning up like a smile) vs shrinking (turning down like a frown)

    Cohort analysis takes a fair amount of time to initially put together but it’s well worth it — every SaaS company should track their customer cohorts.

    What else? What are some more thoughts on customer cohort analysis for SaaS?

  • Faster SaaS Growth Equals Greater Losses

    Continuing with yesterday’s post on Gross Margin as Part of Lifetime Customer Value, David Skok has a important post up titled SaaS Metrics 2.0. In the article, he touches on a critical topic that isn’t well understood: faster SaaS growth equals greater losses. Here’s how he visualizes it:saas_growth

    The idea is that when you sign a new customer, there’s a payback period, which is why gross margin is an important consideration. New SaaS customers are money losers for an extended period of time — often one year — but then are very profitable after that. Intuitively, this makes sense as payments are spread out over time. So, if you lose $X for a new customer until they’re profitable, it only follows that if you sign five times the number of customers, you’re going to lose $5x until they’re profitable (more customer onboarding help, more servers, more infrastructure, etc.).

    Entrepreneurs would do well to understand that faster SaaS growth equals greater losses, and that it should be planned for accordingly.

    What else? What are some more thoughts on faster SaaS growth equaling greater losses?

  • Gross Margin as Part of Lifetime Customer Value

    Continuing with yesterday’s post on SaaS CAC to LTV Metric, there’s another important element that needs to be addressed: gross margin. Gross margin is the percent of revenue left over after taking out the costs required to serve the customer (SaaS cost of goods sold). So, a company having gross margins of 70%+ (as SaaS companies should have), will have more money, as a percent of revenue, to dedicate to acquiring new customers.

    In the context of the lifetime value (LTV) of a customer, a company with 90% gross margins has a much more valuable customer than a company with 70% gross margin (or a lower gross margin, as is often the case).

    When talking about SaaS CAC to LTV, it’s actually better stated as CAC to the LTV gross margin. The idea for the ratio is how efficiently customers are acquired. Well, companies with very different gross margins shouldn’t be comparing their CAC to LTV ratios. Rather, CAC to LTV gross margin ratio would be a better comparison.

    The next time you’re talking about the lifetime value of a customer, talk about the gross margin of the lifetime value of a customer.

    What else? What are some more thoughts on incorporating gross margin into the lifetime value of a customer?

  • SaaS CAC to LTV Metric

    Continuing with The Magic Number for SaaS, there’s another phrase that’s bandied around quite a bit: CAC to LTV. Here’s a quick definition of CAC and LTV:

    • CAC – Cost of customer acquisition (how much it costs to get a customer, on average)
    • LTV – Lifetime value of the customer (how much the customer pays, on average, over the period of time they’re a customer)

    When people talk about CAC to LTV, they mean the ratio of the cost to acquire a customer relative to how much a customer pays over time. Generally, the question is whether or not the company can profitably acquire customers. For several years, often when the startup is sub-scale or investing in growth ahead of profitability, the cost to acquire a customer exceeds the value of the customer. CAC to LTV is an important measure of the efficiency of the business model, especially as it pertains to the repeatable customer acquisition model stage in a startup.

    CAC to LTV is one of the most important metrics for SaaS entrepreneurs and should be well understood.

    What else? What are some more thoughts on the SaaS CAC to LTV metric?

  • Video of the Week: 8 Traits of Successful People

    For our video of the week, watch the TED talk 8 traits of successful people – Richard St. John. Enjoy!

    From YouTube: Ten years of research and 500 face-to-face-interviews led Richard St. John to a collection of eight common traits in successful leaders around the world.

