People sometimes ask me for advice about starting a company. Here are some documents I've written which may or may not be helpful to you.
How do you measure how much your users like your product? This is one of the essential question that every founder needs to answer to make the right decisions - to move the product ahead.
Start-up Tools
Start-ups are always short on time: here are some tools that can save you time and avoid reinventing the wheel. This list is focused on technical tools to save development time.
Let’s play a little make believe. Let’s say you just started a job at a startup company that is in stealth mode. Your job is to promote the company and get it noticed online, and today is the day to get started. But where do you start?
I’ve been in that situation before, and had to fumble around in the dark to figure out the answer. Though I definitely do not claim to be the world’s foremost expert on startup marketing, I think that I can share some tips that should be useful to a lot of tech startups out there. With that said, I’ve compiled a quick and dirty set of steps to get your startup noticed.
Step One: Submit To DirectoriesSince inbound links increase google rankings, and since it can often take a while for directories to index your site, do this NOW. Here’s how you get started:
Step Two: Land Grab
- Google- Yep, good ole’ google. To add your site to google go to: http://www.google.com/addurl/
- Yahoo- Go here: https://siteexplorer.search.yahoo.com/submit and add your site and feeds.
- Go2Web20.net- A flash-based directory of Web 2.0 Companies
- CrunchBase- TechCrunch-owned wiki of startup info
- KillerStartups.com- A startup directory that is updated daily
- Vator.tv- A site dedicated to videos of startups
- SimpleSpark- Another directory focused on web apps
- TradeVibes- A directory focused on the business side of startups
Now that you’ve done the submission thing, time to go out and get some accounts for your startup. Here’s what you should get:
- Twitter- Head over to twitter and register an account for your startup’s name. You’ll be using this later.
- Flickr- Get a flickr account with your company’s name. You’ll first have to get a Yahoo! ID, which is another good thing to have. You’ll use this account to store all your photos.
- StumbleUpon- Might as well grab it, right?
- Mixx- A personalized news service…you might use this, but it doesn’t hurt to grab the name
- Vimeo- An excellent video-hosting service. You’ll create a channel here.
- YouTube- Another video hosting service you might have heard about…..another channel
- FriendFeed- A lot like twitter, but this is more of an aggregator than a communication service.
- Delicious- A social bookmarking service
- Diigo- Another social bookmarking service
- Ustream.tv- A video streaming site
- Facebook- Create a page for your company
And on and on. There are tons of these. Get an account, and on each one, fill out your profile and add a link to your site. Boom. Instantly you have 10 links to your site.
Step Three: Find Your AudienceAll right, now you’ve got some accounts. Good. Now let’s find where your target audience is.
- LinkedIn- Find out if there are groups that contain your target market, and find out what they’re talking about. Don’t immediately bust in and start shilling for your product/service. Instead, see what the issues are, and if you’re able to pitch in, that’s great. If not, just start learning what these people are talking about and that will help you: a) figure out new product features b) find things to write about c) understand whether your offering makes sense.
- Facebook- Again, look to see what people are talking about, and try to help out.
- Reddit- Search through the subreddits to find one that speaks to those that your product will serve
Just like the directories abd services above, there are many, many places to find your audience. Get out there and learn what they’re talking about.
Step Four: Create Some ContentArmed with the knowledge of what your target users are after, start writing some blog posts. Create some videos. Fire up a podcast. Talk to their problems, interests, pain points, etc. It’s okay to mention your product, but no one wants to listen to an infomercial. Just remember to behave like a human being, not just a pitchman. Make it relevant and useful. My favorite way to think of this is to imagine your content being sponsored by your company rather than all about it. Write content your company would want to sponsor.
Step Five: Promote Said ContentAgain, this has to be relevant to your audience and not just a thinly-veiled commercial, as BS just won’t fly when you’re trying to promote your content. In fact, it’s better to not promote your content if it is just product spam, as it is better for your content to be ignored than to have it ripped apart as spam. With all that said, if you have something worthy, promote it.
- Get a bit.ly account- Bit.ly will shorten your URL into something more digestable by twitter and the like, and it will give you stats.
- Add analytics to your site- I like google analytics as it is free and very full-featured. Sign up for an account, add the site, grab the javascript code and verify that you’ve installed the code properly. Then you’ll be able to start tracking.
- With analytics installed and a small URL, go to your twitter account and mention your new post, along with the bit.ly URL.
- Bookmark and categorize the post in Delicious
- Bookmark and categorize the post in Diigo
- Add your post to Digg and Reddit in the appropriate category
- Add your post to StumbleUpon
If you have created video content, make sure you add it to:
Step Six: Reach Out To Bloggers
- Your facebook page
- Your YouTube account
- Your vimeo account
- Your blog
I wait until step six for this because you want to have some real content out there before you start pitching your startup to bloggers. Take it from me, I want to see that a company has its stuff together, has blog posts, some real content, etc. before I cover them. It makes them more real. That said (and assuming you’re a tech startup), start reaching out to:
If you’re not a tech startup, replace the above list with the influential blogs in your space. Go to AllTop, Blogged, and a multitude of other blog discovery sites and find the blogs that cover what you’ll be offering. Start following their blogs and commenting on their stories. That way, when you’re ready to launch or have news, you’ll have already built something of a relationship with them. The bigger the blog and more influential, the lesser the chance that the author will take the time to get to know you, but it shows them that you’re not just someone carpet bombing bloggers in order to get coverage. And again, be human. Write a quick email letting them know that you follow their blog, and that you’re launching a startup that would likely be of interest to their readers. Give them the quick intro and a link to what you’ve got. And DO NOT, I repeat DO NOT come off sounding like a press release.
I’d suggest only reaching out to the biggies when you’ve got real, substantial news. Don’t reach out to TechCrunch when you’ve added a blog post, since your blog post just isn’t important enough to warrant coverage there. Do reach out when you release your product.
SummaryAs you can tell, there are no magic bullets here. You really have to do the work, create content, and form relationships with people if you want to get noticed online. But this should give you a pretty good start.
Again, I need to stress this: None of this will work if you don’t have good content that is interesting, new, and appealing.
The web has forever changed people’s buying habits. Instead of needing to rely on sales people to send them information, buyers now have Google and other search engines to research products, find competitors, and see how other people rate those products in blogs and reviews. Furthermore they are greatly influenced by individuals that have emerged as experts in particular subject areas who use social media to get their messages across.
This sea change in buying behavior requires vendors to re-think how they go to market, and optimize to make sure that they will get found by buyers using search engines, blogs, reviews, and social media. The term Inbound Marketing was invented by the crew at HubSpot, to describe the techniques that are needed to get found by buyers, and to make sure that the reviews and blogs around your industry segment cover what you are doing. (HubSpot is a SaaS company that provides great software tools, plus education to help you automate Inbound Marketing. The founders, Dharmesh Shah and Brian Halligan have also written a great book about the topic: “Inbound Marketing: Get Found Using Google, Social Media, and Blogs (The New Rules of Social Media)”. Full Disclosure: I am an investor and board member at HubSpot.)
HubSpot produced this great humorous video that highlights the hopelessness of the old techniques in this new world:
As further evidence of this change in buying behavior, I was recently talking to the CIO of a large pharmaceutical company, and he told me how he hates spam emails from vendors, and how he had developed a canned email response to them. I asked him to forward me a copy of that email, and have excerpted a couple of paragraphs from it that quite clearly describe the change:
“Please understand that I get dozens of these types of messages a week. I simply do not have time to read them, dig into them, follow-up on them, or reply to them. The most effective solution to this problem is for me to ignore the messages, which is what I usually do. …
… Finally, a small comment. As a customer, I find this type of approach to sales to be largely annoying to me and unproductive for you. We learn far more about what we want to purchase by searching the web, looking for customer references in blogs and forums, word of mouth, and by finding white papers on your site that concretely describe solutions to problems we are having.”
Remarkable Content is King
A key part of getting found is making sure you show up on the first page of a Google search. The lazy marketer’s approach to doing this is to purchase Google Adwords, and pay by the click (referred to as SEM, Search Engine Marketing). However 85% of people ignore the paid ads, so to be really effective, you will need to perfect your SEO (Search Engine Optimization) skills.
SEO requires you to develop great content that your buyers will find sufficiently interesting, different or insightful, that they will want to remark on it. (The authors of Inbound Marketing refer to that as remarkable content.) When your readers remark on your content on-line, using tools like Twitter, Facebook etc., they spread the word virally to other readers and broaden your reach. These comments lead to links back to your site, which lead to ever increasing page ranking in the search engines.
To be successful at this, you will need to keep the content fresh. Traditional web sites don’t work in this regard, as they don’t change frequently enough. What is needed is a blog that you update regularly.
Your blog cannot simply be a sales pitch for your product, but needs to be about topics that your buyers care to read about. The tone could be educational; or humorous; or controversial. But above all it needs to be highly engaging and relevant to them – i.e. remarkable.
When you post a new blog entry, you will see your site traffic surge for a few days, then die back to a level slightly higher than before.The more you post, the faster your traffic will build. But in the end, it is the really great articles that you post that will have the most impact.
Once you have interesting content, you can use social media like Twitter, Facebook, LinkedIn, Digg, StumbleUpon, etc. to get the word out. Your goal is to get other bloggers to link to you, and to have people tweet about your content.
An interesting thing about a marketing department that focuses on Inbound Marketing: it will place a high value on people that know how to write and develop content that draws in an audience. A silver lining to the damage that the internet has inflicted on the publishing industry, is that there are plenty of very talented journalists seeking employment, and they possess the perfect skills for this job!
SEO versus SEM
Like most of things that are good for us in life, SEO requires work and patience before it will payback. So it can be tempting to take shortcuts, and just use SEM (paid search ads). However if it is done right, the results will continue to build, and you will start to build your own audience, and own your own traffic.
We have also seen that the cost of paid search increases as the need to scale the lead volume grows.
The Power of Free
Another extremely powerful way to create inbound traffic and qualified leads is to use a free product or service. A great example of this is the WebSiteGrader service from HubSpot. (If you haven’t tried this, I recommend giving it a try now. It will only take a few minutes.) WebSite Grader has a couple of interesting attributes that are worth studying:
- It is free of charge
- It takes very little work by the customer to get some very valuable results
- It provides its results in the form of a score out of 100. Human beings are very competitive, and when they don’t get a good score, they want to find out how to improve their score. That leads them to wanting to find out more about HubSpot which can help them improve their score.
- It allows them to compare themselves to their competitors. All businesses care about how they are doing relative to their competition. If they are doing worse, this is a powerful motivator to drive them to change.
Think hard about your audience and whether there is an opportunity to build a similar free web service that would draw them in, and provide great value.
If you are interested in learning more about how Free products and services can help your marketing, please refer to this section: The Power of Free.
Building your reach
Once you have great content and possibly a free product/service, you will want to find ways to drive the maximum traffic to that content. In the last couple of years we have seen some powerful new tools emerge to help with this process in the social media space. Get yourself accounts on Twitter, Facebook and LinkedIn, and join in the conversation. (For Twitter, I also recommend downloading the Tweetdeck application.) Start by listening. Watch what people are talking about in your topic areas, and take note of their interests. Once you have an idea of how the conversation works join in. Be careful not to take a sales stance to promote your products, as that will rapidly lose you your audience. However you can draw your audience in with short url’s (see http://bit.ly/) that link to your blog posts and other non-sales oriented content.
This short paragraph is not going to be enough to fully educate you on the ins and outs of using social media to build your audience, so if the topic interests you, I recommend going here to learn more:
Internet Marketing Webinars (see the section on Social Media Marketing).
Influencer Campaigns
In every product area, there are usually already influencers that write the most about that area, and have the largest audience that follows them. To conduct a successful social media campaign, you will want to identify those influencers, and reach out to them to get them to write about your product/service.
To get them to pay attention to you, you will first need to understand what they care about. Read their blog posts and tweets, and try to get inside their minds. Try to determine what appeals to them, and what has clearly turned them off. Then prepare your pitch, and use social media to engage with them.
You will then want to monitor the results by tracking their blog posts, links to the articles, tweets, etc.
For more information…
Inbound marketing is a rich topic area that would take more than a single article like this to describe. For more information, try these links:
I also highly recommend the book:
The following is a guest post by Rob Walling. Rob Walling has been an entrepreneur for most of his life and is author of the book Start Small, Stay Small: A Developer's Guide to Launching a Startup. He also authors the top 20 startup blog Software By Rob, that's read by tens of thousands of startup entrepreneurs every month and he owns the leading ASP.NET invoicing software on the market in addition to a handful of profitable web properties.
Imagine that you've just completed version 1 of your product and you're preparing for launch. You’ve greased the wheels with a few bloggers, targeted some keywords with SEO, created a bit of linkbait, and scheduled the press release to launch in the morning. At this point your co-founder turns to you and says: “What are we going to do with the $300 we have stashed away for advertising?” Consider this your lucky day. The goal of this article is to provide you with the core of what you need to know about cheap startup advertising as quickly as possible, so you can start spending that ad budget wisely. Let's get started.
Two Key Advertising Strategies The half-life of advertising traffic is zero. This means that the moment you stop shelling out cash, the traffic stops. The problem is that with typical conversion rates of 1-2% you're paying for 98 or 99 out of every 100 people to walk away and never come back to your site. To combat this inherent wastefulness of advertising, I have two key strategies I recommend no matter which method of advertising you use.Strategy #1: Try to Get Permission
Seriously consider offering something in exchange for a visitor's email address. It can be a free trial, a free report, or maybe even a free book. But gaining the means and permission to contact that customer again will increase your conversion rate over time in most cases. There is great power in an email list.Strategy #2: Use Advertising to Test
Use advertising as a testing tool rather than a long-term stream of customers. Very few startups can withstand the cash outlay required to turn advertising into a marketing activity with positive ROI. Even if you figure it out, advertising is a volatile marketing medium. Prices increase rapidly in online advertising as new competition crops up or prospects grow bored of your ad and your click through rate drops. When this happens, all of the time you invested in optimizing your ad campaign is *poof*...gone. So instead of relying on ad traffic as an ongoing stream, use it for what it's best at: the ability to generate a slew of visitors very quickly, and to be turned off just as quickly. This kind of traffic source makes it great for split testing and user behavior testing using tools like Clicktale and Crazyegg. It also gives you insight into how certain traffic converts for you. With properly tracked conversions and an ad on Facebook, you can determine that men from 35-45 convert at a rate 15% lower than women of the same age. This is valuable information, especially early in your marketing effort when you're still trying to figure out the ideal market for your application. Often this is not the largest market; it's the one to whom you can market for the lowest cost. As another example, with AdWords you can learn in a hurry which keywords convert for you, and which don't. This is insanely valuable as you invest the time and money on the long-haul of search engine optimization. Knowing the keywords that really convert for your business, as opposed to the ones that you think will convert, can save you piles of cash and many months of SEO effort. The "First Five" Advertising Options With the above strategies in mind, let's look at the first five advertising options you should consider.Option #1: Niche Advertising
As a startup, there are hundreds of general advertising options available, and thousands more niche opportunities. Depending on the niche you're catering to you should be able to find a forum, blog, magazine or website in which to spend some ad dollars. The tighter the niche the better. Remember that niche sites tend to be cheaper to advertise on and drive more targeted traffic, which makes a huge difference in your conversion rate. (And if you're not targeting a niche because you want your audience to be the "whole world," you're going to need a lot more than $300 in your ad budget). In general, if you are marketing to a niche you will know the sites to target. If you don't it's time to pound the pavement and find out what they are. By "pound the pavement" I mean search on Google and contact people in the niche to find out where they hang out online. Two reputable niche ad networks I've worked with in the past are:
- InfluAds - With an increasing number of advertising "communities" covering design & UX, startups and entrepreneurs, work & productivity and web development, InfluAds can work with budgets as small as the $300-400 range. They sell a minimum set of granted impressions, and if more traffic is available during a month then existing advertisers receive it for free. Image ads only.
- BuySellAds - Though they've traditionally focused on the design & UX space, BuySellAds is in the process of branching into many other niches. This image-only ad network was the primary source of traffic for a design-oriented website I owned, and made the difference between a few hundred dollars a month in sales, and a few thousand. Advertising is purchased by impression or on a monthly basis from individual advertisers, meaning each offers different pricing. But the minimum buy is very cheap - in the $10-$20/month range.
Option #2: Google AdWords
- Ad Format: Text or image
- Ad Components (for text ads): 25-character deadline, 2 lines of body copy @ 35 characters each, 35-character display URL
- Approval Process: Automated, with manual review if you trip a filter
A few years ago, Google AdWords was great for startups. Many niches were untouched, and 5 and 10 cent clicks were commonplace. But these days, the vast majority of niches worth pursuing have ever-escalating click prices as more advertising dollars move online, including dollars from large corporations that don't blink an eye about spending $5 to produce a single visitor to their website. With a 1% conversion rate you need a $500 lifetime customer value to break even. This is more than a stretch for most startups who are scraping by on 0.5% conversion rates and sub-$100 lifetime customer values (at least to start with). But with Google carpet-bombing $75 AdWords coupons to every business in the civilized world, the number of advertisers, and thus the competition, is increasing. For the most part, the days of cheap clicks are over. The $1-2 per click I used to pay to advertise my invoicing software has become a negative ROI for me at $4-5 per click. But all is not lost. There is still a place in the backwoods of AdWords where the wild-west mentality (and cheap clicks) reign. That place is the content network. People traditionally think of Google AdWords as the ads that appear to the right of the search results. But the lesser known cousin of search ads are the ads that appear in every AdSense block you see around the web. These are ads placed through the Google AdWords content network. The content network is less targeted, higher volume, and typically much cheaper to advertise on, than the search results. While we don't have time here to delve into specifics of how to place ads on the content network, the most consistent approach I've seen that works over the long-term is to use their cost-per-action tool called the Conversion Optimizer. There's a great write-up of how it works from Patrick McKenzie of Bingo Card Creator fame, here. There are also some helpful tips on advertising on the content network here. And if you're willing to drop a few bucks, by far the best AdWords book available is the Ultimate Guide to Google AdWords, which includes a section on using the content network.
