David Cummings on Startups

Blog

  • Sell in Advance of the Roadmap

    Last year I was talking to an entrepreneur who was recounting how they had just lost a big deal they thought they were going to win. Curious, I asked for more details. The prospect was pitched by a competitor where the competitor spent an hour doing a vision call talking about their direction, upcoming features, and general approach to the market. This call, which was about what was potentially going to happen, sealed the deal.

    Entrepreneurs need to sell in advance of the roadmap.

    Meaning, have a vision for the future and sell features and benefits that are coming soon, not purely what’s there today. Now, this can get tricky as we’ve all had sales people promise us things that were not true. That’s not the idea here. The idea is that when prospects buy a SaaS product, they’re not only buying what the product can do today — they’re also buying what the product will do tomorrow. Find the right balance between making sure the prospect will get value right away and promising things to come.

    Don’t underestimate the importance of selling in advance of the roadmap — customers are also buying a vision of the future.

    What else? What are some more thoughts on the idea of selling in advance of the roadmap?

  • Modern BANT Sales Qualification

    Jacco Van der Kooij has a great article up titled BANT Sales Qualification for a New Era. BANT (budget, authority, need, timeline) has been around for decades as a way to qualify sales prospects. Personally, I’ve used BANT for many years as it’s logical and a great starting point in the absence of a more specific methodology (most sales people don’t use any methodology). Only, Jacco argues that BANT needs to be modernized based on factors like SaaS being less of an upfront expense so budget isn’t as big of a concern as it used to be, decision making often goes through a process, as opposed to a specific person, and more. Here’s Jacco’s modern BANT with a new order:

    • N = Need = Impact on the customer business
    • T = Time-line = Critical event for the customer
    • B = Budget = Priority for the customer
    • A = Authority = Decision Process the customer goes through

    Every entrepreneur needs to go read BANT Sales Qualification for a New Era right now.

    What else? What are some more thoughts on modern BANT sales qualification?

  • Know the Number of Customers for $1 Million in Annual Recurring Revenue

    With so much emphasis on hitting the $1 million in annual recurring revenue (ARR) mark (see The $1 Million Annual Recurring Revenue Milestone and 99% of Tech Startups Never Hit $1 Million in Revenue) it’s important to understand the metrics required. For most SaaS startups, recurring revenue is driven by accounts/customers or seats/users.

    Let’s look at a few price points to see how many customers are required for $1 million in ARR ($83,333 in monthly recurring revenue):

    • $20/month = 4,166 customers
    • $100/month = 833
    • $500/month = 167
    • $1,000/month = 83
    • $3,000/month = 28

    How many customers do you have now? What’s your average revenue per customer (sometimes referred to as average revenue per user or ARPU)? How many more customers do you need to hit the major $1 million in ARR milestone?

    $1 million in annual recurring revenue is hard to hit, and 99% of tech entrepreneurs never achieve it. Entrepreneurs should know how many customers it’ll take to hit $1 million in ARR based on their average price point.

    What else? What are some more thoughts on knowing the number of customers required to hit $1 million in annual recurring revenue?

  • 12 Lessons from ThoughtWorks

    Pat Kua has a great article up titled 12 Years, 12 Lessons Working at ThoughtWorks. In his first section “Tools don’t replace thinking”, he hits on something that’s true for all entrepreneurs building SaaS products:

    Too many times I have witnessed managers implement an organisational-wide tool that is locked down to a specific way of working. The tool fails to solve the problem, and actually blocks real work from getting done. Tools should be there to aid, to help prevent known errors and to help us remember repeated tasks, not to replace thinking.

    Here are the 12 lessons:

    1. Tools don’t replace thinking
    2. Agile “transformations” rarely work unless the management group understand its values
    3. Safety is required for learning
    4. Everyone can be a leader
    5. Architects make the best decisions when they code
    6. Courage is required for change
    7. Congruence is essential for building trust
    8. Successful pair programming correlates with good collaboration
    9. Multi model thinking leads to more powerful outcomes
    10. Appreciate that everyone has different strengths
    11. Learning is a lifelong skill
    12. Happiness occurs through positive impact

    While some lessons are developer centric, most are broadly applicable. Go read 12 Years, 12 Lessons Working at ThoughtWorks.

    What else? What are some more takeaways from the article?

  • Economics of a $100 Million Incubator

    Reading about Expa Labs in the NY Times I couldn’t help but think about what the economics might look like for a $100 million incubator. From the article, there are five partners (I’ve met one of them through a mutual friend), eight startups per class, two classes per year, and $500,000 invested in each startup.

