Category Archives: Angel Investing/Venture Funds

Internet Startup Bubble and The Supposed Super Seed Crash

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OK I admit it. I’m reposting and expanding upon a comment I left on Paul Kedrosky’s blog post The Coming Super-Seed Crash. But whenever I write a lot, it just seems like such a shame to leave it hidden in somebody else’s post, somewhere else on the web…
Paul talked about how there was going to be a crash of super seed funds. I’m not sure I agree with that. There simply aren’t enough of them to characterize some sort of bubble. I think the issue is more about what they’re investing in, which at the moment is mostly internet startups.
To recap my comment, which was in response to Chris Sacca’s comment, and also to continue this post and to add to my thinking:
…But somehow, perhaps this discussion shouldn’t be about the super seed funds. To me, they are employing the correct strategy in the climate of (mostly) internet startups that they are investing in, which is there are too damn many of them and how does one pick the right one(s)?
To me, the issue is not the super seed funds but rather the looming bubble that I believe is forming in the internet only startup space. To give some data, which Sacca asked for!, some thoughts:
1. Too many me-too startups, and they are getting funded too! it’s been super hard to find those gems of unique ideas. It’s so easy to just launch something and everyone thinks they can just build something and it will grow huge.
2. Sacca’s comment about undisciplined angels is very true. At the last YC, I knew practically no one at the first session of YC whereas in years past I knew over half the room. There are many angels newly jumping into the fray and with not enough experience.
3. When the new angels start investing, they can only invest in whatever is available at that moment; they’ve already missed the Groupons, Gilts, Foursquares, etc of the world, so they must pick from what is available. In their excitement, they fund them but without realizing that there are so many me-toos out there, with the exception of those rare unique gems.
4. People who shouldn’t be entrepreneurs are becoming entrepreneurs. One of the first things I do when I meet entrepreneurs is try to talk them out of it. Many can’t take it and it’s good we found out now before we fund them and realize they didn’t have the right attitude and/or staying power. But too many are jumping in and can only see the good parts (ie. I’m building the next Google and I’m gonna be rich!) but don’t realize how much effort it takes to get there.
5. So much froth is being stirred up about becoming entrepreneurs. Every university is starting incubators, everybody wants to be an entrepreneur. Your friends make you feel like an idiot if you’re not starting a new biz. This is bad. Social pressure for you to become something you’re not, or under the wrong circumstances (ie. your life stage may be beyond this, or you have an idea that won’t grow big enough) is really bad and is making some do things they shouldn’t.
6. Major confusion exists on small businesses versus the game changing, world dominating startups. Steve Blank wrote a great post about this recently. Starting businesses is great and should be done, but we’re treating all the startups we encounter as if they were going for the gold when in fact a lot of them will never get there. The crappy economy drives us creative Americans to start a biz to support ourselves and then we get confused when we go out and try to figure out how to grow it. Banks won’t lend to them, and probably never will lend to a small biz internet startup. So they try to raise money as a game changing, world dominating company and actually get funded, but their idea and their personality will never get there.
7. All these startups who blur together in their ideas, and only differentiate in consumers’ minds by just a little bit, means that they only gain a tiny slice of the entire internet userbase. Pretty soon, we will cut the userbase up into ever smaller chunks until we’re left each with something that is barely or not monetizable.
8. Oh by the way, we as users are getting tired of opening up yet another invite email. We’ve already got flickr to share photos; we don’t need another photo sharing service! Entrepreneurs don’t appreciate the high switching costs and our familiarity and comfort with our old services which are working pretty damn well thank you very much. And also, our time is getting occupied more and more fully; we don’t have time to use another service unless it can bring exponential value over and above the ones we’re using now, and not just incremental.
9. On another note, because of these tough competitive conditions, startups aren’t thinking long term enough. One year is not enough time to gain traction and/or pivot a few times to figure out where they should be going. But yet pretty much every startup I encounter only thinks about raising enough money, with respect to their burn, to last only a year. It’s not enough time in today’s climate. At the end of the year, you’ll have launched, gained some early usage, only to figure out you need to pivot and you aren’t making enough money to break even. Then you go out to raise more and you can’t because the probability is high that getting a follow on round to companies with mediocre or crappy metrics is near impossible. So many startups will hit the end of their bank accounts and then just…die….
[NEW] 10. The lack of resources in hiring is a big problem. Before, we could find engineers who were willing to put up with the uncertainties of entrepreneurial life and because there were fewer startups, we could get all of them concentrated into those fewer startups and be able to execute. Now engineers are starting their own thing and finding that they can’t get further unless they hire…and they can’t. This means a lot more of these startups will die because they can’t execute as fast as others, and burn through cash to find this out.
I think all these point to a big internet startup bubble forming, in which angels whose limited resources will get them caught in a bad place where the majority will find it hard to even make their money back. The super seed funds will do well and be profitable because they can bet widely. A sizeable portion of their portfolios will either die or reach small biz status, but they will find their Google(s) to win back all they’ve bet and then some.
Remember also that my viewpoint is that of an angel investor whose spent the last 4 years investing in consumer internet, and then the economic crash hit, at which time I started switching to internet B2B startups, and now I’m very much souring on internet only startups (I’ll explain “only” in a moment). I don’t have the resources of a super angel and certainly not that of a super seed fund. I must deploy my limited resources much more carefully since I’m aiming for cash return in addition to investing for entertainment value. So to be more careful, I must choose wisely.
But choosing wisely among the plethora of internet startups who want users to check-in, share, chat, social network, connect, real time blah blah blah – it’s all becoming a blur to me. I can’t tell what’s really going to become big or not. And I’m not sure all those customers surfing the internet can either.
So with respect to internet only startups, I’m starting to sit on the sidelines. Occasionally some gems will pop up and I will try my best to get in those rounds; these are startups who:
…have almost no competitors
…are making money from the very beginning
…are making something so powerful/unique/cool relative to what’s out there
…are disrupting some old business that everyone else has missed
Sound familiar? Old style VC looked for these businesses and bet big on them because of these attributes and more. But most of the internet startups I see today are just rehashes of the same old. That’s OK – given the intense variability of the startup world, I’ve seen stuff that I never thought would work go big, and stuff that had the best laid plans and apparent opportunity go down the tubes. Still, it’s not something I want to dabble in any more like I did so I’m sitting on the sidelines unless something comes along which really satisfies metrics like those above.
I do have a new emerging thesis though. Remember I said “internet ONLY startups”? I believe there is something unique and emerging in the hardware plus software plus internet space. Once I get my thoughts more ordered on that topic I will post on that for sure.

