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Talking It Up: Launch Capital and Betaworks Voicecamp 2017

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"Alexa, turn on kitchen."

"Alexa, timer set 16 minutes."

It may seem like I'm talking to air, but I'm not; these are words I utter literally every day to my Amazon Echo in my kitchen. I've had my Echo since it first came out and I hopped onto its waitlist for purchase. When it first arrived, it was fun although I really didn't use its music function all that much. However, things really started to shine when new functionality appeared and when I hooked up my Insteon connected light switches to it.

Now it's my constant companion in the kitchen and helps me optimize my cooking time. As I race through food prep, I tell it to turn on the kitchen lights. As I dump vegetables into my steamer, I tell it to set a timer for when they will be done. I also set other timers fluidly as I prep other parts of my meal and in the course of moving throughout the kitchen, Alexa is helping me keep track of when food has finished cooking. The handsfree nature of voice allows me to not waste time taking a few steps to the light switch or fiddle with a digital timer on setting the time and setting it running.

It's this real life experience of what a voice interface can bring that gets me really pumped about voice.

We've all seen other voice applications come and go or just not really gain traction. However, with the advent of true voice devices that listen for your command like the Amazon Echo or Google Home (versus Apple's Siri which requires a button push to activate), the possibilities begin to multiply. I remember my first exposure to voice on Star Trek with its talking computer. But that was in the 1970s and it took until now to bring some of that vision to reality. Better systems and computers to recognize and process voice make real time voice interpretation possible now. However, now comes the really interesting part - how do you deal with the user interface challenges and then build a business on top of that?

As a UX guy, I find that there is inherent elegance in having less physical controls. Like me moving around in the kitchen, Amazon Alexa is a great helper without the need for my hands to *do* anything. And therein lies the challenge of voice interfaces - how can you interpret what I want it to do without me speaking endless complex sentences or memorizing specialized vocabulary? I've been impressed so far with Amazon Echo's capabilities so far, but also wishing for more. In contrast, text-based interfaces via typing have been out there for a while now; however, the interpretation of written language there is less interesting to me than the interpretation of spoken language simply because you need hands to write words. A handsfree interface is much harder to implement properly - the service that does will have a clear advantage over others.

Once you solve the UX challenge, then comes the challenge of building a real business on top of it. Amazon and Google can sell hardware and charge for being on their platforms, but everyone else needs to charge somebody who wants their service bad enough that they will pay for it. Hence, while voice interfaces are inherently context sensitive (ie. you can't be dictating every email in an open office setting), I believe building a real business is even more context sensitive. Startups will need to find those compelling use cases where voice beats other types of interfaces AND a real business exists, and some of those are known and some are still waiting to be imagined. It's why we are excited to be part of Volara.ai, one of the few voice startups we have seen with some great early traction in the hotel space.

And we are looking for more, which is why we are delighted to be part of Betaworks Voicecamp, joining as co-investors into each startup of the batch. Betaworks has a great reputation for ferreting out the unique and untapped in startups; we very much look forward to seeing what develops with Voicecamp 2017. If you're a startup working on voice based conversational interfaces, be sure to apply - the deadline for applications is coming up fast on February 28, 2017!

Help with Board Meetings

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Recently an entrepeneur asked me about holding board meetings, and what kinds of things are discussed at them. I sent him these most excellent posts:

Running More Effective Board Meetings at Startups by Mark Suster

Here are some favorites from Brad Feld's blog:

Ideal Board Meetings

Board of Directors: The Agenda

Great Board Meetings

Board Meetings - Do The Formal Stuff First

Sample Board Meeting Minutes

I also had this outline of a typical board meeting. Here are some of the usual topics discussed:

  1. Administrative and Legal (Chairman & Atty)
    1. Status of Prior Minutes.
    2. Status of Prior Consents.
  2. Financials - Review & Update (CFO/CEO)

  3. Operations Update (CEO)

  4. Sales Update (CEO)

  5. Marketing Update (CEO)

  6. Staffing Update (CEO)

  7. [Status of any Company Disputes] (CEO, VP, Atty)

  8. Compensation Considerations (CEO, CFO)

  9. Strategic/Business Alliance and General Business Update (CEO)

  10. Calendar

    1. Board and Committee Calendar Review.
    2. Annual Shareholders Meeting.

  11. Other Business (All)

  12. Adjourn

Can Recruiters Work With Startups?

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Last week I had lunch with a prominent recruiter who was interested in working with startups. We had a great conversation about ideas and the issues, and at the end I told him I would poll my startups to see if there was any way to structure a relationship that would be palatable for the startup and make sense business-wise for the recruiter.

In polling my startups, I was hoping to find a solution to help combat the problem that people are always having problems hiring and that finding great people was near impossible. Certainly hiring a good recruiter to expand one's networks would be a good thing, if it could be made workable.

The email I sent out was:

hey all,

today i had lunch with a recruiter who helps VCs find personnel for their startups. we talked about recruiting for early stage and how hard it was, but also that it was nearly impossible for them to justify engaging traditional recruiters due to cost mostly, but many also don't deliver very well either. this guy has worked with some top VC firms in the valley so i somewhat believe him that his network of personnel to reach is pretty good, probably better than most recruiting firms.

but this recruiter wanted to help out early stagers and wanted to find a way to do it that made sense. to that end, i told him i would throw out a quick survey to my cos and contacts to see if something might work out.

one issue is paying them for their services. he was willing to back off that for early stagers, because he had normal contracts with bigger companies who could pay the bills but he had time to help out startups and also wanted to do that personally.

if anyone has worked with recruiters before, that can be anywhere from 10% to 33% the hired person's salary which is too much for early stagers.

we talked about accepting equity potentially but the risk of taking early stage startup stock or options is pretty high and most will fail, leaving him with nothing for his efforts if that is the only payment for his services.

so my question to you would be, what would you be willing to pay for their services? maybe something like 5% salary + 5000 options perhaps? or flat fee $5000 + 5000 options? would love to hear your honest thoughts, noting that you won't get their services for free but you must pay something either in equity and/or cash...

thanks in advance!

I have an email list of all my contacts at the startups. There are 62 people on the list, representing 25+ startups and companies.

Of those 62 people, 9 people responded. Here were the results:

1 would not pay cash at all
3 would never pay options for recruiting.
1 suggest deferring payment either until financial position better or next funding round.
2 would pay up to $5K, preferably less.
1 would pay 5% of salary but not more.
1 would pay options if there were future services/longer relationship
1 would pay options with no expectation of future services/longer relationship
1 would be happy to pay the normal recruiting rate 10-33% of salary

All are concerned that recruiters would deliver good candidates at all. Their experience with many recruiting firms was that they were not able to deliver great candidates. Also, there could be conflict of interest in that if recruiter is compensated on % of salary, a recruiter may negotiate for higher salaries. Or they just find you any candidate whether they are good or not, just to get paid.

2 suggested - was there a way to reward recruiters more for a good hire (ie. lasts longer than a year, and performing well) and rewarded little for a poor hire (ie. let go within a year).

One person suggested, could recruiter fees be paid by VC firms as part of their services or use of funds?

In looking at the responses, the consistent message was that startups were very cash strapped and did not want to, or could not, pay any cash at all. Or they did not want to pay until later. Everyone had a different opinion on whether or not they were willing to pay options and what paying options meant.

Looking at it from the recruiter side, there are definitely issues with working with startups:

1. For startups, many times it's low salary and high equity for the new hire. If a recruiter is getting 10-33% of hiring salary, then how does recruiter make money if the new hire salary is much lower than what they would get at a traditional company?

2. Startup equity is notoriously risky. If a recruiter only takes equity for payment, much of that payment will be forfeit since most early stage startups fail.

3. Recruiting is a cash based business like other consulting services. You need upfront cash to survive but startups are reluctant to give you any cash at all.

Given what I found out here, I am not sure that the current recruiter model can work. Some other comments and options I have found interesting that are out there:

1. Incubators and VCs already have recruiters on staff. Some of them are contractors paid through venture funds but some of them are actually on staff so they are not compensated like external, independent contractors.

2. StartupDigest is an email digest focused on startups, but there is a recruiting model hidden inside. It's an application driven, VIP only members list of both startups and key individuals who get matched to each other.

3. Codeeval allows those seeking to hire engineers to post coding challenges and a place to upload solutions. You set potential coding hires to your section of the site and they solve problems that you create. They write code and upload the code to the server where it runs the code and publishes the output and the code for the hiring manager to evaluate.

4. Ovia HR is video based recruiting, but in an asynchronous manner. You upload videos of the hiring manager/recruiter asking interview questions and interviewees come and answer via video. Actual interview situations are mimicked because there is a time limit to answering a question so you don't get time to prepare answers; you have to answer on the fly, just like in a real interview.

Still, in today's world, hiring is a big problem for startups and likely to remain that way for a long time. The explosion of startups means that there are too many choices for prospective new hires to join. Using new technology to help find candidates is nice, but there is no substitute for the power of getting out there and networking yourself. Ultimately, people join your startup not only for the cool idea and opportunity, but for the opportunity to work with smart people whom they respect and can learn from.

Yesterday I had a conversation with my managing director about my investing pace. It had seemed to both of us separately that I had a lot going on, and that I was potentially going to invest in what seemed to be a large amount of startups in a short amount of time. After all, this is my 11th week at Launch Capital - barely 3 months in!

While my pace was blistering by some measures, after some reflection it wasn't so bad after all. Some thoughts on this pace:

1. We looked at the other directors at LC and noted that for some reason, deals seem to come in waves and bursts. Sometimes the bursts can be planned for, like after a Ycombinator or Techstars Demo Day. Other waves come with no warning whatsoever. Or some deals drag on and then run into other more faster moving, hot deals in the future.

And there are long periods of calm where there seems to be no attractive deals for a while. It's in these times I take a breather, but also wonder if I'm doing something wrong that deals have dried up.

2. We talked about adjusting the pace. This could be raising our bar, although I was already only looking for startups with very high potential (see The $100,000,000 Question) and not those whose trajectory was more obviously a smaller exit. We could shift our bar, like being really focused only on startups I had personal interest in. However, we noted that we didn't want to potentially overlook an opportunity simply because it wasn't in some area of determined focus.

3. I also noted that although we had set a goal of investing in 7-10 seed startups this year, the calendar year was problematic to review pace. This is because the second half of the year has 3 dead months in it for fund raising: August - when the investment community all go on vacation for the summer; November/December - when we all dive into the three holiday whammy starting with Thanksgiving, and then it's Hanukkah and Christmas.

Thus, in any given calendar year, there are only really 9 months where rounds have the best chance to be closed. Even though in reality not all investors go on vacation, the problem is that many venture funds operate via partnerships. Often the entire partnership needs to agree on an investment before it takes place; all it can take is enough of the partnership to be on vacation and that can mean that a round can't close with that fund. So investment pace can be raised during those 9 active months as those startups who happen to be fund raising then have a much higher probability of closing their rounds.

4. As mentioned previously, some funding rounds can drag on for months before they close. Nobody ever plans on that, but sometimes it takes time to round up investors to believe in a startup enough to commit. Given my experience, it can be deceptive that I am working on many startups at once because their actual funding rounds may not close until months later, as the entrepreneur tries to find a lead somewhere.

While I talk about my own investment pacing and the environmental factors that affect it, I think this has important implications for startups and the timing of their fund raising.

In the last few years of angel investing, I've observed that startups who start fund raising in the summer are at higher risk to not closing their rounds before the end of the year, due to the 3 down months in the latter part of each year. Starting fund raising in September is even worse because you really have to finalize everything in 2 months; if you start drifting into November, then people begin go on vacation and it's harder to find your investors (and their money). Inevitably, many of these startups drift into January and finally are able to close their rounds.

This is not so true for startups who close rounds with all angels. Individual investors are not beholden to a partnership and can make decisions in more flexible timeframes.

The 3 down months in the latter part of the year also affect those who are looking for their next rounds. Remember that fund raising in the second half of the year really only means you have 3 months to work in - It can be particularly problematic if your burn rate and plan show you running out of money in November or December!

Remember that if you need to raise money, you need to do so before your money runs out. Sometimes people say that the rule of thumb is to start looking for your next round 4-6 months before your current funds run out. However, nobody can predict how long your fund raise will take. Depending on investor interest and your progress, you may raise in a few weeks; or you may need a few more months in if interest is low or your progress isn't substantial. In tough economic times you may find that it takes an extraordinarily long time to raise a next round; you may even need to go asking for a bridge to carry you through what inevitably is the new year when fund raising probability goes up again.

My advice to startups is - no matter what, try to plan for your funds to run to the middle of the calendar year, which has you raising your next round in January. If you need to raise money in the second half of the year, you're putting your venture at much higher risk than otherwise.

Which Subscription/Billing Systems Are the Best?

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The other week, a startup asked me for recommendations on billing/subscription platforms as their startup involved selling a subscription service. I looked on Quora but didn't find any good recommendations there (see: What are some recommended turn-key billing systems for online subscription services? and What tools for billing and subscriptions are good for integrating with your web application?).

I threw a query out to my contacts at 500startups and also on Twitter.

Seems like the winners are Recurly.com, Chargify, and Braintree Payments.

Many thanks to @webwright for his link to Accepting Payments on the Real Time Web.

The actual results of my query are below.

From the 500startups crew, the expectation would be that Recurly would be the platform of choice, given that 500startups has invested in them. Here were the results, out of 8 responses:

Recurly.com - positive votes: 5

positive quotes:

"Recurly is cool yeah"

"Recurly is awesome."

"They're super supportive and easy to use."

Chargify - positive votes: 2

Quotes:

"customer service being super quick"

"From a development POV they were super easy to implement and it's been quite easy to add things as they've released new features and different ways of doing things."

Paypal - negative votes: 1

Quotes:

"I've never worked with any of the others except for Paypal and would never go back to using them for recurring."

CheddarGetter - positive votes: 1

Braintree - positive votes: 3

Quotes:

"They do 1-time and subscription billing, and support a lot of the standard options like free trials, add ons -- and the have a potentially portable CC vault, etc."

"We used Braintree for cc transactions, which recurly can work on top of, and the advice we got from other friends was to avoid building your own subscription system for as long as possible."

"Recurly using braintree on the back end is fantastic. Also allows you to grow because you can eventually use braintree for subscriptions alone by writing a bit more code."

Looking at other discussions, I found some more comments about payment services, especially Zuora which seems to be expensive and also very hard to setup.

From my Twitter followers, I got 14 responses, 1 RT, and 2 replies from marketing folks who follow Twitter for these requests. It's nice to see marketing folks watching the real time web for potential leads, but honestly I just don't know how I can trust a recommendation from such biased sources. I think the other sources are at least more dependable in that regard.

Foxy Cart - votes: 1

Zuora - votes: 1

eVapt - votes: 1

Vindicia - two people who worked for Vindicia replied.

Cybersource - votes: 1

Sagepay - votes: 1

Recurly.com - votes: 5

CheddarGetter - votes: 1

Braintree - votes: 1

Chargify - votes: 2

The tweets follow in this image:

Talk About the Problem, Not Just the Solution

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When I meet with entrepreneurs, the conversation often goes like this:

We start by talking about the startup idea or problem they are trying to solve.  We spend about a minute on that and then we dive into a product demo.  He starts showing me the product, all the cool widgets, flash effects and interactivity and then I raise my hand and call a (hopefully polite) halt.  I pull him back to the problem definition and often have to drag him back to talking about it because he often wants to go back to showing me how cool the website or product he built is.

Here is the problem with this.  I have not bought into the problem statement yet, but the entrepreneur assumes I have.  And it very much seems like he wants to sell me on the beauty of the execution alone, which I may agree looks really elegant and well done.  However, creating a startup is not just about building the product, it's about why we're doing it in the first place. If I don't agree with that yet, then it doesn't matter how we execute or what we're building.

To me, building the product is the most straightforward (out of a potentially chaotic customer discovery process) part of a startup; building the right problem statement is much more important and difficult.  After all, how do you know that you're building the product to solve the right problem?

By right problem, I mean all those things that are so important to contributing to the success of the startup: big enough market, do users have a big enough want or need, can you monetize, are there competitiors or none, etc. etc.  If, in that first few minutes of problem definition, I don't believe your problem statement is worth building for, then it's pointless to keep showing me how great your product is executed.

After I call a halt to the product demo and I explain why, often the entrepreneur looks at me incredulously and tells me you're the first investor to want to stop looking at the product.  This is frightening to me; are there a crew of investors out there who care more about how cool the product is than why they are building the product in the first place?

My favorite pitches tend to follow a form which I learned in high school about writing compositions.  

With the introductory paragraph, you start broad and then work down to your problem statement which generally is the last sentence in the introduction.  Then the next 3 or 4 paragraphs offer proof of your problem statement.  The last paragraph is the concluding paragraph, which summarizes the key points in defense of your problem statement and usually tries to end with a broader concept.

In a pitch, this starts with a lot of time talking about the problem statement, why we're doing this and why it's a great idea to be working on this venture. Once we establish this, we can talk about what they've accomplished from a product standpoint.  After we go through that, we go back to the company and widen the discussion to what they're going to do in the future, and talking about where this company can go from here (and hopefully see the opportunity to grow huge).

These entrepreneurs' pitches look more like this:

We start broad for about a minute and then we narrow quickly into a deep dive into the product itself.  At the end of the discussion, assuming I haven't stopped them first, they just ask me how much money I want to contribute and that's that.

No discussion about the future, no talk about company vision, no assurance that there is a real big opportunity here; just a cool product and someone who wants money to develop it further.

Here's are the issues:

1. Talking about vision and potential future of the company is important.  It gives you a defining vehicle in which to drive the company forward.  It provides direction internally, and external understanding about what your company is all about.  If you don't have this, you could be really stuck at some point if your current product isn't getting traction and you won't have some sort of map to follow; you'll be forced to define one on the fly and you might not be able to.

2. If you never talk about the vision, I will never know if you will ever get one.  I have found some people don't ever get the vision. They can't ever get their heads out of what they're doing at that moment. They somehow are missing the strategic gene, and only have the tactical - so they are great sergeants but not generals. But it's the generals that will build the Googles, not sergeants who can't advance beyond their rank. That doesn't mean that sergeants aren't important; it's just a problem if they are trying to build a startup which requires someone to think like a general to know if they are working on the right problem.

3. If we never talk about the vision, then I won't know if you're aiming for the right opportunity. If all I see is an incremental improvement on what's out there, or something small like a feature (how ever nifty it is), it's just not going to get me excited because I need to bet on the next big thing not just another little thing.

4. Here's another way to look at it. The world contains a whole bunch of problems that you could work on, and a whole bunch of solutions:

So you lightly define a problem, and then you start building and coding because that's what you're good at and you want to get cranking. So you crank.

Now, starting with this solution, you're aiming for some problem:

But your problem definition isn't complete. It's nebulous. The problem with this is, if you had a great problem definition, you might actually be spending time on the wrong solution. If you started with a great problem definition, you might actually end up with a better solution than the one you worked on now:

This is because the set of possible solutions can be enormous and unless you define the problem well, you might be wasting time building something which may not be the optimal solution from the right problem! So why not show me that you understand and have defined the problem fully, and then show me that you're working towards an optimal solution to this problem, versus me feeling unsure that you're working for the optimal solution to some problem which I'm not sure yet whether you should be working on!

So are we headed for a small business, or the next Google? Talking about your product in detail is nice and important, but I want to hear about why you're building it in the first place as much as how much you want to demo what you've built.

Warm Gun: Alternative Impressions

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I just got back from a whole day of hanging out at the Warm Gun: Designing Happiness Conference put on by Dave McClure and his crew at 500startups. Once again, it was a stellar event, gathering designers and developers and the occasional investor (like me, although I guess I'm also a designer and developer with my CS degree). I thought I would post about the event, but post differently than posting just the notes or what was good and not so good. Instead, I thought I'd post some alternative impressions that I got while at the event which I thought were interesting.

