David Cummings on Startups

Tag: business

  • KPI Definitions in Board Decks

    A question I get from entrepreneurs from time to time is to look at past board decks from other startups. Board decks are a normal part of venture-backed startups and help align the executive team, the entrepreneur, and the investors on a quarterly basis.

    Now, decks don’t have a defined standard, so they are a little bit all over the place. But the best ones capture what’s going well, what’s not going well, the strategy, plans, and, of course, metrics.

    On the metrics front, one thing I’ve seen more frequently — but never saw over the first 10 or 15 years — is KPI definitions. Board decks include a variety of performance indicators and metrics, but just because it says “recurring revenue” or “gross renewal rate” doesn’t mean it’s measured the same way everyone else measures it.

    The trend now is to include KPI definitions at the end of the deck that outline each KPI, the unit of measurement, and how it’s calculated. Here’s a list of common board metrics:

    Corporate

    • ARR
    • Net new ACV
    • Net dollar retention
    • Gross dollar retention
    • Operating margin (Op margin)
    • Burn rate
    • Days to zero cash

    Marketing

    • Signups
    • Marketing qualified leads
    • Sales qualified leads

    Sales

    • Sales new ACV
    • Sales efficiency

    Customer Success

    • Managed portfolio efficiency
    • MP NDR (Net dollar retention)
    • MP GDR (Gross dollar retention)
    • CSM carry (ARR per CSM employee)

    Customer Support

    • Cost per case
    • Cost per MAU
    • Case close via automation
    • Support CSAT

    R&D

    • Plan / Do
    • Say / Do
    • Cycle times
    • Availability

    Finance

    • Expense actual to forecast
    • Days to close books
    • Net New ACV actual to forecast
    • Revenue actual to forecast

    People

    • Voluntary attrition 
    • New hire attrition
    • New hire starts
    • Exits

    Entrepreneurs would do well to include KPI definition slides at the end of their board decks to ensure that everyone is on the same page and the metrics are calculated in a way that is readily understood and, ideally, aligned with industry standards.

  • Investor Responsiveness as #1 Value

    Last month, I was talking to an entrepreneur about his experience with a variety of investors over multiple rounds of funding. Toward the end of the conversation, I asked which investor provided the most value and why. Without missing a beat, he said one of the investors stood out, and that the main driver of value was simply responsiveness. Anytime the entrepreneur had a question, the investor would respond immediately with an email or a phone call, regardless of the time of day or day of the week.

    At first, when an investor gets involved, there’s a period of time where the entrepreneur and investor feel out the relationship. What’s appropriate? What’s a good cadence for checking in? What areas does the investor like to work on or help with? And so on. From an investor’s perspective, they might invest in a couple of startups per year, up to dozens depending on their style. Whereas an entrepreneur might have a handful of serious investors and several casual investors on their cap table. The ratios of relationships are nowhere near the same.

    As an entrepreneur goes through an issue, or opportunity for the first time, having an investor who has been there before in a similar situation can be invaluable. Only, the investor has to want to share and spend time with the entrepreneur for it to be mutually beneficial.

    Thinking about this entrepreneur’s comment—that his most valuable investor was the one who was most responsive—makes sense. The entrepreneur is in the trenches, working hard to make progress, and having an on-demand sounding board with experience and knowledge is invaluable.

    My recommendation for entrepreneurs when talking to potential investors is to ask how they like to work with the entrepreneurs they invest in. Entrepreneurs would do well to have a go-to person they look forward to talking with, who has relevant experience and, crucially, is super responsive.

  • Starting Over as an Entrepreneur

    Recently, I was asked what I would do if I could start over as an entrepreneur. This question prompted me to reflect on my journey, particularly the early years when I tried numerous ideas that didn’t succeed. Looking back to my earliest beginnings in the late 1990s, when the Internet was taking off, I started as a freelance web developer during high school and college, building websites for small businesses and nonprofits.

    After several years of freelancing, I listened to client feedback and requests, which led to my first real software product idea: a web content management system delivered as Software as a Service (SaaS). This concept didn’t exist at the time. The key lesson was that the Internet’s rapid growth created opportunities for businesses and organizations eager to establish an online presence but lacking the expertise or desire to do it themselves. They were happy to pay for someone to handle the work and act as their consultant.

    How does this tie back to the question of starting over as an entrepreneur today? The current excitement and energy around artificial intelligence (AI), which feels reminiscent of the Internet boom in the late 1990s. The enthusiasm for AI and its potential to transform the world mirrors that earlier era. Just as I helped companies navigate the shift to the Internet, I would now position myself as an AI consultant. I would cold-call and network with businesses and organizations to help them integrate AI tools and consult on optimizing their processes with AI.