Why I Hate Social Proof

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Just recently, the concept of social proof as a reason for investing has come up again. It first came up when I was giving the Angellist guys some feedback on their referral system. In their emails, there is a prominent section dedicated to social proof and details the other usually-prominent investors and advisors who are investing and have endorsed the startup. But I complained back that in my experience, social proof can be a dangerous reason to invest in a startup, as much as it can lend support to an idea.
Here are some reasons why social proof can be a great thing:
1. Presumably, if a smart investor has committed funds to a venture, then he has researched it and think it is something he can make money with, or else why would he toss away his funds on something that won’t?
2. Previously mentioned smart investor might be someone who has more experience than you, so you rely on someone else’s expertise to help you decide. Or it may be an area where you may have no experience in, but you want someone who does have experience to endorse it.
3. If a lot of smart people invest in something, then the additive effect of a lot of smart people agreeing can lend support to a particular venture.
Now here are some reasons why I hate social proof:
1. Investors like to invest with others that they like. So they tend to travel in packs and herds (ie. think “herd mentality”). Thus you may have a lot of smart investors, who hang with other smart investors normally, who just invite their friends into a venture. The only thing is, sometimes these smart investor friends just trust their other investor friends to bring them worthwhile ventures and they may not have thought through exactly how good or not good a venture is. Given this, it may mean that item 3 in the positive aspects of social proof is an illusion because the group of smart investors endorsing it may actually all be following one or two of them.
2. There are a lot of guys out there who are angel investing that are more rich than you or me. To them, $50K or even hundreds of thousands of dollars are mere blips in their wealth; it’s like if I pull out a $20 bill and give it to you and not really care if I get it back. When your mindset is driven by the fact that you can give out large amounts of money and not have it affect your lifestyle in the slightest, it can really alter your decision process on how you pick startups, and how rigorous you may be. It can very well mean that you’re just happy getting involved in some really cool thing and want to have bragging rights, more so than being really focused on monetary return. It can also mean that there is huge entertainment value realized from being involved, and that they just want to be a part of something cool. How do reasons like that match with your strategy of investing?
3. Following on 2, this can apply to venture funds even more so. They have tons of cash to deploy and are perfectly willing to take on risky ventures since it’s their core business. A fund does not have to have positive outcomes in many of its startups in order to have a sizeable turn for the fund itself. So they can and will take chances on ventures that could be hugely risky across a wide set of measures and be OK if it dies. But where will we be if the investment fails…?
4. If you follow someone’s investment, you really have to be wary of WHY THEY ARE INVESTING. I have encountered the case where I saw a prominent venture fund individual put his money into a startup. The entrepreneur touted that fact and it did seem to lend some credence to the venture. However, when I talked to the prominent venture fund individual about the investment, I found that he invested mostly because he knew the guy personally and wanted to support him so he invested mainly because of that…and also because that item 2 above enabled him to invest a seemingly large part of the small round and he was OK with that. Do you want to co-invest alongside someone who is in reality just supporting someone he is close to and not really thinking as deeply as he should about the business and the opportunity?
5. By the way, it can often seem like because there are smart investors in a round, that when the startup needs help they will jump in to lend a hand. However, I have also found that this is not necessarily true. Many smart investors are very busy people. They may have many companies in their portfolio. Their time is very tight and they may not have time to help in depth with all their startups. They may be forced to focus on only those that are the winners and everyone else doesn’t get much attention. Or worse, if a venture starts going downhill, I’ve also seen them just be left to die; after all, if this one dies, these guys still have many others who can benefit a lot more from their help versus trying to spend your time rescuing those who will die and for little return on their time investment. It is ruthless, but true; sacrificing the losers will mean that focus on the winners will mean they will make back their money and then some. However, if you haven’t invested in every startup that a smart investor has invested in, you may end up investing in a lot of losers and that sucks!
So while it may seem social proof can be beneficial, and in many cases it can be, it is also very bad to invest blindly using only social proof. My advice would be to do your own homework into those startups you want to invest in, and don’t just follow the herd. The herd you’re a part of may turn out to be a herd of wild, strong mustangs led by a dominant horse who can lead you to safety and success….or your herd could suddenly transform itself into a herd of lemmings about to follow the leader right off a cliff.

Advisors for Early Stage Startups Presentation at Yale Entrepreneurship Institute

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Today, I hopped on the Metro North to New Haven and met the summer startups in Yale’s summer incubator program which is put on by the Yale Entrepreneurship Institute (YEI).
YEI’s mission is to help students create successful new businesses from the ideas that students originate themselves and those that are part of Yale’s University research. Applicants are vigorously screened and those who enter the program work on their ventures for an intensive ten weeks. During those ten weeks, industry mentors talk about and teach them entrepreneurship. This is actually not a class but a full time job, so those entering the program receive a stipend for the ten weeks they are in the program. You can see this year’s teams, as well as previous years’ teams, on their website.
They asked me to talk about advisors (and mentors) since I do that as part of my work with David Shen Ventures, LLC. Here is my presentation:

Advisors for Early Stage Startups at Yale

View more presentations from dshen.

