David Cummings on Startups

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  • 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?

  • Video of the Week: Jack Dorsey – The 3 Keys to Twitter’s Success

    For our video of the week, watch Jack Dorsey: The 3 Keys to Twitter’s Success. Enjoy!

    From YouTube: Jack Dorsey outlines three core takeaways from his experiences building and launching Twitter — and more recently — Square, a simple payment utility. 1) Draw: get your idea out of your head and share it, 2) Luck: assess when the time (and the market) is right to execute your idea, 3) Iterate: take in the feedback, be a rigorous editor, and refine your idea.

  • Notes from Twilio S-1 IPO Filing

    Twilio just released their S-1 IPO filing to go public after a tech IPO drought for much of the year (except Atlanta-based SecureWorks). Twilio provides a cloud-based communications platform for phone, text messaging, video, and more (think of it as an easy API for communications). I remember first learning about Twilio back in 2010 when we integrated it into Pardot. We made a connector such that when a lead filled out a form on a site, Pardot would trigger Twilio to call the sales rep assigned to that new prospect, read out the prospect’s information, and say press 1 to connect to the person at which point Twilio would call the new lead with the sales rep on the phone. We used to pitch it as “sales reps hate dialing out but love answering the phone.”

    Here are a few notes from Twilio’s S-1 IPO filing:

    • Our Programmable Communications Cloud software enables developers to embed voice, messaging, video and authentication capabilities into their applications via our simple-to-use Application Programming Interfaces, or APIs. (pg. 1)
    • As of March 31, 2016, over 900,000 developer accounts had been registered on our platform (pg. 2)
    • Revenue (pg. 3)
      2013 – $49.9 million
      2014 – $88.8 million
      2015 – $166.9 million
      2016 Q1 – $59.3 million
    • Losses (pg. 3)
      2013 – $26.9 million
      2014 – $26.8 million
      2015 – $35.5 million
      2016 Q1 – $6.5 million
    • Our platform has global reach, consisting of 22 cloud data centers in seven regions. (pg. 4)
    • We define an Active Customer Account at the end of any period as an individual account, as identified by a unique account identifier, for which we have recognized at least $5 of revenue in the last month of the period. (pg. 14)
    • In the three months ended March 31, 2016, we had nine Variable Customer Accounts, which represented 16% of our total revenue. (pg. 15)
    • Headcount has grown from 386 employees on March 31, 2015 to 567 employees on March 31, 2016 (pg. 17)
    • We believe that our corporate culture has been a critical component of our success. (pg. 17)
    • We also experienced increased expenses in the second quarter of 2015 due to our developer conference, SIGNAL, which we plan to host annually. (pg. 19)
    • We outsource substantially all of our cloud infrastructure to Amazon Web Services (pg. 22)
    • In 2013, 2014 and 2015 and the three months ended March 31, 2016, we derived 9%, 12%, 14% and 15% of our revenue, respectively, from customer accounts located outside the United States. (pg. 23)
    • In 2013, 2014 and 2015 and the three months ended March 31, 2016, WhatsApp accounted for 11%, 13%, 17% and 15% of our revenue, respectively. (pg. 25)
    • WhatsApp has no obligation to provide any notice to us if they elect to stop using our products entirely (pg. 25)
    • Accumulated deficit of $151.8 million (pg. 57)
    • Equity ownership (pg. 143)
      Founder/CEO – 11.9%
      Bessemer Venture Partners – 28.%
      Union Square Ventures – 13.6%
      Fidelity – 6.1%

    With a $240+ million run-rate, Twilio is poised to have a great IPO. As there are telecom fees that lower gross margins and a fair amount of variable revenue, Twilio won’t be priced like a true SaaS company but will still get a healthy multiple due to the great growth rate.

    What else? What are some more thoughts on Twilio’s S-1 IPO filing?

  • Demonstrate Growth Momentum, Even at Modest Scale

    This week I’ve already had conversations with multiple seed stage entrepreneurs that are having a hard time raising money. In each case they have some modest metrics that show progress but don’t have enough revenue to get investors excited. Now, with limited capital, it’s a catch-22 where they need more money to get to the point investors where investors want to invest but can’t get there without investment. My advice: figure out how to show a growth momentum story, even if it’s a modest scale.