    Let’s look at some hypothetical math:

    • Five years of new startup investing/incubating and 10 year total fund life (the incubator is essentially a fund with an investing period and a harvesting period)
    • 40% for new investments ($40 million), 10% for fund expenses ($10 million), and 50% for follow on investments ($50 million)
    • 8 startups per class x $500,000 per startup x 2 classes per year = $8 million in investments per year
    • $40 million for new investments at $8 million in investments per year makes for five years of new investing (80 total investments)
    • Estimated initial target ownership stake of 40% (roughly 20% for the incubator’s value-add and 20% for the $500,000 investment)
    • Assume 20% average ownership stake at time of exit based on a combination of dilution and pro-rata participation
    • Required 3x cash on cash return to be a top tier fund necessitating $300 million in fund proceeds
    • With 20% ownership to achieve $300 million in proceeds, the exits need to have a combined value of $1.5 billion

    Put another way, if Expa Labs can make one unicorn and one half of one unicorn out of 80 incubated startups, they’ll be considered a successful incubator based on having top tier returns.

    What else? What are some more thoughts on the economics of a $100 million incubator?

  • SaaS Founder/CEO Equity at Time of IPO

    As a followup to the Rich or Royal conversation, there’s another example to highlight: SaaS founder equity at time of IPO. Here are the last nine SaaS IPOs profiled on this blog and the founder/CEO equity percentage at time of filing:

    On average, the founder/CEO owned 10.9% of the business at time of IPO. Now, these are some of the most high profile SaaS startups over the past three years and by all measures these founder/CEOs have been tremendously successful. Entrepreneurs would do well to think through the Rich or Royal question and understand the level of dilution that comes from multiple rounds of institutional financing.

    What else? What are some more thoughts on the average SaaS founder/CEO equity at time of IPO?

  • Video of the Week: Vidyard – Small Empires from The Verge

    The Verge has a cool series on YouTube called Small Empires where they profile different startups from around the world. For our video of the week, learn about Vidyard in The startup success story behind Vidyard – Small Empires Ep. 5. Enjoy!

    From YouTube: This Waterloo company started out creating videos, but realized they were better at analyzing other people’s clips. Before there was Vidyard, there was Redwoods Media, a small Canadian startup making marketing videos. Slowly but surely, the company, like so many startups, had to learn two lessons and has come to embrace them over time: being creative is difficult to scale, and they’e actually much better engineers than they are artists.

  • 99% of Tech Startups Never Hit $1 Million in Revenue

    According to the book Scaling Up, 94% of companies — all types of companies, not just tech startups — never hit $1 million in revenue in a calendar year, ever. We’ve all heard the stat that most entrepreneurs fail within five years, but there’s a big difference between not failing and not building a seven figure+ revenue business. So, if 94% of all companies never hit $1 million in revenue, it’s safe to say that 99% of tech startups will never hit $1 million in revenue as tech startups are 10x harder than regular businesses (see the difference between innovative and replicative businesses).

    As an entrepreneur building a tech startup, here are a few things to think about:

    Knowing that 99% of tech startups never hit $1 million in revenue makes success look even more daunting. The key is to continually learn and improve as fast as possible.

    What else? What are some more thoughts on the idea that 99% of tech startups never hit $1 million in revenue?

  • Annual No NDAs Reminder

    Several times this quarter entrepreneurs have asked me for advice, I’ve obliged, and then they’ve promptly given me an NDA to sign. My response is always the same: unfortunately, I don’t sign NDAs to hear startup pitches. Mark Suster’s great post On NDAs and Confidentiality covers all the major points:

    • Processing more legal documents is time consuming and annoying
    • After talking with hundreds of entrepreneurs, it’s not possible to keep track of which ideas came from which entrepreneurs
    • Trust needs to be at the core of a successful relationship, and not initiated by a legal document
    • NDAs are difficult to enforce resulting in little value

    This is the annual no NDAs reminder for most entrepreneurs (note: investors do sign NDAs for growth stage startups).

    What else? What are some more thoughts on NDAs between entrepreneurs and investors?

  • When Things are Hard, More Money Isn’t Always the Solution

    When talking to entrepreneurs, a recurring theme is the belief that if there was more money available, this challenge/headache/difficulty would just go away. It’s as if money solves problems, which isn’t the case. Money can buy the startup more time, which is incredibly valuable, but often there are more fundamental issues that need to be solved.

    Here are a few examples:

    • If I only had money for more software engineers…
      • Without product/market fit, more engineering beyond a modest point often results in product bloat the acts like technical debt (the more the product does, the harder it is to move fast) and makes it harder to pivot (if that becomes required)
    • If I only had money for a bigger marketing budget…
      • Most startups are still trying to figure out a repeatable customer acquisition process and don’t have a marketing process that works. Yes, more money allows for more experimenting but it’s still important to be prudent. Traction: A Startup Guide to Getting Customers has a number of great ideas in it.
    • If I only had money for sales people…
      • Selling is best done by the founders with the help of a sales assistant or SDRs. Throwing money at sales people before the founders prove the value is a quick way to burn through cash.

    Money is hard to come by for most founders and so lacking it is often used as a crutch when things aren’t going well. The best entrepreneurs are resourceful and figure out how to make things work so that they can stay in the arena long enough to win.

    What else? What are some more examples of more money not always being the solution?