    However, the ultimate goal isn’t to remain an AI consultant. Instead, it’s to build relationships with a variety of businesses to identify unmet market needs. From there, I would develop AI-powered business software to help companies operate more efficiently and build a startup around that idea. Rather than searching for a software idea directly from the market, I propose an intermediate step: becoming a general AI problem-solver for companies. This involves doing real work, adding tangible value, and listening to authentic feedback for as long as it takes to discover a compelling AI-related software idea.

    My recommendation to aspiring entrepreneurs interested in B2B software is to work with various companies, assisting them with AI-related change management. This approach mirrors my efforts decades ago, helping organizations derive value from the Internet. While the future is uncertain, I firmly believe AI is the next major technological wave. A tremendous amount of technology implementation and change management will be required, particularly in helping businesses unlock AI’s potential. This work will uncover countless opportunities for new software products, paving the way for thousands of new startups.

  • The Preemptive Funding Offer

    Last week, I caught up with an entrepreneur, and we discussed a preemptive funding offer. The startup is thriving, growing rapidly in a large market with limited competition. Currently, the entrepreneur doesn’t need to raise capital, especially as key business metrics continue to improve. As the company grows, potential investors frequently reach out to build relationships before funding becomes necessary. The entrepreneur has started taking these meetings to connect with the venture community. After a particularly promising meeting, one investor offered a substantial investment at a valuation significantly higher than the last round. So, what should the entrepreneur do?

    We weighed the pros and cons. On the pro side, accepting the offer provides time to assess the investor’s compatibility, ensuring the right chemistry and personality fit for a long-term partnership. The additional capital would support a more aggressive hiring plan, considering it takes three to six months to onboard and scale a team. This could accelerate growth and position the company for greater opportunities. Moreover, the extra funds could act as a financial cushion, offering flexibility to seize new opportunities without immediate spending pressure.

    On the con side, raising money now at a higher valuation, when it’s not needed, reduces optionality. It sets a higher exit bar, which could complicate a future sale. Additional capital also brings increased pressure to grow and expand, which can be beneficial but may sometimes hinder the business. Finally, if growth continues and funds aren’t immediately necessary, the entrepreneur could raise capital later at an even higher valuation, minimizing dilution.

    There’s no right or wrong answer—only an opportunity to reflect on priorities and goals. Entrepreneurs should build relationships with a select group of investors before their next funding round. Occasionally, these connections lead to preemptive offers, as in this case. When this happens, it’s an ideal time to evaluate the next round by listing the pros and cons of acting now versus sticking to the existing financing timeline.

  • Entrepreneurs Selling Equity in a Financing Round

    Last week, I caught up with an entrepreneur who shared his plans to raise a round of capital. Toward the end of our conversation, he asked my thoughts on selling some of his shares during the round to take chips off the table (sell his own equity). “Absolutely,” I said. “I’m a big proponent of entrepreneurs diversifying a bit, especially when it helps them sleep better at night knowing they have some savings.”

    Of course, the challenge is balancing this with the belief that the best person to bet on is yourself, especially when you’ve built a business to the point where investors are willing to buy your personal sharing. After discussing fundraising and personal diversification with numerous entrepreneurs, I’ve seen that selling some personal shares often brings a sigh of relief and a sense of satisfaction. Yes, you might leave some money on the table, and as an entrepreneur, you may feel compelled to go all in. But you never know what lies ahead, and having a financial cushion can be valuable in any scenario.

    From an investor’s perspective, I also support selling some secondary shares. Investing in startups is inherently illiquid with an unpredictable timeline. When the opportunity arises to sell shares—especially if you can recover your initial investment while letting the remaining position ride—it should be taken seriously.

    This point hit home recently when I reflected on a group discussion about investing in an anonymous social network over a decade ago. The business grew rapidly to millions of daily active users, and a prominent venture firm led the next funding round. To achieve their target ownership, they asked existing investors if they’d be interested in selling. I said yes, locking in a return on my angel investment. Ultimately, the business didn’t succeed, but I’m glad I secured a small win while letting most of my investment stay in the startup.

    For entrepreneurs raising a funding round or achieving enough scale to consider a secondary sale, my recommendation is to take some cash off the table and diversify. The future is bright, and a little savings can go a long way.