It was great visiting Yale and being part of the program (the last time I was there was back in 1982!). I was very happy to get home, however, because apparently a tornado touched down in Bridgeport RIGHT ON THE TRAIN TRACKS AND ON TOP OF THE TRAIN BEFORE MINE and caused us to delay. YIKES…

Incubators Should Force Their Startups to Get Paying Customers

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(originally titled, “Forcing Incubator Companies to Get Paying Customers”…changed the title because it bugged me that it was unclear –DS)
I had the pleasure of helping out at the Stanford d.school’s Launchpad class this last quarter. It was a graduate level class which was the first incubator class offered by the design school (a.k.a. d.school) whereas the “b school” (business school) and the “e school” (engineering school) both already had entrepreneurship classes involving creating new businesses.
The class was taught by Perry Klebahn, a classmate of mine from when I was in the product design master’s program way back when, and Michael Dearing of Harrison Metal, an early stage venture fund. They interviewed about 60 applicants and accepted 12 into the class. The goal of this class was to teach entrepreneurship from the design school’s perspective, and their major objective was to sign up paying customers by the end of the class in 10 weeks. Those that did were reported to get an instant A in the class!
Those entering the class mostly started from nothing. So imagine the pressure to develop an idea into a business model and a product that was good enough for customers to want to pay for in as little as 10 weeks!
Certainly Ycombinator drives its companies pretty hard over the 10 weeks or so during the time they are in the program. Every other incubator program does similarly to its crop of startups.
But they have a slightly different goal than what the Stanford Launchpad class had. There was no requirement that their startups develop a product AND get paying customers; the only objective was only to launch, and hopefully convincingly enough to raise a round of cash to keep going. There was no emphasis on racing to a proven business model in the allotted time.
I find this very compelling in this day of economic crises, and as an angel investor trying to find great companies to fund.
Too many startups come into being with no concept of a business model; they aim to get users and drive towards that and hope that a business model falls into their lap along the way. The problem with this approach is that, at early stage, you don’t have enough runway to try a few things and see what can work. You are extremely time constrained given your bank account and you have to race to making revenue as soon as possible.
Granted, this could have worked pre-economic crisis. Many startups were raising their second rounds on the promise of a business model and a strong user base. Sadly, those days are gone; without revenue, it would be extremely hard to get another round today. Investors just think that either you and/or your idea have failed.
As an early stage angel investor, I invest in the riskiest time in a startup’s life. After having seen a lot of my companies trying to employ the “race for users” model and then failing to raise more money, or not raising enough initially, I really like the fact that someone is forcing startups to find customers who will pay for their product or service. This at least proves that there is some validity to whatever business model they are pursuing and increases their survivability with incoming revenue.
How would this be implemented with an incubator program? I think there is one big hiccup which I have not completely solved, or more accurately, is solved only in the context of university setting. This is the reward for being successful in the task of finding paying customers.
For a class of students, their reward is only at the end of class when they successfully find paying customers: they get their A.
For an incubator program which typically invests a small sum of money for a small piece of the company, a big portion of the reward has already been given. How would we incent them to go for a lofty goal of finding paying customers if they already have their reward in hand?
Some ideas:
1. You give them the initial money and let them run. Then you commit to investing a second chunk only in your startups who find paying customers after the time period.
2. You could set loose the entrepreneur teams without funding for 10 weeks and then only fund those at the end who find paying customers. In many ways this parallels what happened in the Launchpad class with students.
3. You could give them their initial money and then only allow those who find paying customers to present to investors at the end. Those who failed are cut loose and left to fend for themselves.
Are there other ideas?
I would love to see some of the incubator programs incorporate this into their graduation criteria. I think it would strengthen the quality of the exiting startups immensely.