  • The Magic Number for SaaS

    Way back in 2008 Lars Leckie published a seminal piece on SaaS metrics titled Magic Number for SaaS Companies. From the piece, here are the stages of evolution of the company:

    1. Product: build a rock solid product. Prove you can sell it as founders before moving past this step.
    2. Sell: Sell like crazy, build out a team, hire some QBSRs (Quota Bearing Sales Reps)
    3. Retention: focus on churn and retention issues, hire more QBSRs
    4. Marketing: spend on marketing, hire more QBSRs

    Then, on to the magic number. The magic number is a ratio of the scaling of recurring revenue to the sales and marketing spend. Here’s the formula:

    (Quarterly Revenue – Previous Quarter Revenue)*4 / (Previous Quarter Total Sales and Marketing Expense)

    So, take the growth in revenue between the quarters, annualize it by multiplying by four, then divide by the total of all sales and marketing expenses. If this number is greater than 1, things are going well and more should be spent on sales and marketing. If this number is less than 1, the cost of customer acquisition relative to the value of the customer is too high and the focus should be on making sales and marketing for effective.

    Scaling a SaaS startup is expensive. Use the SaaS Magic Number to understand how efficiently the business is growing based on relative growth to customer acquisition costs.

    What else? What are some more thoughts on the SaaS Magic Number?

  • 4 Year Anniversary of the Pardot Acquisition

    Today marks the four year anniversary of the Pardot acquisition by ExactTarget. As a part of Salesforce.com now, it’s incredible to see the company thrive and scale to hundreds of millions of dollars of recurring revenue. Looking back, here are a few lessons learned post acquisition:

    SaaS Market Opportunity is Huge

    In hindsight, it’s clear that the SaaS market is much, much larger than expected. Within SaaS, marketing technology has exceeded expectations. Historically, in the pre-Internet client/server era of technology, marketing was never a major tech area because it wasn’t as people driven (e.g. there weren’t that many seats to sell). Now, the four major marketing automation vendors are approaching $1 billion in annual recurring revenue and still growing fast.

    Startups are Hard

    After we sold Pardot, I invested large sums of money in several startups that went under. Hubris is real and should be acknowledged when present. It’s better to take things slower while building expertise and traction. Then, ramp when there’s a clear market and demand (ramping early often results in failure).

    Giving Back is Fun

    Engaging with other entrepreneurs and helping build the startup community through the Atlanta Tech Village is fun. There’s something special about trying to do the impossible and help entrepreneurs grow a business. Easy? No. Fun? Yes.

    As I look back on the four years post acquisition, I’m grateful for the journey and lessons learned.

    What else? What are some more lessons learned post acquisition?

  • Product-First or Movement-First Startup

    When I reflect on four of the fastest-growing ~100 person startups in town, it’s clear that they fall into one of two camps: product-first company or movement-first company.

    Product-first companies absolutely adore their own product. Everything centers around building an amazing product that customers love and everything else comes second. Internally, software engineers and the product team are put up on a pedestal and the hierarchy is clear. Product-first companies are all about the product.

    Movement-first companies are on a mission greater than themselves. Everything centers around educating the market about this better way to do things, most often through live events and heavy sales and marketing. Internally, sales and marketing teams are hard-charging and at the center of the company. Movement-first companies are all about creating a movement.

    What’s the better route? Both are great ways to do it and have their own pros and cons, and both produce very successful businesses. Startups that aren’t amazing at one or the other often fail. Pick one thing and do it well.

    What else? What are some more thoughts about product-first and movement-first startups?

  • What’s the hourly rate for your time?

    Recently I was talking to a successful entrepreneur and he commented how he saves money flying into a remote airport and driving an extra hour to a city on a regular customer trip. That got me thinking about the value of time, and quantifying it as an hourly rate.

    The simplest way to come up with an hourly rate is to take your annual compensation for last year, divide the number by two, and then drop the three zeroes on the end. So, if last year’s salary was $50,000, dividing by two is $25,000, and then dropping the three zeroes results in $25. Meaning, the approximate hourly rate for your time is $25/hour.

    For entrepreneurs getting their business off the ground, it makes sense to save money and sacrifice time to be more capital efficient. But, as the business grows and scales, time becomes more of a limiting factor, and resources become more plentiful. When this happens, entrepreneurs need to consider the hourly rate for their time and start using money to create more time.

    What else? What are some more thoughts on the hourly rate for your time?