The aggregator of TOP 10 Sources Bookmark and Share
paper.io > Business



ADVERTISE ON the FASTEST GROWING AGGREGATOR !

76

Mixergy

« 1 2 3 »
order by views | - date
 
67

Eric Ries

  • Lo, my 57692 subscribers, who are you? 6 September, 2010, 8:08 am
    Since this blog's earliest days, I have made a habit of surveying you, my subscribers. I did it originally as a demonstration of the advantages of having a pathetically small number of customers, but I found the actual info so incredibly helpful, I have done it several times since. Since the last time, your ranks have grown tremendously, and I thank you all for this incredible support. So, to celebrate Labor Day here in the US, I've created another survey. If you're willing to take five minutes to fill it out, I would be most grateful: Click here to take survey As usual, I've added a small minimum viable product (I'm starting to think of this technique as the "survey MVP") at the end, as yet another customer validation exercise. I'll post about the results later; to say anything here would bias the survey. 
  • SXSW 24 August, 2010, 2:24 pm
    Next year will officially mark one-hundred years since scientific management, the first great management paradigm, burst into the national consciousness. It invented many concepts we now take for granted: efficiency, productivity, and the idea of management itself. We owe that movement an incalculable debt of gratitude. Have you decide already how to celebrate this centennial? I have: I'm going to mark the occasion at SXSW Interactive in March, 2011. You're invited (details below). I'm starting to experiment with new ways of talking about the Lean Startup movement and the impact you all are having on the practice of entrepreneurship across countries, industries, and even sizes of companies. We are collectively bringing a new level of scientific rigor to the act of innovation itself, and our revolution is just beginning. We still have much to learn. So take a look at the ideas below, and please leave your thoughts as a comment. As always, I welcome your feedback. The seed of this idea was planted by many of you on Twitter over the past few weeks. In fact, both I and the SXSW organizers got many emails and tweets about the necessity of having Lean Startup be part of SXSWi. As a result, they were kind enough to allow a very late Lean Startup submission to their user-generated PanelPicker system. They use crowdsourcing to figure out which speakers to invite and what topics are of interest to their audience. Even if you've never been to SXSW or don't know what I'm talking about, you can still go vote - it takes less than five minutes. Because we're getting a very late start on the other panels, our submission is way behind. We only have a few days to catch up, as voting ends on August 27 - just three days from now. So please vote, comment, tweet, and help make this happen. Thank you. Here's the submission itself, with my first attempt at a new framing for Lean Startup as a rebirth of scientific management. I'd love to know what you think: The Lean Startup: innovation through experimentation2011 will mark the one-hundredth anniversary of Frederick Winslow Taylor's "Principles of Scientific Management." The tremendous material abundance we enjoy today is the result of the productivity revolution he unleashed by bringing the tools of science to the study of work itself. Management today is rigorous, scientific, and effective -at the production of physical goods. In other areas the picture is bleak, especially for innovative new products. We fail spectacularly in startups and big companies alike. Too often we're building something nobody wants. There is a movement that is trying to eradicate this disease. We are at the beginning of a second scientific management revolution that will bring science, rigor, and discipline to the process of innovation itself. It has already begun to transform the way startups are built around the world. It is called the Lean Startup. All entrepreneurs face these challenges: How do we know if we’re making progress? How do we know if customers will want what we’re building? How do we know what kind of value we can create? Answering requires more than just disciplined thinking at the whiteboard. It requires the coordination of people. In other words, it requires management. The Lean Startup is a management science for entrepreneurs of all kinds. It enables rapid customer-centric iteration. It helps startups test their vision before it's too late. It is a tool for people who want to change the world.Regardless of what the SXSW organizers decide, I intend to host an event in Austin to coincide with the conference. I'm hoping we'll be able to top last year's Lean Startup Smackdown, which was put on by the Austin Lean Startup Circle. I don't know if it will be more like a party, or more like a mini-conference. In fact, I encourage you to weigh in with a comment. Would you be interested in attending? Co-sponsoring or co-organizing? Or just getting drunk? Let me know. Most importantly, I want to continue to send you all my thanks for your tremendous support and encouragement. I can honestly say this is something I would never have imagined attempting on my own, and it is the latest in a series of amazing experiences you've all made possible. Thank you. 
  • Case Study: SlideShare goes freemium 16 August, 2010, 9:25 am
    (Normally, I do not write about companies that are doing a marketing launch. But I have decided to make an exception today, for two reasons. First, SlideShare is a fantastic product (that I use on a regular basis) and an impressive company example of Lean Startup practices in action. Second, their story illustrates a key Lean Startup idea: proving the business in micro-scale. It requires separating the product launch from the marketing launch (see Don't Launch) as well as other staple Lean Startup tactics: minimum viable product, split-testing, customer development and the pivot. This story especially demonstrates that these techniques are not reserved only for tiny startups just starting out. When SlideShare began the journey you're about to read, they already had more than a million visitors a day. Because the stakes were high, they had to successfully use a technique I call Innovation inside the box which is important for entrepreneurs inside established companies of all sizes. Once again, this case study is a collaboration with Sarah Milstein, who conducted the interviews and wrote the post itself, with some minor edits and commentary from me. As this is a new initiative for this blog, we especially welcome your feedback. Did you find this post useful? One recurring request I hear from Lean Startup practitioners around the world is a desire to see examples of the ideas in action. How are we doing? In the meantime, take a look at how SlideShare performed a significant pivot while still moving at full speed. -Eric] “The first user experience was actually terrible.” Rashmi Sinha, co-founder and CEO of SlideShare, describes an early version of the analytics package that’s part of the Pro accounts the company announced today. If your company is using minimum viable product, you’ve probably said the same thing yourself. A lot. SlideShare, founded in 2007, started experimenting with MVPs and A/B testing this year. Those tools, combined with focused customer interviews, have turbo-charged the company’s ability to learn. What prompted the process change? Early this year, SlideShare launched custom channels. Designed for large businesses, the channels let a company share several types of documents, brand the channel with their own design elements, and then include display advertising, contest promotions, blog aggregation, social media integration and metrics reporting. The idea seemed to SlideShare to be a natural direction. Except it didn’t take off. [I was an early adopter of this feature, and participated in the last marketing launch, as you can see here. Alas, even brilliant marketing adorned with a giant picture of me can't fix the wrong product. -Eric] Big companies said they liked the idea, but SlideShare found it hard to close deals. Meanwhile, individuals and smaller companies emailed by the hundreds to say that they wanted the features of custom channels, but the sales model—arranged like a media buy—didn’t make sense to them. SlideShare’s existing customers had needs that the company’s new product—along with its pricing and positioning—simply weren’t solving. Realizing it had taken a wrong turn, SlideShare rethought its approach to premium accounts and ultimately performed what we’d call a value capture pivot, one where the company changes the way it collects revenue from customers. The process started with a few moving parts. First, the company began quietly testing subscription pricing plans, initially positing a basic plan and an enterprise version. Second, when an individual or small company signed up, Sinha would email them to ask if they’d be willing to hold a phone interview with her to discuss their experience of the product. Despite the fact that SlideShare's product is well-established with many customers, Sinha still took the critical step of (to use Steve Blank's famous phrase) getting out of the building, a particularly important job for founders. Third, SlideShare started holding sales calls with large companies to learn what would prompt them to buy the enterprise version. “Individuals and small companies wanted analytics, they wanted to know what was happening in social media [for their content], they wanted ad removal and lead gen. Branding was less important to them,” says Sinha. Big companies had other needs. “We didn’t anticipate at all the control features. For instance, we worked with Pfizer, and they wanted the comments turned off. I hadn’t thought that would be a feature. But they’re regulated, so it makes sense.” SlideShare used the two streams of information to segment their market and come up with three plans that recombined the custom channel features in meaningful ways. But that’s just part of the story. As SlideShare was pivoting, it was also trying out two processes to get better results: 1) A/B testing to refine the pricing plans and the page describing them; and 2) MVPs to hone the actual premium features. The combo helped SlideShare learn a lot in short order. [This is the essential approach to testing a big vision that avoids the "local maximum" trap. See Learning is better than optimization. -Eric] The company ran landing page splits every two or three days (they initially used Unbounce to generate the pages) and measured them carefully with KISSmetrics. They also used SnapABug for live chat on their site. Between the metrics and the direct customer questions, SlideShare had what Sinha calls “minor learnings and then major shifts.” For example, early iterations of their pricing page included the original, free version of SlideShare. “We realized that was really confusing people,” says Sinha. “We don’t give you all this Pro plan information right away when you join SlideShare. It’s more like, ‘If you’re already using SlideShare, you might want to try this.’” They removed the core plan, and conversions went up. The A/B testing did have its challenges. Because SlideShare has more than a million visitors a day, the team is used to developing features that at least 100,000 people will use. “You get used to having a big impact,” says Sinha. With the split tests, maybe 500 people would see an iteration (SlideShare drove traffic with calls to action around their own site). “You have to get ready to deal with much smaller numbers.” The MVPs were tricky to implement for emotional reasons, too. Because the SlideShare team was used to giving away a high-value product, engineers balked at charging for a clearly imperfect product. The analytics package, for instance, launched in what Sinha calls “a very crude version; we started off and sold it before we were comfortable with it.” The saving grace was follow-up interviews. SlideShare asked customers what they had expected in the product; the responses were often literal descriptions. People consistently said they were dying for analytics and specifically that they wanted to track social media and understand the people visiting their content (SlideShare eventually discovered that showing visitors’ locations and timing satisfied people’s needs). “Charging for something half-baked is really interesting,” says Sinha. “It makes the product team uncomfortable. At the same time, you make sure that you get honest feedback. If the product doesn’t meet customers’ expectations, they cancel. It’s a very honest relationship. On analytics, we got a lot of feedback that it was half-baked, that we sold it under false pretense. But we would just respond honestly and fast and say, ‘Tell us what you want.’ Then we’d get back to them when we had built it.” Customers appreciated the follow-up, and many bought again after the feature had evolved. In this regard, SlideShare used the early adopter feedback not only to improve the product, but too improve its understanding of what subsequent customers would want. [That is customer development. -Eric] The marketing launch for SlideShares Pro accounts is today. But the product launch has been happening iteratively over the past months—which means the company is confident in its new offerings. “When we launched custom channels in February, a lot of people reached out and said, “We’d love to buy’,” recalls Sinha. “But it never happened.” [Alas, customers don't know what they want! -Eric] Since creating and refining its premium accounts, SlideShare has closed a number of deals, including high-profile accounts like Dell, Cisco and Pfizer. Sinha notes that Eric Schmidt, in a recent interview, said that you find out whether people truly like a product in the second phase after launch. In the first phase, you get a lot of curious people. Only after the buzz has died down do you truly understand what’s going on. With careful and continuous learning processes, SlideShare is inverting that idea and going to market with a validated product. That is the essence of proving the business in micro-scale. [We'll see if the marketing launch results follow the predictions of SlideShare's validated business model. We wish them the best of luck, and hope we can convince them to share their results - positive or negative - in the near future. In the meantime, good luck and thanks for letting us share your story. -Eric]
  • Case Study: kaChing, Anatomy of a Pivot 28 July, 2010, 8:39 pm
    (The following guest post is a new experiment for this blog. It was written by Sarah Milstein in collaboration with kaChing CEO Andy Rachleff. kaChing has been very active in the Lean Startup movement. If you haven't seen it, Pascal's recent presentation on continuous deployment is a must-see; slides are here. In the interests of full disclosure: I am an advisor to kaChing but did not participate in the interviews that led to this case. With case studies like this, we aim to illustrate specific Lean Startup techniques through the stories of current practitioners. It is written using the information that the company voluntarily shared, and therefore reflects their current thinking and recollections. I am particularly interested in feedback on this case study. Do you find it helpful? Please give us your feedback in the comments. Thanks, Eric) You probably know that Flickr, the photo-sharing site, started out as an MMOG. And if you’re a regular reader of this blog, you may know that IMVU started out as an instant messaging add-on. It’s common, perhaps the norm, for startups to pivot like that—to discover that a product is catching on in unintended ways worth pursuing. Yet there’s a lot of mystery around pivots, and entrepreneurs ask all the time how you know it’s time to commit to a new direction. To shed some light, I talked with kaChing, a destination that enables individual investors to find outstanding money managers to manage their money. The company’s audacious goal is to disrupt the $11 Trillion mutual fund industry. The startling part is that kaChing started out as a…Facebook game. That’s an epic pivot, like shifting from making solar calculators to powering the Space Shuttle. How’d it happen? kaChing launched a virtual portfolio management game on Facebook in January 2008 and a similar version shortly thereafter on kaChing.com. The intent was to discover amateurs who could manage a portfolio as well if not better than professionals (think American Idol) and then facilitate individual investors giving them their real money to manage. In other words, the game would serve as a kind of minor league for the profession. Because kaChing prefers its portfolio managers to have a long track record, the marketplace launch (i.e., the version that would facilitate the investment of real money) was planned for late-2009. kaChing deployed the game across a slew of platforms, including MySpace, the iPhone, and the Yahoo App Platform. The result? They attracted more than 450,000 portfolios—a decent number for a company that hoped a good percentage would prove out as capable managers. They also hoped a reasonable percentage would realize they were lousy money managers and would then convert to clients. In the early fall of 2009, as kaChing prepared for its marketplace launch, the management team showed the app—which included real time market data, SEC-grade accounting, analytics, compliance and customer management tools—to a number of investment pros to get feedback and endorsements. One of those pros was John Powers, head of the Stanford endowment. He noted the platform would be good not only for amateurs who had proven themselves as outstanding portfolio managers in the game, but also for professional money managers —a group that had insufficient tools for managing and scaling their businesses. The kaChing system was based on full transparency. A portfolio manager’s entire track record & holdings had to be disclosed. The company didn’t believe professionals would be willing to reveal that level of detail. But Powers’s reaction was intriguing enough to prompt Andy Rachleff, kaChing’s CEO, to call friends who were professional money managers and describe the idea. The response was surprisingly positive. Andy Mathieson, a founder and managing member at Fairview Capital, was particularly supportive. He was unconcerned about transparency, noting the good have nothing to fear. Mathieson signed on to be a money manager in the marketplace launch, committing five years worth of prior transactional data. Mathieson’s firm has a minimum investment of $1 million dollars outside of kaChing. On kaChing, consumers could invest in Fairview Capital’s strategy with as little as $3k. When the marketplace launched on October 19, it included seven amateurs who had risen through the game’s ranks and four professionals, including Mathieson. Within a month, kaChing observed several interesting things. First, because the amateurs weren’t SEC-registered, the site had to refer to them with awkward terms like “geniuses.” That was confusing for consumers, who already had to figure out what on kaChing.com was a game and what was real. Second, out of 450,000 gamers, only seven had qualified to become kaChing managers. Third, the company expected hundreds of amateurs who performed poorly in the game to realize they weren’t good at investing and therefore become customers. in fact only five people converted into paying customers. Finally, after launch, 30 professional money managers, having read articles on the company, contacted kaChing out of the blue. These managers weren’t concerned with transparency. They were interested in the tools and new distribution medium kaChing provided. In November, kaChing held an all-hands meeting, circling up chairs in their small Palo Alto office, to discuss whether they should focus solely on professionals and abandon the systems for proving amateurs. “Some people weren’t comfortable because it wasn’t as fun, and one senior engineer thought we’d be losing the part of kaChing that was an enabler for anyone who wanted to make it as a pro,” Rachleff recalls. “But what we really wanted to change was not who manages the money, but who has access to the best possible talent. We’d originally thought we’d need to build a significant business with amateur managers to get professionals to come on board, but fortunately It turns out that wasn’t necessary.” The staff agreed they could better fulfill their goals by working just with professional managers. In December, they removed the game from kaChing.com. In February, they held another all-hands meeting to talk about shutting down the legacy Facebook game, which still had 60,000 active users. “Everybody felt the burden of supporting all those transactions every day,” says Pascal-Louis Perez, kaChing’s CTO. “It took a ton of our time, and just wasn’t contributing to our long term vision.” That all-hands lasted five minutes. Which is a nice story. But when kaChing actually shut down each game, hundreds of angry players spewed venom. “We had to ignore them, because they weren’t our target audience – and were never likely to become customers.” says Rachleff. kaChing says they had the fortitude to make quick decisions and stay the course not just because they’d observed how people were using the marketplace, but also because they’d spoken with hundreds of potential and past customers. To acquire new money managers, the company makes traditional sales calls, which means they’ve interviewed many, many professionals and gotten a strong sense of their needs. At the same time, whenever a customer closes an account, kaChing contacts the person to find out why; most agree to a short phone interview. (The site has about 700 active paying customers. Perez says this level of contact, synthesized with their own observations, has given them confidence to make bold decisions. Of the money managers they’ve interviewed, he notes, “The feedback is consistent; we solve big enough problems for people that we believe they’ll come on board.” With 21 employees today, kaChing is devoted to recruiting professional managers and finding product/market fit, first for money managers, then for consumers. Thus far the results are encouraging. More than 30 qualified professional money managers have been attracted to the platform and more than $190 million of customer assets have been committed as well. The kaChing team is quick to note that because they’re still closing-in on product/market fit, they’re less data-driven than they plan to be once they’re in optimizing mode. “We create hypotheses, and test them,” says Rachleff. “If something fails, we cut it off. If something seems to succeed, we pursue it aggressively. You have to have the courage of your convictions. With limited data, you have to make tough decisions.” Special thanks to Pascal-Louis Perez for sharing information and making this post possible.
  • Some IPO speculation 15 July, 2010, 1:29 pm
    Inspired by Steve Blank’s post today about the “lost decade” of IPO’s, I’d like to make some predictions. Let me be clear: Steve is the historian. His posts are born of tremendous research into the secret history of Silicon Valley, and if you haven’t read those essays, you should. By contrast, what I’m about to say is pure speculation. The fact that IPO’s are disappearing makes intuitive sense to me. And the fact that the effects of this IPO vanishing act are being felt first and foremost in the software business also makes sense to me. In fact, I believe that the software business is the canary in the coal mine: increasingly, all businesses are going to look more and more like software businesses. My belief is that the root cause of the IPO shortage is that successful startup companies cannot find productive ways to invest large amounts of money to scale anymore. For software companies especially, scaling distribution and development is comparatively cheap. The old ways aren’t working. Large capital investments simply don’t have the ROI they used to. The world is changing too fast. New products become commoditized too fast. Increasingly, the only profitable thing to invest in is innovation, which means investing in people. And we don’t yet know how to do that on a consistent, scalable, basis. Ironically, the VC’s who depend on IPO’s and the CEO’s who are supposed to be creating them are struggling with the same basic problem. They do not have a comprehensive theory of entrepreneurship that allows them to consistently invest in innovation that can create long-term value. The only way I can see to achieve sustained growth is to create an innovation factory. The modern CEO needs to build an organization that is truly diversified: it is continuously investing in successful sustaining innovation and disruptive innovation. Such an organization should be able to deploy large amounts of capital effectively, by investing in its people. But this is a very different kind of diversification from the old-school GE model. We can’t just diversify across industries or geographies. We can’t even rely on a suite of line-extension products. We have to continually invent new categories of products, new platforms, and new business models – all extremely risky bets. Oh, and by the way, we still have to execute flawlessly. (Even the smallest flaw with an antenna can derail the whole train.) Today’s management reality is just plain harder than that of the past. General managers need to know how to manage the execution-oriented "twentieth century" general managers that work for them. But they also need to know how to manage the new entrepreneurial managers that, increasingly, are essential to their growth. In other words, the old “manager vs. entrepreneur” dichotomy is breaking down. You cannot be a competent general manager in today’s economy if you do not understand entrepreneurship. We are living in a transitional moment. The last of the old-school IPO companies are behind us (at least in software), and yet we have not yet witnessed the new-style IPO companies. Despite Google’s reputation as an innovative company, they seem to me to be counted as one of the last of the old breed. Their entrepreneurial successes are mostly to be found outside the organization, in the form of ex-Googlers who became entrepreneurs. Their internal “startup” projects seem, at least to my eye, to have a success rate only marginally higher than Microsoft’s (perhaps with Android – an acqusition – as a major exception). Certainly a large proportion of them end in failure. The new breed of company currently finds itself satisfied with private capital, and has no need for an IPO. I think Zynga and other games companies may be the earliest exemplars for us to look at. Game companies naturally lend themselves to a “studio” model, with semi-autonomous teams building out their own franchise of sequels and spin-offs. From public reports, it seems like Zynga has really mastered a formula for innovating repeatedly and relentlessly across segments, platforms, and genres. And there are plenty of imitators and fast followers on their way. Will that cohort of companies need an IPO? When private capital is available in sufficient quantities to satisfy investor and founder liquidity needs, why go IPO? The only reason I can think of is when you need dramatically more capital to grow your business, at a magnitude only available on the public markets and therefore worth the loss of control that going public entails. Our leading crop of pre-IPO web companies apparently do not need that much capital – yet. It’s a debatable proposition why they don’t need IPO levels of cash. I freely admit that I have no inside information, no unique insight into what they are thinking. But I am nonetheless confident in my prediction: they don’t yet have the ability to manage an innovation factory at that scale. That’s not a criticism; nobody knows how – yet. We need a new generation of managers trained in a comprehensive management theory of entrepreneurship. Comprehensive means it has to address all aspects of a startups life: marketing and product development, especially. It has to address all stages of startup growth and development – especially including the evolution into a true innovation factory. Tomorrow’s managers will need to know how to build a learning organization (where progress is measured by validated learning) and an execution organization (where progress is measured according to traditional value streams). They will need to know how to combine those organizations into one coherent whole. I believe that the Lean Startup is the first such comprehensive entrepreneurship theory. But these are still early days. We have much work to do. We face problems today that would have bewildered the earliest management theorists. Their struggle was to use management to create enough productivity to feed, clothe, and house the world. Our civilization has excess capacity everywhere. We can build anything we can imagine. But the ranks of highly educated unemployed and the abysmal failure rates of new products both speak to the same question that needs answering: not, “can it be built?” but rather, “should it be built?” The sum total of all we know about entrepreneurship is just the tip of the iceberg. We need to be disciplined, to study what works scientifically, and – above all - to introduce scientific methods into the practice of entrepreneurship itself. When we master that, I think we’ll know what to do with IPO’s again. At least, that's my speculation. In the meantime, it’s going to be fun.
  • Founder personalities and the “first-class man” theory of management 9 July, 2010, 4:42 pm
    At any given time, something like four percent of the US population is engaged in some form of new-company-creation. And that narrow definition of entrepreneurship doesn’t count all of the managers inside established companies who are effectively engaged in the same process of building an internal startup (see What is a startup? for my more expansive definition). What motivates all these entrepreneurs? Typical explanations tend to focus on the well-known anecdotes and larger than life archetypes we have in mind: the twenty-something college dropouts (men, of course) from Stanford inventing some radical new technology. The academic research tells a very different story. What do entrepreneurs look like? Are they born or made? This is a hard question. I think the root cause of that difficulty is that we tend to conflate two different questions into one. First, what causes someone to attempt entrepreneurship instead of a more traditional career path? And second, what attributes make someone likely to be a successful entrepreneur? The difficulty lies in this paradox: many of the attributes that increase the likelihood of becoming an entrepreneur actually impede startup success. Let’s start with the startup personality attributes. The academic research here is extraordinary. Here are the personality traits that are positively correlated with likelihood to pursue entrepreneurship: extraversion, skepticism, need for achievement, risk taking, desire for independence, locus of control, self efficacy, overconfidence, representativeness (the tendency to over-generalize from small samples), and intuition. I think most of those factors correspond to our shared image of what an entrepreneur is supposed to look like. But many other attributes (especially demographic realities) cut against that stereotype. For example, Vivek Wadhwa and others have shown that most entrepreneurs are much older than we expect. Career experience and industry expertise are both positively correlated with entrepreneurship: contrary to stereotype, most entrepreneurs are not young and inexperienced outsiders. And unlike some psychological factors, these experience-based factors also increase the odds of the subsequent venture being successful. It is in the psychological factors that we find the most paradox. For example, consider the propensity for risk-taking. Research has demonstrated the obvious: that people who have greater tolerance for risk or ambiguity are more likely to attempt entrepreneurship. That’s not too surprising. But does a risk-taking attitude actually lead to more startup success? The studies that have looked at this question in particular have found a negative correlation between risk-taking behavior and startup success. That doesn’t strike me as shocking. And, although this hasn’t been subjected to a great deal of study (yet), I believe this same pattern will be found in a variety of other entrepreneurial characteristics: overconfidence, determination to succeed, perseverance, and even the desire to be in control. All of these factors are helpful in getting people to take the plunge, but all of them cause serious impairment of decision-making down the road. Think of the startups you know who are caught in a reality distortion field, heading full-speed off a cliff. Most likely, you will find the above attributes in excess supply. I believe this is also why breakthrough success stories in entrepreneurship often feature a “classic” zany entrepreneur paired with someone you wouldn’t expect to be taking those kinds of risks. We often talk about this as the “visionary” and “the quant” or the “leader” and the “manager.” But I’m not convinced those labels are right at all. I think it much more likely that we’re seeing the embodiment – in the form of personality - of the “problem team/solution team” organizational structure. One team is in charge of carrying out the vision as currently specified, and one team is constantly asking the skeptical questions: who is the customer? Are we solving the right problem? Although we have historically viewed this structure in startups by focusing on the personalities of the founders, I think that reflects our current, relatively poor, understanding of how startups work. We can do better by focusing on process instead of personality. We can consciously organize startups to become much more resilient organizations. Otherwise, we risk having them degenerate into cults of personality. In the early twentieth century, before the advent of scientific management, the overriding management philosophy was that of the first-class man (and they were always men). The idea was, for any job, if you can simply find an individual with just that right combination of virtues, talents, and experience, you could safely delegate all decisions to them. Sound familiar? This kind of reasoning is almost impossible to disprove. If you empower someone to make decisions and then something goes horribly wrong, does that disprove the first-class man theory? Probably not; it’s much easier to blame the particular person who made the mistakes. In fact, making mistakes is seen as “proof” of being second-class. In management jobs related to operations – that is, the people tasked with actually making and distributing physical products – this kind of thinking is now considered ludicrous, thanks to a century of progress. Our modern philosophy of management has this core belief (taken straight from scientific management) at its heart: that the performance of companies is determined by the systems they create, not just the people they hire. No amount of individual superstardom can overcome a badly organized factory, because the weight of the system eventually overwhelms any well-intentioned but poorly organized resistance. Yet we tolerate our modern version of the first-class man theory in the management of more “fuzzy” topics, especially innovation and entrepreneurship. When we look back on this period in history, it will seem just as ludicrous to future entrepreneurs as pre-scientific management looks to us. I am determined to do everything I can to hasten the arrival of that day. If you’re part of the Lean Startup movement, then you’re actually making it happen. Thank you. All of the academic research alluded to in this essay is drawn from Scott Shane’s General Theory of Entrepreneurship which is a fantastic and wide-ranging overview of the state of the art in academic research on entrepreneurship.
  • The Entrepreneur’s Guide to Customer Development 5 July, 2010, 11:25 am
    Brant Cooper and Patrick Vlaskovits have written a new book, The Entrepreneur’s Guide to Customer Development, which builds upon the foundational work of The Four Steps to the Epiphany, while improving accessibility, updating the ideas, and making it more actionable. I believe it is the best introduction to Customer Development you can buy. As all of you know, Steve Blank is the progenitor of Customer Development and author of The Four Steps to the Epiphany. I have personally sold many copies of his book, and continue to recommend it as one of the most important books a startup founder can read.  I used to give copies of Four Steps out to my employees, in the hopes that it would instantly indoctrinate them into the methodology of Customer Development. I just assumed that everybody would love the book as much as I did, and would instantly change their behavior based on what they read in a book. You can imagine how well that worked. Instead of that naive approach, I wish I'd had a book like this one, to help me figure out how to get started with customer development step-by-step.  When I wrote a review of Four Steps on this blog in November, 2008, I did my best to be candid and warn of a few shortcomings:And Steve is the first to admit that it's a "turgid" read, without a great deal of narrative flow. It's part workbook, part war story compendium, part theoretical treatise, and part manifesto. It's trying to do way too many things at once. On the plus side, that means it's a great deal. On the minus side, that has made it a wee bit hard to understand.Brant and Patrick undertook a difficult challenge: to provide a generally accessible introduction to Customer Development, without diluting its impact or dumbing-down its principles. I think they've succeeded. The Entrepreneur’s Guide is an easy read.  It is written in a conversational tone, doesn't take itself too seriously, and avoids extraneous fluff. It does a great job of laying out general principles and suggesting specific, highly actionable tactics. You can easily take from it whatever makes sense for your business, and leave the rest. And it's incredibly to-the-point: you can digest this book in a couple of hours. While the customer development framework of Four Steps is universally relevant, The Entrepreneur’s Guide updates its practices for modern startups. Four Steps primarily centers its stories and case studies on B2B hardware and software startups. This new volume also tackles examples from the Internet and wireless startups of today, both B2B and B2C. And throughout, they maintain a thoroughly realistic take on the power - and limitations - of an entrepreneurship methodology:Successful implementation of Customer Development, let alone simply believing in it, will not guarantee success for your business. Customer Development will help you – force you – to make better decisions based on tested hypotheses, rather than untested assumptions. The results of the Customer Development process may indicate that the assumptions about your product, your customers and your market are all wrong. In fact, they probably will. And then it is your responsibility, as the idea-generator (read: entrepreneur), to interpret the data you have elicited and modify your next set of assumptions to iterate upon.Many “airport business books” urge entrepreneurs to never give in. They tell them to persist in their dream of building a great product and/or company, no matter what the odds are or what the market might be telling them – success is just around the corner. They tend to illustrate this sort of advice with inspiring stories of entrepreneurs who succeeded against all odds and simply refused to throw in the towel. While maintaining persistence and willpower is certainly good advice, Customer Development methodologies are designed to give you data and feedback you may not want to hear. It is incumbent upon you to listen.The Entrepreneur’s Guide to Customer Development includes four powerful case studies/interviews with successful entrepreneurs who have taken iterative approaches to their respective startups that very much resemble the spirit of Lean Startups and Customer Development.  I found these to be particularly interesting and worthwhile. At the heart of Brant and Patrick's interpretation of Customer Development is their belief that its fundamental teaching is to question assumptions. This gives them a hook with which to apply their ideas to a wide variety of situations. In other words, if particular examples in the book don’t apply to you directly, Brant and Patrick show you how to figure out what might work for you.  This is important, since every situation is different.  I'll give them the last word:You are already skeptical of Customer Development and Lean Startups and the slew of emerging buzzwords and supple-to-the-point-of-meaningless terms. That’s great, more power to you; we applaud your skepticism. But be philosophically consistent: periodically take the time to question your own expertise and that of your friends, partners and investors. Make the effort to test your assumptions.If there’s a shortcoming to this book, it’s that it focuses primarily on the Customer Discovery step in The Four Steps.  Here’s hoping they soon tackle Customer Validation. Well done, Brant and Patrick. I can't wait to see what's next. In the meantime, go buy a copy of The Entrepreneur´s Guide to Customer Development right now.
  • What is a startup? 21 June, 2010, 12:01 pm
    I think most people have a fairly specific image that gets conjured up when they hear the word startup. Maybe it’s the “two guys in a garage” made famous by HP, or the idea of Jobs and Wozniack walking barefoot and shaggy through the Homebrew Computer Club. Maybe it’s the more recent wunderkinds like Zuckerberg or Brin and Page. What all of these pictures have in common is a narrative that goes something like this: scrappy outsiders, possessed of a unique genius, took outrageous risks and worked incomprehensible hours to beat the odds. But this cinematic view of entrepreneurs is flawed in many ways. Let’s start with the most basic. It leads people to mistakenly believe that any time they see two guys in a garage attempting the impossible, that’s a startup. Wrong. It also causes them to miss the numerous other kinds of startups that appear in less-glamorous settings: inside enterprises, non-profits, and even governments. And because both small businesses and startups have a high mortality rate, sometimes these images lead us to believe that any small business is a startup. Wrong again. So let’s begin with a definition of a startup that captures its essential nature, and tries to leave behind the specific associations of the most famous startups. A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty. Let’s take each of these pieces in turn. First, I want to emphasize the human institution aspect, because this is completely lost in the “two guys in a garage” story. The word institution connotes bureaucracy, process, even lethargy. How can that be part of a startup? Yet, the real stories of successful startups are full of activities that can rightly be called institution-building: hiring creative employees, coordinating their activities, and creating a company culture that delivers results. Although some startups may approach these activities in radical ways, they are nonetheless key ingredients in their success. Isn’t the word human redundant in this definition? What other kinds of institutions are there, anyway? And yet, we so often loose sight of the fact that startups are not their products, their technological breakthroughs, or even their data. Even for companies that essentially have only one product, the value the company creates is located not in the product itself but with the people and their organization who built it. To see proof of this, simply observe the results of the large majorities of corporate acquisitions of startups. In most cases, essential aspects of the startup are lost, even when the product, its brand, and even its employment contracts are preserved. A startup is greater than the sum of its parts; it is an acutely human enterprise. And yet the newness of a startup’s product or service is also a key part of the definition. This is a tricky part of the definition, too. I prefer to take the most expansive possible definition of product, one that encompasses any source of value for a set of people who voluntarily choose to become customers. This is equally true of a packaged good in a grocery store, an ecommerce website, a non-profit social service or a variety of government programs. In every case, the organization is dedicated to uncovering a new source of value for customers, and cares about the actual impact of its work on those customers (by contrast, a monopoly or true bureaucracy generally doesn’t care and only seeks to perpetuate itself). It’s also important that we’re talking innovation, but this should also be understood broadly. Even the most radical new inventions always build upon previous technology. Many startups don’t innovate at all in the product dimension, but use other kinds of innovation: repurposing an existing technology for a new use, devising a new business model that unlocks value that was previously hidden, or even simply bringing a product or service to a new location or set of customers previously underserved. In all of these cases, innovation is at the heart of the company’s success. Because innovation is inherently risky, there may be outsized economic returns for startups that are able to harness the risk in a new way – but this is not an essential part of the startup character. The real question is: “what is the degree of innovation that this business proposes to accomplish?” There is one last important part of this definition: the context in which the innovation happens. Most businesses – large and small alike – are typically excluded by this context. Startups are designed to confront situations of extreme uncertainty. To open up a new business that is an exact clone of an existing business, all the way down to the business model, pricing, target customer, and specific product may, under many circumstances, be an attractive economic investment. But it is not a startup, because its success depends only on decent execution – so much so that this success can be modeled with high accuracy. This is why so many small businesses can be financed with simple bank loans; the level of risk and uncertainty is well enough understood that a reasonably intelligent loan officer can assess its prospects. Thus, the land of startups is a unique place, where the risks themselves are unknown. Contrast this with other high-risk situations, like buying a high-risk stock. Although the specific payoff of a specific risky stock is not known, investing in many such stocks can be modeled accurately. Thus a decent financial advisor can give you a reasonably accurate long-term expected return for a set of risky stocks. When the “risk premium” is known, we are not in startup land. In fact, when viewed in retrospect, most startups appear like no-brainers. Probably the most famous example today is Google: how did we ever live without it? Building that particular product was not nearly has risky as it seemed at the time; in fact, I think it is a reasonable inference to say that it was almost guaranteed to succeed. It just wasn’t possible for anyone to know that ahead of time. Startups are designed for the situations that cannot be modeled, are not clear-cut, and where the risk is not necessarily large – it’s just not yet known. I emphasize this point because it is necessary to motivate large amounts of the theory of the lean startup. Fundamentally, the lean startup is a methodology for coping with uncertainty and unknowns with agility, poise, and ruthless efficiency. It is a completely different experience from the equally hard job of executing in a traditional kind of business, and my goal is not to disparage those other practitioners – after all, most startups aspire to become non-startups someday. Still, these differences matter, because the “best practices” that are learned in other contexts do not transplant well into the startup soil. In fact the most spectacular startup failures result when people were in a startup situation but failed to recognize it, or failed to recognize what it meant for their behavior. This definition is also important for what it excludes. Notice that it says nothing about the size of the company involved. Big companies often fail because they find themselves in a startup situation but are unable to reorient in time to cope with this situation; this specific pathology is explored in The Innovator’s Dilemma. This kind of crisis can be precipitated by many external factors: macroeconomic changes, trade policy, technological change, or even cultural shifts. But most often, the entrant of a startup into a previously calm market precipitates this kind of crisis. This has significant implications for general managers in enterprise, about which you can read more at HBR: Is Entrepreneurship a Management Science?
  • No departments 17 June, 2010, 8:26 am
    Big companies have departments. Startups are companies. Startups aspire to become big companies. Therefore, startups should have departments. Right? Why do companies have departments? There are a lot of reasons: ladder of advancement, sharing of best practices, functional specialization. Each of these benefits also exists in startups, which is why most startups are also organized in departments. But I have come to believe that because of the unique context of startup land, the payoff is a lot smaller than it is for larger companies. Meanwhile the drawbacks of functional departments can cause real and lasting harm. I once worked at a startup with an exceptional functional department system. The leaders of each department were world-class experts in their respective fields. The team hired only the best and the brightest. Looking back after a few years, it’s evident that many of the people who worked in these departments have gone on to do incredible things in industry. They are leaders, visionaries, founders and managers having tremendous success. Yet talent organized improperly can lead to failure. I was an engineer on the engineering team. We had to work closely with artists on an art team. We sat in different parts of the building, ate lunch separately, spoke a different specialized jargon, and generally didn’t understand each other. According to the Waterfall methodology in which we worked, this shouldn’t have been a problem. After all, we rarely had to work on the same project at the same time. The art team would often be involved in the specification phase of a new feature, since they were responsible for the look-and-feel of the product. Then we’d build the feature, which would often include tools that were intended for the art team to use to build the parts of the product that they were responsible for (in video game parlance, this is the “art path” that allows artists to get their work into the production product). Sure, some communication was necessary, especially as artists had to be trained on new tools periodically. But according to the theory, this should have been covered by the various specs and documentation we were rigorous about producing. If anyone has ever worked in an environment like this, you’ll probably be able to imagine the things that can go wrong. For one, the engineers consider the artists stupid; the artists consider the engineers arrogant. Not a lot of trust builds up that can be used when real disagreements emerge. Instead, there’s a positive feedback loop of bad feelings. And like feedback on a simple microphone sound system, this would occasionally boil over into screeching. I remember one such meeting vividly. I was the junior guy on a project team; I was called in to do some technical due diligence for reasons that were obscure to me, because the team already had much more senior engineers assigned to it. I was invited to a feature decision meeting, where the team was closing in on a detailed spec. The meeting was tense. The artists on the team had called in the big guns, and VP-level folks were there to explain the importance of certain aspects of the visual design that threatened to be cut. I eventually realized that I was there as part of the same plan – the art team has specifically requested someone technical but unimportant to be able to render opinions that might undermine their more senior opposition. Not to be outdone, the technologists on the team had also brought their big guns, and the meeting was packed with employees of every level – from VP’s all the way down to me. As the meeting progressed, the temperature kept rising. At first, I couldn’t even follow the recriminations back-and-forth. Eventually, though, I realized what was at issue: the art team was insisting that the UI for this feature have rounded corners. Incredibly, they were willing to bring the company to a standstill to protest that this was an absolutely essential feature. Even more surprisingly, the engineering team was equally vocal about their contention that adding rounded corners would add weeks of development time to the project, which would have pushed it out way past its hard deadline, effectively killing it. On the surface, this was a ludicrous dispute – both sides were willing to kill the project rather than proceed with (or without) a minor UI tweak. Were they just crazy? I don’t think so. This meeting was just the latest in a series of escalating skirmishes that had taken place over many months. The feedback loop looked something like this. The art team would create a spec for a feature, detailing the UI as best they could. The engineering team would then build that feature, mimicking the UI as close as they could using the current primitives supported by the system. When the art team would review the final product, they were inevitably outraged – it deviated from the spec in ways they considered major. So there would be a lot of scope negotiation at the very end, when it is most expensive. Sometimes, the art team would win the argument, and the engineers would pull a few all-nighters to make them happy, but feeling betrayed at the new additions to the spec. Sometimes the engineering team would win, and the art team would have to accept (and be held responsible) for a feature that didn’t really work the way they wanted, feeling betrayed at the violation of their agreement. As an isolated incident, this wouldn’t be a big deal. But scope negotiations between departments are an example of an “iterated prisoner’s dilemma” situation, where the same parties repeatedly negotiate, and rely on their previous experience to inform their choices in the current round. Unfortunately, the equilibrium in this particular setup has one overriding outcome: longer and more detailed specs. Here’s why. The art team feels burned that they didn’t get what they asked for. Last time, the engineers weaseled out of their commitments by point out areas where the spec didn’t specify what was really important to the artists. So this time, they are going to spell out what’s important in even greater detail, to leave less wiggle room. The engineering team feels burned too, and feels that they were blamed for deficiencies in the spec as if it was their fault that the technology doesn’t really support what the artists want to do. So they react in two ways. First, they actively encourage a more detailed spec, and are more aggressive about pointing out possible inconsistencies. This forces the art team to make concrete decisions about stuff they don’t really care about. Second, the engineering team starts to pad their estimates, knowing that each feature in the spec is not really done when they think it’s done – there’s going to be inevitable scope creep from the art team when they finally see the final result. What are the consequences of this more detailed spec? For one, it takes a lot longer to create, meaning that the projects themselves get larger in order to rationalize the increased investment in planning. Second, the extra detail obscures the artists’ original intent in specifying the feature, so the engineers are even more likely to miss the big picture and build the wrong things. And lastly, it removes the engineering team’s ability to find breakthrough solutions that might deliver most of the value at a fraction of the cost. They can’t use any discretion for fear of breaking the spec’s contract, even if the changes would probably go unnoticed or even be in the company’s best interests. The lack of trust (and the procedure of the Waterfall methodology) makes it very difficult to ask for clarification or changes in the spec while the implementation is underway. This feedback is a nasty trap, and it’s just how this room full of otherwise rational adults wound up in a screaming match about rounded corners. It was painful to watch. Now, part of the reason I remember this particular meeting so well is that I wound up doing something considered really radical at the time. I suggested that we change the underlying architecture of our UI system so that the artists would be able to build their own UI pieces themselves and then integrate them into the product without requiring new code every time. It took an incredible amount of politicking and arm-twisted, but I did eventually get the teams to agree to that solution. I’m proud of that contribution, but the reason I tell that part of the story is not to show off, but rather to be able to tell you what happened next. Although both teams got something valuable about the new system, neither was very happy. I had successfully defused the situation, and by reducing the feedback loop between the artists spec and its implementation, I was able to help them realize their goals better. As a technical fix, it was brilliant. As a solution to the underlying problem, it was useless. Neither side liked me very much for having "fixed" their problem. In particular, the artists felt like I had created a lot more work for them – they were used to having other people grapple with implementation details for them, and now they had to do it themselves. They either had to hire a developer onto the art team itself (unthinkable) or learn those development skills themselves (which was, to be fair, really hard). The engineering team wasn’t happy either. Creating this new architecture was a fair bit of work, and they couldn’t shake the feeling that I had basically sided with the enemy, giving them tools that would require a lot of engineering support but basically deprive the engineering team of any credit for the resulting features. I’ve now come to believe that this confrontation was a direct result of the partition between the departments in this company, and that rather than seek technical solutions to the disagreement, I would have been better off working to break down those walls. Let me tell one more story from that same company. I mentioned before the art path, the set of tools the engineering team was required to build and maintain for the art team to be able to create content. Because the art team was considered an internal customer (and “friendly” to boot), we didn’t waste a lot of time making the tools easy to use. Instead, we spent time making sure the exact behavior of the tools were well documented – by engineers, naturally. This led to some pretty bizarre situations. One time I remember in particular, an engineer fixed a bug that was causing artists’ creations to render in our 3D environment with a skewed rotation. The details aren’t important, but it turned out that under certain relatively common conditions, the objects would come out completely upside-down. I’m sure this engineer was expecting to be treated as a hero by the art team, since he had just fixed a major bug. But instead he was reviled. Why? The artists had known about this bug for ages, but had just assumed it was a natural part of the system. They had learned that the best way to solve problems is through trial-and-error, doing whatever it takes to get the object to look right. So sometimes the object would come out upside-down, sometimes not. When it did, they’d just invert their original work so that after the upside-down transformation, it looked right. Sure, there was a lot of randomness in whether they would need to take this extra step, but this was nothing unusual. From their point of view, the tools were full of meaningless jargon and bizarre incantations that resulted in nearly random behavior. This bug was not even considered a major one, since at least it had a deterministic fix. But now you can see what happened when the bug was fixed. A large, but mostly random, sample of objects started rendering upside-down! This required either that we leave the bug in place, or that the art team go back and rework all those thousands of upside-down objects. Neither solution is particularly alluring. Again, this led to lots of mutual recriminations. Why didn’t the art team come to the engineers and tell them of this bug as soon as it manifested? Why aren’t they smart enough to figure out what the tools actually do? On the other side, why don’t the engineers just deliver tools that work like they’re supposed to? Other more established companies have tools that are intuitive to use, why can’t we? The solution to this problem is actually really simple. Just create an art path team, composed of some artists and engineers. Force them to live and work in the same physical space, force the engineers to actually do some art production, and force the artists to actually learn what the technical limits of the tools are. As the team gets traction, simply rotate members from both departments through this team, so that the knowledge they gain is eventually diffused through both organizations. And hold the leaders of that team – artists and engineers alike – accountable for a set of clear goals for the tools that are important to the company. There’s nothing intrinsically difficult about this problem, just as their was nothing intrinsically difficult with the “rounded corners” problem I discussed earlier. The barrier to doing the right thing is the entrenched ideas originating from departments. Who would lead this team? Who would they report to? How would we ensure that the team was faithful to the best practices of both the art team and the engineering team? And plus, do we really want to be cross-training engineers in art and artists in engineering? Isn’t that a waste of time? After all, both teams are already too busy, how can we afford to pull people off and waste time? This is another variation of the time/quality/money fallacy – the very quality problems that a team like this would address are currently wasting time and causing the team to be “too busy” to invest in the solution. So: enough with functional departments at startups. Let's start holding people accountable solely for their contribution to the only thing that matters: validated learning about customers.
  • The Five Whys for Startups (for Harvard Business Review) 2 June, 2010, 9:50 am
    I continue my series for Harvard Business Review with the Lean Startup technique called Five Whys. Five Whys has its origins in the Toyota Production System. I've written about this before in some detail, but this was an opportunity to try and frame it for a general business audience. After all, Five Whys is the most general, most transferable technique in the toolkit, because it can act as a natural speed regulator for any kind of work. (If you're curious about the theory behind this idea, see Work in small batches.) The Five Whys for Start-Ups - The Conversation - Harvard Business Review Root cause analysis and preventive maintenance are concepts we expect to see in a factory setting. Start-ups supposedly don't have time for detailed processes and procedures. And yet the key to startup speed is to maintain a disciplined approach to testing and evaluating new products, features, and ideas. As start-ups scale, this agility will be lost unless the founders maintain a consistent investment in that discipline. Techniques from lean manufacturing can be part of a startup's innovation culture. One such technique is called Five Whys, which has its origins in the Toyota Production System, and posits that behind every supposedly technical problem is actually a human problem. Applied to a start-up, here's how it works....Read the rest of The Five Whys for Start-Ups. You can view previous essays in this series here: Is Entrepreneurship a Management Science? Two Ways to Hold Entrepreneurs Accountable Beware of Vanity Metrics  For Startups, How Much Process Is Too Much?  Speed up or slow down? 
« 1 2 3 »
order by views | - date
 