    The goal is prove momentum and show month-over-month growth for the last 4-6 months. Here’s what that might look like:

    • Annual recurring revenue started the year at $100,000 and is now at $175,000 five months in growing 15% month-over-month (e.g. $100,000 in month 1, $115,000 in month 2, $132,500 in month 3, $152,000 in month 4, $174,900 in month 5, etc.)
    • Daily active users started the year at 100,000 and are now at 207,000 five months in growing 20% month-over-month (e.g. 100,000 in month 1, 120,000 in month 2, 144,000 in month 3, 172,800 in month 4, 207,360 in month 5, etc.)

    In both of these examples the metrics are still in the seed territory (e.g. institutional investors want to see at least $1 million in annual recurring revenue for a SaaS startup) but there’s a clear story of sustained growth at a modest scale over several months. That sustained growth proves something is working and helps an investor believe that there’s opportunity for even more growth in the future.

    What else? What are some more thoughts on demonstrating growth momentum as a way to get investors interested?

  • The 6/10 Law – A Growth Framework

    Continuing with 7 Takeaways from Mike Maples on the Black Box of VC at the end of the slide deck the author introduces the 6/10 Law as a growth framework to evaluate the scale necessary to build a legendary company. Generally, the idea is that the IPO sweet spot is between years six and 10 such that a startup needs to reach a scale in that timeframe to achieve escape velocity. Here’s the 6/10 Law process:

    • Select 3 Analogous Companies (high, medium, low success) with similar business models
    • All 3 should have gone public
    • Thought Experiment:
      – Can we grow at those rates?
      – How much money did they need to raise and when?
      – When were they IPO-ready?
      – What did their businesses look like? Revenue, growth, margins, G&A, R&D, etc.

    The next time you’re looking for a leadership team exercise, or a personal thought experiment, go through this process and analyze your startup relative to a legendary one with a similar business model.

    What else? What are some more thoughts on the 6/10 Law growth framework?

  • 7 Takeaways from Mike Maples on the Black Box of VC

    Mike Maples, Jr has a great slide deck up titled Inside the Black Box of Venture Capital. Over the course of 77 slides he shares a number of excellent ideas. After reading through it, seven takeaways stood out to me:

    1. Only 3% of VC Partners generate >3x in their careers
    2. VCs are paid to take high risk for high return. It’s the only reason LPs invest in VCs.
    3. The best company in a given year will usually be more valuable than all other 9,999 companies combined
    4. VCs have very little incentive to tell you exactly what they are thinking
    5. There is only one good answer to “who else are you talking to…” – “The usual suspects.”
    6. How much traction do you have? Ideally 30% a month growth in an important area (sales, revenue, users)
    7. Schedule all of your meetings in a single week 3 weeks out into the future if you can; 2 weeks of meetings is OK, but close to the limit

    Interested in venture capital? Interested in raising money from VCs? Go read Inside the Black Box of Venture Capital.

    What else? What are some more takeaways from Inside the Black Box of Venture Capital?

  • Sales and Marketing as a Percentage of Sales, for Public SaaS Companies

    Bloomberg Businessweek has a chart with the sales and marketing costs as a percentage of revenue in the last 12 months for several notable public SaaS companies:

    • Workday – 37%
    • Salesforce.com – 49%
    • ServiceNow – 50%
    • NetSuite – 52%
    • Marketo – 60%
    • Box – 80%

    https://twitter.com/guan/status/734536100027478017

    A few thoughts:

    • These companies clearly believe there is tremendous growth in the market, and investors are backing them up
    • While it isn’t this simple, imagine cutting sales and marketing costs by 80% and many of these companies would be very profitable (another reason why it’s reasonable to value SaaS companies at 4 – 6x revenue)
    • If these public SaaS companies with scale are spending 50%+ of their revenue on sales and marketing, imagine what the unicorn SaaS companies are spending as a percentage of revenue (hint: well over 100%)

    Knowing this, it’s easy to see why Sales-Oriented Startup CEOs are preferred. The most successful SaaS companies are incredibly focused on sales.

    What else? What are some more thoughts on sales and marketing as a percentage of revenue for SaaS companies?