Design as a Central Resource in Incubators and Funds

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In my last post, Giving UX and Design Advice, I started talking about a buddy of mine asking me about design support in incubators and described what goes on in the mind of one person (me!) who gives design and UX advice. I believe this gives clues as to how to find a person to fill the role of a design/UX advisor, or if someone wanted to become one, what they might expect.
Let’s get on with the real topic, which is, if you’re running an incubator, should you provide design as a central resource? And if you do, how might that work?
Also, when I say incubators, I think that we can include any investment operation, such as a venture fund, who wants to provide centralized design help to its portfolio companies.
The Problem Statement
There is recognition that for early stage startups, getting the product right has unprecedented importance over other aspects of the business. If this is true, then getting the user experience of the product right is paramount. Assuming we know the difference between design and UX, design has definitely the user facing component of the user experience of a product. Thus it’s natural that helping startups find great design support is very important.
The problem with finding design support is that…there just aren’t enough great designers around! The world simply doesn’t have enough designers who are talented AND are great at crafting a great front-end user experience. Note that you can’t just have someone who is talented because some guys are just not good UX people. So if we’re lucky to find a great designer who is also a great UX person, then we’d want to utilize this person on a wide variety of projects.
However, in what form should the design/UX help take? Advice only, or actual work? Here are some examples of this in the real world now.
The Designer in Residence
About 5-6 months ago, the world saw its first Designer in Residence (DIR) at Bessemer Venture Partners. The term was first coined by Bessemer’s David Cowan and shortly after the Mint acquisition, their designer Jason Putorti became the first DIR. I have talked with Jason about his experiences as a DIR and will wrap in some thoughts from conversations with him and Bessemer folks. For a more in-depth look at his experiences in his time as DIR, please look for his upcoming post at his blog.
The main purpose of the DIR was to help out the Bessemer portfolio from a design point of view. Any portfolio company that was receptive to help would get time with Jason, although it was mostly from an advice point of view. The startups that were receptive to outside advice really appreciated his visits and comments. Many startups did not feel the need to receive outside help and some of those probably didn’t need any design advice, and some, by some viewpoint, probably could have used some even if they didn’t think they needed it.
That’s not to say that Jason didn’t deep dive; this did occur but it didn’t happen very often since his time was limited with each company.
Betaworks
As part of our operations at betaworks, we incubate some businesses. Thus, providing design help to our internal projects was deemed critical to getting those internal products out the door quickly and allow us to iterate on them, without having to waste time to find design help for every project. We hired a designer to be on staff to help us work quickly on our ideas.
In the case of betaworks, my proposed problem statement is not their main purpose for having the designer on staff; this designer actually does the work, and so therefore his time is limited because he needs to focus on projects to get design work done. Currently he works on 2-3 projects maximum, and at any one time is focused on one.
He hasn’t done much at giving design/UX advice though, simply because his time would get overwhelmed helping too many people at once, and then only at the advice level.
He also has noted to me that he has extremely enjoyed the interactions and the projects, and the wide variety of problems to solve from simple sites to complex services. Such is the nature of working for an operation whose day to day interactions are always with the latest and greatest!
Parallels with Central Design Teams in Bigger Companies
The issues experienced, when attempting to provide actual work, mirror those of companies with central design teams attempting to service many teams at once. Because the teams do not have dedicated design support, they have to come to the central resource to get things done.
The typical issues encountered in these situations are:
1. Competition for design time, and the resulting tensions. Sometimes there is the threat of going outside the company for design help, which works for some companies and is absolutely prohibited by others.
2. Accounting dollar-wise for design time can be challenging, and things such as chargebacks to matrix headcount attribution have been tried to account for resourcing, and to see how much design time and cost a project has used.
3. Headcount is always an issue, and fighting to add to headcount in a central organization when it’s not tied directly to any revenue generating project (instead, it’s tied to all projects both revenue generating and losing) is a difficult fight to win.
4. Designers in these central teams are often stressed to finish way too much work and quality can suffer if the demands on their time exceed their ability to finish quality work.
5. Causing 4, scheduling projects is always a problem when so many people are vying for your design time. Prioritization is always an issue, and frustrations can occur when someone doesn’t get support when they need it.
Provide Only Advice, or Resources to do the Actual Work?
Here you go, the pros and cons of both!
Advice Only:
PROS:
1. Can handle a lot of projects at once.
2. Can talk about issues larger than just design alone, that are related to user experience.
3. Breadth of exposure to many projects gives a breadth of experiences to bring to bear on any one given project.
4. Effectiveness is potentially at its greatest at the certain stages of the project, like at the beginning during product definition before decisions have been made, and evaluating what has been done already, especially if there is evidence that there are problems with what has been launched and receptiveness to help from the team is greatest (since it’s obvious there is something that needs to be fixed, rather than not having concrete evidence before a product is launched.
CONS:
1. Only helps those who are receptive.
2. Even receptive people may ignore your advice, or simply forget about it later.
3. Advice can only be implemented if the team can internalize what is being said. If they do not have enough depth of understanding, they may not be able to implement fully, or only partially which may not be enough.
4. Lack of depth on a project can result in incomplete advice.
5. Advice can be wrong, or simply wrong for a given team. The right solution for a given problem may come in a multitude of forms; the advice a single person gives really only offers one solution but it may not be the solution that a team requires to get to success. Remember that success can come in many forms. For example, even if a product has a terrible UX, if the startup is sold and investors make money, then by many measures, the startup has reached a success despite ignoring UX advice.
6. Giving design/UX advice requires an individual who enjoys giving advice as a career and not doing the actual work. It may be hard to find skilled individuals who want to give advice and not do the actual work.
7. Giving design advice is only part of the solution; we still have to find someone to do the actual work. Designers are still hard to come by. Without anyone to implement the advice, the advice may be pointless.
Doing Actual Work:
PROS:
1. Inserting a great designer is the best way to ensure that the right design work gets implemented. Having someone on the team who is there, fighting for the right thing to do 24/7, is the best way to ensure that a great UX gets launched. It also enables depth on a project, so that the probability of the right design being implemented is greater.
2. Evidence has shown that most designers love doing the actual work, and that it is much more satisfying than just giving advice. So it’s most likely easier to find designers to staff a central group that does work.
CONS:
1. Coverage of projects is extremely limited, often only one project at a time.
2. Since coverage of projects is limited, you need a lot of personnel to cover a lot of projects. Paying salaries for all these folks and supporting them can be a challenge for an operation that does not have recurring revenue (ie. a fund or incubator is not a business with revenue). Or do we charge our startups, which has its own issues given that they are most likely early stage and very sensitive to expenses?
However, if the entity that provides design support has deep pockets, then either design support can be provided for free, or at a steeply discounted cost to the marketplace.
3. Running a central group which does work is like running a design consultancy. It will have the same issues as any consultancy in managing the work and client. Having worked at frogdesign, I can tell you that running a consultancy is not an easy thing; keeping deliveries on schedule, maintaining happy customers and quality of work all takes experience.
4. How do we know that the designers on staff can maintain quality? What if the best design support can be found outside the central group? What if the design talents that the startup needs are not found within the group?
5. Finding designers to hire is still tough. How much time is required to even build the team itself?
6. Central group design support is still very discontinuous; the group comes in, does work, and then stops for a while. In the space between projects, a lot of learning is accomplished which may not get back to the designers. At some point the startups will require their own dedicated design help which is continuous and 24/7.
One might notice that in either case, the list of cons exceeds the pros. I would say that the brevity of the pros doesn’t minimize their importance. Each of those pros has tremendous value for each path. It is the cons that we must watch out for and be OK with, when setting up design support for an incubator or fund.
Footnotes:
a. As I was finishing up this post, I got word that the venture group at Google provides design support on contract, and on a limited basis to its portfolio companies. I hope to meet with the designer to get his take on how this works and how it’s going for him.
b. One of my reviewers pointed out that this post ended kind of open ended and left him feeling the need for some firm conclusion. Yes I bailed on giving a specific conclusion because I believe that the direction an entity takes is highly specific to the situation and its own needs. I do not think there is one size fits all in providing either type of design support. I wanted to point out what the pros and cons of each direction were, and let the reader create his own solution based on his own requirements.
Many thanks to James Cham @jamescham, Jason Putorti @novaurora, and Neil Wehrle @neilw for reviewing this post!