Option #3: Facebook
- Ad Format: Text with required image
- Ad Components: 110x80 image, 25 character headline, 135 characters of body copy
- Approval Process: Manual (sometimes slow)
Facebook is still viable for startups with its ability to deliver 10-15 cent clicks under the right circumstances. But it's a bit like the Wild West: if you approach Facebook advertising incorrectly you will pay a premium, around 75-90 cents per click. The value of Facebook is its ability to show your ads to exactly who you want to see it based on information in a user's profile. You can easily segment on gender, age, location, relationship status and a number of other fixed parameters, along with thousands of interests and occupations you can target using keywords. The key to low cost Facebook clicks is having a high click through rate (CTR). The key to a high CTR is a combination of a powerful image, an engaging headline, and laser-focused targeting. Due to space constraints we're not going to cover the basics of choosing a powerful image or writing an engaging headline. Not when there are perfectly good articles already written on the subject for those who would like to know more: choosing an image / writing a headline. But once your ad is written, there is a trick to achieving those 10 cent clicks. Based on a tip from my friend JD, I now use the following method with Facebook ads:
This approach requires ongoing maintenance but if you can generate targeted, 10-cent clicks it's worth the effort.
- Target your demographic information so tightly that you can write a headline that addresses them specifically. Example: if you are selling shoes online to the U.S. market, create 10 different versions of the ad, one for each of the major metro areas in the U.S. Also include the qualifying "interests" keyword: shoes. Now make each ad headline address its group specifically, using a formula like "Need Shoes in [city name]?"
- Start the ads with a modest budget of, say, $5-10 per ad per day.
- After 12-24 hours review the ads. Some will have high CTRs and costs per click around 10-15 cents. Others will have low CTRs and clicks in the 80-90 cent range.
- Pause the higher cost ads and increase the budget for the low cost ads to whatever you can afford; $100 per day or more per ad.
- For a few days you will receive extremely low-cost, targeted traffic. But since you've chosen a small group of people, they will start to tune out the ad rather quickly. At this point your CTR will drop and your cost will climb. Pause the ad, and start over with new cities, new images or new headlines.
Option #4: StumbleUpon
I recently advertised my developer's guide to launching a startup on StumbleUpon. The plus side of StumbleUpon is that all clicks are 5 cents. The downside is the bounce rate is high since people are basically channel surfing. I achieved a 96.88% bounce rate in my experiment, with an average stay of 2 seconds. I wonder if it was something I said? In my test, only 25 visitors stayed longer than 5 seconds. I paid $50 for 1000 clicks, but since only 25 of them stayed long enough to read anything, I effectively paid $2 per click. Your mileage may vary, but through this and other experiments I've gathered the following tips for advertising on StumbleUpon:
- Ad Format: not applicable
- Ad Components: just your URL
- Approval Process: Manual
- Your #1 goal is to get stumblers to stay longer than 5 seconds. Your #2 goal is to get them to up-vote your page. Paying $50 for 1000 clicks is one thing. Having it go viral and receiving 10,000 clicks for the same price is another.
- Don't send StumbleUpon traffic to a landing page that asks for an email address. StumbleUpon users are notoriously fickle about providing their email.
- People stumble to be entertained, so if your page doesn't have the potential to go viral or turn into linkbait, you will not likely fare well.
- Blog-like content and videos seem to work best. Anything that resembles a traditional landing page will bomb.
Option #5: Reddit
- Ad Format: Text with optional image
- Ad Components: 70x70 image, title, URL
- Approval Process: Manual (two-day lead time)
Reddit uses an interesting approach for their ad pricing: advertisers bid a certain amount per day, all of the money goes into one big pot, and each advertiser receives their share of the impressions based on the percetage of funds they contributed. It's a simple system, but it means there's a bit of uncertainty about what you're going to get for your money. However, Reddit has the potential to provide some very cheap clicks - I've seen as low as 3 cents - if you play your card right. Similar to StumbleUpon, Reddit provides your ad with the potential to go viral. Gabriel Weinberg has a great write-up of the 20,700 clicks he scored for 3.14 cents each for his new search engine Duck Duck Go. His eye-catching image and tech-focused startup served him well with the audience. As he says:
First, a search engine ad is a good fit for reddit ads in general. It has broad market appeal and redditters in general like trying out new technology. Second, I think the ad is particularly well structured. The circular duck icon draws your attention, is contrasting to site colors, and sticks out because it is a circle (as most images are square). I believe the title also has appeal.Gyutae Park also has a nice write-up of the 434 clicks he purchased for 9 cents each here. One of my recent experiments was a bit more pricey: 187 clicks at 40 cents each. My lackluster performance was a combination of landing on a competitive advertising day, and using a poor-quality header image. In retrospect, I have no idea what I was thinking using this unreadable image:Reddit ads are so simple (just two visible components) that the only tip I have is self-evident: your image has to rock, and so does your title. It's all about choosing an image and headline that makes people click. Conclusion To conclude, I want to reiterate what I said early in this article: unless you have deep pockets think of advertising not as a long-term traffic strategy, but as a testing tool to improve your website and find out more about your ideal visitor. Few bootstrapped startups can withstand the cash outlay required to turn advertising into a marketing activity with a positive ROI, but that shouldn't keep you from testing the waters to find out for yourself. I look forward to hearing about your advertising experience and recommendations in the comments.
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Update – As a followup, we analyzed all of these startup failure post-mortems to identify the top 20 reasons for startup failure. Also worth a read after you review these startup failure post-mortems.
We love a good entrepreneurial success story – entrepreneur as protagonist overcomes obstacles and builds a thriving, successful company (and become wealthy while doing so). We want to hear about, learn from and even replicate what they’ve done. However, this survivorship bias is problematic. Jason Cohen of Smart Bear Software does a nice job articulating this issue stating:
The fact that you are learning only from success is a deeper problem than you imagine…drawing conclusions only from data that is available or convenient and thus systematically biasing your results.
Luckily, the startup community often courageously shares their stories – even when things don’t end well. And so below is our list of the 25 “best” startup failure post-mortems of all time. Three notes before we begin:
- After reading these, you realize more than ever that the startup community is really like no other. We were amazed by the candor and generosity of many of the writers of these post-mortems. Corporate America could learn from this.
- We didn’t find post-mortems by investors (VCs, angels, etc) except for one by Roger Ehrenberg. We’d love to see these given the number of businesses you see and ultimately invest in. It would be an admission that you’re not infallible, but we already know that
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- If we’ve missed a great post-mortem others would benefit from reading, please leave it in the comments, and we’ll add it. BTW, if you do the count, there are actually 32 post-mortems in this post. Think of it as 7 bonus post-mortems on the house.
If you are an entrepreneur seeking funding, try our free Funding Recommendation Engine to identify a list of angels, venture capital and state grant programs that best match your business. It’s free. Get started here.
With that preamble, here is the list in no particular order. We’ve picked quotes out of each that we thought were insightful, funny, poignant or some combo of the three. They in no way summarize the posts so please do read them (but probably not all at one time).
Post-Mortem Title: How My Startup Failed
There was no doubt about it: I had discovered The Next Big Thing. Like Edison and the lightbulb, like Gates and the pc operating system, I would launch a revolution that would transform society while bringing me wealth and fame. I was about to become the first person in America to sell condom key chains.
Post-Mortem Title: Why Wesabe Lost to Mint
Company: Wesabe
Author: Marc HedlundBetween the worse data aggregation method and the much higher amount of work Wesabe made you do, it was far easier to have a good experience on Mint, and that good experience came far more quickly. Everything I’ve mentioned — not being dependent on a single source provider, preserving users’ privacy, helping users actually make positive change in their financial lives — all of those things are great, rational reasons to pursue what we pursued. But none of them matter if the product is harder to use, since most people simply won’t care enough or get enough benefit from long-term features if a shorter-term alternative is available.
Post-Mortem Title: ArsDigita – From Start-up to Bust-up
Company: ArsDigita
Author: Philip GreenspunFor roughly one year Peter Bloom (General Atlantic), Chip Hazard (Greylock), and Allen Shaheen (CEO) exercised absolute power over ArsDigita Corporation. During this year they
- spent $20 million to get back to the same revenue that I had when I was CEO
- declined Microsoft’s offer (summer 2000) to be the first enterprise software company with a .NET product (a Microsoft employee came back from a follow-up meeting with Allen and said “He reminds me of a lot of CEOs of companies that we’ve worked with… that have gone bankrupt.”)
- deprecated the old feature-complete product (ACS 3.4) before finishing the new product (ACS 4.x); note that this is a well-known way to kill a company among people with software products experience; Informix self-destructed because people couldn’t figure out whether to run the old proven version 7 or the new fancy version 9 so they converted to Oracle instead)
- created a vastly higher cost structure; I had 80 people mostly on base salaries under $100,000 and was bringing in revenue at the rate of $20 million annually. The ArsDigita of Greylock, General Atlantic, and Allen had nearly 200 with lots of new executive positions at $200,000 or over, programmers at base salaries of $125,000, etc. Contributing to the high cost structure was the new culture of working 9-5 Monday through Friday. Allen, Greylock, and General Atlantic wouldn’t be in the building on weekends and neither would the employees bother to come in.
- surrendered market leadership and thought leadership
Post-Mortem Title: RiotVine Post-Mortem
Company: RiotVine
Author: KabirIt’s not about good ideas or bad ideas: it’s about ideas that make people talk.
And this worked really well for foursquare thanks to the mayorship. If I tell someone I’m the mayor of a spot, I’m in an instant conversation: “What makes you the mayor?” “That’s lame, I’m there way more than you” “What do you get for being mayor?”. Compare that to talking about Gowalla: “I just swapped this sticker of a bike for a sticker of a six pack of beer! What? Yes, I am still a virgin”. See the difference? Make some aspect of your product easy and fun to talk about, and make it unique.
Post-Mortem Title: The Last AnNounce(r)ment
Company: Nouncer
Author: Eran Hammer-LahavA month ago, half way through my angel funds raised from family members, I decided to review the progress I’ve made and figure out what still needs to happen to make this a viable business. I was also actively pursuing raising VC funds with the help of a very talented and well connected friend. At the end, I asked myself what are the most critical resources I need to be successful and the answer was partners and developers. I’ve been looking for both for about a year and was unable to find the right people. I realized that money was not the issue.
Post-Mortem Title: My eHarmony for Hiring Failure
This started to make me more nervous. I was manifesting this huge monolithic application in my head that would revolutionize the job search, I had even written some code at this point, and didn’t have any idea if actual businesses were willing to pay a dime for it.
Post-Mortem Title: BricaBox: Goodbye World!
Company: BricaBox
Author: Nate WestheimerGo vest yourself.
When a co-founder walks out of a company — as was the case for me — you’ve already been dealt a heavy blow. Don’t exacerbate the issue by needing to figure out how to deal with a large equity deadweight on your hands (investors won’t like that the #2 stakeholder is absent, even estranged, from your company). So, the best way of dealing with this issue is to take a long, long vesting period for all major sweat equity founders.Post-Mortem Title: Boompa.com Launch Postmortem, Part 1: Research, Picking a Team, Office Space and Money
Company: Boompa.comEthan and I came up with the “Zombie Team” test for figuring out whether or not someone is ready to work on an intense project, be it a start-up or otherwise. The test is this: If zombies suddenly sprung from the earth, could you trust the perspective team member to cover your back? Would they tell you if they got bit? Most importantly would you give them the team’s only gun if you knew they were the better shot? If the answer is no to any of those questions you need to let them get eaten by the cubicle wasteland of corporate culture, because they aren’t ready for this kind of work.
Company: Xmarks (company seems semi-dead given recent pledgebank setup)
Author: Todd
For four years we have offered the synchronization service for no charge, predicated on the hypothesis that a business model would emerge to support the free service. With that investment thesis thwarted, there is no way to pay expenses, primarily salary and hosting costs. Without the resources to keep the service going, we must shut it down.
Company: EventVue
Our Deadly Cultural Mistakes:
– didn’t focus on learning & failing fast until it was too late
- didn’t care/focus enough about discovering how to market eventvue
– made compromises in early hiring decisions – choose expediency over talent/competency
Author: Ariel Diaz
The market was not there
The thesis of our current business model (startups are all about testing theses) was that there was a need for video producers and content owners to make money from their videos, and that they could do that by charging their audience. We found both sides of that equation didn’t really work. I validated this in my conversations with companies with more market reach than us, that had tried similar products (ppv video platform), but pulled the plug because they didn’t see the demand for it.
Video producers are afraid of charging for content, because they don’t think people will pay. And they’re largely right. Consumers still don’t like paying for stuff, period. We did find some specific industry verticals where the model works (some high schools, some boxing and mixed martial arts events, some exclusive conferences), but not enough to warrant a large market and an independent company.
Company: IonLab
Author: Swaroop C H
Second, as one of my friends observed, I talked to about 7 people (both acquaintances and friends) whose judgment I trusted. 3 of them sympathized and agreed with my decision and 4 of them admonished me and asked me to “hang in there.” You know what was the clincher? The first 3 had done startups themselves and the latter 4 had not. The latter 4 did not really understand the context, even though they meant well and are intelligent folks.
The most significant drawback to a remote team is the administrative hassle. It’s a pain to manage payroll, unemployment, insurance, etc in one state. It’s a freaking nightmare to manage in three states (well, two states and a district), even though we paid a payroll service to take care of it. Apparently, once your startup gets larger, there are companies that will manage this with minimal hassle, but for a small team, it was a major annoyance and distraction.
Company: Kiko
Author: Mahesh M Piddshetti
Make an environment where you will be productive. Working from home can be convenient, but often times will be much less productive than a separate space. Also its a good idea to have separate spaces so you’ll have some work/life balance.
Company: Overto
Author: Pawel Brodzinski
Thin line between life and death of internet service is a number of users. For the initial period of time the numbers were growing systematically. Then we hit the ceiling of what we could achieve effortlessly. It was a time to do some marketing. Unfortunately no one of us was skilled in that area. Even worse, no one had enough time to fill the gap.
The Seven Deadly Sins
While we certainly made more than seven mistakes during the nearly four-year life of Monitor110, I think these top the list.
- The lack of a single, “the buck stops here” leader until too late in the game
- No separation between the technology organization and the product organization
- Too much PR, too early
- Too much money
- Not close enough to the customer
- Slow to adapt to market reality
- Disagreement on strategy both within the Company and with the Board
Author: Paul Biggar
None of these problems should have been unassailable, which leads us to why NewsLabs failed as a company:
- Nathan and I had major communication problems,
- we weren’t intrinsically motivated by news and journalism,
- making a new product required changes we could not make,
- our motivation to make a successful company got destroyed by all of the above.
For anyone faced with winding down a company, I’d highly recommend taking a while off before making any big decisions, and not just the two and a half weeks that I’d initially tried. You’re not thinking straight when your startup dies – your perspective may be a bit different in a few months, as might your preferences for what you want to do next.
The corollary to that is to wind up your startup before you’re totally out of money, so that you have options for what to do next and don’t have to bargain from a place of total weakness.
So the most important thing is to sell – a fact lots of startups forget. And we did too. After much thought it comes down to these six reasons why we failed (beside the obvious one that the VC market imploded when we needed money and noone was able to get any funding):
- We didn’t sell anything
- We didn’t sell anything
- We didn’t sell anything
- The market window was not yet open
- We focused too much on technology
- We had the wrong business model
Author: Mark Goldenson
I would advise any entrepreneur or investor considering content to think twice, as Howard Lindzon from Wallstrip warned us. Content is an order of magnitude harder than technology with an order less upside; no YouTube producer will earn within a hundredth of $1.65 billion. This will only become more true as DVRs and media-sharing reduce revenues and pay-for-performance ads eliminate inefficient ad spend, of which there is a lot. The main and perhaps only reason to do content should be the love of creating it.Company: SMSnoodle
I have been hearing this advise from the time I have been in my mother’s womb.Dont take this easily.If you are a techie there are more chances that you won’t follow this advise. Your heart doesn’t get satisfied with any levels of development.Ignore your heart.Listen to your brain. If you are a web startup , you can take max 6 months to release your first version( for something like mint.com) .Simpler websites shouldn’t take more than 2-3 months.You can always iterate and extrapolate later.Wet your feet asap.