I was shopping for a lot of books!

Two presenters gave some suggestions for reading, Geoffrey Miller and Jennifer Aaker. Through them I instantly bought on Amazon:

We Feel Fine: An Almanac of Human Emotion by Sep Kamvar and Jonathan Harris
resonate: Present Visual Stories that Transform Audiences by Nancy Duarte
The Mating Mind: How Sexual Choice Shaped the Evolution of Human Nature by Geoffrey Miller
Spent: Sex, Evolution, and Consumer Behavior by Geoffrey Miller

I am glad that some of the presenters did give favorite texts because it is hard to take notes in a conference setting; they talk fairly rapidly and move through slides so quick that it is hard to take the important points down. Some of them thankfully will either post their presentations on Slideshare or email them to me personally which is pretty cool.

Ex-Yahoo! designers, the next generation

I met a few designers who had been doing design at Yahoo! and left relatively recently. Most of them got there after I had left, with one I saw who was there when I was there and was still had not left!

But seeing them present and hearing about the work they did for some reason gave me a lump in my throat. I spent 9 years at Yahoo! as VP of User Experience and Design and we did so much while I was there. Now there was the new generation who designed for Yahoo in not only a new regime but new internet environment of high bandwidth, HTML4 going on 5, advanced browser technologies, faster computers, iPhone and iPads - it was a much different environment than the one I had designed Yahoo! sites for way back when. For some reason I felt nostalgic for the old days, but was impressed by their skills and knowledge and also felt disconnected with the new generation.

It was good to say hi and talk about the Yahoo!s that we respectively knew and where we were going from there.

"Twitter intros" were everywhere

What an amazing thing Twitter does - I walk into Warm Gun and immediately I am meeting and talking to people as if they know me because they tell me they have been following me on Twitter for a while now - I do the same to them if I recognize their names by their Twitter handles.

It certainly breaks the ice and for many, we seem to already know each other before meeting in person!

On the other hand, it is vaguely stalker like - should I be afraid...?

"Those who do not remember history are destined to repeat it."

Sitting through the last presentation of the developer track, I was listening to Tom Chi, former Yahoo! search designer and now at Google. He was giving a quick talk on the intricacies of designing a search user experience.

A lot of the things he talked about were things we did when I was still at Yahoo (although afterwards, we got into a great discussion on all the cool things they were doing that weren't mentioned in the presentation due to time constraints). Still, I could not recall where anyone had recorded information about search UX much. One of my designers, Christina Wodtke (now at MySpace) wrote about search UX design in her book, Information Architecture: Blueprints for the Web (2nd Edition). On Boxes and Arrows, there are a few stories about search UX:

Advancing Advanced Search
Search Behavior Patterns
Long Tails and Short Queries (which references an excellent research article by Amanda Spink, From E-Sex to E-Commerce)

But if you didn't know where to look, it would be potentially really hard to find this information. And the new generation of designers might not even try to find it before trying to design a search experience on their sites. What a shame that would be: they would most likely make the same mistakes that others have made before them. IF ONLY they had the knowledge of others before them!

Yet I find that much of the deep knowledge tends to be proprietary or trapped in the minds of individuals who worked on the problems and then went elsewhere, or left to rot on departing employees' hard drives.

At Yahoo! we had a website where we made all the user researchers upload their usability reports into one place so that we could always go back and see what others had done before them. Now that I've been gone for 6 years, who knows if that repository still exists. Certainly the individuals have been scattered to the four winds.

Perhaps this is something that someone on the internet would do, which is to create a repository of design knowledge. Perhaps we could somehow get donations of historical proprietary data. Perhaps we could save presentations from all the talks both formal and informal (like on Slideshare). Maybe it could be a Design Wikipedia, or something like Television Tropes & Idioms where every formula for a TV show has been recorded and basically reused and recombined for new shows.

Otherwise, we're going to be relegated to finding these individuals and making give the same presentation over and over again for each new generation of designers...maybe that's yet another great reason to hold Warm Gun next year!

What Startups Need Most Of Today

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What startups don't need more of:

1. Funding - if you have a great idea and team, you should be able to find money.

2. Smart people - Universities like MIT, Stanford, UC Berkeley and the like, are churning out 1000s of smart people each year. You may be smart, but you're a dime a dozen.

3. Great ideas - Generally, if you have a great idea, you can get funding. You can even get funding for a mediocre idea if someone likes you. Given the explosion of startups, there doesn't seem to be a lack for ideas.

4. Effort and Sweat - There is no lack of motivation to build either a company or a product. Given defined problems, there are known paths to building great usable, useful, and desirable products as long as you put in the time.

What startups need most of today are:

1. Experience - most entrepreneurs are young and haven't worked much in industry. They need business savviness and experience either on their team or mentors who are willing to put in the time to handhold inexperienced entrepreneurs. Of course, entrepreneurs need to be open, willing to hear feedback, and to learn from it.

2. Contacts - Following on 1., if you haven't been in industry long, then you haven't had time to network properly. Getting the proper introductions can make or break a new business.

3. Monetization - Every startup needs money, but how to get it? Some of this related to experienced persons being involved and creating a business model; some of it relates to working with a platform to accelerate monetization.

4. Distribution/Customers - Whether you're a consumer or B2B startup, you need customers. For consumer startups, how do you build a customer base when users are bombarded by invites to "great and new" services and everyone's attention is drawn in a 100 different ways? For B2B startups, how do you find the right people to talk to in a business and get them to accelerate their process to buy your serivce?

5. Hiring - There are too many startups and not enough people to work in them. This is because every entrepreneurial person wants to be their own founder and are not OK with a small percentage of another company. The fact that not every smart person that is out there is fit for a startup means the available pool of hires drops dramatically.

The persons, platform, and/or organization which solves these problems for entrepreneurs is going to make a killing...!

Giving UX and Design Advice

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A buddy of mine was helping some friends setup an incubator and he asked me whether or not they should have some UX/design support that is resident in the incubator.

It's an interesting proposition. According to Dave McClure:

Addictive User Experience (aka Design) & Scalable Distribution Methods (aka Marketing) are the most critical for success in consumer internet startups, not pure Engineering talent.
(from Startups & VCs: Learn How to Design, Market, & Eat Your Own Consumer Internet Dogfood)

I tend to agree. Most startups are started by business people or engineers. It is very rare to find startups started by designers; relative to the other disciplines, it's like finding a needle in a haystack. So most entrepreneur teams really have no formal training in the area of user experience and any that do well are either lucky or naturally talented. But yet at early stage, the quality of the product experience matters so much more than at any other time and is so critical to the early traction a startup can get. Also, designers are among the hardest of disciplines to hire for; there simply aren't enough to go around, especially compared to the number of engineers universities crank out each year. Thus it's natural that an incubator, which provides a lot of critical resources to its incubated businesses, would want to provide design as one of those resources.

I should also say that we've been really bastardizing the use of the term "designer". There are many sub-disciplines within the category of design: visual design, graphic design, interaction design, user researchers, usability testing professionals. Saying that someone should get a talented designer is not a cure-all for UX success. You must have some basic level of understanding and skill in a few of these areas in order to create a great user experience.

For the last 4 years, I've been advising startups partially in the area of UX and design. I think there are parallels in what I do and what an incubator might provide. Both an incubator and I have a portfolio of companies to provide design support for; but yet how to provide a level of support for so many customers at one time? Is it actual design detail work or is it just guidance? Certainly I have thought a lot about providing UX and design help to all the startups in my portfolio, and in what form that help looks like. However, the nature of providing help in this form comes with interesting dynamics.

All About Influencing

Everything is influenced based, which means that in no way can I force someone to come to my viewpoint. I have to convince them that my way is better through belief in my past experiences and/or through some sort of research, or through the persuasiveness of my reasoning. These individuals do not report to me; nor in reality do they even have to listen to me. I do not hold their destinies in my hands so I cannot have that level of control over whether they listen to me or act on my advice.

In the beginning, this was a source of mild frustration because I would tell my startups that something was wrong or could be better in that way, but yet they would seem to not do what I just told them to do. I realized that early on that my advice was just that; it was advice that someone would just add to their knowledge base and they would act on it or not.

Not Letting Grinfucks Get to You

I also have to let go of the fact that they may not listen to me at all, or totally disagree with me and discount whatever I advise. Sometimes they would even agree with what I said and then go back to doing whatever it was they were doing later (I believe this is what Mark Suster calls the "grinfuck".). However, I can't let this get to me or else immense frustration will set in.

However, as much as we see someone else is failing (by our own standards), I have to admit that there is always the probability that I am not right. If there is anything I've learned about product design is that there is huge variability of success amongst users. I think if we thought hard enough, even the most crappiest designed products have had huge success in the world (ie. Windows). Or we underestimate users' tolerance for imperfect design; sometimes users put up with so much because the product satisfies some basic need very well. Then, when you consider what makes a startup successful, it throws even more variability into whether or not a perfect design is really required. For example, one metric for success is when a big company buys your startup for a lot of money; you may have a really imperfect product but yet we're successful because we sold our startup for a lot of money and made a decent return.

To me, this is all a probability game. Too often we get caught up in black and white: "if you don't implement my design ideas, you're gonna fail." To me, it's about maximizing all chances of success, with UX and design being one of those all important details a startup works on. When you execute well across a number of fronts, that raises the probability of success. The more details you execute poorly or imperfectly, the less your probability of success. So I ask you, the intreprid entrepreneur, wouldn't you want to listen to some UX design advice to maximize your probability of success overall?

Gotta Keep an Endless Flow of Ideas Comin'

When teams don't like my initial ideas, I find I have to keep throwing ideas at them until something sticks. In some situations, I seem to have an endless supplies of things to try. In others, I hit a wall and run out of ideas very quickly. It's definitely frustrating to me when I run out of ideas, as I consider myself a pretty creative guy. But there is ultimately an end to ideas when they come from a single person, and from someone who doesn't live and breathe the startup day in and day out.

Advising Generally Means You're Not Doing the Work

However, advising is generally not actually doing the work. You're evaluating, giving your opinion, suggesting changes, giving ideas and direction on what can work better. Rarely am I actually launching Photoshop or doing actual HTML.

I like advising. I like teaching and guiding others and it's a source of great satisfaction to me to help others succeed. I also like to see if my theories actually work or not, so now it's a challenge to see if my ideas are right or not. Second, advising allows me to cover a far wider set of customers than by doing the actual work. In order to do great work, you really have to focus on a project; multitasking can get you only so far and I'm sure anyone who is in the contracting business will tell you the pitfalls of working on more than one project at a time. Quality of the work, thought leadership, and time management all become huge challenges when you're working on just one more extra thing.

The downside to advising is that I'm not doing the actual work. Advice can only communicate your ideas so far; words just cannot replace the actual design work being just done by you. To some, doing the work is far more satisfying than giving advice. Hey I know - I've been there. I've lost count of how many sites I've launched at Yahoo, or the immense enjoyment I feel when I'm part of team designing, building, and launching a product at Apple or through our contracts at frogdesign. You also don't learn as much unless you're doing the actual work; living and breathing the design allows you to be immersed in the users and their problems with your product. Hearing it secondhand just isn't the same.

I think for many designers, it's tough to just give advice. It is hard to let go of the immense personal satisfaction and learning of doing the actual work. I think this is partially why there aren't that many designers out there giving advice in some form or another. It's actually pretty cool to be doing the work and taking a product all the way through to launch.

One other important point about doing the work: it also maximizes the chance that your ideas will get implemented. Any ideas you may plant in someone are just thoughts; taking those thoughts to action requires firm belief by the listener in what you said, being able to internalize it, and then act on it. But if you are on the team doing the implementing, then you have the best chance of implementing the ideas into the product because you already believe in it and have internalized it, and recognize and can walk a path to realization of the idea.

Not Doing the Work Means Wider Coverage of Projects

One advantage to stepping back from the actual work is that you can cover a wider variety of projects simultaneously. I do not know of any designer who can handle more than two projects at the same time; most only work on one at a time before moving on. Spreading your brain across multiple projects really puts quality at risk. It is very difficult to do your best work when you're not focused on one thing.

However, if I'm giving just advice, I can do that across many more projects. Still, it is consistent with multitasking issues that if I don't get depth on a given project, that it's hard to give really detailed advice. So often I may spend more time on a single project and get to know it better and then I can give more depth in my advice. I do think my past Yahoo experience as been a great advantage here. At Yahoo we worked on a wide variety of projects and I am usually able to bring some depth to my advice without needing much time to get to know a project.

The Difference Between Design Advice and UX Advice

Just so I'm clear - I think there is a difference between "design" advice and "UX" advice. Definitely the two are related. Building a great user experience pretty much means you're employing great visual and interaction design, coupled with user research to reinforce and inform. However, I think there are differences as well. Mostly, I think that design is a subset of creating the entire user experience, which encompasses branding and its effects on a user's constant use of a product, tackling a certain market segment, and customer service, among other things.

When I give specific design advice, I tend to think of looking at the specific elements on an interface and commenting on the interaction or its aesthetics. I talk about placement of controls, and what is confusing and what is not. I talk about the flow across screens and whether or not that makes sense, or could be easier or not. Often this comes in the form of a design walkthrough with discussion after.

However, when I give UX advice, my comments go wider and I talk about the entire product experience. A conversation may start with "can I get help on my GUI?" but sometimes I see the problem is not with the GUI but it's with a broader issue of why the heck we're doing this in the first place. I start talking about who the customer is, and why they're targeting the customer. I also talk about getting a better product definition and problem statement.

Personally, I think it's not a good use of time if the problem statement is incorrect in the first place to dive into detail UI issues. Once you have refined the problem statement (aka iterate until you find the right product fit for a customer base and get a scalable business model - thanks, Steve Blank!), then we can start talking about whether the UI you have created is appropriate for that or not. Then we can take an orderly approach to crafting a superior UI for a problem that users desire a solution to and hopefully make money off of.

Finding the Right People

OK I just expounded on my experiences in giving design and UX advice. Why? It's important to understand the motivations and experiences of a person who loves giving design and UX advice so that if your goal is to find similar support, you're going to have to find a person with similar motivations and experiences.

I have not met many people who are happy giving design advice only. Most designers I have met want to do the work and derive great enjoyment from the work. At one time, I too loved doing the work; however, the complexities of life forced me to create a situation where I could still contribute and grow in my experiences but not mean that I am on critical path for any particular project. (Someday, I would be happy to talk about exactly what complexities I mean here, but just not in my blog but live over a beer ;-) ) Giving advice rather doing the work meant that I could still be part of the process as well as be a part of a greater number of projects, but not do the actual work because my life isn't structured to deliver actual work well.

So if you want design and UX advice, you're going to have to find someone who is OK with not doing the work and hopefully loves doing this.

I started this post by talking about helping a friend out regarding design support in incubators and then focused on the individual giving advice, in order to understand what kind of person might be good in such a role and what experience they might need. Watch for my next post on my thoughts on design as a central resource in incubators.

OK I'm annoyed.

All around the startup circles I hear about how startups need designers and how having a talented designer is going to solve their product UX problems.

This is a problem.

That's because getting a talented "designer" isn't necessarily going to fix your UX problems. There are many problems with this idea:

First, a product user experience is much broader than design alone. There are many elements that create a great experience for users with your product. The front line is held by the GUI where a designer usually plies his skills. But there is also product stability and quality, pricing, customer support, branding and marketing - you get the idea. Sometimes your product experience's problem is not design by something else.

Second, there are many talented designers who are really bad at crafting a great user experience. In my experiences at hiring designers at Yahoo, I have found that some designers, while extremely talented in the areas they are skilled in, were really bad at creating a great user experience! This is because they do not have the open sensitivity to what others need in the product, cannot escape designing for themselves, or simply lacked training in creating a great UX. We have successfully trained some people to follow traditional UX design processes and thus made them into great UX people. However, not everyone is good at UX; they just lack some innate sensitivity to what makes a product useful, usable, and desirable all at the same time.

Having said the previous, there are many great user experience people who have no traditional design training whatsoever. Having one of these lead a product team may be all you need to take a mediocre or bad UX and create a great one. Typically we call these folks great product people and they can come from many different disciplines.

Third, people still use the word "designer" to mean a wide variety of skill sets and occupations. These are:

Visual Designer - someone who is great at aesthetics and "styling", and creating art. They are masters at creating a visual style for your product.

Interaction Designer - someone who is great at creating great interactions with the product, making it easily usable. They are great at making interfaces understandable and quickly learnable.

User Researcher/Usability Engineer - someone who excels at researching users and their needs, watching and recording their reactions to products both the good and the bad. They gather data to inform the design and improve the product.

Each one of these skill areas is a full discipline in its own right. People go to school for 4 years, do graduate research in them, and then work solely in this area as a full career.

Thus saying you want a designer doesn't help me find the right person for you. We have to figure out what kind of designer you really need based on the problems you are trying to solve, or the holes in the skills you have.

By the way, every startup has headcount issues. So they want that guy who can do it all. Realistically, there are people who have skills in all those areas. But they are the most sought after folks on the market, and there are so few of them to go around. To wait for that perfect person to show up will mean that you are going to wait a long, long time.

Typically, in the past, we have put together a team of 2-3 of the various functional areas to work together on creating the UX. Finding people who are really good at any one of the skill areas is the easiest; finding someone with 2 or more of those skill areas grows quickly exponentially impossible in any reasonable timeframe.

As mentioned before, potentially it is more important to find people who are great product people: those who are talented at creating great user experiences need not be designers per se, although it is necessary to have design skills in order to do the actual work in creating it. Without those skills, a product person would have to work with others to do the detail work. Therefore, a great product person leading a team of people who may not be so good at UX (ie. designers, engineers, etc) can generate an awesome result.

However, there are a lot of people in the design field who are trained in designing great user experiences. Thus, great UX people tend to be those with a design background. But still, not all of them have to be designers.

All startups would agree that at early stage, getting the product experience right as soon as possible is probably more critical at this stage than any stage in the life cycle of a company. But let's get a little more educated and specific on what it means to create a great user experience, what design's role is in that process, and which design roles we need to create it.


Lately, I've encountered more B2B startups. I think it's a sign of the times, where B2B startups can provide some early revenue much sooner than for consumer startups who have to chase dollars out of elusive internet surfers.

However, I've noticed that there is no lack of frustration in the length of time it takes to close a B2B client. This is definitely due to the fact that many entrepreneurs are young and have not worked in big companies before, or certainly not in their current clients' organizations.

Having worked at IBM, Apple, and Yahoo!, I can tell you that big orgs have their peculiar quirks with respect to doing deals with service providers. Let me take you now into the mind of a big company person whom you're courting to buy your service...

Meet Mr. Big Company. He might be in any number of occupations, but let's talk about two types of Mr. Big Company: the IT guy and everyone else. Why do I separate IT guys? They have special anxieties about signing up with your service over and above anyone else in the org. More on that later.

Let's say Mr. BC (for Big Company) is not the IT guy and discovers your service. He loves what you're doing; he sees instant value in making his job easier, better, faster, stronger, whatever. But typically, he has no engineering at his beck and call. So he is forced to either sit frustrated or go outside the company to find help. But if he decides to try to implement you, here's what he's working with...

Based on where he sits in the management hierarchy, he has the ability to pre-approve up to a certain amount of expenses before having to get approval up the chain. Ideally, whatever your service costs is under that amount, or else he needs to go to his manager, and potentially his manager has to go to his manager, and so on and so on.

Mr. BC's department has a budget, and the budget is broken out into several categories of expenditures. Woe to he, if he did not ask for the money at the beginning of the quarter, or even potentially at the beginning of the year! If it can be fit into some category of his budget AND he has funds in that budgeting item, then he can potentially spend money for you.

