David Cummings on Startups

Blog

  • Addressing Competitor FUD

    One major challenge for a startup is when established companies start putting out FUD to slow the upstart down. FUD, an acronym for Fear, Uncertainty, and Doubt, is painful for scrappy startups that are working hard and doing what’s right for the customer, yet it’s a normal part of business.

    Here are a few thoughts on addressing competitor FUD:

    • Don’t ignore the FUD — talk about it head-on with the potential customers, and make sure every issue is discussed (too small, will go out of business, not proven, about to be eclipsed by a new in-house product, etc.)
    • Engage with the potential customer on a level where it’s abundantly clear how the product or service will be better, faster, and/or cheaper than how they’re doing it now, and tie that directly to a hard ROI (the solution needs to be a must-have and in the path of revenue)
    • Reach out to the competitor spreading the FUD and look to build a bridge, or at least the start of a relationship
    • Finally, ensure that you’re controlling what you can control

    Competitor FUD is one of the more annoying aspects of being an entrepreneur but it still needs to addressed, just like everything else. Don’t ignore it or shy away from it and build the case for why it it’s a non-issue.

    What else? What are some more thoughts on addressing competitor FUD?

  • The Most Successful B2B Apps are Must-Haves

    One area I see a number of entrepreneurs struggle with is building a product that is truly a must-have for their customer. While it’s true that every spreadsheet is another SaaS app, the reality is that if what the app does is only slightly better than the spreadsheet, it’s going to be a nice-to-have and not a must-have. Why? Because spreadsheets are commonplace, well understood, and people don’t like change. The most successful B2B apps are must-haves.

    Here are a few ideas for assessing if an app is a must-have:

    • Customers say things like “I don’t know how I did my job before XYZ” and “I can’t run my business without XYZ”
    • If the app goes down, customers are calling immediately (as opposed to shrugging their shoulders and not caring)
    • Customers use the app multiple times per week, if not daily, to accomplish something important
    • Is the app clearly in the path of revenue?
    • The results (value delivered) are not possible without specialized software (e.g. the data isn’t available without the system capturing it, the data size is too large to process it in spreadsheets, the data is too siloed, the data is too large to be actionable without automations, etc.)

    Building a B2B app is easy. Building a must-have B2B app that hundreds or thousands of customers use is incredibly hard. Build a must-have B2B app whenever possible.

    What else? What are some more thoughts on the idea that the most successful B2B apps are must-haves?

  • Video of the Week: Making Something People Love

    For our video of the week, watch the Tools for Entrepreneurs: Making Something People Love as part of Google for Entrepreneurs. Enjoy!

    From YouTube: Google for Entrepreneurs and General Assembly have partnered up to create “Tools for Entrepreneurs,” video classes for entrepreneurs to grow their skills and grow their businesses. — Renowned entrepreneur and Reddit cofounder Alexis Ohanian, will inspire you to think of unique ways to connect with your customers, and to build a community of users who want your business to succeed. In this class you’ll learn some key branding, marketing, and user experience principles, plus specific tactics and strategies that you can use to create a company people love.

  • Sell Less, Minimize Dilution

    One piece of advice that I’ve recommended to many entrepreneurs, with little success, is that they don’t have to sell the typical 20-30% of their business every financing round. Add the 10 – 15% additional dilution for each round from the new optional pool, and the overall dilution is often 40%+. Here’s the thing: institutional investors love to say that they have to buy at least 20% of the business for it to be worthwhile, but in reality, the percent ownership is a flexible amount.

    Here are a few thoughts on selling less and minimizing dilution:

    • If it’s a winner take all or winner take most market, forget about dilution and focus on winning
    • Many markets have multiple winners (like email marketing), such that there’s room for several players including ones that don’t raise a ton (or any) outside capital, and still build great businesses (like Pardot and MailChimp)
    • Find a partner that can provide enough capital to get to the next milestone (e.g. raise $2.5 million instead of $5 million and model it out so that you still make meaningful progress over the next 18 – 24 months)
    • Pay close attention to growth rate and don’t let it get below 100% such that you raise enough capital to continue to grow fast (slow or no growth is the death of many venture-backed startups)
    • Know that there are many more sub $100 million exits than there are above that amount (see less than 2% of all venture-backed startups sell for more than $100 million)
    • Venture debt is an amazing deal and should be pursued (see credit lines for SaaS startups)

    I know the glamorous thing to do is to raise a bunch of money but the reality is that most entrepreneurs can’t do that, and the ones that can should really consider raising less money and being more conscious of their dilution.

    What else? What are some more thoughts on selling less and minimizing dilution?

  • The Ideal Team Player

    Patrick Lencioni is one of my favorite leadership authors writing books like The Advantage and The 5 Dysfunctions of a Team. His latest book, The Ideal Team Player, is focused on “how to recognize and cultivate the three essential virtues.” As always, he starts with a fable and then goes into more detail.

    Here are the three virtues and descriptions from the book:

    1. Humility – Humility isn’t thinking less of yourself, but thinking of yourself less.
    2. Hunger – Hungry people are always looking for more.
    3. People smarts – A person’s common sense about people…the ability to be interpersonally appropriate and aware.

    Looking to improve your leadership skills and build a better organization? Start by reading Lencioni’s books.