Company: Untitled Partners
Author: Jordan Cooper
Hiring is hard, and without proper experience, we should have leaned more heavily on our investors to help us with this decision. Hiring was a challenge we found difficult throughout the life of our Company. We made as many bad decisions as we did good ones with regard to hiring full time, part time, and independent contractors/consultants. Biggest takeaway: As soon as the data starts to suggest someone might be the wrong hire, don’t wait, immediately start recruiting a replacement, and upgrade as soon as possible.
Company: Cryptine Networks
Author: Andrew Fife
No matter how close of friends, how much you trust each other or how good your intentions are money comes between people and everyone over estimates their own contributions. Furthermore, founders become highly emotional about their companies. Thus, the process of negotiating taking back stock from founders is not rational and inherently very difficult. However, vesting schedules reduce the difficult negotiation to simply and mechanically exercising the companies pre-agreed right to repurchase stock at the price it was issued. I foolishly let myself fall into the “it won’t happen to me” trap but no startup gets it right on the first try and theses hiccups often lead to changes in the team. Believing that any startup won’t have to deal with stock vesting issues is totally unrealistic.
Company: SubMat
Author: Laurent Krentz
My philosophy was to get as far as possible with a small seed round. To do this, I thought keeping my day job would allow to spend the money wisely on product or marketing actions. Wrong. Quit your job (if you can), and get down to business. Period. You need to be dedicated to your project, meet people, talk about it, code and hack this sh*t out of it. At the end of the day, I was doing both things wrong: my day job, and my startup.
Company: Imercive
Author: Keith B. Nowak
For one, we stuck with the wrong strategy for too long. I think this was partly because it was hard to admit the idea wasn’t as good as I originally thought or that we couldn’t make it work. If we had been honest with ourselves earlier on we may have been able to pivot sooner and have enough capital left to properly execute the new strategy. I believe the biggest mistake I made as CEO of imercive was failing to pivot sooner.
Company: Meetro (aka Lefora)Author: Paul Bragiel
We could have gone about trying to fix Meetro but the team was just ready to move on. Raising money on the flat growth we had was nearly impossible. Plus I knew that in order to keep the tight-knit team we had built together, we needed to shift focus for sanity sake. People (myself included) just felt beat up. We knew that fixing these issues would involve a complete rearchitecturing of the code, and people just weren’t excited about the idea enough anymore to do it right.
Company: eCrowds
Author: David Cummings
As the product became more and more complex, the performance degraded. In my mind, speed is a feature for all web apps so this was unacceptable, especially since it was used to run live, public websites. We spent hundreds of hours trying to speed of the app with little success. This taught me that we needed to having benchmarking tools incorporated into the development cycle from the beginning due to the nature of our product.
Note: This post-mortem is not by the company and so is unlike others in the list and is quite editorial (warning).
Dave Jones made a virtue of having no business model for APB. He said “if a game is built around a business model, that’s a recipe for failure.”
Bullsh1t.
Post-Mortem Title: A Startup Idea Postmortem: Proof That Good Ideas Aren’t Always Good Business
Author: Rob MayBut the more we moved down the path, the more I realized the complexities involved with selling answers. Knowledge is a tricky thing to sell, because even experts disagree on some answers. What’s worse, most people think they know more than they really do. Look at how many idiots think they know stocks, or programming, or even business. Nearly everyone thinks they can give good management tips. It is difficult to sell something so… confusing, and we realized it would lead to problems down the road. Yahoo, and most of the other sites, fix this by having people vote on the best answer, but we couldn’t post answers in public because that would take away our residual incentives. And anyway, I’m not convinced in the “wisdom of crowds” for anything beyond general knowledge. It doesn’t work for domain specific stuff.
Post-Mortem Title: Co-Founder Potts Shares Lessons Learned from Backfence Bust
Company: Backfence
Author: Mark Potts | Mark GlaserHyper-local is really hard. Don’t kid yourself. You don’t just open the doors and hit critical mass. We knew that from the jump. It takes a lot of work to build a community. Look carefully at most hyper-local sites and see just how much posting is really being done, especially by members of the community as opposed to be the sites’ operators. Anybody who’s run a hyper-local site will tell you that it takes a couple of years just to get to a point where you’ve truly got a vibrant online community. It takes even longer to turn that into a viable business. Unfortunately, for a variety of reasons, Backfence was unable to sustain itself long enough to reach that point.
Post-Mortem Title: What an Entrepreneur Learned from His Failed Startup (interview)
Company: Sedna Wireless
Author: Rajiv Poddar | Kamla BhattFinances were just one part of the story. The other part was that we failed to execute our own plans. Both external factors (e.g. the hardware ecosystem in India) and internal reasons (e.g. the expertise of the team) played a role. With money it would have lasted a bit more longer.
Post-Mortem Title: Couldery Shouldery
Company: Lookery
Author: Scott RaferWe exposed ourselves to a huge single point of failure called Facebook. I’ve ranted for years about how bad an idea it is for startups to be mobile-carrier dependent. In retrospect, there is no difference between Verizon Wireless and Facebook in this context. To succeed in that kind of environment requires any number of resources. One of them is clearly significant outside financing, which we’d explicitly chosen to do without. We could have and should have used the proceeds of the convertible note to get out from under Facebook’s thumb rather to invest further in the Facebook Platform.
Post-Mortem Title: How To Develop a Product Nobody Wants
Company: ChubbyBrainLike a Printer/Fax/Copy Machine – We were trying to be a credible data company and a community. Most companies struggle to be good at just one thing, and we decided we were going to be good at two. Bottom line – We are data guys. We’re good at data. We like data. Community was about things we didn’t have as much familiarity with, i.e., social media, game mechanics, community building, etc. These were things when we started that we honestly had little insight into given the composition of our team. Even those who know these things intimately will admit it can be difficult. As novices, the task was even more daunting.
We have shamelessly included our own quasi post mortem. We messed up a lot of things in v1.0 of ChubbyBrain so this is a post-mortem of our first product which we’ve gotten a lot of nice and positive feedback on. We’re happy to report we are still alive.
If you have a friend, colleague who is starting their own business, and you found one of these post-mortems useful, please share this with them. Success stories are inspiring of course, but there is a lot to be learned from failure. And the startup community, as evidenced from the above, is immensely generous in sharing their knowledge – whether the outcome is good or bad. Best of luck in your venture.
If you’ve read this far, you definitely should:
Don’t spend money on marketing, do offer flexibility and data exporting to eliminate buyers’ regret, make sure to capitalize on and value goodwill, and only charge for things that are hard to do. That’s what some startups say is the key to success in the freemium business. But the biggest reason the five presenters this morning at the Freemium Summit in San Francisco — Pandora, Dropbox, Evernote, Automattic (see disclosure at the bottom) and MailChimp — are doing well is because they have great products that people want. They’ve been able to get those products to a broad audience by using the freemium model — that is, offering a free service with the option to upgrade. It’s an increasingly important business model, but one that’s hard to navigate, so their anecdotes, open sharing of data, and lessons learned were really valuable.
Pandora’s reverse-freemium approach: Pandora first launched in August 2005 with something that sounds quite similar to freemium: users got 10 hours of free online radio at signup, after which they were asked to pay $36 per year. “In the first couple weeks we had 100,000 people come through and the vast majority listened to every last minute of their free ten hours,” said CTO Tom Conrad. “Then we asked them for their credit card and they would wander off into the wilderness.”
That November, Pandora switched on an “ad-supported” option. It was ad-supported in name only, however, because they had no ad server, no ad staff — not even a place on their page to put ads. But growth quadrupled overnight, and within three days, Apple called and asked to buy out ad inventory through December. Conrad and his team of course said yes, arriving at the price of $10,000 for the month. “We literally hard-coded the ads on the page,” he said. “We didn’t want them to know, but every time they changed their creative we’d have to relaunch the entire site.”Pandora now has 20 million uniques and took in $50 million in revenue last year. Subscription rates had dropped to well below 1 percent of users. But 1 percent of a large number is still a large number, so last year the company launched Pandora One, a new take on premium with higher quality streams, a desktop app and fewer usage limits. It now has 300,000 subscribers, accounts for 1.6 or 1.7 percent of monthly uniques, and is expected to bring in 15 percent of 2010 revenue.
Dropbox’s numbers game: Dropbox CEO Drew Houston says you should know one thing about freemium: “It is a numbers game, so bust out your Excel spreadsheet. It’s all about finding things in the margins — lots of little things rather than one key thing.” Houston went into detail about the backup service’s attempts to recruit users through search marketing. The company found that obvious keywords like “online storage” were bid up, and the long tail of search terms had low volume. Then, people coming from search who actually signed up might not even pick the paid version (which has more storage and features).
Ultimately that meant “our cost per effective acquisition per paid user was thousands of dollars for a hundred-dollar product.” So for a time, Dropbox went to great lengths to hide the free option to users coming in through search, and as a result confused users and felt terrible. “So the big lesson there is if you adopt a freemium business model your marketing cost is the free users.” The fact was that Dropbox was offering a product that people didn’t know they needed until they tried, and “search is great for harvesting demand, not creating it,” Houston said.Having dropped search marketing as a strategy, Dropbox has actually grown incredibly fast. At some point, the company realized that user referrals were its biggest source of growth, so now it encourages referrals with an incentive program. That increased signups by 60 percent, said Houston, and it now drives 30 percent of total signups. The company now devotes 30 percent of its engineering to acquiring active users.
Houston also told a second story about Dropbox’s realization that its unlimited undo history — available to free and paying users — was responsible for a huge and growing share of its costs. And further, few customers actually used the feature. “We said ‘holy sh*t!’ More than half of our hosting costs are going to deleted, not restored prior versions of files,” said Houston. The company was wary of rolling back a free feature, but was able to manage the transition without too much fuss by telling customers about it openly, and giving existing users the option to keep the feature if they liked.
Evernote’s key metric: Evernote, the personal note-taking service, faces a challenge to spreading virally in that it’s not at all a social product, said CEO Phil Libin. But what Evernote can focus on is deriving maximum value from the users it does have. The company, which launched in June 2008, has 2.7 million users, with 7,000 new users per day (mostly through word of mouth, despite the lack of social features, said Libin), and 50,000 paying users (who convert in order to use the service on multiple platforms and for other premium features).
The thing is, over time inactive users drop off, and active users start paying. Once Evernote finally figured that dynamic out and started talking about it, term sheets and partnerships requests started flowing in, Libin said. “Our key insight is users are growing really fast, but revenue is growing faster.” Currently, users are growing 10 percent per month and revenue is growing 18 percent. “It’s like our users are a fine stinky cheese or wine — it gets better with age,” said Libin. “More and more people who aren’t going to pay just leave, and more who stay pay.” So 0.5 percent of people who sign up in a given month go premium, but 2 percent of people who signed up a year ago are now paying Evernote.Libin’s key metric is comparing revenue per active user with variable expenses. At this point, the company makes $0.25 per month per active user, and spends $0.09 on variable expenses like infrastructure, customers service and network operations. He said freemium can work for any business if you have 1) a great long-term retention rate, 2) a product that increases in value over time and 3) variable costs.
Automattic CEO Toni Schneider and MailChimp CEO Ben Chestnut added a few more key lessons in their talks. Schneider talked about the blogging-software company’s decision to offer a-la-carte freemium services instead of tiered levels, giving both his team and users more flexibility. His company now makes 40 percent of its revenue from premium services like domain mapping, with the remainder from ad sales and enterprise products. But he said the problem with this approach is customers may not know of services they could receive, because it’s harder to market them individually.
Chestnut talked about the fact that free products are ripe for abuse. His 10-year-old email marketing company started offering a free version seven months ago, and has seen 240 percent user growth, a 225 percent increase in email delivery volume from 200 to 450 million, and a 200 percent projected revenue increase. But the biggest bumps of all? A 354 percent increase in abuse-related issues like spamming, followed by a 245 percent increase in legal costs dealing people trying to game the system. Luckily, MailChimp was able to develop automated ways to discover and deal with some of these issues, but even as an anticipated side effect the increase in abuse from going freemium has been huge.
Photos courtesy of Flickr users Hillary H, gaborcselle and hzeller, respectively.
Disclosure: Automattic, maker of WordPress.com, is backed by True Ventures, a venture capital firm that is an investor in the parent company of this blog, Giga Omni Media. Om Malik, founder of Giga Omni Media, is also a venture partner at True.
People sometimes ask me for advice about starting a company. Here are some documents I've written which may or may not be helpful to you.
And here's an article that Inc Magazine recently (Feb 2010) was kind enough to solict with me. :)
Good luck with your idea!
How do you measure how much your users like your product? This is one of the essential question that every founder needs to answer to make the right decisions - to move the product ahead.
In some lean startup related discussion I stumbled accross the idea of asking your users if they were sad if the used product would vanish. As the lean startup is all about validating assumptions based on data and turning them into "validated learnings" this simple way of measuring a user's attachment was an idea that spoke to me. I wanted this for connex.io but our designer Thierry convinced me that we had to adapt the idea for it to work in our context. And we did.
Based on the simple idea outlined we created a small form on which we simply ask our users if they are happy or not. We adapted the question because we feared the original phrasing would scare away users looking for a reliable, thrustworthy system. In our case we felt it was a necessity because people see their address book as very valuable and want to know that it is stored safe and secure.
Based on the reformulated question we started gathering feedback. Around 10% of our active users have provided feedback this way. The ratio of YES and NOs has been within what we expected but the box has allowed users to give feedback that is much more valuable than just a YES or NO. It gives people an easy way to vent their frustration if something went wrong. People seem to click on NO almost instinctively providing us with an opportunity to help them and turn them around.
We mainly use Uservoice to provide our users with help and gather feedback but this box has proven to do better in helping us to reach out to unhappy users.
We were wondering why users click on the button when they do not contact us through a service such as Uservoice? We believe that it is almost effortless to click one of the buttons and that some users probably already feel better simply by clicking.
How does our box work?
The box is simple. A question and two buttons. Although simple almost every user we talk to has noticed it. Once a user clicks YES or NO the click is registered and the user is given the opportunity to expand upon their click.
If expanded or not we are sent an email notifying us about the happy or unhappy user (including the comment if there was one) which allows us to react in near real time if a problem occurs. We can thank the user for their feedback and if a user is unhappy we can ask him what went wrong, what he expected to go differently and how we can help.
Over 50% of these emails to unhappy users get a reply by the user and often they already are halfway back to being happy.
It is a seamless way to get in touch with our users without them having to do more than expressing an emotion and allowing us to provide our users with surprisingly good customer service.
Summing up: This feedback mechanism has allowed us to realize in near real time when something goes wrong for one of our users and we can offer them help and solutions. I can only recommend to every startup to start using a similar mechanism. It is the best way we have found so far to let users initiate contact giving you a reason to reach out to them and build a relationship - wheter the first reaction was positive or negative.
Written by Marcus Kuhn
So you have a new startup company and want some coverage. This post will give you 36 places where you can submit your startup for reviews, mentions or at least some backlinks.
When we launched our public beta in April, the first thing we wanted was some coverage on different startup blogs and websites. We didn’t have a PR company or a bunch of contacts, hence we needed to start from scratch.
So I took my sweet time Googling different websites that would take submissions, tips or published their editor’s email. Initially the list got pretty big, but I weeded out websites where you need to be way bigger to get mentioned (Mashable, Techcrunch and the like) or that charge money for a review.
We were pretty happy with the coverage we got and I thought I’ll save you some time by sharing my list.
2. Springwise
3. CrunchBase
4. GotoWeb2.0
5. StartupMeme
6. SimpleSpark
8. FeedMyApp
9. BigStartups
10. GreatWebApps
11. Wwwhatsnew
13. MakeUseOf
14. LaunchFeed
15. MoMB
16. Demo Girl
17. WebDev 2.0
18. DzineBlog
19. Sociable Blog
20. Emily Chang
21. Rev2
22. Ziipa
23. On The App
24. Next Web App
25. DIY Startup News
26. AppUseful
27. Startup Booster
28. Paggu
29. Robin Speziale
30. Submit Startup
31. TechHotSpot
32. YouNoodle
33. Lovely Pages
35. TechPluto
36. Netted
Update:
Suggestions from the readers
37. Hacker News (thanks Jacques Mattheij)
38. The Atlantic Technology Channel (thanks Alexis)
39. Appsumo (thanks Noah)
40. Appvita (thanks Sergi)
41. Techattitude (thanks Precog)
42. Minisprout (thanks Alex)
42. Startuplift (thanks Pete)
Know of any other good ones? Please add in the comments.
Want to make money by selling what you know? Take a look at Traindom.
Tagged: blog coverage, get coverage, startup review, startups, submit startup
This article is a bit out of the ordinary. But, it's a Frid
ay so I'm hoping you'll cut me some slack.
For some reason, I like wordsmithing and trying to make phrases smaller (but still have some meaning). So, late at night, I tried to come up with some of my best startup advice and see if I could reduce it down to exactly three words (which is why I call them "triplets"). One thing led to another, and I became obsessed with it. So, then I made 47 before I had to make myself stop. And, to ensure that you didn't take this too seriously, I included a photo of some puppies. You will now find the article irresistible and will share it with the entire world.
In any case, hope you enjoy them. It's likely not the most brilliant startup advice you've ever read -- but it has a decent chance of being the shortest. Oh, and please be sure to add your own in the comments.