Funny thing is, if he has a budget for something and he didn't spend it the last year, he may lose the ability to gain budget for it in the next accounting period AND even have a reduced ability to argue for it! So if you can find someone who has to spend his money or lose it, you're in luck!

If it's not in his budget, then he has to go through a potentially vigorous process of asking for more money. This can be an extremely time consuming process as he convinces his manager, and then they go and try to convince their manager, and then even potentially the finance person who oversees their department, or even the CFO if it's a small org.

The more levels of approval it takes, the higher the chance it will get killed. The more skilled the person asking for the money is, the higher the chance that it will succeed. All of this presupposes there is a bucket of money to pull from when they do get approval. Also, the more levels of approval it requires, the more time it takes. This is why it can take the better part of a year to get approval to do seemingly something small.

If Mr. BC is part of a matrix org which depends on other departments to cooperate, then he must also sell all the other department heads on implementing the service. If some marketing guy wants to implement some traffic driver onto the web pages of their website, then he must convince the web team to take some of their valuable time to implement the service. If the visual design of the service needs to be customized, then the design department and brand management may need to review it to make sure it is done to standards.

This will inevitably cause delays both in approval and in implementation.

Mr. BC is excited about your service, but he is also paranoid about you making him look bad. Thus, he will do some due diligence to ensure that you are reputable and that you won't screw him later on, and that you'll be worth all the time he put into fighting for budget and other parties' agreement to implement the service. At any moment, he feels like he doesn't trust you to do well, he'll bolt and not bother with you.

However, it can and will take time to build his trust. He may drag his feet to see how your service performs with other clients. It's no loss to him; he's not any worse for NOT implementing your service.

OK let's say he's a special class of Mr. BC called the IT guy. He's both the go-to guy and the guy people yell at when things go wrong. He's never fast enough to fix anything, and he gets blamed for everything that goes wrong. So after a couple months of this he says f**k this and he becomes ultraconservative simply for job preservation.

Along comes you and your awesome service. He may be the one who wants to implement your service, or worse he may be the guy whom SOMEONE ELSE wants to implement your awesome service. If he wants your service, he's at least like the other Mr. BCs and has to go through items 1 thru 4 above.

But if he's being asked by someone else to implement your service, then that raises the level of conservatism. Now if you fail, he gets to fail AND gets yelled at by a whole bunch of people.

So he takes his time in evaluating you and your awesome service, tapping into every little bit of your business and product, trying to find any small reason to say you guys suck and that his company shouldn't implement you. This means more delays, which just overall increases your frustration as your bank account runs lower, and increases the chance that it will just die through the approval process in the company.

If it dies, he's still OK; problem averted - he's covered his ass and doesn't have to take a chance on risking his career and his blood pressure on supporting and implementing you.

But IT guy isn't done with you after launching your awesome service; he's gotta watch you forever or at least until your contract ends. He gets to be stressed about you for the life of your relationship with the company. So he's not only doing his due diligence on you to ensure good service at launch, he's worried about you providing good service for years to come. Otherwise, it will fall to him to fix whatever mess you got him into by screwing up.

Hopefully by now you can see why the Mr. BC you're dealing with seems to be dragging his feet. It sucks and it is very, very rare that you encounter an org that moves differently.

How do you combat this?

First you must sell well. The basic benefits must be bought into and hopefully you're good at this or else your company is doomed anyways.

Second, you gotta go in with the attitude that you will do everything you can do not make your benefactor look bad. How this happens is by:

1. Creating a service that is bulletproof. It doesn't crash, and will work 24/7 for years, even after a nuclear bomb hits your building. Remember that if you become a key part of someone else's business, every second that you are down could mean that you are losing another company thousands, if not millions of dollars in revenue. (If you don't believe this, consider that whenever the Yahoo ad server went down even for a couple of hours, it meant huge swaths of revenue not recognized because ads were not delivered. It could affect quarterly earnings outlooks and incur the wrath of your best customers who may not come back!)

2. Delivering on what you promise and what the service promises. There are two things here. You, as the company rep, are make some assurances that your product is going to deliver to Mr. BC's expectations. He's going to buy into this based on his relationship and trust to YOU. Then it's up to the service itself to deliver to whatever expectations you set for it.

3. Providing great customer service, 24/7 if need be. If a problem happens at 3am, someone needs to get up and do whatever it takes to get the service up and running. You must answer emails and phone calls ASAP. Responsiveness on all fronts is key.

4. Building a reputation of trust, which can be through happy existing customers but also through your own personal handling of the relationship.

Third, you can also do other things like providing as much ammunition for Mr. BC to use within his org to get it approved as fast as possible. Help him sell it within his org! Case studies, stats, referrals, whatever info he needs - you should gather it and send it to him ASAP.

Doing all of the above and having a sensitivity towards the issues that Mr. BC faces within his org will result in better understanding of the issues and hopefully a speeding up of getting your B2B client to sign up for your awesome service as soon as possible.

Hiring and Succeeding in a Multidisciplinary World

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Decades before the coming of the Internet, we could confidently go to school, get a major, and then get a job in that discipline. I could get a BS in Marketing and find a marketing job at a great company, and know I had learned the basics of what I needed to know to start at a job and suceed from there.

Along comes the Internet which turns this all upside down. I see this everyday in the job postings that internet startups post. Some typical ones:

1. UX Designer - Someone that can do visual design, interaction design, usability testing, and also translate visual designs to HTML/CSS code or Flash.

Internally I cringe when I see this kind of post; when people ask for my help in finding this person, I tell them that they should either 1) prepare for a long wait, or 2) prepare to really be hiring four people. Why the long wait? Because it is almost impossible to find people who can do all 4, let alone even 2 of the job description. Visual designers are trained in visual aesthetics, a discipline that is decidedly non-technical and totally subjective in nature. Interaction designers are experts in structure and how users interact with products and interfaces, which has a relation to but does not need to include visual design. Usability testing requires knowledge and training in statistics and testing protocols, which are even more different than the basic skills required for visual and interaction designers. Argubly, usability testing professionals could require no design sensitivity whatsoever to perform their job well.

In years previous, universities have not adequately cross trained people on all the design disciplines. Certainly even peoples' brains aren't generally wired for creativity and technical disciplines together; you more often find a propensity towards one or the other but rarely for both.

2. Internet Marketing Expert - Someone who can do SEM, SEO, Word of Mouth blog marketing, brand management, marketing materials for sales, public relations.

Let's see, that just about covers the entire old discipline of marketing plus the new ones of SEM and SEO! Even CMOs can rarely say they've worked in each of the old marketing roles. If we split it into technical and non-technical, we find that SEM/SEO are on one side, and the remaining on the other side. Now we're requiring marketers, who aren't really technical and numbers people, to now engage with numbers and to be experts at it. If we add SEO into the mix, now they have to understand what drives search engine ranking and how to wrangle HTML to make it more search engine friendly.

Again, we mix multiple disciplines, with creative and technical angles, into one person who can do it all. Many more examples exist: SEM Engineer, Web Designer (HTML/CSS + Design), Flash Designer (which requires true programming skills to create Actionscript) - the list goes on.

So why do we have this problem now?

In years past, we would go to college and get a degree and be able to find a job. If we had some area of expertise, like in consumer electronics or fashion, then it would make it easier to find a job in that industry. But crosstraining wasn't required; corporations would hire people good for a task and there were enough headcount to do so.

Along comes the Internet which screws all of this up. So many changes:

1. Marketing becomes measurable! Now marketing isn't just about getting awareness out there or subcontracting that out to advertising agencies. You could actually setup technology to get you response information on your marketing efforts. Optimization becomes possible on cost, targeting, and effort. Now you can compute the ROI of a campaign and know which campaigns gave you the most bang for the buck. Given the data of viewers of a campaign, you could target only those customers you wanted exactly (more or less) and be much more exact than saying "approximately 35% of the people who pass this billboard on a given day is a woman". Effort could then be optimized to those channels and programs to maximize ROI with the least amount of effort. Being a marketing quant is now a requirement or else people don't like you for the fact that you can't judge the effectiveness of your own campaigns.

2. There is still confusion on where the new roles lie. Even though there is an M for marketing in SEM, does it belong in marketing or is it more a technical function? Marketing departments now require engineering sub-departments to help them function! What about SEO? That has a marketing application, which is to help drive users to a site through search ranking, but it is a highly technical endeavor, and marketing people don't have access to a site's code to alter it. However, traditional engineers aren't even sure how to perform good SEO. So does it belong in engineering or marketing?

There is even confusion amongst design. In many companies, site design reports to marketing. But designers need to work closely with the product teams in order to be effective. And some design roles require even working closely with engineers to implement design. So should design be in the product organization? The engineering organization? Back to marketing? Even usability testing professionals have a heavy research bent; should that be part of the corporate marketing research group or product group?

Dependent on where the multidisciplinary folks end up, the roles they play and how well they play them are heavily influenced by the orgs in which they sit.

3. Startup fever rises, and everyone needs to be cheap and hire the least amount of folks. So they always look for that one guy to do everything design, or all marketing. Add to that the fact that many entrepreneurs are young and are encountering multidisciplinary roles for the first time, that they do not know that there are multiple areas of expertise that encompass some of these single title occupations.

Even experienced entrepreneurs have to stay cheap, and still try to find that one guy who can help do it all.

4. There is a lack of understanding of these multidisciplinary roles. I find that for design, people want someone to just take care of it all but I end up explaining to them that each part of the design requires different sensitivities and skills and that you can spend 4 years of college and 2 years of grad school becoming an expert in only of the areas, without ever touching the other areas. Even all those disciplines that are lumped under the generic term "internet marketing", they touch on so many other areas and are sometimes even done better by those who have trained first in another discipline, like engineering.

Yes I've been harping on marketing and design, but this also applies to many other disciplines:

Customer Service - traditional customer service department, or marketing communications, or feedback for product team, or customer service via social media?

Engineering - "I want a database engineer that can also do front end engineering..."

Sales - "I want a sales guy who can also do business development, so selling online advertising and also calling on B2B customers..."

...and the list goes on....

The fact of the matter is, for Internet companies, it is almost a must that you be conversant in more than one discipline in order to be successful. Consider two design folks that I know, Irene Au (@ireneau), Director of Google User Experience, and Jason Putorti (@novaurora), formerly of Mint.com and now a Designer in Residence at Bessemer Venture Partners.

Both of them are accomplished designers. Yet both of them have engineering degrees and later got into design. In watching both of them, they were successful because they were able to bridge the gap between design and engineering and create success by melding the two on a variety of fronts, from implementation, to technical understanding, to being able to integrate design and engineering, and being able to simply communicate better with their engineering peers.

Contrast that with some designers on both my old team at Yahoo and in Irene's team at Google. We both have seen designers who were very talented in their own right but simply could not either survive working on internet projects and/or interact successfully with their peers in engineering and product management. Chiefly we saw this happen to folks that were not able to acquire enough knowledge of other disciplines to be successful.

We can say the Internet has disrupted many old traditional businesses and business models, but I think that the Internet has also disrupted traditional occupations. Companies and their managers need to realize the difficulties of finding multidisciplinary folks and balance that with finding someone with fewer disciplines or doing more internal training to take talented people and adding to their skills. Universities hopefully are adjusting their curricula to reflect that you can't just teach disciplines the old way; you need to teach them all those new ways that today's working world requires and demands from its workforce. Workers today should also go out and cross train themselves in multiple related areas, whether it's on the job or through secondary or self education. Otherwise, you'll quickly find yourselves out of the job and unable to find a new one...

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.

SMASH Conference Prep Dinner

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Last night I went to yet another great dinner hosted by Dave McClure at the hip Clift Hotel in SF. It was a precursor to a conference series on social marketing called SMASH Summit. If you follow Dave, you'll know that he is big on the fact that marketing and design in startups are key elements for success, and that most startups don't do either well.

SMASH is an acronym standing for Social Media And internet Strategies and Hack-tics. A bit forced, but the concept is pretty cool.

Speakers included Matt Cohler of Benchmark, Rashmi Sinha CEO of Slideshare, Stew Langille from Mint.com, and Jeremiah Owyang of Altimeter Group. It was a great round up of information presented, showing the various ways folks are using social media marketing.

Last night's dinner was actually a preparatory step to a one-day conference series Dave is going to put on both in SF and in NYC. After dinner, the tables had a discussion on what they have done in social media marketing and the goal was to generate some possible topics for discussion at the SMASH summits. As official notetaker, I wrote down some ideas and listed them below, so that you will get a possible taste for what you may see at the SMASH summits:

Marketers that work for sites that are democratic - how do you tell what succeeds or fails with the crowd?

How to gain trust for novice social networkers for social marketing?

How do you manage novices facing more technically savvy social media users? Ex. forum users ragging on novice posters for not knowing a tech solution.

How to use our customer base who are more technically savvy to support call center people?

How do you use cross channel communication?

How do you connect developers with passionate customers?

What's better than focus groups? What do you use instead?

How do you overcome corporate/executive fear of talking to your customers?

How do you track/prove ROI of social media? Ex. We only have anecdotal evidence of more sales via positive social media response.

What metrics of social marketing are important?

Panel idea: Bigger companies' overall experiences with implementing social marketing/media (success/fail stories, case studies, techniques, etc.)

Panel idea: Experiences with integration of old school organizations with new social media (more specific than previous: talk about organizational difficulties and how to solve, how to win over the old regime, how to deal with people protecting their turf, etc)

Where does social media belong in the organization?

I'm looking forward to checking out the first SMASH summit for great discussion on these topics and more!

Lasting Two Years

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An interesting observation I've seen amongst early stage internet startups is that more and more of them are requiring closer to two years to get to breakeven. This is because of many factors, one big one being the fact that there are too many me-too products and that distribution is the number one problem facing entrepreneurs today. But also, many startups end up in someplace different than where they started. They may find that their initial theses is wrong and need to twist/turn/adapt into some other product to be successful. This also takes time.

I talked with an early stage VC and she mentioned that she had seen the same thing, which was a large percentage of them coming back for bridge rounds after working for about a year. We talked about the fact that they always seem to raise money for about a year or runway, but yet most of them just need a few months more to get to breakeven.

Even in my own startups, there are a number of them that "just need a bit more time." If only they had a bit more runway, if only they had a bit more cash, if only they could raise more....we are seeing that startups with mediocre metrics aren't finding it easy to raise cash so they are dead in the water, and soon to die in totality.

I talked with another investor about whether or not we should get more of our startups to raise more cash at the beginning. He actually was less of the opinion that we should demand startups find a way to last 2 years from the get-go. It was an interesting conversation and I think the difference in perspectives comes from the fact that I'm an angel investor with limited resources, and that this investor had far more resources to bring to bear on successful versus mediocre or dying startups. Also, given that this was my own money I'm investing, it was far more important to me than investing someone else's money. Strategically, it makes sense for them not to care as much. We already know startups will die; it's a ruthless culling process that startups experience. A professional investor can just move on and invest in the next big one, or invest in the winners in his portfolio. But given that my personal money is at stake, I care more about startups lasting long enough to make something with their businesses.

I've been tooting the "last 2 years" horn ever since the economy tanked. But universally I have been ignored. Remember that there are two levers to apply here: one is how much money to raise, the second is the burn. However, I never see anybody produce a 2 year plan ever. A host of reasons why not:

1. Entrepreneurs are unwilling to reduce their burn. There are a number of reasons for this, ranging from families that need support to those unwilling to reduce their lifestyles, to inability to hire people at low salaries.

2. Entrepreneurs are unwilling to go out and raise more. Yes, begging for money sucks and takes too much time and is not fun. Entrepreneurs just want to get back to work building.

3. Entrepreneurs are unwilling to take the dilution. They already have sold part of the company and don't want to sell more.

4. An investor assures an entrepreneur that they will give them more money if they need it. Entrepreneur decides to trust investor.

Great reasons all, but the reality is that a huge majority of startups are all taking 2 years to get to a good place. The marketplace for products and for investment is not like it was 2-3 years ago before the economy tanked. In previous years, you could go raise money on no revenue but a ton of users. Now it's near impossible. Second chances are hard to come by. Raising money on mediocre metrics is near impossible.

One last appeal: Entrepreneurs, do what you can to last 2 years. Expect it. Raise enough money and/or adjust burn assuming no revenue. It's become unfortunately the norm.

Betaday09 11-17-09

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This last Thursday betaworks had our annual Betaday, where we gather our entrepreneurs, investors, and other luminaries and prominent folks from the industry to meet and greet and have lively discussion on issues facing us today.

It was held at the Hiro Ballroom at the Maritime Hotel. Swank mood lighting and hipster chill bar decor was found everywhere:

..as was the latest footwear fashions:

Before the festivities:

John Borthwick giving the opening remarks to full house:

Gary Vaynerchuk on how social distribution is changing media:

Is the Web page dead?

The death and rebirth of search:

Stowe Boyd moderating niche membership and birth of mass amplification:

A lively discussion on crowdsourcing:

Another fun packed, informative day with betaworks!

Talking People Out of Being Entrepreneurs

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In the last few months, there have been a number of people whom I've tried to talk out of being entrepreneurs. I tell them it's really a test to see if, after hearing about how hard it is, whether or not they actually still want to do it.

There are many who are newcomers to entrepreneurism. I think this is great. But I think most of the newcomers underestimate what it takes to start a company and make it successful.

So I let it all out. I tell them how it requires some serious soul searching about what kind of person they are. You have to be natural risk taker. You must be willing to throw all caution to the wind, because you never know what's going to happen. You must be willing to throw away all levels of comfort in hopes of some huge gain later on. Are you OK with leaving your current job and its consistent pay, health insurance, and sense of direction in your life for a lot lower pay and the chaos that accompanies typical startups?

I talk about the time commitment. I talk about my early Yahoo days when there were just a bunch of us, and we worked our tail off for years. I talk about the long hours we spent building Yahoo back in the day, the stress, the do-everything-yourself mentality and the chaos of not knowing what's coming next. I tell them about the fact that relationships have broken up due to training for Ironman, which even at its peak, doesn't equate to time commitment spent at a startup and for a longer period of time. I go through the inevitable ups and downs that come with relationships and families of entrepreneurs; it's not an easy place to be when your work and family demands collide.

I make them take a hard look at themselves, and I also gauge their reaction to what I say. I can see it in their eyes and in their replies if they are unwilling to give it up. My intuition is running high in sensitivity as I sense whether or not they have what it takes to go the extra distance to be a successful entrepreneur.

Don't get me wrong; I am not judging what's good or bad, but only what's appropriate. I am not making a judgement call on whether you're a good or bad person if you have or do not have what it takes to be an entrepreneur. For some people, it's just not the right path to take. Yes it's disappointing, but I think we need to be realistic that entrepreneurism isn't for everyone. Or perhaps your life stage is now not the right time for a startup - for example, having a family and/or dependents, and/or a lifestyle which requires steady income may not make it appropriate for you to jump into a startup.

This is really important. We investors are betting on you to take our money and build something big with it. We are looking for those who are willing to do anything it takes to make something successful so that we all win, and that means sometimes driving yourself into the dirt and dealing with the stress of knowing that your bank account is about to run out and that if you don't do something fast/creative/better, you'll not be able to feed yourself or have a roof over your head anymore. This kind of passion/adaptability/drive for building a great company is what we're looking for.

If you're going to quit as soon as the risk is too high for your own personal livelihood, then it's best that we just don't start. It's not positive for either of us. Find an occupation that allows you to live the life you want, at the stage you're at now and be happy about that. Don't try to start a company on the assumption that you're going to just have the same kind of life you did when you worked at a bigger company.