Giving UX and Design Advice

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A buddy of mine was helping some friends setup an incubator and he asked me whether or not they should have some UX/design support that is resident in the incubator.
It’s an interesting proposition. According to Dave McClure:
Addictive User Experience (aka Design) & Scalable Distribution Methods (aka Marketing) are the most critical for success in consumer internet startups, not pure Engineering talent.
(from Startups & VCs: Learn How to Design, Market, & Eat Your Own Consumer Internet Dogfood)
I tend to agree. Most startups are started by business people or engineers. It is very rare to find startups started by designers; relative to the other disciplines, it’s like finding a needle in a haystack. So most entrepreneur teams really have no formal training in the area of user experience and any that do well are either lucky or naturally talented. But yet at early stage, the quality of the product experience matters so much more than at any other time and is so critical to the early traction a startup can get. Also, designers are among the hardest of disciplines to hire for; there simply aren’t enough to go around, especially compared to the number of engineers universities crank out each year. Thus it’s natural that an incubator, which provides a lot of critical resources to its incubated businesses, would want to provide design as one of those resources.
I should also say that we’ve been really bastardizing the use of the term “designer”. There are many sub-disciplines within the category of design: visual design, graphic design, interaction design, user researchers, usability testing professionals. Saying that someone should get a talented designer is not a cure-all for UX success. You must have some basic level of understanding and skill in a few of these areas in order to create a great user experience.
For the last 4 years, I’ve been advising startups partially in the area of UX and design. I think there are parallels in what I do and what an incubator might provide. Both an incubator and I have a portfolio of companies to provide design support for; but yet how to provide a level of support for so many customers at one time? Is it actual design detail work or is it just guidance? Certainly I have thought a lot about providing UX and design help to all the startups in my portfolio, and in what form that help looks like. However, the nature of providing help in this form comes with interesting dynamics.
All About Influencing
Everything is influenced based, which means that in no way can I force someone to come to my viewpoint. I have to convince them that my way is better through belief in my past experiences and/or through some sort of research, or through the persuasiveness of my reasoning. These individuals do not report to me; nor in reality do they even have to listen to me. I do not hold their destinies in my hands so I cannot have that level of control over whether they listen to me or act on my advice.
In the beginning, this was a source of mild frustration because I would tell my startups that something was wrong or could be better in that way, but yet they would seem to not do what I just told them to do. I realized that early on that my advice was just that; it was advice that someone would just add to their knowledge base and they would act on it or not.
Not Letting Grinfucks Get to You
I also have to let go of the fact that they may not listen to me at all, or totally disagree with me and discount whatever I advise. Sometimes they would even agree with what I said and then go back to doing whatever it was they were doing later (I believe this is what Mark Suster calls the “grinfuck”.). However, I can’t let this get to me or else immense frustration will set in.
However, as much as we see someone else is failing (by our own standards), I have to admit that there is always the probability that I am not right. If there is anything I’ve learned about product design is that there is huge variability of success amongst users. I think if we thought hard enough, even the most crappiest designed products have had huge success in the world (ie. Windows). Or we underestimate users’ tolerance for imperfect design; sometimes users put up with so much because the product satisfies some basic need very well. Then, when you consider what makes a startup successful, it throws even more variability into whether or not a perfect design is really required. For example, one metric for success is when a big company buys your startup for a lot of money; you may have a really imperfect product but yet we’re successful because we sold our startup for a lot of money and made a decent return.
To me, this is all a probability game. Too often we get caught up in black and white: “if you don’t implement my design ideas, you’re gonna fail.” To me, it’s about maximizing all chances of success, with UX and design being one of those all important details a startup works on. When you execute well across a number of fronts, that raises the probability of success. The more details you execute poorly or imperfectly, the less your probability of success. So I ask you, the intreprid entrepreneur, wouldn’t you want to listen to some UX design advice to maximize your probability of success overall?
Gotta Keep an Endless Flow of Ideas Comin’
When teams don’t like my initial ideas, I find I have to keep throwing ideas at them until something sticks. In some situations, I seem to have an endless supplies of things to try. In others, I hit a wall and run out of ideas very quickly. It’s definitely frustrating to me when I run out of ideas, as I consider myself a pretty creative guy. But there is ultimately an end to ideas when they come from a single person, and from someone who doesn’t live and breathe the startup day in and day out.
Advising Generally Means You’re Not Doing the Work
However, advising is generally not actually doing the work. You’re evaluating, giving your opinion, suggesting changes, giving ideas and direction on what can work better. Rarely am I actually launching Photoshop or doing actual HTML.
I like advising. I like teaching and guiding others and it’s a source of great satisfaction to me to help others succeed. I also like to see if my theories actually work or not, so now it’s a challenge to see if my ideas are right or not. Second, advising allows me to cover a far wider set of customers than by doing the actual work. In order to do great work, you really have to focus on a project; multitasking can get you only so far and I’m sure anyone who is in the contracting business will tell you the pitfalls of working on more than one project at a time. Quality of the work, thought leadership, and time management all become huge challenges when you’re working on just one more extra thing.
The downside to advising is that I’m not doing the actual work. Advice can only communicate your ideas so far; words just cannot replace the actual design work being just done by you. To some, doing the work is far more satisfying than giving advice. Hey I know – I’ve been there. I’ve lost count of how many sites I’ve launched at Yahoo, or the immense enjoyment I feel when I’m part of team designing, building, and launching a product at Apple or through our contracts at frogdesign. You also don’t learn as much unless you’re doing the actual work; living and breathing the design allows you to be immersed in the users and their problems with your product. Hearing it secondhand just isn’t the same.
I think for many designers, it’s tough to just give advice. It is hard to let go of the immense personal satisfaction and learning of doing the actual work. I think this is partially why there aren’t that many designers out there giving advice in some form or another. It’s actually pretty cool to be doing the work and taking a product all the way through to launch.
One other important point about doing the work: it also maximizes the chance that your ideas will get implemented. Any ideas you may plant in someone are just thoughts; taking those thoughts to action requires firm belief by the listener in what you said, being able to internalize it, and then act on it. But if you are on the team doing the implementing, then you have the best chance of implementing the ideas into the product because you already believe in it and have internalized it, and recognize and can walk a path to realization of the idea.
Not Doing the Work Means Wider Coverage of Projects
One advantage to stepping back from the actual work is that you can cover a wider variety of projects simultaneously. I do not know of any designer who can handle more than two projects at the same time; most only work on one at a time before moving on. Spreading your brain across multiple projects really puts quality at risk. It is very difficult to do your best work when you’re not focused on one thing.
However, if I’m giving just advice, I can do that across many more projects. Still, it is consistent with multitasking issues that if I don’t get depth on a given project, that it’s hard to give really detailed advice. So often I may spend more time on a single project and get to know it better and then I can give more depth in my advice. I do think my past Yahoo experience as been a great advantage here. At Yahoo we worked on a wide variety of projects and I am usually able to bring some depth to my advice without needing much time to get to know a project.
The Difference Between Design Advice and UX Advice
Just so I’m clear – I think there is a difference between “design” advice and “UX” advice. Definitely the two are related. Building a great user experience pretty much means you’re employing great visual and interaction design, coupled with user research to reinforce and inform. However, I think there are differences as well. Mostly, I think that design is a subset of creating the entire user experience, which encompasses branding and its effects on a user’s constant use of a product, tackling a certain market segment, and customer service, among other things.
When I give specific design advice, I tend to think of looking at the specific elements on an interface and commenting on the interaction or its aesthetics. I talk about placement of controls, and what is confusing and what is not. I talk about the flow across screens and whether or not that makes sense, or could be easier or not. Often this comes in the form of a design walkthrough with discussion after.
However, when I give UX advice, my comments go wider and I talk about the entire product experience. A conversation may start with “can I get help on my GUI?” but sometimes I see the problem is not with the GUI but it’s with a broader issue of why the heck we’re doing this in the first place. I start talking about who the customer is, and why they’re targeting the customer. I also talk about getting a better product definition and problem statement.
Personally, I think it’s not a good use of time if the problem statement is incorrect in the first place to dive into detail UI issues. Once you have refined the problem statement (aka iterate until you find the right product fit for a customer base and get a scalable business model – thanks, Steve Blank!), then we can start talking about whether the UI you have created is appropriate for that or not. Then we can take an orderly approach to crafting a superior UI for a problem that users desire a solution to and hopefully make money off of.
Finding the Right People
OK I just expounded on my experiences in giving design and UX advice. Why? It’s important to understand the motivations and experiences of a person who loves giving design and UX advice so that if your goal is to find similar support, you’re going to have to find a person with similar motivations and experiences.
I have not met many people who are happy giving design advice only. Most designers I have met want to do the work and derive great enjoyment from the work. At one time, I too loved doing the work; however, the complexities of life forced me to create a situation where I could still contribute and grow in my experiences but not mean that I am on critical path for any particular project. (Someday, I would be happy to talk about exactly what complexities I mean here, but just not in my blog but live over a beer 😉 ) Giving advice rather doing the work meant that I could still be part of the process as well as be a part of a greater number of projects, but not do the actual work because my life isn’t structured to deliver actual work well.
So if you want design and UX advice, you’re going to have to find someone who is OK with not doing the work and hopefully loves doing this.
I started this post by talking about helping a friend out regarding design support in incubators and then focused on the individual giving advice, in order to understand what kind of person might be good in such a role and what experience they might need. Watch for my next post on my thoughts on design as a central resource in incubators.

