David Cummings on Startups

Tag: finance

  • 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.

  • Everything Compounds

    Last week, an entrepreneur asked me what I appreciate now, after 25 years as an entrepreneur, that I didn’t fully grasp back then. After a moment of reflection, I replied that everything compounds. As children, we learn about compounding in the context of money, often citing Albert Einstein’s famous quote that compound interest is the eighth wonder of the world. While this is true, the principle of compounding extends far beyond finances—it applies to everything.

    For example, when I moved to Atlanta, I knew only a few people. After a year, I still hadn’t found my community. One late afternoon, I called a college friend and shared my feelings. He expressed a similar sentiment but suggested inviting people to breakfast and lunch to build connections. I took his advice to heart. For a solid decade, I scheduled business lunches three to four days a week and business breakfasts one to two days a week. As a result, I now know hundreds of entrepreneurs and community leaders, many of whom have become friends and colleagues for one or two decades. Relationships, like everything else, compound over time.

    For over 15 years, I’ve read dozens of blogs and information-aggregation sites like Techmeme and Hacker News. For the past decade, I’ve listened to numerous podcasts on business, technology, and startups. By consistently consuming information in these areas, my knowledge, pattern matching, and mental models have compounded. While AI and large language models (LLMs) may accelerate information retrieval and analysis, the value of compounding knowledge will always remain relevant.

    Everything compounds—from money to relationships to knowledge and beyond. The key is to start investing time and energy now. Build a process through consistent inputs and habits, and after many years, you’ll reap the rewards. The best time to start is today.

  • 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.

  • Three Financial Tips for Growing Businesses

    Last week I had the opportunity to participate in the EO Accelerator quarterly education day as I’m the Champion for the Accelerator program on the EO Atlanta Board. Each quarter we have an all day education event taught by a certified facilitator that flies in for the program. The program, for entrepreneurs with revenues under $1 million, is three years long, with rolling admittance and unique content on the topics of People, Strategy, Money, and Sales. This was Money day.

    Money day was taught by Greg Crabtree, one of the most entrepreneur-minded CPAs I’ve ever met. Greg runs a firm in Huntsville, AL that charges a flat monthly fee, typically $400 – $1,000, to clients in exchange for fixed quarterly accounting services and unlimited advice. Greg provided several frameworks for thinking about financial concepts in business, that are especially helpful for entrepreneurs.

    Salary Cap

    The idea behind the salary cap comes from professional sports, like the NFL. The way to calculate it for your business is to take all your non-labor costs on a trailing 12 month basis and subtract that value from your trailing 12 month revenues. Why is this good to measure? It helps you focus on the maximum amount the business will bear for labor costs before the company won’t be profitable. Too often, entrepreneurs add new staff before the business warrants it and this provides a value to monitor. Note that looking at your trailing 12 months expenses and revenue is typically better than looking at annual values on a calendar year, for the purposes of making decisions like hiring.

    Core Working Capital

    One question I’ve asked many times, and been asked many times, is “How do I determine how much I should have in the bank before expanding/hiring?” Core working capital (CWC) is the answer to that question. CWC, according to Greg’s recommendation, is two months of monthly operating costs in cash in the bank after the following:

    • Taxes
    • Debt payments (he recommends no debt or line of credit)
    • Current liabilities

    Of course, the amount of desired working capital will vary from business to business, but this simple rule of two months of cash in the bank is a good starting point.

    Profit Margin Goals

    The third take away from Greg came in the form of profit margin goals. Greg’s advice was that businesses should strive for a 10% profit margin after fair market wages are incorporated for all principals in the business. Here are the three common profit ranges for a growing business:

    • 5% range – the danger zone
    • 10% range – the target for most businesses
    • 15% range – doing extremely well, especially if the business has scale

    I hope these three financial ideas for growing businesses are as beneficial to you as they are to me. Thanks again to Greg for doing a great job.