David Cummings on Startups

Blog

  • The $1 Million Annual Recurring Revenue Milestone

    Continuing with yesterday’s post on Measuring the # of Startups that Raise Money at $10M+ Valuations, there’s another startup community metric worth measuring: the number of startups that achieve $1 million in annual recurring revenue (ARR). Much like the $10M+ valuation is a great indicator of potential success, $1 million in ARR is also a great indicator of potential success. Here are a few thoughts on the $1 million in ARR milestone:

    • Assuming 70-80% gross margins (revenue minus cost of goods sold), there’s enough cash flowing through the startup to maintain a team of 5-10 people indefinitely to grow the business
    • With $1M in annual recurring revenue and a great growth rate, the company has enough traction to raise a small Series A round or another angel round (see Metrics to Raise a Series A)
    • Ability to join a great entrepreneurial group like Entrepreneurs’ Organization (it has a $1 million minimum revenue threshold)
    • Enough continuous feedback and input from customers (product usage is oxygen) to expand and improve the product indefinitely so as to build the customer base

    All first-time entrepreneurs should make it a major goal to hit $1 million in annual recurring revenue. The $1 million ARR milestone represents the financial core of a sustainable business.

    What else? What are some more thoughts on the $1 million in annual recurring revenue milestone?

  • Measuring the # of Startups that Raise Money at $10M+ Valuations

    One of the common questions about the Atlanta Tech Village is how we measure startup success. Of course, we throw big parties to celebrate graduates like Yik Yak and SalesLoft, but it usually takes years before a company has enough local employees to warrant moving out. Long term, we’re tracking the number of jobs created by active and graduated Tech Village companies towards our goal of helping create 10,000 new jobs. One idea, as another metric to track, is the number of startups that achieve a post-money valuation greater than $10 million.

    Here are a few thoughts as to why a $10M+ valuation is worth tracking:

    • Represents a likely level of customer traction that something good is going on past product/market fit
    • Shows that the startup has progressed beyond angel investors and likely has institutional investors
    • Means the startup has raised a meaningful amount of money (e.g. > $2 million)
    • Makes it likely that the startup has a team of 10+ employees and the potential to create many more jobs

    Measuring the number of startups that raise money at a $10M+ post-money valuation is another worthwhile metric for ambitious startup communities.

    What else? What are some more reasons why the $10M+ valuation is worth tracking?

  • 7 Elements of a SaaS Platform Company

    Within the B2B SaaS world, one of the common entrepreneurial aspirations is to build a platform company. A platform company, like it sounds, is one that achieves a level of success and market penetration such that a number of other companies build add-ons or integrations to programmatically interact with the platform. Salesforce.com (owner of Pardot) is the most well known SaaS example.

    Here are seven elements of a SaaS platform company:

    • Large, fast growing customer base (thousands of customers)
    • Publicly available API
    • Mature partner program with hundreds of integrations
    • Major annual user conference and regional conferences
    • Continued thought leadership and innovation
    • Category definer
    • Often publicly traded

    For SaaS entrepreneurs, building a platform company means a tremendous level of success. While there’s no single definition of a platform company, these seven elements are often a good indicator.

    What else? What are some more elements of a SaaS platform company?

  • The Trough of Sorrow

    Paul Graham has a famous graph for new products called “The Process” where things start off with exuberance before quickly cooling down and going through a long low period called the “Trough of Sorrow”:

    The trough of sorrow is real. Startup life is like a roller coaster with high highs and low lows and the product process is closely related. Now, the big question is what do you do when you hit the trough of sorrow. Here are a few thoughts:

    • Celebrate the small wins – Even in the trough of sorrow some things will be going well. Look for these small wins and celebrate them.
    • Find peers in similar situations – Everyone goes through the trough of sorrow on the way to success. Seek out like-minded people and share experiences with each other.
    • Reach out for help – Plenty of other successful entrepreneurs have already persevered through the trough of sorrow and can give guidance on what worked, and didn’t work.
    • Talk to customers – Find the small (possibly tiny) group of customers that absolutely love your product. Listen to them. Ask them for help. Get strength from the fact that they love the product and that there has to be more people like them out there.

    Most entrepreneurs don’t make it through the trough of sorrow. Sometimes the market isn’t ready for the product. Sometimes the product isn’t any good. Yet, sometimes, with enough fortitude and strength, the trough of sorrow is conquered and lift-off happens. Entrepreneurs that make it through this rite of passage appreciate the success even more.

    What else? What are some more thoughts on the trough of sorrow?

  • Video of the Week: Gary Vaynerchuk Vistage Keynote

    In honor of Gary Vaynerchuk keynoting the SalesLoft Rainmaker 2016 conference next week, our video of the week is his Vistage keynote. This talk is much more focused on his entrepreneurial journey compared to the previous talk at USC. Enjoy!

