February 2010 Archives

I went to Dave McClure's Startup2Startup last night and we listened to Mark Fletcher recount his current startup commandments. Mark has had a great history in startups, having built ONElist back in the day which merged with eGroups and got acquired by my old alma mater Yahoo. Then he built Bloglines which sold to IAC in 2005. Now he is working on another startup called SnapGroups, which got announced and was supposed to launch last night, but unfortunately also came out with a nasty bug and kind of stifled the launch..!

One of his slides had to do with startup business models, which was more in the area of talking about startup business building strategy than just strictly revenue models. For his 3 startups, including his current one, he listed his startup strategies (me paraphrasing here and imperfect memory at work):

ONElist: Raise lots of money (~$46MM), grow big fast, hire a lot of guys, dominate the market before anyone else, go IPO

Bloglines: Raise a bit of money ($200K), hire small team, build great product, flip it.

SnapGroups: Spend as little as possible ($6K) using lean startup methods, outsource everything, work on something he's passionate about, no exit strategy to shoot for.

It was a trip back in history for me, as I came into the startup world via Yahoo, and lived through the times as Mark had. What was amazing to me was the difference in strategy given what was in vogue at the time.

During the dotcom boom years, it was just build as fast as possible and get huge before everyone else, and then go for IPO. This of course didn't work anymore after the dotcom bust, and the introduction of Sarbanes Oxley which basically killed the IPO market even as it attempted to fix the bad accounting problems and protect the shareholder. Also, the excesses of the dotcom era were completely gone, and also gone with it the ability to IPO on little or no revenue.

Then along came the post dotcom bust years and it seemed that the M&A market for startups heated up. So now it was cool to get a bit of investment, and then build something that a Yahoo or Google wanted, and then get bought. At this point, we saw that it was getting cheaper and cheaper to launch web products, and over time, a lot of people jumped on the flipping bandwagon.

Soon, flipping became tough also because it was easy to copy somebody else and now the market was flooded with me-too products. Everybody called on the corporate development teams of the Googles and Yahoos of the world and it became impossible to get their attention. They didn't want to hear about you if you were too small; they only had so much time and only could focus on those opportunities that yielded the largest results for them. Yeah you thought you were cool, but against that kind of competition you weren't cool enough.

Somewhere in there, along came Ycombinator who proved that you could build something with so little capital and get it launched that it started being copied everywhere. Also, the world shifted to providing so many outsourced services and resources that you could build something by using other peoples' servers, open source code, and even excellent coders from other parts of the globe. Other companies would do the heavy lifting on commoditized services while you could focus on the core differentiator of your service.

Enter the economic downturn of 2008 and now M&A was difficult because major companies were pulling back to conserve cash and survive. They were also questioning their M&A strategies prior to this because they were buying startups for huge sums of money but wondering where all that hockey stick growth had gone to, after destroying the incentives of the brainchilds of the startup by making them rich and then watching them leave. Flipping became not so easy.

College kids couldn't find jobs any more; nobody was hiring. Plus, they keep hearing from their peers that working at large corporations sucks. Enter also the rise of a ton of resources like Ycombinator to jumpstart tech startups in a number of locations. Starting up became the in-thing and now we see tons of people trying to do this in a super cheap, fail fast, be adaptable way.

Despite the obvious indicators, I have found that entrepreneurs still are sticking to last era's strategies. Mark was smart; he watched the market and then built quickly to exploit the advantages of the era he built in. But today, I still meet entrepreneurs who are building to pre-dotcom bust year concept of building users fast and then thinking they can raise money later!

Even investors are stuck in last era's strategies. The consequence of raising ever larger funds meant that they were hoping for the huge deals that were present in dotcom boom years, but now that strategy doesn't work so well with the IPO market so slow and the presence of large enough startups worthy to put that much capital in so scarce. They add in the fact that initial capital requirements are so low, that often they find great startups who don't need or want their enormous amounts of cash.

I also changed my investment criteria. Many startups I funded before the 2008 economic downturn still had dotcom boom year or flipping strategies, and had burn rates to match. But then as we crossed into 2008, I started seeing that either strategy now created enormous downside risk of failure, and so had to now go for startups who were smaller, followed the lean strategy, and looked seriously at producing revenue sooner than later.