The Bastardization of the Terms “Designer” and “User Experience”

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OK I’m annoyed.
All around the startup circles I hear about how startups need designers and how having a talented designer is going to solve their product UX problems.
This is a problem.
That’s because getting a talented “designer” isn’t necessarily going to fix your UX problems. There are many problems with this idea:
First, a product user experience is much broader than design alone. There are many elements that create a great experience for users with your product. The front line is held by the GUI where a designer usually plies his skills. But there is also product stability and quality, pricing, customer support, branding and marketing – you get the idea. Sometimes your product experience’s problem is not design by something else.
Second, there are many talented designers who are really bad at crafting a great user experience. In my experiences at hiring designers at Yahoo, I have found that some designers, while extremely talented in the areas they are skilled in, were really bad at creating a great user experience! This is because they do not have the open sensitivity to what others need in the product, cannot escape designing for themselves, or simply lacked training in creating a great UX. We have successfully trained some people to follow traditional UX design processes and thus made them into great UX people. However, not everyone is good at UX; they just lack some innate sensitivity to what makes a product useful, usable, and desirable all at the same time.
Having said the previous, there are many great user experience people who have no traditional design training whatsoever. Having one of these lead a product team may be all you need to take a mediocre or bad UX and create a great one. Typically we call these folks great product people and they can come from many different disciplines.
Third, people still use the word “designer” to mean a wide variety of skill sets and occupations. These are:
Visual Designer – someone who is great at aesthetics and “styling”, and creating art. They are masters at creating a visual style for your product.
Interaction Designer – someone who is great at creating great interactions with the product, making it easily usable. They are great at making interfaces understandable and quickly learnable.
User Researcher/Usability Engineer – someone who excels at researching users and their needs, watching and recording their reactions to products both the good and the bad. They gather data to inform the design and improve the product.
Each one of these skill areas is a full discipline in its own right. People go to school for 4 years, do graduate research in them, and then work solely in this area as a full career.
Thus saying you want a designer doesn’t help me find the right person for you. We have to figure out what kind of designer you really need based on the problems you are trying to solve, or the holes in the skills you have.
By the way, every startup has headcount issues. So they want that guy who can do it all. Realistically, there are people who have skills in all those areas. But they are the most sought after folks on the market, and there are so few of them to go around. To wait for that perfect person to show up will mean that you are going to wait a long, long time.
Typically, in the past, we have put together a team of 2-3 of the various functional areas to work together on creating the UX. Finding people who are really good at any one of the skill areas is the easiest; finding someone with 2 or more of those skill areas grows quickly exponentially impossible in any reasonable timeframe.
As mentioned before, potentially it is more important to find people who are great product people: those who are talented at creating great user experiences need not be designers per se, although it is necessary to have design skills in order to do the actual work in creating it. Without those skills, a product person would have to work with others to do the detail work. Therefore, a great product person leading a team of people who may not be so good at UX (ie. designers, engineers, etc) can generate an awesome result.
However, there are a lot of people in the design field who are trained in designing great user experiences. Thus, great UX people tend to be those with a design background. But still, not all of them have to be designers.
All startups would agree that at early stage, getting the product experience right as soon as possible is probably more critical at this stage than any stage in the life cycle of a company. But let’s get a little more educated and specific on what it means to create a great user experience, what design’s role is in that process, and which design roles we need to create it.

