David Cummings on Startups

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  • 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?

  • 6 Corporate Culture Ideas

    After Terminus won the #1 place to work award, several people asked what they do to build such a strong organization. Of course, the core of a great culture is the people, which starts with the values (see Strong Core Values Help Those That Don’t Fit Self Select Out). Yet, establishing values is only one piece of the overall puzzle. The key is to institutionalize programs that strengthen the corporate culture.

    Here are six corporate culture ideas:

    1. Align Interview Questions with Core Values
    2. Maintain a Simplified One Page Strategic Plan
    3. Co-Founders are Keepers of the Culture
    4. The Culture-Oriented 7 Step Hiring Process
    5. 3 Must Read Culture Guides for Entrepreneurs
    6. 6 Steps to Build a Culture of Accountability

    Corporate culture is intentional and powerful — make it the centerpiece of the company.

    What else? What are some more corporate culture ideas?

  • The Perpetual “Access to Capital” Question

    During last week’s panel on sports and technology, the perpetual question came up: how’s the access to capital for startups in Atlanta? I’ve heard this question hundreds of times over the years, both pre and post Atlanta Tech Village. The question is worthwhile, especially as most people asking the question aren’t in the startup world, and are genuinely curious.

    Here are a few thoughts on the “access to capital” question:

    • Funding for entrepreneurs with an idea is still limited to the three Fs: friends, family, and fools
    • Once there’s a modest amount of traction — say, $100k in revenue or 10,000 daily active users — there’s a very limited number of angels and micro-VCs that will write a check (most entrepreneurs at this stage still aren’t able to raise money)
    • After more substantial traction — $1 million in revenue or 100,000 daily active users — there is a tremendous amount of capital available, primarily from outside the region. Capital is more mobile than ever and investors are actively looking for fast-growing startups with traction.

    So, regional capital is still very limited, but startups that have the basis of a working business, and great growth, have access to plenty of capital.

    What else? What are some more thoughts on the “access to capital” question?

  • Moving Fast and Slow

    In the startup world, there’s a misconception that everyone is frantically running around working 12 hour days just to survive. Yes, moving fast and getting things done quickly are critical. In fact, that’s the main reason small startups beat big companies repeatedly: moving fast and iterating is a huge advantage.

    Only, it’s not all fast, all the time.

    With intense efforts comes intense use of energy. And, sometimes moving slow is the right call. Whether it’s the need to go easy for a week, or work off the technical debt that’s been accumulating, going slow can be needed. Personally, I find my ratio to be 90/10: working hard 80% of the days until I feel myself losing the edge, then I slow down for a day.

    The next time you feel you’ve been running too hard, for too long, ask yourself how you’re balancing moving fast and slow.

    What else? What are some more thoughts on moving fast and slow?

  • The Intersection of Sports and Technology

    Earlier today I had the chance to participate on a panel at the new home of the Atlanta Braves: SunTrust Park. After seeing the stadium progress (very cool!), we talked for 30 minutes about the intersection of sports and technology, especially the innovation opportunities that lie ahead.

    Here are a few of the ideas discussed:

    • Teams want to use technology to enhance the fan experience, especially the downtime when the game isn’t happening (e.g. between innings, pitcher changeovers, etc.) and the community element
    • Bandwidth is no longer a concern at modern stadiums as every fan can stream video real-time, opening up new opportunities (drones? more cameras on wires?)
    • Startups play an important role in the sports technology world even though most will fail (it only takes one to change the world)

    I’m excited about the future of sports and technology.

    What else? What are some more thoughts on the intersection of sports and technology?