subscribe for mail

recently suggested


 
49

Chris Dixon

  • Web services should be both federated and extensible 4 September, 2010, 12:12 pm
    One of the most important developments of the web 2.0 era is the proliferation of full featured, bidirectional APIs.  APIs provide a way to “federate” web services from a single website to a distributed network of 3rd party sites. Another important web 2.0 development is the proliferation of web Apps (e.g. Facebook Apps). Apps provide a way to make websites “extensible.” The next step in this evolution is to create web services that are both federated (APIs) and extensible (Apps). In my ideal world, the social graph would not be controlled by a private company. That said, Facebook, to its credit, has aggressively promoted a fairly open API through Facebook Connect. Facebook has also been a leader in promoting Apps. For Facebook, creating extensible, federated services would mean providing a framework for Facebook Connect Apps – apps that extend Facebook functionality but reside on non-Facebook.com websites. Consider the following scenario.  Imagine that in the future a geolocation data/algorithm provider like SimpleGeo takes Facebook Places check-in data and, using algorithms and non-Facebook data, produces new data sets, for example: map directions, venue recommendations, and location-based coupons. The combination of Facebook’s data (social graph and check-ins) and SimpleGeo data/algorithms would create much more advanced feature possibilities than either service acting alone. With today’s APIs, if, say, Gowalla wanted to integrate Facebook plus SimpleGeo into their app*, they would basically have 3 choices: 1) Embed Facebook widgets in Gowalla.  These are simple iframes (effectively separate little websites) that don’t interact with SimpleGeo.  Gowalla would just have to sit and wait and hope that Facebook decided to bake in SimpleGeo-like functionality. 2) Pre-import SimpleGeo data. This significantly limits the size and dynamism of the SimpleGeo data sets and doesn’t incorporate SimpleGeo algorithms, thus severely limiting functionality. 3) Host an instance of SimpleGeo’s servers internally.  This requires heavy technical integration, undermining the main benefit of APIs. In a world of extensible APIs (or “API Apps”), Gowalla could instead send Facebook data back to SimpleGeo.  The data flow would look something like this: (Note how there are three parties involved – @peretti calls this a “data threesome”). This configuration is much simpler to integrate – and potentially much more powerful and dynamic – than the other configurations listed above.  You could implement this today, but it would create user experience challenges.  For example, Gowalla would be sending Facebook data to a 3rd party (step 3), which might (depending on the data sent) require explicit user opt-in. Things become more onerous if SimpleGeo wanted to share its own user data with Gowalla. That would require an additional oAuth to SimpleGeo (authorizing step 4). Allowing websites to be federated and extensible will open up a whole new wave of innovation.  Ideally some spec like oAuth could include the multiple authorizations in a single authorization screen.  Facebook could also do this by allowing 3rd parties to be part of the Facebook Connect authorization process.  Inasmuch as Facebook’s seems to be trying to embed their social graph as deeply as possible into the core experiences of other websites, allowing extensible APIs would seem to be a smart move. * I have no connection to any of these companies (Facebook, Gowalla, SimpleGeo) and have no knowledge of their product plans beyond their public websites.  I am imagining functionality that Gowalla and SimpleGeo might include someday but for all I know they have no interest in these features – I just picked them somewhat arbitrarily as examples.
  • Howard Lindzon’s “Web is Dead” series 1 September, 2010, 8:09 am
    Howard’s Stocktwits interviews are always really fun.  Some people don’t get his subtly self-deprecating sense of humor but I love it. Besides discussing the usual suspects (Facebook, Twitter, Apple), we spend some time trashing Wall Street and chatting about some early-stage startups including Founder Collective investments Bnter, Giiv, Ze Frank Games, and Canvas (founder of 4chan Moot’s new startup).  Of course I also shamelessly promote Hunch. Also, Fred Wilson’s interview with Howard is a must watch.
  • Converts versus equity deals 31 August, 2010, 7:58 am
    There has been a debate going on the past few days over whether seed deals should be funded using equity or convertible notes (converts). Paul Graham kicked it off by noting that all the financings in the recent YC batch were converts. Prominent investors including Mark Suster and Seth Levine weighed in (I highly recommend reading their posts). While this debate might sound technical, at its core it is really about a difference in seed investing philosophy. I am a proponent of convertibles, but only with a cap (I’ve written about the problems of convertibles without caps before and never invest in them).  I believe that pretty much every other seed investor who advocates converts also assumes they have a cap.  So any discussion of convertibles without caps seems to me a red herring. There are two kind of rights that investors get when they put money in company.  The first are economic rights: basically that they make money when the investment is successful.  The second are control rights: board seats, the ability to block financings and acquisitions, the ability to change management, etc.  Converts give investors economics rights with basically zero control rights (legally it is just a loan with some special conversion provisions). Equity financings normally give investors explicit rights (most equity terms sheets specify board seats, specific blocking conditions, etc) in addition to standard shareholder rights under whatever state the company incorporated in (usually CA or Delaware). To the extent that I know anything about seed investing, I learned it from Ron Conway.  I remember one deal he showed me where the entire deal was done on a one page fax (not the term sheet – the entire deal).  Having learned about venture investing as a junior employee at a VC firm I was shocked. I asked him “what if X or Y happens and the entrepreneur screws you.”  Ron said something like “then I lose my money and never do business with that person again.”  It turned out he did very well on that company and has funded that entrepreneur repeatedly with great success. You can hire lawyers to try to cover every situation where founders or follow on investors try to screw you. But the reality is that if the founders want to screw you, you made a bet on bad people and will probably lose your money. You think legal documents will protect you? Imagine investors getting into a lawsuit with a two person early-stage team, or trying to fire and swap out the founders – the very thing they bet on.  And follow on investors (normally VCs) have a variety of ways to screw seed investors if they want to, whether the seed deal was a convert of equity.  So as a seed investor all you can really do is get economic rights and then make sure you pick good founders and VCs. Seed investing is a people business.  Good entrepreneurs understand this.  Ron was an investor in my last two companies and never had any control rights but had massive sway because he worked so hard to help us and gave such sage advice.  And most importantly, he carried great moral authority. We always knew he was speaking from deep experience and looking out for the company’s best interests – sometimes against his own economic interests. Like it or not, the seed investment world runs on trust and reputation – not legal documents.
  • Good bizdev cannibalizes itself 28 August, 2010, 11:53 am
    A few successful websites were built almost entirely through viral growth. The vast majority, however, started off by partnering with other, already successful websites. Even Google began by partnering with Yahoo. As superior as Google’s search algorithm was, it was very hard to get the masses to switch to a new search engine. In the web 1.0 world (approximately pre-2004), integrating two web services involved lots of manual work, such as negotiating legal contracts and custom technical integration. Creating these kinds of partnerships is usually referred to as “business development” or “BizDev” (personally, I usually just call it “BD”). In the web 2.0 world, it became common for websites to create fully functional, self-service API’s with standardized legal terms. This made it possible to drastically reduce the friction of integrating services. My Hunch cofounder Caterina Fake coined the term “BizDev 2.0″ to refer to this idea (and of course Flickr was a pioneer of super robust APIs). There is no question that removing legal and technical hurdles is a win for everyone (except lawyers). However, unless your service is extremely high profile and its value is easily understood, it still needs to be marketed to potential partners. Many websites won’t consider using a self-service API until they’ve seen it working on other sites with measurable results. So how do you overcome this particular kind of chicken-and-egg problem? During his interview process, Hunch’s Shaival Shah, said something that struck a chord with me: he didn’t want to be called “VP BizDev” because, he said, a good BizDev person makes BizDev irrelevant. The idea is to create a number of BizDev 1.0 partnerships while simultaneously building and marketing a full service API.  If you can do BizDev 1.0 with some number of (ideally high profile) websites and demonstrate that it is valuable to them (ideally quantitatively), you can then scale your service BizDev 2.0 style. Maybe this could be called BizDev 1.5. Shaival wrote up a much more detailed post on self-cannibalizing BizDev that is well worth reading.
  • The bowling pin strategy 21 August, 2010, 5:34 am
    A huge challenge for user-generated websites is overcoming the chicken-and-egg problem: attracting users and contributors when you are starting with zero content. One way to approach this challenge is to use what Geoffrey Moore calls the bowling pin strategy: find a niche where the chicken-and-egg problem is more easily overcome and then find ways to hop from that niche to other niches and eventually to the broader market. Facebook executed the bowling pin strategy brilliantly by starting at Harvard and then spreading out to other colleges and eventually the general public.  If Facebook started out with, say, 1000 users spread randomly across the world, it wouldn’t have been very useful to anyone.  But having the first 1000 users at Harvard made it extremely useful to Harvard students.  Those students in turn had friends at other colleges, allowing Facebook to hop from one school to another. Yelp also used a bowling pin strategy by focusing first on getting critical mass in one location – San Francisco – and then expanding out from there.  They also focused on activities that (at the time) social networking users favored: dining out, clubbing and shopping. Contrast this to their direct competitors that were started around the same time, were equally well funded, yet have been far less successful. How do you identify a good initial niche?  First, it has to be a true community – people who have shared interests and frequently interact with one another.  They should also have a particularly strong need for your product to be willing to put up with an initial lack of content. Stack Overflow chose programmers as their first niche, presumably because that’s a community where the Stack Overflow founders were influential and where the competing websites weren’t satisfying demand. Quora chose technology investors and entrepreneurs, presumably also because that’s where the founders were influential and well connected. Both of these niches tend to be very active online and are likely to have have many other interests, hence the spillover potential into other niches is high. (Stack Overflow’s cooking site is growing nicely – many of the initial users are programmers who crossed over). Location based services like Foursquare started out focused primarily on dense cities like New York City where users are more likely to serendipitously bump into friends or use tips to discover new things. Facebook has such massive scale that it is able to roll out its LBS product (Places) to 500M users at once and not bother with a niche strategy.  Presumably certain groups are more likely to use Facebook check-ins than others, but with Facebook’s scale they can let the users figure this out instead of having to plan it deliberately. That said, history suggests that big companies who rely on this “carpet bombing strategy” are often upended by focused startups who take over one niche at a time.
  • Graphs 22 July, 2010, 10:13 am
    It has become customary to use “graph” to refer to the underlying data structures at social networks like Facebook. (Computer scientists call the study of graphs “network theory,” but on the web the word “network” is used to refer to the websites themselves). A graph consists of a set of nodes connected by edges. The original internet graph is the web itself, where webpages are nodes and links are edges. In social graphs, the nodes are people and the edges friendship. Edges are what mathematicians call relations. Two important properties that relations can either have or not have are symmetry (if A ~ B then B ~ A) and transitivity (if A ~ B and B ~ C then A ~ C). Facebook’s social graph is symmetric (if I am friends with you then you are friends with me) but not transitive (I can be friends with you without being friends with your friend).  You could say friendship is probabilistically transitive in the sense that I am more likely to like someone who is a friend’s friend then I am a user chosen at random. This is basis of Facebook’s friend recommendations. Twitter’s graph is probably best thought of as an interest graph. One of Twitter’s central innovations was to discard symmetry: you can follow someone without them following you. This allowed Twitter to evolve into an extremely useful publishing platform, replacing RSS for many people. The Twitter graph isn’t transitive but one of its most powerful uses is retweeting, which gives the Twitter graph what might be called curated transitivity. Graphs can be implicitly or explicitly created by users. Facebook and Twitter’s graphs were explicitly created by users (although Twitter’s Suggested User List made much of the graph de facto implicit). Google Buzz attempted to create a social graph implicitly from users’ emailing patterns, which didn’t seem to work very well. Over the next few years we’ll see the rising importance of other types of graphs. Some examples: Taste: At Hunch we’ve created what we call the taste graph. We created this implicitly from questions answered by users and other data sources. Our thesis is that for many activities – for example deciding what movie to see or blouse to buy – it’s more useful to have the neighbors on your graph be people with similar tastes versus people who are your friends. Financial Trust: Social payment startups like Square and Venmo are creating financial graphs – the nodes are people and institutions and the relations are financial trust. These graphs are useful for preventing fraud, streamlining transactions, and lowering the barrier to accepting non-cash payments. Endorsement: An endorsement graph is one in which people endorse institutions, products, services or other people for a particular skill or activity. LinkedIn created a successful professional graph and a less successful endorsement graph. Facebook seems to be trying to layer an endorsement graph on its social graph with its Like feature. A general endorsement graph could be useful for purchasing decisions and hence highly monetizable. Local: Location-based startups like Foursquare let users create social graphs (which might evolve into better social graphs than what Facebook has since users seem to be more selective friending people in local apps). But probably more interesting are the people and venue graphs created by the check-in patterns. These local graphs could be useful for, among other things, recommendations, coupons, and advertising. Besides creating graphs, Facebook and Twitter (via Facebook Connect and OAuth) created identity systems that are extremely useful for the creation of 3rd party graphs. I expect we’ll look back on the next few years as the golden age of graph innovation.
  • It’s not that seed investors are smarter – it’s that entrepreneurs are 5 July, 2010, 11:03 am
    Paul Kedrosky recently speculated that there might be seed fund “crash” looming. Liz Gannes followed up by suggesting seed investors are a fad akin to reality-TV celebrities: In many ways, what [prominent seed funds] are saying is that they’re just smarter, and as such will outlast all the copycat and wannabe seed funders as well as the stale VCs with a fresh coat of paint. But then — Kim Kardashian is the only one who can make a living tweeting. At some point it will be quite obvious whether the super angels’ investments and strategy succeed or fail. Here’s the key point these analyses overlook: It’s not the seed investors who are smarter – it’s the entrepreneurs. Consider the case of the last company I co-founded, SiteAdvisor. We raised our first round of $2.6M at a $2.5M pre-money valuation. After the first round of funding, investors owned 56% of the company. Moreover, the $2.6M came in 3 tranches: $500K, another $500K, and then $1.6K.  To get the 2nd and 3rd tranches we had to hit predefined milestones and re-pitch the VC partnerships. Had we instead raised the first $1M from seed funds, we would have been free to raise the remaining money at a higher valuation. In fact, after we spent less than $1M building the product, we raised more money at a $16M pre-money valuation. We never even touched the $1.6M third tranche even though it caused us to take significant dilution. This was a very common occurrence before the rise of seed funds, due to VCs pressuring entrepreneurs to raise more money than they needed so the VCs could “put more money to work.” When SiteAdvisor was eventually acquired, we had spent less than a third of the money we raised. Compare the dilution we actually took to what we could have taken had we raised seed before VC: Professional seed funds barely existed back then, especially on the East Coast. And even if they did, I’m not sure I would have been savvy enough to opt for them over VCs. I thought the brands of the big VCs would help me and didn’t really understand the dynamics of fund raising.* Today, entrepreneurs are much savvier, thanks to the proliferation of good advice on blogs, via mentorship programs, and a generally more active and connected entrepreneur community. For example, Founder Collective recently backed two Y-Combinator startups who decided to raise money exclusively from seed investors despite having top-tier VCs throwing money at them at higher valuations. These were “hot” companies who had plenty of options but realized they’d take less start-to-exit dilution by raising money from helpful seed investors first and VCs later. Will there be there a seed fund crash? Seed fund returns are highly correlated with VC returns which are highly correlated with public markets and the overall economy. I have no idea what the state of the overall economy will be over the next few years. Perhaps it will crash and take VCs and seed funds down with it. But I do have strong evidence that prominent seed funds will outperform top-tier VC funds, because I know the details of their investments, and that their portfolios contain the same companies as top-tier VCs except the they invested in earlier rounds at significantly lower valuations.  So unless these prominent seed funds were incredibly unlucky picking companies (and since they are extremely diversified I highly doubt that), their returns will significantly beat top-tier VC returns. * Note that we have nothing but gratitude toward the SiteAdvisor VCs – Rob Stavis at Bessemer and Hemant Taneja at General Catalyst. They offered what was considered a market deal at the time and supported us when (almost) no one else would.
  • Competition is overrated 26 June, 2010, 6:46 am
    Your #1 competitor starting out will always be the BACK button, nothing else. – Garry Tan Suppose you have an idea for a startup, and then do some research only to discover there are already similar products on the market. You become disheartened and wonder if you should abandon your idea. In fact, the existence of competing products is a meaningful signal, but not necessarily a negative one.  Here are some things to consider. 1) Almost every good idea has already been built. Sometimes new ideas are just ahead of their time. There were probably 50 companies that tried to do viral video sharing before YouTube. Before 2005, when YouTube was founded, relatively few users had broadband and video cameras. YouTube also took advantage of the latest version of Flash that could play videos seamlessly. Other times existing companies simply didn’t execute well. Google and Facebook launched long after their competitors, but executed incredibly well and focused on the right things. When Google launched, other search engines like Yahoo, Excite, and Lycos were focused on becoming multipurpose “portals” and had de-prioritized search (Yahoo even outsourced their search technology). 2) The fact that other entrepreneurs thought the idea was good enough to build can be a positive signal. They probably went through some kind of vetting process like talking to target users and doing some market research. By launching later, you can piggyback off the work they’ve already done. That said, you do need to be careful not to get sucked into groupthink. For example, many techies follow the dictum “build something you would use yourself,” which leads to a glut of techie-centric products. There are tons Delicious and Digg clones even though it’s not clear those sites have appeal beyond their core techie audience. 3) That other people tried your idea without success could imply it’s a bad idea or simply that the timing or execution was wrong. Distinguishing between these cases is hard and where you should apply serious thought. If you think your competitors executed poorly, you should develop a theory of what they did wrong and how you’ll do better. Group buying had been tried a hundred times, but Groupon was the first to succeed, specifically by using coupons to track sales and by acquiring the local merchants first and then getting users instead of vice versa. If you think your competitor’s timing was off, you should have a thesis about what’s changed to make now the right time. These changes could come in a variety of forms: for example, it could be that users have become more sophisticated, the prices of key inputs have dropped, or that prerequisite technologies have become widely adopted. Startups are primarly competing against indifference, lack of awareness, and lack of understanding — not other startups. For web startups this means you should worry about users simply not coming to your site, or when they do come, hitting the BACK button.
  • Builders and extractors 19 June, 2010, 8:22 pm
    Tim O’Reilly poses a question every entrepreneur and investor should consider: are you creating more value for others than you capture for yourself? Google makes billions of dollars in annual profits, but generates many times that in productivity gains for other people. Having a positive social contribution isn’t limited to non-profit organizations – non-profits just happen to have a zero in the “value capture” column of the ledger. Wall Street stands at the other extreme: boatloads of value capture and very little value creation. I think of people who aim to create more value than they capture as “builders” and people who don’t as “extractors.” Most entrepreneurs are natural-born builders. They want to create something from nothing and are happy to see the benefits of their labor spill over to others. Sadly, the builder mindset isn’t as widespread among investors. I recently heard a well-known Boston VC say: “There are 15 good deals a year and our job is to try to win those deals” – a statement that epitomizes the passive, extractor mindset. The problem with VC seed programs is they not only fail to enlarge the pie, they actually shrink it by making otherwise fundable companies unfundable through negative signaling. The good news is there is a large – and growing – class of investors with the builder mindset. Y Combinator and similar mentorship programs are true builders: their startups probably wouldn’t have existed without them (and the founders might have ended up at big companies). There are also lots of angel and seed investors who are builders. A few that come to mind: Ron Conway, Chris Sacca, Mike Maples (Floodgate), Roger Ehrenberg, Keith Rabois, Ken Lehrer, Jeff Clavier, Betaworks, Steve Anderson, and Aydin Senkut. There are also VCs who are builders. Ones that I’ve worked with directly recently include Union Square, True, Bessemer, Khosla, Index, and First Round. Given that there is a surplus of venture money, entrepreneurs and seed investors now have the luxury of choosing to work with builders and avoid extractors. Hopefully over time this will weed out the extractors.
  • Pivoting 14 June, 2010, 6:18 pm
    My Hunch cofounders and I frequently ask ourselves: “If we were to start over today, would we build our product the same way we had so far?” This exercise is meant to counter a number of common cognitive biases, such as: 1. The sunk costs trap.  People tend to overvalue past investments when making forward-looking investment decisions. From the rumors I’ve heard, Joost was a company that fell into the sunk costs trap. In the beginning, their p2p architecture was their main differentiator. Thus they invested a lot in building p2p infrastructure and required users to download a software client. When browser-based web video companies like Hulu and YouTube surpassed them, Joost switched to a browser-based client but still required a special plugin so they could maintain their p2p architecture. In fact, the problem the p2p architecture was solving – reducing bandwidth costs – had, in the meantime, become a secondary basis of competition.  By the time Joost finally discarded the p2p model, it was too late. 2. The Bridge on the River Kwai syndrome.  This is when entrepreneurs fall so in love with their engineering project qua engineering project that they lose site of the larger mission.  Former engineers (like me) are particularly susceptible to this as we often get excited about technology for its own sake. Many products can be built much more quickly and cheaply by settling for good technology plus a bunch of hacks – human editing, partnerships, using 3rd party software – versus creating a perfect technology from scratch. At my last company, SiteAdvisor, we made the decision up front to build a non-perfect system that did 99% of what a much more expensive, “perfect” technological solution would have done.  The software wasn’t always pretty – to the annoyance of some of our engineers – but it worked. 3. Solving the wrong problem. Location-based social networks have been around for years. Foursquare came along just a year ago and has seemingly surpassed its predecessors. The other companies built elaborate infrastructures: e.g they partnered with wireless carriers so that users’ locations could be tracked in the background without having to “check-in”.  Foursquare built a relatively simple app that added some entertaining features like badges and mayorships. It turned out that requiring users to manually check in was not only easier to build but also appealing as users got more control over their privacy. Foursquare’s competitors were solving the wrong problem. Ask yourself: if you started over today, would you build the same product?  If not, consider significant changes to what you are building. The popular word for this today is “pivoting” and I think it is apropos. You aren’t throwing away what you’ve learned or the good things you’ve built. You are keeping your strong leg grounded and adjusting your weak leg to move in a new direction.
« 1 2 3 »
order by views | - date
 