Mark's message was incredibly insightful, which is that this world is a constantly shifting place, and that you have to be nimble enough to switch strategies when the world changes on you. You also have to be observant enough to know when to make those changes, and not get locked into past views which may not be valid in today's world.

Advising with Influence and Resonance

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Being an advisor is tough. It's all about influence. None of the entrepreneurs I work with have to do anything I say and it's all about convincing them that something I say is worth listening to and executing on.

I had breakfast with my life/executive coach yesterday to catch up and she mentioned she was working on how to be a more effective influencer. In doing some research on the topic, she found that it is actually more about personal charisma than just straight intelligence and knowledge. For example, she related to me that smiling a lot and charm have a great effect on whether you are successful at influencing somebody or not. So it's a lot like what effective salespeople are good at, which is using their personality to charm you while you inadvertantly hand over your wallet!

Towards the end of my tenure at Yahoo, I managed to land into two roles that were all about influence. The first one involved getting all the product teams to revamp their site designs to implement larger more monetizable display ads. The second role involved implementing worldwide a more disciplined and quality oriented product development process. Both required me to become a salesman and evangelist, two things I was definitely not. But I learned about how to get things done via influence and how much I still had to learn.

If you've ever worked in a role where you had to get things done with influence, you will agree with me that it can be very frustrating. Nobody ever reports directly to you and so you can't force people to do anything. They may even agree with you at a meeting but then when everyone walks away from the meeting they go back to doing their usual thing and not what you asked them to do. In fact, I had even vowed that if I were ever to take another permanent role, that I would only do it if I had direct control of the team and my destiny.

But here I am, thriving as an advisor to 20+ startups over the last 3.5 years and enjoying my work solely built on influence.

A lot of entrepreneurs look to me to give them the answer. In fact, in times past I have delivered an answer but I have found problems with this approach:

1. The answer is often "my" answer but not the entrepreneur's answer. This is because, given my experiences and expertise, that I would tackle the problem in a certain way and because it was me executing, I could probably make something out of it. However, if an entrepreneur doesn't have similar experiences, then they have a greater chance of failure.

2. The early stage world is incredibly random and I have often found answers that I would not have done but yet have been successful. So what exactly may seem an answer today may quite often not be where you end up.

3. There are often many answers to the same problem. Again, back to point 1, what may be the answer for me may not be the answer for you.

This is why I hesitate to throw an answer out there unless someone is smart enough (like yesterday!) to ask the right question, which is "if this were you, what would you do?" This is important to frame the answer correctly so that the questioner realizes that my answer to the question is more about me than him. If I were the entrepreneur, this is how I would do it - but you're not me!

My approach has morphed to a more "throw ideas out until one sticks" method, basically putting so much out there until something resonates with the entrepreneur and team.

This resonance is very important. Everyone comes to the table with strengths and weaknesses and all the experiences they have. Thus, whatever idea they run with has to be something they are resonant with and can run with because they will be the ones living with it day and night to make something worthwhile out of it. I am only there intermittently but can't direct them every minute; it's their project so they have to own it through and through.

The unfortunate side effect of this is sometimes I can sound vague or perhaps even dodging their question of "what should I do next?" I have found over the last 3.5 years of advising that my biggest help to startups is to guide them like a teacher, teach them general concepts and help them translate them to whatever they are doing now, and to help expand their thinking as a lot of entrepreneurs tend to get very myopic in what they are doing and have a hard time keeping track of innovation outside their own project. So instead of providing them with "the answer", I provide them with ways to look beyond themselves and perhaps find an answer for themselves within that process.

Nexus One First Impressions

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About two weeks ago I managed to score a Nexus One. Having been an iPhone user now through 3 iterations, I was curious to see what Android was like and whether or not it would kill my iPhone love.

I started playing with my Nexus One without a SIM card. I just turned on WIFI because I was most curious about the app and operating system experience; I assumed that calling would be about the same as another mobile phone, which would probably mean that was better than my crappy AT&T iPhone experience.

Although I did not perform an exhaustive use of the phone, I did form some pretty quick impressions that I'd thought I'd share:

1. Their app store didn't connect when I tried to buy something while connected through WIFI. My expectations through 3G would have been much less as connectivity could have hampered a purchase, but through WIFI it shouldn't have had a problem. On my iPhone, I've purchased many things and it has never failed to connect.