Startup Triplets: Startup Advice In Exactly Three Words
1. Watch your cash. [tweet]
2. Pick founders carefully. [tweet]
3. Hire generalists early. [tweet]
4. Hire specialists later. [tweet]
5. Invest in culture. [tweet]
6. Avoid tempting distractions. [tweet]
7. Support customers maniacally. [tweet]
8. Avoid business plans. [tweet]
9. Write a blog. [tweet]
10. Never fudge numbers. [tweet]
11. Encourage diverse thinking. [tweet]
12. Guard your time. [tweet]
13. Defer renting space. [tweet]
14. Get enough sleep. [tweet]
15. Delay raising capital. [tweet]
16. Persist through downturns. [tweet]
17. Decide with data. [tweet]
18. Improve product daily. [tweet]
19. Recognize revenue consistently. [tweet]
20. Start charging early. [tweet]
21. Reward early adopters. [tweet]
22. Sell something today. [tweet]
23. Say “NO” often. [tweet]
24. Accept imperfect data. [tweet]
25. Recruit with zest. [tweet]
26. Nurture your best. [tweet]
27. Treat vendors well. [tweet]
28. Believe in yourself. [tweet]
29. Respect your competitors. [tweet]
30. Try something new. [tweet]
31. Build a brand. [tweet]
32. Focus, focus, focus. [tweet]
33. Iterate more often. [tweet]
34. Use your product. [tweet]
35. Live your vision. [tweet]
36. Encourage rational debate. [tweet]
37. Make decisions swiftly. [tweet]
38. Face harsh realities. [tweet]
39. Don’t break laws. [tweet]
40. Protect your health. [tweet]
41. Celebrate your successes. [tweet]
42. Cancel unnecessary meetings. [tweet]
43. Improve emloyee's resumes. [tweet]
44. Beware big bullies. [tweet]
45. Share the experience. [tweet]
46. Maintain your relationships. [tweet]
47. Keep it fun. [tweet]
Update: Guy Kawasaki (yes, the Guy Kawasaki) was kind enough to post some of his own triplets. Here are some:
48. Sales fixes everything.
49. Ship then test.
50. Do not partner.
You can see his full list here: Guy Kawasaki's Startup Triplets.
Challenge: You're way smarter than I am. Please come up with your own startup triplets and share them. Leave a comment or post it to twitter (with hashtag #StartupTriplets). I think you'll find it fun -- and addicting. I'll take the best ones and pull them together into a future post -- or even a book. You could be famous!
Ready? Go!
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Start-up Tools
- Start-ups are always short on time: here are some tools that can save you time and avoid reinventing the wheel.
- This list is focused on technical tools to save development time.
- With each tool, we've added a list of start-ups known to be using that tool, so there's a sense of how well tested they are by the community. If no start-up can vouch for the tool it doesn't make it onto the list.
- List of Contributors
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I met with a group of very experienced and sophisticated investors yesterday who make up the investment committee of a large charitable foundation that is an investor in USV. I gave them a two minute brief on our macro investment thesis (large networks of engaged users that can disrupt big markets) and then took them on a tour of some of these large networks (Lending Club, Kickstarter, Etsy, Twitter, and Codecademy). Then I took questions.
This group doesn't spend a ton of time on AVC, Techmeme, Hacker News, or the tech industry in general. And yet the questions they asked me were as good as I ever get. I guess four decades of investing teaches you a lot.
One of the best questions I got was "when do you decide to sell?". Such a great question and such a hard one to answer. I've got scars from this one.
I explained that first and foremost, we generally don't make that call. The entrepreneur and her management team generally makes that call and the board is asked to ratify it.
But when and if we get to weigh in on the timing of the exit, my view is that you look to exit your weakest investments as soon as you can and you let your winners run as long as you can.
USV 2004 is instructive. Between 2004 and 2008, we made investments in 21 companies. So the youngest portfolio company in that portfolio is four years old now. Most are five to six years old. And a few, like Meetup and Return Path, are ten years old or more. We've exited six of the 21 investments, you can see them here, under past investments at the bottom.
We still have fifteen investments active in that portfolio including Zynga and Twitter and we own large blocks of stock in both of those companies. We own stakes in thirteen other portfolio companies most of which we believe are super strong companies that are building large and sustainable businesses. We will likely exit a few weaker investments in that portfolio over this year and next. But there are at least ten companies in the USV 2004 portfolio that we would be happy to own for the rest of this decade.
This does create a bit of an issue in that we raise ten year venture capital funds. So we are supposed to wind things up in the 2004 fund in another two years. But I am fairly sure that my partners and I and our limited partners will be happy to let this fund play itself out over a longer period of time.
I've made the mistake of exiting investments too quickly. Back in the middle of 2007, my previous firm Flatiron exited our investment in Mercado Libre at the IPO selling our entire position for about a 10x gain. In the almost five years that MELI has been public, it has gone up 5x. So had we held our position for another five years, we'd have made 50x instead of 10x. That stings. Lesson learned.
When you have portfolio companies that are category creators, category leaders, who are well managed, and growing 50% per year or more and delivering 20-30% pre-tax margins (or more), and who have no existential threats to their market leadership, you might want to hang on to them for a bit. They may be just getting going on the valuation creation thing.
We’d previously highlighted the top startup failure post-mortems of all-time here (32 in total) written by a group of startup entrepreneurs gracious enough to share their lessons learned from their startup’s failure. Many of you read those post-mortems and asked, what are the most common reasons for failure cited across those posts?
Well, we’ve done the work, and below are your answers. After a thorough analysis of those 32 start-up post-mortems, we have determined the common reasons founders gave to compile this list of the top 20 ways to have your startup fail. First, a handy chart to highlight the top 20 reasons for failure followed by an explanation of each reason and relevant examples from the the post-mortems.
If getting VC or angel money is one of the ways that will help you avoid failure, why not check out the free Funding Recommendation Engine here?
#20 – Start the company at the wrong time
Many companies that failed started during the recent financial crisis (and continues to suffer through), and some startups highlighted the larger market negativity as a reason for their ultimate demise. The negativity either impacted investment funding (venture capital fell off a cliff in 2009) or the customers they were targeted as was the case for Untitled Partners who were building a platform for fractional art ownership. In their post-mortem, on this topic, they wrote:
Our analysis was supported by articles in the Wall Street Journal and the NYT, as well as the Mei Moses art index, which suggested the art market was countercyclical and had a low correlation to the S&P. What we didn’t account for was the magnitude of the current correction and the effect that it would have on discretionary luxury spending even within a population that financially could still afford our product. We were obviously wrong about Untitled Partners’ ability to grow through the subsequent downturn.
#19 – Not working on it full time
Startups are hard. There even harder when you’re pulled in a couple of different directions aka a day job. This came through in several post-mortems. If you’re working another full-time job with nobody fully invested, you are running the risk of burning out, acting with less urgency and just not having enough hours in the day to get what you need done. Also, with another job, there is the risk that a team acts with less urgency given they have sources of income. The team over at Overto felt the lack of at least one full-time resource was the primary reason for their failure writing:
We thought we’d able to run internet service after hours. To some point that was true. As far as nothing bad was happening with the servers and the application it was all fine. We were working on new features when we had enough free time. Problems started when we faced some issues with our infrastructure. We weren’t able to resolve issues on the fly and had several downtimes. You can guess how it influenced user experience. That also backfired on service development since we had to focus on current problems instead of adding new functionalities. Lack of person working full-time and being able to deal with maintenance and bug fixing was the most important reason of failure.
#18 – Location, Location, Location
Location was an issue in two different ways. The first being that there has to be congruence between your startup’s concept and location. By way of crude example, if your building innovative trading software for Wall Street, be where you customers are and where you can best network. Location also played a role in failure for remote teams. The key being that if your team is working remotely, make sure you find effective communication methods; else lack of teamwork and planning could lead to failure. Location issues were given as a reason for failure 6% of the time. In their startup post-mortem, Nouncer discussed their decision to be in NY as one that hurt their company stating:
In my case, New York didn’t lack money, community, able workers, or smart people with good advice. It lacked the audience my product needed to succeed – the early adopters web hackers looking for the next cool toy to play with. I can count on one hand the number of people I’ve met in New York meetups and events that fit this description. In San Francisco one can find hacking events on a daily basis, as well as many unconference events where people get their hands dirty playing with code. This is a very specific audience dictated by my decision not to build a consumer product.
#17 – Be unable to Attract Investors
While this may be a cousin of reason #20 (starting the company at the wrong time), there was a group of founders who candidly expressed that their inability to attract investors was the reason for their ultimate demise. If there is no money out there for your idea, reassess whether there is a market for it, and reassess your approach.
#16 – Get outcompeted
Despite the platitudes that startups shouldn’t pay attention to the competition, the reality is that once an idea gets hot or gets market validation, there may be many entrants in a space. And while obsessing over the competition is not healthy, ignoring them was also a recipe for failure in 10% of the startup failures. Marc Hedlund of Wesabe talked about this in his post-mortem stating:
Between the worse data aggregation method and the much higher amount of work Wesabe made you do, it was far easier to have a good experience on Mint, and that good experience came far more quickly. Everything I’ve mentioned — not being dependent on a single source provider, preserving users’ privacy, helping users actually make positive change in their financial lives — all of those things are great, rational reasons to pursue what we pursued. But none of them matter if the product is harder to use, since most people simply won’t care enough or get enough benefit from long-term features if a shorter-term alternative is available.
#15 – Burn Out
Work life balance is not something that startup founders often get and so the risk of burning out is high. The ability to cut your losses where necessary and re-direct your efforts when you see a dead end was deemed important to succeeding and avoiding burnout as was having a solid, diverse and driven team so that responsibilities can be shared. Burning out was given as a reason for failure in 12+% of the startup failures. The post-mortem of Diffle talks about the impacts of burn out after one’s startup fails which was quite telling in that burn out doesn’t end when the startup is over. It lingers for a while as this post-mortem reveals:
I didn’t realize it at the time, but I was flying when I closed down Diffle – running on pure adrenalin. Part of this was from working with the YC startup, and part was just that entrepreneurship tends to put you into this highly-focused, tunnel-vision state that feels just slighly unreal.
That all crashed down about a month later, which happened to be about a week and a half after I started the job hunt. I ended up getting rejected by FriendFeed, and then told the other companies that I wasn’t quite ready to go back into the employee world and needed a few months to figure out what I really wanted to do next.
For anyone faced with winding down a company, I’d highlyrecommend taking a while off before making any big decisions, and not just the two and a half weeks that I’d initially tried. You’re not thinking straight when your startup dies – your perspective may be a bit different in a few months, as might your preferences for what you want to do next.
#14 – Lose Focus – Distracted by Shiny Objects
Getting sidetracked with all the ‘could-bes’ was cited numerous times as a contributor to failure. It is important to get one thing out on the market and focus on one product else you risk ending up with too many almost finished products that are not valuable to customers or you. In the post-mortem of Kiko, Mahesh Piddshetti writes:
Most entrepreneurs have lots of ideas. Often times, many of them may be really good. I don’t know about you, but my favorite part about startups is talking about new products and new business ideas. If you’re a creative person, it’s very easy to get side-tracked on side ideas when you really should be working on your main one. This is bad. Bad, bad, bad. We did this a lot with Kiko, and it caused many delays in getting the product out the door.
#13 – Disharmony with Investors/Co-founders
Discord with a cofounder was one of the most fatal issues for a company. Bricabox cofounder advises, “When a co-founder walks out of a company — as was the case for me — you’ve already been dealt a heavy blow. Don’t exacerbate the issue by needing to figure out how to deal with large equity deadweight on your hands (investors won’t like that the #2 stakeholder is absent, even estranged, from your company). So, the best way of dealing with this issue is to take a long, long vesting period for all major sweat equity founders.”
But acrimony isn’t limited to the founding team, and when things go bad with an investor, it can get ugly pretty quickly as evidenced in the case of ArsDigital. Investors and founders did not see eye to eye on what was best for the company, and eventually investors began to run the company per this account of failure. The post-mortem of ArsDigita takes the cake for candor and illustrating in graphic detail what goes on when investors and startup management have a falling out from the startup’s perspective. Phillip Greenspun writes:
For roughly one year Peter Bloom (General Atlantic), Chip Hazard (Greylock), and Allen Shaheen (CEO) exercised absolute power over ArsDigita Corporation. During this year they
- spent $20 million to get back to the same revenue that I had when I was CEO
- declined Microsoft’s offer (summer 2000) to be the first enterprise software company with a .NET product (a Microsoft employee came back from a follow-up meeting with Allen and said “He reminds me of a lot of CEOs of companies that we’ve worked with… that have gone bankrupt.”)
- deprecated the old feature-complete product (ACS 3.4) before finishing the new product (ACS 4.x); note that this is a well-known way to kill a company among people with software products experience; Informix self-destructed because people couldn’t figure out whether to run the old proven version 7 or the new fancy version 9 so they converted to Oracle instead)
- created a vastly higher cost structure; I had 80 people mostly on base salaries under $100,000 and was bringing in revenue at the rate of $20 million annually. The ArsDigita of Greylock, General Atlantic, and Allen had nearly 200 with lots of new executive positions at $200,000 or over, programmers at base salaries of $125,000, etc. Contributing to the high cost structure was the new culture of working 9-5 Monday through Friday. Allen, Greylock, and General Atlantic wouldn’t be in the building on weekends and neither would the employees bother to come in.
- surrendered market leadership and thought leadership
#12 – Do not use your connections
We often hear about startup entrepreneurs lamenting their lack of connections so we were surprised to see that one of the top reasons for failure was entrepreneurs who said they did not not properly utilize their own network. Whether it was for advice or introductions, almost 16% of the startup post-mortems stated that the team did not use their connections well enough, which led to failure. So what does this teach us? If you have a network (and everyone does), be judicious in using it, but be sure to use it.
#11 – Pricing Issues
Pricing is one part science, 10 parts art. And a dark art according to a large number of startups which failed and who attributed product pricing that was too high or too low to make money. For example one entrepreneur said, “It took a lot of key chains bought at 50 cents and sold for $1.25 just to pay the phone bill.” The founder of EventVue said that their deadly strategic mistake was that they “went after enterprise sales model with a non-recurring, small price.”
#10 – A “User Un-Friendly” Product
Not sure there is any revelation here, but bad things happen when you ignore a user’s wants and needs whether done consciously or accidentally.
#9 – Do not cut your losses a la Pivot at the right time
One of the most overused startup words of 2010 was Pivot, but pivoting away from a bad product, a bad hire, a bad decision, etc quickly enough was cited as a reason for failure often. Dwelling or being married to a bad idea is not a good way to allocate resources. It’s not just ideas – if you make a bad-hiring decision, take corrective action (euphemism for let them go) sooner than later. As soon as you see that your product is not getting a response in the market, think about what product changes might be necessary. Letting inertia and stubbornness limit your growth and ability to change your business model was cited as cause for failure almost 1/5 of the time.
#8 – Lack Passion and Domain Expertise
There are many good ideas out there in the world, but our startup post-mortem founders found that a lack of passion for a domain and a lack of knowledge of a domain were key reasons for failure no matter how good an idea is. The co-founder of Untitled Partners stated, “I underestimated the importance of a relationship between our corporate and personal identities. “About 18.8% of the time, the post-mortems cited lack of passion as a cause of failure. In their post-mortem, NewsTilt candidly spoke about their lack of interest in the domain they selected writing:
I think it’s fair to say we didn’t really care about journalism. We started by building a commenting product which came from my desire for the perfect commenting system for my blog [17]. This turned into designing the best damn commenting system ever, which led to figuring out an ideal customer: newspapers. While there, we figured they were never going to buy, and we figured out a product that people were dying to use if it existed.
But we didn’t really care about journalism, and weren’t even avid news readers. If the first thing we did every day was go to news.bbc.co.uk, we should have been making this product. But even when we had NewsTilt, it wasn’t my go-to place to be entertained, that was still Hacker News and Reddit. And how could we build a product that we were only interested in from a business perspective.
This compounded when we didn’t really know anything about the industry, or what readers wanted.
#7 – Release product at the wrong time
If you release your product too early, users may write it off as not good enough and getting them back may be difficult if their first impression of you was negative. And if you release your product too late, you may have missed your window of opportunity. “This requires balance, if it is a critical user-based website where users need to depend on it like Ebay or Mint.com, an outage could mean catastrophe. But if it a website like Twitter, an outage is a joke. Know your website, don’t take forever to get it to the market. But, if it’s critical then make sure its sound.” As Reid Hoffman said: “If you’re not somewhat embarrassed by your 1.0 product launch, then you’ve released too late“. This was cited as cause for failure more than 20% of the time.
#6 – I got this product. Now I just need a business model.
Sure Twitter gets away with not having a business model, but they’re not the norm. Perhaps we’re old school, but if there is not a plan to bring in more revenue than expenses, that’s a problem. Failed founders seem to agree that a business model is important. Unfortunately, in 1 of 4 failure post-mortems, the lack of a business model was cited as a reason for failure.