  • Market A or B for a Startup

    Last week, I spoke with an entrepreneur who shared his elevator pitch. I then asked a few questions and learned more about his business. He mentioned that they have two early adopter customers: one in Industry A with a unique use case, and another in Industry B with a completely different use case. He then asked which market I thought he should focus on. After posing more questions about the product being a must-have versus it being a nice-to-have, and trying to understand the mission-critical nature of the application, it became clear that there wasn’t enough information available yet. I explained that I couldn’t provide any recommendations on which direction to pursue. Instead, I suggested that he either sign more customers and evaluate which use cases are most valuable or spend time with the existing two customers, diving so deeply that he could make a gut decision about which market is better for his business overall.

    In this example, my recommendation is to acquire at least 10 unaffiliated customers to create a broader sample set. This would allow him to learn how, why, where, and when they use the product. From there, the best direction forward would likely become obvious. Back in our time at Pardot, we debated this for years. We initially targeted very small businesses, then small businesses, followed by small-to-medium-sized businesses, and ultimately settled on medium-sized businesses, as well as emerging-growth small businesses. Over time, we honed in on three characteristics that our most successful customers shared.

    First, they had an email newsletter sign-up box on their website. This indicated that they used email marketing in their business and likely engaged in regular communication, such as a monthly newsletter. Second, they ran Google Ads for their product. When we searched the company name or product name and found Google Ads, it showed us that they were investing in lead generation, implying a certain level of marketing presence. Third, we would search the company name on LinkedIn to see if they had any sales reps listed as employees. If they did, it suggested they had a consultative sales process, making a B2B marketing automation platform like ours a worthwhile investment.

    Naturally, we wrote some code to automate the process of finding companies that met these three criteria and used that as our prospecting mechanism for cold outbound to companies that fit our profile. While this example focuses more on identifying common criteria for an ideal customer rather than choosing a specific market, it’s instructive. The ideal customer might not be tied to a particular market or vertical. In our case at Pardot, it was a very horizontal product, and these three criteria were strong indicators of whether a company would succeed with it.

    My recommendation for entrepreneurs is to sign at least 10—if not more—unaffiliated customers and spend a tremendous amount of time with them, either in person or over a Zoom call. Talk to the customers and learn every minute detail possible about why they bought the product, how they use it, and what value they derive from it. Choosing a market, a vertical, or even criteria for the ideal customer is a critical step in an entrepreneur’s journey and should not be taken lightly.

  • From Speed Alone to Speed + Quality

    Most beginning entrepreneurs suffer from the same problem: chasing too many shiny objects. With a clean slate or in the early stages of a new venture, there’s no shortage of ideas to pursue. When a prospect asks for something, the response is often, “Let’s do it.” If a different prospect requests something completely unrelated, the answer is, “Sure, why not?” The goal is to build a business, so responding to customer requests seems logical, right? However, this approach quickly breaks down due to finite resources and limited time. I often say that more startups have died from indigestion rather than starvation.

    In the early days of Pardot, we were building what is now known as marketing automation software, but it didn’t have a term back then. At one point, we called it lead generation software, then lead management software, and eventually, the term that stuck was marketing automation. The fact that we called it lead management software was indicative of what we started doing at the beginning. However, I made the rookie mistake of trying to do too much too fast. While we needed to offer forms, lead routing, lead scoring, and basically an intake system for leads generated on the website that could then be connected to a CRM, we kept building and building. We wanted to have the most feature-rich system, but we lost sight of maintaining a level of quality control at the same time. Being small and nimble, we had to move fast and build out our system, but the lack of quality was driven home one day when I came into the office and customers started reporting that they were seeing leads in their system that they didn’t generate themselves. That’s right; we were cross-contaminating data. Leads generated from one customer were being put into other customers’ systems. Uh-oh, we had moved fast and broken things. It’s one thing to have little bugs that affect the user experience or annoy a customer for a bit; it’s an entirely different thing to corrupt one customer’s data with another’s.

    After quite a bit of work, we had cleaned up the data and addressed the issues in the system. Thankfully, we had learned our lesson: speed creates an early advantage, but speed plus quality is the sustainable advantage.

    Entrepreneurs should use speed to their advantage and iterate as quickly as possible for the customer. Yet, within this context, it’s critical to maintain a strong opinion of where the market is headed and regularly say no to requests that are outside of the vision. Over time, pure speed gets replaced with speed and quality. Pay attention to the signs and be ready to add more efforts around quality as the customer count grows.