One of the big problems I've seen over the last 3 years of angel investing and with entrepreneurs is that they will raise money and then compensation goes to near market levels for the people in the startup. They think that they can be in a startup and have their old lifestyle not be threatened. The reality is that startups are not a place where lifestyle can be guaranteed. This ranges from the "working lean and mean" philosophy (how can you pay yourselves market rates and still be lean?) to execution speed (you can't work at speeds seen in large organizations; you'll get crushed by other startups) to just the simple fact that the risk of failure is tremendous (you don't get the comfort of stability in a startup that you would get at a larger more established company; that's the price you pay for constant salary versus the chaos of a startup).

So if you pass my test, which is, after my whole tirade about the risks of startups and the downsides of what it's like to be an entrepreneur, you are still fired up about being one, then more power to you. Let's take this conversation further. But I am getting better at spotting hesitation, fear, and reluctance after hearing my speech. So let's not kid ourselves in being somebody we're not.

It's sexy being an entrepreneur. The rewards are great. The upsides are what everyone sees, and nobody sees the downsides. Dealing with the downsides is where the rubber meets the road and where you'll be tested sorely on whether or not you are a great entrepreneur. But if you're not entrepreneur material, you're not and that's that, whether it's your personality, life stage, or otherwise. You're not a bad person; it's just not for you and we should all just realize this, and not fool ourselves into thinking otherwise.

What the Heck Do All Those Terms Mean?

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I was just talking to a new entrepreneur about a term sheet and I realized that trying to understand all those dang terms on a term sheet was super tough because of all the legalese there, and also it's hard to know the implications of terms if you haven't experienced them first hand. It took me 2+ years of investing to get to some basic understanding of the terms and I'm still not even close to being an expert at it.

Searching on Google, I found some excellent posts from Brad Feld that explains some of the basic terms in a more easily understood way. Here are links to them:

Information and Registration Rights
Anti-Dilution
Redemption Rights
Liquidation Preference
Drag Along Rights
Protective Provisions

The Rise of Small Business on the Net

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A few years back I worked on a tiny startup that was attempting to jump on the affiliate marketing/blogging bandwagon. It was all the rage that people were making $100Ks per year just writing articles and doing a good job on driving traffic and purchases to marketers. It was a site about how geeks were cool because they were buying cool products, and so we would write about these really cool products and then drive affiliate traffic to places where you could buy them.

Our venture didn't get that far, but so many others' did. And the list is growing.

As everyone working on projects on the Net knows, the cost of building a business has dropped dramatically over the years. It started with blogging software which would could install on our own servers or use the hosted versions. Now, you can go out and find shareware for just about anything; stuff that would have cost a big company millions of dollars and a team of 100 to build in the past could now be found and deployed for a tiny fraction of that cost.

It's also easier to deploy web applications now. Previously you had to be a computer scientist to do so; now just about anyone can figure out how to deploy it, or using hosted versions just fill out a signup form and point your domain at it and you're off and running.

So now, just about anyone can throw up a website which has some advanced functionality. And people are doing it too. In the startup world, we see the internet has gotten super crowded over the last few years. Very few truly unique business/product ideas have emerged, and many are just clones of each other. Or once someone puts up a good idea, the clones emerge quickly because it's so easy and fast to put up a website. Thus, it's now less about the idea but rather how many customers you can grab and whether you can monetize that traffic to balance out your burn.

Thankfully, the internet crowd is enormous. Grabbing a small slice of that traffic and monetizing it effectively can mean a sustainable business that pays its employees a decent salary. In the past, we called these businesses microbusinesses or lifestyle businesses where a single person could make a decent living managing a website. However, in today's world, I call this phenomenon the rise of small business on the net.

Many startups we encounter have plans that we know can reach this stage. With great execution and effort, we can easily see many businesses growing to great small businesses. They will have revenue from several $100Ks a year to small millions. They have a small teams and all of them are well compensated for their work. All the employees will have great lives supported by this business.

The effort is comparable to opening up a storefront on your favorite street. In the old days, you'd go find a great physical location with lots of foot traffic. You go get a small business loan from your local bank and open up shop. Then you go and acquire customers and build your business from there. In today's world, you can do it on the internet without a physical location and tap into customers from around the globe.

From an investor's standpoint, we're finding that this creates a number of problems. Our model is dependent on finding those startups which will go big, much bigger than small business size, and find a way to return our investment with large gain through some mechanism like M&A or IPO. However, the ease at which startups can reach small business stage makes our job harder; we're seeing many businesses reach a certain level of growth and then breaking through that level is tough due to how easy it is for competitors to enter your market, and how hard it is to acquire the attention of users.

Some of us are thinking about change in the way we support some startups. I find parallels in the area of restaurant investing, where the investment is all about cash return and not ownership. What kind of restaurant would go IPO? Highly unlikely. But could we make 10-20% on our investment? Infinitely possible.

I wonder about how the structure of deals we do for internet startups might mimic restaurant investing. Instead of caring so much about ownership, perhaps we should find a way to get a healthy return on capital invested through cash flow, if the startup monetizes efficiently and does it well.

The problem with traditional investing in startups here is that these small businesses may never attract an acquirer and certainly the chance of an IPO is even more remote. Driving these small businesses to activities to return an investors' capital in that manner may take a healthy sustainable operation and turn it into something unsustainable and problematic as it reinvents itself to attract an M&A event or IPO. That seems dumb; the business is thriving and its employees well paid and happy - why destroy this?

I think the world of investing should think more about the rise of small business on the net. Many more businesses each day are showing up that are great sustainable operations supporting employees and their customers. They are never going to be superstar Googlesque success stories and we should not attempt to turn them into one. In today's crappy economy, the world needs more small businesses to show up to employ the masses and make them money. We as investors should find a way to invest in and help these companies to grow, and just be comfortable in the fact that they will never be Google but still can help us make a healthy return on our money.

Second Chances

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I was just reading 10 Huge Successes Built On Second Ideas and it motivated me to write this post, as I've been thinking a lot about the fact that entrepreneurs often end up in a place very different from where they started. It's gonna be a bit random, but here's what I've been thinking about:

1. How we pick startups to fund.

Time and time again I hear seasoned investors talk about betting on smart people because smart people will adapt and twist and turn to make their journey worthwhile. It is less about what they're building, although that is what brought them to the investor in the first place. Rather, the bet is that the person is good enough to figure something big out of whatever it is they pitched you.

I guess it's just me, but I place more emphasis on the idea than others, as there are many smart people working on stuff that doesn't have a chance, and is almost certain to require...a second chance.

The problem I see is that money only goes so far, and second chances don't come by easily. Most people don't raise enough money to allow them to twist and turn later; they only have enough to get them to barely a market trial of their initial idea. That's why I push entrepreneurs to raise at least 2 years of capital now, while their attraction is hot. Trying to raise more money later on mediocre to poor metrics is next to impossible in today's market. Otherwise, the entrepreneur will have to (usually painfully) adjust burn to last them further into the future or...just die.

2. Helping startups change/enhance what they're doing now.

I was talking to a venture capitalist the other day who said that you had to bet on entrepreneurs who knew what to do whatever the situation, and that if you had to help them then this was a sign of trouble. I find this to be somewhat not true, as I've built my business on sitting with entrepreneurs and helping them shape their products. I've found out that even smart entrepreneurs appreciate you throwing them ideas and opportunities that they can use, especially when they are in a bind. Finding smart people is fine, but everyone needs help once in a while and it's the smart ones that know they need help and accept it.

It's happened a few times now, where startups are now figuring out what to do next. One has changed completely, and others are in the process of reinventing/rethinking what they started working on because it hasn't worked out as well as they thought it would. I find the more I insert myself in this process, whether I ply coach-like skills to help give them some process in reinvention, or I'm throwing a constant stream of ideas at them until something sticks, the faster they will get on a new and potentially better path before their money runs out.

3. Raising money is a tough process for second chances.

This is tough for a variety of reasons.

a. Dealing with existing investors can be difficult. Already you have some invested in your company. But yet, now you're out there raising more money to continue - if your metrics are mediocre, then this could mean a sideways or down round to keep working on your current idea, and you must take into account the fact that your investors already own a piece of your company, and now more money is coming in and ownership and control issues arise. They best condition would have been if they invested into a note without a cap, which I would never do, because then you have total control over what happens to them.

b. Raising money on mediocre metrics is next to impossible. If you've gotten to a point a year in and your growth is not so great with little or no revenue, it's next to impossible to get another set of investors to bet on your idea in today's economic climate. They often assume that your idea and/or team isn't right.

c. If you're working on a totally new idea that may be great, but you and new investors still have to account for the fact that there are existing investors already, and what kinds of ownership and control issues exist and how they will change. Potentially it could also mean some questions will arise as to why your previous idea tanked and if whatever those reasons were make you look bad, then it will be hard to raise more money.

4. Mentally it's hard.

Yeah it's tough as hell. You're all gung-ho on your initial idea, you've got your investors and everyone around you excited about where you started and now you gotta change. That sucks! And you often beat your head on the table trying to figure out how and where to go next.

As many smart people I've met, they have often shown that they are often not equipped to continue on these projects in the face of adversity. This is both situational and internal.

Situational means that they may have real life needs for capital, like a family to support. I say situational because dependent on their life stage, the situational needs may be completely different like, for example, during when the time they were just coming out of college.

Internal refers to elements of one's psyche to enable them to deal with the harsh realities of entrepreneurism and what it often takes to build a business. So being smart is one great metric, but it's not enough by itself. You need to be creative, adaptable, able to withstand change and adversity and find solutions in chaos. Many people can't do this. Over the last few years, I've noticed that many people think they can just start a company and it'll be an easy ride to Google style riches. Time and time again it's proven wrong to me, having been through it at Yahoo and watching countless startups now.

All I can say is second chances (or twisting/turning/adapting from their initial idea) are tough. I am one for doing a little upfront planning for having enough time to twist/turn/adapt as far as second or maybe even a third chance, since it happens very often. Raise enough money early in the process and create a plan to go for 2 years, assuming no revenue or progress. Be prepared for it mentally, celebrate when your initial plan pans out, and buckle down the hatches when you have to shift.

Are You Evil or Are You Just Lucky?

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Last night I attended the Startup2Startup"s CeWebrity DeathMatch: Jason Calacanis vs Guy Kawasaki on "Is Apple Becoming Big Brother?" and it was a hoot. Watching Guy and Jason rag on each other was pretty hilarious and Dave McClure did a great job keeping the action going all night.

After the main feature, Startup2Startup dinners have a discussion at our dinner tables around a topic, which, tonight, was based on the concept of being evil and whether it was necessary or not. One question that circulated around the table was whether or not doing evil things in our lives was justifiable or not. In a funny way, I was glad that we did not get around to me answering this question because I really didn't have an evil example in my work past to give.

How can that be? Well I'll tell you. I thought back through my work history and could not think of a single evil event I've ever done. Not in business, not in politics of corporation, not in management. Now perhaps some of my former team may think of evil things I've done, especially like during layoffs, but that wasn't really self orchestrated but rather forced on me by the corporation.

I've always tried to live my life to a higher moral standard and in dealing with people as human beings. I've never been great at lying, and thus corporate politics totally are out of my realm and I have seen many instances where I would have been totally outclassed in dealing with manipulation and backstabbing of others. I'm also not very talkative during meetings, which I believe has sunk my career because I've always let others take the limelight and not myself. The unfortunate by product of this is that if you don't say something in meetings, people tend to view you as having nothing to contribute and thus are not worthy of attending further meetings or advancement in the company.

This, my readers, is the reason why I got about as high as I could up the corporate ladder and then could go no further. Because I'm an honest guy, don't play corporate politics well, and just do my job well, that's unfortunately not a formula for success in organizations.

I thought back to this lack of evil and wondered how I came to be at this point in my life. And I came on one big factor which has carried me to this day - that is LUCK.

In looking back to people I've worked for, the companies I've been at, the people who took a chance on me when I was just a dumb out of college guy, and then somehow being buddies with right two guys at Stanford leading to me joining the right internet startup at the right time - these coincidences were incredible instances in chance.

Looking back at this path I've taken through my career, I could have just taken the wrong step in a multitude of places and gone off totally into another place. But yet I ended up here.

Intelligence had an effect? Perhaps, but a lot of smart people do some smart things, or what they think is smart and don't get anywhere. And I'm not particularly a genius either. I don't think I went around and did anything special but just happened on these people as I walked through life. So that couldn't be it.

While a lot of people poo-poo luck, I'm a big believer in it. The big problem is, how the heck do you find luck? I also think that some people are naturally lucky, and there are people who seem to have no luck at all. To that end, I have some suggestions as to how to increase your luck:

1. If you're a lucky person, you've made it!

2. If you're totally unlucky, I don't think you'll instantly be lucky. However, there could be hope for you. Read on.

3. Hang out with lucky people. Don't you hate it when some of these people always seem to have great things happen to them and it doesn't seem like they do anything? These are the people you need to find and become BFFs with. The downside is that lucky people want to also increase their luck, so they will try to find luckier people to hang out with. So you may not be successful in becoming BFFs with these people because they may spot your lucklessness.

4. Get rid of unlucky people around you. These people will be a drag on your life. Don't hang out with them. Something bad that happens to them may also happen to you despite your luckiness. Increase your luck by hanging out with lucky people.

5. Generally, lucky people are happy, and unlucky people are not. I think that your general outlook in life can help add lucky points to your life, or at least fake it.

6. Don't go putting yourself in risky situations. Why walk around in the middle of the night wearing expensive jewelry in the bad part of town? Duh. Reduce the chance that your unluckiness might manifest itself. Or don't use up your lucky quotient for the day by doing inherently risky and stupid things.

7. Place yourself in situations where you can shine. So instead of walking around in the middle of the night wearing expensive jewelry in the bad part of town, go to Startup2Startup and meet some smart people, maybe some VC who takes a liking to you and funds you.

As an entrepreneur or investor, I cannot under emphasize the importance of luck. Meeting the right founder at the right time, being in the marketplace and finding some product that consumers love and it takes off, finding the right business partner who ultimately buys your company, or discovering that in a crowded marketplace that you backed the right entrepreneur (like me joining Yahoo, instead of Excite, Infoseek, or Lycos).

Luck is one of those unexplainable forces in the universe. All I can say is do things to increase your luck as one of those things you can do to help you be successful in life or business....and be very wary of when your luck runs out.

Advertisers Are Also Your Customers

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I was just reading this post Techcrunch Europe: The long lost formula for start-up success. No, really by Nigel Eccles and found it to be a great summary of Steve Blank's Customer Development methodology. But one thing stuck out for me which was a rather short two liner:

For apps that are supported by advertising, your customer is the person who hands over the cash. That is the advertiser, so the criteria still holds.

So much insight packed into these two sentences and yet no further discussion on it!

This was something that we discovered through the dotcom bust years at Yahoo!, and really didn't become something more apparent until we were down in the dumps in revenue after the crash of 2000-01 years.

For years, Yahoo! built its products on the mantra of always taking care of the users. Do what users want and traffic will come, and with it all the rewards including revenue. It really did work great, and arguably Yahoo! became the powerhouse it did back then amongst users because we had a single focused view on users' needs. It seemed to us that no matter what we did, money still came in and the product teams largely ignored any extra effort in taking care of our advertisers who were paying our bills.

This was exceedingly apparent in the ad banners that we ran and refused to change for years, which was the 468x60 banner. When traditional advertisers started toeing the internet advertising waters, they looked with disdain on the small rectangle that sat on our pages, which, when compared to the traditional ways of doing advertising, provided no where near the capability of producing "wow" for their clients. Our technical specs didn't help either; while they protected users from downloading huge files and slowing down their web experiences on Yahoo!, they severely limited what advertisers could do in those little rectangles.

And so it was that we went through the dotcom boom to bust period, saw its primary sources of ad revenue die away - the OTHER hugely funded dotcoms - and with traditional advertisers who really didn't want to put any time or effort into producing ads for Yahoo!, but were looking elsewhere at sites who were beginning to use other ad technologies like floating ads. It wasn't until Yahoo! started loosening up its standards and allowing different and new ad technologies on its pages that traditional advertisers started coming on board Yahoo! and trying internet advertising.

We realized that we actually had another customer besides our users, which was our advertisers. We also realized that our business was like a three-legged stool. The first leg was the company, which benefitted from having users and revenue from our advertisers; the second leg was our users; the third leg was advertisers. All three legs must be in balance or else the stool tips over. In our early years, we really only took care of two legs, which was the company and our users. The third leg existed, but we didn't really do anything about it because no matter what we did, revenue poured in, and mostly from all those dotcoms that had way too much money to spend on advertising. These dotcoms just wanted to get exposure to users and fast, to build their businesses quickly and get out ahead of their competitors (never mind that their business models weren't sustainable). So they spent a ton of money advertising on Yahoo! to do that and Yahoo! didn't really need to do anything else to get them to come on board.

When these dotcoms died, so did the revenue and we realized that we really didn't do much for people who had been doing advertising for years, well before the internet existed. So we worked hard to remedy this and bring our advertising technology to a place where it could support what traditional advertisers were looking for. The three legged stool became truly balanced and Yahoo! launched ahead of its competitors in the years following 2001, as we went out and wooed advertisers with much improved ability to create "wow" (as well as all the other important things like advertiser sales, support, and operations).

I think too many startups today don't think enough about the three-legged stool. They focus on their company and their users, and then slap ads on their pages and get frustrated when they pull in a small amount of money every month and wonder why their CPMs are so low. Or worse, some companies build their businesses solely for advertisers and forget that their users need to have a product or service that helps them, and not just advance the wishes of advertisers. Thus the three legged stool becomes unbalanced yet again.

Not suprisingly, users and advertisers go hand in hand. Advertisers look for users to market their products to. But not just any users; they want exactly the users that would want their product. Just giving a bunch of users to advertisers means giving what is called remnant inventory to them; it's the lowest cost inventory that they're willing to pay for since you haven't been able to tell them what kind of users they are reaching. So sites need to find a way to deliver those exact users that advertisers want to see their ads.

Users on the other hand, tend to hate advertising because most of the time it's irrelevant to anything they want or need at that moment, can be annoying, and a lot of it can be interruptive of whatever it is they are doing at that time. Aspirationally, companies need to find ways of delivering the right ad to the right person at the right time. Tough job, probably tougher than figuring out what kind of users you have to sell to advertisers.

However ignoring the third leg of the stool is just folly. If a site is going to ad supported, startups should realize there is a third customer for their site, the advertiser, and put steps into motion from the very beginning to take care of this customer. As we learned at Yahoo!, doing it later on is potentially painful - you don't want a downturn, or watch your startup's bank account run down to zero, to shock you out of the realities of what you should have been doing.

Combining Startup Investing and Distribution

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A while back I wrote about "me-too" products and that one of the biggest issues facing early stage internet startups is the lack of distribution to get their product out there. After going to Ycombinator yesterday, I, again, felt that similar feeling when I wrote my post many weeks ago.

I thought that some of these were really great, but most of them were much-improved twists on what was already out there. In this crowded world where people already have multiple ways of doing things, I thought it was a damn shame that many of these startups would fail not because they weren't better, but just because they could not get enough customer exposure before their bank accounts ran out.

Just the other day, I had lunch with a buddy of mine at a small publishing company and the topic of distribution came up again. We talked about how valuable the traffic they had on their site was to all these little startups who had none at all. From this conversation, an idea emerged.

Here's the idea, and it's one that is best executed by people who have traffic, like a Yahoo or a Google, or even a NYTimes.

Any of these companies and their like all have done venture investing. But it's been very much like a investor-startup relationship, which is we give you money and you go out to make something big out of it. To me, I think this should change. I think there should be a way to give both money and distribution. To an emerging startup, a firehose of traffic could be worth its weight in gold, in addition to the money.