#5 – Ran out of cash
Money and time are finite and need to be allocated judiciously. The question of how should you spend your money was a frequent conundrum and reason for failure cited by failed startups. The decision on whether to spend significantly upfront to get the product off the group or develop gradually over time is a tough act to balance. The team at YouCastr cited money problems as the reason for failure but went on to highlight other reasons for shutting down vs. trying to raise more money writing:
The single biggest reason we are closing down (a common one) is running out of cash. Despite putting the company in an EXTREMELY lean position, generating revenue, and holding out as long as we could, we didn’t have the cash to keep going. The next few reasons shed more light as to why we chose to shut down instead of finding more cash.
#4 – Poor Marketing
Knowing your target audience and knowing how to get their attention and convert them to leads and ultimately customers is one of the most important skills of a successful business. Yet, in almost 30% of failures, ineffective marketing was a primary cause of failure. Oftentimes, the inability to market was a function of founders who liked to code or build product but who didn’t relish the idea of promoting the product. The folks at Devver highlighted the need to find someone who enjoys creating and finding distribution channels and developing business relationship for the company as a key need that startups should ensure they fill.
#3 – Not the right team
A diverse team with different skill sets was often cited as being critical to the success of a starti[ company. Failure post-mortems often lamented that “I wish we had a CTO from the start, or wished that the startup had “a founder that loved the business aspect of things”. In some cases, the founding team wished they had more checks and balances. As Nouncers founder stated, “This brings me back to the underlying problem I didn’t have a partner to balance me out and provide sanity checks for business and technology decisions made.” Wesabe founder also stated that he was the sole and quite stubborn decision maker for much of the enterprises life, and therefore he can blame no one but himself for the failures of Wesabe. Team deficiencies were given as a reason for startup failure almost 1/3 of the time.
#2 – Building a solution looking for a problem, i.e., not targeting a “market need”
Choosing to tackle problems that are interesting to solve rather than those that serve a market need was often cited as a reason for failure. Sure, you can build an app and see if it will stick, but knowing there is a market need upfront is a good thing. “Companies should tackle market problems not technical problems” according to the BricaBox founder. One of the main reasons BricaBox failed was because it was solving a technical problem. The founder states that, “While it’s good to scratch itches, it’s best to scratch those you share with the greater market. If you want to solve a technical problem, get a group together and do it as open source.”
#1 – Being inflexible and not actively seeking or using customer feedback
Ignoring your users is a tried and true way to fail. Yes that sounds obvious but this was the #1 reason given for failure amongst the 32 startup failure post-mortems we analyzed. Tunnel vision and not gathering user feedback are fatal flaws for most startups. For instance, ecrowds, a web content management system company, said that “ We spent way too much time building it for ourselves and not getting feedback from prospects — it’s easy to get tunnel vision. I’d recommend not going more than two or three months from the initial start to getting in the hands of prospects that are truly objective.”
So brave startups, you now know the top 20 reasons startups fail based on the experiences, generosity and candor of 32 of your fallen brethren. We hope this checklist will come in handy on your startup journey and that you’ll share it with other startup cofounders who may benefit from some of its key messages.
Special thanks to Chandni Shah, a Carnegie Mellon graduate, for her fantastic work poring through these post-mortems to compile this analysis and assist with this write-up.
Revenue is the most important metric when it comes to starting a business. But it’s not the only metric you should be concerned with.
Of course some companies have gotten very creative when it comes to justifying their business model to investors, but I don’t think those are the kinds of metrics you should be paying attention to, especially if you want to succeed.
In the end, it’s watching and learning from the traditional metrics that will help you grow your startup into a real business. Here are the 9 most important.
Startup Metric #1 Customer Acquisition Cost (CAC)
CAC is the metric that matters the most if you are in the early stages of your startup growth because if you want to survive you need users. But it costs money to acquire customers. The question is how much, and is it profitable?
To calculate your CAC cost, divide your sales and marketing costs, including overhead expenses in these departments, for a given period by the number of customers you picked up during that period.
A high CAC cost means you are spending too much money to acquire new customers. To lower it you need to optimize your sign up and landing pages. Optimizely is a great tool to use when testing different variables on a web page.
We’ll talk more about what’s a viable CAC cost for a startup when we get to the Life Time Value metric.
Startup Metric #2 Retention
I’ve seen a lot of entrepreneurs get so obsessed with customer acquisition that they forget about customer retention. I’ve actually been guilty of it myself!
Unfortunately you need to break out of this obsession because if all you do is focus on acquisition you end up neglecting your current customers, which can mean they might eventually get frustrated and leave.
One of the most important things that I learned about retention actually helped me break my single-minded focus on acquisition, and will probably help you too. For me, it costs 6 to 7 times more to acquire a new customer than it does to keep a current client.
In addition, it costs me 4 times more to close a deal with new customers than it does to upsell a current one. That means you cannot neglect your current clients!
So who exactly should you focus on? There are three kinds of customers you need to think about:
- Current – what can you do to make these customers more satisfied? If you don’t know, simply ask. People love to talk and give their opinion, so you won’t be bothering them.
- Inactive – customers who’ve stopped using the product or slowed their use of it should be asked why. Again, they are a great source you should take advantage of to help you improve your product and customer service.
…We’ll talk about the third customer in the following section.
Startup Metric #3 Churn
Churn, or attrition, is another really important metric you should keep your eye on. This is a measure of how many customers stop paying you for your product.
Some startups measure churn at 30 days. Others wait 90 days so as not to confuse an inactive customer, who may start using the product again in the future, with someone who doesn’t intend to come back.
It’s important to realize that you will lose customers. There is no getting around that. What you have to do is find out what a profitable level of loss is to you.
By the way, did you know that you are 2 times more likely to close with a lost customer than you are to acquire a new one? That should be a good incentive to motivate you to find out why certain customers have stopped paying for your product.
If you have customers who are leaving your product, then try to conduct as many win/lose interviews with them. You can do this by phone or email, though I recommend you do as many as you can on the phone. Make them feel like a real person.
Another great way to keep churn low is to use data to anticipate churn and then create personalized retention plans.
Startup Metric #4 Life Time Value (LTV)
What exactly is the LTV? It’s how much you expect to earn from a customer during the time they are with your company.
That means you first have to know how long most customers stay with you. It could be six months, 12 months or longer. Then you multiply the monthly revenue you expect from that customer and you get the LTV.
Keep in mind that you should include any expenses related to installation or maintenance of your product.
You don’t need a college education to see that a business will fail if the CAC is higher than your LTV. This is why David Skok calls CAC the startup killer.
Here are two guidelines David suggests you might find useful:
- LTV > CAC. (It appears that LTV should be about 3 x CAC for a viable SaaS or other form of recurring revenue model.)
- Aim to recover your CAC in < 12 months, otherwise your business will require too much capital to grow.
Obviously what you need is a CAC a lot lower than LTV.
Startup Metric #5 Product Metabolism
Product metabolism is a metric created by Dustin Dolginow, and it basically measures the speed at which you and your company move and make decisions.
Like the human metabolism, product metabolism is usually high in the early stages of a startup. As the company begins to mature, however, that metabolism begins to slow down.
Dustin argues that this is good since it could be damaging for a large company to make lots of gut-level decisions that may hurt customer retention, and because of the larger size of the company, they cannot respond quickly.
Netflix is a company that’s recently made some rather dramatic changes to how it operates, namely raising prices and branching off one of its divisions into a full-fledge company. Not everyone agrees that this was a bad decision, but it’s still early so time will tell.
Like a lot of these metrics, maintaining product metabolism is a balancing act. If you move too fast you create instability. If you move too slow you might irritate your customers.
One of the best ways I’ve found to measure product metabolism is to use KISSinsights and ask my customers two simple questions: Are we moving too fast or too slow? Why?
Startup Metric #6 Viral Coefficient
This metric measures the organic growth of your company. Usually a startup will start with inviting friends to use the product. If it is a good product, then these beta users will then tell their friends and so on.
Other ways that make your product viral is through social pushes like share buttons, email invitations and promotions on Twitter or Facebook.
Here are your inputs when calculating the viral coefficient:
- Initial set of customers
- Number of invites sent to each new customer
- Percentage of invites that convert
That conversion rate over several cycles is your viral coefficient. A positive viral coefficient rate means four things:
- You are giving your customers a positive user experience
- You’ve found a good product/market fit
- You have a low cost of acquisition
- You will probably have high profitability
One way to improve your viral coefficient is to build incentives into your products.
The business app Hashable is a good example of this. As people use the app they are pushed up the leader board in rankings, and as they move up they are encouraged to share their progress with their network, leading to more users.
Startup Metric #7 Revenue
This is one of the most important metrics to pay attention to because it’s all about profitability. In other words, are you making money?
Revenue is the income that your company brings in. It’s usually reported as “sales” or “sales revenue” that comes when customers purchase your product, but revenue can also include other income like interest or late fees.
Revenue doesn’t come easily, and you’ll be paying out a lot more money than what is coming in if you are a SaaS since customers usually pay in small increments.
One way to avoid this is by offering longer contracts and requiring advanced payments.
If you have a good product, you should have a high conversion of users who are not paying that eventually become paying customers. To increase revenue, focus your efforts on turning “activated” users into paying customers, the focus of our next metric.
Startup Metric #8 Activation
Activation is a measurement of the conversion rate from when a visitor or prospect moves to becoming an active user, the signal being some kind of sign up or download.
A high conversion rate means that the visitors had a good first user experience. A low activation rate usually means that your product isn’t interesting enough or they found it difficult to get started.
SaaS products usually use activation as a way to attract and gain a following in the early stages of their business, hoping that the good user experience will entice people to pay for additional benefits.
This is true with the web-browser productivity tool ToDoist.
Activation begins with entering a username and password. The free plan allows people to build a list of projects they can track, including all the sub-tasks. But you have to become a premium member if you want more robust tools like alerts and notes.
Startup Metric #9 Referral
This metric is sort of a spin-off of your viral coefficient metric, but it’s truly too important not to measure as a standalone.
To calculate your referral rate just figure out the percentage of users who come from existing customers.
A good way to determine a referral that’s viral versus a recommendation from an existing customer is simply to ask when a user is signing up, “How did you hear about us?”
As you might expect, the higher your referral rate, the lower your CAC is going to be and the more profitable your company will be.
A great way to encourage referrals is to program occasional reminders into your products. You’ll see this often with phone apps that show pop ups from time to time asking you to send a recommendation to a friend.
Conclusion
Isn’t it amazing how all of these metrics are connected? But it can be difficult to measure and monitor all of these metrics as a small startup. You just don’t have the time.
I recommend you start small and focus only on the ones that affect your bottom line, namely revenue, CAC, LTV and churn. After that, pay attention to retention, referral, your viral coefficient, activation and product metabolism.
This is why I’m became the Co-founder of KISSmetrics. I felt the time was right to make an analytics package that helps track these important metrics for startups.
I want to hear from you: What other metrics should startups focus on?
About the Author: Neil Patel is the VP of Marketing of KISSmetrics and blogs at Quick Sprout.
The following is a guest post by Leo Widrich, co-founder of Buffer, a smarter way to post on Social Media. [Note: I'm an angel investor in Buffer and love what they're doing]
The Complete Guide to Getting Press Coverage For Your Startup
Whoa, this guide was long, long, long overdue. Over the past few months, a lot of people reached out for help on how to best get press for their startup. I could help them with a quick email response, but it never felt quite appropriate.
So from now on, just a link to this guide will hopefully be useful.
Over the past 6-9 months, I am extremely thankful for the amazing stories lots of great writers from news and tech sites have written about Buffer.
To put it into perspective:
Mashable featured us 6 times, TechCrunch twice, over 10 articles in The Next Web, plenty of write-ups from ReadWriteWeb, GigaOm, LifeHacker, VentureBeat, Inc. Magazine and others. In total, there were over 40 stories by these notable sites written about us, each one based on the tips in this guide.
It is up to you to judge how good or bad the above outcome is and there are others who have done better of course. And one of the things I still fail on, is getting covered by mainstream media, such as CNN, Forbes,and FastCompany and co.
Yet, I wanted to share my experience with you on what we have achieved with Buffer and spill all the knowledge I have for getting covered. Literally everything, down to the tiniest detail.
First off, I don't want to fool you and need to emphasize the nature of our product, Buffer. It is a tool for Social Media, making you more efficient and productive. It is a consumer product, helpful to anyone using Twitter, Facebook or LinkedIn.
That's pretty helpful if you want to get featured by tech sites. So, please bear in mind, that any results below, are biased towards and tied to the nature of Buffer. It might not make any difference to your approach, but just in case.
Secondly, don't be overwhelmed with the info below. A lot of these things took me a long time to figure out. Trying to follow all these points right away, might leave you frustrated and with too much to do at once. I would suggest:
- read one section,
- do it,
- get back to the guide at a later time to do the next step.
I believe, getting your startup covered, is one of the most important things you can do to get your product out there. It can help with and did so for us with a lot of things, such as new signups, getting investment, partnerships and biz dev deals.
Especially if you are a first time entrepreneur, who can't rely on a huge personal network, that helps you get the word out, press can be an amazing way of doing it.
All set? Let's get started:
1) Have your own startup blog, learn to tell stories
Yes, I can't stress this first point enough. Especially as it seems quite unclear at first. A lot of the success I have had with getting covered comes down to us having a very active blog.
I have written before about why your startup needs a blog. This point is different to anything mentioned there. That's great right? On top of all the good things that happen through having a blog, it also plays a major role when getting covered. Here is why:
If you learn to blog, you will learn to become a better writer. You will understand why one headline gets shared more than others. You will understand, why one piece of content attracts more readers than others. You will understand that no one wants to hear about your product, unless it provides a focused insight on which problem it will solve for your readers.
So once you run your own startup blog, 2 things will happen:
a) Once you submit stories to tech writers, you will be on the exact same level with them. You will understand their struggle. See, a writer doesn't care about your product. But they care about providing value for their readers. Once you understand that, the door to getting loads of write-ups is wide open. You will be a writer suggesting a great story, not the marketing guy trying to get his startup featured.
b) Being a blogger and knowing how to write, will give you an immense pull. You can provide your own coverage on your own blog. Let me give you an example. Recently we added Buffer for LinkedIn. The write-up on our own blog, got well over 500 shares, brought more sign-ups than the tech coverage we reached out for AND without any further emails triggered 4 more write-ups from notable blogs, just because it was getting shared so wildly.
So the first step to getting coverage for your startup is to build an active blog, that teaches you about writing and telling stories.
2) How to get to know writers via Twitter and Facebook
Mashable doesn't cover you a writer does!
Here is one of the biggest mistakes I made at the start. I thought if I had something news-worthy, I would pitch that Mashable site or that TechCrunch blog with a story. Not surprisingly, we never got any write-ups from it.
Then I realized something, it's not the news-outlets that write about you, it's individual writers that do. Sounds stupid and obvious right? Yet, it changed my approach completely.
So, in order for your startup to get covered, you need to know those writers and you need to know LOTS of them.
The first thing I did is follow them all on Twitter and subscribe to their Facebook updates. Here is a list of the about pages from Mashable, TechCrunch, and ReadWriteWeb (these are just examples, make a much bigger list, than just those 3). Go ahead and find the most suitable writers covering the industry your startup is in.
Now that you follow them and are subscribed, become interested in what they do. I don't mean to make this a big task, do it very casually and make it a habit. Browse your Twitter and Facebook stream and you will come across them.
The best part? Those writers are all great people. It's a lot of fun to read their stories and hang out on Twitter and Facebook with them.
Answer some questions if they ask, reply to Tweets and Facebook posts, retweet their stuff, comment on what they write about. Do it, because you are interested and they write about your industry. One more time:
Become genuinely interested and understand what they like.
Your pitch will be ten times better once you email them. You will be able to relate personally and they will have seen your face before. When they see your name in their inbox, they are much more likely to at least open that email.
So the second step is to start connecting with those writers on Social Networks.
3) Do your best to avoid the Alexias and Sarah Lacys
So, we have added this great functionality to our product. And there is that woman Alexia, who writes about startups. What a great match, let's get in touch!
Oh boy, was I naive, when I started out. Later I understood that it is not enough to just submit a news tip and realized I had to reach out to writers themselves.
Armed with lots of courage through this newly gained knowledge, I would email Alexia, Ben Parr, Sarah Lacy and MG Siegler, with my fantastic story for them.
And yet still, no response. Here is the thing:
These writers are the busiest of them all and most exposed to pitches all day long. They get literally hammered with hundreds of them every day. The chance that they will pick up your story is very slim. Do yourself a favor do not reach out to them.
Instead, be laser -focused on writers, that cover your industry. And look for people, that are young and new and don't get hundreds of emails every day.
This is very easy, just go to the front page and browse through the latest stories. You will easily and quickly find the right person, after you have seen 3-4 stories from them over the past few days.
So as the third step, avoid to reaching out to the most prestigious writers. Narrow your focus and find the rising stars. as much as you can.
3) Crafting that email pitch for reporters an example that got us on Mashable
With anything you do in life, expect to have a 25% success rate. ~ Auren Hoffman, CEO Rapleaf
We have come a long way by now. You know it is all about your story, not your product. You know you need to build personal relationships with writers and you know you need to reach out to younger writers, who actually write about stuff related to your product.
If you have come that far, you have probably already increased your success rate of getting featured by a large multiple. The road to getting covered is still a tough one.
So lets work on that pitch. That's what will likely actual part that will determine, whether a story about your startup goes live or not.