    What else? What are your thoughts on the book The Ideal Team Player?

  • Two Major SaaS Exits Announced

    After last week’s Lack of SaaS Consolidation post, we just had two major SaaS exits announced in the last 24 hours:

    With relatively few SaaS exits recently, these two are huge. What to make of it? Here are a few thoughts:

    • SaaS has much more growth ahead than public markets even priced in
    • Market leaders get a serious premium
    • Consolidation will eventually happen for the category leaders
    • Plan on 10+ years for the largest of SaaS exits
    • Look for more of these huge exits over the next five years (Zendesk, Shopify, HubSpot, etc.)

    It’s a great time to be in SaaS and we have many years of growth ahead of us.

    What else? What are some more thoughts on these recent SaaS acquisition announcements?

  • 20+ Fundraising Tips from First Round Capital

    First Round Capital has a great new article up titled The Fundraising Wisdom That Helped Our Founders Raise $18B in Follow-On Capital. Every entrepreneur that’s raising money, or considering raising money, should head on over and read it. Here are 20+ tips from the post:

    1. First, Fix Your Timeline
    2. Target the Right Investors
      1. Vet the portfolio, pick the partner
    3. Generate Scarcity
      1. Fundraise like a surfer — plan to take on investors in sets.
      2. Make it a race
    4. The Wins and Sins of Pitching
      1. Surface all the burning questions
      2. Frame your problem in an original way
      3. Anticipate and address any objections
      4. Don’t bury your lead
      5. Explain the customer pain point faster with emotion
      6. Don’t just have a dedicated competition slide
      7. Put your team slide toward the end of the deck
      8. Keep your slides simple and rely more on what you say
      9. Make your appendix your arsenal
      10. Don’t stress about slide numbers
      11. Don’t roll with an entourage
      12. Pitch to your personality
      13. Sync your timeline and your mindset
      14. Exhibit unapologetic confidence
      15. Build credibility through vulnerability
      16. Don’t trigger the bullsh*t meter
    5. Rehearsal Required
    6. Putting it all Together

    Read the post and soak in the fundraising wisdom — it’s worth your time.

    What else? What are some more fundraising tips?

  • Leads, Leads, Leads

    Whenever I’m talking to entrepreneurs, especially seed stage entrepreneurs, the number one challenge is customer acquisition. Drilling in, more specifically, every entrepreneur wants more leads (who wouldn’t?). In fact, Jason Lemkin argues that lead velocity rate is the most important metric in SaaS. Since leads are so important, it follows that entrepreneurs need to build internal lead generation capabilities.

    Here are a few thoughts on lead generation:

    • Use a marketing automation system as the core of the lead generation efforts
    • Pick a sales development cloud to execute outbound campaigns
    • Run the standard B2B marketing playbook (SEO, SEM, email campaigns, webinars, ebooks, etc.)
    • Ensure the marketing team has a quantitive mindset (think analytics and data — Google Analytics is your friend)
    • Establish a definition of marketing qualified lead and sales qualified lead
    • Require clear objectives and key results from the team
    • Build a repeatable process and constantly iterate

    Lead generation is significantly harder than it looks. Entrepreneurs need to build a customer acquisition machine post product/market fit, and lead generation is one of the top priorities.

    What else? What are some more thoughts on leads being so critical in building a successful startup?

  • Economics of a Software-Focused Private Equity Strategy

    A few weeks ago I had the chance to spend time with a general partner from a large private equity firm. This particular partner was focused on software companies in the middle market. Naturally, I wanted to learn how the model works, so I drilled in.

    Here’s the general idea:

    • Buy the majority of a “platform” software company with modest growth for 10x EBITDA (e.g. find a software company with $40 million in revenue generating $10 million/year in EBITDA and purchase 70% of it for $70 million)
    • Spend 3-4 years helping the platform company acquire 5-10 smaller, complementary software companies for 5x EBITDA (sub-scale companies sell for a much lower multiple e.g. a $5 million software company doing $1 million in EBITDA might sell for $5 million)
    • Build up the company to $30 – $40 million/year in EBITDA and sell it for 10x EBITDA (likely to another private equity firm)

    Pretty interesting. This makes sense and is a standard roll up strategy, only applied to software companies. The next time you read about a private equity firm buying a software company with modest growth, there’s a good chance this is the strategy.

    What else? What are some more thoughts on the economics of a software-focused private equity strategy?

  • Lack of SaaS Consolidation

    Villi Iltchev has an interesting post up titled Why SaaS Consolidation is Not Happening. As more and more money has been invested in SaaS over the past 10 years, the logical expectation is that there would be a corresponding number of exits. Only, the number of material SaaS exits has been relatively small.

    Here are a few of the challenges with SaaS consolidation as enumerated by the author:

    • Supporting and scaling multiple clouds is daunting.
    • Customer Success is the vendor’s responsibility in SaaS.
    • Distribution in SaaS is much less impactful.
    • Sales productivity does not get better.

    I agree and expect to see a number of small-to-medium SaaS companies rolled up over the next five years (see What Happens to Small SaaS Companies). Once the 10 year horizon is done for venture funds, and a number of their SaaS investments are only growing modestly, look for a number of exits to private equity firms that will roll them up and maximize cash flow.

    What else? What are some other thoughts on the lack of SaaS consolidation?