Suppose at the bottom of every page, which is not worth very much to advertisers since they want to be at the top of the page, there was a row of links which was labeled, "New things to try:", or "Cool startups:", or even something more explicit like "Check out our new ventures:". Then for each startup you invest in, part of the deal is to gain a place in that row of links. You could have permanent placement, or rotating placement if there are more startups than link slots.

Then just let them run. I think you'd be surprised at the amount of traffic the bottom of the page can generate. Certainly, even 1000s of clicks per day driving to a new startup would be extremely valuable. At Yahoo, we did some exploration on placing links down there. At Yahoo traffic levels, they were driving a tremendous number of clicks to Yahoo products and services each day! But yet that space at the bottom of the page wasn't really being monetized otherwise, or of any use to users after the main content of the page had ended.

So why not give it to the startups you invest in?

Today, startups are in a fight for attention. The only way for most startups to get noticed, induce trial, and thus get true validation from the marketplace that they are better, is to point a firehose at them. SEO is too slow, SEM is expensive - what else is left - perhaps partnerships with companies who can give them exposure. But I think that while it is possible, it is a lot of effort to do a BD deal for distribution. As an investor, I would think that it would be easier to just give it them ourselves, right? If you can firehose your investments to show the world they exist, induce trial, really prove out their models, wouldn't that take a huge amount of risk out of your investments and increase the chance of a startup being successful? Of course it would also show whether or not you chose wisely or not....

So c'mon big media companies - work with your venture arms. Invest AND offer a firehose. These guys need it, and, aspirationally, we do want some of these products which ARE better than what we have out there now.

The Problem with Early Stage Me-Too Product Startups

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I believe the universe of internet businesses has become extremely crowded in the last few years. In the early days, you could come out easily with something new because there weren't that many competitors out there. Now, it's hard to find somebody who isn't working on something similar to what you're thinking about. So competition is fierce and many times you'll find entrenched competitors with a lot of product inertia and a great head start.

The other huge problem is on the consumer side. Consumers are deluged by new products and services all the time. They have overload and just keep to the products they know best, and need to have a really good reason to change and move from another service to a new entrant. We saw this first in the past with email addresses; Yahoo Mail users were hesitant to move because the cost of changing your email address was super high and thus user retention was very high. Now add what makes up our digital lives on services like flickr (all our pictures that we've uploaded for half a decade now), or facebook (our friends are all here, plus their interconnections), or linkedin (our business connections are all here, plus all their historical connections). The cost of moving has become so high because we've invested so much time and effort into those services and we don't want to redo that, let alone adding the cost of learning a new service.

As an early stage investor, I've found that this makes picking companies exponentially harder and it's a shame. I meet a lot of smart entrepreneurs with some really great ideas, but then I do some research online and find that there are others who are working on something similar or in a close enough space to be competitive. Then I start to get worried about their prospects.

You can find tons of books on the subject of competition and winning despite having entrenched competitors. In general, I have found that entrepreneurs are doing what they should be doing to attack a crowded market. These are things like (my thanks to Andrew Chen for helping me with this list):

1. Innovate on the product experience (ie. Posterous vs. Wordpress).

2. Business model changes, where you are going free (or freemium) for a product that's usually subscription (or fixed charge).

3. Changing the market where you're going long tail instead of hitting the larger market (ie. casual games versus hardcore games).

4. Change in distribution model, where you are delivering something as a service rather than a download, or bundled into an existing thing (ie. Facebook app) instead of a standalone thing.

5. Change in branding. An example is where you cater to an upscale prestige market or niche market instead of a mass brand, or vice versa like taking a niche product and making it available to the masses.

6. Create a business that is better, out of a larger part of another business (ie. Lefora created a message board hosting product for those who don't want all the bells and whistles of a full social networking product).

7. Innovate on design, which appeals to those who want a similar product but one that looks/feels better.

8. Offering more features on a product, or customization on product.

And the big, traditional way of taking a new entrant into a crowded market:

9. Mass advertising to gain broad awareness and induce trial and adoption of new product in face of existing competitors.

So I am not saying it's not possible to win against a crowded marketplace. My issue is with early stage startups: in order to win in a crowded marketplace, early stage startups often don't have enough resources to last long enough to compete effectively and win. While a lot of the above can be implemented, growth time is limited by whether or not you have enough capital and revenue to survive until you run out.

To me, if you're developing a me-too product, it's ultimately going to boil down to a marketing game more than in any other situation. You can develop the best product or service, but if nobody knows about it because they're busy using something else, then you're still dead.

So distribution for a me-too product is critical. In the past and present, large corporations could do this because they had lots of money to launch large advertising campaigns. They knew distribution channels and could insert their new product there. They had contacts in their market and it was straightforward to get word out that they had a new product even if it was similar to existing products.

As a new startup, you may not have those channels and contacts established, and certainly you don't have money to spend on advertising plastered on the Superbowl, magazines, online, and elsewhere.

However, once you finish your product using one or more of the strategies above, you need to jump to strategy number 9 as soon as possible and get it out to consumers. You don't have time to wait until people notice you; you need to get noticed.

Some possible ways of doing this:

1. Buy advertising. As an early stage startup, this is the least viable unless you somehow have enough money to do this. Lead gen advertising can be better than CPM based advertising as you'll be able to pay only on a referral, but still this costs money. Let's move onto cheaper alternatives.

2. Marketing that involves barter space. You trade something of value for advertising space on their side. Something of value can be advertising space on your site, or donation to their cause for charities.

3. Word of Mouth Marketing. Contact bloggers, magazines, users and get them to try and talk about your product. Getting in the NYTimes is a big traffic driver, as well as many other national circulation magazines. Online publications like C|Net and The Huffington Post can also be great. Twitter is also a great up and coming means for getting your word out.

4. Get distribution partners. Existing companies can add your product on their sites and can help you promote it. This is usually in deeper partnership such that it goes beyond just buying ad space. You look for exclusivity in contracts and features that your product has that enhance an existing company's product and prestige.

5. Viral marketing. This is a very hard avenue to execute, which is to start with a few users and then it blossoms outward to many. Determining how your product can be viral can be an elusive game and if you don't hit on it early, you could waste a lot of time tweaking and hoping that something you create will be virally popular and spread.

In working with a few startups, I am disheartened by the fact that the importance of distribution is still not well understood. The leading thought is that "if I build something great, then everyone will come find me." Unfortunately, that is rarely the case in this crowded marketplace, and most early stage companies don't have enough time to let people just wander around until they find out about the product.

They did not do enough work to go out and contact bloggers. They didn't go out and try to woo corporate partners to see if they would help them get their message out. They just waited for users to come and they didn't come in great enough quantity to support their business by the time their money ran out.

So don't let your product fail simply because you can't induce trial. Remember, you have developed a me-too product, one that users already have a solution for and switching costs and barriers may be too high for them to take action to look for a better solution. You need to get them to know that your solution exists, and attract them to try it out - and since you're an early stage startup, you need to do this ASAP to give yourself enough time to let consumer adoption grab hold and ultimately take off, all before your money runs out.

World Domination Plan

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I love it when I hear entrepreneurs are working on a world domination plan.

I see a lot of entrepreneurs arrive with pitches that are limited in scope. They talk about how the world needs this function, how great it is, and how current products don't have these features. Usually, they really are great ideas. When we get to revenue, sometimes there is a plan and sometimes there isn't. But many of these revenue plans only seem to get to a few million a year at most. This may be a great small business, but for an investor, we need to ply our limited resources into those opportunities that will grow into huge businesses, and not just a million a year.

The need for a world domination plan is important to me. I want to invest in businesses that will grow into huge businesses, which will maximize my return on investment. I don't want to invest in businesses that will grow into small businesses, even if they are great small businesses. I only have time and resources to work on so many projects and need to maximize my efforts.

The plan needs to be believable to both me and the entrepreneur. It's not enough that I just believe it's possible; the entrepreneur must also believe the plan since he is executing it. If only I believe in the possibility, that's not good enough. To me, it's a form of personal deception; I see the idea, I see its potential, and it doesn't matter who works on it - it must build into a big business as I believe, right? It's not that simple even if I wish it was. I'm not the one executing the idea and doing all the ground work. The entrepreneur must believe in the idea and be able to do all that. If he does not believe in the idea and/or cannot execute it, it's going to fail.

Some people have enough resources to invest in experimental projects, meaning that there is no clear path to success at the beginning. I unfortunately don't have enough resources to deploy like that. Thus, I need to at least have some comfort that both the entrepreneur and I believe there is a world domination plan (and yes I know there is a great probability that this will change).

What is your world domination plan?

Still Lots of Interest in Incubation Out There

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In the last few months, I've encountered at least 3 people who are thinking about incubating. On the one hand, it's amazing that the topic still comes up, but on the other hand, it's not so amazing.

Clearly the news about the spectacular failures of incubators during the last Internet bust hasn't deterred anyone from trying to build incubation operations. We can even find examples of incubation-type operations that are arguably working like Ycombinator and similar operations in other locales, like Techstars and LaunchBox Digital.

People keep wondering themselves why they can't just build stuff, and keep building stuff until something works. Or setup something like Ycombinator/Techstars/LaunchBox. It seems so cheap and easy to build a web site/service and get it out there. Why not just build lots of things quickly and try them until something works?

I believe the answer is YES you can. But before you do, I would point you to my two blog posts about incubation, which were gleaned from conversations from many incubator operations both personal and groups in the present and in the past. At betaworks, I took on the project of finding out as much as about incubation as I could, to inform betaworks about the best way to go about coming up an idea (or ideas), how to get them built, and set them up for later success. I then went out and talked to people incubating and distilled what I learned into these two posts:

Incubation 101
Incubation 201: Should You Incubate?

Words of wisdom/caution to those who want to do this:

1. Generally, professional investors run away from people trying to raise money into incubators, because of lot of them were around when the dot-com incubators all collapsed and they remember that. So calling whatever you're doing an incubator has been found to be a detriment to fund raising.

2. Find your benefactor, woo someone who believes in you and what you're going to do and has cash to fund your operation.

3. Be aware of destroying incentives that will hinder people from working their butt off on their projects. These are things like paying people full salaries and benefits, and not tying the ownership of the project deeply enough to the people working on them, among other things. Keep people hungry and motivated, that they think their entire future and life depend on the project they are working on.

4. Transferrance of an idea is SUPER HARD. Don't think it's easy to just be able to explain an idea to someone else and they will understand it as intuitively and viscerally as the idea originator.

5. Keep costs as low as possible. This will keep everyone's runway as long as possible. It will also add to the hunger.

6. Figure out what you're good at, and leverage that in developing the incubation operation. Paul Graham loves smart hackers and is really good at filtering for that. So Ycombinator teams are always composed of super smart hackers because his strategy is based more on having super smart hackers around than just the idea, because often times where you start is not where you end up, and smart people will find a way to success no matter what. What do you believe will generate success and how will your strengths help that strategy?

7. Following on 6., I would advise you not to compete with Ycombinator or any of the other incubator type operations out there. Don't call yourself Ycombinator 2.0 either in name or messaging. Only Paul Graham can pull off Ycombinator in the way he is doing now. Be yourself and build your own brand.

8. Out of respect for the kind folks who shared with me their knowledge and wisdom which cost them a ton of time and money in legal fees to figure out, I am not publishing anything about what I learned about company structure or legal matters. You should go find a law firm who has worked in this area before and they can help you figure things out. As a hint, some of that has to do with the SEC Investment Company Act of 1940.

I wish you well in your incubative endeavors. May you build something truly great!

The Importance of Revenue at Early Stage, Now More Than Ever

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Revenue is important. DUH.

It seems as though we forgot about that through the internet years. People were willing to put money into startups to build up a user base and put revenue generation second before that. They didn't have to deal with revenue because they knew that they could raise their next round based on tremendous usage and on the assumption that if you had a gazillion users, then you must be able to monetize them somehow.

That did work for many startups through the dotcom boom years, and even after the internet bust it still worked for many years, right up until the economy took a nose dive.

The world changed, and now that second round is just about non-existent.

So I, along with just about every other experienced investor out there, have started to demand revenue as soon as possible (better) or want to see it at the outset (best). We have turned away just about every early stage company that has no revenue or no firm revenue plan.

While we'd love to be optimistic and place a bet on a startup that only has user building potential, but no clear revenue plan, it's just too risky right now. Or, if the entrepreneur has not created a firm revenue plan, or does not plan to turn on revenue generation as soon as possible. Any of those are too risky for me right now.

Why? In the economic climate of today, 99% of the funding sources won't even touch a startup that doesn't have revenue showing, when they hit their next round. I've seen it happen multiple times for companies trying to raise money today. Thus, if you don't have your own source of cash (a.k.a. revenue), then you'll end up dying when you burn through your initial cash that you've raised. You just can't count on that next tranche of cash to appear when you need it most.

So in investing in you, I want you to survive. I want you to build a great business. I DO NOT WANT YOU TO DIE a few months or a year from now when you run out of cash, just simply because you put off revenue generation until the very end and it's too late to generate enough cash to support yourself. To me, that's a waste of not only my money, but of everyone else's money as well. Think about that if you're going to take your friends' and family's money. In today's funding environment, you might as well be tossing it out the door if you don't start revenue generation from day one.

Before the internet, startups were always created to make money. Entrepreneurs always thought about building businesses to make money from day one. And many of them would drive themselves into the hungriest state, risking their homes on additional mortgages and their relationships with divorce. Their unwavering belief in their business idea coupled by their need for cash to sustain their lives kept them going until some of the biggest businesses of today were built.

Somehow we lost that when funding sources were willing to bet on ideas that didn't have obvious monetization early on. It took the economy to dive into recession to bring this "create a business to make money" philosophy back into the forefront.

Perhaps it never should have gone away.

I'm only looking at startups with revenue or will turn on revenue from day one now, but I also wonder about what I will do when the economy recovers. Would I go back to placing bets on some ideas that may not have obvious revenue plans, or are generating revenue immediately? I think that we'll have to take a look at the funding environment and the startup ecosystem to see if we'll ever go back to supporting businesses like that.

All You Can Eat Tacos with Thrive

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Last Wednesday night, we braved freezing weather to converge on Mercadito Cantina in the East Village of NYC with the team from Thrive.


They just got acquired by Tree.com (LendingTree) and we were celebrating the end of their startup-ness.

A reporter asked me some thought provoking questions about the state of the world and whether Silicon Valley will play a large role in recovery and building new companies and employing tons of now-out-of-work people. I gave a rambling reply which also caused me to think deeper about how things are and my dissatisfaction with many things in the past, which I hope will be fixed. Since it was an interesting thought exercise for me, I thought I'd share it with you (with a bit more embellishment):

3% is the new 20%

Greed has played a large role in how broken the system is. I now say 3% growth is the new 20%, which means that expectations have been totally out of whack in the past. When I was at Yahoo, it was ridiculous to have investors continually push for 20% growth quarter over quarter, year over year. It's unsustainable. and when Yahoo fails at this, or any company for that matter, the investors knock the stock down. When the stock goes down, the investors get in an uproar and scream bloody murder, try to get rid of the current management team, cause a huge ruckus which is hugely distracting and doesn't enable a company to respond in the way that is best, which sometimes takes time - More time than investors are willing to give. The short term mindset of investors which drives the short term mindset of companies doesn't let any company plan effectively for the long term, but only for next quarter's earnings call.

Stock market driven by emotion

The whole stock market is driven by emotion which is really bad in general. Whatever happened to what I learned about stock investing way back, when the stock price was a reflection of the actual value of the assets a company had, not what emotion drives what we think it should be?

Is incremental innovation enough?

Lots of innovation is definitely in the form of incremental innovation but that is true in more established technologies. We see this in bulk on the internet, but on the other hand, we still see a lot of truly weird new stuff that nobody is working on before. I think a lot of people think they can merely do something better and that is enough to get to a good place, or become number one. the main problem is that users have services overload; ex. how many social networks do we really need?

This is a big problem for us internet startup investors. We see a lot of me-too products and while something may be truly better, there are so many factors out there that inhibit the establishment and growth of a me-too product, even though it's better. Users have lots of inertia in products they know; they learn, get used to them, then are unwilling to switch. Users also can't determine what is truly better or not - when two things work in the same industry or product area, users aren't going to spend time to dig into every new product's details to figure out which is better; they don't have time. In the past, large marketing campaigns to drive awareness could get a new entrant a place in the marketplace, but "firehoses of users" aren't easy to find or establish to get enough trial such that natural growth of users starts to happen.

Where's the next big industry creation going to happen?

If i were a betting man, I would say cleantech is the next big area for large scale innovation that creates big companies and factories, that employ a wide variety of skills and skill levels - it's an area that will require lots of capital to start and get going.

Internet tech only employs a certain type and set of skills - as a veteran of the internet and investor in the area, I still think there will be lots of innovation there, but it will come more slowly and the big returns will become more rare, but lots of smaller companies will pop up. It's still an interesting area and think it will be for some time. Capital requirements are virtually nil for internet startups now.

Statistics says that Silicon Valley can still drive a large portion of company creation and thus, help in the recovery

I'm biased. I live in the Silicon Valley and in living there, versus visiting elsewhere, I think that innovation and new business creation still happens a great deal in the valley. Why:

1. Even in the economic downturn where we'll see many of the venture funds die, the greatest concentration will still be in the bay area. No other region in the US can claim the sheer number of funds and greatest concentration of angel investors too.

2. The economic downturn will kill off many dumb ideas and leave the strongest to survive. This puts back a constraint on startups which had gone missing in the boom years: gotta make a great business that can make money. duh!

3. Still people flock to silicon valley to start businesses. This inertia isn't going to go away instantly. It would require many years of failure to reset this in peoples' minds that Silicon Valley isn't the right place to be.

4. Being in the Valley means you are surrounded by tons of other like-minded startup people. It would be hard to find some other place like this, except for perhaps NYC or maybe Boston (even those two would still be dwarfed by the sheer number of people in Silicon Valley). Everywhere else has a much much less dense concentration of people who can help you and who have done it before.

5. I personally still look at deals and those that kind of are sub-standard, I tell them (as does everyone else) to go back to the drawing board and come up with an idea that can make money. This kind of feedback is just one more iterative step in getting people to the right place.

6. So eventually some great ideas will make it through the filter, but you have to wait for time and effort to pay off. Statistics says that the greater number you have to play with, the higher the chance you'll get something new and big. With the sheer volume of stuff that goes on in Silicon Valley, that says to me statistically that you'll get a next big idea faster than in any other place in the country.

The next big breakthrough employing 1000s of people won't happen overnight

I doubt that any idea could move that fast and with the economy so down, it will be even harder to see a company grow to such size in those conditions, even those with some momentum. So in that sense, it may be that the government's massive infrastructure projects may be the ones that will employ a lot of people in the short term while the other companies fight off their investors by laying off people just so they can get their revenue numbers looking better.

What if we didn't layoff anyone and just waited it out?

What if companies didn't sucumb to the pressure - what if they kept paying people but were OK with zero profit? We all know we'll pull out of this downturn at some point - but we have to make a whole bunch of people suffer by laying them off just so a company can look good to investors. Again, the short term focus will weaken companies and place a lot of good, experienced workers out of work. OK OK I'm not totally correct because maybe some companies will make less than their expenses so they will no longer be break even, so maybe they should cut dumb projects and fat off their staff. On the other hand, we've seen time and time again where companies would layoff people in downturns, and then just re-hire them later during good times. We don't need them - we DO need them - this see-sawing back and forth costs people in time, money, and effort.

What if we just didn't fire them, made less or zero money, and just waited it out since we would have hired them back anyways?

Another thing I learned along the way: being loyal to a company is a thing of the past. A company exists for the survival of itself; if that means that people should be let go, it will do so in order to survive. It doesn't care about the people, even though it should. As long as the people help a company survive, it will retain those people. Anybody who doesn't contribute to its survival get cut. I don't see people having any say or power in this decision. Thus, we have to prepare and take care of ourselves in case it happens.