Here is an email that got us written up by Mashable:
———————————————————-
Hi Sam,
Really loved your post yesterday on how the fan managed to get a job with the team, this is priceless and amazing example of how passion can help us succeed!
We have some big news for you. With the new release of Twitter.com, we have just released a way to post retweets via Buffer right from Twitter.com at a better time. It works seamlessly via installing our browser extension. You will have now, next to "reply" "retweet" and "favorite" a new option to "Buffer".
I believe this will allow anyone to spend very little time, glancing over their Twitter stream and retweeting everything they find interesting - yet without ever flooding their followers with too many Tweets in a row. It should be a great way to Tweet interesting content at the best times, well spaced out over the day straight by using Twitter.com. A bonus tip here is to use this in connection with Twitter lists, where most people have a lot of great content aggregated, but a hard time sharing from there.
You are the only newssource I have approached with this, do you think this could be an interesting story for you and your readers?
Best,
Leo
——————————————————-
Let's go through it paragraph by paragraph:
Really loved your post yesterday on how the fan managed to get a job with the team, this is priceless and amazing example of how passion can help us succeed!
The opening is not at all about myself or anything related to our startup. I have been following this writer for a few weeks. I really love his posts and Tweets, I still follow him and enjoy reading his posts today. So I thought of opening with a note to one of the posts I enjoyed the most.
We have some big news for you. With the new release of Twitter.com, we have just released a way to post retweets via Buffer right from Twitter.com at a better time. It works seamlessly via installing our browser extension. You will have now, next to "reply" "retweet" and "favorite" a new option to "Buffer".
Now, the first paragraph is about your product. What has changed, how does it work. I found making this very descriptive can help a lot. There is no talk about how it will change the world (yet), just what it does. Concise and easy to understand.
I believe this will allow anyone to spend very little time, glancing over their Twitter stream and retweeting everything they find interesting - yet without ever flooding their followers with too many Tweets in a row. It should be a great way to Tweet interesting content at the best times, well spaced out over the day straight by using Twitter.com. A bonus tip here is to use this in connection with Twitter lists, where most people have a lot of great content aggregated, but a hard time sharing from there.
This part is only about the value for the reader. Why would anyone care? Which use cases are there? How can this be interesting for a reader? Think of this part as the one, where a writer can scan his brain for headlines and imagine a story about this written up.
You are the only newssource I have approached with this.
Do you think this could be an interesting story for you and your readers?
The last part is as important as everything else. Be sure to always give the story away as an exclusive. Then, ask one clear question, that the writer can respond to.
Triggering a thanks for thinking of us, but I will pass on this story. Can be as important as getting a yes. You will be able to either move on or work with that writer on the story.
A lot of my pitches get declined or no response still, it's completely normal. Make that your expectation. Never expect that writers don't like you or are annoyed by you. It's not true. They are just super busy. Move on, fire off the next pitch and learn.
One more thing on this. As you grow, your bargaining power grows too. You can add deadlines to when this will go live on your own blog/emailed out. If you start out, just try lots of different pitches. It is a great way to learn what works and what doesn't.
Oh and here is the end result of that pitch as a post: Buffer App Lets Users Schedule Shares Directly From Twitter
4) The art and timing of sending that pitch off and getting in touch with reporters
You have crafted your pitch, and are ready to hit that send button. Hold off for just a little bit.
You are facing tough competition. Not only from other startups, but also from plenty of PR firms, who want stories written up for their clients. The one great advantage you have, is that you can add that extra bit of personality.
Here is what I normally do:
Before I send that pitch off, I would send a Tweet to the writer saying: "could I drop you a quick line on an exclusive story?" I've found that Twitter is a much quicker medium and triggers answers much faster. So once, I get a reply, I can hit send and it will be much easier for the writer to recognize my name and at least look over the email.
You can do the same thing by sending a Tweet after you have emailed. Mentioning them with a simple "Just sent a quick email over on an exclusive story, I hope you will be able to take a look." It again gives you a differentiating element.
Your messages often get ruled out as a mass email, so you need to take that extra step and add personality to your approach. I have had great results doing this.
Play around with this. I have also tried sending no Tweet and it worked. It is really up to you judging based on the situation. If one thing doesn't work, try the next one.
In any case, be sure to make it personal, from writer to writer, not from startup to Mashable.
Timing of your email and Tweets
Timing is also a very important aspect for getting you covered. The best days for traffic for getting coverage of your story I have learnt are Tuesday, Wednesday and Thursday. Monday is way too fast to get you written up, the inboxes of reporters are full it's just not a great day.
If you launched something, what I would do is, get that email over to reporters in the morning, before 10am.
Make sure you check with time zones. Most reporters live in either SF or New York. 10am PST can be a very poor timing for an EST reporter. They will see it early afternoon, when they have most stories for the day already on their to do list.
At the same time, I learnt that, whilst Fridays aren't as good for traffic, the news is slower. So your chances of getting covered on that day can be higher. With a recent story about Buffer on Mashable, I took advantage of this. I followed up on a story I had pitched earlier in the week. Since it was extremely busy, I wouldn't get a response, yet a quick follow up email on Friday would receive an immediate response.
Play around with timing and the approach through Social Media, in either way, focus on getting your pitch out before noon.
5) A story about your startup is written and published now what?
Yes, yes, yes! You finally managed to get your story written up. A great tech blog picked it up, and wrote about your latest feature. Especially if it is your first time and you are only slightly similar to me, you are jumping around in your room, opening that bottle of champagne.
Yet, now is the time to show up, roll up your sleeves and make the most of your success. It is something that a lot of people forget, yet, the results of doing the following 7 steps can be immense:
- Monitor the comments on the post, be lightning fast in responding to feedback and support if readers ask for it.
- Write a comment yourself. Be grateful, thank the writer for the story, and highlight something you liked.
- Share the story, again, by emphasizing the writer. Mention their Twitter handle when you Tweet. Mention their G+ name when you post.
- Monitor the Facebook posting from the blog on your story. Do the same thing as with the comments, reply to them, jump in and offer your support.
- Monitor the Twitter stream, thank people for retweets of the story, pick up responses and conversations. Again, jump in, be grateful for feedback and offer support.
- Send a follow up email to the writer, thanking them for the story and truly appreciating their work.
One big point here, if you get hammered in the comments, don't try to defend yourself. Instead, be appreciative, say thanks and look into the problems. Make yourself vulnerable, it's amazing how this works to build a community of raving fans. I have seen this go bad a few times with other startups and it just ends in a pointless, opinionated argument.
So really, why are you doing all that? The answer is very simple: To get more press in the future. Remember, this is not a one-off event, you want to get featured many, many, many times.
If you go that extra mile, by really showing how grateful you are, appreciating the writer's work, chances are you will be remembered and make it have it a lot easier next time you want a story written up.
For our first Mashable story, we did exactly that. Check out the example here:
HOW TO: Space Out Your Tweets Without Being Online All Day
When I sent a follow up email that day, I received a reply mentioning how great it was that we were in the comments and how well the story sat with their readers, and that I should please keep them posted on any new features we release.
You bet I did!
6) Four completely different types of stories you can pitch
The goal when getting covered by the press, as I have briefly touched on above is to get covered again and again and again. In order to achieve that, you need to have a few different types of pitches up your sleeves.
Here is a list of 4 very distinct ideas you can use for pitches alongside some examples that got written up for each of them.
Big disaster happened your product is there to help pitch
This is something very powerful and also difficult to detect. It demands quite a bit of creativity from your end and again, the mindset of a writer. If you are not convinced to have a blog by now, head back to chapter 1 and check it out again.
Let me give you 2 examples of this:
When CoTweet, a popular Social Media tool shut down their free version recently, I thought that a lot of people must be annoyed by this. So, I realized, they will definitely be looking for a replacement.
I reached out to Mashable and suggested them a story to them on this, titled CoTweet Gone: Here Are 7 Great Alternatives. I didn't even have to ask whether they could include Buffer.
When Summify, popular news aggregation tool was scooped up by Twitter and announced it would close its services, News.me did the exact same thing. They reached out to news sites and said they are a great replacement for Summify. There were lots of posts written up about them.
Again, the key for me was to always think about how you can provide value for readers, not how you can get your startup covered. If you do that, you will have a great amount of new opportunities to get features about your startup written up.
Awesome data - pitch
News sites love, love, love data. Especially if it is in some way related to the biggest Social Networking sites. Why do they love data so much? Because it spreads like wildfire on Social Media and is a very interesting insight for readers.
Let me give you an example of how we got over 5 stories written up about one data set we collected:
We looked at 1 million Tweets that were sent through Buffer and realized, we are adding a lot of value for users. Basically, we could show, that if you start using Buffer, you will get 200% more clicks on Tweets, double the number of retweets and an increase in your Klout score by 3.5 points.
This was absolute gold and the news sites loved it. How could any site not want to write about a tool that increases clicks on your links by 200%? We could use that data on many occasions even in future write-ups, when the study was no longer the focal point.
Dig up some interesting stats from your users and find out, what might be an invaluable insight for readers. It will again open up lots of great opportunities for sites to write about.
Brand new features to make users awesome - pitch
This is the most well known pitch startups use these days. You have a new feature added to your product and think it's worthy of getting covered.
The point I want to focus on with new features pitches is to keep it to 1 feature only. I have made the mistake plenty of times in the past, that I would send a pitch saying: We have added this feature and this feature and also this and this and that.
If you remember the email pitch in chapter 3 you will find, that I have only focused on one single aspect. Just that one thing, nothing else. And in fact, it was a tiny thing. Yet, by working out exactly how it will be helpful for readers, I could give a very compelling pitch.
Try and do the same, only pitch one iteration or addition of your product. Not 10. It will make your pitch a lot clearer and easier to understand. Writers have a very short attention span, and if they need to figure out how they can add up all your different new iterations in a story, they will be a lot more likely to just move on to the next pitch that sits there in their inbox.
And it will also give you an opportunity to pitch lots of different stories, as you are adding different features.
Hit big milestone - pitch
The last type of pitch that has worked well for us is the Milestones pitch. This is a great one, not only for signups, but also for branding. People will see you are still around, you have grown, you are worthwhile to get a proper first or second look.
I learnt that this is also a great one for news sites, as they get a unique insight into your startups background, that no one else has access to, like for example a feature.
In our case, we had an early story once 1,000 000 Tweets were sent out using Buffer. The key here is to pick a big number. Oftentimes, signups won't be the one. It can be any number that shows great usage of your app and makes readers curious to check you out and writers curious to cover you.
With this type of pitch, it is particularly up to you to show why the mentioned figure is relevant. Klout for example, made a big deal out of the fact that they had 100 million users scored with their algorithm. It didn't mean that they had 100 million users, yet sure enough but it helped them to trigger a huge amount of press around their milestone.
7) How to make getting covered a habit, not an accident
Whoa, we have gone a long way. I tried to go into every detail I could think of to help you get your startup written up. And yet, I have one last point, that I think might be as important as every other one mentioned here.
You don't want your startup being featured once, twice or three times. You want it to show up in the news in a cycle. Every 2 to 3 weeks, you should pop up again. With a cool new feature, with some interesting data, a big new milestone, you name it.
If you make this your goal, everything you do, will be much more focused on the long run. And I learnt, I will be able to motivate myself a lot better for things that wouldn't make sense as a one-off.
The relationships are easier to build. Writing your blog is easier to do. Being grateful once you get one story is much easier to focus on.
Everything mentioned in this guide, should set you up for making it easy to get into this cycle of constant coverage and news mentions. Of course, the development of your startup needs to clearly follow that path.
Given that you have launched with a true MVP in Lean Startup fashion, and are iterating like a madman, you shouldn't run into any troubles to come up with a new story ever two to three weeks.
If you do, work with your team and push yourself to release more stuff, more frequently.
Work on different stories as mentioned in the previous chapter, and set yourself a schedule for reaching out for write-ups. If 2-3 weeks is too tight at the beginning, make it once a month, but have it as a consistent and recurring point on your to do list.
Are you ready to rumble? Get yourself out there and get that startup covered. By following the steps from this guide, I have no doubt you will manage to do so.
If you still have any questions, just let me know in the comments below or shoot me an email leo@bufferapp.com.
What do you think? How have your PR efforts gone? Had any big hits you'd like to brag about? If so, please share in the comments and teach us a few things.
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The feeling was palpable. Y Combinator had sixty-five companies present (42Floors was one of them). And we saw 500 eager investors, frenzied almost, excited to invest in entrepreneurs. One investor emailed me four times, texted me three times, called me and sent me a message on LinkedIn -- desperate to get a check in before the round closes.
No business plans, not even pitch decks this time. One 2-1/2 minute pitch and a quick follow up meeting. Seven figure seed rounds that can be closed within days and oversubscribed 2x to 3x. Founders with no experience fundraising and no pre-existing networks, making connections with top tier guys. It was really a sight to see.
Let me take you back to Y Combinator demo day, summer of 2009. We launched FlightCaster. I have this distinct memory of standing in the lobby, seeing these investors talking to each other. I sheepishly introduced myself, giving them the 30-second pitch on FlightCaster. They weren't rude, they weren't abusive, but they weren't hungry to talk to me.
There had not yet been a Dropbox valuation. Airbnb had only recently launched. And Heroku was still a small 12-person company. The prevailing conversation was about how Y Combinator companies produce features not products. How the companies had strong technical teams but would need maturity before being ready for a seed level institutional investment. Even the top 2 or 3 companies of the batch struggled to raise money.
Well that time has passed. The pendulum has swung.
It's easy to lose perspective. It's weird to see entrepreneurs compare convertible note caps of 7, 8, 10 million dollars from this lens of low, medium and high. I see those numbers and I just can't believe that any seed company is receiving a 7 million dollar cap. None of us could get over 3 in 2009.
The Y Combinator partners have been really good about trying to teach everyone perspective. They have seen several economic cycles so they know things come and go. But it's hard to hear that amidst the frenzy of investors clamoring for shares of what could be the next Dropbox.
So a word to every other founder out there enjoying the current (and temporary) good times we all face. I urge you to go back and re-read my posts about Bubblicious Seed Rounds. Times are good now but the trough of sorrow awaits. And it might hit us at a time when the macroeconomics of fundraising are not so founder friendly. There is currently more capital offered than capital needed. And that shift in supply and demand has had inevitable results in terms of valuations.
It should not, however, have an effect on the way in which we treat each other. The following may be preachy or even cliché (and the best of us don't need to hear it). But we entrepreneurs are all part of the same startup ecosystem. And what one of us does, affects the rest.
How We Need to Conduct Ourselves in a Hot Market
Mutual Respect
Even in the toughest of my fundraising attempts of the past, when I received literally thirty no's in a row, no one was ever disrespectful to me. In fact many of those investors who turned me down went way out of their way to help out. Now we're in a time when we get to say no to investors, but we must still be respectful of them. The startup world is very small, and we will all be working together for a very long time. The manner in which we conduct ourselves now will not be forgotten, good or bad.
Optimize on People, Not Price
These caps are just astounding. Ten million, twelve million, fifteen million?!! This is just craziness. Yes, it is your job as a fiduciary of your company to do what's best for your company. And often that means achieving a high price for your shares. However, valuation or cap remains only one component. If you are trying to build a big company, one that will last through four or five rounds of funding, and go on for the next 8 years of your life, the value of the right partner will far exceed the marginal equity given up right now.
At 42Floors, I know that we will be selling our shares at a high price. But I tell every investor that valuation is no where near my top concern. And I mean it. This is not an EBay auction where top price wins. We're looking for long-term partners and the cap table math shows that the marginal difference between this cap and that cap doesn't really matter in comparison to how big we build our company. We want to build a billion-dollar company. There are very, very few people who have done that before. And to get them on board, they need to offer an equity stake that reflects their financial and emotional buy-in as an owner.
Slow It Down
Your relationships will be an incredible asset for you. But it's very hard to start a long-term, trusting relationship when you put the proverbial gun to the investor's head thirty minutes into a first meeting and require a check or you're walking. Yes, you have plenty of options and you don't technically need their money. Choose carefully. You want to really know each other. When that time comes and you need a bridge to your next round, you want those investors to think back fondly to how they were treated at the beginning of the relationship.
Raise More
Right now the convention seems to be you raise 1.2 million in a seed. I don't know where this number comes from. When I look around at my friends that raised 12 months ago, I keep seeing the same thing. They're down to a couple hundred thousand dollars and their product is doing well, but not gang busters.
So where are they? Are they ready for an A round? No, not really. They don't have the metrics for it yet. So they need a bridge, then. Yeah, but bridges are really hard to get, especially when investors feel they overpaid for a tiny piece of equity in the seed round.
If these startups had seven hundred thousand dollars in the bank instead of two hundred thousand dollars, they wouldn't be out fundraising. They'd be out moving their company forward and would be getting to that A from a position of strength instead of limping into a bridge. Raise more money now. Take the hit on dilution. With prices as high as they are, you'll never regret it.
Price Your Rounds
One of the incredible things that convertible notes did for us over the last two years is virtually eliminated the risk associated with simultaneous closes. No longer do we look for lead investors as we cycle through people that are willing to write checks once a lead is in place. With Series AA financing docs, you don't even have to negotiate terms anymore. And what used to be a two-month process is for many companies now a five-day process.
