David Cummings on Startups

Tag: Entrepreneurship

  • 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.

  • 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.

  • 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.

  • Recruiting on Non-Recruiting Work Trips

    Recently, I was catching up with a friend, and she shared a story that stuck in my mind. A friend of hers has a nephew who’s an undergraduate studying AI at one of the prestigious state schools in the Midwest. One day, out of the blue, he received an email from the founder/CEO of a famous AI company (you can guess which one) requesting to meet. Not thinking the email was real, he initially didn’t respond. After a day, he thought, “Well, what if it is real? I might as well respond.” So he responded, and the CEO replied that he would enjoy meeting at a certain date and time, leaving it up to the student to share whichever place works best for him. The student threw out a place and set it up.

    Now, he expected the CEO to roll in with an entourage, team members, and a whole experience. Instead, it was just the CEO, and they had a great one-hour conversation, marking the start of a relationship. For many entrepreneurs, recruiting and building a team is one of the most important parts of the job. For first-time entrepreneurs, it takes time—and sometimes even years—before it clicks that the recruiting function needs to happen in parallel across many different positions and well in advance of needing that hire.

    One way to make this actionable is to build a list of potential hires and roles the organization will need in the next 12 to 24 months. With this list in place, start sharing it with friends, colleagues, investors, and partners, working to build a pre-pipeline of potential candidates. Taking it one step further, with this example from above, every time you visit a city to meet a customer, partner, or investor, make a point of reaching out to three to five potential candidates in that market and work to get at least one in-person meeting with them. While this does take a lot of work, building a team is as important as it gets.

    The next time you hear an entrepreneur lament how hard it is to fill a role, remind him that 10 to 20% of his time should be spent on recruiting—both for roles open today and roles that will be open tomorrow.

  • 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.

  • Incredibly Narrow to Start

    Last week, I was catching up with some entrepreneurs who are off to a fast start. They’ve cobbled together a solution using a mix of off-the-shelf technology, proprietary technology, and human-in-the-loop services. However, the leads coming in have been for a variety of different use cases and ideas.

    It’s a high-class problem to have—clearly, the market wants what they’re offering. But as entrepreneurs with limited resources, it’s critical to focus on the most acute pain in the market. There’s an old adage in startup land: more startups die from indigestion than starvation. This means that startups often fail not from a lack of opportunity but from trying to do too many different things for too many different customers, ultimately taking on more than they can handle.

    So, how do you figure out where to focus when you’ve found an unmet need in the market? Here are a few ideas:

    • Quantify the value. How much are prospects willing to pay? Which ones have the most urgent need?
    • Timeline. Who can roll out the technology the fastest? This can also serve as a proxy for urgency and value.
    • Size of market segment. Looking beyond these initial leads, which market opportunity has the most long-term potential? Getting a wedge into a small but fast-growing market that will eventually be large is one of the best ways to build a business.
    • Customer-funded development. Is a potential customer willing to fund new features and solutions to address their needs? In an ideal scenario, customer pain aligns with the entrepreneur’s vision, and development is funded by the customer.
    • Willingness to partner. Is the prospect interested in joining a customer advisory board and influencing future development? Some people enjoy being influencers, even for B2B products. These individuals are incredibly valuable to startups as they provide testimonials and answer reference calls—don’t underestimate the importance of having a customer who cares.

    Ultimately, it benefits the entrepreneur to zoom in and focus on the use case that both fits their vision and has the potential to build the foundation of a business that matches their ambition. Entrepreneurs would do well to start unbelievably narrow, nail it, and then expand. Starting small is the way to go big.