Category Archives: Pitching Me

The Ultimate Product

The other day, I met with an entrepreneur and we talked about his project.
He first stated his mission, and then dived into his product and service and how it worked. As he talked about the various features his site had, how users would interact with the product, and what would happen when they did, my brain was actually split. Half my brain was following what he was saying, and the other half thought about his initial mission statement. As his talk went on, my brain halves began to diverge.
The second half of my brain was constructing the ultimate product to his initial mission statement. The ultimate product is the product that completely satisfies the users’ problem as defined by the mission statement.
When my brain halves diverged, I was unfortunately very uncomfortable at this point. This is because what the entrepreneur was describing was not the ultimate product, but in fact something different. At this point, I stopped the entrepreneur in his description about the product and we talked about the ultimate product.
I detailed it out and walked through in the ideal case, what that was, and how it would work. But it was unfortunately different than what he was describing. It was one of the reasons why I felt uncomfortable in supporting him in his project, because his product seemed to be enough off the path to the ultimate product that there were more than necessary barriers to getting there, when it seemed to me that there were more direct paths to the ultimate product.
I think it’s a worthwhile exercise to construct the ultimate product for a given need, and then see if you can get there via your startup’s evolution. If you can imagine the ultimate product in your mind, I think it can give you guidance on how to build it. But if you don’t know what that is, how can you know if you’re on the right path to get there?

More on the Rise of Small Business on the Net

I saw this great post by Steve Blank: Make No Little Plans – Defining the Scalable Startup the other day and tweeted out a quote that I thought was very important to me:
A lot of entrepreneurs think that their startup is the next big thing when in reality they’re just building a small business.
His post talks about the fact that many entrepreneurs that create web businesses want to be big, but in fact only create something that is small. There is nothing wrong with this; the world needs lots of small businesses, and even those on the internet. The post also offers some hints and tips as to how to create something that grows large.
When I tweeted, the tweet also showed up on my newsfeed where some of my Facebook friends commented. I thought that the comments there were a nice addition to my previous post, The Rise of Small Business on the Net, and thought I’d post them here:
Me: “A lot of entrepreneurs think their startup is next big thing when in reality they’re just building a small business.”
Friend 1: Depends what you call small. A lot of room between a hardware store and Google. 🙂
Me: a small biz is one that makes a decent amount of revenue for its employees and is a nice sustainable business, but not much more than that. there is not hyper growth but just nice, recurring revenue. there can be a big spread of revenue that could qualify for this, like from a few 100Ks to even low millions.
The issue is that it is unfortunately a dangerous place for angel investors to be, because the biz is too small to be acquired at a large multiple of its value, or even to be noticed by the big guys. We can’t easily get our return on investment from companies like these.
However, that is not to say that these biz shouldn’t exist. I think it’s a healthy evolution from the storefronts we see on our streets to the virtual storefronts of the internet. not all biz need to go IPO or make a billion bucks from an acquisition for them to have a reason to exist.
Friend 2: Do angels build in other means of acheiving ROI? For instance share of revenue+ebitda over time after a certain agreed to time horizon?
Me: not traditionally, but i have been thinking about applying something like this to startup investing. it’s almost like investing in a restaurant or some other kind of cash business.
however, another problem exists where the entrepreneur is batting for the moon and of course they always think their idea will be the next google, even when we can see … See Morethat it will only grow so big. thus, they are unwilling to accept terms that are not the usual startup investing type terms for investing.
i do think about this every day though, and hope that a solution does present itself. or we just suck it up and try to only pick the ones we think have the best chance for being google-like, or near-google-like, and we just write off the others that we can’t get our money out of, even if they are nice small businesses.
Friend 3: For some reason I think there must be a sweet spot for investors that focus on smaller tech businesses or even projects. I’m thinking about investments in tech analogous to those made by restaurateurs, real estate developers, etc. Where capital requirements are low and return is performance based not exit based.
Me: I call this the Rise of Small Business on the Net and think that there is something here, but just not quite clear yet. in the old days, banks would be the lenders to such businesses, but banks are way too conservative to invest in internet businesses, and with the economy the way it is, they are even less so.
While Steve’s post (and many others) focus on encouraging the entrepreneur to think bigger (even I ask about the world domination plan and more on why), I have not heard much about the plight of investors who end up involved in a startup which becomes more like a small business than the scalable, world dominating startup we all would love to find. Steve does mention those who are OK with flipping startups, but some are simply too small to even flip.
I’d love to hear more about this from others who are thinking about this.

Lasting Two Years

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.

Talking People Out of Being Entrepreneurs

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.

The Rise of Small Business on the Net

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

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.

More About the World Domination Plan

In the last few meetings with entrepreneurs, I’ve noticed I’ve been consistently asking about whether they have a world domination plan. But I think my request is being misinterpreted; of course, I have not helped since I haven’t clarified what I’m looking for either.
I am reminded of when I ran User Experience at Yahoo and when we interviewed people, we would give them a test. This usually was an hour to create a new design for Yahoo Profiles. We would give them some paper, pencils or pens, and then leave them alone for an hour. After an hour, we’d come back and see what they came up with.
It’s pretty amazing the variance of output that we’d see. Some people would have maybe one piece of paper done. Others would have a whole tornado of paper and sketches on them and on the white boards on the walls. The way people “fail” this test if they came up with just one answer and were adamant about that being the only perfect answer. That’s not the point; the point is that it’s pretty impossible to come up with a fantastic solution in one hour. We gave them the test to illustrate their design process. If they had a great process and could walk us through their thinking, then we knew they could get a fantastic solution if given enough time. Those with a poor process would typically come up with just one answer and settle on that, thinking it was final.
This is the same for when I ask for the world domination plan. It would be nice to get “the answer” but I think it’s pretty unrealistic given the twists and turns that startups go through. Some give me “the answer”, which is fine if it’s in the context of something they’re thinking about. Sometimes, though, there is a certainty in their belief that is scary to me; it almost shows an inflexibility in their thinking that they are shooting for this solution and you sense that they’re going to bulldog their way to this answer even if it is the wrong answer.
It’s also pretty amazing to see how many entrepreneurs don’t even think about it. I ask them and there is a blank look on their faces. This is a problem. While that doesn’t mean a decent business couldn’t be built out of their idea, it could mean that it only grows to a certain point and then…that’s it. Great for the employees of the company who get paid every day, great for the founders who work at the company and own lots of it and also get paid, but not so great for us investors whose money is locked in the equity of the company.
As an investor, I would much prefer that you have the frame of mind that you WILL take over the world in whatever area you’re operating in and you’re always thinking about how that would happen. I don’t want to see a blank face like it was a new concept. I just want to hear that you are thinking about it either all the time or at least it’s floating in the back of your brain most of the time.
Because it’s then that us investors know that we have the best chance of getting our money back and hopefully making some on top of it. Smaller companies can be great companies, but many reach some midpoint where they may not be acquired because their potential seems limited and acquirers are also looking for big opportunities. Thus, our exit potential is also limited. When you’re on a trajectory through luck and planning to world domination, then your options are much greater because everyone chases you and wants your world dominating characteristics added to their own. You could even go IPO – but not if you’re not big enough.
World dominating companies are the ones we want to be involved in and it starts with the right mindset. Remember it’s not “the answer” that I’m looking for, but rather that right frame of mind and that you’re noodling on it day and night as you’re building your company.

The Problem with Early Stage Me-Too Product Startups

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

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?

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

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.