Referrals Get My Attention

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Lately I’ve been going through my info@ email address which I put on my site. It’s a throwback to when it was proper to put a contact email address on your website to be a good netizen. However, whenever I check it, it’s always filled with cold calls: random emails with business plans (often from Nigeria!) and then there are some that are totally not within my stated interests on my website. Occasionally, I do get the important email from someone who is trying to get hold of me, like an old colleague or some organization that wants to get hold of me. But most of it is unfortunately tends to be cold call emails asking for my investment.
This morning I saw @davidhornik tweeted:
Spending the morning talking with students about the power of networking. Cold calls are for suckers.
That last line says it all: “Cold calls are for suckers.”
It is so true. Those emails I get in my info@ inbox are just that: cold calls which I will never engage with. I know that sounds cold and uncaring but it’s true. Why is that? It’s because I use referrals as an effective filter to be able to tell whether or not somebody has some sort of legitimacy or not. Otherwise, I would get deluged with a ton of meetings that would inevitably be a waste of time for both me and the entrepreneur.
Thus, 99% of my deal flow comes from trusted sources: friends, fellow investors, other entrepreneurs, etc. These are sources with whom I’ve worked and know that they value the judgement call they place on sending a referral over to me. That’s because giving great referrals is a relationship building tactic, and giving bad ones is definitely not.
Then @bfeld published an article on the Business Insider called If A VC Turns You Down, Don’t Ask Them To Refer You To Someone Else which also talks about how not to ask for a referral. His last paragraph hits home:
Venture capitalists take referrals seriously. If someone I trust e-mails me a referral, the first thing I do is ask the VC for more information about the person being referred and whether the VC is interested in investing in the person. If the VC doesn’t know the person, I immediately question the validity of the introduction. If this happens regularly, I heavily discount the value of any introduction from the VC. This is a self-correcting phenomenon. Good VCs are careful with introductions because they want to make sure both parties view the introduction as valuable. Hopefully entrepreneurs understand this dynamic.

Smart relationships know and live Brad’s comment. They know that there is value in giving great referrals and know when not to give a referral.
To get my attention AND if you don’t know me, find someone who does know me; entrepreneur circles in the Bay area are pretty small and I think it would not be hard to network to someone who is connected to me. If you pitch them well, you’ll get a referral to me and, thus, my attention. But don’t send me random emails to my info@ inbox.