43

readwriteweb

  • Never Mind the Valley: Here's Madison 9 September, 2010, 5:00 pm
    Madison, Wisconsin has always been known as a progressive town - in part because it's home to the University of Wisconsin-Madison. But over the last few years, the city has gained a reputation as an emerging technology startup hub in the Midwest. Earlier this year, Forbes Magazine named Madison the 7th most innovative city in the U.S., ranking it ahead of the noted startup hotspot of Boston. Like many cities that foster thriving startup communities, Madison benefits from strong university and government support (the latter in the form of a 25% tax credit for angel investors and a 2% forgivable loan for startups), as well as a number of entrepreneur-friendly events organizations. Sponsor Local Programs to Develop Entrepreneurship RWW's Never Mind the Valley series: Since early 2009, Capital Entrepreneurs has held a monthly meet-up for entrepreneurs. With over 60 member companies, the group has helped bring the Madison entrepreneur community together. The group also has its own Capital Entrepreneurs Angel List, based off of a similar program out of Venture Hacks. Based off a successful program at MIT, Merlin Mentors pairs new startups with successful business people in the community, who act as mentors and as an informal board of advisors. Merlin (short for Madison Entrepreneur Resource, Learning and Innovation Network) Mentors was developed with the support of various programs at the University of Wisconsin-Madison. In the Fall of 2009, the university received a Kaufman grant to foster entrepreneurship on campus. And between the Burrill Business Plan competition, the Entrepreneurial Residential Learning Community - a dormitory that is geared towards those interested in entrepreneurship, and a Student Business Incubator, there are a number of programs on campus that help develop the startup community. This summer was the first year for the Forward Tech Festival/Conference which hopes to become a mini SXSW for the Midwest region. Notable startups from Madison include the social media and gaming company
  • The Startup Financing Dating Game: Courting Potential Investors 9 September, 2010, 4:40 pm
    A majority of the advice aimed at helping startups manage relationships with venture capitalists is tailored for when that startup is raising or has raised funding. Certainly a lot of the interaction between startups and investors takes place during and after financing rounds, but there is a lot entrepreneurs can be doing before they seek funding to set themselves up for success with VCs. In a response to a question on the Q&A site Quora, VC Mark Suster offered his advice to entrepreneurs on how to manage relationships with VCs before fundraising begins. Sponsor "Spending (small amounts) of time now will pay dividends later when (if) you actually do need money."- Mark SusterSuster's first point is to pick and choose which VCs you decide to build a relationship with very carefully. There's no point in spending time on a relationship with a VC who is irrelevant to your product sector or who you can't imagine actually working with in the future (for any reason). It's a lot like dating when you think about it - if you're seriously looking to meet your future spouse, why waste time dating someone you'd never consider marrying? "Don't come to a VC when you need money," says Suster. After all, you need to get to know the person you're going to marry before you get engaged. "It's too hard for them to assess your character in a short period of time (and vice versa) and it's too hard for them to see how your thinking, product & traction develop over time." Another point Suster makes is that you want to build a relationship with a VC that is not "a yes man." Just as with relationships of the heart, being continually told what you want to hear does not a healthy bond make. VCs should be constructively skeptical and constantly challenging and questioning your every move - pushing your startup to grow. While a startup is prone to spend much of its early time worrying about its product and its customers (as it should), Suster says that "spending (small amounts) of time now will pay dividends later when (if) you actually do need money." He advises newborn startups to make sure the VCs they engage are aware they aren't looking for funding at the moment, and to keep things casual - no formal pitches. Communication at the onset of a VC/startup relationship is just as important as it is with a romantic relationship. Each party needs to know what they are getting into, and that they're on the same page. It may be more efficient to build up that relationship slowly through a series of small casual coffee dates rather than jumping in head-first with a full-blown steak-dinner-carriage-ride-through-Central-Park date. "Once you've pitched and been turned down it is incredibly hard to re-engage that VC," says Suster. Discuss
  • Network Launches to Help Entrepreneurs Find Co-founders 9 September, 2010, 3:30 pm
    While it's possible to go it alone and be a single-person founder of a startup, many people need - and prefer - to have a co-founder. As Graphic.ly CEO Micah Baldwin describes it, you want "a hacker and a hustler." But finding someone who has the right skills, the right personality, the right work style, the right vision isn't easy. In fact, judging from the number of times you see people posting "looking for co-founder" on Hacker News, it's quite a challenge. Sponsor On Monday, the Cofounder Network launched, aiming to help solve this problem by matching entrepreneurs from around the world. "By connecting superior entrepreneurs to start up new ventures," reads the blog post announcing the network, "we will boost the startup ecosystem and help solve world problems along the way." The Cofounder Network is an initiative of techVenture, which already works to bring together entrepreneurs and investors. The Cofounder Network will function in a similar way, addressing both the screening and the matching of applicants. You can either apply directly to the network or be referred by a partner. Currently, these partners include Startup School, Indiegogo, Linden Ventures, Palomar5, and others. The application asks for entrepreneurs to describe "your personal mission in life," to give links to your digital identity, and to describe past experiences and achievements. Applicants are also asked to describe what they're looking for in an ideal co-founder. The first step will be to look for a match locally, and if one can't be found to then look globally. The Cofounder Network has partners worldwide, and argues that "matching cofounders coming from different cultural hemispheres can bring another significant advantage." Meeting people at local networking events, conferences, and (the most common place, perhaps) college may be the most well-known routes to finding a co-founder. But clearly that's not always an option, and so the Cofounder Network hopes to be another avenue for folks to explore. Discuss
  • Valuable Startup Advice Emerges from Debate Between Angels & VCs 8 September, 2010, 5:30 pm
    One of the big debates in the venture capital industry lately has been the growing argument between so-called "super angels" and traditional VCs - the former being prone to mention how they feel the latter "sucks." As one would expect, many voices in the industry have made themselves heard in the form of VC blog posts and passionate, profanity-laced shouting matches. But when the fog of war clears, what should startups take away from the debate? Should they seek investment from VCs or super angels? Or both? Thankfully, some level-headed perspectives have emerged that are aimed at helping young startups interpret the lessons to be learned. Sponsor "The financing sources that are appropriate if you need a total of $1 million are different than if you need $10 million or $100 million."- Chip Hazard, Flybridge CapitalIs there a benefit to one over the other? As Founder Collectvie's Eric Paley said in a blog post on the topic earlier this week, "the world isn't so black and white." When it comes down to it, every startup is unique, just as every VC is unique and every angel is unique - so there is probably no blanket assumption that can be made about the industry. For startups setting their sights on the beast of the early-stage funding market, Chip Hazard, a partner at Flybridge Capital, suggests to simply figure out what works best for your company. "Put together an overall multiyear plan for your business, assume it takes longer and more money than what the plan suggests, and then determine what that means," writes Hazard. "The simple point here is that the financing sources that are appropriate if you need a total of $1 million are different than if you need $10 million or $100 million." He also notes that while many would prefer to raise all of this capital at once, the smart decision is to raise it piece-be-piece. "Funding through milestones such as these will allow you to raise subsequent rounds of capital at higher prices," he says. "Reducing risk and demonstrating potential upside will always translate into higher valuations." Because every VC and angel is unique and has their own idea about where your company is headed and how involved they should be, picking one or another is not a decision to be made lightly, says Hazard. "One of the greatest sources of conflicts between entrepreneurs and investors happens when this alignment is not in place from day one," says Hazard. Discuss
  • Making Market Research Cheaper and Easier for Entrepreneurs 8 September, 2010, 1:31 pm
    Understanding your market is a crucial part of planning your startup. But traditional market research can be both expensive and time-consuming, taking weeks or even months to develop, execute and analyze and eating up dollars that many new companies just don't have. Ask Your Target Market is an online self-service market research platform that tackles those obstacles, helping startups and small businesses assess their markets while avoiding both the high price and lack of agility associated with traditional market research. Sponsor And today, AYTM announces that it has been selected as the official market research tool for startups participating in the Founder Institute. The data collected from AYTM will be utilized to supplement the curriculum of the Founder Institute's entrepreneur training program. AskYourTargetMarket surveys start at $30 and the company promises says most surveys are completed within 72 hours, with real-time results available. The company uses a "psychographic prescreening question" to help assemble the panel of respondents that will best represent your target market. Only looking for vegetarians or iPhone 4 users or people with active MySpace profiles (hey, you never know)? You can direct the survey right at that demographic. Or alternately, you can establish the criteria for those receiving the survey based on several factors including gender, age range, income, education, and location. And you can drill down into the results based on these demographics as well. The surveys are short - containing only up to 25 questions. But as so many demographic questions can be avoided by the way in which you assemble the panel of respondents, shorter surveys probably mean more completions. Becoming the "market research tool of choice" for the Founder Institute participants is a strong endorsement for AYTM. Have you used the service? If so, what are your thoughts? Discuss
  • Leaner Than Lean: Is Ultralight a New Class of Startups? 7 September, 2010, 12:40 pm
    There is a fascinating article online this morning from the San Francisco Chronicle's Tom Abate in which he profiles Raymond Lei, a 19-year-old Berkeley student and entrepreneur. While still in high school Lei founded ooShirts.com with just a computer and an idea. A few years and just a couple thousand dollars in capital later, Lei runs a successful 2.5 person team set to earn over $700,000 in 2010. Abate dubs ooShirts an "ultralight startup," but is Lei's bedroom business any different from a lean startup? Sponsor In recent years, lean startups have become a popular sector of Internet businesses that look to push a product at "low burn." A lot of what makes a lean startup lean, according the man who coined the term, Eric Ries, is when the company strives to create value for customers. "Every activity that does not contribute to learning about customers" should be defined as "waste," Ries says. But Lei's company seems leaner than lean, with almost no "burn" whatsoever. According to the ooShirts.com homepage, less than 0.5% of the company's revenue goes to advertising. Instead the company relies on referrals and repeat customers to help spread the word. By working with over a dozen suppliers, ooShirts keeps its shipping costs low - savings it passes on to its customers in order to undercut competition. ooShirts is part of a unique subset of Internet companies. While many startups one might categorize as "lean" are developing applications and tools for the Web, ooShirts is playing in the co-creation and mass customization space. These companies serve as intermediaries between customers and manufacturers who can create customized products, and thus can afford to run at a "low burn." Because of this business relationship, mass customization companies may need to be set aside from lean startups, which by nature are highly iterative product companies. But perhaps there is some intersection between lean startups and the low burning mass customization companies. Or maybe Abate's term "ultralight" is a new class of startups? Either way, running thin is certainly a growing trend among startups, and ooShirts is a fine example of how the Internet is enabling the success of these businesses. Discuss
  • Year One Labs Launches Startup Accelerator in Montreal 7 September, 2010, 10:05 am
    When ReadWriteWeb profiled Montreal last month as part of our "Never Mind the Valley" series, it was clear that the city had a thriving entrepreneurial community. And today the Montreal startup scene gets stronger with the announcement of the launch of Year One Labs, a startup accelerator program. Sponsor The program is founded by four entrepreneurs - Raymond Luk, Ben Yoskovitz, Ian Rae, and Alistair Croll - who describe themselves as "operators, not armchair quarterbacks. We've been in the trenches." The program will utilize the "lean startup" methodology and be focused on a "rigorous process of customer development and iterative adjustment." Year One Labs' founders say the program will take a hands-on approach, offering $50,000 issued in tranches, a network of mentors, access to investors, and office space at the Year One Labs space. In exchange, the program will take a minority stake - between 10-20% - in the participating startups. Mentors include Flowtown co-founder Dan Martell and Shopify creator Tobias Lutke. According to a blog post at Flow Ventures, of which Luk is the founder, "The best way to 'pitch' Y1L is to sit down with us face to face and talk about the problem you're going to solve." Discuss
  • Investment in 3rd Party Twitter Startups Down 50%, Says Report 7 September, 2010, 9:30 am
    Although the number of registered Twitter users has grown to over 145 million, a report released yesterday by investment research firm CB Insights notes that that popularity hasn't translated into investment in the Twitter ecosystem. According to its research, investment by venture capitalists and angel investors into pure play Twitter startups has dropped over 50% from June 2009 to May 2010. "Pure play" startups are those whose product is predicated wholly on the Twitter platform. Sponsor From June 2008 to May 2009, CB Insights tracked $21.6 million in investment into pure-play Twitter startups. But over the last 12 month period, that investment figure is down to $10.4 million. While the dollar amount is down dramatically, the number of investment rounds has stayed nearly the same: 11 last year versus 10 this year. Despite the growing popularity of Twitter, investors (and developers) appear to be uncertain about both the stability and the direction of Twitter. When Twitter purchased Tweetie back in April and acquired Smallthought Systems in June, it signalled to many that the company would be "filling the holes" in its platform itself, rather than leaving them for third-party developers to address. While investment in and development of the Twitter ecosystem as a whole will continue, it seems unlikely that investment in pure play Twitter startups will rebound to meet the levels cited in another CB Insights report: the one that tracked a 220% increase in pure play iPhone and iPad app startups. Discuss
  • Did Your Startup Get Work Done This Labor Day? 6 September, 2010, 6:30 pm
    In a post last week about how to measure the effectiveness of startup employees, we mentioned that perhaps the number of hours worked isn't the best metric. With that said, this weekend was Labor Day weekend in the U.S., one of the more popular get-out-of-town weekends of the entire calendar, but does that apply for entrepreneurs and startups? Certainly there were some die-hards out there that refused to leave their desks this weekend, but we still wanted to know - do startups labor on labor day? I polled Twitter over the weekend and got some interesting responses. Here's what you had to say. Sponsor "No question. It is something I enjoy too much, had to put at least a couple hours in."-techofnowOne of the most succinct responses I was sent came from Pasadena-based IT pro Brian Jeremy, who said simply, "entrepreneurs never take days off." Never? Not even on Labor Day, a holiday meant to be a celebration and respite from work? I suppose, for an entrepreneur, the right mindset means never feeling satisfied with one's work, and always wanting to work harder and longer (and enjoying every second of it). Perhaps the hardest working entrepreneurs don't feel they deserve a day like Labor Day? Jeremy isn't alone in his sentiments. In fact, many of the responses leaned in favor of working on Labor Day. Chris Grayson, a New York-based digital media consultant and marketing strategist, said, "What @brianjeremy said." Others jokingly hinted at the fact that they were unaware any holiday even existed today. When I asked if it was even a question that startups and entrepreneurs would work this weekend, the entrepreneur behind the Twitter account techofnow replied, "No question. It is something I enjoy too much, had to put at least a couple hours in." Another response said, "I love to use holidays as a chance to get ahead of the competition," which is certainly a good move, if your competition gets lazy. It would seem that time off and holidays are few and far between for young companies looking to get off the ground. For those with some experience (and a team of employees) under their belts, holidays are avoided less often. Jeff Powers, co-founder at Occipital, says that even though his team officially had the day off, he's "been working all day as usual." Sometimes even the most seasoned entrepreneurs-turned-managers can't break old work habits. But perhaps polling Twitter was a bit of a biased method for this question. After all, those out enjoying the holiday weekend are less likely to be paying attention to Twitter well enough to chime in. So here is your opportunity - let us know: did your startup get work done this Labor Day weekend? Or did you take the time to decompress before getting back to business Tuesday? Or was it a mix of both with laptops on the beach? Leave us a comment with your opinion on working holidays! Discuss
  • Using a Virtual Personal Assistant for Your Startup 5 September, 2010, 12:00 pm
    ReadWriteWeb Co-Editor Marshall Kirkpatrick recently extolled the virtues of Amazon's Mechanical Turk for "rocking conference blogging." He's not the only person who's seeing some real benefits from outsourcing small tasks to the service, as I've noticed a number of people talk about the ways in which they use - or could envision using - Mechanical Turk to help them. Ewan McIntosh, for example, wonders if teachers could utilize the service to outsource some of the "larger scale time suckers" in education -- entering attendance records, generating letters to parents, and so on. Sponsor Lindsey Harper recently wrote about her experiences using Mechanical Turk to validate her startup idea. Noting that friends and family are unlikely to be objective when assessing whether or not your idea is viable, she spent $28 on the Amazon service in order to poll 200 people on her concept. Her survey asked whether or not they'd use the service, example of how they might use it. In addition to asking for general feedback on the idea, she also captured gender and age demographics, so she could have a better idea of who her market might be. "The information I got back for my $27.50 was INVALUABLE," she writes. "I found from that 1 survey, how to basically build my product for launch. What features I had to have based on how users would use the service. I also realized I could basically cut my current feature set in 1/2 because what I thought people would want, wasn't even mentioned." Rob Walling had a guest post on Jason Cohen's blog last week that goes into more details about some of the other ways startups can use Mechanical Turk and other virtual personal assistants. The post is an excerpt from Walling's new book Start Small, Stay Small: A Developer's Guide to Launching a Startup. As Walling notes, "The value proposition of a VA deals with how you monetize your time. If you monetize it at $50/hour and you can pay a VA $6/hour to handle administrative tasks, this frees up time for you to create real value in your business by developing new features or expanding marketing efforts. Performing tasks you could pay someone else $6 to accomplish is a foolish use of an entrepreneur's time." Echoing Harper's use of Mechanical Turk, Walling argues that virtual assistants can be useful for startups to develop proof of concept. But they can also be utilized following launch to handle small administrative tasks. Walling offers a lot of great tips on how to find and evaluate virtual assistants, noting that "My first piece of advice is to avoid spending too much time worrying about screening your VA before you hire them. In the end, how well they work out depends entirely on how well they accomplish their tasks." Hiring someone will help you judge their efficiency and reliability, and Walling suggests these steps for the first task you assign: Back everything upProvide detailed instructions. Even better, provide screenshots. Timebox your requests, but assume that the virtual assistant will not be as fast as you are.Be clear with the timeline you establish for the work. If the first virtual assistant you hire doesn't work out, find another one. But don't give up on the whole process after one go, says Walling, as it takes time as an entrepreneur to find how to best utilize this sort of service. Have you utilized a virtual personal assistant for your startup? How so? And what have your experiences been? Discuss
« 1 2 3 »
order by views | - date
 