  • Entrepreneur Updates as Leading Indicator of Success

    Last week, a fellow entrepreneur said something to me that really stuck in my mind: “I knew he’d be successful based on his updates.” In this case, we’re both angel investors in another entrepreneur’s venture, and we were talking about all the great progress this company is making. The comment about the updates got me thinking and reminded me of another entrepreneur’s regular updates that I receive, which are unbelievably good. Now, when describing the updates as “good,” it isn’t that the business is doing well—although in both cases here, they are—rather, it’s the style, tone, thoughtfulness, quality, and creativeness of the update. It’s about connecting the reader with anecdotes, stories, and emotion, and providing metrics and data in a way that’s easily consumable and approachable. Yes, there are a number of monthly update templates online, and entrepreneurs should default to those if they don’t have their own.

    Regular updates, as well as past board decks and strategy documents, are some of the most informative resources when doing due diligence on a startup, whether you’re a potential investor or a potential mentor. One of my favorite pieces of advice is to ask for these historical documents and use them to look for trends, thoughtfulness, and how an entrepreneur thinks. The goal isn’t to find perfect updates from the last three years; rather, it’s to look for evolution and maturation of thought. It’s to see if the entrepreneur articulates both what has gone well and what hasn’t. Too often, entrepreneurs gloss over the hard times when communicating, but those who do address them often show a greater level of experience and understand that by sharing the challenges, they also share the opportunity for others to help. Past updates and other regular corporate communications are the first place I like to start when understanding an entrepreneur and a startup.

    Entrepreneurs should always provide regular updates. The alternative—not doing any updates—is strongly discouraged. Rather, the big idea is that updates are one of the best ways to connect with all constituents, from employees to partners to mentors to investors. For some entrepreneurs, this can be a calling card that helps differentiate them from others in the market.

  • Double Revenue With No Additional Employees

    For the first 10+ years of my entrepreneurial journey, I was too focused on the number of employees as a key measure of success. When meeting other entrepreneurs, one of the first questions I asked to gauge the size and scale of their business was, So, how many employees do you have now? While that question is still relevant today, it is much less so than in the past.

    Productivity per employee has increased tremendously. The ability to leverage software and other systems for scaling has improved dramatically. The nature of work has also evolved, with more remote and hybrid work arrangements and a greater reliance on contractors and freelancers. My previous belief that W-2 employees were a key proxy for success no longer holds. In fact, many predict that we will see more billion-dollar companies in the future with only a small handful of employees.

    Last week, I heard an entrepreneur say he wants to double the size of his business without increasing headcount. This doesn’t mean keeping the exact same team but rather using AI to boost productivity, outsourcing more functions, and recruiting higher-skilled employees when attrition occurs. The key idea is that as teams grow, management and leadership demands increase, and the organization tends to move more slowly. In this case, the entrepreneur operates at considerable scale, and there is also a focus on increasing annual recurring revenue per employee as a key metric for business health. The goal isn’t to build the largest team possible—it’s to build the most efficient and successful one.

    Entrepreneurs in the growth stage would benefit from considering how they could double their revenue without adding new headcount. What positions would remain? Which ones would be outsourced? Which roles would need to be filled by more experienced hires? What would be the advantages and drawbacks? Entrepreneurs should evaluate the relationship between in-house employees and scale earlier than they might have in the past.

  • The Entrepreneur’s Passion

    Last week, I was talking to an entrepreneur, and one of the things that stood out was the passion in his voice. You could tell he was fired up and committed to building a business with a strong sense of customer empathy.

    When talking to entrepreneurs, I always enjoy asking questions like: Why did you start this business? Why is now the right time to create this company? What makes you uniquely suited to succeed? While these are important questions, a key nuance is the passion exuded by the entrepreneur. Does he really care? Does he truly want to make this happen? What sacrifices is he willing to make?

    The challenge with discussing passion is that it can be subjective. Different personality styles express passion in different ways. Some people get excited, talking fast and with high energy. Others become serious, showing a deep conviction. While passion comes in different forms, it’s ultimately one of those things you recognize when you see it.

    One final note is about the intersection of entrepreneurs searching for a great idea versus being passionate about that idea. This can be a tough balance. Great ideas are hard to find, and while some entrepreneurs are passionate about anything and everything, others struggle to get excited even when they find a strong idea. For many, that lack of excitement is a dealbreaker.

    From my experience, most things that move society forward, help others, or solve meaningful problems provide a foundation for passion. Of course, it’s ideal to find a need in an area you’re already passionate about, but I wouldn’t limit the search for a great idea to things that are immediately exciting.

    The next time you talk to an entrepreneur, listen to his voice. Pay attention to the excitement around the idea. After the conversation, do a mental analysis of his level of passion. Some of the most successful entrepreneurs I know are also the most passionate about their mission.