The problem with raising your 1 to 2 million on convertible notes is that those valuation caps are not valuations, they're caps. If your company blows it out of the water, you'll be just fine no matter what. But if you're like the 80% of companies that are in the middle, then you run the risk of having a priced round down the line that is below the cap.
Shut up and get back to work.
Once you close that round and you get your Techcrunch hit, it's all now in the past. Having a syndicate of all these famous top-notch investors doesn't magically create great products. The only metric that matters now has a binary outcome. Have you built something that people want? If yes, prove it. If no, you didn't make it. The name of your investors on your crunch base page, the number of followers on your Angelist profile, and the cap on your valuation— all will have no relevance if you fail to delight your users. For this one period of time, fundraising is fun. But now more than ever it's time to prove you're worth it. Go do something incredible.
And finally, a word to all the investors out there who are crazy-rushed right now with all of us. Thank you for your support. Thank you for putting your money into startups and not some other asset class. Thank you for spending your time on helping this new generation change the world. Thank you for your mentorship, both when we're looking for it and when we have forgotten that we need it. Thank you for being there for us now when things are good, and thank you for being there for us later when things might not be.
The pendulum has swung. For now.
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Here is an essay version of my class notes from Class 4 of CS183: Startup. Errors and omissions are my own. Credit for good stuff is Peter’s entirely.
CS183: Startup—Notes Essay—April 11—The Last Mover Advantage
I. Escaping Competition
The usual narrative is that capitalism and perfect competition are synonyms. No one is a monopoly. Firms compete and profits are competed away. But that’s a curious narrative. A better one frames capitalism and perfect competition as opposites; capitalism is about the accumulation of capital, whereas the world of perfect competition is one in which you can’t make any money. Why people tend to view capitalism and perfect competition as interchangeable is thus an interesting question that’s worth exploring from several different angles.
The first thing to recognize is that our bias favoring competition is deep-rooted. Competition is seen as almost quintessentially American. It builds character. We learn a lot from it. We see the competitive ideology at work in education. There is a sense in which extreme forms of competition are seen as setting one up for future, non-competitive success. Getting into medical school, for example, is extremely competitive. But then you get to be a well-paid doctor.
There are, of course, cases where perfect competition is just fine. Not all businesses are created to make money; some people might be just fine with not turning a profit, or making just enough to keep the lights on. But to the extent one wants to make money, he should probably be quite skeptical about perfect competition. Some fields, like sports and politics, are incredibly and perhaps inherently competitive. It’s easier to build a good business than it is to become the fastest person alive or to get elected President.
It may upset people to hear that competition may not be unqualifiedly good. We should be clear what we mean here. Some sense of competition seems appropriate. Competition can make for better learning and education. Sometimes credentials do reflect significant degrees of accomplishment. But the worry is that people make a habit of chasing them. Too often, we seem to forget that it’s genuine accomplishment we’re after, and we just train people to compete forever. But that does everyone a great disservice if what’s theoretically optimal is to manage to stop competing, i.e. to become a monopoly and enjoy success.
A law school anecdote will help illustrate the point. By graduation, students at Stanford Law and other elite law schools have been racking up credentials and awards for well over a dozen years. The pinnacle of post law school credentialism is landing a Supreme Court clerkship. After graduating from SLS in ’92 and clerking for a year on the 11th Circuit, Peter Thiel was one of the small handful of clerks who made it to the interview stage with two of the Justices. That capstone credential was within reach. Peter was so close to winning that last competition. There was a sense that, if only he’d get the nod, he’d be set for life. But he didn’t.
Years later, after Peter built and sold PayPal, he reconnected with an old friend from SLS. The first thing the friend said was, “So, aren’t you glad you didn’t get that Supreme Court clerkship?” It was a funny question. At the time, it seemed much better to be chosen than not chosen. But there are many reasons to doubt whether winning that last competition would have been so good after all. Probably it would have meant a future of more insane competition. And no PayPal. The pithy, wry version of this is the line about Rhodes Scholars: they all had a great future in their past.
This is not to say that clerkships, scholarships, and awards don’t often reflect incredible accomplishment. Where that’s the case, we shouldn’t diminish it. But too often in the race to compete, we learn to confuse what is hard with what is valuable. Intense competition makes things hard because you just beat heads with other people. The intensity of competition becomes a proxy for value. But value is a different question entirely. And to the extent it’s not there, you’re competing just for the sake of competition. Henry Kissinger’s anti-academic line aptly describes the conflation of difficulty and value: in academia at least, the battles are so fierce because the stakes are so small.
That seems true, but it also seems odd. If the stakes are so small, why don’t people stop fighting so hard and do something else instead? We can only speculate. Maybe those people just don’t know how to tell what’s valuable. Maybe all they can understand is the difficulty proxy. Maybe they’ve bought into the romanticization of competition. But it’s important to ask at what point it makes sense to get away from competition and shift your life trajectory towards monopoly.
Just look at high school, which, for Stanford students and the like, was not a model of perfect competition. It probably looked more like extreme asymmetric warfare; it was machine guns versus bows and arrows. No doubt that’s fun for the top students. But then you get to college and the competition amps up. Even more so during grad school. Things in the professional world are often worst of all; at every level, people are just competing with each other to get ahead. This is tricky to talk about. We have a pervasive ideology that intense, perfect competition makes the best world. But in many ways that’s deeply problematic.
One problem with fierce competition is that it’s demoralizing. Top high school students who arrive at elite universities quickly find out that the competitive bar has been raised. But instead of questioning the existence of the bar, they tend to try to compete their way higher. That is costly. Universities deal with this problem in different ways. Princeton deals with it through enormous amounts of alcohol, which presumably helps blunt the edges a bit. Yale blunts the pain through eccentricity by encouraging people to pursue extremely esoteric humanities studies. Harvard—most bizarrely of all—sends its students into the eye of the hurricane. Everyone just tries to compete even more. The rationalization is that it’s actually inspiring to be repeatedly beaten by all these high-caliber people. We should question whether that’s right.
Of all the top universities, Stanford is the farthest from perfect competition. Maybe that’s by chance or maybe it’s by design. The geography probably helps, since the east coast doesn’t have to pay much attention to us, and vice versa. But there’s a sense of structured heterogeneity too; there’s a strong engineering piece, the strong humanities piece, and even the best athletics piece in the country. To the extent there’s competition, it’s often a joke. Consider the Stanford-Berkeley rivalry. That’s pretty asymmetric too. In football, Stanford usually wins. But take something that really matters, like starting tech companies. If you ask the question, “Graduates from which of the two universities started the most valuable company?” for each of the last 40 years, Stanford probably wins by something like 40 to zero. It’s monopoly capitalism, far away from a world of perfect competition.
The perfect illustration of competition writ large is war. Everyone just kills everyone. There are always rationalizations for war. Often it’s been romanticized, though perhaps not so much anymore. But it makes sense: if life really is war, you should spend all your time either getting ready for it or doing it. That’s the Harvard mindset.
But what if life isn’t just war? Perhaps there’s more to it than that. Maybe you should sometimes run away. Maybe you should sheath the sword and figure out something else to do. Maybe “life is war” is just a strange lie we’re told, and competition isn’t actually as good as we assume it is.
II. Lies People Tell
The pushback to all this is that, generally speaking, life really is war. Determining how much of life is actually perfect competition versus how much is monopoly isn’t easy. We should start by evaluating the various versions of the claim that life is war. To do that, we have to be on guard against falsehood and distortion. Let’s consider the reasons why people might bend the truth about monopoly versus competition in the world of technology.
A. Avoid the DOJ
One problem is that if you have a monopoly, you probably don’t want to talk about it. Antitrust and other laws on this can be nuanced and confusing. But generally speaking, a CEO bragging about the great monopoly he’s running is an invitation to be audited, scrutinized, and criticized. There’s just no reason to do it. And if the politics problem is quite severe, there is actually strong positive incentive is to distort the truth. You don’t just not say that you are a monopoly; you shout from the rooftops that you’re not, even if you are.
The world of perfect competition is no freer from perverse incentives to lie. One truth about that world is that, as always, companies want investors. But another truth about the world of perfect competition is that investors should not invest in any companies, because no company can or will make a profit. When two truths so clash, the incentive is to distort one of them.
So monopolies pretend they’re not monopolies while non-monopolies pretend they are. On the scale of perfect competition to monopoly, the range of where most companies fall is shrunk by their rhetoric. We perceive that there are only small differences between them. Since people have extreme pressure to lie towards convergence, the reality is probably more binary—monopoly or competitive commodity business—than we think.
B. Market Lies
People also tell lies about markets. Really big markets tend to be very competitive. You don’t want to be a minnow in a giant pool. You want to be best in your class. So if you’re in a business that finds itself in a competitive situation, you may well fool yourself into thinking that your relevant market is much smaller than it actually is.
Suppose you want to start a restaurant in Palo Alto that will serve only British food. It will be the only such restaurant in Palo Alto. “No one else is doing it,” you might say. “We’re in a class of our own.” But is that true? What is the relevant market? Is it the market for British food? Or the restaurant market in general? Should you consider only the Palo Alto market? Or do people sometimes travel to or from Menlo Park or Mountain View to eat? These questions are hard, but the bigger problem is that your incentive is not to ask them at all. Rather, your incentive is to rhetorically shrink the market. If a bearish investor reminds you that 90% of restaurants fail within 2 years, you’ll come up with a story about how you’re different. You’ll spend time trying to convince people you’re the only game in town instead of seriously considering whether that’s true. You should wonder whether there are people who eat only British food in Palo Alto. In this example, those are the only people you have pricing power over. And it’s very possible that those people don’t exist.
In 2001, some PayPal people used to go eat on Castro Street in Mountain View. Then, like now, there were all sorts of different lunch places. Whether you wanted Indian, Thai, Vietnamese, American, or something else, you had several restaurants to choose from. And there were more choices once you picked a type. Indian restaurants, for instance, divided into South Indian vs. not, cheaper vs. fancier. Castro Street was pretty competitive. PayPal, by contrast, was at that time the only e-mail based payments company in world. It employed fewer people than the Mountain View restaurants did. Yet from a capital formation perspective, PayPal was much more valuable than all the equity of all those restaurants combined. Starting a new South Indian food restaurant on Castro Street was, and is, a hard way to make money. It’s a big, competitive market. But when you focus on your one or two differentiating factors, it’s easy to convince yourself that it’s not.
Movie pitches unfold in much the same way. Most of them are the same in that they all claim that this movie will be truly unique. This new film, investors are told, will combine various elements in entirely new ways. And that may even be true. Suppose we want to have Andrew Luck star in a cross between “Hackers” and “Jaws.” The plot summary is: college football star joins elite group of hackers to catch the shark that killed his friend. That’s definitely never been done before. We’ve had sports stars and “Hackers” and “Jaws,” but never anything at the intersection of that Venn diagram. But query whether that intersection would be any good or not.
The takeaway is that it’s important to identify how these rhetorical narratives work. Non-monopolies always narrow their market. Monopolies insist they’re in a huge market. In logical operator terms, non-monopolies tell intersection stories: British food ∩ restaurant ∩ Palo Alto. Hometown hero ∩ hackers ∩ sharks. Monopolies, by contrast, tell union stories about tiny fishes in big markets. Any narrative that carries the subtext of “we’re not the monopoly the government is looking for” will do.
C. Market Share Lies
There are all kinds of ways to frame markets differently. Some ways are much better than others. Asking what is the truth about a given market—and reaching as close to an objective answer as possible—is crucially important. If you’re making a mobile app, you need to determine whether your market is apps on the iPhone, of which there are several hundred thousand, or whether there’s a good way to define or create a very different, smaller market. But one must stay on guard against the sources of bias in this process.
Let’s drill down on search engine market share. The big question of whether Google is a monopoly or not depends on what market it’s in. If you say that Google is a search engine, you would conclude that it has 66.4% of the search market. Microsoft and Yahoo have 15.3% and 13.8%, respectively. Using the Herfindahl-Hirschman index, you would conclude that Google is a monopoly since 66% squared is well over 0.25.
But suppose you say that Google is an advertising company, not a search company. That changes things. U.S. search advertising is a $16b market. U.S. online advertising is a $31b market. U.S. advertising generally is a $144b market. And global advertising is a $412b market. So you would conclude that, even if Google dominated the $16b U.S. search advertising market, it would have less than 4% of the global advertising market. Now, Google looks less like a monopoly and more like a small player in a very competitive world.
Or you could say that Google is tech company. Yes, Google does search and advertising. But they also do robotic cars. They’re doing TV. Google Plus is trying to compete with Facebook. And Google is trying to take on the entire phone industry with its Android phone. Consumer tech is a $964b market. So if we decide that Google as a tech company, we must view it in a different context entirely.
It’s not surprising that this is Google’s narrative. Monopolies and companies worried about being perceived as such tell a union story. Defining their market as a union of a whole bunch of markets makes them a rhetorical small fish in a big pond. In practice, the narrative sounds like this quotation from Eric Schmidt:
“The Internet is incredibly competitive, and new forms of accessing information are being utilized every day.”The subtext is: we have to run hard to stay in the same place. We aren’t that big. We may get defeated or destroyed at any time. In this sense we’re no different than the pizzeria in downtown Palo Alto.
D. Cash and Competition
One important data point is how much cash a company has on its balance sheets. Apple has about $98b (and is growing by about $30b each year). Microsoft has $52b. Google has $45b. Amazon has $10b. In a perfectly competitive world, you would have to take all that cash and reinvest it in order to stay where you are. If you’re able to grow at $30b/year, you have to question whether things are really that competitive. Consider gross margins for a moment. Gross margins are the amount of profit you get for every incremental unit in marginal revenues. Apple’s gross margins are around 40%. Google’s are about 65%. Microsoft’s are around 75%. Amazon’s are 14%. But even $0.14 profit on a marginal dollar of revenue is huge, particularly for a retailer; grocery stores are probably at something like 2% gross margins.
But in perfect competition, marginal revenues equal marginal costs. So high margins for big companies suggest that two or more businesses might be combined: a core monopoly business (search, for Google), and then a bunch of other various efforts (robotic cars, TV, etc.). Cash builds up because it turns out that it doesn’t cost all that much to run the monopoly piece, and it doesn’t make sense to pump it into all the side projects. In a competitive world, you would have to be funding a lot more side projects to stay even. In a monopoly world, you should pour less into side projects, unless politics demand that the cash be spread around. Amazon currently needs to reinvest just 3% of its profits. It has to keep running to stay ahead, but it’s more easy jog than intense sprint.
III. How To Own a Market
For a company to own its market, it must have some combination of brand, scale cost advantages, network effects, or proprietary technology. Of these elements, brand is probably the hardest to pin down. One way to think about brand is as a classic code word for monopoly. But getting more specific than that is hard. Whatever a brand is, it means that people do not see products as interchangeable and are thus willing to pay more. Take Pepsi and Coke, for example. Most people have a fairly strong preference for one or the other. Both companies generate huge cash flows because consumers, it turns out, aren’t very indifferent at all. They buy into one of the two brands. Brand is a tricky concept for investors to understand and identify in advance. But what’s understood is that if you manage to build a brand, you build a monopoly.
Scale cost advantages, network effects, and proprietary technology are more easily understood. Scale advantages come into play where there are high fixed costs and low marginal costs. Amazon has serious scale advantages in the online world. Wal-Mart enjoys them in the retail world. They get more efficient as they get bigger. There are all kinds of different network effects, but the gist of them is that the nature of a product locks people into a particular business. Similarly, there are many different versions of proprietary technology, but the key theme is that it exists where, for some reason or other, no one else can use the technology you develop.
Apple—probably the greatest tech monopoly today—has all these things. It has complex combination of proprietary technology. By building both the hardware and the software, it basically owns the entire value chain. With legions of people working at Foxconn, it has serious scale cost advantages. Countless developers building on Apple platform and millions of repeat customers interacting with the Apple ecosystem provide the network effects that lock people in. And Apple’s brand is not only some combination of all of these, but also something extra that’s hard to define. If another company made an otherwise identical product, it would have to be priced less than the Apple version. Even beyond Apple’s other advantages, the brand allows for greater monetization.
IV. Creating Your Market
There are three steps to creating a truly valuable tech company. First, you want to find, create, or discover a new market. Second, you monopolize that market. Then you figure out how to expand that monopoly over time.
A. Choosing the Right Market
The Goldilocks principle is key in choosing the initial market; that market should not be too small or too large. It should be just right. Too small a market means no customers, which is a problem. This was the problem with PayPal’s original idea of beaming money on palm pilots. No one else was doing it, which was good. But no one really needed it done, which was bad.
Markets that are too big are bad for all the reasons discussed above; it’s hard to get a handle on them and they are usually too competitive to make money.
Finding the right market is not a rhetorical exercise. We are no longer talking about tweaking words to trick ourselves or persuade investors. Creating your market has nothing to do with framing stories about intersections or unions. What is essential is to figure out the objective truth of the market.
B. Monopoly and Scaling
If there is no compelling narrative of what the market is and how it can scale, you haven’t yet found or created the right market. A plan to scale is crucial. A classic example is the Edison Gower-Bell Telephone Company. Alexander Graham Bell developed the telephone, and with it, a new market. Initially, that market was very small; only a few people were involved in it. It was very easy to be the only one doing things in such a small, early market. They expanded. They kept expanding. The market became durable. Network effects began to operate. It quickly became very hard for others to break in.