suggest a feed

 
40

bothsidesofthetable

  • My Life as a CEO (and VC): Chief Psychologist 8 September, 2010, 7:37 am
    I’ve had a post in my head for months – maybe longer – about the role of a CEO.   It originally appeared on TechCrunch as a guest post but just in case you missed it there.  My primary role was “chief psychologist” and as I’ve learned over the past few years the same has been true as a VC.  Both are basically people businesses. I finally got around to writing it having read Fred Wilson’s post about what a CEO does.  He says it basically comes down to three key functions: Sets the overall vision and strategy of the company and communicates it to all stakeholders Recruits, hires, and retains the very best talent for the company. Makes sure there is always enough cash in the bank. Matt Blumberg, who runs one of Fred’s portfolio companies, Return Path, follows up with an additional three: Don’t be a bottleneck (make sure you aren’t holding up people’s work) Run great meetings (don’t be a productivity drain on the company) Stay fresh (be mentally and physically fit & attuned to what is going on in the world) Howard Lindzon weighed in with his comments: “As a CEO of a venture backed business myself and founder of many others, I would add one thing…Thick Skin. If you fail, you need to start all over. As you start to succeed, you will hear from people like me…’armchair quarterbacks’ . If you really succeed, everyone wants you to fail eventually so you need even thicker skin.” And I’d add to the world of “lists of three” the old adage that many VCs quote about boards having only three roles: Raising money Selling the company Hiring & Firing the CEO These are good starting points and one day I’d like to elaborate more on the topic of running a company and as only I can do I will take these short lists and make them much longer But today I’m going to do the opposite.  I’d like to boil down the role to just one critical function: chief psychologist. 1. Psychologist as the CEO of Employees –   Everybody wants to work somewhere “that is not political” but that place only exists in a mythical utopian island.  Even three person organizations are political.  Not when you first start but if you’ve been at it for 2 years or more you’ll know what I mean. Almost by definition to be a great leader you need to be an effective psychologist.  If you want to grow you, as Fred’s post points out, need to be able to attract & retain the very best talent.  Some entrepreneurs make the mistake of never devolving power.  They are control freaks and have to own all of the decisions.  This breaks Matt’s rule about not being a bottleneck.  This is the failure of many early-stage companies when they try to scale. And the opposite is also true.  Leaders who trust people too easily and get divorced from the details are almost always failures.  It’s a paradox: control too much and you constrain growth, control too little and your quality lapses. Anybody who has worked with me knows that I have these “control freak” tendencies as I think many leaders do.  We want quality, we trust our own instincts & judgments and we think that many people don’t live up to our standards.  But we know that ultimately being effective is about finding those people that do.  It often takes a while of experimentation and watching their results to start to trust them.  But when they start to meet and exceed your expectations it’s magic.  You’re suddenly free to focus your energies elsewhere. Once you’ve been around for a few years, attracted some great people, landed real, paying customers and raised venture capital you’ve likely got a talented team around you.  Almost definitionally very talented people will butt heads.  It’s your job to give people enough space to flourish without conflict, resolve conflicts when they do occur, encourage your team members to perform at their best and set the culture by which they ultimately treat their colleagues and staff. My first company was founded in Ireland, headquartered in England and had country operations in the UK, France & Germany.  Due to the language and culture issues in Europe we opted for a country structure with an MD in each country and local sales, marketing & customers support staff.  We obviously had the debate about whether these functions could be centralized but either strategy has its trade-offs. This is akin in the US to having sales staff in NY, SF & LA with your HQ in one of these locations. As each country grew it obviously vied for centralized resources: finances (to fund people development & marketing), technology development (they wanted to show their largest customers that they were willing to build in critical features or integrations required to win big deals) and also they wanted my time – out in the field and with their biggest customers. As things got bigger we hired a head of European sales and a head of European marketing.  In your case this might simply be a VP of Sales or Customer Support for multiple locations.  Naturally the countries reacted negatively to reporting to a centralized figure in the UK (and of course to no longer reporting to the CEO). I found that a lot of my time went into spending time with the country MD’s to show them that they were still important to me and that I was still willing to help with sales campaigns.  Equally I had to spend time with the heads of sales & marketing to keep them confident I wasn’t going to undermine their authority in the country operations. But it wasn’t just about company structures.  If one sales guy had a banner year he wanted to know why the other sales guy wasn’t pulling his weight.  He wanted more resources allocated to him and he would begin wondering whether he might rise in the organization.  If any of you have built larger organizations I’m sure these types of issues will resonate. Lots of requests for “just 20 minutes of my time.” To try and overcome many of these issues we held all company meetings twice / year where we paid for EVERY employee (executive assistants, customer support staff, interns) in the company to come to a central location for a day-and-a-half of team building & fun.   Keeping things together was a function of re-energizing everybody: reminding them that they were important, reacquainting them with their colleagues and making sure that they felt part of something bigger / more important. As virtually anybody in our company will tell you I was the last person to leave almost all of these events.  Not because I had to prove I was a party animal (although there was that) but mostly because I wanted everybody to have their private 20 minutes to tell me what was going on in their jobs, lives, careers. I’m sure this mostly played the role of catharsis but I did remember almost every individual story and in my own way would try to make things just a little bit better in some small way over time.  It would surprise anybody who has never been a CEO the specificity and sometimes simplicity of the grievances: We haven’t gotten a new office printer in 3 years, I really can’t take it any more Their office pays for their coffee and ours doesn’t.  It doesn’t seem fair I don’t understand why she gets all of the best accounts.  How can I hit my quota selling to Deutsche Bahn – their sales cycles are so slow! But this isn’t restricted to distributed teams, multi-country environments or even large companies.  We faced it when we were small. I had developers who thought that the chief architect was a bottleneck – having to be involved in every decision.  Our most talented developer wanted to move to the US for personal reasons.  We kept him on a remote role – by far the best decision we could make. The funny thing about a startup is that if you keep it together for several years life happens along the way.  We went through marriages, divorces, babies, deaths of close family members and even deeper issues like alcoholism.   Along the way it was my job to play the role of sympathetic counsel, mediator or bad guy depending on the situation. It is such an under-discussed issue as we spend our time in startups mostly talking about products, marketing and fund raising.  And business schools seem to also over emphasize the quantitative skills over the human ones.  I guess the latter is harder to teach but I believe a bigger driver of success. If you want to attract world class talent you have to be inspirational, persuasive and persistent (they best people always have other offers).  If you want to retain the best talent you have to be able to devolve power, coach people for performance, resolve conflicts, find ways to create growth opportunities, balance carrot / stick motivational techniques, etc. And if you want to really be an effectively leader you need to know when & how to get rid of under-performers or bad seeds.  One of the most common “chief psychologist” asks of me as the CEO was to resolve an inter-personal conflict with another employee.  You can’t fudge these types of situations – you are often forced over time to pick sides.  And I’ll tell anybody who asks (or doesn’t) that I’d rather hire somebody with 90% of the skills and a great attitude than a bad seed with more talent. 2. Chief Psychologist As a VC – I am surprised by the extent to which my role as a VC has continued this “chief psychologist” trajectory.  I’ve often said that being a CEO is one of the loneliest jobs that there is because you always feel the need to be self-confident and make sure others don’t sense any self doubt.  You’d love to tell your employees that you’re going through tough times / decisions but you don’t want it to affect them. You want to be able to tell your VCs that you’re nervous your market will be limited but you’re worried that might affect your next funding round (or your job!). So you internalize much as a CEO, which is why groups like YPO are so important for super successful entrepreneurs. As a VC you see the insides of companies rather than the companies positive spin on TechCrunch.  I spoke to a VC recently who said, “if only my company was going as well as the Wall Street Journal says they are.”  That is not uncommon. I have been involved as an investor in many CEO / founder disputes including many that are not in my portfolio.  I’ve had to sit with founders and talk to them about how we need to hire more senior staff as the company is growing and that person is not necessarily able to fill the new role we as a company need.  I’ve been involved in helping CEOs who are having disputes with investors and want to figure out how to resolve them. I had one of these “chief psychologist” moments last week with one of my favorite young entrepreneurs.  His firm hasn’t yet performed up to the level at which he expected.  I opened up with a very blunt conversation about self confidence, self doubt, family pressure, peer pressure and the demands on a CEO.  I *think* he found the conversation relieving and confirming. I’m no savant for being able to know his issues of the mind – I’ve been there.  Lived it.  And as a VC, mentor, angel investor and founder of Launchpad LA I live it as a routine of my life.  I had the CEO of a prominent site in 2006 come to me near tears about how she couldn’t take the stress of running her company any more.  I helped keep her calm down and we focused on other possible outcomes (we eventually got the company sold for more than $7 million and she owned half of it). Another prominent CEO was on the verge of both company & personal bankruptcy when we had lunch.  He and his family had guaranteed a personal loan on the company. I think one of my most important roles a VC is that of chief psychologist.  I know it doesn’t sound glamourous but since the development of a company is such a roller coaster ride I believe that the best VCs understand the need to help counsel people – to be their best motivators.  Sometimes this is heat.  Sometimes this is light.  But not paying attention to the human element in company performance is being oblivious.
  • How to Discuss Stock Options with Your Team 6 September, 2010, 11:17 pm
    I was thumbing through Twitter messages on my Blackberry on Monday (I use Twitter as a “mobile first, web second” product) when I saw the following Tweet (see graphic). I resisted the temptation to jump in with a response because I knew it was too complicated of a topic to discuss on Twitter.  But I thought I should do a quick post on the topic. 1. Options are gravy - I lived through the first dot com era where we used stock options as a recruiting tool.  I freely admit this (along with nearly everything between 1999-2000) was a mistake.  We set our sites on our IPO price and then worked back to our current valuation and  showed potential employees what we thought they could earn (with all legal caveats) if the company was successful. The stupid thing is we sort of believed it ourselves.  If Ventro was worth $8 billion on $2 million of sales surely a paltry $1 billion would suffice.  Goldman Sachs was an investor and the assured us an IPO would happen and riches would be had by all.  I think they believed it, too. We obviously attracted the wrong people for the wrong reasons and this led to a lot of disappointment.  We had a lot of re-setting of expectations to do. Options are obviously a very important economic motivator for your first 3-5 employees and your most senior management team.  But unless you become Facebook or Zynga they likely aren’t going to pay off big for everybody else. So I developed this standard line that I used for all employees.  I’ve said versions of it on this blog before so I hope it’s not too repetitive.  But it’s critical to get this right: “Join our company if you think you’ll learn from being here.  I think you will. Join if you think your career will progress because you’ll be given more responsibilities than elsewhere and if you’re good at what you do you can move up quickly. We’re a meritocracy. Join because you know you’ll be earning less than you could elsewhere at some meaningless job cranking out non-core code, producing Powerpoint slides or shuffling paper.  You can always earn more.  But join here if you want to grow. Join because you like the culture.  You think you’ll have fun.  You’ll consider your colleagues close friends. Join because in three year’s time when you look at this job and this company on your CV you’ll feel proud and it will be part of how you got where you were going. Join because as we grow our ability to reward you will grow and your income will grow with our success that you contributed to. We give out stock options.  I hope they’re worth money to you some day.  But let them be “icing on the cake.”  If they pay off handsomely that’s great.  But don’t count on it.  Don’t let it be your motivator or your driving decision. Not because we don’t want them to be valuable, but because we don’t want to create an “options culture” around here.  Option cultures are corrosive, create the wrong incentives and attract the wrong sort of people.” I’ve said similar hundreds of times.  And I believe it.  If you find out one day that company you went to work for was Facebook then consider it the lottery.  And that would be nice. But if you’re the CEO who is spinning up a story about how the options for non-founders, non-VPs is going to be worth a lot some day then you’re probably doing some young entrepreneur a disservice at your expense.**  And when they figure it out some day they’re not likely to be very loyal moving forward.  Do the harder work and convince them to join anyways – without the stock option bravado. ** Unless you really are Mark Pincus, Mark Zuckerberg, Ev Williams or similar.  Then go ahead 2. The best policy is transparency – The stream on Twitter, as best as I can tell, started with Chris Dixon sending the following Tweet (see graphic) My interpretation of this Tweet was harmless enough.  I thought Chris basically meant that investors know what most deals (not just their own) get done at so they have a pretty good sense how to price seed, A, B, etc. rounds and still be competitive.  This is mostly true.  I don’t know whether I fully agree that they keep them secret for “informational advantage” but maybe. I tend to keep valuations secret because I’m usually told by a trusted source and feel it isn’t my place to reveal confidential information.  I wouldn’t be a VC for very long if I did.  I see people’s private information for a living. Anyhow, on the above Tweet Andrew Weissman (a VC) disagreed with the premise – I’ll assume Andrew read it how I did followed by Nate Westheimer who wrote the Tweet that Henry Blodget retweeted (opening image) about companies wanting to keep their valuations from stock-holding employees. Quickly dissecting I think Nate’s response slightly veered off topic.  There’s a difference between companies wanting to hide valuations and investors doing so. I think Chris’s initial comment was about investors Investors generally are not the people to reveal valuations to anybody – it is the business of the company and the CEO should manage this information. Whatever the intent of the dialog let me encourage all management teams to be transparent with their employees.  My personal preference is to tell people the amount of stock options they are receiving (total number), the value of those stock options (say $100,000), the value of the company (e.g. $10 million post money) and therefore if we sold for $100 million dollars one day your gain would be approximately $1 million). “If you perform extremely well in this role there is always a possibility of further allocations although that is clearly not guaranteed or promised.” 3. That said, don’t complicate the topic – If you’re the founder of a company you likely know a lot about things like Liquidation Preferences and how they affect value allocations when the company is sold.  You also understand that there are future financing rounds and in tough times this can change the value equation of stocks. Some founders err on the side of telling employees absolutely everything.  I prefer not to.  It’s not that I don’t want transparency – it’s just that some issues are technical complications that aren’t material to the employees understanding of the issue.  I know some people will take issue with this approach and that’s fine.  But here’s my rationale: I see way too many employees trying to understand all of the complexities and spending way too much time trying to calculate how much their options are worth through each fund raising round.  This really conflicts with my view that options are to be put in the top drawer of your study at home and treated like upside gravy. The most complexity the more angst the more options end up working against your intent if you think about them the way I do. Obviously I’m not talking about your most senior 3-5 employees who hopefully own meaningful stakes, are making salary sacrifices and have the experience in understanding stock option nuances.  Much experience tells me that most people don’t. It kind of reminds me of sales employee bonus plans.  If you make them easy people spend their time selling.  If you make them complex to maximize every possible way to incentivize behavior sales people end up spending 10% of their sales time calculating how much their bonus would be if they structured their deal this way or that way.  Ah, the law of unintended consequences. 4. Valuation or percentages – it’s up to you.  I think either strategy is OK.  I prefer percentages (e.g. you’re getting 1.5%) for the top employees (in addition to the method I described above) and staying away from percentages for everybody else. If you’re transparent about the value of the number of their stock options, the value of their stock options and the market cap of the company then they can do the calculation themselves (98% won’t know how, but they have all the information they need). Why do I feel this way?  It’s really meaningless to say to somebody that you own 0.18% of the company.  It doesn’t make somebody feel better.  And by telling them the value they have all they need to assess whether or not it was a good deal.  Sometimes a percentage can be equally meaningless. But I can buy both arguments.  I choose my way.  Either way, make sure not to over sell.  And I would opt for transparency.  There is nothing worse than an employee who wakes up one day feeling duped or a sense of mismatched expectations.  Then everybody loses.
  • Mafia Sourcing – How Insider’s Game User Generated News 1 September, 2010, 11:16 pm
    The Web.  Open, democratic, leveling, freeing information from closed networks.  The wisdom of the crowds. Or so it seems. I originally came from the entreprise software world (for 10 years) and before that I was in mobile & telecoms (8 years) so the last three years of immersing myself in consumer Internet, digital media & advertisings has been very eye opening.  I arrived on this scene wet behind the ears assuming that the web was, as it seemed to me as a user, powered by the masses for the masses.  Ah, the joys of youthful naivete. I first learned the ropes around SEO (search engine optimization) and how for years this has been a cat-and-mouse game where people game the system (Google) through link exchanges, offshore SEO “agencies,” widgets, algorithmically optimized content and the like that degrades the quality of search results.  I then learned about the large world of Internet arbitrage, lead gen, and “crap-taculous” revenue as one friend calls it.  I learned about domain parking and how much money that drives for Google. And then I had another bubble burst.  I had previously believed that the world of user-generated news sites were run on a open, crowd-sourced model.  You submitted news to a website like Digg and if it was interesting content with a great headline and newsworthy text it would get driven up to the masses.  I know the more experienced consumer web people will be laughing about now. What I learned 18 months ago is that sites like Digg traditionally have not been “crowd sourced” so much as “mafia sourced.” Here’s how I learned: When I first started blogging 18 months ago or so I started asking people the best way to get distribution.  I didn’t want to obsess with it (I have a day job!) but I wanted to be sure I wasn’t writing just for my mom.  I had a lot of initial success publishing my content on Twitter and the truth is that it was fairly democratic.  If I wrote an interesting story with a compelling enough title it tended to get good click throughs (2-4% each time I Tweeted & for reasons I’ve explained before I Tweeted 2-3 times into different day parts). I had a few friends help with the initial distribution and explained how to do that in this post on how to blog effectively. I then experimented by putting a button from Tweetmeme to make it easier to Tweet from my blog and FB share button from awe.sm.  Things started to spread more virally.  Awe.sm is right! Then I started experiencing the magic of being “profiled” on a few sites.  The first to hit was when I was on the WordPress home page.  BOOM!  Traffic rolled in.  And then I got covered a couple of times on HackerNews and another major spike. Next on my agenda – Digg.  If HackerNews was big, Digg must be even bigger – right? I put up a button on my blog and noticed that I got a few clicks on the button.  But it didn’t drive ANY traffic.  Hmm. Not the expected reaction.  I tried another experiment – I asked a friend of mine to submit a story on Digg.  He had told me he used Digg all the time so I figured if people saw him there submitting a story it would bring at least some juice.  Nada.  Bagel.  Zippo. I called a friend of mine who is REALLY in the know.  I’ll need to protect his identity I asked him why I sucked on Digg.  He asked me who submitted my story.  I told him and he said, “well, that’s your problem.”  Huh? “On Digg it really matters who submits your story.  There is a small group of people that all work collectively to promote stories.  We all know each other by online handles.  We are all linked in IM (instant messenger).  When we want a story promoted we ping each other and all of the power users will promote the story.  When it starts breaking then the power of the crowds takes over.  If you want a story to break on Digg just let me know.  I’ll help promote it. I never took my friend up on this offer.  Blogging is a hobby for me and I love being able to learn about all of the technologies from a practitioners perspective rather than the Ivory Tower.  But I don’t make a penny from blogging and I certainly wasn’t wanting to mafia source a bunch of users who probably would drive unfocused numbers to my blog.  I care about quality entrepreneurs & investors engaging with me intellectually, not mob scenes.  Asking a friend to help ReTweet a story on occasion was a far cry from an organized ring. But I did want to learn. So I called a bunch of other friends in the space and they all corroborated my initial friend’s story.  Some offered to help promoted me on  StumbleUpon, Fark and others.  Uh, no thanks.  Et tu, Brute?  Yup.  Seems these rings operate where they can. One place that really has surprised me is HackerNews.  At least from what I can tell (maybe I’m still PollyAna-ish about it because I love HackerNews) this user generated news is much less gamed.  They seems to make it hard to directly link to stories and I haven’t heard of HN mafia circles.  If I’m wrong please write a comment (even if anonymous). So when I read the articles about the Digg V4 controversy (see: wikipedia & TechCrunch) it doesn’t surprise me that Digg would want to change its feature set to make it a more honest broker of user-generated news (the way Twitter seems to be to me).  Yes, they are getting lambasted by their users for the recent changes but probably precisely because when you’re the mafia you don’t appreciate a little light shining.  I must admit that I haven’t followed the Digg v4 controversy closely enough.  I stopped watching when the Sopranos ended.  So there might be more to users discontent than making the system harder to game. I for one applaud any efforts to make user-generated news (and the web) more democratic & open.
  • US Economic Risks (Sept 2010): Impact on Investors & Entrepreneurs 30 August, 2010, 9:55 pm
    This post was originally published in a shorter (more sensible) format in the Wall Street Journal online.  If you’re short on time click on the WSJ link and read  the 990 word version there.  Otherwise, grab a cup ‘o coffee … Clicking on any graph below will take you to that article. One year ago I predicted that in 2010/11 the economy, far from being on the path of permanent recovery was on a temporary resurgence and there was a strong possibility of a “double dip” recession.  My advice to entrepreneurs was and is “when the hors d’oeuvres tray is being passed take two” (e.g. raise money now to weather any storms). My original thinking from Oct ’09 was, while I didn’t (and still don’t) have a crystal ball I worried that: consumers were over-stretched with debt (and make up 77% of the economy), unemployment would continue to rise, which in turn would drive the stock market south and cut the rate of M&A activity and VC investment even further. Sounds obvious now, but as I wrote the original piece the DJIA had already come roaring back from 6,600 to 9,865 so it was certainly against conventional wisdom. It eventually closed at 11,204 in April ’10 before sliding back around 10,000 as I sit here and type.  Well before the recent decline I sent out a Tweet that said, “Many will disagree but I still fear deflation, structural unemployment and political malaise.”  Scott Austin of the WSJ (worth following) saw my Tweet and asked me to go on record with my rationale. So I agreed to offer my current thinking on the economy and what it portends for the VC industry & fund raising for entrepreneurs. Let me preface by saying I obviously have a vested interest in being wrong about tough times ahead but as the old saying goes, “hope for best, plan for the worst.” 2010 has been a great year for startup fund raising: Let’s face it, 2010 has been “the year of the super angel / seed funds” that was arguably first popularized by First Round Capital but has gathered steam with the success of great firms like Floodgate, Founder Collective, SoftTech VC and more recently Felicis Ventures, 500 Startups and incubators like YCombinator & Betaworks.  The prices of angel deals have recently crept up, VCs have also gotten their checkbooks out again, frothy deals are happening and people are feeling bullish.  I heard an entrepreneur last Friday tell me that after he appeared on AngelList he had a funding frenzy with one investor whom he had never met offering to fund him after just 15 minutes on the phone. We’re still caught in the “post recession bounce”: What’s happening is that the angel & VC community is still feeling good from having bounced back from the nadir of the famous “RIP Good Times” funk that we felt in 2008. This has been especially true for angels or seed investors as there is a new thesis that less capital is needed to start Internet companies so more money is being spent at this phase of the funding lifecycle. VCs have also gone back to writing checks because as an industry we can’t be seen as “sitting on the sidelines” for years at a time.  VCs get paid to “put money to work.” While not 1999 all over again but I am observing first-hand the signs of funding frenzy.  I know not everybody agrees.  Let’s talk again in a year or two.  I’ll happily eat crow if it turns out this wasn’t an overly bullish phase.  The industry is still in major contraction with many funds shutting down or slimming down and I believe this trend will continue for the next few years. We have structural employment issues:  The official unemployment rate in the US is hovering just below 10% but “true” unemployment is much higher when you account for those that have stopped looking or taken part-time employment and in key states like California and Michigan we’re downright hurting.  45% of all unemployed people have been looking for jobs 6 months or more – this is unprecedented.  And when you further strip out any employment created by government stimulus that is uncertain to continue going forward we know that the country is not creating enough jobs.  We’d have to hit 2.5% GDP growth just to stand still on employment! And last quarter we now know grew at just 1.6%. We as a country are suffering from what is known as “structural unemployment” where jobs have disappeared from certain segments forever due to technological or structural obsolescence.  This led to the unusual protectionist proclamations by Andy Grove (former CEO of Intel) in a recent BusinessWeek article where he measures the US against China in what he calls the 10x problem – for every high-tech job we create in the US, China is creating 10 as evidenced by Apple’s 25,000 employees against its Chinese supply-chain of 250,000 (see Foxconn’s growth below: now larger than HP, Microsoft, Dell, Apple, Intel and Sony combined!). Yes, I studied Ricardo’s theory of Comparative Advantage in college that says that lower-skilled jobs should move to countries with lower labor costs, but Andy Grove’s point about loss of skills in manufacturing leading to a decline in innovation in the next technology wave is both real and troubling.  Here talking about lithium-ion batteries and the early lead we’ve squandered in that market: “With some technologies, both scaling and innovation take place overseas. Such is the case with advanced batteries. It has taken years and many false starts, but finally we are about to witness mass-produced electric cars and trucks. They all rely on lithium-ion batteries. What microprocessors are to computing, batteries are to electric vehicles… The U.S. lost its lead in batteries 30 years ago when it stopped making consumer electronics devices… U.S. companies did not participate in the first phase and consequently were not in the running for all that followed. I doubt they will ever catch up.” I don’t agree with his protectionist solutions such as tariffs, but the problem seems both real and lasting. Personal balance sheets are still stretched: The problem in the US starts & ends with “consumerism” that was fueled by artificially high real estate prices, which drove up spending and the stock market.  The reality is that we’ve spent beyond our means for years and the process of “de-leveraging” (increasing savings by spending less) has begun.  We took $2.3 trillion out of our homes and spent 2/3rds of it on flat screen TVs, trips to Hawaii, time shares, Apple products and everything else we couldn’t afford.  The spending contraction is inevitable in a period of declining real prices of housing, high unemployment and tightening credit. High unemployment, wage stagnation, lowering real estate prices and the lowering of demand for products may lead to deflation (where prices of goods & services decrease each month – i.e. the opposite of inflation).  This coupled with government intervention of companies “too big to fail” were the blight that led to Japan’s “lost decade.”  Sound familiar? Deflation is crippling because as consumers expect products to be cheaper tomorrow they hold off purchasing every month to see what happens leading to a negative spiraling economy. The housing market is not recovered: Sales in existing homes in the US fell 27.2% between June and July 2010 (and 25% from a year ago).  Sales fell in every region of the country with the Midwest suffering the worst at 35%.  We also have an overhang of foreclosures either held by banks or consumers who have not yet “blown up” but are increasingly behind on payments.   Anybody wanting to understand how “oversold” the housing market is should read The Big Short. Government programs led to the law of “unintended consequences”: Our housing slump now is continuing well beyond where many people had hoped it would be by now.  Some of the delay is just overhang of a bad market but we may be delaying true supply/demand matching through the well-intentioned government’s attempt to stem price declines.  The government had a tax incentive for first-time buyers that expired April 30th, which many people believe “pulled forward” demand rather than improved the market. The same happened in autos and one could argue that the same has happened with the government stimulus overall.  Surely any retrenchment in Keynesian stimulus will lead to further economic declines going forward. The reality is that when governments try to intercede they often create “the law of unintended consequences” and to a certain degree assets prices just need to normalize. Washington is in no mood to take stimulatory action – for a long time: While there was a momentary unity in the US government for bailouts & stimulus spending that were initiated in the Bush administration (many people conveniently forget this now) and continued under Obama, it is clear that this era of consensus is over.  Keynesians will argue that this is a bad thing and fiscal conservatives will argue that it is a necessary discipline.  Either way, the gridlock that is now the US congress will prevent any real economic responses and it seems likely that this political malaise will last beyond the 2012 election as the Republicans look to make big gains in the 2010 mid-term elections. The Fed: That leaves the most likely response to any economic weakening to be dealt with by the much less political Federal Reserve. With interest rates near 0% the Fed can’t cut interest rates to try and stimulate the economy and drive good inflation (or avoid deflation).  They would need to turn to non-conventional means to spur the economy such as “quantitative easing.” In fact, just last week Fed chair Ben Bernanke hinted that they would consider “unconventional measures” during his speech in Jackson Hole where he talked openly about the problems in the US economy: “Consumer spending may continue to grow relatively slowly in the near term as households focus on repairing their balance sheets. I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace.” While he is publicly saying that he expects a modestly improved economy in 2011, it’s hard to be too sanguine when you look at the data.  Consumer debt relative to incomes has risen to an all time high reaching 138% of 2007 (obviously that’s not sustainable!) and has recently come back down to 122% (said David Brooks on The PBS News Hour).  Historic averages were in the mid-60′s.  It’s obvious that consumers need to cut back spending. Bernanke again: “the pace of spending will … depend on the progress that households make in repairing their financial positions. Among the most notable results to emerge from the recent revision of the U.S. national income data is that, in recent quarters, household saving has been higher than we thought” Obviously a “good news, bad news situation.”  People are lessening their debts but that decrease in spending slows the economy.  I expect this to continue.  In the long run it’s important but in the short-run I expect more volatility in the market.  As I like to say, “We were at one hell of a 25-year cocktail party, expect that the hang-over is just going to take some time.” State & local governments are going to be hit:  One likely result of the economic crisis and lack of political alignment in Washington is further cut-backs at state and local levels because unlike the federal government they can’t print money.  This spells further unemployment, cuts in services and a further retrenchment in middle-class spending and housing prices. In California the primary school education system has cut 10 days from the school year to save jobs.  Surely cut-backs are needed in every state but we’re going to have a heck of a debate going on about where to cut.  But as you can see from the graph below while private sector jobs in CA have contracted the public sector job rate has been static.  I doubt this situation will hold politically.  Oh, and one more politically charged issue we’ll deal with in our lifetime – the total “pension shortfall” across all states in the US is estimated at more than $1 trillion dollars. And the tax changes for 2011 could cause a further end-of-year sell-off: Another factor often not discussed is that the capital gains tax increases coming into effect in 2011 are might just lead to a stock market sell-off in Q410 as investors “lock in” gains at a lower tax rate. Stock market declines equal lowering of wealth effects which in turn equals lower consumer spending and hits on corporate earnings.   This affects M&A activities for startups, which with the reduction of the IPO market could spell lower returns in the short-term for technology startup investors. I try not to predict stock market prices are too much because I’ve lost track of what “normal” is.  I just checked and if you bought $1,000 of the S&P Index exactly 10 years ago it would be worth $700.64 today (and that excludes the effects of inflation).  But at a minimum it’s hard for me to sign up to a “bullish” stock market scenario.  I’ve heard them argued – I’m a bit circumspect. The initial vulnerability will affect angel investors:  The stock market and real estate impacts usually hit angel investors (excluding angel funds) before they hit VCs so that is where the initial hit will likely come again this time.  This class of investors is more diversified across categories plus is investing personal money and therefore feels the hit in assets declines first.  Also, if there is a lowering of M&A activity this will lead to increased financing needs for startups driving higher failure rates or increases in “adverse terms” entering future financing rounds.  Either won’t bode well for angels if they’re also hurting on non tech investments. Many entrepreneurs could be caught in the “series A&B funding gap” Equally worrying for entrepreneurs if the markets take a turn for the worse is that even if they managed to get angel rounds funded they may run into a VC brick wall.  VC funding is definitely back from the constipation that was 2009 replete with frothy valuations chasing dreams of the next Facebook, Groupon or Zynga.  But a double-dip recession couple with contracting VC market highlighted by Paul Kedrosky, a Kauffman Fellow, will surely bring back a period of inertia. What does this mean if you’re an investor? If we do have a double-dip recession or a “lost decade” the investors who have put money to work in capital efficient companies at reasonable (not frothy) valuations will fare the best. The investors who in my opinion will be especially vulnerable are those who chose to spread too many bets or didn’t reserve enough for follow-on investments.  Massive market corrections require hands-on investors who are good at: building management confidence in tough times, encouraging costs cuts, performing triage so that the strongest survive and helping shepherd co-investors into writing follow-on checks.  You simply can’t do with with 50+ active investments for one person.  I saw this first hand in the first dot-com crash. What does this mean if you’re an entrepreneur? If economic times turns out to be worse than they are today entrepreneurs who raised enough money in 2010 to weather a storm will be best placed to survive the second dip or the long lack of recovery.  Additionally, those who run lean operations and raised money from supportive investor bases will be best positioned.  Having a combination of entrepreneur-friendly angels plus deep-pocketed VCs might be just what the doctor ordered. In the end I’m a venture capital investor so I will still be looking to make investments.  My time horizon for investing is 7-10 years so today’s economy doesn’t affect my exit prices BUT I need to be sure the companies I invest in reach the promised land.  I will continue to look for “lean” teams, co-investors on deals to help get through any rough patches and entrepreneurs who have the resiliency to make it through whatever the economic conditions throw at us. The tech industry can help with job stimulation, but we’re not immune to macroeconomic trends.
  • Is Convertible Debt Preferable to Equity? 30 August, 2010, 7:58 am
    Seth Levine of Foundry Group addresses this important topic this morning on his blog with a post, “Has Convertible Debt Won?”Seth was basing this on a Tweet by Paul Graham that said” “Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.” I have to say that I didn’t take the question to mean that convertible debt had won for the entire market, but either way it’s clear that convertible debt has become an increasing trend.  I’ve written about the topic of convertible debt at length before specifically about how angels & entrepreneurs should think about pricing. Convertible debt is an investment that “converts” into equity in the future usually at a discount to your next funding round price and sometimes has a “cap” (maximum price). Clearly this is is a trend and a topic that is interesting entrepreneurs.  Funnily enough I just answered this question yesterday on Quora when somebody asked, “Why would an early-stage investor specifically NOT prefer a convertible note structure to straight equity (e.g. a priced/valued preferred stock financing)?” Here is my answer with some minor editing: _____________ Why many early-stage investors DO price rounds (e.g. prefer equity to convertible debt): If you’re an early stage investor (e.g. angel, seed) you’re taking the most risk.  If you’re the “first money in” usually there is still product risk, market risk, financing risk and execution risk So from basic econ 101, the higher the risks, the greater the failure rates, the higher the returns need to be to accomodate for those increased failures and the higher risks taken Your goal as an early stage investor is specifically to lock in the most fair early-stage valuation you can You clearly don’t want to price it so low that the founders don’t feel incentivized so it’s not about the lowest possible price but more about guaranteeing a certain cap As an investor when you do convertible debt you’re usually pricing the round when the next money comes in.  But as an angel you’re usually not only taking risks but also helping the company succeed (through introductions, social proof, coaching, recruiting). So think about it – why should you be penalized for helping a company to get a higher valuation in the next round and thus your money gets converted at a higher price? How early-stage investors have learned to accomodate convertible debt The mechanism that people use to resolve this conflict is a “convertible debt with a cap”  meaning that while the funding instrument is still debt when it converts it has a maximum price – a “cap.” Make no mistake – this IS a priced round.  In fact, in some ways can be worse for the entrepreneur.  It basically sets your maximum price rather than your actual price.  Example: If you do a convertible note raising $400k at a $3.6m pre money you’re ceiling is that you’ve given away 10% of the company ($400k/$4m post money).  But your actual next round might come in at $2m pre money.  You might have been better just negotiating an agreed price in the first place.  Not always, but sometimes. So why do people do convertible debt with a cap? 1) it can be cheaper to complete the round from legal expenses 2) emotional.  Entrepreneurs are increasingly trained to think convertible debt is better (when it’s not always the case) I’m OK to fund companies with a convertible debt with cap model for small investments – no problem.  In my mind the deal is priced. Should entrepreneurs ever prefer a priced equity round to convertible debt? If you have a choice between pricing a round and not pricing a round for the exact same investors then it is in the entrepreneur’s best interest not to price it and I could understand why one would do this. That said, I have seen times where convert with no cap was done and the entrepreneur slightly regretted it EVEN when the got a big up round in the next financing.  I know that sounds crazy, but the situation is – you got people that you like, trust, respect as angels that really, really help a lot.  You then get a big VC to invest at a high price and you realize that means your angels are going to be unhappy with how much they own of your company after the financing relative to what they THOUGHT they would own.  The reality is that as an entrepreneur you really do want to try and keep all of your investors happy and it really is fair that early investors who were willing to take a risk on you before you were a BIG DEAL should really be compensated. Also, f you have 2 competing offers from different investors and one has “convertible debt no cap” and the other has a “priced round.” If the second firm or people were much stronger investors I’d take their money all day long even thought it’s priced as long as the valuation / price range was “fair” (e.g. 20-25% dilution).  I’d optimize for success vs. exact ownership.  Most companies fail and most entrepreneurs who raise money don’t make a return.  Therefore anything you can do to turn this into a 1 vs. a 0 is a smart move IMO. Why would an angel agree to a convertible note with no cap? Simple: he/she feels the deal is “hot” and therefore competitive.  He/she is hoping to “get in on the deal” whatever the terms may be.  I personally don’t believe this makes for a good long-term investment thesis but that’s not for me to decide. In frothy markets (like we’re seeing in August 2010) this happens more frequently. In down markets more deals are priced. YCombinator might determine that it is best for them but they’re not the typical angel investor.  YCombinator runs a program where they get a really wide group of companies involved for which they invest in each one.  That’s not the typical angel investor What about “super angel” funds? I think super angel funds may be more willing than angels or VCs to do convertible debt.  Super angel funds usually want to invest at really early stages and are putting small amounts of money to work.  Therefore if they put $250k into your company and it’s not priced it’s not the end of the world to them (on a $40 million fund) if the eventual round gets done at $8m pre-money vs. $3 million pre-money. The reason they might feel this way is that they’re really just placing an option that if you succeed that they’ll have the inside track to invest a larger amount in your next round.  I’ve heard at least one super angel tell me this. I can understand this investment philosophy since as an investor like this you’re really trying to optimize for finding the few really big deals and price (within reason) will be less relevant.  If they got in at $3m pre vs. $8m pre doesn’t matter if the company sells for $500m. True that this logic COULD be applied to angels.  But angels typically don’t have as deep of pockets and therefore don’t do as many deals and don’t follow as much as do angel funds. Maybe we should move towards “convertible debt with a price?” Thinking about it some more – the biggest reason I keep hearing cited is that the process is so much quicker & cheaper legally than an equity round. As I’ve cited the problem I see for investors is the risk of not pricing and for entrepreneurs “convertible debt with a cap” gives them a maximum price but not a minimum. In larger rounds I think equity makes sense so that everybody agrees to the terms up front On smaller rounds, why don’t we just do “convertible debt with price” and everybody can be happy? In summary – I don’t believe the “convertible debt” has “won” in the market – especially not “convertible debt with no cap.”  The market is frothy right now so terms are bending toward entrepreneur-friendly terms.  But as you’ll see in my next post – I dont’ believe this will last for long. ** Image courtesy of 22Dollars.com
  • Fight When it’s Time to Fight. Be Gracious When It’s Time to Give In. 26 August, 2010, 4:28 pm
    There are times to fight.  I must admit it’s part of my DNA to enjoy a good fight (not as much as Jason Calacanis does, mind you ahem: Facebook. Er: Comscore, Cough: Angel funding payola). But there are times to give in and compromise.  Don’t confuse the two.  When you give in, do so graciously.  Take the high road.  Act and feel zen. Back when I ran my first company I fought a lot.  It seemed the world was always on fire and there was some skirmish to be had.  I fought with landlords (when the real estate market crashed), venture debt providers (who wouldn’t take a hair cut when everybody else had to), the board (over compensation), our competitors (over everything) and any service provider who didn’t live up to our perceived contract (recruiters, accountants, sales lead companies, web hosting companies).  I guess the older & wiser that I get the more I realize that finding common ground is often better than fighting. The guys who usually were there to talk sense into me were my close colleagues Stuart Lander (COO) and David Lapter (CFO) – both more level-headed than I.  Stuart has some fighter instincts like I do but the ex lawyer in him taught him that a negotiated settlement is always better than a drawn-out fight. I remember one of the conversation points we always had when we agreed to compromise and one I’m proud to say that I took the lead on – how to give-in graciously.  I had this philosophy that if I’m going to fight I’m going to fight hard and win.  If I’m going to compromise then I wanted to at least come off graciously.  Many people make the mistake of giving in and being nasty. What I always told Stuart (who handled most of the final negotiations) was, “Ok, we decided to give in.  Let’s agree what our compromise is and let’s be gracious.  Let’s tell them we were wrong to have fought so hard.  Let’s tell them that we’re sorry about how things turned out.  Let’s tell them there’s not hard feelings and we’d like to find a way to rebuild our relationship going forward.”  And we did practice what we preached – it wasn’t just rhetoric. See my view is that if you give in or compromise and you display “sour grapes” then in the end you don’t get what your really wanted AND you end up feeling miserable about the whole thing.  So you lose twice.  Not to mention that you gave in and the other party still thinks you’re an arsehole and probably talks badly about you in public.  I’d rather choose to be zen and maintain my public reputation. This also applies to internal company decisions.  Let’s say a senior member of your team demanded a pay raise (cash or equity) and you didn’t like the way they approached you. Sometimes the right thing is to firmly but politely resist the increase.  Sometimes the right thing to do is to give in completely.  And sometimes the right thing to do is to compromise.  That’s not the point of this post. But if you DO decide to either compromise or meet their objectives then DON’T be snide or mean-spirited about it.  If you’re going to give in then lavish praise on them as you meet their request.  There’s nothing worse than consenting to the increase and still having them be pissed off about it. Developers don’t want to work yet another weekend? Need to decide whether to fight or concede.  Again, don’t concede and be a baby about it making people feel badly for not coming in during a crucial hour.  If you feel you need them there regardless then dig in your heels, but others say “we’re in a crunch time but you guys sure do need a weekend off.  Enjoy.” And on and on. I got to thinking about the “lose twice” scenario this afternoon.  I was at a swimming pool (on vacation) at a nice hotel near Laguna Beach, CA.  They have two pools – one adult and one for children.  Unfortunately (for reasons that are unclear to me – even as a parent) they allow kids in both pools.  So we were sitting there in our lounge chairs when they announced they were closing the adult pool for the day because a little kid (I hope) had just pooped in the pool.  Aaargh.  But it was done – so what are you going to do about it? Zen. The lady next to me would not let up.  She was ranting about why it should still be OK to go in the pool (“in my day kids always pooped in the pool,” “a little poop never hurt anybody,” “how can you complain about poop when everybody wears suntan lotion & chemicals into the pool!”)  I’m not exaggerating when I tell you she was still ranting 30 minutes later.  All I kept thinking was, “you’re losing twice, lady.”  Once because you can’t swim in the adult pool and twice because you’re so worked up about it you’re miserable x10.  I had to leave so I guess I lost twice, too.  Beatch. It reminds me of when somebody cuts you off in their car on a highway.  Sure, he (and let’s face it – it’s always a “he”) is a jerk.  But you can’t change it.  Aside from being dangerous to chase him and wag your finger at him, you’ve suddenly gotten your heart rate up 20 points.  You lose twice. There are many times in life where taking the wrong path causes you to lose twice.  Know the difference between fighting (and enjoying it) or giving in, letting go of the angst and choosing to be zen. So in business when it’s time to fight – fight.  When it’s time to concede or compromise – do so graciously.  Don’t lose twice.
  • The 1/9/90 Rule of UGC & Why It’s OK to Have Lurkers 24 August, 2010, 11:27 am
    Two days ago I wrote about Quora.  I’ve been loving the product even if it sucks up some of my time.  I prefer my time go into a very focused Q&A website than into a more generic Facebook.  What Quora has done is wrap social networking around Q&A with the more clever next-gen UX I’ve seen. But my post today is not about Quora, it’s about an answer that I wrote on Quora.  I stumbled upon the Question, “What-is-the-motivation-behind-writing-public-reviews-and-tips-as-on-Amazon-Yelp-Foursquare-StickyBits-etc” and took the bait.  I wrote the following answer: “I have always believed that UGC (user generated content) website users fall into three categories that follow the 1/9/90 rule. 1% = power users, 9% = casual contributors, 90% = lurkers.  We all get benefit regardless of our roles. 1. Power Users – These are the people you’re likely asking about.  They spend inordinate amounts of time contributing to the website.  They might be moderating categories on Wikipedia, writing 100′s of restaurant / bar reviews on Yelp, checking-in and commenting on every Foursquare venue or even writing entire transcriptions of TV shows on ViiKii.net.  Or let’s face it – writing lots of answers on Quora. These people use these networks for a variety of reasons but it relates to: - enjoyment from being a creator rather than just a reader - creation of social status within the organization for having contributed - rewards or perceived rewards for achieving status (kind of like collecting airline miles) - self promotion in order to gain status that might either help with future job prospects or to drive traffic to ones website for primary business - to meet friends / other people that are similarly inclined because they, too, are “power users.” I tell people who built UGC websites that you really need to cater to the 1% users.  They need to have the right tools, social status, rewards and stickiness to your product because they don’t want to abandon their creation.  You live or die on the power users because they build the most compelling content and help promote your website (because it helps them). 2. Casual Contributors – These people are uninterested in achieving status on your website.  They had a very positive or negative experience and they want to tell the world.  They are passionate about a topic (like this one for me!) and they feel inclined to spend some time contributing. For casual contributors the system MUST be quick and easy.  They don’t want to figure out how your complicated stuff works.  They don’t want to register for everything and they don’t care about your points or game mechanics.  As you scale your business they are tremendously important because at scale their contributions really add up. 3. Lurkers.  Most UGC sites try to spend time converting lurkers to contributors.  Don’t.  90% of all users will never contribute anything to your company.  They are there to ingest content. I wish Twitter understood this better.  If they did then they would run marketing campaigns to let users know that “it’s OK to turn up and just consume content. Twitter’s great for that, too.  You don’t ever need to send a Tweet to love Twitter.”  I never understood why they don’t communicate that more broadly because I think most people’s fear of Twitter is that they don’t want to tell the world what they ate for lunch. Make it fun and easy for lurkers to visit.  They deliver real value to you because however you choose to monetize, lurkers will always be your largest category.” Then two things happened.  Ming Yeow Ng asked, “Would you consider Facebook a UGC site?”  Great question.  I wrote the following update to my original answer to that question: Update: Social networking sites have an additional attribute in that they are communication vehicles as well as UGC sites.  Therefore more people contribute as they are communicating in an IM like way with other people rather than looking to contribute community content.  I still think they follow predictable behavior with power users, casual contributors and lurkers.  But perhaps the lurker category is smaller. And more embarassingly to me Garindra Prahandono gave me this link to an article written by the guru of web design, Jakob Nielsen about the 1/9/90 rule written back in 2006. I’ve been talking to entrepreneurs about the 1/9/90 rule for ages and didn’t realize that it was “tacit knowledge” that I had picked up through conversations with many people over the years but attributable to Jakob Nielsen.  Although the 1/9/90 and the word “lurker” seem to be attributable to somebody else, my philosophy on building UGC has been original thinking / POV.  That said, it’s scarily similar.  From the Neilsen article I loved this bit: “How to Overcome Participation Inequality You can’t. The first step to dealing with participation inequality is to recognize that it will always be with us. It’s existed in every online community and multi-user service that has ever been studied. Your only real choice here is in how you shape the inequality curve’s angle. Are you going to have the “usual” 90-9-1 distribution, or the more radical 99-1-0.1 distribution common in some social websites? Can you achieve a more equitable distribution of, say, 80-16-4? (That is, only 80% lurkers, with 16% contributing some and 4% contributing the most.) Although participation will always be somewhat unequal, there are ways to better equalize it” So in summary, if you’re going to do a UGC site: Know that there will be three buckets of users Design the product to accomodate needs of all three. Incentives for “power user” plus product features that make tons of iterative contribution easy Easy for one-time contribution without registration or other hassles for “casual contributors” and don’t think you need to convert them all to power users.  You won’t.  Their character and use case is different.  Celebrate their contribution as good enough. Make it easy for “lurkers” to get value out of your website.  This is where your website goes mainstream, addresses “normals” and becomes monetizable. You can convert some people to “casual contributors” to give you a 2/18/80 curve or similar but lurkers will always be lurkers.  Just ask people who receive traffic from Stumble Upon. And if you’re Twitter, LET THEM KNOW IT’S OK TO BE A LURKER!!  Trying to convert everybody to a contributor is counter productive.  If a person feels that they need to contribute to get value out of your site then they’ll probably stay away.  Simply letting me know that most people are lurkers and they will get tons of value out of your product as pure lurkers and there are plenty of other reasons to use Twitter without contributing will encourage more people to come every day.  Nobody wants to join a club where they feel like they’re not supposed to be there. ** Lurker image courtesy of Wine Library TV.  T-shirt can be ordered here:
  • The Power of Quora & Why Benchmark was Right to Pay Up 23 August, 2010, 1:16 am
    I was an early user of Quora and like all new technologies they take a bit of playing with them for a while, discussing them with others and reflecting on them to let them sink in.  I’m no wall flower so when something doesn’t resonate I’m usually pretty vocal about it. With Quora, it was the opposite – something has always felt right but it took me a while to really understand it.  I now do. Here’s my experience, my “ah ha” moment and why I think, although still nascent, it’s one of the most powerful websites on the web right now. 1. Pre Quora – AVC & Answers OnStartups AVC: I’ve always loved Q&A websites and discussion boards.  For me this dates back to pre-Internet days of bulletin boards, CompuServe, Prodigy and the like.  If you find the right community it’s a great way to learn, contribute and get to know other people with similar interests. Take AVC.com, the blog by Fred Wilson.  He wrote a blog post that always stuck with me about how there are regulars on his blog who hang out there a bit like “Cheers” just having a chat with a metaphorical beer in hand.  It’s true.  I go there frequently and often spend as much time reading the comments as I do the post.  I rarely only read the post.  What I notice is that people further the conversation, talk with each other, network, try to get noticed (linking to their websites, etc.).  Basically, it’s a topic community discussion board and that’s why people go to AVC.com every day. And to give credit where it’s due (in addition to the content that Fred produces) a lot of the discussion works well because of the Disqus commenting platform.  I wish every blog used Disqus and I wish every website that syndicated content would create an integrated commenting thread the way that Business Insider does.  It’s an awesome implementation.  Fred talks about it here – he beat me to the punch because I always wanted to write about how awesome this is. Answers OnStartups- Shortly after I started blogging I noticed a website called “Answers on Startups,” which I instantly loved and spent a bunch of time on.  It was this sort of techie / geeky looking UI implementation of questions that anybody could ask about startups.  There were so many good questions that I raced through and answered a bunch.  If I’m totally honest it started as a marketing exercise.  I didn’t have a ton of followers (was only getting about 20,000 visitors a month back then) so I saw it as a way to promote my content. I picked questions that I had already covered in depth on my blog and answered them in shorter form. I always wrote an authentic response and never cut-and-pasted text.  But at the end I always put a link that said, “if you’re interested in a longer discussion I wrote a blog post on the topic here (link).”  It drove great traffic and when I checked the referral logs they stayed on average of like 8 minutes with many staying 20+ minutes.  This compares with an average user who comes for 2 minutes, reads 1.5 articles and leaves. Only later did I realize that this was part of Dharmesh Shah’s larger blog and that the software was based on the popular “stack overflow” software.  Frankly, I enjoyed the community so much that I would have continued to come back more often but my blogging pace has been such that evening time commenting on an answer website was time away from writing pieces like this. 2. Quora “Lite” When Quora went into Beta and became the “hip product to have access to” in Silicon Valley I felt compelled to play around with it.  Like the initial days of Twitter there wasn’t a whole lot of explanation about what you were really supposed to do on Quora and without all of your friends there contributing it wasn’t obvious to me what was so important about it.  I felt that the Stack Overflow software made it much more obvious what I was supposed to do when I arrived. That said, I noticed really early on that the Silicon Valley “power players” were all on Quora and people like Reid Hoffman are actually in there answering questions.  The design, albeit not intuitive at first, was beautiful and in weird ways very graceful.  But still … with blogging being my priority it was hard to commit the hours to Quora. 3. The Revelation The big “ah hah” came through a lunchtime discussion with my friend James Hritz, a smart and deep thinker who is VP Strategy & Biz Dev over at FAN.  He said (paraphrasing): “Mark, you put a lot of time into blogging and so you have a large following now.  Let’s face it, you give out money for a living so if you can write well you’re always bound to have a big following (me: um, thanks, I guess).  I have a lot of topics I’m passionate about and love to talk, think and debate about.  But let’s face it – I don’t want all of the overhead associated with blogging. You blog both because you enjoy it and because it helps build your online reputation.  I’m the same but without a big following and without wanting to put in the effort to market myself to create a community I can achieve what I need to on Quora.  You wouldn’t believe the discussions I get into over there and the people I debate with!  I pick my topics to answer and they’re ones that I know better than most having worked at Fox through all of our growth years and building out this large advertising network.  I comment and I build awareness & reputation.  It’s the same things you’re doing on your blog.” Wow.  Really?  Let me have a look again at Quora.  Really? 4. The Power of Quora & Why it Matters Really. On Quora you can subscribe to topics, specific answers or people.  You’re alerted when people follow you, when the create new questions in your topic area and when new people have answered the questions you’re following. And the system is really quite smart.  First, it has DIGG like voting mechanism where you can vote up or down the quality of an answer.  If your objective is to be near the top of an answer stack (e.g. and thus be read by everybody following the topic) then you need a great quality answer.  You also need to answer the question reasonably early because when a question has been around for a while the important people aren’t likely to be going back and reading it again (thus they will neither see your answer or vote your up). So in a way it has built in game mechanics.  And they are trying to bake in user adoption into the design of the product.  Obviously it is build on a social network “follow people” model that is asymmetric like Twitter.  When somebody is new to Quora and is following you it encourages you to “give them topics” to follow, which is clever because if they accept the topics they get more alerts, more emails – more bacn – and thus they come back to the site more frequently. Want to get more followers?  When you vote up and/or comment on people’s answers they get an alert.  You definitely notice the people who are engaged with your content and you can’t help but click on the link of their name to see just who they are.  Engagement. Game mechanics. Get me some followers. And somehow there is a brilliant self-organizing like mechanism to Quora.  When I made a typo in describing why I love AngelList, Nivi spotted it and “recommended an edit.”  One click, accept and fixed.  When I was looking through some questions to see if I could answer them I noticed that topic suggestions were getting attached in real time like tags.  Was this automated by the system or recommended by users?  At this point I don’t know but I’m guessing both.  But the power is that if a question is asked and it pushed into the appropriate topic areas then it will pass in front of people who want to answer that topic. It also feels very wiki like.  I saw some questions where the tags looked wrong. I deleted them just to see what would happen.  Poof!  I wrote some answers and then quickly noticed alerts flashing gracefully across the top of the screen.  People were voting up my answers in near real time (within 10 minutes of my posting).  New followers.  People were commenting on my answers.  What were they saying, I better check! Now somebody has asked me to answer a question.  They want to know whether I think Fourquare is dead now that Facebook has announced “Places.”  My answer to that question is here.  Doh! Ming Yeow Ng has me beat on the leader answer board!  Argh.  My answer to that question and another question about why people contribute to UGC sites could be blog posts.  They ARE blog posts. The thing is … in a way you can blog on topics you want in a format where people who want to hear about that topic (or from you) have self selected. Quora was becoming addictive and sucked me in to the “time suck” quadrant. Although on reflection, answering questions, reading other people’s responses, earning social status … probably more “zone of effectiveness” than might immediately be obvious. And, finally, anybody who works in the space of SEO knows that the hottest thing going right now in user results are Q&A sites (see below).  So James Hritz’s hypothesis proves correct – I blog about AngelList and get third in the SEO rankings.  Ming Yeow Ng writes a killer response to the AngelList questions and gets the pole position (again!) when people read the topic (although there’s still time for you to go there and vote up my answer ) Obviously kidding.  Sort of.  No, really. At an $86 million, pre-money valuation Benchmark sure did pay up for this investment.  Still, I’m betting they got this one right.  High value content + early maven adopters + topic orientation + SEO friendly content + bacn + high user engagement = a very montizeable product one day.
  • Please Help My Friend Colin Recover His Kidnapped Children: Noor & Ramsay 21 August, 2010, 10:25 pm
    I’ve never made a public appeal before.  Then again, I’ve never had a friend in need like my dear friend Colin Bower who is trying to recover his two kidnapped boys Noor (8) and Ramsay (6). The short story: Colin & I have been close friends for 13 years when we started our MBA program together.  We then both lived in London and our children played together.  Colin moved back to his home town of Boston before I returned to the US and unfortunately he got divorced from his wife, an Egyptian national, in 2008.  He was granted full legal custody by the US courts of his two young boys (US citizens).  His wife created forged passports in a fake name and kidnapped his two children by illegally flying back to Cairo on Egypt Air.  He hasn’t seen them in more than a year and she is in hiding. Mirvat el Nady now has an arrest warrant in the US and is wanted by Interpol (see here).  Colin is being supported by his Senator John Kerry and has received help from Vice President Biden and Attorney General, Eric Holder.  The problem is that Egypt doesn’t support the Hague Convention and doesn’t have an extradition policy with the United States so they don’t recognize any of the international legal rulings in Colin’s favor.  Colin has now won visitation rights in an Egyptian court, but Mirvat didn’t show up at the legally required meeting day / time in Egypt. What can you do to help Colin? Watch a short 3 minute video of Colin being interviewed by the Boston news station - this will make Colin’s situation come to life for you rather than just trusting my blog post.  It is a heart-breaking interview to watch for anybody but more so if you have children.  What would you do if your’s were kidnapped and taken abroad with no recourse? UPDATE: I’ve set up a donation page where you can contribute (even small amounts appreciated) to Colin’s legal defense fund. I figure if I can get 1,000 people to give just $25 Colin will have greatly needed resources. Click here for donation page: Visit this Facebook page with further details. Leave Colin a short note of support Please share the Facebook page from the link with your network to help create awareness and like the page to receive updates Sent out a Tweet with the text “I support the release of @colinmbower’s boys #noorramsay http://bit.ly/noorramsay“ If you feel so inclined you could add “thank you @johnkerry for your support” (Colin lives in Boston so John Kerry is his senator. We hope the more public support Kerry sees the more active his support will be) Please Retweet this post by clicking on the green retweet button and share it on Facebook by clicking on the blue FB share button If you know any way to help (friends in government or any other ways you could recommend) please email me.  My email address is my Twitter handle at Gmail. The slightly longer story: Colin was married to an Egyptian national (who went to USC and had previously lived in the US) and had two boys, now 8 and 6.  We were close friends at the University of Chicago’s international MBA program.  We then both lived in London where Colin was a director at AOL Europe in their hey day and was then CEO of a tech startup.  When he left to set up his own company he worked out of my office. I knew Colin and Mirvat (his former wife) both well.  I will refrain from any commentary about her character.  My wife & I went out with them as couples and I spent much time with Colin separately with our business school classmates when they were in town.  I knew Colin’s eldest son Noor really well.  He was born about 18 months before my first son so he was one of the first young babies and toddler I hung out with a lot.  When my first son was born and was a toddler the four of us used to hang out together.  Colin was a loving and affectionate father.  Our kids played well together and naturally my son followed Noor’s lead as the “big guy.”  A couple of years later Colin’s second son Ramsay was born. Colin moved back to the US before I did.  He moved to Boston (where he resides today) near where he was raised in Manchester-by-the-Sea.  In 2008 Colin & Mirvat were divorced and Colin was awarded full legal custody of both children.  Mirvat was granted restricted visitation rights and was specifically barred from driving a car with the children (she wasn’t legally allowed to drive at all) or to leave the state of Massachusetts without written consent. Mirvat’s family is well connected in Egypt.  When we lived in London we had attended parties at the residence of the Egyptian ambassador to England and went to several dinners with the children of prominent and internationally renowned Egyptian families that I won’t name here.  Mirvat was able to obtain falsified Egyptian passports with the name “Power” rather than “Bower” and she was able to fly out of the country on EgyptAir, whom Colin holds accountable for its lax security policies even post 9/11. I spoke to Colin nearly weekly through his entire divorce proceedings.  His wife had access to large economic resources and I saw first hand how our justice system can be heavily biased toward parties with vastly superior financial resources.  After Colin won the much drawn-out US proceedings Mirvat opened a further legal battle in England where they shared joint property.  This further bogged down Colin from a time perspective as well as emotionally and financially. Colin’s battle to win custody of his two children has now raged on for 3 years.  He hasn’t seen or spoken to them in more than a year.  To this day my phone conversations with him are still heart-breaking yet I’m struck by his resolve to win back his boys.  I could see weaker men giving up in the futility that the international system imposes. I am amazed and inspired by Colin’s commitment to his boys.  He spends all of his working day working hard at his social media consulting firm because in his words, “I need to continue to be economically successful to finance the return of my boys and have a stable environment for them to return to.  My job and my fight for my boys are all I have now.”  He flies regularly to Cairo to try and increase his legal rights there and had spent months flying to London in their protracted property battle.  To say that Colin spends all of his free time and his money on his efforts understates the case. Colin, I know things have been difficult.  But you’re an inspiration to fathers everywhere. I saw the love you gave Noor and Ramsay first hand.  And all of my love, thoughts and support goes out to you in your time of need.  Bring back #noorramsay
  • Quick Hack to Make Your Boss (and you) More Productive 19 August, 2010, 9:01 pm
    Yesterday I wrote a post about the “Urgency Addiction” and how many people start important tasks late and then motivate with a huge wave of productivity and inspiration driven by deadlines and commitments to others. In the comments section Bill DAllesandro offered some insight that he had seen from Microsoft on “interruptions” “A study by Microsoft showed just how lethal interruptions are to productivity. The researchers taped 29 hours of people working in a typical office, and found that they were interrupted on average four times each hour. Sounds like a day at most offices. Here’s the kicker – 40% of the time, the person did not resume the task they were working on before the interruption. The more complex the task, the less likely the person was to resume working on it after an interruption. That means most of us are getting derailed from our work four times each hour, maybe more if you work in a high email traffic office.” He also write a nice post on limiting email and managing on the important / urgent matrix from the perspective on a recovering ex investment banker. This comment and blog post prompted me to write a post that has been in my queue for a long time.  I often write that I learned more than I care to admit from working at Andersen Consulting.  Compared to being an entrepreneur it feels like I didn’t learn much there but on reflection I learned much more than I think even I realize. One of the earliest lessons we learned was how to make our bosses productive through a very simple tool called a “point sheet.”  The premise is simple: whenever you have a question or get stuck on something you’re tempted to quickly ask your boss or your colleagues for help.  This solves your immediate need but it greatly interrupts the productivity of others. So the solution was that any time you had a question you had to write it down on these pre-printed tablets of paper called “point sheets” and once you had accumulated enough questions you could bring them en masse to your boss (everyone who worked at Andersen in the early 90’s is giving a small chuckle from nostalgia about right now). And the funny thing – by the time you were ready to walk through 7-8 issues with your boss you realize that you had already figured out 3 or 4 of them on your own.  With a bit of patience it’s surprising just how many times you find answers to your own issues if you just try (seems like a lesson I’m trying to teach my 7 and 4 year olds these days). Now imagine in the world of email, IM, Twitter and mobile phones imagine just how much worse this problem has become. So if you’re managing a team why not ask them to all abide by the PSP (point sheet policy) and save yourself from all of the distracting productivity drains.  Set aside one block in the morning and one in the afternoon for going through your team’s issues. Of even if you don’t have a team I’ll bet you have a boss.  Why not tell them you’re implementing a new tool designed to make THEM more productive.   Chances are they’ll love you for it.
« 1 2 »
order by views | - date
 