    From YouTube: Gary Vaynerchuk builds businesses. Fresh out of college he took his family wine business and grew it from a $3M to a $60M business in just five years. Now he runs VaynerMedia, one of the world’s hottest digital agencies. Along the way he became a prolific angel investor and venture capitalist, investing in companies like Facebook, Twitter, Tumblr, Uber, and Birchbox before eventually co-founding VaynerRSE, a $25M angel fund.

  • Build a Management Training Program

    Once we hit the scale up phase at Pardot, we made the decision that we wanted to promote managers from within, whenever possible. This meant we had a number of first-time managers, and a need for a management training program. Next, we built a simple management training program that was part book club and part peer discussion.

    Here’s how the program worked:

    The real value was building a culture of experience sharing with a focus on becoming better managers. Entrepreneurs would do well to start a management training program when they experience rapid growth.

    What else? What are some more thoughts on building a management training program?

  • VC Fund Size is Good Indicator of Required Exit Size

    One important consideration for entrepreneurs out raising money is the desired exit size for any given investor. Meaning, all investors want to make great returns, but the size and scale of the desired return varies based on the size and scale of the venture fund. When raising a seed round or small series A from a $25 million fund, if the investor bought in at a $2 million or $3 million valuation and the company sells for $25 million, there’s a good chance everyone will be very happy. Now, if an investor from a $300 million fund bought a small stake in the Series A round and the company sold for $25 million, the investor wouldn’t be happy. Why? Turning $500k into $5 million doesn’t move the needle for a $300 million fund.

    Consider the 27x rule for venture fund aggregate investments. It says that for any given fund size, they need an aggregate exit amount equal to 27 times the size of the fund to be top quartile investors — this requires big exits. Similarly, one venture fund I know doesn’t feel it was a quality exit unless they returned at least 10% of the fund back to their LPs (see Ask Prospective Investors About the Ideal Exit). If the average venture fund owns 10% of a portfolio company, and needs to return at least 10% of the fund size to their LPs in the event of an exit, the target for a typical exit needs to be the size of the investor’s fund, or larger.

    Entrepreneurs would do well to know that the VC fund size is a good indicator of minimum required exit size for everyone to be happy. The larger the fund, the larger the required exit.

    What else? What are some more thoughts on the idea that VC fund size is a good indicator of required exit size?

  • Benefits of Internal Recruiters

    When a startup hits the scaling phase and starts hiring a significant number of people on a regular basis, one of the best things to do is to hire an internal recruiter. At Pardot, we actually hired several full-time internal recruiters well before we hit 100 employees as we saw our fast growth continuing indefinitely. Here are a few benefits of internal recruiters:

    • Internal recruiters learn the culture and core values inside and out
    • Internal recruiters get to know the team and hiring managers such that they can better align candidates with positions
    • Internal recruiters are only focused on their own company (as opposed to being split across different companies)
    • Internal recruiters can build a future pipeline of candidates well in advance so that when the next milestone is achieved, or funding round secured, the time to getting great new hires on board is significantly reduced

    Hiring internal recruiters early on in the scaling process can make a huge impact on the business. Entrepreneurs would do well to engage internal recruiters earlier than expected.

    What else? What are some more benefits of internal recruiters?

  • Write an LP Portfolio Summary from the Investor Perspective

    Earlier today I received the quarterly update from a venture partnership where I’m a limited partner. Limited partners are the investors behind the investors. The LP update includes information about the fund (like number of investments, amount of money deployed, etc.) as well as a page for each portfolio company. Similar to an executive summary, the LP portfolio summary explains the startup in a straightforward way with limited hype. Here are the typical sections in an LP portfolio summary:

    • Company name
    • Geographic location
    • One line company description
    • Investment summary table
      • Amount invested
      • Total equity capital invested
      • Ownership percentage
      • Investment date
      • CEO
      • VC board member
    • Investment overview
    • Company overview
    • Market overview
    • Management team

    For entrepreneurs looking to raise money, writing an LP portfolio summary from the perspective of your potential investor is a good exercise to get in the mindset of the investor and think through the respective details. The key is to present the information in a concise way that is informative without being jargon-filled.

    What else? What are some more thoughts on writing an LP portfolio summary from the investor perspective?

  • Atlanta Startup Village #35

    Tomorrow, Monday, February 29th at 7pm is Atlanta Startup Village #35 at the Atlanta Tech Village. Join over 450 people that have already RSVP’d and learn about five new startups. Here are the presenting companies:

    • Give360 – a bold, new way to fundraise
    • EventTent – the newest “go-to” event app that enhances live experiences.
    • The Un-brokerage – insurance on your time.
    • VeriSolutions – intelligent restaurant safety monitoring
    • Collabmix – Collaborate, Record and Share Music Files

    It’s going to be a great event — thanks to everyone that makes it happen.

    Also, want to learn about more startups in Atlanta? Check out the list of startups at the Atlanta Tech Village.