David Cummings on Startups

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  • Selling Personal Equity During a Financing Round

    Continuing with yesterday’s post Plan for Equity Dilution Over Multiple Rounds, there’s another element worth mentioning: entrepreneurs often sell some personal equity during a financing round. Selling personal equity, as different from the company selling equity, is often called “taking chips off the table.” Since the entrepreneur has taken a significantly below market salary (if any salary), and now he or she is signing up for at least 3 – 5 more years, the natural desire is to de-risk things and sell some equity.

    Here are a few thoughts on selling personal equity during a financing round:

    • Many investors won’t buy founder equity unless there’s at least a few million in recurring revenue (often, much more revenue, or being near cash-flow breakeven, is required)
    • Entrepreneurs can usually only sell a small amount (e.g. ~5% of their equity)
    • Investors are more motivated to buy founder equity if they have a target ownership percentage (e.g. they want to buy a minimum of 20% of the startup, but with existing investors there’s only room for 18%, so they buy 2% more from the founders)
    • When there’s a more competitive funding round (e.g. competing term sheets from multiple investors), it’s more likely that the entrepreneur can sell some personal shares

    Entrepreneurs selling equity and “taking some chips off the table” during a financing event is fairly common once institutional investors get involved (e.g. after the seed stage). Entrepreneurs would do well to know what’s possible and what the current market will bear when it comes to selling personal equity.

    What else? What are some more thoughts on selling personal equity during a financing round?

  • Plan for Equity Dilution Over Multiple Rounds

    One of the areas I like to help entrepreneurs understand is how equity dilution works with each round of financing. A general rule of thumb is 30-40% dilution with each round (e.g. 30% for investors and 10% for a new employee option pool) such that founders usually have between 4 and 15% at time of IPO (see Founder Equity of Ownership at Time of IPO).

    For simple math, let’s say an entrepreneur has 100% of the business. Here’s how the dilution might work, assuming 35% dilution in each round:

    • After round 1 – 65%
    • After round 2 – 42%
    • After round 3 – 28%

    So, after three rounds of financing, an entrepreneur would have 72% less equity (28% of the original equity).

    Entrepreneurs would do well to understand how dilution works and to plan accordingly.

    What else? What are some more thoughts on equity dilution over multiple rounds?

  • Simple Product Management Planning Process

    Scaling the product management planning process is a real challenge as the startup goes from idea stage to early stage to growth stage. At first, the entrepreneur guides all product functions. Then, there are too many different pieces and a product management group convenes on a regular basis to plan and curate functionality. Finally, product management becomes it’s own team (initially a team of one) and grows from there. Naturally, more process is required as the company grows.

    Here’s an example product management planning process:

    • Create a simple Google Spreadsheet with sheets for different constituencies
    • Solicit requests from sales, marketing, services, support, client advocates, product management, and engineering in individual sheets
    • Review the customer idea exchange and take the top 10 most popular items and 20 other items that have the most bang-for-the-buck and add them to a new sheet
    • Analyze trends from the 100 most recent support tickets and confirm the big ones are in the Google Spreadsheet
    • Categorize every item based on priority (low, medium, high) and difficulty (low, medium, high)
    • Get a group of stakeholders together, no more than five people, and debate everything that’s been assembled and decide on the items for the next quarter
    • Share the quarterly roadmap with the team and ensure alignment
    • Repeat each quarter

    Start with a simple product management process and expand it from there always considering the balance between moving fast and making the best decisions possible.

    What else? What are some more thoughts on a simple product management planning process?

  • A Feature vs a Product

    Whenever an entrepreneur shares their idea with me, the following question always comes up, “is this a feature or a product?” Occasionally, it’s clear that this is a feature with product and platform potential, but most products, especially minimum viable products, start out as a feature solving a simple problem.

    At Pardot, version one of our software tracked individual page views of prospects (micro web analytics) and captured web forms. Over time, email marketing, landing pages, scoring, grading, automation rules, drip programs, and more were added. At first it was a feature and then over the course of several years became a product.

    Here are a few questions on the feature vs product debate:

    • How valuable is this functionality as a standalone application?
    • How much more valuable is this feature as part of a broader set of features?
    • How much of a nice-to-have vs a must-have is this functionality?
    • Are there existing products in the market that should add this feature? Why or why wouldn’t they do that?
    • Where is the market headed? More standalone features or products that combine features?

    The feature vs product debate is ongoing, but one of the main takeaways is whether or not an ecosystem and industry gets built around the business (a product/platform) or if the business runs in more of a silo and offers a more limited, but highly focused, feature.

    What else? What are some other thoughts on the idea of a feature vs a product?

  • Scenario Planning

    One of the fun things to do with spreadsheets is build out different “what if” scenarios around sales, marketing, operations, fundraising, exit opportunities, and more. So many different inputs, data points, metrics, and formulas to test. Only, to do this efficiently and effectively, it’s imperative to have accurate data and tools.

    Here are a few thoughts on scenario planning:

    • Ask an advisor, mentor, board member, or fellow entrepreneur for an existing spreadsheet to use as an example
    • Resist the temptation to just plug in a number (e.g. 2% of calls will result in a demo), and instead use real data from the current team in the current time frame (e.g. use a system like SalesLoft to capture the outbound call, email, and demos scheduled data)
    • Build multiple scenarios for each “what if”, including the high/medium/low outcomes or optimistic/average/conservative outcomes
    • Run the results by an experienced CFO or entrepreneur and solicit feedback
    • Shares the results with key members of the team and use it to inform decision making

    Scenario planning is a common strategy entrepreneurs use to grow their business. Build out different “what if” scenarios and make better decisions.