People are resilient, and will drive new business creation

In a downturn, people tend to be resilient. I read somewhere that during these times, people start their own businesses because they've been laid off, sulk for a while, then pick themselves up and go and start new sustainable businesses because now they are free from the corporate mess to do so, whereas they may not have felt that freedom before....?

Entrepreneurism is under attack

I agree generally with this statement. I think the capital mkts are closed, but only for a while. The evidence is that the recovery steps are taking hold but it will still be a few months before things are more back to normal. There will be a shake out in the venture industry. IPOs will still be tough until SAOX gets fixed, which I heard people are working on.

Education could use some serious improvement in the US. But still many kids come out of college wanting to do a startup instead of taking a corporate job. so while we essentially closed the doors to international talent, I think that there is plenty of talent ready and willing to go with just a little experienced handholding.

Basic research is declining I hear. People aren't encouraged to take science; they want to make the quick buck so they become stock traders. So less ideas come out that way, but still there are many untapped. I met a guy who had a line to the DARPA funded projects in universities. He raised a small fund to help these projects become real businesses. Real scary star wars stuff he was telling me about. Pretty cool.

The search for exits is a problem for the whole venture industry. Tt does foster this attitude of building a business for the exit and not for sustainability. This needs some re-thinking. I admit I even suffer from exit-itis as an angel investor. But we also need to figure out how investors can profit from supporting a company and being able to cash out their investment.

Silicon Valley downturn not as severe as other parts of the country..sort of

Still lots of wealthy people running around, although a lot of Valley companies laying off 1000s of people. And I think parts of the Valley are experiencing downturns but not all, as evidenced by housing prices, etc. Still, it's probably not as bad as other parts of the country. But as for contributing to the entire country's recovery, I think you'd have to make people move to the Bay area to look for jobs, or have those companies expand out to other states to get cheaper labor. One problem is finding skilled workers in the areas that high technology requires in other states. Sometimes, you just can't find those people there, or get people to move there because the quality of life is not what they want (who doesn't want to live in California haha?).

I read an article in Venture Hacks about American Apparel. This is the innovation that is required in the US; to stop throwing jobs out of the country and figure out how to do things here, so that we can employ Americans and pay them what we need to pay, but also do it in a cost effective manner to be competitive.

California is well poised to recover

I think California has a great chance to recover by itself: entertainment industry in southern California, tech and other stuff in northern California. As in other years, I think there will yet again be a migration to California to look for fortune, as companies get created and are looking for skilled people, and that will draw skilled people from states where jobs are lost.

Do you agree or disagree?

Startup Vocabulary: RENVY, RENVIOUS

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RENVY
[ren-vee]
noun, verb

-noun
A feeling of discontent or covetousness with regard to another startup's revenue, especially when you have none:
Green with renvy takes on new meaning when we're talking about money.

-verb
To regard with renvy:
I renvy company Y reaching breakeven; if only we had went for revenue from the very beginning, we wouldn't have to go beg for more money.

RENVIOUS
[ren-vee-uhs]
adjective

-adjective
Full of, feeling, or expressing renvy:
We at company X are renvious of company Y's $100 million dollars of revenue last year and are planning to take them out in beer pong on Friday night.

This startup vocabulary lesson was brought to you by the folks at Loudwater Labs.

Pitching Me

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Some teams from Seedcamp from London were in town this last week and I managed to get a private pitch session. Here is a video of uberVU pitching me, shot from a mobile phone:


uberVU - betaworks pitch from Vladimir Oane on Vimeo.

I don't look too good without makeup, do I?

The Death Spiral

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This slide from the infamous Sequoia deck is one of my favorites:

Running lean is something all startups should practice at all times, even if they are profitable. Keeping costs under control is an art and a science and is even more critical when you're just starting out and don't have any revenues.

So add in our economic woes and in the short term, the death spiral becomes a high probability and high burn startups can't pull out of it, because funding has almost all but dried up. Venture funds are pulling back and getting super conservative; they have good reason too - the crappy economy does not allow startups with slow to prove business models to survive. At the early stage, it's even worse; us angels and early stage funds can't give a startup enough money to last out past when the bailout plan and economic recovery will begin. Early stage startups need enough runway to get to positive metrics so that they can raise the next round. If they can get to profitability, even better. However, if you try to raise money now and your metrics are average or not all that great, you won't get your raise.

Hence you enter into the death spiral and you're dead.

UNLESS...you reduce burn now. Do whatever it takes: layoffs, cutting salaries, removing non-essential services and perks. It's all about survival now and for as long as you can, to give you as much time as possible to get your metrics to a positive place. Activate revenue generation immediately; don't wait. Start getting cash in now and you'll be able to last even a bit longer.

And if you're starting a company right now, begin with good habits of running lean. Don't get into thinking you can run the company as if it were a bigger, more mature company. You can't. The bad economy exacerbates these problems.

It's times like these when you really find who truly believes in the company and the idea. If you need cash in your life (ie. have a family), you should seriously reconsider being in a startup. Startups need to run lean to survive; it means that there is a huge amount of sacrifice that its employees take on to really run lean. Those who are truly believe in the company and idea will stay no matter what it takes; they will not leave when you cut salary or perks. And they will work their butts off for minimal pay and equity alone. If you can't live in an environment like that, I would really urge you to look at what is truly important in your life before joining a startup.

Tipjoy Helps With Hurricane Relief

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A plug for a new company with a cool application and technology. A simple social gesture such as tipping hasn't been explored much on the Internet. I think it's an interesting area and filled with opportunity.

Check out their latest announcement and help with hurricane relief!

Follow On Innovation: Designer's Dream or Nightmare?

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This year's Ycombinator did not disappoint me in seeing smart, young people crank out new business ideas. But I was struck by the number of repeated ideas in this class's mix.

In past classes, Ycombinator participants came up with truly innovative ideas and prototypes to illustrate those ideas. They were really new and concepts that I had not seen before.

In this class, I saw many that were remakes of old ideas, either from previous Ycombinator classes or even just improvements on products/services that were already out in the marketplace. All of them were better though; their user experience was markedly better and most people agreed that the Ycombinator teams produced better versions of existing products.

It brings up the question of what I would call "follow on innovation," which is to take an existing idea and make it better and then customers should adopt the new product because it's better, faster, easier to use,....right?

One of my favorite business books is The Innovator's Dilemma by Clayton Christensen. The book describes the classic case study of the hard drive industry. Established hard drive manufacturers would create one version of it, and either be unincentivized to innovate on the technology or miss seeing the opportunity of a smaller hard drive. Smaller more nimble incumbents would develop a faster, smaller hard drive while the established manufacturers missed the opportunity to develop the newer versions for fear of cannibalizing their existing business. This happened over and over again as hard drives got faster and decreased in size.

At each stage, the existing company would somehow miss the opportunity to jump into that new space. They would research and research and find that no customers would ever want smaller, faster hard drives. Their financials would always say that the new product versions would cannibalize their existing businesses and create harm to their companies. They were smart people doing the right thing and that right thing told them they should not innovate and that there was no proof in the innovation being good for their bottom lines. Their own analyses created an opportunity for new incumbents to enter the market and steal large amounts of share from entrenched, already-established companies.

Here we see follow on innovation clearly overtaking existing, established businesses. If it can happen in the hard drive industry, couldn't it happen with one of these Ycombinator companies in the Internet?

In Digital Dreams: The Work of the Sony Design Center by Paul Kunkel, Sony's Design Center looks at their products through a life cycle from "sunrise" to "sunset". "Sunrise" is when the product is first introduced. The product is a completely new entrant to the marketplace. Competing products introduced into the marketplace from competitors compete on features and technology, and features are added until differentiation is no longer achievable through either features or technology. This is when the product starts crossing from "noon" to "sunset" and competing on design becomes ascendant.

Sony stops adding features as a main focus and starts creating new designs around the features and technology. Products are created in different forms and colors, appealing to every consumers' taste in the way it looks and feels versus on features alone. According to the book, it is heaven for designers because now they are the important resource to which product teams must turn for further competition.

For Sony products like the Walkman, "sunrise" to "sunset" takes years, if not decades. Physical product development cycles usually take about 6 months to a year to complete back then; now they are faster given advances in manufacturing technology and the lack of need to innovate on basic technologies. Still, they take a long time to plan and build and for consumers to buy and experience and, ultimately, replace to try a new product. On the Internet, products and services move from "sunrise" to "sunset" in a matter of months. The pace of innovation is incredibly fast and a high percentage of the basic technologies enabling a product or service can be implemented very quickly. Products rapidly reach that point at which design and the user experience quickly becomes a differentiator between competing services who essentially accomplish the same thing.

In the beginning of an Internet product, engineers' importance supercedes that of other disciplines. Basic technology must be developed, implemented, and tested. As other entrants emerge, they too develop similar technologies and then there are many competitors in a market where formerly there was only one.

As an internet product reaches "sunset", the user experience becomes more important. Basic technologies have been developed and now you need to deliver the benefits of those technologies as easy as possible. Retention of users comes from clear, simple designs and hard-to-measure metrics like branding and emotional satisfaction from using one service over another. It's the designers' dream time because their discipline comes to the forefront for product development.

Or is it their nightmare?

It's never as easy as saying that a great user experience is all you need, when other basic technologies have been developed, and all other things like marketing, funding, etc. are held equal. User experiences can be copied; they are near impossible to protect via patents. Branding can be mimicked. The more aggressive the design, the higher the risk that you attract some and alienate others. It also means that the more aggressive the design the more often you need to update the design because design can get dated and worn out.

And for early stage companies trying to enter into a market with entrenched competitors, you're trying to build a better product through user experience alone. You probably do have a better user experience when compared to your competitors, but trying to unseat a gorilla in a marketplace because there is so much inertia in current users is incredibly tough without a lot of resources.

As a person with a design background, I am a big proponent of design and its importance to product teams. But in looking at some of this last Ycombinator's products, I find myself wondering if a better user experience on top of a product that is already existing in the marketplace is good enough for it to compete and survive to grow to be a worthwhile sized business.

I intend on studying this further as I watch the current batch of Ycombinator companies and others attempt to gain market share through mainly innovation in design.

If I Put It Up, They Will Come....Right?

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You know what - if we all sat down and thought for a while, we can all think of at least one company that made it big all by itself, nice and viral like, without any help from anyone but users, and that first user was able to drag all his friends in, and then exponentially drag all their friends in as well, and so on, and so on. Pretty soon it became an internet dynamo, a dominant force on the Web and its founders made a gajillion bucks off it for practically doing nothing.

No advertising. No SEM. No SEO. No nothing. Just magic. Maybe a bit of accidental viral-ness, but nothing else.

The funny thing is, I've met so many entrepreneurs whose site growth strategy depends on this magic.

I listen to them tell me their idea, and sometimes their idea is pretty cool. Sometimes they've got the site up and their idea's coolness is actually reflected in what they built. I tell them I really like it and then ask them if they are going to start a company. Then the story gets murkier.

Each one tells me yes they really want to start a company. Each one has big dreams. Then I start asking them about how they're going to get the word out about their product. Then it's unclear. They say they want to put it up and see how it does.

Well....Okay.

I tell them do they intend on doing marketing, even some marketing on the cheap like reaching out to bloggers, or SEM, or something. As soon as the mention of spending more money comes into play, the answers get murkier and murkier.

I persist. I ask them why don't they go out and raise money and become a startup. Then they would have money to spend on marketing. They give a range of answers from not wanting to leave the comfort of their current job to fear of committing to something that might not work to "still thinking about it." Mostly, they got the site up and are just waiting to see what happens.

At this point, I have my answer at least (which is "no I'm not investing").

You know, it's hard to leave the comfort of where you are now. You're making money to support a great lifestyle, or a family. You are comfortable, and don't want to face the potential chaos of the unknown, let alone a startup and its challenges. You might even fail - god forbid what others might think of you, or worse, what you might think of yourself. You might fail, and end up with no money, no job and you bet it all on this one thing and now you might have....zip...nada....nothing.

So you say you'll just put it up and see what happens.

My thoughts to you are:

1. Growth by "magic" into an internet dynamo happens SOOOOOO infrequently that the chances of what you built doing that are so vanishingly small.

BUT - what you built might actually be useful and cool enough to grow into a decent sized business (or even a dynamo) IF you were to put some sweat and money into distribution and marketing so that users know you exist.

In absence of full commitment, you might as well be playing Lotto.

2. Since you won't fully commit, you're unfortunately not risk tolerant enough to become a great entrepreneur. No offense, and I don't say it as negative criticism. Not everyone is built to deal with the uncertainties of being an entrepreneur, and the chaos that inevitably ensues from running a startup and living on the edge of having no money. So just stay home, make your money, live your life.

And don't be delusional about the chances of your site which you just "put up" and are "watching what happens."

Our Economy Sucks, Raise More Money Now

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Our subprime mess is very much underway and the economy is suffering from that and a host of other issues. When consumers feel the pinch, that means they buy less, and companies don't make as much money, and then they spend less on advertising and also on acquisitions. This is important to both startups and us investors: consumers spend less, so they are less willing to buy products and services from a company. Companies spend less and then they slowdown their advertising spend. Stats show that advertisers will maintain their online ad budgets when compared to offline budgets (woe to offline operations who are heavily dependent on advertising for revenue), but I can't help but wonder how much online advertising could have grown MORE if our economy wasn't so bad. Last as companies pull back and preserve cash, they will be less likely to acquire all these nice startups that we're working on now. Granted, the wiser and the more resourced companies will actually go on a buying spree, but they'll be after the startups at super cheap prices since they'll be lower performing towards the end of the year as revenues become tougher. Beware the corporate development folks who seem to slow down a bit; they're just waiting for you to go through your cash reserves and get to a more desperate place by end of year and snap you up at a discount!

When I meet startups, I am now telling them to raise more than they were thinking. I try to get them to run the numbers and to figure out how to survive until at least the second half of 2009, or further if possible. I want them to survive through the economic downturn and not be dependent on additional money until then. I tell them to expect that any revenue projections will be missed towards the end of this year, and advise them that if they try to raise money on poor metrics AND they have run out of money, they will have an extremely hard time doing it.

A lot of entrepreneurs are still coming to me with raising $100k-$300k in their plans. Then I try to convince them of the economic issues and that unless you can survive for 1.5 years on $300k, you'd better change the plan. Not all of them listen though. It will be interesting to see if I am right. To me, you should be at least $500k, even better upwards of $1-1.5MM, whereas in a decent economy, you could get by with $300k-$1MM.

Some of them only want to survive 6-9 months to get a prototype up and raise money on that. In a better economy, I would say that this is not a bad scenario. However, in today's world, I tell them that if they are getting traction on an idea in investors' eyes, that they should leverage that inertia and get more money now. If they build a prototype and are not gaining traction in a down economy, it's only going to show that you could not gain traction and investors be much less likely to participate as they look for positive metrics. It's much better to raise money on a beta and/or the idea and get as much money as you can now, and to plan on survival on minimal or no revenues for 1.5 years.

Another issue with the 6-9 month plan: August and the holidays. Running out of money by August really sucks for fund raising. This is because the venture community goes on summer vacation and it's nearly impossible to find someone to get a meeting. You have to wait until they all get back in September. Then you have about a two month window everyone gets distracted once again because it's Thanksgiving and then Christmas. From about mid-November to first/second week of January, the venture community goes on vacation, peoples' minds are on the holidays and families and not on funding you.

If you're an entrepreneur reading this now: raise more cash than you think, expect that any revenue projections you have will be missed, and try to plan to survive on minimal or no revenues until at least the latter half of 2009, and raise all that money now while you have investor inertia.

Incubation 201: Should You Incubate?

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My last post Incubation 101 went over basic concepts which I think are essential to the success of any incubation operation. Basically, I think that risk of failure increases exponentially if you don't follow these concepts in their entirety.

In this post, I want to bring out some subtle points mentioned in the previous post which refer to whether or not you SHOULD incubate at all. I assume that if you are thinking about incubating, that somehow you've reached a point in your career/life where you CAN incubate. But does it mean you should?

What are YOU personally willing to do?

Self-examination and knowledge is very important. You need to figure out exactly HOW you can contribute to incubation and the nurturing of ideas into businesses. Then you need to figure out what really motivates you and how you gain satisfaction, relative to the kind of participation you're willing to give.

Are you willing to jump back into the startup life of working 24/7?

If you're not in a position to go back to startup life, then you shouldn't incubate your own ideas. Remember, the idea originator has the resonance with the idea, and is best poised to take an idea to a successful conclusion. If you're not willing to do that, that's a clear sign you shouldn't incubate. Transferrence of an idea to someone else is nearly impossible and substantially decreases chances for success. Incubating at arm's length is still possible.

Do you have incredible, kick-ass product ideas and want to see them flourish?

This is better than having dumb ideas, or ideas that others are working on, or no ideas at all. You shouldn't incubate your ideas if you don't have great ideas to begin with. Again, maybe you should incubate at arm's length.

Being the "Guy at the Top"

The most dangerous thing you can do with incubation is try to be the "guy at the top" who directs things but doesn't get involved in the day to day of any incubated operation. You generate great ideas, and then hire a team to execute that idea, and then think you can sit back and watch the idea flourish, grow big, and you reap the benefits while being able to kick back and just manage it all.

Incubating Your Own Ideas

So you have great ideas and are willing to go back into the startup world. Incubation is a great way to figure out what to do next, if you have the resources to work on many things simultaneously. You will need to be personally involved in the day to day of each incubated idea, and you'll most likely max out at around 3-4 ideas, perhaps less.

Follow the principles in Incubation 101 and you'll do great.

Managing Incubation at Arm's Length

So you don't have great ideas, OR you aren't willing to put yourself back into startup mode regardless of whatever ideas you have.

My advice to you, is to let go of any notions that you be the "guy at the top" and find another way to help others with their ideas. Reorient your values and take great pleasure in watching others' flourish with their own ideas, but contribute in ways that allow you to be involved.

This can be through advisorships and/or investments. Provide value to your entrepreneurs as you invest money in their ideas and they will come to you for help. Create a positive relationship and you can gain some satisfaction in knowing that you contributed to the success of their idea.

Raise a venture fund and support people more through cash, if you aren't so helpful in other ways. Keep the incubated ideas and companies at arm's length as much as possible to maximize incentives and reduce your exposure to ideas that aren't going anywhere. Again, follow the principles in Incubation 101 and you'll minimize risk and maximize your chance of finding something great.

My Personal Experience

Back in early 2006, I attempted to raise a venture fund with an incubation component. I was having a hard time raising it, and ultimately this caused me to get involved with startups in a different way. Looking back, I was glad that I didn't fully realize the incubation operation as I think it would have gotten to a bad place.

In my self-examination, which happened much later, I discovered:

1. I was not willing to put my personal time into any one idea. This would have lead to a bunch of ideas run by me, the "guy at the top". This would have been a risk increasing move.

2. I really didn't have great ideas. I had some, but none that were earth shattering. I didn't have a way to generate great ideas but would have tried to execute some mediocre ideas, again increasing risk.

3. I realized I was much better at taking someone else's ideas and making them even better.

Thus, I am today at something-like incubating at arm's length. I feel that I have yielded a much better risk profile through my work with startups across a number of great ideas and entrepreneurs, and leveraging my personality preference for making an existing idea better versus coming up with a great idea myself. I also have higher personal satisfaction working in this fashion.

Read Incubation 101, do the self-discovery, and do incubation the right way for YOU.

Incubation 101

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Over the last few months, I spent some time interviewing a whole bunch of people about incubating businesses. It was very enlightening not for the information I uncovered, but the fact that it just brought to the forefront of consciousness things I already knew.