2. Surfing through their app store, it is clearly early and the amount of apps available here is growing but nowhere near the breadth of Apple's app store. Until their app store catches up, this is going to be a huge hinderance in my adopting the Nexus One.

3. I couldn't figure out how to sync with anything on my Mac. IPhone shines here of course being an Apple product.

4. All Google related services were very nicely integrated. But annoyingly like the mail app on the iPhone, they don't cache messages. This is something I hate from the iPhone and they haven't fixed it here. This is also something I loved about my old Treo 680 where I could download and hold cached email and read/access it offline.

5. The Nexus One touch screen doesn't seem as responsive as the iPhone. Many times I have to multi-hit an icon to get it to respond. This is annoying.

6. As far as the UI is concerned, I don't see anything that stands out so much that would make it more or less usable. It is elegant in its own way, and I think that while the differences are a bit disconcerting now due to my unfamiliarity with it, I think that I would get used to the small differences between the iPhone and Android and be OK with it.

This is not like Windows and OS X where the differences and issues are so glaring despite the similarities that I find myself constantly wondering why Windows sucks and OS X is just better.

The back button is pretty cool though. Sometimes I wish the iPhone had one.

However, I think my biggest issues are the lack of integration with a desktop platform and the brand value of owning Apple.

The iPhone's easy integration with my Mac and OS X is of tremendous value to me. I remember spending an incredible amount of time figuring out how to sync my Treo 680 to whatever I was using. It sort of worked eventually, but it also just seemed very Borg-like and not an elegant integration. I suppose if I lived completely in the cloud, maybe Android might be OK. But, being a stodgy old timer in the computing space, I don't trust the cloud and like backing up to my desktop, which is further backed up elsewhere.

The other big thing is brand value. It's about owning a device that is beautiful and calls attention to not only it, but me also. Apple has done an amazing job creating products that are not only usable and useful, but beautiful and objects of desire. Somehow the Nexus One just falls short in this area in a big way. I don't feel brand connected to anything with this device. Should I be connected to Google in that way? But Google doesn't have that kind of brand that Apple has, which is fashionable, sexy, techie but easy and elegant to use. Google is pure tech and geek to me, which is fine but I think getting geek and high fashion is better.

I expect the Nexus One and their app store to catch up to the iPhone in many ways, but the brand value is something that Apple owns and that Steve Jobs and his team have done an amazing job of cultivating, and is one that unfortunately I can't see Google matching in the same way, assuming they even want to.

In the world of feature parity for any kind of product, what else is left to compete on? Style and brand.

[UPDATED] If We Meet, I Will Ask You...

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After blogging about a variety of topics, I find that they form the core nucleus of the things I care about before investing in a startup. Yes, I also care about the usual stuff like smart entrepreneurs, great idea, etc. But I think there are things that I've been focusing on assuming we get past the basic stuff.

So if I meet with you, you can expect discussions on:

1. What's your world domination plan (and more on why it's important to have one)? How can you avoid just becoming another small business which is not a reason for not existing, but does bring danger to us investors?

2. I'm most likely going to try to talk you out of being an entrepreneur.

3. Most startups I meet are working on me-too products, even if they don't think so. How can you not be about just developing a me-too product?

4. Are you planning on lasting two years? If you aren't and you need time and money to pivot, you won't be able to raise money in this climate because second chances are impossible to come by.

5. How are you going to make money? Please, no more projects that are just going to gain lots of users...

6. If I were to envision the The Ultimate Product (and Part 1.5), would what you're building be that product, or on the path to that product?

7. How are you going to gain customers - distribution is by far the number one problem facing internet startups today (see me-too post and my combining startup investing and distribution post).

8. [UPDATED: 2/4/11] How will you get to $100,000,000 in revenue per year?

9. [UPDATED: 6/14/11] Study past startups and competitors and learn from their mistakes and successes. Tell me how and why you're not going to let history's mistakes repeat themselves.

My hope is that not only you will have great answers to all these questions, but you will also internalize and truly believe in those answers yourself, and that your answers aren't just lip service. Hope to see you soon at a cafe near you!

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This page is an archive of entries from February 2010 listed from newest to oldest.

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