32

AVC

  • Preditter 9 September, 2010, 6:37 am
    My partner Albert is a hacker. We didn't invest very much in development platforms before Albert joined us (Twitter being somewhat of an exception) because we couldn't eat our own dogfood. Albert changed all of that for us. He can not only evaluate development platforms but he can use them and provide feedback to the team. Over labor day weekend, Albert hacked together a web app he calls Preditter. As he explains in this blog post, he built Preditter on top of three of our portfolio company platforms, Twitter, MongoDB, and Twilio. If you want to make a prediction about a football game this weekend, just tweet the prediction to your followers and add @preditter to the end of the tweet. I just did that. Here is the tweet: .bbpBox{background:url(http://a1.twimg.com/profile_background_images/3942868/twittering_machine.jpg) #6699CC;padding:20px;}Jets over Ravens on monday night @preditter @garyveeThu Sep 09 13:26:08 via webFred Wilsonfredwilson Let's do Albert a favor and test Preditter out. And let us know what you think.
  • Contrarian Investing 7 September, 2010, 3:41 am
    My favorite investor is the contrarian. I know a lot of momentum investors that do well and I respect their approach to investing. But it is not an approach I can wrap my head around. My favorite quote on contrarian investing is from Baron Rothschild who supposedly said: the time to buy is when there is blood in the streets, even if the blood is your own That is the kind of thinking that drove me to put a bunch of money into the market directly buying stocks in the fall of 2008, which I blogged about frequently here. It was very hard to raise a venture fund focused entirely on early stage web investments in 2003 and 2004. Nobody thought that was a good idea. And that fund we raised will be the best venture fund I've ever been involved in. So I've had enough experience personally with contrarian thinking and excellent investments to know that it makes sense, at least to me. I've been thinking a lot about what a contrarian would do in web investing right now. The easy answer is sit on the sidelines. But we are not paid to sit on the sidelines. We are expected to invest capital. In addition, I feel strongly about not trying to time markets. We like to put about the same amount of capital out year after year without too much variation. We will only invest in things we know well so that takes non-web sectors off the table. Add to that our particular investment thesis around investing in large networks of engaged users and avoiding gatekeepers and you have a quandry. I'm thinking a lot about this question these days so I thought I'd put it out there and see what you all think. Opinions of all sorts are welcome here, including the occasional kookery.
  • Coworking Spaces 2 September, 2010, 4:26 am
    I've never been much of a fan of incubators. Some have made the model work. My favorite of the bunch is Betaworks, based here in NYC. Betaworks is more than an incubator, but they have shown that they can make the incubation model work with projects like bit.ly and chartbeat. But one aspect of incubation that I like very much is the idea that multiple projects are sharing the same workspace. The term for this kind of work setup is coworking. There are various approaches to coworking. There is the shared space model. Foursquare, Curbed, and Hard Candy Shell have shared a single office for the past year and a half and they get a lot of benefits from working together even though they are three companies all working on very different things. Our portfolio company Outside.in has employees from our portfolio companies Disqus and Zemanta working out of their office. We see that kind of setup all over the startup world. I encourage all of our young companies to think about that kind of setup. The main benefits of this kind of setup are comraderie (small startups can be lonely), knowledge sharing, high energy, culture, and cost sharing. I have heard so many stories of software developers walking to the other side of the office to talk to software developers working for another company to talk about a thorny tech issue. That same thing can happen in finance, legal, bus dev, marketing, product management, really all parts of the business. You can get some of the benefits of scale without being at scale. I have been contacted by a large number of people working in city, state, and federal government recently asking me how they can help small tech companies. They often ask about real estate. I tell them that small office spaces are plentiful and not terribly expensive, but that what we need more of is coworking spaces. And we have been getting them at a nice clip here in NYC. A few weeks ago I was down at the NYU Poly coworking space on Varick St right near the Holland Tunnel. They have about thirty companies in one large open floor in a very nice buiding owned by Trinity Church. NYC Seed keeps their manhattan office there as well. Dogpatch Labs has coworking spaces in SF, Boston, and NYC. The NYC Dogpatch is on 12th between University and Broadway. There are a lot of great companies going into and coming out of Dogpatch these days. A new coworking space has opened in Williamsburg recently called The Brooklyn Makery.  The image at the top of this post is of their space. I am really excited about this project and a few of us from our office are going out there in a few weeks to visit all the teams. There is an all woman entrepreneur coworking space on 23rd St between Fifth and Sixth called InGoodCompany. There is an all green/environmental startup coworking space on lower broadway called Green Spaces. I could go on and on, but I'll just link to this wiki of coworking spaces in NYC. If yours is not on there, please add it. If you are launching a startup or have one that is just one or two people, you should really try to get into a coworking space. It can be more cost effective, but that is not the best reason to do it. You'll get knowledge sharing, energy, and a lof of camraderie. And you can't put a price on those things when you are doing a startup.
  • Some Thoughts On Convertible Debt 31 August, 2010, 3:18 am
    Seth Levine has a long and thoughtful post on convertible debt vs equity. If you are an entrepreneur or active in the angel/seed sector, you should read it. He wrote it in response to Paul Graham's tweet that said: Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note. I am sure that Paul was talking about angel/seed rounds and was not suggesting that convertible debt has "won" as the preferred financing structure in the venture capital business. But since our firm does participate in select angel/seed rounds, this was interesting to me. I have been doing venture capital for 25 years now and have also done many angel investments personally along with my wife. We have never done a convertible debt round. That run may soon come to an end if Paul is right. Maybe I will have to join the convertible debt parade. But I don't like convertible debt for a host of reasons. It used to be that convertible debt was a lot easier and cheaper to do legally. But with non-negotiated "light series A docs" from most top venture law firms out there, you can do a Series A Preferred for less than $5000. And these light Series A documents focus on economics not control and governance, just like converts do. So to me that is not a valid argument for doing convertible debt anymore. It still is true that negotiating valuation can be very tricky in an angel round and it may be better to defer that negotiation until the next round. That is what convertible debt does. But I am a sophisticated investor. I do this for a living. I can negotiate a fair price with an entrepreneur in five minutes and have done that for a seed/angel round many times. So I don't think that argument applies to an investment I am making either. Fans of convertible debt argue that debt with a valuation cap is no different than a priced equity round. That is true if the valuation cap is the same as the valuation that the investors would pay if it was equity. But if that is the case, then the entrepreneur is getting screwed. He or she is agreeing to either take the valuation that would have been offered, or something lower if the next round is lower. That is not a good deal for the entrepreneur. In truth. there are many convertible debt deals getting done right now with very high valuation caps and some with no valuation caps. In that instance, we are simply seeing the impact of limited supply vs excess demand come into play in the angle/seed market and we need to call this what it is - a price increase. And that is what I think Paul is actually seeing. He has done such a good job with Y Combinator and his leadership and vision has inspired a wave of seed and angel investment in web services that is unprecedented. That wave is creating price expansion. It is a seller's market and will be for some time to come. And then things will settle down. And when they do, I think we will see the angel/seed market return to a more normal place. A place where priced equity deals between entrepreneurs and sophisticated investors is the norm. Of course, I could be wrong about all of this. It could be wishful thinking so that I don't have to eat my words and do a convert. That may well happen. Maybe very soon. Maybe my next deal. But I won't be happy about it. Related articles by Zemanta Is Convertible Debt Preferable to Equity? (bothsidesofthetable.com) Equity vs. Convertible Debt: VCs Debate Shifting Investment Trends (readwriteweb.com) Why Convertible Debt Is A Sucker's Play (burnhamsbeat.com) Has convertible debt won? And if it has, is that a good thing? (sethlevine.com) Do VCs Really Prefer Convertable Notes Over Straight Equity? (businessinsider.com)
  • Symbology 28 August, 2010, 6:04 am
    When you want to look up information on publicly traded companies, it helps to know the ticker symbol. Microsft's ticker is MSFT, Google's ticker is GOOG, Apple's ticker is AAPL. Every publicly traded company has a ticker. But private companies don't have tickers. And as more and more private companies are attaining status and drawing the attention of mainstream media and the investment community, it is time for that to change. Yesterday Stocktwits and Second Market proposed a set of tickers for popular privately held companies. The proposed list of tickers is here. I'd like to see services like Tracked.com (a portfolio company of ours: $TRACK), Google Finance, Yahoo Finance, Crunchbase, Wikinvest, and their competitors adopt these tickers. If everyone supported the TWIT symbol for Twitter, the FBOOK symbol for Facebook, and the SKYPE symbol for Skype it would make it a lot easier to aggregate financial and other information on these companies. I have been an investor and on the board of a company called Alacra for over ten years. We made the investment in the Flatiron partnership. One of Alacra's most successful services is called Concordance. They manage symbology for large enterprises with large datasets. It is a critical service for large banks, brokers, accountants, consultants, law firms, and other knowledge driven industries. Unique identifiers are so helpful when you are trying to make sense of large amounts of data. It is particularly helpful in the case of company specific information and it is also expected in the investment community. So I hope this effort by Stocktwits and Second Market gains traction with the other web services that aggregate information on private and public companies. I'll do my part by tweeting with these tickers (using the $ticker standard set by Stocktwits) when I talk about private companies on Twitter. I hope others will do the same. And Stocktwits and Second Market can make my life easier by making sure that companies like Alacra and Wikinvest that don't have private company symbols get them asap. I wonder if they should open up this database in some way so that companies can issue themselves tickers. It seems like trying to manage this as a closed system won't scale very well and some kind of open system will work better. I'm curious what others think.
  • Angel Liquidity 27 August, 2010, 7:09 am
    Lots of talk these days about new forms of angel/seed capital. But less talk about the most vexing issue facing the venture ecosystem over the past decade - that being the shrinking amount of liquidity on the way out. If you look at how much money has been raised by venture firms, including the seed and super seed categories, versus how much money has been returned in the past ten years, the ratio is not good. At some point the investors who fund the venture capital asset class will not be able to keep funding it. The asset class needs to focus on liquidity. M&A continues to be the one bright spot and although I have not seen the data, I suspect M&A activity around venture backed companies in the past ten years has not shrunk and may have actually increased (if you take out the bubble years of 98-2000). But IPOs of venture backed companies have almost been nonexistent over the past ten years. And that had been an important source of liquidity in the venture capital ecosystem. There is some hope that the IPOs of Skype and Demand Media will spark a renewed interest in tech IPOs. I am very excited about Skype. But friends on wall street tell me that the Skype IPO has issues, like a very weak stock market, the huge overhang of the eBay position, and a continued skepticism around tech IPOs. We will see. I am hoping my friends on wall street are wrong. I have written about the emerging third way which is secondary sales of founder, angel, and VC stakes to late stage VC firms, growth equity firms, private equity firms, and even hedge funds. This has been a bright spot of late and the trend continues to be positive. Yesterday our portfolio company Etsy announced that it had concluded a largely secondary transaction with Index Ventures. The interesting thing about this transaction is that it was not founder liquidity driven. The founders did not sell in the transaction. It was not VC liquidity driven. Some of the existing VC firms actually bought in the transaction. It was angel liquidity driven. Etsy did two angel rounds early in its existence. Our firm participated in the second round. But both rounds were largely composed of individuals, including a bar owner and a restaurant owner who provided the first outside capital. In the video below, founder/CEO Rob Kalin tells the story of installing a new handmade wood bar for the bar owner and in return securing his first outside capital for Etsy. The entire video is very good. If you have a few minutes, check it out. But the main point of this post is we are seeing that angels can get liquidity via these secondary transactions. They don't need to wait for the sale of the company or possibly the IPO. That is a very good thing, for the angel/seed sector, and for the overall venture capital market. I hope these secondary purchases work out well for the funds that are making them. Because if they do, we will see even more of them. And that may be a way out of the liqudity issues plaguing the venture capital business these days. Related articles by Zemanta Index Ventures Buys Into Etsy, Triples Valuation To Nearly $300 Million (techcrunch.com) Index Ventures buys into Etsy, now worth almost $300 million (eu.techcrunch.com) Etsy Raise Another $20 Million For $300 Million Valuation (paidcontent.org)
  • Blogging and Venture Capital 26 August, 2010, 5:41 am
    I came across this interview I did at Wharton a few years ago. They asked me how blogging has impacted the way we do the venture capital business. I don't think many people have seen this since the total views on YouTube are only 34 right now. I think it's a pretty good explanation of how this blog is a critical part of how I work. It is only 3 minutes long.
  • The CEO Mentor and Coach 25 August, 2010, 4:36 am
    I've written about this topic before. I think many people with the ambition and the opportunity can become excellent CEOs. But it takes a lot of work and a commitment to self improvement. It is a very hard job. It is lonely. And it requires discipline and decisiveness. Most of these traits can be learned. But who do you learn them from? Certainly not me. I have never been a CEO and never will be. I can help entrepreneurs with many things. But there are some aspects of running a company that I can't help with. So I encourage most of the CEOs I work with to get mentors or coaches (or both). I have seen this work so well for so many people. You might ask "what can a coach or a mentor really help me with?" I'll point to a blog post by Ben Horowitz on "office politics." I tweeted this out yesterday so some of you may have read it already. If you are a CEO or plan to be one someday, you should read it. Here's an example of Ben's advice on what to do when one exec comes to you complaining about the performance of another exec:If they are telling you something that you already know, then the big news is that you have let the situation go too far. Whatever your reasons for attempting to rehabilitate the wayward executive, you have taken too long and now your organization has turned on the executive in question. You must resolve the situation quickly. Almost always, this means firing the executive. While I’ve seen executives improve their performance and skill sets, I’ve never seen one lose the support of the organization then regain it.On the other hand, if the complaint is new news, then you must immediately stop the conversation and make clear to the complaining executive that you in no way agree with their assessment. You do not want to cripple the other executive before you re-evaluate their performance. You do not want the complaint to become a self-fulfilling prophecy. Once you’ve shut down the conversation, you must quickly re-assess the employee in question. If you find that they are doing an excellent job, then you must figure out the complaining executive’s motivations and resolve them. Do not let an accusation of this magnitude fester. If you find that the employee is doing a poor job, there will be time to go back and get the complaining employee’s input, but you should be on a track to remove the poor performer at that point. Imagine having someone you can pick up the phone and call when this happens to you? How nice would that be?You can get that several ways. You can take an investment from a VC like Ben or Mark Suster or Jeff Glass or many others who have serious operating experience. Or you can bring an experienced and successful CEO (or two) onto your baord. Or you can get a CEO Coach. I would not recommend you overdo it. Getting advice from too many places isn't very good. Pick a mentor/coach and run with it. If you are struggling with the demands of being the boss, the first thing to realize is you are not alone. It is a super hard job. The second thing is to get some help. From someone who has done it before and knows what to do. Trust me, you will be much happier once you do that.
  • Getting Meetings 24 August, 2010, 3:42 am
    Getting meetings with VCs can be hard. I am sure that many people think it is hard to get a meeting with me.But I thought I'd highlight an exchange that happened here at AVC yesterday.A woman named Kelley Boyd left a comment on yesterday's post that I liked.I replied and let her know that I liked it and asked what she was working on right now.She replied and suggested we have coffee tomorrow (which is today).That is not likely to happen, but I will absolutely meet her.I don't know what will come of the meeting but I like meeting new people with fresh ideas. I reblogged this quote from Clayton Christensen on my tumblog yesterday and also tweeted it:if you have a humble eagerness to learn something from everybody, your learning opportunities will be unlimitedI don't think the word humble comes to mind when people think of me. I have to work on humility every day. It does not come naturally to me.But the latter part of that quote about learning from everybody is something I totally buy into. I don't like to go to the "in conferences" and meet with the "in people." I don't learn much from them. I like to have coffee with people like Kelley. I am sure I am going to learn something from her.I know I am hard to reach, that I return less and less emails every day. But if you have something to share and say to me, please keep trying. I promise you that I am listening.
  • The Expanding Birthrate Of Web Startups 22 August, 2010, 5:20 am
    There is a general consensus that web startups are being created at a faster rate than ever. The impact of accelerator programs like Y Combinator, Techstars, Seedcamp, and dozens more are one factor. The expanding pool of angel, seed, and super seed funds is another. And the most important factor is how cheap it is to build and launch a web service these days. You can bootstrap your way into existence.I like to think of the venture capital business like parenting. When I invest in a company, I am committing to the care and feeding of the company until cash flow breakeven (the startup equivalent of adulthood). That care and feeding includes the decision to call it quits and give up on the project sometimes, but honestly that doesn't happen that much in our portfolios.So when I look at this expanding birthrate, I think "who is going to house, feed, school, and send all these kids to college?" Part of the answer is that this crop of startups is going to be way more self sufficient than what has come before them. I believe that is certainly true. We invested about a half a million of seed capital into a company last year and it is already profitable and there is a good chance that company isn't going to need any more capital from us. But it will continue to need advice of other sorts.Part of the answer is that this crop of startups will get bought out earlier than those who have come before them. Look at Hot Potato. Josh Kopelman said "we've only been investors for a couple of months" about Hot Potato. That is a good outcome for the founders. Not so much for the investors. But it is going to happen more and more as large tech companies look for teams that have a proven record of building and launching strong products.But even with these two very positive factors, I worry like a parent with too many kids. "Who is going to take care of all of these kids?"I am an investor in some of these super seed funds personally. I see the capital calls. When a fund has called 40% of its committed capital six months into its existence, I worry. What happens when the money runs out? Will there be more?Flatiron Partners came into existence in 1996. Today we still manage a portfolio of four companies. That is down from something like 55 total companies we funded. But the fact is fourteen years later we still have four portfolio companies.Union Square Ventures' first fund was raised in 2004. We invested in twenty-one companies and we still have sixteen active companies. And we still have $25mm on reserve for them. Christina and I calculated last week that about half of those sixteen active companies still might need more funding from us. So we have eight "kids who have not yet reached adulthood". That is six years after we raised the fund.The thing that nobody understands until you've lived through it is just how long it takes for some companies to get profitable and self sustaining. And just how long it takes for some companies to get liquid and leave the portfolio. The VCs I talk to who have been doing this for 25 years or longer aren't so much worried about the "dipshit companies" (as if there were such a thing). They are worried about the entry of so many new investors with relatively small funds birthing so many companies. These veterans may not be as connected to the latest web startup, but they sure are connected to the realities of the venture capital business. They've lived through it and they know what is involved with getting a company all the way to profitability and exit.The venture capital business is contracting. There are less VC funds than there were a few years ago. And there will be fewer in a few more years. And the birthrate of web startups is expanding. That is the challenge we all face. So, if you are an entrepreneur you should be very focused on either getting to profitability or getting a VC firm or two with deep pockets into your company (or both). If you are a seed investor, don't go quite so fast. Reserve some funds for follow on investments. And help your portfolio companies get to profitability or get a VC firm or two with deep pockets into your company. I think this expanding birthrate is a great thing. Entrepreneurship is alive and well all around the world. Smart and scrappy entrepreneurs are imaging new products and services and building them. But we all should be careful to think about how we are going to fund all of this company creation. Not just the first part of it, but all of it.
« 1 2 3 »
order by views | - date
 
