David Cummings on Startups

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  • 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.

  • 5 Ideas for Prospect List Building

    Back in the very early days of Hannon Hill we had six customers of which two were in higher education. Now, even though it wasn’t enough to be statistically significant, these two colleges loved the product and provided great feedback (usage is oxygen for a product). Sensing an opportunity in higher education, I bought a giant book from Barnes & Noble that reviewed every college and university in the United States (over 4,000 schools). We divided the book in half and started calling people involved with managing all the public facing .edu websites. Today, hundreds of colleges and universities use Hannon Hill to manage thousands of websites and millions of web pages.

    Here are five ideas for prospect list building:

    1. Look for lists of fast-growing companies like the Inc. 5000 or the Deloitte Fast 500
    2. Research tradeshow attendees and exhibitors like Dreamforce or SaaStr Annual
    3. Implement an email finding tool like Email Hunter
    4. Use crowdsourcing tools like Amazon’s Mechanical Turk to flesh out prospect fields
    5. With the lists, run prospecting campaigns on a sales acceleration platform like SalesLoft

    Prospect list building is a critical part of the startup process. Just remember: nothing happens until something is sold.

    What else? What are some more ideas for prospect list building?

  • Video of the Week: Maintaining Success for the Long Term – Michael Moritz

    Our video of the week is actually an audio interview of Michael Moritz from Sequoia Capital sharing how they’ve maintained success as one of the top venture investors for over 30 years. Listen to Sam Altman of Y Combinator interview Michael Moritz on the topic of Maintaining Success for the Long Term. Enjoy!

  • Add 10 – 15% More Dilution to Each Funding Round

    When first-time entrepreneurs set out to raise money, they often consider the tradeoffs of getting on the funding treadmill vs continuing to bootstrap. Once they think the fundraising route is the way to go, I like to recommend they plug the fundraising math in a spreadsheet and see what the different outcomes might look like (e.g. the valuation multiplier to raise money is 5x). Only, this is where many entrepreneurs don’t understand the option pool shuffle.

    Entrepreneurs need to factor in an additional 10 – 15% dilution for each round of funding for new employee stock option pools.

    As part of the pitch to raise money, there’s always the goal to hire X number of new people. Well, to hire those people it requires equity, and the more talented the people, the more equity that’s required. Investors typically want the startup to create a new option pool as part of the financing event.

    Entrepreneurs would do well to factor in 10 – 15% more dilution for each round of funding when analyzing fundraising options.

    What else? What are some more thoughts on the idea that many entrepreneurs don’t think through employee option pools when raising money?

  • 5 Questions to Determine a Must-Have Product

    Continuing with yesterday’s post on the 3 Main Reasons Entrepreneurs Succeed, the idea of a must-have vs nice-to-have product is one of the more difficult things to evaluate. So many product ideas seem great when you hear them but when you actually experience a new product, most fall short of being truly transformative. At Pardot, we pitched a number of different modules and features to prospects but most people didn’t use 50% of the product. At it’s core, the basic functionality of sending tracked emails, understanding user behavior at the one-to-one level, and tieing it all in with the CRM provided the majority of the value. Yet, based on feedback from customers, we knew that the core alone resulted in a “must-have” product.

    Here are five questions to help determine if it’s a must-have product:

    1. If you told your customers tomorrow that you were shutting down the product immediately, how upset would they be?
    2. When you send Net Promoter Score surveys to your customers, how high do they rate you?
    3. If you called up a random customer on the phone and asked if the product unequivocally helps them make more money or save money, would they reply with a resounding “yes”?
    4. When an existing user changes jobs, how hard do they push to get the product in place at their new employer?
    5. When your app goes down briefly for maintenance or a server error, how loud and fast are the complaints?

    Figuring out if a product is a must-have can be difficult early on. As things progress and more customers come on board, hearing statements like “I don’t know how I did my job before using this product” are good indicators of a must-have app. Use these questions to determine if a product is a must-have.

    What else? What are some more questions to help determine if a product is a must-have?

  • 3 Main Reasons Entrepreneurs Succeed

    Earlier today I was talking to a tech investor about different startups in Atlanta. Towards the end of the conversation he asked what I thought were the main reasons why some entrepreneurs succeed and others don’t. It’s a great question that doesn’t have an easy answer. See, there are a number of entrepreneurs that seem to have it all going for them, yet they fail miserably. Conversely, there are a number of entrepreneurs that seem like they have a slim chance of success, yet amazing things happen.

    Here are the three main reasons entrepreneurs succeed:

    1. Market Timing – A seemingly good idea with poor market timing is a bad idea. No matter what the entrepreneur does, if the market isn’t ready, it isn’t going to work out. Market timing matters much more than more people realize (see Bill Gross on market timing).
    2. Resilience – The entrepreneurial journey is a grind, especially the first few years, which are especially hard. I know entrepreneurs that had to pivot multiple times over multiple years before figuring out something that worked. Having the internal fortitude and locus of control makes a big impact.
    3. Must-Have vs Nice-to-Have Product – Too many products, especially tech products, are nice-to-have apps that do something that’s OK but not revolutionary. This is especially hard because it’s not always obvious early on just how valuable and impactful a product can be before it’s fleshed out (see Candy, Vitamins, and Pain-Killers).

    Other aspects like the team are incredibly important but I’ve found these to be the three main reasons entrepreneurs succeed. When a resilient entrepreneur has a must-have product with great market timing, awesome things happen.

    What else? What are your top three reasons entrepreneurs succeed?

  • 5 Common Mistakes Entrepreneurs Make After Raising a Seed Round

    After talking with dozens of seed stage entrepreneurs at the Atlanta Tech Village I’ve come to see a variety of patterns. Now, no two entrepreneurs are the same and no two startups are the same, but there are some general “business physics” that exist. Here are the five common mistakes entrepreneurs make after raising a seed round:

    1. Not doing whatever it takes to get 10 unaffiliated customers as quickly as possible
    2. Not following the 3:1 customer acquisition to engineering spend ratio (depending on the size of the seed round)
    3. Not budgeting to make the money last at least 18 months
    4. Not understanding there’s a Series A crunch before trying to raise the next round and the metrics required to raise a Series A
    5. Not updating the Simplified One Page Strategic Plan every quarter

    The next time you talk to an entrepreneur that has just raised their seed round, share these five common mistakes and help them not make the same errors.

    What else? What are some more common mistakes entrepreneurs make after raising a seed round?