Incubation has had a bad reputation over the years, especially the large ones like IdeaLab and Internet Capital Group that raised enormous sums of money but didn't return nearly what they were supposed to. When I tried to raise my own venture fund 2 years ago and wanted to include an incubation component, I was advised unilaterally to not call it an incubator or else I would get nowhere fast! Investors had been burned way too much on the incubator model in the past to trust new ones.

Yet incubation is sexy. Generate new, cool ideas. Create new businesses. Find the next Google. Unbridled innovation, unlimited success! Wow!

If only it were that easy or certain. Incubation is really hard, but in my research I've uncovered some guiding principles which make incubation viable and possible as a strategy.

Here are the highlights:

Incubation works nicely for internet projects
Developing products and services for the internet has gotten so cheap and easy that invested capital can be very small relative to other industries.

Incubation is HARD
It's not easy to come up with a great new business. Attempting it is not for those wishing for a quick win. You have to be patient, focused, and be able to let go of projects that aren't getting anywhere or waste too much of your time and resources.

Go cheap
The less money you spend, the less money you need to properly incubate. Testing ideas as cheap as possible reduces overall investment. Don't invest a ton in infrastructure liking buying a pretty building and cool office furniture. Outsourcing can help with being cheap especially in the international marketplace for talent.

Build fast
Get your concepts out there fast and test. Being slow means competitors can get into a space before you can test properly. Also, the more ideas you can generate and test, the more chances you have of hitting on something worthwhile.

Fail and remove fast
If something is failing, close it down fast! Have the discipline to kill projects that aren't working. Throwing money at failing projects doesn't solve the problem either. The ability to let go of bad projects is extremely important. Otherwise, projects that are sitting around languishing just waste money and effort to keep afloat.

Go wide...Carefully
Risk is reduced if you cast your net wide of ideas to try. Throwing all your eggs into one or a small number of baskets increases risk substantially of failure. But go wide carefully, meaning don't stretch your resources too thinly.

The founder of an idea needs to go with that business
It is nearly impossible to properly transfer an idea to someone else. Trying to do so raises risk tremendously. To reduce risk, the person who comes up with an idea should stay with that idea, should that idea blossom into a business. This is because the originator of an idea typically has some intrinsic resonance with that idea as a business, and is the right person to build, innovate, and nurture it.

If you are not willing to take an idea through to its proper conclusion, my advice to you is to re-examine your life and what you want to do. If you're not willing to jump back into a startup, then I would tell you to just let others develop their own ideas and let go of your own. Take pleasure in nuturing others and their ideas into great businesses. Raise a venture fund and help others do well.

The team members also should go with that business
Shared resources developing an idea is a nice concept, but to reduce risk, as soon as an idea starts taking off, the development and product team should immediately be deployed on that project. Switching people on a project is hugely problematic and wastes time in education, learnings, and experience.

Any resources working in an incubator should be told beforehand that if they work on an idea, they can't just sit around and keep coming up with new ideas; they need to see the blossoming idea through to its conclusion. If anyone can't buy into that model, then they should find a job somewhere else.

Keep resources at arm's length
The more resources you can keep not on recurring payroll, the better. It's easier to remove people who aren't working out, or shut down projects. Hire the teams on projects that are flourishing to the corporations in which those projects reside.

Build a rolodex of resources you can deploy at a moment's notice. Find great people who are willing to give you great rates and can do great work.

Be disciplined in a process for evaluation
Set clear checkpoints for your incubated projects. If they do not reach basic minimum levels, then they should be shut down ruthlessly. Budgets, time, goals all can be used to create checkpoints.

Incentives are key
Nothing motivates people better than survival instinct and a life or death deadline. The survival instinct is activated when they know they're going to run out of money (like their salary, their means for eating and paying rent, etc.) if they aren't successful. The life or death deadline is activated when they know they're not going to get any more resources or help beyond a certain point. So they MUST be successful or else they're gonna starve.

On the other side of the coin, it is highly motivational to know that their success is also tied to success of their project in a large and singular manner.

Paying them a regular salary from the overall incubator pool is not motivating enough; it makes them too comfortable knowing that they could fail on any idea but still are able to go on surviving. It also severely reduces their urgency, knowing that they're still going to get a paycheck whether or not it launches today or 3 months from now.

Giving them large ownership in a separate corporation formed from their project is. Tying their salary to the separate corporation is even better.

Forming a separate corporate entity per project increases clarity in ownership and process
Keeping projects internally makes it difficult to track and assign costs properly to each project. When you have a separate corporation each with its own budget and resources, tracking becomes easier.

It also makes it clear who owns what part of what corporation, and how much of it. Keeping projects internally removes that fact as you're part of and being paid by the whole.

This clarity extends to funding as well. When an entity is running out of money, you have to take an official step to put more funds into that corporation's bank account, along with all the ramifications in doing so in ownership, and why you have to do so. It really makes you think twice about funding a business that may be faltering or flawed.

As mentioned before, when peoples' salaries are tied to the corporation, then incentives are highly aligned with the success of that corporation, and not blurred with the whole incubator.

Some ideas require a sustainability component to be fully tested
A recurring theme among internet products is that ideas can be launched quickly and once it's out there, people will come and use it, love it, and it will grow. Banking on an idea to grow organically by itself is a recipe for disaster. The problem is that not many ideas have the ability to do so. We often fool ourselves that by launching a new idea live, that people will just come and use it and it will be the next Google. It might happen, but probably won't. Then we get frustrated wondering why it isn't growing, and often end up thinking that the idea sucked and we should close it down.

However, it is deceptive to think that an idea which does not grow organically is a failure. The reality is that the idea might actually be good, but just requires people, time, money, and smarts to apply to it and then it might grow. Thinking through the sustainability of a launched idea and how that can be supported for at least some period of time is really important.

Incubation works great if you're personally trying to figure out what to do next
If you have some personal capital and want to find a new idea to work on, incubation could be for you. I've talked to a number of people who have employed incubation at a personal level successfully. Instead of working on just one idea, they launch 3-4 and work on all simultaneously. Each idea gets funding and their own team. At the end of the process, the most successful idea survives. The other projects are closed down or sold, and you become CEO of the surviving, thriving business.

It could work much better than working on singular idea and trying to determine if that idea is the right one or not. Or working ideas serially. Being serial takes up a lot more time than doing things in parallel.

Yes it takes a lot of time and effort, and requires a multi-tasking brain. But if you're a startup person, you're probably used to working like that anyways.

Find great startup people
Seems basic right? It's actually harder than you think.

Find creative, hard working, caffeinated people who are smart and motivated AND can take a project to a conclusion. Too many people float at the creative, idea stage and don't have what it takes to stay with an idea over time and develop it. Discovering people who are like this is very hard, so beware.

As mentioned previously, keeping them at arm's length makes it easier to get rid of inappropriate people. Be ruthless in culling people who aren't working out.

Young people are great. They can work for long hours, live cheaply, have almost no other attachments in their lives. They will try stuff because they don't know better, unlike us old, jaded, experienced people. They're not so great because they don't have enough business experience to know how to take a business further.

Build an idea with revenue generation on the mind from day one
If an idea is generating money, its ability to sustain itself grows dramatically. Creating products which bank on the free model and gain lots of users, but have no concept or plan for short term revenue, is great for people who have a powerful investor as backer and who is willing to fund growth beyond that point. For an incubator, I would say that this is not a good path to go down and substantially increases risk of failure.

Revenue generation sustains the incubation process
Following on the last principle, if you can find a way to generate revenue immediately, then the incubation process can be self-funded and sustaining, and opens up the ability to try new ideas without deploying more outside capital.

Good luck with your incubation efforts, and I'd love to hear how you're doing if you are going to incubate new businesses.

Exploratory Products vs. Utility Products

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Over this last year, the topic of exploratory products versus utility products has come up so many times. And I've always felt uncomfortable with products that engage users because it helps them "discover" or "explore" something.

"Discovery" and "exploration" are always so alluring terms. Throughout human history, we've always envied the explorer. Christopher Columbus set out to discover the New World. Lewis and Clark went looking for a way to the Pacific Ocean. Neil Armstrong sets his foot on Lunar soil and declares, "That's one small step for man, one giant leap for mankind." Even watching Star Trek with the Enterprise on their 5 year mission to explore new worlds, we can't help but wish we were on the Enterprise alongside Captain Kirk and Mr. Spock. It sounds so wonderful, so romantic, and speaks to our ingrained cultural tendencies that achieving, discovering, and exploring makes us feel that blazing new territory like pioneers puts us out of the comfort zone and sets our senses afire, and takes us out of our normal, boring lives.

First, I think that there is a segment of the population with a natural "gene" for exploration. I personally know people whose first inclination every morning right when they get up is to go to click randomly on news articles or websites, like StumbleUpon or Digg, or Del.icio.us. They always do this before doing anything else.

Second, I think there are differences in the manifestation of the "exploration gene" based on age. Young people seem to engage in more exploratory behavior. But once young people grow older, they get more responsibilities, their time gets occupied by a whole bunch of things, their lives get so full that there is little or no time for exploration unless you have a natural "gene" for exploration.

To me, exploration is either an activity relegated to a small population relative to the whole, or one that does not sustain itself as a person ages. Given this belief, I think there is a tremendous amount of risk associated with products that depend on "exploration" and "discovery" as the main reasons why users would want to and/or continue using a product.

What's the difference between an exploratory product and a utility product?

Utility products are those which depend less on exploration and discovery as primary tenets. Instead, utility products work their way into our lives because they are essential and we gain continual value from our usage and interaction with the product.

Here's an example. News sites like NYTimes.com are utility sites. We consume news every day and find value from that by being informed. But they also introduce exploration to keep things interesting with their Most Emailed Stories module. But it's not the focus of the site; it's secondary.

Another example: StumbleUpon. I consider StumbleUpon a classic exploration site. You go there because you don't know what you'll find. You have to like discovering new websites and are ok with spending your valuable time doing so. But yet traffic over the last year has been dropping.

Here are the Alexa graphs for NYTimes and StumbleUpon:

Do you want your product's graph to look like NYTimes.com or StumbleUpon?

My basic tenet is:

If you want a chance at success, you must make your product essential from a utilitarian point of view. You can use exploration to make your product more interesting, but if you make exploration your main purpose, you'll reach a topping out point of users and potentially decline over time.

Is it a perfect rule? No, of course not. I am sure if we thought hard enough, we could think of some sites who are successful at employing exploration as their main purpose. However, I'm talking about risk reduction of failure and increasing the probability of success dramatically in my opinion. Wouldn't you want to reduce the risk of failure by a great amount?

Talking Entrepreneurs Out of Only Going for Users

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Occasionally I come across an entrepreneur who insists that his current strategy is to go for users and not worry about revenue now. It always makes me cringe. Then I try to talk them out of that strategy and find a more balanced strategy of getting users and revenue at the same time. Why do I feel this way?

In the past, the "get users now worry about revenue later" strategy has been successfully employed, so it's not totally without merit. Yes it's true; if you have tons of users then at the very least you can monetize the eyeballs via advertising. But certainly if many users find your product/service useful, that's evidence that they would probably pay to use some version of your service at some point.

In examining how this strategy does work, I've come up with these cases:

You hit on a killer app early and you have hockey stick growth in users.

Somehow you've hit on a killer app early and you've got users up the wazoo. You see exponential growth and you can increase your valuation by waiting a bit longer to really cement your negotiation position when fund raising. In any case, operations can last that long because the speed at which your users are growing is so fast that it is obvious you can survive cash-wise until you reach your goal, before you need to figure out your revenue strategy.

You can last expenses-wise long enough to grow users to a point to be valuable.

You've built a service and found it valuable to users, and now you want to wait to build up users before figuring out a firm revenue plan. Expenses to run the site are low enough that don't eat into your funds. Whatever money you've raised now, you can extend that budget for a very long time (try 1-5 years). Or maybe you're rich or you are married to a rich spouse and don't need the money coming in from the company to survive.

You've got the initial backing of a big fund.

I've seen cases where if you get seed money from a big fund, like Sequoia, then it gives you a bit of comfort that there will be someone there to infuse you with cash if you get the huge amount of users but don't have revenue. Often their terms enable them to get first right to fund you when it comes time for the next funding round. But also realize that they can spend $100k-$500K on a company and not bat an eyelash if they lose it all; they've got billions under management and can afford to give you seed cash knowing that they might lose it.

If I see an entrepreneur that fall into these categories, then I usually shut up on this issue. But most people are definitely not, especially when they are in the early stage of their startup.

That's why I try to talk entrepreneurs out of going just for users. I want them to think about revenue right from the beginning. Even if it's incomplete or risky, at least they are thinking about it now versus getting into a budget crunch and then realizing they should figure out revenue when they're almost out of cash. And who knows, they may actually hit on something that brings them revenue to survive or even do better than that. But you'll never know unless you try as soon as possible.

I've also seen entrepreneurs argue they have a funding plan along with their business/product plan. They will build the product and user base, survive until their current cash runs low, and then they will go for their Series A funding and everything will work out great. The problem with this plan is that there is no backup; it pre-supposes everything will go as planned with no hiccups. This is a highly risky supposition to go on.

One problem is that you think you've got something great, but those pesky users don't behave like you want them to. They might actually NOT come in droves to your wonderful product! Or they come slower than you think.

Another problem could be that engineering your incredible product might take longer than you think. Or you launch but find out you need to do more.

The last problem is that convincing people to give you tons of money can be easy or hard. I've seen a company close Series A in a month and a half, and I've seen companies still out there after a year trying to raise money. You can't plan for how venture funds and investors are going to react to your plan and progress, even if it seems great. Even if you court someone, the terms negotation and the due diligence process could take months.

Mitigating the risk of all these bad things happening could just simply be...to think about revenue from the beginning. In that way, you can get cash coming in as soon as possible in case you need to survive longer than your plan dictates as you can never predict if you'll need to or not.

It Sucks to Not Be an Engineer...

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It's gotten pretty clear to me that if you're not an engineer, then starting a new Internet startup becomes a difficult venture.

Consider the non-engineers out there with great ideas. You want to start a company but haven't been able to convince someone that you have a great idea through Powerpoint alone. Everyone wants to see something working so they can wrap their brains around it and see if it is truly viable. But you can't show them anything. So you go try to build it.

So far it becomes an expensive project...well, in Web 2.0 terms it's expensive. In normal terms, it probably costs what it should cost. You go find some money, and you pay people what they need to get paid and whatever you build gets built.

But not so in the world of Web 2.0. It turns out that full on products can be built for so much less than normal. Well...less than normal if you are an engineer and program it up yourself. You are programmer, product manager, visionary, business development, designer all rolled up in one. You spend a few months coding at night after your day job and, poof, you have a working web site. The only expenses you may have are your own; nobody else needs to get paid.

For non-engineers, it's a tough to build a Web 2.0 company without being an engineer, or having one as a partner. You could hire an outsourced engineering firm but that could run your costs up to $30k to $100k per month for many months. You could raise that but you'd need 6-12 months to build something. That would put your angel raise at the very high bounds of what is achievable with a Web 2.0 concept. And you'd have to do it without a working prototype. Makes it that much more difficult as investors know they should see something first and have gotten spoiled by all the other Web 2.0 companies who do come in to present a concept with working prototype in hand.

Best bet: Find an engineer or two and bring them on board with your concept. Without engineers, it's a long hard road and I've already encountered several entrepreneurs who are trying to start something, as well as those who are well along the way. Those who have built something could only get money from friends and family, so having rich friends and family goes a long way. Very few have gotten money from a fund, and those were people who had track records in entrepreneurship, experienced and persuasive in the pitch, and had all the important questions answered.

Second best bet: buy Ruby on Rails for Dummies and start programming.

These last few weeks have been really hectic. For a while, it seemed like I wasn't looking at any new deals whatsoever. I resigned myself to working on the companies I had signed up with but also could see that my work with them was starting to taper off in an expected fashion.

But then it changed. All of a sudden, a flurry of new opportunities came down and I found myself meeting with companies every week. It actually got fairly hectic, meeting up with entrepreneurs and actually going through some due diligence processes with a few companies. But one by one they dropped off my radar. As they dropped off my radar for a variety of reasons, some interesting observations came to light about the way startups and investors strategize with each other.

The Entrepreneurs' Perspective

The most sought after entrepreneurs/startups get deluged by requests from angels to invest in them. Typically, they are also pursued by venture capitalists who also like what they see and want to participate. The availability of money to these entrepreneurs creates an situation where they can pick and choose the money they receive. I've seen them go in these directions:

1. They go directly for the big VC investment and skip angels altogether. Let's face facts: raising money sucks. It's time consuming, you get a lot of negativity from people who don't believe in you, and you'd much rather be building something than begging for money. So why not skip all the nonsense and just take the big money and go back to building your business and hiring people you need.

2. They take the VC investment but only bring on some angels who are either high value or friends. Similar to 1., they get the big money but only bring on those people they like or those angels that can help them later.

3. They delay VC funding to push up their valuation, and only pick a handful from the crowd of angels wanting in. The most bold of entrepreneurs who are on to a good thing will press their advantage by not taking big money now, which could mean they have to give up more of their company at this point, and wait to build their business a bit more which raises valuation for later and, thus, gives them a larger advantage for not giving up so much of their company later in exchange for a large VC raise. They instead raise a smaller amount (ie. $500k - $1MM) which gives them the ability to run for enough time to build their business to a more valuable state.

4. They want angels who are active investors and can bring value to their company. More and more I speak to entrepreneurs who only want angels who can help them in their business versus just bringing money alone. It makes sense; angels who can help are more motivated to help because they have skin in the game. It does make for a tough environment for those angels with only money to give.

5. They are limiting the number of angels and/or investors. Managing a lot of investors can be troublesome to entrepreneurs. Simply cutting all the paperwork (ie. stock purchase agreements, stock certificates, etc.) can cost more money. Collecting the money can be tough for those angels who are dragging their heels in transferring the cash into your account. Dealing with nervous investors can be a draw on resources as you need to respond to their requests for information and calming their anxieties about whether or not you're going to make money for them.

This all goes out the window for those entrepreneurs who don't have something hot enough to attract lots of investors.

The Investors' Perspective: Herd Mentality, Joining the Herd

As an investor, I want to get in on the great deals. Finding deals that are good but are hidden can be really tough. It's more often that there is a common opinion about a startup and that everyone wants to get a piece of the action.

I try to do my own due diligence. I also try to form my own opinion about a startup. But I do find it difficult to ignore what others' think about a company. Over these last few weeks, I've looked at bunch of deals where there was a large number of investors trying to get in. But I've somehow lost out on a number of them. Why was that? Some observations:

1. Herd mentality is inescapable. For some reason, when many people think you have a hot deal, then you tend to think so too. They must know something you don't, or you bank on someone else's expertise, or you just don't have time to do all the due diligence yourself. Thus, I tend to look more seriously at deals with lots of interest, even when I tell myself I'm going to be disciplined enough to do all the due diligence on my own.

2. The investor herd piled in, wanting to invest into a startup. It's a common scene around the valley. The hottest deals get shopped around the most popular and prominent angels who are all high value and high profile. They have lots of money and value to bear on a deal. But they also have their friends who come in on the deal. So a combination of being able to keep in an entrepreneur's mindset and haivng the herd not forget about you, thus keeping you in the entrepreneur's mindset, helps to get you into a deal...or not. I have not been really part of any investor herd before so it was literally impossible for me to stay in an entrepreneur's list of investors as they get deluged by a huge number of people and can barely manage the flow of communication. I know I've been dropped off investor lists because of not being part of a herd.

3. Joining a herd became a worthy goal. As I thought about reasons why I missed out on deals over these last few weeks, I started thinking about how I could join a herd. I don't like to bill myself as a guy who can do lots of investor intros now, but knew I could get there in a few years as I worked with more and more people. But now I think about the networking aspect more, and using entrepreneurs to introduce me to some prominent angels and VCs around the valley. Slowly but surely, I am starting to not be forgotten amongst the investor herds, which is a good thing. So far, I think a combination of personality and value has helped me stay in the mindshare of herds. I meet people and show them that I'm a cool guy and not a wonk, and that my experience can actually help a company that we may all be investing in, and things seem to be happening.