23

Paul Graham

« 1 2 3 »
order by views | - date
 
21

startuplessonslearned

  • Lo, my 57692 subscribers, who are you? 6 September, 2010, 8:08 am
    Since this blog's earliest days, I have made a habit of surveying you, my subscribers. I did it originally as a demonstration of the advantages of having a pathetically small number of customers, but I found the actual info so incredibly helpful, I have done it several times since. Since the last time, your ranks have grown tremendously, and I thank you all for this incredible support. So, to celebrate Labor Day here in the US, I've created another survey. If you're willing to take five minutes to fill it out, I would be most grateful: Click here to take survey As usual, I've added a small minimum viable product (I'm starting to think of this technique as the "survey MVP") at the end, as yet another customer validation exercise. I'll post about the results later; to say anything here would bias the survey. 
  • SXSW 24 August, 2010, 2:24 pm
    Next year will officially mark one-hundred years since scientific management, the first great management paradigm, burst into the national consciousness. It invented many concepts we now take for granted: efficiency, productivity, and the idea of management itself. We owe that movement an incalculable debt of gratitude. Have you decide already how to celebrate this centennial? I have: I'm going to mark the occasion at SXSW Interactive in March, 2011. You're invited (details below). I'm starting to experiment with new ways of talking about the Lean Startup movement and the impact you all are having on the practice of entrepreneurship across countries, industries, and even sizes of companies. We are collectively bringing a new level of scientific rigor to the act of innovation itself, and our revolution is just beginning. We still have much to learn. So take a look at the ideas below, and please leave your thoughts as a comment. As always, I welcome your feedback. The seed of this idea was planted by many of you on Twitter over the past few weeks. In fact, both I and the SXSW organizers got many emails and tweets about the necessity of having Lean Startup be part of SXSWi. As a result, they were kind enough to allow a very late Lean Startup submission to their user-generated PanelPicker system. They use crowdsourcing to figure out which speakers to invite and what topics are of interest to their audience. Even if you've never been to SXSW or don't know what I'm talking about, you can still go vote - it takes less than five minutes. Because we're getting a very late start on the other panels, our submission is way behind. We only have a few days to catch up, as voting ends on August 27 - just three days from now. So please vote, comment, tweet, and help make this happen. Thank you. Here's the submission itself, with my first attempt at a new framing for Lean Startup as a rebirth of scientific management. I'd love to know what you think: The Lean Startup: innovation through experimentation2011 will mark the one-hundredth anniversary of Frederick Winslow Taylor's "Principles of Scientific Management." The tremendous material abundance we enjoy today is the result of the productivity revolution he unleashed by bringing the tools of science to the study of work itself. Management today is rigorous, scientific, and effective -at the production of physical goods. In other areas the picture is bleak, especially for innovative new products. We fail spectacularly in startups and big companies alike. Too often we're building something nobody wants. There is a movement that is trying to eradicate this disease. We are at the beginning of a second scientific management revolution that will bring science, rigor, and discipline to the process of innovation itself. It has already begun to transform the way startups are built around the world. It is called the Lean Startup. All entrepreneurs face these challenges: How do we know if we’re making progress? How do we know if customers will want what we’re building? How do we know what kind of value we can create? Answering requires more than just disciplined thinking at the whiteboard. It requires the coordination of people. In other words, it requires management. The Lean Startup is a management science for entrepreneurs of all kinds. It enables rapid customer-centric iteration. It helps startups test their vision before it's too late. It is a tool for people who want to change the world.Regardless of what the SXSW organizers decide, I intend to host an event in Austin to coincide with the conference. I'm hoping we'll be able to top last year's Lean Startup Smackdown, which was put on by the Austin Lean Startup Circle. I don't know if it will be more like a party, or more like a mini-conference. In fact, I encourage you to weigh in with a comment. Would you be interested in attending? Co-sponsoring or co-organizing? Or just getting drunk? Let me know. Most importantly, I want to continue to send you all my thanks for your tremendous support and encouragement. I can honestly say this is something I would never have imagined attempting on my own, and it is the latest in a series of amazing experiences you've all made possible. Thank you. 
  • Case Study: SlideShare goes freemium 16 August, 2010, 9:25 am
    (Normally, I do not write about companies that are doing a marketing launch. But I have decided to make an exception today, for two reasons. First, SlideShare is a fantastic product (that I use on a regular basis) and an impressive company example of Lean Startup practices in action. Second, their story illustrates a key Lean Startup idea: proving the business in micro-scale. It requires separating the product launch from the marketing launch (see Don't Launch) as well as other staple Lean Startup tactics: minimum viable product, split-testing, customer development and the pivot. This story especially demonstrates that these techniques are not reserved only for tiny startups just starting out. When SlideShare began the journey you're about to read, they already had more than a million visitors a day. Because the stakes were high, they had to successfully use a technique I call Innovation inside the box which is important for entrepreneurs inside established companies of all sizes. Once again, this case study is a collaboration with Sarah Milstein, who conducted the interviews and wrote the post itself, with some minor edits and commentary from me. As this is a new initiative for this blog, we especially welcome your feedback. Did you find this post useful? One recurring request I hear from Lean Startup practitioners around the world is a desire to see examples of the ideas in action. How are we doing? In the meantime, take a look at how SlideShare performed a significant pivot while still moving at full speed. -Eric] “The first user experience was actually terrible.” Rashmi Sinha, co-founder and CEO of SlideShare, describes an early version of the analytics package that’s part of the Pro accounts the company announced today. If your company is using minimum viable product, you’ve probably said the same thing yourself. A lot. SlideShare, founded in 2007, started experimenting with MVPs and A/B testing this year. Those tools, combined with focused customer interviews, have turbo-charged the company’s ability to learn. What prompted the process change? Early this year, SlideShare launched custom channels. Designed for large businesses, the channels let a company share several types of documents, brand the channel with their own design elements, and then include display advertising, contest promotions, blog aggregation, social media integration and metrics reporting. The idea seemed to SlideShare to be a natural direction. Except it didn’t take off. [I was an early adopter of this feature, and participated in the last marketing launch, as you can see here. Alas, even brilliant marketing adorned with a giant picture of me can't fix the wrong product. -Eric] Big companies said they liked the idea, but SlideShare found it hard to close deals. Meanwhile, individuals and smaller companies emailed by the hundreds to say that they wanted the features of custom channels, but the sales model—arranged like a media buy—didn’t make sense to them. SlideShare’s existing customers had needs that the company’s new product—along with its pricing and positioning—simply weren’t solving. Realizing it had taken a wrong turn, SlideShare rethought its approach to premium accounts and ultimately performed what we’d call a value capture pivot, one where the company changes the way it collects revenue from customers. The process started with a few moving parts. First, the company began quietly testing subscription pricing plans, initially positing a basic plan and an enterprise version. Second, when an individual or small company signed up, Sinha would email them to ask if they’d be willing to hold a phone interview with her to discuss their experience of the product. Despite the fact that SlideShare's product is well-established with many customers, Sinha still took the critical step of (to use Steve Blank's famous phrase) getting out of the building, a particularly important job for founders. Third, SlideShare started holding sales calls with large companies to learn what would prompt them to buy the enterprise version. “Individuals and small companies wanted analytics, they wanted to know what was happening in social media [for their content], they wanted ad removal and lead gen. Branding was less important to them,” says Sinha. Big companies had other needs. “We didn’t anticipate at all the control features. For instance, we worked with Pfizer, and they wanted the comments turned off. I hadn’t thought that would be a feature. But they’re regulated, so it makes sense.” SlideShare used the two streams of information to segment their market and come up with three plans that recombined the custom channel features in meaningful ways. But that’s just part of the story. As SlideShare was pivoting, it was also trying out two processes to get better results: 1) A/B testing to refine the pricing plans and the page describing them; and 2) MVPs to hone the actual premium features. The combo helped SlideShare learn a lot in short order. [This is the essential approach to testing a big vision that avoids the "local maximum" trap. See Learning is better than optimization. -Eric] The company ran landing page splits every two or three days (they initially used Unbounce to generate the pages) and measured them carefully with KISSmetrics. They also used SnapABug for live chat on their site. Between the metrics and the direct customer questions, SlideShare had what Sinha calls “minor learnings and then major shifts.” For example, early iterations of their pricing page included the original, free version of SlideShare. “We realized that was really confusing people,” says Sinha. “We don’t give you all this Pro plan information right away when you join SlideShare. It’s more like, ‘If you’re already using SlideShare, you might want to try this.’” They removed the core plan, and conversions went up. The A/B testing did have its challenges. Because SlideShare has more than a million visitors a day, the team is used to developing features that at least 100,000 people will use. “You get used to having a big impact,” says Sinha. With the split tests, maybe 500 people would see an iteration (SlideShare drove traffic with calls to action around their own site). “You have to get ready to deal with much smaller numbers.” The MVPs were tricky to implement for emotional reasons, too. Because the SlideShare team was used to giving away a high-value product, engineers balked at charging for a clearly imperfect product. The analytics package, for instance, launched in what Sinha calls “a very crude version; we started off and sold it before we were comfortable with it.” The saving grace was follow-up interviews. SlideShare asked customers what they had expected in the product; the responses were often literal descriptions. People consistently said they were dying for analytics and specifically that they wanted to track social media and understand the people visiting their content (SlideShare eventually discovered that showing visitors’ locations and timing satisfied people’s needs). “Charging for something half-baked is really interesting,” says Sinha. “It makes the product team uncomfortable. At the same time, you make sure that you get honest feedback. If the product doesn’t meet customers’ expectations, they cancel. It’s a very honest relationship. On analytics, we got a lot of feedback that it was half-baked, that we sold it under false pretense. But we would just respond honestly and fast and say, ‘Tell us what you want.’ Then we’d get back to them when we had built it.” Customers appreciated the follow-up, and many bought again after the feature had evolved. In this regard, SlideShare used the early adopter feedback not only to improve the product, but too improve its understanding of what subsequent customers would want. [That is customer development. -Eric] The marketing launch for SlideShares Pro accounts is today. But the product launch has been happening iteratively over the past months—which means the company is confident in its new offerings. “When we launched custom channels in February, a lot of people reached out and said, “We’d love to buy’,” recalls Sinha. “But it never happened.” [Alas, customers don't know what they want! -Eric] Since creating and refining its premium accounts, SlideShare has closed a number of deals, including high-profile accounts like Dell, Cisco and Pfizer. Sinha notes that Eric Schmidt, in a recent interview, said that you find out whether people truly like a product in the second phase after launch. In the first phase, you get a lot of curious people. Only after the buzz has died down do you truly understand what’s going on. With careful and continuous learning processes, SlideShare is inverting that idea and going to market with a validated product. That is the essence of proving the business in micro-scale. [We'll see if the marketing launch results follow the predictions of SlideShare's validated business model. We wish them the best of luck, and hope we can convince them to share their results - positive or negative - in the near future. In the meantime, good luck and thanks for letting us share your story. -Eric]
  • Case Study: kaChing, Anatomy of a Pivot 28 July, 2010, 8:39 pm
    (The following guest post is a new experiment for this blog. It was written by Sarah Milstein in collaboration with kaChing CEO Andy Rachleff. kaChing has been very active in the Lean Startup movement. If you haven't seen it, Pascal's recent presentation on continuous deployment is a must-see; slides are here. In the interests of full disclosure: I am an advisor to kaChing but did not participate in the interviews that led to this case. With case studies like this, we aim to illustrate specific Lean Startup techniques through the stories of current practitioners. It is written using the information that the company voluntarily shared, and therefore reflects their current thinking and recollections. I am particularly interested in feedback on this case study. Do you find it helpful? Please give us your feedback in the comments. Thanks, Eric) You probably know that Flickr, the photo-sharing site, started out as an MMOG. And if you’re a regular reader of this blog, you may know that IMVU started out as an instant messaging add-on. It’s common, perhaps the norm, for startups to pivot like that—to discover that a product is catching on in unintended ways worth pursuing. Yet there’s a lot of mystery around pivots, and entrepreneurs ask all the time how you know it’s time to commit to a new direction. To shed some light, I talked with kaChing, a destination that enables individual investors to find outstanding money managers to manage their money. The company’s audacious goal is to disrupt the $11 Trillion mutual fund industry. The startling part is that kaChing started out as a…Facebook game. That’s an epic pivot, like shifting from making solar calculators to powering the Space Shuttle. How’d it happen? kaChing launched a virtual portfolio management game on Facebook in January 2008 and a similar version shortly thereafter on kaChing.com. The intent was to discover amateurs who could manage a portfolio as well if not better than professionals (think American Idol) and then facilitate individual investors giving them their real money to manage. In other words, the game would serve as a kind of minor league for the profession. Because kaChing prefers its portfolio managers to have a long track record, the marketplace launch (i.e., the version that would facilitate the investment of real money) was planned for late-2009. kaChing deployed the game across a slew of platforms, including MySpace, the iPhone, and the Yahoo App Platform. The result? They attracted more than 450,000 portfolios—a decent number for a company that hoped a good percentage would prove out as capable managers. They also hoped a reasonable percentage would realize they were lousy money managers and would then convert to clients. In the early fall of 2009, as kaChing prepared for its marketplace launch, the management team showed the app—which included real time market data, SEC-grade accounting, analytics, compliance and customer management tools—to a number of investment pros to get feedback and endorsements. One of those pros was John Powers, head of the Stanford endowment. He noted the platform would be good not only for amateurs who had proven themselves as outstanding portfolio managers in the game, but also for professional money managers —a group that had insufficient tools for managing and scaling their businesses. The kaChing system was based on full transparency. A portfolio manager’s entire track record & holdings had to be disclosed. The company didn’t believe professionals would be willing to reveal that level of detail. But Powers’s reaction was intriguing enough to prompt Andy Rachleff, kaChing’s CEO, to call friends who were professional money managers and describe the idea. The response was surprisingly positive. Andy Mathieson, a founder and managing member at Fairview Capital, was particularly supportive. He was unconcerned about transparency, noting the good have nothing to fear. Mathieson signed on to be a money manager in the marketplace launch, committing five years worth of prior transactional data. Mathieson’s firm has a minimum investment of $1 million dollars outside of kaChing. On kaChing, consumers could invest in Fairview Capital’s strategy with as little as $3k. When the marketplace launched on October 19, it included seven amateurs who had risen through the game’s ranks and four professionals, including Mathieson. Within a month, kaChing observed several interesting things. First, because the amateurs weren’t SEC-registered, the site had to refer to them with awkward terms like “geniuses.” That was confusing for consumers, who already had to figure out what on kaChing.com was a game and what was real. Second, out of 450,000 gamers, only seven had qualified to become kaChing managers. Third, the company expected hundreds of amateurs who performed poorly in the game to realize they weren’t good at investing and therefore become customers. in fact only five people converted into paying customers. Finally, after launch, 30 professional money managers, having read articles on the company, contacted kaChing out of the blue. These managers weren’t concerned with transparency. They were interested in the tools and new distribution medium kaChing provided. In November, kaChing held an all-hands meeting, circling up chairs in their small Palo Alto office, to discuss whether they should focus solely on professionals and abandon the systems for proving amateurs. “Some people weren’t comfortable because it wasn’t as fun, and one senior engineer thought we’d be losing the part of kaChing that was an enabler for anyone who wanted to make it as a pro,” Rachleff recalls. “But what we really wanted to change was not who manages the money, but who has access to the best possible talent. We’d originally thought we’d need to build a significant business with amateur managers to get professionals to come on board, but fortunately It turns out that wasn’t necessary.” The staff agreed they could better fulfill their goals by working just with professional managers. In December, they removed the game from kaChing.com. In February, they held another all-hands meeting to talk about shutting down the legacy Facebook game, which still had 60,000 active users. “Everybody felt the burden of supporting all those transactions every day,” says Pascal-Louis Perez, kaChing’s CTO. “It took a ton of our time, and just wasn’t contributing to our long term vision.” That all-hands lasted five minutes. Which is a nice story. But when kaChing actually shut down each game, hundreds of angry players spewed venom. “We had to ignore them, because they weren’t our target audience – and were never likely to become customers.” says Rachleff. kaChing says they had the fortitude to make quick decisions and stay the course not just because they’d observed how people were using the marketplace, but also because they’d spoken with hundreds of potential and past customers. To acquire new money managers, the company makes traditional sales calls, which means they’ve interviewed many, many professionals and gotten a strong sense of their needs. At the same time, whenever a customer closes an account, kaChing contacts the person to find out why; most agree to a short phone interview. (The site has about 700 active paying customers. Perez says this level of contact, synthesized with their own observations, has given them confidence to make bold decisions. Of the money managers they’ve interviewed, he notes, “The feedback is consistent; we solve big enough problems for people that we believe they’ll come on board.” With 21 employees today, kaChing is devoted to recruiting professional managers and finding product/market fit, first for money managers, then for consumers. Thus far the results are encouraging. More than 30 qualified professional money managers have been attracted to the platform and more than $190 million of customer assets have been committed as well. The kaChing team is quick to note that because they’re still closing-in on product/market fit, they’re less data-driven than they plan to be once they’re in optimizing mode. “We create hypotheses, and test them,” says Rachleff. “If something fails, we cut it off. If something seems to succeed, we pursue it aggressively. You have to have the courage of your convictions. With limited data, you have to make tough decisions.” Special thanks to Pascal-Louis Perez for sharing information and making this post possible.
  • Some IPO speculation 15 July, 2010, 1:29 pm
    Inspired by Steve Blank’s post today about the “lost decade” of IPO’s, I’d like to make some predictions. Let me be clear: Steve is the historian. His posts are born of tremendous research into the secret history of Silicon Valley, and if you haven’t read those essays, you should. By contrast, what I’m about to say is pure speculation. The fact that IPO’s are disappearing makes intuitive sense to me. And the fact that the effects of this IPO vanishing act are being felt first and foremost in the software business also makes sense to me. In fact, I believe that the software business is the canary in the coal mine: increasingly, all businesses are going to look more and more like software businesses. My belief is that the root cause of the IPO shortage is that successful startup companies cannot find productive ways to invest large amounts of money to scale anymore. For software companies especially, scaling distribution and development is comparatively cheap. The old ways aren’t working. Large capital investments simply don’t have the ROI they used to. The world is changing too fast. New products become commoditized too fast. Increasingly, the only profitable thing to invest in is innovation, which means investing in people. And we don’t yet know how to do that on a consistent, scalable, basis. Ironically, the VC’s who depend on IPO’s and the CEO’s who are supposed to be creating them are struggling with the same basic problem. They do not have a comprehensive theory of entrepreneurship that allows them to consistently invest in innovation that can create long-term value. The only way I can see to achieve sustained growth is to create an innovation factory. The modern CEO needs to build an organization that is truly diversified: it is continuously investing in successful sustaining innovation and disruptive innovation. Such an organization should be able to deploy large amounts of capital effectively, by investing in its people. But this is a very different kind of diversification from the old-school GE model. We can’t just diversify across industries or geographies. We can’t even rely on a suite of line-extension products. We have to continually invent new categories of products, new platforms, and new business models – all extremely risky bets. Oh, and by the way, we still have to execute flawlessly. (Even the smallest flaw with an antenna can derail the whole train.) Today’s management reality is just plain harder than that of the past. General managers need to know how to manage the execution-oriented "twentieth century" general managers that work for them. But they also need to know how to manage the new entrepreneurial managers that, increasingly, are essential to their growth. In other words, the old “manager vs. entrepreneur” dichotomy is breaking down. You cannot be a competent general manager in today’s economy if you do not understand entrepreneurship. We are living in a transitional moment. The last of the old-school IPO companies are behind us (at least in software), and yet we have not yet witnessed the new-style IPO companies. Despite Google’s reputation as an innovative company, they seem to me to be counted as one of the last of the old breed. Their entrepreneurial successes are mostly to be found outside the organization, in the form of ex-Googlers who became entrepreneurs. Their internal “startup” projects seem, at least to my eye, to have a success rate only marginally higher than Microsoft’s (perhaps with Android – an acqusition – as a major exception). Certainly a large proportion of them end in failure. The new breed of company currently finds itself satisfied with private capital, and has no need for an IPO. I think Zynga and other games companies may be the earliest exemplars for us to look at. Game companies naturally lend themselves to a “studio” model, with semi-autonomous teams building out their own franchise of sequels and spin-offs. From public reports, it seems like Zynga has really mastered a formula for innovating repeatedly and relentlessly across segments, platforms, and genres. And there are plenty of imitators and fast followers on their way. Will that cohort of companies need an IPO? When private capital is available in sufficient quantities to satisfy investor and founder liquidity needs, why go IPO? The only reason I can think of is when you need dramatically more capital to grow your business, at a magnitude only available on the public markets and therefore worth the loss of control that going public entails. Our leading crop of pre-IPO web companies apparently do not need that much capital – yet. It’s a debatable proposition why they don’t need IPO levels of cash. I freely admit that I have no inside information, no unique insight into what they are thinking. But I am nonetheless confident in my prediction: they don’t yet have the ability to manage an innovation factory at that scale. That’s not a criticism; nobody knows how – yet. We need a new generation of managers trained in a comprehensive management theory of entrepreneurship. Comprehensive means it has to address all aspects of a startups life: marketing and product development, especially. It has to address all stages of startup growth and development – especially including the evolution into a true innovation factory. Tomorrow’s managers will need to know how to build a learning organization (where progress is measured by validated learning) and an execution organization (where progress is measured according to traditional value streams). They will need to know how to combine those organizations into one coherent whole. I believe that the Lean Startup is the first such comprehensive entrepreneurship theory. But these are still early days. We have much work to do. We face problems today that would have bewildered the earliest management theorists. Their struggle was to use management to create enough productivity to feed, clothe, and house the world. Our civilization has excess capacity everywhere. We can build anything we can imagine. But the ranks of highly educated unemployed and the abysmal failure rates of new products both speak to the same question that needs answering: not, “can it be built?” but rather, “should it be built?” The sum total of all we know about entrepreneurship is just the tip of the iceberg. We need to be disciplined, to study what works scientifically, and – above all - to introduce scientific methods into the practice of entrepreneurship itself. When we master that, I think we’ll know what to do with IPO’s again. At least, that's my speculation. In the meantime, it’s going to be fun.
  • Founder personalities and the “first-class man” theory of management 9 July, 2010, 4:42 pm
    At any given time, something like four percent of the US population is engaged in some form of new-company-creation. And that narrow definition of entrepreneurship doesn’t count all of the managers inside established companies who are effectively engaged in the same process of building an internal startup (see What is a startup? for my more expansive definition). What motivates all these entrepreneurs? Typical explanations tend to focus on the well-known anecdotes and larger than life archetypes we have in mind: the twenty-something college dropouts (men, of course) from Stanford inventing some radical new technology. The academic research tells a very different story. What do entrepreneurs look like? Are they born or made? This is a hard question. I think the root cause of that difficulty is that we tend to conflate two different questions into one. First, what causes someone to attempt entrepreneurship instead of a more traditional career path? And second, what attributes make someone likely to be a successful entrepreneur? The difficulty lies in this paradox: many of the attributes that increase the likelihood of becoming an entrepreneur actually impede startup success. Let’s start with the startup personality attributes. The academic research here is extraordinary. Here are the personality traits that are positively correlated with likelihood to pursue entrepreneurship: extraversion, skepticism, need for achievement, risk taking, desire for independence, locus of control, self efficacy, overconfidence, representativeness (the tendency to over-generalize from small samples), and intuition. I think most of those factors correspond to our shared image of what an entrepreneur is supposed to look like. But many other attributes (especially demographic realities) cut against that stereotype. For example, Vivek Wadhwa and others have shown that most entrepreneurs are much older than we expect. Career experience and industry expertise are both positively correlated with entrepreneurship: contrary to stereotype, most entrepreneurs are not young and inexperienced outsiders. And unlike some psychological factors, these experience-based factors also increase the odds of the subsequent venture being successful. It is in the psychological factors that we find the most paradox. For example, consider the propensity for risk-taking. Research has demonstrated the obvious: that people who have greater tolerance for risk or ambiguity are more likely to attempt entrepreneurship. That’s not too surprising. But does a risk-taking attitude actually lead to more startup success? The studies that have looked at this question in particular have found a negative correlation between risk-taking behavior and startup success. That doesn’t strike me as shocking. And, although this hasn’t been subjected to a great deal of study (yet), I believe this same pattern will be found in a variety of other entrepreneurial characteristics: overconfidence, determination to succeed, perseverance, and even the desire to be in control. All of these factors are helpful in getting people to take the plunge, but all of them cause serious impairment of decision-making down the road. Think of the startups you know who are caught in a reality distortion field, heading full-speed off a cliff. Most likely, you will find the above attributes in excess supply. I believe this is also why breakthrough success stories in entrepreneurship often feature a “classic” zany entrepreneur paired with someone you wouldn’t expect to be taking those kinds of risks. We often talk about this as the “visionary” and “the quant” or the “leader” and the “manager.” But I’m not convinced those labels are right at all. I think it much more likely that we’re seeing the embodiment – in the form of personality - of the “problem team/solution team” organizational structure. One team is in charge of carrying out the vision as currently specified, and one team is constantly asking the skeptical questions: who is the customer? Are we solving the right problem? Although we have historically viewed this structure in startups by focusing on the personalities of the founders, I think that reflects our current, relatively poor, understanding of how startups work. We can do better by focusing on process instead of personality. We can consciously organize startups to become much more resilient organizations. Otherwise, we risk having them degenerate into cults of personality. In the early twentieth century, before the advent of scientific management, the overriding management philosophy was that of the first-class man (and they were always men). The idea was, for any job, if you can simply find an individual with just that right combination of virtues, talents, and experience, you could safely delegate all decisions to them. Sound familiar? This kind of reasoning is almost impossible to disprove. If you empower someone to make decisions and then something goes horribly wrong, does that disprove the first-class man theory? Probably not; it’s much easier to blame the particular person who made the mistakes. In fact, making mistakes is seen as “proof” of being second-class. In management jobs related to operations – that is, the people tasked with actually making and distributing physical products – this kind of thinking is now considered ludicrous, thanks to a century of progress. Our modern philosophy of management has this core belief (taken straight from scientific management) at its heart: that the performance of companies is determined by the systems they create, not just the people they hire. No amount of individual superstardom can overcome a badly organized factory, because the weight of the system eventually overwhelms any well-intentioned but poorly organized resistance. Yet we tolerate our modern version of the first-class man theory in the management of more “fuzzy” topics, especially innovation and entrepreneurship. When we look back on this period in history, it will seem just as ludicrous to future entrepreneurs as pre-scientific management looks to us. I am determined to do everything I can to hasten the arrival of that day. If you’re part of the Lean Startup movement, then you’re actually making it happen. Thank you. All of the academic research alluded to in this essay is drawn from Scott Shane’s General Theory of Entrepreneurship which is a fantastic and wide-ranging overview of the state of the art in academic research on entrepreneurship.
  • The Entrepreneur’s Guide to Customer Development 5 July, 2010, 11:25 am
    Brant Cooper and Patrick Vlaskovits have written a new book, The Entrepreneur’s Guide to Customer Development, which builds upon the foundational work of The Four Steps to the Epiphany, while improving accessibility, updating the ideas, and making it more actionable. I believe it is the best introduction to Customer Development you can buy. As all of you know, Steve Blank is the progenitor of Customer Development and author of The Four Steps to the Epiphany. I have personally sold many copies of his book, and continue to recommend it as one of the most important books a startup founder can read.  I used to give copies of Four Steps out to my employees, in the hopes that it would instantly indoctrinate them into the methodology of Customer Development. I just assumed that everybody would love the book as much as I did, and would instantly change their behavior based on what they read in a book. You can imagine how well that worked. Instead of that naive approach, I wish I'd had a book like this one, to help me figure out how to get started with customer development step-by-step.  When I wrote a review of Four Steps on this blog in November, 2008, I did my best to be candid and warn of a few shortcomings:And Steve is the first to admit that it's a "turgid" read, without a great deal of narrative flow. It's part workbook, part war story compendium, part theoretical treatise, and part manifesto. It's trying to do way too many things at once. On the plus side, that means it's a great deal. On the minus side, that has made it a wee bit hard to understand.Brant and Patrick undertook a difficult challenge: to provide a generally accessible introduction to Customer Development, without diluting its impact or dumbing-down its principles. I think they've succeeded. The Entrepreneur’s Guide is an easy read.  It is written in a conversational tone, doesn't take itself too seriously, and avoids extraneous fluff. It does a great job of laying out general principles and suggesting specific, highly actionable tactics. You can easily take from it whatever makes sense for your business, and leave the rest. And it's incredibly to-the-point: you can digest this book in a couple of hours. While the customer development framework of Four Steps is universally relevant, The Entrepreneur’s Guide updates its practices for modern startups. Four Steps primarily centers its stories and case studies on B2B hardware and software startups. This new volume also tackles examples from the Internet and wireless startups of today, both B2B and B2C. And throughout, they maintain a thoroughly realistic take on the power - and limitations - of an entrepreneurship methodology:Successful implementation of Customer Development, let alone simply believing in it, will not guarantee success for your business. Customer Development will help you – force you – to make better decisions based on tested hypotheses, rather than untested assumptions. The results of the Customer Development process may indicate that the assumptions about your product, your customers and your market are all wrong. In fact, they probably will. And then it is your responsibility, as the idea-generator (read: entrepreneur), to interpret the data you have elicited and modify your next set of assumptions to iterate upon.Many “airport business books” urge entrepreneurs to never give in. They tell them to persist in their dream of building a great product and/or company, no matter what the odds are or what the market might be telling them – success is just around the corner. They tend to illustrate this sort of advice with inspiring stories of entrepreneurs who succeeded against all odds and simply refused to throw in the towel. While maintaining persistence and willpower is certainly good advice, Customer Development methodologies are designed to give you data and feedback you may not want to hear. It is incumbent upon you to listen.The Entrepreneur’s Guide to Customer Development includes four powerful case studies/interviews with successful entrepreneurs who have taken iterative approaches to their respective startups that very much resemble the spirit of Lean Startups and Customer Development.  I found these to be particularly interesting and worthwhile. At the heart of Brant and Patrick's interpretation of Customer Development is their belief that its fundamental teaching is to question assumptions. This gives them a hook with which to apply their ideas to a wide variety of situations. In other words, if particular examples in the book don’t apply to you directly, Brant and Patrick show you how to figure out what might work for you.  This is important, since every situation is different.  I'll give them the last word:You are already skeptical of Customer Development and Lean Startups and the slew of emerging buzzwords and supple-to-the-point-of-meaningless terms. That’s great, more power to you; we applaud your skepticism. But be philosophically consistent: periodically take the time to question your own expertise and that of your friends, partners and investors. Make the effort to test your assumptions.If there’s a shortcoming to this book, it’s that it focuses primarily on the Customer Discovery step in The Four Steps.  Here’s hoping they soon tackle Customer Validation. Well done, Brant and Patrick. I can't wait to see what's next. In the meantime, go buy a copy of The Entrepreneur´s Guide to Customer Development right now.
  • What is a startup? 21 June, 2010, 12:01 pm
    I think most people have a fairly specific image that gets conjured up when they hear the word startup. Maybe it’s the “two guys in a garage” made famous by HP, or the idea of Jobs and Wozniack walking barefoot and shaggy through the Homebrew Computer Club. Maybe it’s the more recent wunderkinds like Zuckerberg or Brin and Page. What all of these pictures have in common is a narrative that goes something like this: scrappy outsiders, possessed of a unique genius, took outrageous risks and worked incomprehensible hours to beat the odds. But this cinematic view of entrepreneurs is flawed in many ways. Let’s start with the most basic. It leads people to mistakenly believe that any time they see two guys in a garage attempting the impossible, that’s a startup. Wrong. It also causes them to miss the numerous other kinds of startups that appear in less-glamorous settings: inside enterprises, non-profits, and even governments. And because both small businesses and startups have a high mortality rate, sometimes these images lead us to believe that any small business is a startup. Wrong again. So let’s begin with a definition of a startup that captures its essential nature, and tries to leave behind the specific associations of the most famous startups. A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty. Let’s take each of these pieces in turn. First, I want to emphasize the human institution aspect, because this is completely lost in the “two guys in a garage” story. The word institution connotes bureaucracy, process, even lethargy. How can that be part of a startup? Yet, the real stories of successful startups are full of activities that can rightly be called institution-building: hiring creative employees, coordinating their activities, and creating a company culture that delivers results. Although some startups may approach these activities in radical ways, they are nonetheless key ingredients in their success. Isn’t the word human redundant in this definition? What other kinds of institutions are there, anyway? And yet, we so often loose sight of the fact that startups are not their products, their technological breakthroughs, or even their data. Even for companies that essentially have only one product, the value the company creates is located not in the product itself but with the people and their organization who built it. To see proof of this, simply observe the results of the large majorities of corporate acquisitions of startups. In most cases, essential aspects of the startup are lost, even when the product, its brand, and even its employment contracts are preserved. A startup is greater than the sum of its parts; it is an acutely human enterprise. And yet the newness of a startup’s product or service is also a key part of the definition. This is a tricky part of the definition, too. I prefer to take the most expansive possible definition of product, one that encompasses any source of value for a set of people who voluntarily choose to become customers. This is equally true of a packaged good in a grocery store, an ecommerce website, a non-profit social service or a variety of government programs. In every case, the organization is dedicated to uncovering a new source of value for customers, and cares about the actual impact of its work on those customers (by contrast, a monopoly or true bureaucracy generally doesn’t care and only seeks to perpetuate itself). It’s also important that we’re talking innovation, but this should also be understood broadly. Even the most radical new inventions always build upon previous technology. Many startups don’t innovate at all in the product dimension, but use other kinds of innovation: repurposing an existing technology for a new use, devising a new business model that unlocks value that was previously hidden, or even simply bringing a product or service to a new location or set of customers previously underserved. In all of these cases, innovation is at the heart of the company’s success. Because innovation is inherently risky, there may be outsized economic returns for startups that are able to harness the risk in a new way – but this is not an essential part of the startup character. The real question is: “what is the degree of innovation that this business proposes to accomplish?” There is one last important part of this definition: the context in which the innovation happens. Most businesses – large and small alike – are typically excluded by this context. Startups are designed to confront situations of extreme uncertainty. To open up a new business that is an exact clone of an existing business, all the way down to the business model, pricing, target customer, and specific product may, under many circumstances, be an attractive economic investment. But it is not a startup, because its success depends only on decent execution – so much so that this success can be modeled with high accuracy. This is why so many small businesses can be financed with simple bank loans; the level of risk and uncertainty is well enough understood that a reasonably intelligent loan officer can assess its prospects. Thus, the land of startups is a unique place, where the risks themselves are unknown. Contrast this with other high-risk situations, like buying a high-risk stock. Although the specific payoff of a specific risky stock is not known, investing in many such stocks can be modeled accurately. Thus a decent financial advisor can give you a reasonably accurate long-term expected return for a set of risky stocks. When the “risk premium” is known, we are not in startup land. In fact, when viewed in retrospect, most startups appear like no-brainers. Probably the most famous example today is Google: how did we ever live without it? Building that particular product was not nearly has risky as it seemed at the time; in fact, I think it is a reasonable inference to say that it was almost guaranteed to succeed. It just wasn’t possible for anyone to know that ahead of time. Startups are designed for the situations that cannot be modeled, are not clear-cut, and where the risk is not necessarily large – it’s just not yet known. I emphasize this point because it is necessary to motivate large amounts of the theory of the lean startup. Fundamentally, the lean startup is a methodology for coping with uncertainty and unknowns with agility, poise, and ruthless efficiency. It is a completely different experience from the equally hard job of executing in a traditional kind of business, and my goal is not to disparage those other practitioners – after all, most startups aspire to become non-startups someday. Still, these differences matter, because the “best practices” that are learned in other contexts do not transplant well into the startup soil. In fact the most spectacular startup failures result when people were in a startup situation but failed to recognize it, or failed to recognize what it meant for their behavior. This definition is also important for what it excludes. Notice that it says nothing about the size of the company involved. Big companies often fail because they find themselves in a startup situation but are unable to reorient in time to cope with this situation; this specific pathology is explored in The Innovator’s Dilemma. This kind of crisis can be precipitated by many external factors: macroeconomic changes, trade policy, technological change, or even cultural shifts. But most often, the entrant of a startup into a previously calm market precipitates this kind of crisis. This has significant implications for general managers in enterprise, about which you can read more at HBR: Is Entrepreneurship a Management Science?
  • No departments 17 June, 2010, 8:26 am
    Big companies have departments. Startups are companies. Startups aspire to become big companies. Therefore, startups should have departments. Right? Why do companies have departments? There are a lot of reasons: ladder of advancement, sharing of best practices, functional specialization. Each of these benefits also exists in startups, which is why most startups are also organized in departments. But I have come to believe that because of the unique context of startup land, the payoff is a lot smaller than it is for larger companies. Meanwhile the drawbacks of functional departments can cause real and lasting harm. I once worked at a startup with an exceptional functional department system. The leaders of each department were world-class experts in their respective fields. The team hired only the best and the brightest. Looking back after a few years, it’s evident that many of the people who worked in these departments have gone on to do incredible things in industry. They are leaders, visionaries, founders and managers having tremendous success. Yet talent organized improperly can lead to failure. I was an engineer on the engineering team. We had to work closely with artists on an art team. We sat in different parts of the building, ate lunch separately, spoke a different specialized jargon, and generally didn’t understand each other. According to the Waterfall methodology in which we worked, this shouldn’t have been a problem. After all, we rarely had to work on the same project at the same time. The art team would often be involved in the specification phase of a new feature, since they were responsible for the look-and-feel of the product. Then we’d build the feature, which would often include tools that were intended for the art team to use to build the parts of the product that they were responsible for (in video game parlance, this is the “art path” that allows artists to get their work into the production product). Sure, some communication was necessary, especially as artists had to be trained on new tools periodically. But according to the theory, this should have been covered by the various specs and documentation we were rigorous about producing. If anyone has ever worked in an environment like this, you’ll probably be able to imagine the things that can go wrong. For one, the engineers consider the artists stupid; the artists consider the engineers arrogant. Not a lot of trust builds up that can be used when real disagreements emerge. Instead, there’s a positive feedback loop of bad feelings. And like feedback on a simple microphone sound system, this would occasionally boil over into screeching. I remember one such meeting vividly. I was the junior guy on a project team; I was called in to do some technical due diligence for reasons that were obscure to me, because the team already had much more senior engineers assigned to it. I was invited to a feature decision meeting, where the team was closing in on a detailed spec. The meeting was tense. The artists on the team had called in the big guns, and VP-level folks were there to explain the importance of certain aspects of the visual design that threatened to be cut. I eventually realized that I was there as part of the same plan – the art team has specifically requested someone technical but unimportant to be able to render opinions that might undermine their more senior opposition. Not to be outdone, the technologists on the team had also brought their big guns, and the meeting was packed with employees of every level – from VP’s all the way down to me. As the meeting progressed, the temperature kept rising. At first, I couldn’t even follow the recriminations back-and-forth. Eventually, though, I realized what was at issue: the art team was insisting that the UI for this feature have rounded corners. Incredibly, they were willing to bring the company to a standstill to protest that this was an absolutely essential feature. Even more surprisingly, the engineering team was equally vocal about their contention that adding rounded corners would add weeks of development time to the project, which would have pushed it out way past its hard deadline, effectively killing it. On the surface, this was a ludicrous dispute – both sides were willing to kill the project rather than proceed with (or without) a minor UI tweak. Were they just crazy? I don’t think so. This meeting was just the latest in a series of escalating skirmishes that had taken place over many months. The feedback loop looked something like this. The art team would create a spec for a feature, detailing the UI as best they could. The engineering team would then build that feature, mimicking the UI as close as they could using the current primitives supported by the system. When the art team would review the final product, they were inevitably outraged – it deviated from the spec in ways they considered major. So there would be a lot of scope negotiation at the very end, when it is most expensive. Sometimes, the art team would win the argument, and the engineers would pull a few all-nighters to make them happy, but feeling betrayed at the new additions to the spec. Sometimes the engineering team would win, and the art team would have to accept (and be held responsible) for a feature that didn’t really work the way they wanted, feeling betrayed at the violation of their agreement. As an isolated incident, this wouldn’t be a big deal. But scope negotiations between departments are an example of an “iterated prisoner’s dilemma” situation, where the same parties repeatedly negotiate, and rely on their previous experience to inform their choices in the current round. Unfortunately, the equilibrium in this particular setup has one overriding outcome: longer and more detailed specs. Here’s why. The art team feels burned that they didn’t get what they asked for. Last time, the engineers weaseled out of their commitments by point out areas where the spec didn’t specify what was really important to the artists. So this time, they are going to spell out what’s important in even greater detail, to leave less wiggle room. The engineering team feels burned too, and feels that they were blamed for deficiencies in the spec as if it was their fault that the technology doesn’t really support what the artists want to do. So they react in two ways. First, they actively encourage a more detailed spec, and are more aggressive about pointing out possible inconsistencies. This forces the art team to make concrete decisions about stuff they don’t really care about. Second, the engineering team starts to pad their estimates, knowing that each feature in the spec is not really done when they think it’s done – there’s going to be inevitable scope creep from the art team when they finally see the final result. What are the consequences of this more detailed spec? For one, it takes a lot longer to create, meaning that the projects themselves get larger in order to rationalize the increased investment in planning. Second, the extra detail obscures the artists’ original intent in specifying the feature, so the engineers are even more likely to miss the big picture and build the wrong things. And lastly, it removes the engineering team’s ability to find breakthrough solutions that might deliver most of the value at a fraction of the cost. They can’t use any discretion for fear of breaking the spec’s contract, even if the changes would probably go unnoticed or even be in the company’s best interests. The lack of trust (and the procedure of the Waterfall methodology) makes it very difficult to ask for clarification or changes in the spec while the implementation is underway. This feedback is a nasty trap, and it’s just how this room full of otherwise rational adults wound up in a screaming match about rounded corners. It was painful to watch. Now, part of the reason I remember this particular meeting so well is that I wound up doing something considered really radical at the time. I suggested that we change the underlying architecture of our UI system so that the artists would be able to build their own UI pieces themselves and then integrate them into the product without requiring new code every time. It took an incredible amount of politicking and arm-twisted, but I did eventually get the teams to agree to that solution. I’m proud of that contribution, but the reason I tell that part of the story is not to show off, but rather to be able to tell you what happened next. Although both teams got something valuable about the new system, neither was very happy. I had successfully defused the situation, and by reducing the feedback loop between the artists spec and its implementation, I was able to help them realize their goals better. As a technical fix, it was brilliant. As a solution to the underlying problem, it was useless. Neither side liked me very much for having "fixed" their problem. In particular, the artists felt like I had created a lot more work for them – they were used to having other people grapple with implementation details for them, and now they had to do it themselves. They either had to hire a developer onto the art team itself (unthinkable) or learn those development skills themselves (which was, to be fair, really hard). The engineering team wasn’t happy either. Creating this new architecture was a fair bit of work, and they couldn’t shake the feeling that I had basically sided with the enemy, giving them tools that would require a lot of engineering support but basically deprive the engineering team of any credit for the resulting features. I’ve now come to believe that this confrontation was a direct result of the partition between the departments in this company, and that rather than seek technical solutions to the disagreement, I would have been better off working to break down those walls. Let me tell one more story from that same company. I mentioned before the art path, the set of tools the engineering team was required to build and maintain for the art team to be able to create content. Because the art team was considered an internal customer (and “friendly” to boot), we didn’t waste a lot of time making the tools easy to use. Instead, we spent time making sure the exact behavior of the tools were well documented – by engineers, naturally. This led to some pretty bizarre situations. One time I remember in particular, an engineer fixed a bug that was causing artists’ creations to render in our 3D environment with a skewed rotation. The details aren’t important, but it turned out that under certain relatively common conditions, the objects would come out completely upside-down. I’m sure this engineer was expecting to be treated as a hero by the art team, since he had just fixed a major bug. But instead he was reviled. Why? The artists had known about this bug for ages, but had just assumed it was a natural part of the system. They had learned that the best way to solve problems is through trial-and-error, doing whatever it takes to get the object to look right. So sometimes the object would come out upside-down, sometimes not. When it did, they’d just invert their original work so that after the upside-down transformation, it looked right. Sure, there was a lot of randomness in whether they would need to take this extra step, but this was nothing unusual. From their point of view, the tools were full of meaningless jargon and bizarre incantations that resulted in nearly random behavior. This bug was not even considered a major one, since at least it had a deterministic fix. But now you can see what happened when the bug was fixed. A large, but mostly random, sample of objects started rendering upside-down! This required either that we leave the bug in place, or that the art team go back and rework all those thousands of upside-down objects. Neither solution is particularly alluring. Again, this led to lots of mutual recriminations. Why didn’t the art team come to the engineers and tell them of this bug as soon as it manifested? Why aren’t they smart enough to figure out what the tools actually do? On the other side, why don’t the engineers just deliver tools that work like they’re supposed to? Other more established companies have tools that are intuitive to use, why can’t we? The solution to this problem is actually really simple. Just create an art path team, composed of some artists and engineers. Force them to live and work in the same physical space, force the engineers to actually do some art production, and force the artists to actually learn what the technical limits of the tools are. As the team gets traction, simply rotate members from both departments through this team, so that the knowledge they gain is eventually diffused through both organizations. And hold the leaders of that team – artists and engineers alike – accountable for a set of clear goals for the tools that are important to the company. There’s nothing intrinsically difficult about this problem, just as their was nothing intrinsically difficult with the “rounded corners” problem I discussed earlier. The barrier to doing the right thing is the entrenched ideas originating from departments. Who would lead this team? Who would they report to? How would we ensure that the team was faithful to the best practices of both the art team and the engineering team? And plus, do we really want to be cross-training engineers in art and artists in engineering? Isn’t that a waste of time? After all, both teams are already too busy, how can we afford to pull people off and waste time? This is another variation of the time/quality/money fallacy – the very quality problems that a team like this would address are currently wasting time and causing the team to be “too busy” to invest in the solution. So: enough with functional departments at startups. Let's start holding people accountable solely for their contribution to the only thing that matters: validated learning about customers.
  • The Five Whys for Startups (for Harvard Business Review) 2 June, 2010, 9:50 am
    I continue my series for Harvard Business Review with the Lean Startup technique called Five Whys. Five Whys has its origins in the Toyota Production System. I've written about this before in some detail, but this was an opportunity to try and frame it for a general business audience. After all, Five Whys is the most general, most transferable technique in the toolkit, because it can act as a natural speed regulator for any kind of work. (If you're curious about the theory behind this idea, see Work in small batches.) The Five Whys for Start-Ups - The Conversation - Harvard Business Review Root cause analysis and preventive maintenance are concepts we expect to see in a factory setting. Start-ups supposedly don't have time for detailed processes and procedures. And yet the key to startup speed is to maintain a disciplined approach to testing and evaluating new products, features, and ideas. As start-ups scale, this agility will be lost unless the founders maintain a consistent investment in that discipline. Techniques from lean manufacturing can be part of a startup's innovation culture. One such technique is called Five Whys, which has its origins in the Toyota Production System, and posits that behind every supposedly technical problem is actually a human problem. Applied to a start-up, here's how it works....Read the rest of The Five Whys for Start-Ups. You can view previous essays in this series here: Is Entrepreneurship a Management Science? Two Ways to Hold Entrepreneurs Accountable Beware of Vanity Metrics  For Startups, How Much Process Is Too Much?  Speed up or slow down? 
« 1 2 3 »
order by views | - date
 