The best kind of business is thus one where you can tell a compelling story about the future. The stories will all be different, but they take the same form: find a small target market, become the best in the world at serving it, take over immediately adjacent markets, widen the aperture of what you’re doing, and capture more and more. Once the operation is quite large, some combination of network effects, technology, scale advantages, or even brand should make it very hard for others to follow. That is the recipe for building valuable businesses.
Probably every single tech company ever has fit some version of this pattern. Of course, putting together a completely accurate narrative of your company’s future requires nothing less than figuring out the entire future of the world, which isn’t likely to happen. But not being able to get the future exactly right doesn’t mean you don’t have to think about it. And the more you think about it, the better your narrative and better your chances of building a valuable company.
C. Some Examples
Amazon started very small. Initially, it was just going to be an online bookstore. Granted, becoming the best bookstore in the world, i.e. having all books in catalogue, is not a trivial thing to do. But the scale was very manageable. What is amazing about Amazon was that and how they were able to gradually scale from bookstore to the world’s general store. This was part of the founding vision from the outset. The Amazon name was brilliant; the incredible diversity of life in the Amazon reflected the initial goal of cataloging every book in the world. But the elasticity in the name let it scale seamlessly. At a different scale, the Amazon’s diversity also stood for every thing in the world.
eBay also started small. The idea was to build a platform and prepare for the unexpected. The first unexpected thing was the popularity of Pez dispensers. eBay became the single place where people who were into collecting all the various kinds of Pez dispensers could get them. Then came beanie babies. eBay soon became the only place in world where you could quickly get any particular beanie baby you wanted. Creating a marketplace for auctions lent itself to natural monopoly. Marketplaces are full of buyers and sellers. If you’re buying, you go where the most sellers are. And if you’re selling, you go to where the buyers are. This is why most companies list on just one stock exchange; to create liquidity, all buyers and sellers should be concentrated in the same place. And eBay was able to expand its marketplace to cover a surprisingly large number of verticals.
But eBay ran into problems in 2004, when it became apparent that that auction model didn’t extend well to everything. That core monopoly business turned out to be an auction marketplace for somewhat unique products, like coins and stamps, for which there was intense demand but limited supply. The auction model was much less successful for commodity-like products, which companies like Amazon, Overstock, and Buy.com dealt in. eBay still turned out to be a great monopoly business. It’s just a smaller one than people thought it would be in 2004.
LinkedIn has 61 million users in the U.S. and 150 million worldwide. The idea was that it would be a network for everyone. The reality is that it’s largely just used for headhunting. Some have proposed a unique long/short strategy utilizing that insight: short the companies where lots of people are joining LinkedIn to post résumés and look for jobs, and go long the companies who are suspiciously quiet on LinkedIn. The big question about LinkedIn is whether the business network is the same as the social network. LinkedIn’s narrative is that the business network is fundamentally discrete. If that’s true, it will probably own that market for a long time.
Twitter is a classic example of starting with a small, niche product. The idea was simply that anyone can become a microbroadcaster. It works even if you just do it with a small number of people. But as it scales you basically build a new media distribution center. The big question about Twitter is whether it will ever make any money. That’s not an easy question to answer. But if you ask the future tech questions—Do you have a technological advantage? Do you have a moat? Can people replicate this?—Twitter seems safe. If Twitter’s market is the market for sending messages of 140 characters or less, it would be incredibly hard to replicate it. Sure, you can copy it. But you can’t replicate it. Indeed, it’s almost impossible to imagine a technological future where you can compete with Twitter. Move to 141 characters and you break SMS compatibility. Go down to 139 and you’re just missing a character. So while monetization is an open question, Twitter’s robustness and durability are hard to beat.
Zynga is another interesting case. Mark Pincus has wisely said that, “Not having clear goal at outset leads to death by a thousand compromises.” Zynga executed very well from the beginning. They started doing social games like Farmville. They aggressively copied what worked, scaled, figured out how to monetize these games—how to get enough users to pay for in-game perks—better than anyone else did. Their success with monetization drove the viral loop and allowed them to get more customers quickly.
The question about Zynga is how durable it is. Is it a creative or non-creative business? Zynga wants the narrative to be that it’s not a creative or a design company. If it is, the problem is that coming up with new great games is hard. Zynga would basically just be game version of a Hollywood studio whose fortunes can rise or fall with the seasons. Instead, Zynga wants the narrative to be about hardcore psychometric sauce. It’s a better company if it’s figured out how psychological and mathematical laws give it permanent monopoly advantages. Zynga wants, perhaps needs, to be able to truthfully say, “we know how to make people buy more sheep, and therefore we are a permanent monopoly.”
Groupon also started small and scaled up aggressively. The questions for Groupon is what is the relevant market and how can they own it. Groupon insists it’s a brand; it’s penetrated to all these cities, and people look to it, not others, for deals. The anti-Groupon angle is that it has no proprietary technology and no network effects. If the branding isn’t as strong as Groupon says it is, it will face lots of challenges in the long term.
All these companies are different, but the pattern is the same: start with a small, specific market, scale up, and always have an account of how robust you are going forward. The best way to fail is to invert this recipe by starting big and shrinking. Pets.com, Webvan, and Kozmo.com made this mistake. There are many modes of failure. But not being honest about objective market conditions is a sort of failure paradigm. You can’t succeed by believing your own rhetoric over reality except by luck.
V. Tech Frontiers
There is always some room to operate in existing markets. Instead of creating a new market, you could “disrupt” existing industries. But the disruptive tech story is possibly overdone. Disruptive companies tend not to succeed. Disruptive kids get sent to principal’s office. Look at Napster. Napster was certainly disruptive…probably too disruptive. It broke too many rules and people weren’t ready for it. Take the name itself: Napster. It sounds disruptive. But what kinds of things can one “nap”? Music and kids. Yikes. Much better than to disrupt is to find a frontier and go for it.
But where is the frontier in technology? How should we begin to think about it? Here is one possible framework. Picture the world as being covered by ponds, lakes, and oceans. You’re in a boat, in a body of water. But it’s extremely foggy, so you don’t know how far it is to the other side. You don’t know whether you’re in a pond, a lake, or an ocean.
If you’re in a pond, you might expect the crossing to take about an hour. So if you’ve been out a whole day, you’re either in a lake or an ocean. If you’ve been out for a year, you’re crossing an ocean. The longer journey, the longer your expected remaining journey. It’s true that you’re getting closer to reaching the other side as time goes on. But here, time passing is also indicative that you still have quite a ways to go.
So where are the places where technology is happening? Where is there room for the journey to continue? The frontier is a promising place, but also a very uncertain one. You can imagine a tech market where nothing is happening for a long time, things suddenly start to happen, and then it all stops. The tech frontier is temporal, not geographical. It’s when things are happening.
Consider the automotive industry. Trying to build a car company in the 19th century was a bad idea. It was too early. But it’s far too late to build a traditional car company today. Car companies—some 300 of them, a few of which are still around—were built in 20th century. The time to build a car company was the time when car technology was being created—not before, and not after.
We should ask ourselves whether the right time to enter a tech industry is early on, as conventional wisdom suggests. The best time to enter may be much later than that. It can’t be too late, since you still need room to do something. But you want to enter the field when you can make the last great development, after which the drawbridge goes up and you have permanent capture. You want to pick the right time, go long on tech, succeed, and then short tech.
Microsoft is probably the last operating system company. It was also an early one, but there’s a sense in which it will be the last as well. Google, the narrative goes, is the last search engine company; it wrought a quantum improvement in search with its shift to an algorithmic approach, and that can’t be much improved on. What about bioinformatics? A lot seems to be happening there. But whether it’s too early to jump in is hard to know. The field seems very promising. But it’s difficult to get a sense of where it will likely be in 15 or 20 years. Since the goal is to build companies that will still be around in 2020, you want to avoid a field where things are moving too quickly. You want to avoid being an innovative but non-profitable disk drive company from the ‘80s.
Some markets are like the automotive market. Should you start a new lithium battery company? Probably not. The time for that may have passed. Innovation may be too slow. The technology may be too set by now.
But sometimes seemingly terminal markets aren’t. Look at aerospace. SpaceX thinks it can cut space launch costs by 70-90%. That would be incredibly valuable. If nothing has happened in an industry for a long time, and you come along and dramatically improve something important, chances are that no one else will come and do that again, to you.
Artificial Intelligence is probably an underrated field. People are burned out on it, largely because it has been overrated and overstated for many decades. Few people think AI is or will soon be real at this point. But progress is increasingly relentless. AI performance in chess is increasing. Computers will probably beat humans in Go in 4 or 5 years. AI is probably a good place to look on the tech frontier. The challenge is that no one knows how far it will go.
Mobile Internet deserves some mention. The question is whether there’s a gold rush in mobile. An important subquestion is whether, given a gold rush, you’d rather be a gold digger or the guy selling shovels to gold diggers. But Google and Apple are selling the shovels. And there may not be that much gold left to find. The worry is that the market is just too big. Too many companies are competing. As discussed above, there are various rhetorical tricks one can use to whittle down the market size and make any given company seem way more unique. Maybe you can create a mobile company that owns a valuable niche. Maybe you can find some gold. But that’s worth being skeptical about.
VI. Frontiers and People
One way to tell whether you’ve found a good frontier is to answer the question “Why should the 20th employee join your company?” If you have a great answer, you’re on the right track. If not, you’re not. The problem is the question is deceptively easy sounding.
So what makes for a good answer? First, let’s put the question in context. You must recognize that your indirect competition for good employees is companies like Google. So the more pointed version of the question is: “Why would the 20th engineer join your company when they could go to Google instead and get more money and prestige?”
The right answer has to be that you’re creating some sort of monopoly business. Early businesses are driven by the quality of the people involved with them. To attract the best people, you need a compelling monopoly story. To the extent you’re competing with Google for talent, you must understand that Google is a great monopoly business. You probably should not compete with them at their core monopoly business of search. But in terms of hiring, you simply can’t compete with a great monopoly business unless you have a powerful narrative that has you becoming a great monopoly business too.
This raises the question that we’ll discuss next week: kinds of people do you want to take with you as you head off into the frontier?
By Tal_Raviv
Ah, spring. Birds chirping, bees humming, and the annual ritual of tech startups kicking off accelerators.
Ecquire went through two incubators, one in 2008 and one in 2011. Yep, that’s like repeating third grade twice, but at least now we’re “experts” at utilizing startup accelerators, if nothing else.Looking back at 2008 (DreamIt Ventures) we totally underused those three months. We went from no product to 11K users but had no clear vision for what came next or why. In 2011 (GrowLab), demo day got us partner meetings, term sheets, traction, revenue, and more important than anything, a legitimate business model.
The difference was NOT the incubators themselves. They were both extremely well run and well thought-out. The difference was our approach.
Entering the Arena
In the six months leading up to GrowLab, Paul and I were consulting and freelancing for other companies to pay the bills. Let me tell you, it sucks. Our customer acquisition cost was prohibitive, and we were unable to pivot. Our hands were tied as we saw our company grind to a halt before our eyes.
On the flight to Vancouver, we knew we had to come out of GrowLab with funding or sustainability. If we failed we’d have to take everything we’d worked for and drag it out to the curb for collection. And get real jobs.
So, we walked into Growlab on day one, tossed out two years worth of code, and lined up on the starting block.
Why Are You Here?
This incubator is a once-in-a-lifetime opportunity for your startup. If you build something people want, this is the window of opportunity where it has the biggest chance to get traction, get funded, get to revenue, whatever it is your business needs next.
That window is the widest on demo day, when the velvet cloth is lifted and the world lays eyes on your baby. What do you envision happening at that moment?
Know this: the moment following demo day, you’re a has-been. It’s hard to imagine when you’re in it and the center of attention of the startup community, but soon there will be a next batch.
The value of your time in an accelerator is multiplied ten-fold. Understand that and you won’t become yesterday’s newspaper.
So, what do you want to happen on demo day?Want a check? A term sheet? Then what is going to make VCs try to tackle you as you walk off the stage.
Want lots and lots of users? Then think about what you need for every member in the audience to sign up/download/buy your product on the spot (and enthusiastically tell their friends and colleagues to do the same).
So, decide why you are here. Here are some examples:
- Figuring out if anyone wants this as fast as humanly possible
- Figure out if anyone will pay for this, and how much
- Build a rinse-and-repeat economical marketing machine
- Figuring out if we can resell this idea in X industry
- Double our retention
- Get to X number of daily active users
- Raise paid conversions from 0.5% to 2%
- Prove to investors that your company is not a risk and that their money is pure gasoline to your engine
The last one is probably the most common. This means users/revenue/testimonials/traction long before demo day. To achieve this, your real demo day deadline is 30 days prior to the accelerator’s demo day.
The worst companies don’t have a question they’re trying to answer. They’re just doing what they’ve always done…code a bit more every day, hoping that at some critical mass of features suddenly all their dreams will come true. That approach doesn’t belong in an accelerator.
For Ecquire, Paul and I needed angel funding. We knew that we had the biggest chance to accomplish that if we walked in with users, traction, and revenue.
It’s a Death Match Against Time
Now that you know what you want demo day to look like, work backwards to day one. What do you need in T minus one month to demo day? What about T minus two months? Where do you need to be right now?
With demo day at the end, the benefit of every hour you put in during an accelerator is multiplied x10 compared to the rest of the year.
Here’s a tip most startups seemed to miss: when a mentor comes to meet with your startup individually – only send one co-founder in. Don’t send the whole team. That co-founder can take notes and update you over lunch or on the walk home.
An incubator (especially if you’re travelling to get there) may sounds like an adventure. No. You’re going to war against time, and only one of you will win.
Eyes on the Prize
Paul and I knew absolutely nobody in Vancouver when we landed. It was perfect. We had no distractions to contend with and could focus entirely on our startup goals.
As soon as we landed we started working, planning, outlining, and designing. For us personally, we felt like we were in heaven – finally being able to work full time on our company. We appreciated our *time* like no other company in the incubator.
This attitude continued for four months. We knew that we had to give 300% during those months. If we didn’t feel burnout we weren’t working hard enough.
(Typing that sentence makes me a little sick – I’m against workaholism and bragging about hours – but for a contained period of time, it was absolutely what we had to do.)
In contrast, several of the startups were local to Vancouver, and I could see it was difficult for them to get into Rocky Balboa mode. It’s hard to stay in the same city and tell your family and friends you’re disappearing for four months.
On the other hand, we could easily keep working on nights, weekends, and holidays because no one expected to see us.
And just “being at work” doesn’t count when all that matters is results. Cameron Herold, the COO of 1-800-GOT-JUNK gave us advice that saved us days worth of time over the course of GrowLab:
Don’t check your email in the morning. Get straight to it. Check it after lunch or at night.
That’s focus.
Stand Up Against Distractions
Startup incubators/accelerators pride themselves on the mentorship and advice they provide their portfolio. With all the mentors and speakers, you’d think this would make it easier to choose a direction and focus on execution.
Nope. You’re going to meet a ton of smart, confident people, and they’re going to talk a lot about what “you should really do” in their opinion. Don’t forget, they’re super confident because they either manage a lot of money or they sold a company or three in their past. People put in a position to give advice….will always give advice. So you’re going to get a lot of advice.
Each one is going to listen to you for about two minutes and then talk for 30. That’s the nature of the startup world. You’ve spent months and years researching and knowing your field and they have thought about it for two minutes. Remember that you know your idea more than anyone.
The hardest part of an incubator is knowing who NOT to listen to.
Original photo by: Serendigity Here’s the most helpful rule for filtering out the crap that people will tell you (again, with utmost confidence in their opinion)Listen most to the people who have tried your product or at least are the intended audience.
In our case, since most investors were never in a sales/operational in-the-trenches role, it was very hard to take their advice too seriously. On the other hand the mentors who went ahead and gave the product an actual spin beyond the website got our full attention.
That said, your network is about to explode (in a good way). Especially with the incubator brand on your forehead, this is the time to ask for every. single. connection. offered to you. This will end in a few months when you become a has-been so take advantage of it now, follow up, maintain the relationship, and hold on to the contacts you do find valuable.
You Don’t Have Time to Burn Out
For all this talk of focus and workaholism, Growlab was a blast. We did a lot of hiking, spent a long weekend in Tofino, and got to know Granville Island beer really, really well.
When I was having fun I knew it was in service of work. I needed to keep my brain fresh so I could keep coding energetically and creatively.
Chilling in Deep Cove, British Columbia
Day to day I highly recommend having a physical regimen to keep you sane. Being Crossfit nerds, we invested in a YMCA membership and made it part of our routine.
I took Saturdays off as a rule. Taking one day a week off from even thinking about Ecquire really helped me sustain my efforts.
Entrepreneurship is not a competition of who stays longer at the office. Get what you need done and stop when you’re causing more harm than good. Like me, below.
There’s some fantastic startup accelerators out there, especially DreamIt and Growlab. As many resources as they may provide you, the only one that really matters is your time. Decide what you want to use it to ultimately accomplish, and conserve it like you would your cash and your equity. Then demo day will be exactly as you envisioned.
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