    What else? What are some more thoughts on scenario planning?

  • Video of the Week: Dan Pink – The puzzle of motivation

    For our video of the week, watch Dan Pink talk about the puzzle of motivation. As an entrepreneur and leader, motivation is constant topic, and an area to study. Enjoy!

    From YouTube: Career analyst Dan Pink examines the puzzle of motivation, starting with a fact that social scientists know but most managers don’t: Traditional rewards aren’t always as effective as we think. Listen for illuminating stories — and maybe, a way forward.

  • Terminus as #1 Best Place to Work

    Yesterday, Terminus won the local Atlanta Business Chronicle award for being the #1 best place to work in Atlanta. Awards like this are great external validation for the amazing culture and team that makes up the organization. And, there are several benefits:

    • Employees and other stakeholders have a greater sense of pride and ownership being part of one of the best organizations in the region
    • The workplace surveys, done by a third-party, provide valuable feedback as to areas for improvement (even after coming in 1st place there are ways to get better)
    • Recruiting gets easier as people actively seek out organizations that are best places to work

    Winning a best place to work award is a real honor and Terminus deserves it. Congratulations to Eric and the team!

  • Notes from the Coupa S-1 IPO Filing

    Coupa, a SaaS spend management platform, just published their S-1 IPO filing to go public. Seeing the filing makes me sentimental as I first learned about them in 2009 when they become one of our early Pardot customers and we were at similar stages with our respective startups. Now, with over $100 million in recurring revenue and a strong growth rate, Coupa is positioned for a solid IPO.

    Here are a few notes from the Coupa S-1 IPO filing:

    • Mission – Our mission is to deliver “Value as a Service” by helping our customers maximize their spend under management, achieve significant cost savings and drive profitability. (pg. 1)
    • 460 customers, 1.5 million users, and 2 million suppliers (pg. 1)
    • We refer to the process companies use to purchase goods and services as spend management (pg. 1)
    • Revenues and net losses: (pg. 2)
      • Revenues
        • 2014 – $50.8 million
        • 2015 – $83.7 million
        • 1H 2016 – $60.3 million ($120.6 million annualized divided by 460 customers makes for an average of $262,000/customer/year)
      • Net losses
        • 2014 – $27.3 million
        • 2015 – $46.2 million
        • 1H 2016 – $24.3 million
    • Competitive strengths: (pg. 7)
      • Easy and Intuitive User Interface that Enables Widespread Employee Adoption.
      • Unified Platform With Powerful Functionality.
      • Independence and Interoperability.
      • Powerful Network Effects.
      • Cloud Platform.
      • Rich Partner Ecosystem.
      • Results-Driven Culture.
      • Higher Supplier Adoption.
      • Proprietary Data Enables Superior Insights.
    •  Accumulated deficit of $147.2 million at July 31, 2016 (pg. 16)
    • In general, the upfront costs associated with new customers are higher in the first year than the aggregate revenues we recognize from those new customers in the first year. (pg. 19)
    • We have funded our operations since inception primarily through equity financings and prepayments by customers. (pg. 30)
    • Equity (pg. 121)
      • CEO/Chairman (non-founder): 5.8%
      • VCs – 59%
      • Mutual Funds – 5.1%

    Congrats to the Coupa team on building a meaningful, fast-growing SaaS company. My guess is that Coupa has a strong IPO and gets acquired by someone like Salesforce.com, Oracle, or Microsoft in the next 24 months as they look to expand their SaaS portfolio.

  • No Product Roadmaps

    Continuing with yesterday’s post on Quarterly Product Themes, another area we struggled with at Pardot was product roadmaps. Early on, we tried to map things out for the product. We’d come up with an idea to do Z, and in order to Z we first needed Y, and everything was laid out beautifully. Then, a week later, this other idea/request would come up, we’d debate it vigorously and decide it was more important than an item on the roadmap. Staying close to the customer required a short feedback loop and necessitated rapid product iteration.

    It was time for a change. It was time for no product roadmaps.

    Instead, we had a Google Sheet with a separate tab for each department in the company and their product requests along with a GetSatisfaction idea board for customer requests. Finally, there was a Google Sheet tab for the priority product items and that constantly changed as we moved requests in and out as well as implemented new features and fixes. When a prospect or customer would ask about our product roadmap, we’d say we don’t have a detailed roadmap due to the need to stay nimble, but we’d share big broad ideas about our general strategy and product direction. The product roadmap was no more.

    What else? What are some more thoughts on not doing product roadmaps?

  • Quarterly Product Themes

    One of the challenges we had at Pardot was balancing the different requests from our constituents. Sales wanted one set of features while customer success wanted a different set of features. Then, support had their own desires separate from engineering which wanted to make a number of behind-the-scenes improvements. What to do?

    We eventually arrived at doing a product theme every quarter where we alternated between heavy market-facing improvements (lots of shiny bells and whistles for sales) and heavy back-end improvements (lots of infrastructure work, fixing of nagging issues, and general product polishing). This process worked well in that it was clear to our different stakeholders where the emphasis was for the quarter, along with the expectation of what we’d do the following quarter.

    Consider using product themes for each quarter as the startup grows and product demands increase.

    What else? What are some more thoughts on quarterly product themes?