15

Answers OnStartups

  • Placement and training business 9 September, 2010, 2:13 am
    Am planning to start a business which is primarily based on Talent Search, Recruitment and Training. While Talent Search and Recruitment is for Executive to Manager level, the Training will be for Supervisor to Executive level, primarily on sincerity, hard work, work culture, floor management, office tools, basic computer usage, etc. I will be beginning with HR, Logistics and Production professionals first and then spread the talent search for other functions. Need opinion, warnings and suggestions. The business will be based at Pune and concentrating more in Maharashtra.
  • Hosted Scripts Web Startup 8 September, 2010, 10:28 pm
    I'm starting a web startup that hosts open source scripts such as wordpress, joomla, phpbb etc for free, any user gets a working website, with a sub-domain. Users get free sub-domain and hosting, which they can use to install open source scripts! Features for future implementation: - Add custom domains - unlimited storage - one click installs And much more I would like to know your opinion on this start up (I will be going online in a few days and would like to know your opinion/comments) Thank you in advance
  • Is Micropreneur Academy worth it? 8 September, 2010, 6:27 pm
    Is micropreneur Academy worth it? http://www.micropreneur.com/ Any members on this site? Also what does it cost? Background: I read the 'Software by Rob' blog and think he has some very good advice for the whole micro-ISV space. He started this membership site and I haven't heard anything about it besides from his blog. Also, my other question about startuptodo.com (http://answers.onstartups.com/questions/3023/is-startuptodo-com-worth-it) got me some informative answers, so I thought I would ask about another membership site.
  • WHERE and HOW to find a computer programmer to partner with and bring programming in-house 8 September, 2010, 6:08 pm
    Currently I have been personally funding my tech related start up idea by paying a developer to get it to the demo stage where it is now. In order to get it to the next level the costs increase as I was expecting. (I approached the developer I had been using to partner with, but he is more of a project manager working with various developers and I signed a contract not to recruit his developers). I am looking to bring on a developer/programmer to reduce costs and have an individual in-house to grow with the company and produce ideas. I do not have a coding background at all so my technology connections are very limited and there is no way I could do it myself. What is the best way going about finding a programmer/developer to partner with myself on this project of mine? I understand once I find an individual I will need to interview them and see if our interests are aligned, but I don’t know where to start finding the right programmer willing to partner with me. Are there any online forums? Developer groups (I am located in southern California) Would Craigslist be an option? Any comments or suggestions will be greatly appreciated.
  • need help determining idea's worth 8 September, 2010, 6:04 pm
    My friend and I are currently developing an iPhone app, it's very challenging and we may have to outsource the development of some core features, which is going to cost a lot. the problem is that we still haven't determined if the idea is worth developing. does it provide a real value to users? are they willing to pay? and how much? so what we have in mind is to have bloggers(smartphone app reviewers) write about our still in development app and see the blog reaction to it. is this a good way to find out?(can you recommend a good blogger?) would you recommend a better way?
  • cheap/reliable Pay-As-You-Go hosting (cloud?) 8 September, 2010, 4:33 pm
    I need Pay as you go hosting for a few of my web startups, I don't want to pay and get a dedicated server or VPN and not even use half the resourses, I also don't want to get shared hosting and get suspended for using too much resources! With pay as you go hosting (cloud?) I only pay for what I use, and of its cloud, I can make as many servers as I want (one for each startup) and only pay for what I use! Can anyone suggest a few hosting companies that offer this?
  • Using Facebook Connect - Pros and Cons 8 September, 2010, 11:24 am
    is Facebook Connect worth the efforts? any benefits in long term? are there any negative consequences like slow page loads and increased page download times etc? Update: Okay so I just tried Facebook Connect on http://www.huffingtonpost.com/ and it impressed me with the functionality. However, being a new user, I also found interface a bit clumsy and complicated. Viral loop, branding and competitive advantage points are well taken. Looks like it adds value to both FB and independent websites. But apart from sharing updates and fetching user info. What else is possible? Can any one share their success stats like increase in page-views/visits etc... Update 2: Facebook has introduced a new home page news feed that only shows popular items. Probably this change affects the viral loop. Comments plz?
  • Domain name starting with "get" 7 September, 2010, 6:28 pm
    What do you think of domains that have the word "get" before the actual product name, just like getclicky.com or the domains used by 37 Signals products (basecamphq.com, campfirenow.com)? Does it look good? what does it say to customers?
  • Outsourcing "product development" for Tech startups 7 September, 2010, 3:50 pm
    what are the most crucial steps to be taken by a new tech startup when outsourcing major part of the tech to IT firms or outsourcing "product development" eg new social media website project?
  • What to do with a semi successful side-project? 7 September, 2010, 1:12 pm
    Beside my two startups I invest 99% of my time in, I have several side projects I started just for fun. Trying out new programming languages, those kind of things. One of these side projects is a community (basically just a phpBB installation) geared towards a VERY specific niche, a specific type of equipment underground music producers use. The website is mostly self-managing (we have some volunteering moderators) and I only check in every month or so to see if everything is still running smoothly. The website has been running for a few years now and it's a really tight and friendly community. They love the site so much some members proposed to donate money to cover the hosting. (I turned it down, because in all fairness the webhosting costs are minimal.) The site has about 20k visits/100k views a month. No revenue, since we don't have any ads or user subscriptions. I see tons of possibilities to improve the site and turn it into a business. Not because the traffic is that impressive, but because the target group is so specific and we could provide them with other related services they might want to pay for. However, I really don't want to divide my time by 3 startups so I guess my question is if there's a way to leverage the potential without putting in a lot of time in it myself. Perhaps I could try selling it to the manufacturer of the equipment (they already sponsored us once) or am I better of finding someone that can develop it for me? (in exchange for shares or money). I have thought of just putting advertisements on it, because it's such a specific niche. This way I could develop the site based on its revenue, but the community seems very adversed to this idea. They are bit 'anti-commercial' if that makes sense. The advertisements would have to be highly targeted which again means I have to curate them which I currently don't have the time for. Any ideas on this?
« 1 2 3 »
order by views | - date
 