4. I am trying to standout in a herd. If you demonstrate that you can bring high value to the company, staying in the list of investors for a given entrepreneur becomes easy. I can sometimes stay in a deal where other investors with lesser or no value to a company beyond just cash get dropped. I have found a great variance in entrepreneurs in whether or not they find value in what I could bring to their companies. If entrepreneurs don't find value in what I bring, then the probability becomes much greater that I will get dropped from their investor lists.

5. I need to constantly follow-up on deals I want in on. In the past, I've relied on entrepreneurs to contact me when they're ready to talk investing. However, a number of them have dropped me simply because I didn't do my part to stay in their mindshare. Shouting loud via email or phone works well and helps a lot.

Lots to keep track of in the ecosystem of investors and entrepreneurs in order to not be forgotten amongst the herds of investors roaming Silicon Valley.

The Three Faces of My Schizophrenia

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In working as advisor and angel investor to startups, I find that I can be schizophrenic at times. Three faces I wear, when dealing with entrepeneurs:

INVESTOR

Characterized by:
1. Paranoia about losing my money.
2. Saying "sell the company"; starts when my return crosses about 5x my investment, and becomes a yell when my investment hits 10x.
3. Motivated by what my terms say for Notes.
4. Recommending courses of action which generate a lot of cash for the company, which increases value of the company and thus my investment.

ADVISOR

Characterized by:
1. Recommending courses of action which build the company.
2. Seeking the best ways to create product and do business.
3. Balanced view towards generating revenue in the company versus building product, which can be at odds if, for example, we're talking about advertising and internet users.
4. Might recommend against selling the company given what I have seen when bigger companies absorb smaller companies.
5. Seeks the best employees and resources to do the job. Pushes those resources to build the company bigger and faster to exclusion of other things like sleep.

DAVE SHEN HUMAN BEING

Characterized by:
1. Tends towards recommending humanistic approach to treating employees.
2. Wants to grow employees, sees them as learning over time, nuturing them to be better.
3. Coaches people to balance life, work, and family. Asks what makes people happy and what keeps them motivated, encourages people to find this in the company.

If you've been in the startup game for a while, you'll know that these three faces I wear are often at odds with each other and conflict in goals. For example, how can I counsel people to balance work and life and go home at 5pm to make time for family when as advisor, I want these guys to work 24/7 because the startup needs it, and as investor, I want them to work so freakin' hard so my money isn't wasted?

When I start working with someone, one of the first things I tell people is that I can be schizophrenic. They always laugh and sometimes I can see that they don't get what I mean; the more experienced ones snicker and thank me for being upfront!

It can disconcerting to have a guy like me advising you to do one thing and then tell you to do something else in opposition to what I just said a while ago. It's because I do wear many different hats, and the forces within me struggle every day to push/pull me in several directions. It's a challenge to find a balanced answer, and I like the challenge of finding a solution that satisfies all of my three "identities". I just hope I do not drive any of my entrepreneurs nuts by my triple schizophrenic state...

Ycombinator Demo Day: Summer Class in Mountain View

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I went to my first Ycombinator Demo Day this last Thursday. I wasn't sure what to expect, except for the fact that a whole bunch of startups created by near-college grads would be presenting their projects. I definitely wasn't expecting any well-thought out business plans but was hoping to see some really cool stuff.

After the event, much has been written about the companies themselves, and you can read about them at VentureBeat: The Ycombinator List and at TechCrunch: Ycombinator Demo Day: The Summer Class. There has been enough coverage about the companies, so rather than do that I wanted to write about something else regarding the Demo Day.

Usually when you sit through pitches, they can be relatively dry. You see lots of graphs and how big the market opportunity is and it's usually a more serious and professional presentation.

For Demo Day, I was pleasantly surprised that each presentation had a healthy dose of humor cleverly injected. I found myself chuckling at funny demos, laughing at jokes made at competitors' expense, and smiling to see them laughing at themselves. During one of the breaks between presentations, I stopped to say hi to Paul Graham (co-founder of Ycombinator) and asked him about whether or not he encouraged humor to be part of the presentations. He said they were actually more humorous during the dry-runs and that he actually pulled them back from being too over the top. I shudder to think what they were like before he pulled them back...!

Sitting through 19 demos for 3+ hours could have been a truly grueling affair. I am glad that the young graduates of this summer's Ycombinator class threw some humor into their demos and turning a potentially boring, lifeless afternoon into a more lively event.

"The Business Opportunity" and the Epiphany

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I was just recommended this excellent book called The Four Steps to the Epiphany by Steven Blank. It describes a particular problem I've encountered with some of the startups I've met with.

Some of the entrepreneurs I've met with lead with the business opportunity. They say that the market is this big. They have charts and research to back that up. They show millions upon millions, if not billions of dollars spent in this market alone.

Then they present this product that fits into this market. They go on to say that we can attack this market opportunity by building a product to gather all these eyeballs, users, consumers, whatever and then sell this market to advertisers and marketers.

It always worries me when they lead with business opportunity.

Most likely what I discover after is:

1. The entrepreneur is not a model customer of this market. They have come upon this opportunity through research.

2. The entrepreneur has researched business opportunity but has not researched what customers want. While it may be true that marketers spend millions and billions of dollars trying to reach these consumers, the entrepreneur has not asked consumers whether they want the product he is building.

3. I often get a defensive response when I tell them this is an issue.

Which brings me back to The Four Steps to the Epiphany. Author, Steve Blank describes the Customer Development Model, which is an iterative method of figuring out what customers actually want, versus driving a business with financial projections and product development and assumptions that the product will be accepted by consumers. He argues that every successful startup runs by this model, and that running it by traditional product development models brings a huge amount of risk into whether the business will be successful or not.

Reading about the Customer Development Model brought me back to those meetings with entrepreneurs who are trying to build companies using traditional methods. Those meetings left me feeling uncomfortable and ultimately, following my instinct on these matters, I would often let the opportunity go. I am glad to be reading this book, because now it frames my uncomfortable feelings into a way of articulating them better.

As an angel investor, I want to reduce risk whenever possible. I find that when entrepreneurs resonate with the market and are building a product that they are target markets for, then it minimizes risk. This also means that you get extra passion for the product because the entrepreneur wants the product for himself, and you may reduce the need for external research to figure out what customers want, which reduces cost and time which could be used in building the product.

That's not to say that someone couldn't be successful if they don't fully or completely resonate with the product and are the target market. Success is a probability game and when entrepreneurs are themselves the target market and they resonate with the customers, then you stack the odds in your favor by a great deal.

Allocation of Shares at Company Formation

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A new entrepreneur recently asked me about how to allocate shares at the company formation stage. I asked around and here are some highlights on what I found:

In talking with my lawyer and some entrepreneurs, you could start with 10MM total but it's not uncommon to create more upon formation, like 20 or 30MM. The reason for doing this is to not have to file additional paperwork (and incur legal fees) in creating more shares when you need them.

Also, you don't usually allocate the whole bunch of shares at the outset. Note that the existence of shares does not mean ownership, but only those you allocate. So if you have 3 founders and each has 1MM shares out of a total pool of unallocated 30MM shares, you have officially created 3MM shares but still hold 27MM in reserve. Thus, the 3 people officially own the company at 33% a piece; the additional 27MM does not come into play until they get allocated.

As for allocating a bunch for additional employees, people have allocated about 10-20% of the total for employees and the options pool. As for sheer number, that could be upwards of 4MM set aside for employees, advisors, and board of directors, which is pretty large for an early stage company.

So if you go with 10MM total shares and you want 20% of total for the options/employee pool and let's say you have 2 founders who want to own the company at 50/50, then you would have 10 MM shares allocated, 4 MM goes to both founders for 50/50 ownership split at 8MM shares total, and then the rest at 2MM (20%) reserved for hiring key people.

FYI - advisors jumping in at this stage typically get .1% to 1 or even 2-3% as options depending on their level of involvement.

Early employees coming in really early stage could get multiple-100s of thousands of options, which rachets down dramatically as the product gets built and time goes on. Certainly this balances with whether or not they get market rate salary or not.

Still, the message is "don't be greedy". Incent your employees to get the job done and reward them. Don't try to hold on to too much or else you may run into trouble later. Same goes for the financing stage. Be prepared to give up part of the company for monies received, but don't try to hold on to too much or else you may never get funded. On the flip side, be realistic and don't give away the farm, which could land you in trouble the other way.

Why and How Do Startups Move So Fast?

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The question of how do startups move so fast comes up surprisingly often. I finally gave it some thought, after the question came up again in a recent meeting with one of my companies. Over the last year or so of working with startups, I came up with some observations:

1. Small teams, 1-3 people. Makes sense right? Less time lost, less arguing, etc. Less meetings.

2. Everybody resonates with the idea and generally agrees with direction. Since everyone is either a participant or expert in the field in which the site is created for, then everyone does not need to learn but knows instinctively what to do. Nobody is working on a product that they do not use themselves. It's a great way to find people like yourselves, when you recruit from the level of common interest in a certain product area.

NOTE: It's really hard sometimes to get someone to resonate with your idea. You may hire them for their intrinsic talent, but it may be really difficult to get them to feel the instinctive bond with your product area.
Sometimes it's impossible. Doesn't mean that great work can't get done, but it does mean a level of independence can't be achieved, as non-resonating employees need more directional advice than those who do resonate.

3. Along with 1, the teams usually only consist of engineers cranking away. Most of them are multi-talented to a point, so they play multiple roles of programmer, GUI, html/css, product manager, product visionary.

4. Strangely enough, I have not found location to be a common factor for moving fast. Certainly it enhances the process, but a lot of teams are working with people remotely, since engrs are so hard to find and many just don't want to move. Somehow, they have found ways of working together and can still make progress. Lots of travel involved and constant communication are two of many key points in making it work. If I get a chance, I'll dig into it more with some of the startups I work with as to how it's working and how it's not. In my startups, 6 out of the 8 companies have resources external to their main location, mostly engineers who are working in remote locations. I have not seen any dramatic slowdowns with their teams.

5. People are generally just cranking. They see something needs to get done and then they just do it. There is less the asking for permission. Everybody needs to get on the same page and just keep moving forward in a very independent way. Early on at Yahoo!, many of our engineers would just do stuff and we would rarely ask them to do some particular thing. The product would constantly evolve while we worried about other stuff. Although when we asked them to actually do something and if they did not agree, it never got done which was frustrating from another viewpoint. So it worked until they got to a point when their initial sensibilities finally turned out to be wrong. Sometimes they could be convinced that they were wrong, but sometimes not...

While speed may be intuitive to some, I think it's harder to achieve than you think, unless you have the right people with the right sensibilities and right alignment in thinking.

One of the hardest things I've seen is when a non-engineer comes up with an idea and tries to get it done. Because they can't write code themselves, they need to find someone who can. But more often than not, they find only someone who can code but not become resonant with the idea to just work on it and take vague direction and execute on it.

It's the magic bullet that everyone searches for:

"Dang it, I just want to describe my idea to someone and that someone just deals with the details and makes it happen!"

Unfortunately, it's the details that often count...you want something done right, you better sweat the details!

Avoiding Blur

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I was just talking to a startup about their website and we were strategizing what it could become. We noodled, talked, brainstormed, argued, and finally agreed for over 5 hours and developed a sense for what we want the future site would be like.

At the end of the session, I was still feeling uneasy about what we came up with. The main reason was that it was merely a combination of what other sites were doing in part. One site would have this feature, but not the main direction for the site. Another site had people doing the activity, but in a different way. Some of the bigger sites out there also had the ability to do what we were doing, but of course their missions were much more broader and not focused like ours. Could we do better by simply having a niche, focused mission but having many of the same tools as other sites, and also competing against the fact that users were already using our competitors for that same mission we wanted them to focus on with our site?

This was the source of my unease. If there are competitors or near competitors, or even non-competitors, who allow users to accomplish the same thing on their sites, whether it is their main mission or not, AND these competitors exist already, this is a danger point. I call it "blur".

The blur occurs in users minds when they hear about what you want them to do, but can't figure out where to do it. They may already be doing it on some other site, by either using some existing functionality, or jacking some other functionality to get the job done.

Blur is heavily related to product differentiation. You want something to cut through the blur. When they think of something they want or need to do, you want them to think of you. Whatever functions you have must be cool, creative, and original enough to attract them to you despite being in a similar place with other existing sites.

Here is an example. Suppose you want to build a site to allow users to connect with friends. Let's say your main interface is email, as a possible differentiator. However, as a user who hears about your offering, "connect with friends via this new way, but with email", they'll think all sorts of things like:

Hmm I'm already on Facebook and that works for me.
I have my address book on Outlook and email people just fine.
All my friends are on MySpace. Why switch?
I don't have time to try something new, let alone learning it and THEN getting all my friends on it.

The problem here is that when you express your mission to users, they get caught in the blur of other competitors being able to do pretty much the same thing and you don't have something to justify the switching cost of going to your service to do something they can do already somewhere else.

You need to find that one (or more) things that people can do on your site that no one else offers, AND is cool enough to get them to come over and learn something new.

It's always a danger point for me when I hear of entrepreneurs who design something supposedly really cool but then I point out that people are already doing these things on other sites. I ALWAYS get pushback because they think their creation is the best out there, and nobody has mashed up the functions in such a focused manner.

It might actually be great. I'm just talking about risk here and the realities of getting users attention in a crowded space. You might actually have something that is a ton better at doing something, than for them to do it on some existing site.

I'm into risk reduction. Why try to fight with through user blur with something that isn't shouting "Come here and try me because I'm different" loud enough? You could run out of resources and funding trying to bulldoze your way into users' attentions. If you had several million dollars in the bank, yeah potentially you could market your way to success in a certain category.

Or you could spend a little more creative time and figure out something to build that is actually cooler and hasn't done before, and that users will want to spend time with. Enough to get past the switching cost and try your service.

WIth that previous startup I mentioned, after 5 hours of discussion, we spent another 20 minutes talking about something that wasn't mentioned and was something very unique in their offering. I think that 20 minutes is going to turn out to be most valuable part of that day. Because I think we added back something that would cut through the blur and thus reduce our potential risk in attracting users to our site, to do something that they could do somewhere else in general, but being able to do that one thing that they CAN'T anywhere else.

We could have gone home after 5 hours. But spending that little bit of extra time and effort to find something to avoid the blur was worthwhile and I believe, critical for the success of the company.

Are You Startup Material?

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It all started with my recruiting woes. I dutifully plowed through my contacts every time one of my startups was looking for new hires. I talked to many of them but almost all of them refused to leave where they were to go take the leap to a startup. After many conversations, I figured out that startups aren't for everyone. It was a frustrating but interesting learning experience into the changing lives and minds of our workforce, and what was appropriate for one person would be inappropriate for another, and that which could change over time.

Are YOU startup material? Looking now at who you are, what motivates you, and where your life is - would you want to make the leap to join a startup? Some questions to ask yourself (and some discussion on each):

How young/old are you?

Startup people are typically young. At least from a physiological standpoint.

Young people have lots of energy and stamina to stay up late for nights on end. They still have the ability built up from pulling constant all-nighters from college so they still retain this ability even after they graduate. Their youthful bodies still have strong hearts bolstered by endless, sleepless nights partying on beer and chicken wings. Their brains are quick and agile and not dulled by age. The older you get, the more your body has reduced stamina to stay up all night and hack. Old brains just don't work so fast without proper sleep.

And it really sucks that as you grow older, your chances of entering a startup diminish greatly. This is a shame because the most experienced people you want tend to be older.

Can you go for a long time with a reduced salary? With no salary?

Once you enter a startup, you're entering a place where reward is typically bound to options and stock, not weekly salary. This reward can be long in coming, ranging from months to years. How long can you survive with reduced salary, given your dependents and lifestyle? Are you willing to risk that? Do you have enough saved up to last for a long amount of time, say months or even years?

Startups can't pay market salaries. If you need immediate cash, startups aren't for you. Go find a job at a stable, growing company.

After a startup raises money, they can pay you more, but it can still be reduced from market levels. After all, the money is a great motivator for you to work long hours for the big win; if you get it all upfront, then where's the motivation? You're not hungry.

How many attachments do you have? Are you married and have family or dependents? Do you have a lifestyle that requires attention and/or capital?

As for age, young people have little or no attachments like spouses or children or possessions, which is another reason why you find young people in startups. Starting from almost nothing, they have nothing to worry about except themselves. It is very easy to throw your life into a startup when your life is not occupied already.

But perhaps you have other interests which take time. You may like to volunteer at a non-profit and gain lots of satisfaction from that, or train for Ironman. You like these so much that you are unwilling to give them up for something else which will undoubtedly be all-consuming.

Owning expensive things like houses and boats take up resources. You need immediate cash to pay for mortgages and bills. Do you race cars for a hobby?

Are you married? A spouse and family will put demands on your energy and time. Are they willing to give up their time so that you can pursue your interests in a startup? Are they truly OK with not seeing you at home for dinner many nights? Be warned: those that have not experienced the startup world may think they know what it's like time-wise, but I will guarantee you that they may have zero concept of what it's REALLY like. Make sure you sit down with them and talk it through in excruciating detail and get their support and buy-in. More than one family has been wrecked because of too much time spent at a startup. Make sure YOU know you're joining the startup for the right reasons and with the right familial support.

Are you comfortable where you are in life, job, family, etc. or are you hungry?

If you're comfortable, you may not be willing to give up your current job with nice high salary and which supports your current lifestyle. You may not want to stay up all night working for little pay and for a risky return some unknown time in the future.

If you're hungry, then perhaps you could be right for a startup. You may want more out of life, more money, more fame. Whatever it is, it's more than now and you want it fast and not wait decades. The only way you can get this faster is if you take more risk at a startup which could vault you to whatever it is you're lacking.

Which leads to the next point....

Are you conservative or a risk taker?

If you are a conservative person, STAY AWAY FROM STARTUPS. If you cannot risk your entire career, fortune, whatever, at all, you shouldn't consider a startup. You'll drive yourself nuts and everyone else around you.

Can you deal with ambiguity, adapt well to change, be ok with constant chaos?

A startup is not known for stability. Things don't work as smoothly as you want and you have to be OK when things aren't perfect, or forgotten, or done in haphazard ways. If you require order in the way you do things and need that around you, a startup is probably not for you.

Do you like to learn and do everything? Do you not mind taking up tasks outside your areas of expertise?

Startups are typically short staffed. Everyone typically pitches in and does a little of everything. Marketing people code HTML pages, Business Development folks take out the trash, Engineers open up photoshop and crank out graphics for the site. If you like to learn and either want to become or are a jack of all trades, startups are the perfect environment to grow your ADD.

If you just like to do your thing and pass the buck on everything else, I am certain you will be shunned by everyone on the team.

Lastly, are you passionate about the startup you may join?

Passion drives humans to do amazing things. If the startup you're joining seems cool but your heart really isn't in it, I would highly recommend not joining it. Wait until you find something that you can really get behind. Passion will give you strength and stamina to work long hours, to really resonate with what you're working on, and give you extra motivation to keep working even when you've been not sleeping for days.

Startups can give you the experience of a lifetime. I would not have given up my experience at Yahoo! for anything and it taught me a lot about passion, the thrill of working together with a whole bunch of smart, motivated folks, and a lot about myself and what I am made of. But like it or not, we're not all startup material. It's something we need to be realistic about, and also, for us on the other side trying to recruit for startups, it's frustrating but we understand.

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About this Archive

This page is an archive of recent entries in the Startups category.

Series A is the previous category.

Startups in the News is the next category.

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