7

Steve Blank

  • Why Product Managers Wear Sneakers 2 September, 2010, 6:00 am
    I gave a talk last night to the Silicon Valley Product Management Association.  It’s a San Francisco Bay Area forum for networking, jobs and education for over 500 Product Management professionals. This is one of the Silicon Valley organizations that remind you why this is a company-town whose main industry is entrepreneurship, (and a great example of an industry cluster.) The published title of the talk was, “How to Create a $100M Business and Out Innovate your Competition.”  I read that and thought, “If I knew how to do that I would have been a VC.”  So instead I gave a talk I called, “Why Product Managers Need Sneakers.” The gist of the talk was to observe that: startups are not smaller versions of large companies startups search for a business model, large companies execute an existing one the skills that talented product managers bring to a large company are at best not transferable to a startup (and at worst destructive) product managers in a startup can either be an asset or an albatross. They’re an albatross if they perform as they do in a large company, and believe that they “own” customer interaction, feedback to engineering and authoring market requirements documents. They’re an asset to a startup if they understand that their job is to get the founder outside the building and in front of customers. They can be the scorekeepers in Customer Discovery and Validation as the company iterates and pivots the business model and refines the minimum feature set. “Why Product Managers Wear Sneakers” was a reference to the amount of running around outside the building (with the founder) product managers will need to do in a startup. Except they won’t be called Product Managers. In a startup they will be part of the Customer Development team. If you’ve seen my talks before you can skip forward to slide 19. Filed under: Big Companies versus Startups: Durant versus Sloan, Customer Development
  • Boys Rules, Girls Lose – Women at Work 30 August, 2010, 6:00 am
    My two daughters are now in college and have put their toes in the working-world with summer jobs. As they’ve grown older, they’ve heard their parent’s advice about women in the workforce. This post is not advice nor is it a recommendation of what you should do. It’s simply my interpretation of what I observed watching my daughters grow up. Our circumstances were unique, times have changed, and your conclusions and opinions will most certainly differ. Gender Differences Growing up in the 60’s and 70’s when women were struggling against inequality in jobs, pay, etc., my wife and I came into parenthood with an unconscious bias that gender differences were mostly cultural. So how we raised our kids was an unintended science experiment. When our two girls were toddlers, my wife started dressing them in overalls, and consciously bought them trucks and “boy toys” to play with along with dolls. We were both surprised and bemused to see them ignore the trucks and cars and prefer to play house. A bit later, our biggest eye-opener was when our younger daughter started asking for the “pretty pink dresses” instead of the overalls. (Given they didn’t watch TV, we ruled that out as a major role in their choices.) We started to believe that perhaps there was some hard-wiring about gender. Boys With Sticks As our kids reached grade school, the next lesson was watching them at play. I remember hiking with my girls and two 8-year old boys. When we stopped for lunch, the boys found sticks and immediately began a sword fight. When they tired of that, the boys chased each other and wrestled until they were exhausted. The girls, finding their pile of sticks, began building something together and telling each other stories. The suggestion of “why don’t you guys try each others games?” was met with utter 8-year old disdain. I realized I was looking at something – competition versus collaboration – that also seemed hard-wired. (Competition versus collaboration is my shorthand for a much longer set of gender-linked behaviors.) Boys Rules, Girls Lose When I entered the business world, I quickly found that office politics was just an older version of boys with sticks. The testosterone level was higher, and the game was more like musical-chairs with winners and losers until there was a single person on top. As a guy I didn’t need a rulebook to understand the game; there was a hierarchy, it was competitive, I win you lose. It took me awhile but I realized that implicitly that advancement in corporations was unconsciously constructed around how men interact with each other. And unless they consciously work at it, most companies are not set up for collaboration. As I grew older I realized that women in the workplace around me were having a harder time than the guys. They’d all come from college equally ambitious, but only after a few years, something different was happening to their careers. Over time, I observed women who succeeded in the business world (as defined by their interest in moving up the hierarchy) headed in one of four career directions: They chose departments within corporations where collaboration was an asset like Public Relations, HR, customer service, etc. They set up their own companies to provide services and ran their own companies collaboratively. They opted out of the workplace and raised a family, returning later. They figured out the “boys rules” and followed them (having to work harder and smarter to prove that they were.) Understand There Are Rules – And They’re Not Yours When my girls started to play soccer, I used to remind them, “Make sure the people on the field aren’t carrying sticks because if they’re playing field hockey while you’re playing soccer, you’re going to get hurt.” As they got older, they understood I wasn’t only talking about sports but that I was trying to teach them how to figure out the rules of any game they were about to play.  And that included the workplace. My advice to our daughters about women in the workplace has been pretty simple: The language of business is about winners and losers. Bosses who read Sun Tzu’s “The Art of War” as a guide to business strategy or “Leadership Secrets of Attila the Hun” are unlikely to create a culture of collaboration. There are implicit rules of competition and collaboration in companies.  It’s not that anyone is hiding a secret rulebook; it’s just that no one has articulated the rules. In most companies men set these rules. Again, nothing secret here, but men don’t realize that they behave and think differently. They don’t have to explain the rules to other men so it never occurs to them to explain the rules to women. As women, they will be expected to perform to boys rules as defined in their workplace: This means they need to spend the time understanding what the rules are in their company and industry. If they don’t, they will find others less competent but more adept at playing the game getting promoted instead of them. Women can be equally competitive if they desire. It’s not a question of competency. Or a skill only boys have. If they want to succeed by competing they can. They just have to learn the rules and practice them. Find mentors then become one. In every organization or industry there’s someone who’s figured out the rules. Seek them out and know what they know. By the time you do, it’s your turn to mentor someone else. Collaboration can make you a stronger competitor. The irony is that organizations which collaborate are more effective competitors. When they reach a position of authority, use their instincts to build a fearsome organization/company. If they prefer to collaborate and don’t want to play by boy’s rules, they need to understand what their career choices are. There are plenty of other ways to be a productive member of society other than a position on a corporate org chart. Understanding the rules and career options doesn’t mean the rules are right or they have to accept them as the only career choices.  They can make change happen if they so desire. But they need to understand the personal costs of doing so. Some find the idea of gender differences uncomfortable. Having fought to have men and women be treated equally, discovering that there may be gender specific hard-wiring for behavior sets up cognitive dissonance. Some simply won’t accept that there are workplace gender differences. I may be wrong. Perhaps I misunderstood what I’ve seen or that time has changed the workplace significantly. Take this advice as a working hypothesis and see if it matches your experience. Time will tell whether we gave our daughters good advice. Filed under: Family/Career
  • The Non-Dummies Guide to Customer Discovery 26 August, 2010, 6:00 am
    Customer Development is a stupidly simple idea. It’s one that you can describe in 30-seconds or less. But it took me 3 years and almost 300 pages of 10-point type to describe the concept in my book The Four Steps to the Epiphany.  Unlike a traditional business book, The Four Steps is more akin to a reference manual for how to “engineer” a startup – from the initial search for a repeatable business model all the way through the management techniques to transition to a company. Entrepreneurs who use it effectively have dog-eared pages marked with sticky notes. Enter Brant Cooper and Patrick Vlaskovits who looked at my text as the equivalent of War and Peace. They decided that what the world needed was a simple explanation of the key concepts of Customer Discovery – the first of the four steps of Customer Development. Their book The Entrepreneur’s Guide to Customer Development: A cheat sheet to the Four Steps to the Epiphany does just that. If you are interested in Customer Development, there’s now a quick and simple way to get up to speed. This is a book you should have on your shelf. Filed under: Customer Development
  • Solving the Innovator’s Dilemma – Customer Development in a Big Company 23 August, 2010, 6:00 am
    One of the ways I learn is to teach. My students ask questions I can’t answer and challenge me to solve problems I never considered. At times I’ll do what I consider an extension of teaching; a two-day Customer Discovery/Validation intensive session with a large corporation serious about Customer Development at my ranch on the California Coast. My last session was with a passionate, smart, entrepreneurial team from a Fortune 100 company. (And if I told you who they were I’d have to kill you.) Their copies of the Four Steps were dog-eared and marked with sticky notes. We spent two days of analyzing and exploring their customer discovery visits just completed across South America, Africa and Asia. Learning which hypotheses survived these visits were eye-openers for all of us. We used what they learned to plan their next steps for additional Discovery, and ultimately Customer Validation. It reminded me of the differences in Customer Discovery between a scalable startup and a big company. Here’s what we observed: It’s Easier for Big Companies to Get Meetings – But It’s Not Always a Blessing When a big company calls prospective customers to set up Discovery meetings, their datebook fills up fast. Execs at higher levels than you’d expect join the meeting eager to hear what the big company has to say about their industry. That’s the good news. The bad news is that the meetings become far more formal and more crowded, than one that a startup would have. This crowd actually dampens the opportunity for learning. Since the meetings attract senior execs everyone around the table waits for the big boss to speak and follows his or her lead. This stifles or shuts down the important “outlier” conversations that drive pivots and iterations in the discovery process. Solution: try to get a blend of one-on-one meetings along with the group session. And be sure to set expectations for the meeting before it happens. We’re Not Here for a Sales Call If someone from a large company is flying halfway around the world to visit your company, your presumption is they have something to sell you. Crucial in the Customer Discovery process is not selling…it’s listening. The exploring, probing, gaining reactions is why you’re there. (Of course, if someone forces a purchase order on you and you reject it, you’ve just failed miserably at entrepreneurship.)  Disabusing the audience of the notion that the visit is a sales call is vital to the customer discovery mission. Followers of the Customer Development process know that you can’t start selling until you have transformed product, customer and other hypotheses into a validated business model and sales roadmap. (Short-circuiting that process is a major “foul” that often leads to premature business models and suboptimal sales results.) To potential customers who’ve never been asked for their opinion before, the purpose of a Discovery meeting can be confusing. There are business cultures where the vendor/customer interactions are limited to “here’s what I have to sell, do you want to buy it.” Solution: spend more time on the “setup” for the meeting. Tell potential customers before you meet, “We’re working on an interesting product and we’d be happy to share where we are in exchange for some feedback. But we are not here for a sales call.” Getting the Customer to Talk is Even More Challenging There’s no more important skill in Customer Discovery than “good listening.” When a big company shows up, everyone expects an important formal presentation, which is hardly your Discovery mission at all.  Structuring the conversation in a way that elicits feedback before you reveal the product hypothesis is essential to getting honest reactions, good or bad. Yet just reading your questions from a list is a real-turnoff. Insert them casually into a conversation and don’t try too hard to get every one of them answered in every meeting. Solution: One of our favorite hints, from a great post by ash maurya, is to pose problems to the group in a randomized list. “We see these three problems in your industry.  Do you agree?  Could you rank them in order of importance to you?”  This literally forces a discussion and prioritization and is repeatable again and again. “We believe the most important features you need in a supersonic transporter are….” or “Our research tells us that female consumers most want a, b, and c.” Big Companies are Bred for Large Scale Success When you’re doing disruptive innovation in a multi-billion dollar company, a $10Million dollar/year new product line doesn’t even move the needle. So to get new divisions launched large optimistic forecasts are the norm. Ironically, one of the greatest risks in large companies is high pressure expectations to make these first pass forecasts that subvert an honest Customer Development process. The temptation is to transform the vision of a large market into a solid corporate revenue forecast – before Customer Development even begins. Solution: Upper management needs to understand that a new division pursuing disruptive innovation is not the same as a division adding a new version of an established product. Rather, it is a organization searching for a business model (inside a company that’s executing an existing one.) That means you may find that revenue appears later than the plan called for, or that there are no customers or fewer than the plan suggests. Customer Development Without Agile Engineering Is A Plan For Failure Beleving in Customer Development but still retaining waterfall development for engineering and manufacturing is a setup for problems if not outright failure. Even in a large company you can’t do Customer Development without aligning some part of engineering to respond to unexpected customer needs and findings. Solution: Get engineering buy-in by. Make sure the engineering and manufacturing plans “before” Customer Development don’t look the same as “after” Customer Development. Spend your Way to Success Usually Results in the Opposite Ironically large revenue goals may lead to largesse in overfunding the new division, with the implicit assumption that dollars can “buy your way to success.” All the money in the world doesn’t negate the painful search for a business model, or the lack of a scalable/profitable one. And new divisions in large companies operate just like startups who get overfunded – somehow their expense budgets always equal at least their funding. Solution: Eight and nine digit funding before Customer Discovery is a curse not a blessing. Take the money in tranches (equivalent to VC “rounds”) predicated on milestones in finding a repeatable and scalable business model. There’s an Overhead Cost to Being an Entrepreneur in a big, established corporation Large companies are just plain organized – with rules, HR, finance and more importantly, are built around process and procedures for execution. It’s why so few big companies succeed at true entrepreneurship. Solution: Assume as a given that as a new division head at least 15% of your time will be spent managing up and protecting down. Few in your own company will understand what you’re up to. Lessons Learned Customer Development in large companies has it’s own unique challenges Some parts of being a big company make it easier, others make being a startup even riskier Filed under: Big Companies versus Startups: Durant versus Sloan, Customer Development, Teaching
  • How Customer Development Failed Us 18 August, 2010, 6:00 am
    One of the attributes of great entrepreneurs is that they are tenacious and relentless. This guest post is from Andrew Elliott of Lottay. Andrew read the Four Steps to the Epiphany, tracked me down at California Coastal Commission hearing in Santa Barbara, and had me meeting with him in a stairwell during a break in my day-long meeting. Here’s his story of when Customer Development failed. ——– Hi, we’re Lottay!  We’ve been a startup for the past two years or so and we’ve come to a critical point on this crazy roller coaster ride.  Here’s our story: We started like most entrepreneurs — an idea, an opportunity, and very little money. Our vision was to radically change the gift card industry. We were lucky to learn about Customer Development early on in the life of our startup.  It made more sense than our 60 page business plan predicated on a B-school class and a supernatural ability to predict the future. More importantly, we’d witnessed Customer Development’s massive success at another local startup. We bought Steve’s book, started product development and began reaching out to customers ins search of our first earlyvangelists. Along the way we were fortunate to meet Steve, develop strategic partnerships, and raise a series A round of investment.  Confident we were Doing It Right, we pressed forward.  We even had some pretty monumental successes.  So how did Customer Development fail us?  Well, perhaps it’s more accurate to say that we failed customer development. In retrospect, our mistakes fell mainly into one of two categories: (1) Failure to follow the process (2) Failure to be honest with ourselves If we could travel back in time to that fateful meeting at the Coffee Cat and give ourselves a good talking to, what would we say?  Well, it just so happens that we’ve fitted Ross’s 2001 Subaru with a flux capacitor, gotten our hands on some plutonium and we’re about to hit eighty eight miles per hour!  Here’s what we plan to say: Write it Down This seems so obvious, yet it must be said: write down and track the evolution of your hypotheses. It’s something that’s almost too easy to gloss over — keeping track of your hypotheses and the results of your customer development work are vital. Failure to keep track of our hypotheses meant we were never quite clear on what was working and what was not.  This meant we had a hard time focusing our development. It’s your vision damn it! The customer does not define the product or vision for the company. The founders do. In Four Steps to the Epiphany Steve says you’re looking for a niche – he means that you’re going to hear a lot of “No’s” and that’s okay. What’s not okay is letting these non-customers define your vision daily. Failure to maintain a coherent vision allowed us to pitch one thing, “It’s a virtual gift card you can spend on anything!” while selling something else, “It’s an ecard + money!”  After a while even we didn’t know which was our actual vision. Make Money or Take Money? Focus on revenue from day one.  It’s the only reliable metric for success. You may think you’ve found your earlyvangelists but you can only be sure when they start making you money. Taking outside investment gives you options. But with this money comes temptation. Temptation to focus on growth and worry about revenue later.  Temptation to stay the course when your gut tells you it’s time to change.  Making revenue your first priority does so many good things for you as an entrepreneur – saves cash, validates customers, and tells you if you have a real business. It’s only a business if you make money. Fail Fast and Move On Being honest with yourself is perhaps the hardest part of being an entrepreneur. You’ve sold your friends, your investors, and yourself on your vision. You wouldn’t be putting yourself and your family through this if you didn’t believe in your idea. So who keeps you honest and tells you when you don’t have a business? Your customers and your hypotheses. There may come a time you need to face the fact that the earlyvangelists you thought you had are actually just very polite users.  Face the fact that your product won’t be able to make money or scale.  Face the fact that your hypotheses are all wrong.  And ultimately, face that fact that it’s time to majorly rewrite your vision. The sooner you face these facts the more chances you’ll have to course-correct and win. The Future? Now that we’re back from the past, how are we moving forward?  Well, we’re back to customer discovery.  And this time we’re writing it down. In fact, we’re creating a simple software solution that guides us through documenting customer interactions and validating our hypotheses (let us know if you’re interested in testing it). We’re also charging customers and partners right off the bat for our services.  And we’re using that money to do more customer discovery and validation. Finally, we’re holding ourselves accountable to our vision and hypotheses. Disclaimer Keep in mind that our opinions are just that. We may have no idea what we’re talking about. After all we’re just some guys trying to make it in this crazy startup world.  We’d love to know what you think. Do these ring true to you?  How do you keep track of your vision and hypotheses?Leave a comment or email us at contact@lottay.com. Lessons Learned Customer Development is like being Agile.  It’s easy to say you’re doing it. Hard to actually do it. Filed under: Customer Development
  • Teach Like You’re the Student 10 August, 2010, 6:00 am
    “I never have let my schooling interfere with my education.” - Mark Twain Every time I see my graduate students try to teach for the first time, it’s usually so painful I bite my lip. Then I remember the first day I stood up in front of a classroom. You Hired My first job in Silicon Valley was at ESL (a supplier of intelligence and reconnaissance systems,) I had managed to talk myself into getting hired as a training instructor. (Long back-story here.) The company had a major military contract to deploy an intelligence gathering system to Korea, they needed to train the Army Security Agency on maintenance of the system, the 10 week training course (6-hours a day) hadn’t been written, and the class was supposed to start in 6 weeks. I convinced them that I knew the type of training military maintenance people need, and I had done some informal teaching in the Air Force. Out of desperation and a warm body right in front of them, they realized I was probably better than nothing, so I got hired. As I wrote the course, I was handed a couple of books on how to put together a training class for the military and given some advice on how to assemble lessons.  But besides my own experience as a student in military technical training classes, I had never taught more than one person at a time. The Dry Run About a week before the course was due to start, the manager of training said, “Steve, we’d like to see you do a dry run of a class tomorrow. Pick the material you feel most comfortable with teaching and give us a lecture for an hour.” I didn’t sleep that night. While I had taught my peers in the military how to repair equipment, it had been informal side-by-side training on a lab bench. I had never been in front of a classroom. I was scared and nervous. The next day I stood up in front of the classroom and in the audience was the rest of the training department, my manager and the manager of the entire intelligence system program. I don’t remember exactly what class material I taught, but I do know I gripped the side of the podium so hard my fingers hurt as I read my notes and droned on. I was so nervous that I skipped an entire page of notes.  In the one or two times I managed to look up, I saw my boss wincing, the program manager putting his head in his hands, and then most everyone drift out of the room.  After about 20 minutes my manager said, “Thanks Steve, that’s enough.”  He quickly left and when I passed him in the hall, he was in deep conversation with the program manager, and I could hear snippets of my name and the word “terrible.” Even I knew I had done horribly.  I was ashamed and disappointed, and when my manger called me into his office that afternoon, I thought I was going to be fired before the class started. Teach Like You’re the Student As I sat in his office, I wondered if they would pay me through the end of the month or would they just walk me out the door that day. The latter seemed likely when he said, “I’ve never seen my boss so depressed. He thinks the Army is not going to pay us for the training course if you teach it.”  I was waiting for the “you’re fired” words to come out his mouth. Instead, I was blown away when he offered,” Well the good news is that you can’t get any worse.”  And he was smiling. He continued, “You figured out 6-airplanes and 3-vans full of computer equipment in six weeks.  That’s better than anyone we have on staff could have done.  Your lessons are clear and well organized.  And most importantly you love this stuff, and it comes through when you talk about it.  But we thought you were going to have a heart attack up in front of the room.” I started to exhale.  Maybe he wasn’t going to fire me. He laughed as he said, “In the last 15 years I’ve hired lots of training instructors, and something tells me you’re going to be pretty good at it… if you get through the first two weeks.”  Then he gave me some advice about teaching that’s stuck with me for more than three decades: “Just pretend you’re teaching you.  How would you do that? What would you want to know? What did you dislike when you were taught? What stories would you tell to make it understandable? What would keep you interested and engaged?” I Love This Job The class started a week later, and the first two days were as painful for me as they were for my students.  At first I never left the podium and was afraid to stop reading my notes. But after the second night, the class and I all went out drinking in Sunnyvale, and I realized that my manager was right – my students were exactly like me.  What they wanted to know was what I would have wanted to know if I was in that classroom. Over the next weeks as I slowly relaxed, I started to connect with the class. I stopped reading my notes, got out from behind the podium and started telling stories about my own experience and all the things that could go wrong that weren’t in the manual. I’ve never stopped. Lessons Learned Research says teaching excellence is associated with extraversion, agreeableness, conscientiousness, openness, and low neuroticism. My experience says that all that may be true, but you need to teach like you’re the student. Filed under: ESL, Teaching
  • The Rise of the Lean VC – Consumer Internet Gets Its Own Investors 5 August, 2010, 6:00 am
    Consumer Internet investing seems to have split off from traditional Venture Capital, and is creating a new category of VC’s: Lean VC’s.  I think you can blame Customer and Agile Development for a small part of it. Here’s why. Electron-based Venture Capital When I first came to Silicon Valley the world of Venture Capital looked pretty simple. VC’s invested in things that ran on electrons: hardware, software and silicon.  While individual VC’s inside venture firms specialized in particular domains (PC’s, peripherals, semiconductors, test equipment, operating systems, applications, etc.,) their investments had roughly the same time horizon and were focused around things that used electrons – primarily computing and computing infrastructure. The VC business took off with the rapid growth of the semiconductor business. Fairchild Semiconductor became the progenitor of a flood of Silicon Valley chip companies and at the same time the adoption of the limited partnership as the model for Venture Firms gave VC’s their own profitable business model. The personal computer business was built on top of the semiconductor business about the same time that the last of the pieces of Venture Capital were falling into place – the 1979 change in the EISRA “prudent man” rule allowing pension funds to pour billions into Venture Funds. Here’s what the start of Valley chip business looked like on a genealogy map, tracing most all of its DNA back to the first Silicon Valley chip company, Schockley Semiconductor. Cell-based Venture Capital – The Birth of Biotech Venture Capital In 1980 Genentech became the first IPO of a venture funded biotech company. The fact that serious money could be made in companies investing in life sciences wasn’t lost on the venture community.  But the knowledge that VC’s had built investing in electron-based companies didn’t translate to expertise in cell-based or cell-proximate companies.  The technologies were different, the time horizons were different, (2 to 5x longer to take a drug through FDA trials ~14 years,) and the regulatory environment was different (barely any in traditional VC investments compared to FDA trials for drugs and 510K approvals needed for medical devices.) Finally the amount of capital needed to take a drug to FDA trials could be enormously expensive, at least 10x more than startup costs at an electron-based company. The two watershed events for biotech startups were the Bayh-Dole Act of 1980 and the Orphan Drug Act of 1983. Bayh-Dole allowed for private ownership of government funded intellectual property developed in universities while the Orphan Drug Act created incentives for developing drugs for disorders afflicting fewer than 200,000 Americans. After a while, the only thing Biotech VC’s had in common with their compatriots who invested in electrons was that they both invest.  (In some Venture Capital firms they may share the same roof and overhead, but no one is confused, they’re in very different businesses.) The Rise of the “Lean VC’s” – Consumer Internet Gets Funded For a few reasons, I’ve been struggling to make sense of all the noise happening in what others have called the Super Angel arena. First, my students are confused about who to talk to and how to think about funding their consumer internet startups.  Second, and full disclosure, I’ve invested in a few of these funds; and third my teaching partner Ann Miura-Ko is a partner in one of these funds. My take is that we are watching an entirely new category of Venture Capital firms emerge.  It is as an important a split as when the biotech guys hung out their shingles. Consumer Internet startup investors are now their own category.  I call them “Lean VC’s” to emphasize why they’re different. (In his indomitable way, Dave McClure describes this shift best, but I have to screen-scrape his posts, paste them into Word and clear the formatting to read them.) One could argue that there’s nothing new here, as Internet distibution models started in 1995. But in reality they only became mainstream ~5-7 years ago. Most of the social and mobile channels (YouTube, Facebook, Twitter, iPhone, Android) have emerged in just the past 3-5 years. But these VC’s aren’t Lean because they fund startups with web-based distribution models. It’s because the startups are doing something very new that make them “Lean” : These startups embrace customer and agile development that Eric Ries has been evangelizing. They build a minimum feature set. Quickly iterate the product in front of customers. Drive for a repeatable and scalable business model (revenue in Dave McClure’s investment thesis, “network of scale” in Union Square’s.) Their capital needs are low at the front end. The advantage of commodity software stacks drops initial startup costs for Internet Commerce companies. (But scaling customer acquisition may take the same amount of dollars as a traditional software startup.) Lean VC’s are Different The skills needed to succeed as a “Lean VC” are different from those needed for traditional software investing. Previous experience of investing in software companies that hire direct sales organizations and take years to build the product using waterfall development doesn’t translate to expertise in Consumer Internet startups. The technologies are different, the speed of execution, iteration and pivots are different and the time horizons for exits are different, (2 to 5x shorter for a consumer Internet company.) Finally, the “death of the IPO” and the emergence of the “small market M&A” changes Consumer Internet economics. One of the interesting characteristics of these new “Lean VC” funds is that they can be smaller than the traditional multi hundred million dollar VC fund. The small investments necessary to get a consumer internet startup going enables Lean VC’s to make lots of early bets and double-down when early results appear. (And the results do appear years earlier then in a traditional startup.) (BTW, just like the Biotech VC’s who may share a building with Electron-based VC’s, you may find a Lean Venture Capitalist sitting under the same roof as a traditional VC. Just make sure they get and embrace the Lean VC principles. The test is, ask them how they differ in their investing philosophy from the rest of their firm.) Lean Angels Along with Lean VC’s a new class of angel investors has emerged. YCombinator, Techstars, et al, have been described as incubators but in reality they are the new “Lean Angels.”  These angels “get” the sea change happening in Internet Commerce. The difference is that unlike Lean VC’s, these angels help their startups rapidly develop the product, but typically don’t add much help in developing the market/customers. And while they provide the initial investment they rarely follow-on with the Series A dollars needed for scale. They’re a great feeder system for the new class of Lean VC’s. Lessons Learned Entrepreneurs in the consumer Internet space should look for funding from Lean Angels or Lean VC’s Lean VC’s are expert in on-line distribution, Agile and Customer Development They drive for early results inexpensively, and invest heavily when they see results Their strategies for their startups differ – some focus on revenue, others build large networks of users Filed under: Customer Development, Venture Capital
  • Keeping Score 29 July, 2010, 6:00 am
    One of the toughest problems for entrepreneurs is to keep score as they search for their business model. Keeping Score One of the key concepts of Customer Development is writing down your initial hypotheses (guesses) of all the parts of your business model, then updating them with the facts you find outside the building. Since I first wrote the book Four Steps to the Epiphany I’ve realized that an even better way to keep score is by diagramming each of your  business model hypotheses on a whiteboard and updating them as your iterate and pivot. I’ve been experimenting with how to best teach this idea to students in classroom and with startups. My favorite book of how to diagram your business is Business Model Generation written by Alexander Osterwalder.  It has the notion that any business model can be drawn with just 9 separate boxes.  It’s a great idea. The Real World My teaching partner Ann Miura-Ko and I both love the concept of Business Model Generation. However we find using the book to teach and in early stage venture problematic. It makes assumptions about the depth of knowledge about business models that we find that students and startups lack. For example, we find that the distinction between who’s a user and who’s a customer may be obvious to sophisticated strategists in large companies but is often overlooked in a startup. The same issues arise between understanding the difference between a distribution channel and the specific demand creation activities needed to drive customers into that channel. Being able to get these concepts is the difference between startup success and failure.  So while we love the book, Ann has been drawing her own business model diagrams you’ll see in the presentation below. Given Ann and I are such big fans of the Business Model Generation book we were happy to have coffee with Alexander Osterwalder and share our thoughts about what we thought was missing. In hindsight I think we were asking for the business model generation book for dummies (kind of like someone asking me for six steps to Customer Development rather than four,) but Alexander was not only was generous with his time but posted a thoughtful response to our comments. Business Plans Versus Business Models Given what I think of Business Plan competitions, it was ironic that I spoke last week at the Clean Tech Open business plan competition conference. I did appreciate the venue and shared my thoughts of how a startup goes from an idea to a business plan to business model to customer development and finally to a venture pitch, all in the presentation below. Lessons Learned Gather all your hypotheses in Customer Discovery Diagram all your hypotheses of your business model Update the diagram as you gather facts outside the building Minor iterations will make minor changes to the diagram Pivots will have you changing major pieces Filed under: Customer Development
  • You Can’t Take It With You 26 July, 2010, 6:00 am
    If you’ve had a great career what happens to all your knowledge and experience when you retire? Great Suit My wife and I had dinner last night with a friend of hers from high school. Tom, her husband whom I had never met before joined us as well. I took one look at his suit and guessed “high-powered lawyer. “ (I was right, the suit probably added another $250 per billable hour.) Over dinner we got chatting, and I found out that besides the great suit, Tom was actually a pretty remarkable guy. He was a trial litigator, one of the guys that slug it out in court in front of a judge and jury. And Tom wasn’t just any trial lawyer. He was the hired gun that Fortune 100 companies and hedge funds bring in when billions are at stake.  Listening to some of his stories over dinner was entertaining enough, but after awhile I realized I was hearing something else – this guy played strategy while his opponents were using tactics. Chess and Military History It turns out that Tom was a student of military history and a chess player. He described preparing for cases like war. “Most trial lawyers play defense. I’m on the offense from day one. In depositions and filing motions I’ll use misdirection to get the opposing counsel thinking I’m heading in one direction, and I’m heading in the other. When I file for a Summary Judgment, it’s usually from a direction my opponents never expected.” He then went on to give me a tour of 30 years of trial lawyer experience. So I asked, “Did you learn any of this in law school?”  He laughed. “I went to Harvard. They didn’t teach war there.” “Do any of your junior partners in your firm know how to do what you do?”  “Well they watch me, and I guess they learn by osmosis.” Then I asked my favorite question. “When you retire, what happens to all the knowledge and experience you’ve acquired?” You Can’t Take It With You I think the question caught him a bit by surprise. I explained, “You have a record in winning trials that’s based on a strategy and methodology you developed and you’ve likely have moved the state of the art in your profession – and it’s all going into the trash bin of history – unless you pass it on. Teach It or Lose It I asked Tom to think about writing down a longer version of the stories he told me over dinner, almost like an autobiography but focused on his career.  And for each big trial or milestone summarize it with a “Lessons Learned” section.  I observed that at the end of this exercise, he’ll come to one of three conclusions: 1) he has a great collection of war stories to tell while he’s skiing or playing golf or 2) he can make a book out of those stories or 3) buried in the stories and lessons learned was a strategy that was new, unique and worth teaching to future generations of lawyers. I suggested that he volunteer to guest teach in someone else’ class at a local law school (and where he lived there were plenty) to see if he enjoyed it.  His war stories would certainly keep students on the edge of their seats. (If you were a law school student having him come in to your class and say, “The first time you run into me, I’d make you wet your pants” might get your attention.) But more importantly this would help him decide if he wanted to teach as an Adjunct Professor after he retired. If as I surmised, he actually did push the state of the art in his field forward and his teaching went beyond war stories to a theoretical framework, most schools would be happy for him to develop and teach a class. Why Do It? I suggested that there were four reasons he ought to take teaching seriously. First, his accumulated knowledge will disappear when he does. Second, it’s incumbent on all of us to make those who come after us smarter than we were.  Third, having students question your assumptions makes you smarter (and at our age growing new neurons are helpful,) and finally fourth, for those of us whose career was on a stage, teaching is just another stage with an appreciative audience. Not Just For Lawyers Driving home for dinner, I realized that the same advice for Tom and lawyers would work for professionals in any domain; doctors, engineers, venture capitalists, CEO’s or even entrepreneurs. Don’t let your knowledge and experience die with you. Lessons Learned If you don’t teach it or write it down, the accumulated knowledge of your career is gone. War stories about your career can be entertainment, or even better if you want to teach, make them the basis of a strategy and methodology worth passing on. Retirement doesn’t have to be only about golf and skiing. Filed under: Teaching
  • The Phantom Sales Forecast – Failing at Customer Validation 22 July, 2010, 6:00 am
    Startup CEO’s can’t delegate sales and expect it to happen. Customer Validation needs to have the CEO actively involved. Here’s an example in a direct sales channel. Customer Development Diagnostics over Lunch A VC asked me to have lunch with the CEO of  a startup building cloud-based enterprise software. (Boy did I feel like Rip Van Winkle.) The board was getting nervous as the company was missing its revenue plan. These lunches always start with the CEO looking like they had much better things to do. Before lunch even came the CEO ticked off the names of forty or so customers he talked to during the company’s first nine months and gave me a great dissertation on the day-in-the-life of his target customers and what their problems were. He went through his product feature by feature and matched them to the customer problems. He talked about how his business model would make money and how the prospects he talked to seem to agree with his assumptions. It certainly sounded like he had done a great job of Customer Discovery. Sales Process Next, he took me through his sales process. They had five salespeople supported by two in marketing. (They had beta customers, using but not paying for the product.) Over lunch the CEO told me he had stopped talking to customers since he had been tied up helping get the product out the door and his VP of Sales (a successful sales executive from a large company) had managed the sales process for the last six months. In fact, the few times he had asked to go out in the field the VP of Sales said, “Not yet, I don’t want to waste your time.” Too Good to Be True For the first time I started squirming in my seat. He said, “I insist on getting weekly status reports with forecasted deal size and probability of close. We have a great sales pipeline.” When I asked how close any of the deals on the forecast were to getting closed, he assured me the company’s two beta customers—well-known companies that would be marquee accounts if they closed—were imminent orders. “How do you know this?” I asked. “Have you heard it personally from the customers?” Now it was his turn to squirm a bit. “No, not exactly,” he replied, “but our VP of Sales assures me we will have a purchase order in the next few weeks or so.” I put my fork down. Very few large companies write big checks to unknown startups without at least meeting the CEO. When I asked if he could draw the sales road map for these two accounts that were about to close, he admitted he didn’t know any of the details, given it was all in the VP of Sales’ head. Since we were running out of time, I said, “Your sales pipeline sounds great. In fact, it sounds too good to be true. If you really do close any of these accounts, my hat is off to you and your sales team. If, as I suspect they don’t close, do me a favor.” “What’s that?” He asked, looking irritated. “You need to pick up the phone and call the top five accounts on your sales pipeline. Ask them this question: if you gave them your product today for free, are they prepared to install and use it across their department and company? If the answer is no, you have absolutely no customers on your forecast who will be prepared to buy from you in the next six months.” He smiled and stuck me with the tab for lunch. I didn’t expect to hear from him ever again. What If the Price Were Zero? Less than two weeks later, I got a call and was surprised to hear the agitated voice of the CEO. “Steve, our brand-name account, the one we have been working on for the last eight months, told us they weren’t going to buy the product this year. They just didn’t see the urgency.” Listening, I got the rest of the story. “When my VP of Sales told me that,” he said, “I got on the phone and spoke to the account personally. I asked them your question—would they deploy the product in their department or company if the price were zero? I’m still stunned by the answer. They said the product wasn’t mission critical enough for their company to justify the disruption.” “Wow, that’s not good,” I said, trying to sound sympathetic. “It only gets worse,” he said. “Since I was hearing this from one of the accounts my VP of Sales thought was going to close, I insisted we jointly call our other ‘imminent’ account. It’s the same story as the first. Then I called the next three down the list and got essentially the same story. They all think our product is ‘interesting,’ but no one is ready to put serious money down now. I’m beginning to suspect our entire forecast is not real. What am I going to tell my board?” My not-so-difficult advice was that he was going to have to tell his board exactly what was going on. But before he did, he needed to understand the sales situation in its entirety, and then come up with a plan for fixing it. Then he was going to present both the problem and suggested fix to his board. (You never want a board to have to tell you how to run your company. When that happens, it’s time to update your resume.) The Phantom Sales Forecast The implications of a phantom sales forecast meant something fundamental was broken. In talking to each of his salespeople, he discovered the sales team had no standardized sales process. Each was calling on different levels of an account and trying whatever seemed to work best. This was just a symptom of something deeper –  while they thought they understood the target customer their initial hypotheses from Customer Discovery were wrong. But no one had told the CEO. He realized the company was going to have to start from scratch, Pivot back to Customer Discovery and find out how to develop a sales road map. He presented his plan to the board, fired the VP of Sales and kept his best salesperson and the marketing VP. Then he went home, kissed his family goodbye, and went out to the field to discover what would make a customer buy. His board wished him luck and started the clock ticking on his remaining tenure. He had six months to get and close customers. Customer Validation The CEO had discovered what happens when you do a good job on Customer Discovery but get too “busy” for to personally get involved in Customer Validation. It wasn’t that he didn’t need a VP of Sales, but he had entirely outsourced the Validation step to him. Until a scalable and repeatable business model is found the CEO needs to be intimately involved in the sales process. Lessons Learned Ownership of Customer Validation belongs to the CEO. A VP of Sales can assist but the CEO needs to answer: Do I understand the sales process in detail? Is the sales process repeatable? Can I prove it’s repeatable? (Proof are multiple full-price orders in sufficient quantity.) Can we get these orders with the current product and release spec? Do we have a workable sales and distribution channel? Am I confident we can scale a profitable business? Filed under: Customer Development, Customer Development Manifesto
« 1 2 3 »
order by views | - date
 
Copyright © 2010 paper.io Top Content Aggregator.| Founder's blog