Can’t Escape Sex Appeal

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I’ve come to realize that startup investing is very much like my experience with online dating sites. Despite dating sites attempting to match people via their personalities, attributes, and interests, it still really boiled down to one thing: how they looked in their profile pictures. I know that sounds incredibly lame, but after trying dating sites and also talking to others who have used dating sites more than me, the main reason why someone responds is if you like how they look in their profile picture and whether or not you’re attracted to the way they look.
I have found that a major reason why I invest in a startup is if I feel some kind of personal attraction to it. Some of those personal reasons are:
1. I’m personally interested in the area that the startup is working in.
2. I have some emotional connection to their project, perhaps due to some similar project I had worked on in the past.
3. It tickles some intellectual part of my psyche, and my desire to learn more about their space.
4. There is some inherent coolness to their project, and that coolness may rub off on me from a brand perspective of being associated with it.
…and so on.
However, none of these reasons have any kind of relation to whether the startup makes any kind of business sense. A startup could very well have a strong business case, even up to the point of having lots of traction and revenue, but yet be unsexy to me. I think there are many untapped business areas that aren’t all that sexy and therefore ripe picking grounds for new entrants to disrupt old businesses in those areas and do very well. In fact, I’ve met some, BUT…have found that I just could not pull the trigger.
I’ve come to realize that it just boils down to personal attraction. On a dating site, I found that if a profile picture wasn’t attractive to me no matter what the site said how much her attributes were compatible with mine. The same goes with startups; if for some reason the project isn’t all that sexy to me, I just can’t seem to bring myself to do it.
As an angel with limited resources, I need to deploy them smartly and maximize their value to me, which also includes a sexiness component. That’s not to say that there aren’t angels out there who would take a chance on something unsexy to them; I think that for them, it’s more about being part of a great business and building it then the inherent product area they are working in. Me, being a product and UX guy, I love being associated with products I love, which introduces an inherent sexy bias when deciding on whether to invest or not.
I think that if I were running a fund, my decision process would be broaden to less sexy projects. Still, we have limited time and resources and need to make sure value can be added to the startups even in a larger portfolio and need to pick wisely for the reasons we have. I think that when you’re investing someone else’s money, you’ll have to think twice about passing on something that can produce a gain for your investors.
However, all this sucks for entrepreneurs who are working in business areas that aren’t part of what’s hot right now. Real time? Ride the excitement of Twitter and Ashton Kutcher! Social? Maybe that’s so yesteday. Social gaming, now that’s sexy! Virtual goods yeah! Processing waste? Yech, even if it is profitable. I think you get the idea.
How does an entrepreneur combat unsexy? I think it’s like improving your chances on a dating site:
1. Some people just aren’t attracted to you, so you’ll just have to get over it. There will be some investors who just don’t think your project is interesting enough to them and you won’t be able to convince them otherwise.
2. Improving your profile picture helps a lot. So how do you improve the way your startup looks? You may introduce some interesting component to your plan that makes your project more sexy. You might actually increase the sexiness of your visual/interaction design. That in itself may be enough to sway an investor to like you versus not.
But beware of pursuing sexy for sexy’s sake. Even though we may look for dates of attractive people and they may be eye candy to us, in the end, it’s what’s underneath that drives whether we will go out with them again. So even as you dress up your project, it may take you down a path that is detrimental to your future. It may even waste your time as you should be working on your core product.
3. You could rewrite your profile description to be more fun and engaging, which in theory is a reflection of how cool and fun you are. This is like creating a better pitch deck, or sexy prototype, or some kind of cool new UX for your product.
4. You could learn how to chat better and be more interesting and fun, which is probably a skill that is more for men than women and sort of like learning how to pick up girls. This is worthwhile both before the actual face to face and during the date. If you write an engaging first message to a prospective date, that can solicit a response better than a boring, lame one. Certainly chatting up someone better during a date will have a great effect on whether you get another date. This is like when you may simply just pitch better and that can be sexy in itself when the sales job is so good you can’t resist falling under the spell of a great pitch guy.
5. Go and find someone who likes you the way you are, which means that being on a free for all dating site like Match.com is not right, but maybe eHarmony is more for you. Tackling a non-sexy business in the world of sexy can be tough, even if the potential benefits are clear to you. As in dating, you should probably go and find someone who loves you the way you are now, versus trying to put on a different dress or suit, or changing your make up or hairdo.
Thus getting introduced to the right investor, who actually does know something about your industry, can get you the resources that you need.
Still having said all that, it may not be enough to convince me to invest in you. I just may not find you sexy enough even if you are wearing a thong bikini…

Tips on Demo Day and Afterwards for YCombinator Startups

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These last few weeks I’ve been part of the Ycombinator Mentors program where we get a few of the YC startups to hang with and help them, as Paul Graham puts it, “convince us to invest in them.” It’s been a great experience going through product and business issues, and helping them shape something meaningful and hopefully world dominating with their initial ideas.
I just completed this email to send out to my mentees (is that a word?) as I realized that, after attending several YC Demo Days, that I have seen a remarkable number of the teams not take advantage of the opportunity to really engage with the audience of investors, reporters, and corporations. As both a reminder and a call to action (mostly to make introverted engineers break out of their shell!), I listed some items that might help. I think it also helps to know how we feel on our end, as we sit through 20+ fast paced presentations and then enter a whirlwind of conversations after.
Here’s the email:
I thought I would send some thoughts on handling Demo Day and its aftermath (if anything to be a good YC mentor..!) as I’ve seen some YC teams really handle it poorly. This is not about the presentation as I’m sure that PG and others are hammering you guys on getting that good. Rather, this about what happens during Demo Day after the presentations and how to manage the crowd, and even afterwards.
BEFOREHAND:
1. If you don’t have business cards, get some made now! Go to FedEx/Kinko’s and give them an illustrator file. They can make business cards overnight.
2. PG undoubtedly has an attendee list; can you get that from him? Review it beforehand and try to prioritize those people to meet. Keep it in your pocket and check off people that you meet and make quick notes on interest, experience, follow ups, next steps, etc.
If you can, prepare beforehand a little about what you may talk to certain people about. This can be as simple as knowing a few of the recent investments an investor has made, or how you can help Google build one of their products better. Or perhaps you’d like to get in touch with someone’s portfolio company. This can be as simple as a conversation starter to break the ice, or as big as trying to do a deal with Google to integrate your technology.
3. Think about your own status. Are you raising money now? Soon? Or not? Have you raised money already? Looking for business partnerships? Want to sell out or get acquired right now?
Make sure you decide as much of this beforehand as it will undoubtedly affect your conversations. You will inevitably be asked, “are you raising money now?” and you should have some sense for yes or no, and if yes, for how much. You want to be confident in your progress and in your answers, not wishy washy. The worst thing you could say is, “well, I don’t know…maybe…we’re not really sure yet…hem haw…” But also, don’t lie or make things up. This is more about anticipating what questions will be asked of you post-presentations and just taking a bit of time to prepare your response.
4. Try to get a good night’s sleep the night before. Try to arrive at the top of your game, not sleep deprived and/or over-caffeinated.
AT DEMO DAY, AFTER THE PRESENTATIONS:
1. The crowd as you can imagine is filled with reporters, corporate representatives (typically from venture arms), angel investors, and venture capitalists. It is really like speed dating; you should get out there and meet as many people as possible, getting their contact info and gauging their interest in you.
It will be, and expect it to be, overwhelming. It is definitely overwhelming to us. We’ll have been overloaded by the quick machine gun set of presentations and trying to absorb it all, and then we’re thrown into fast smoozing with those startups that somehow have grabbed our attention. We’ll be scribbling fast notes on our Demo Day sheets and then we’re going to try to go back and figure out who we want to meet first before we have to leave.
2. Don’t be a wallflower! I’ve seen some teams hang on the sidelines and not mingle. This is bad! This is a chance for you to meet and try to woo some investors to be interested in you! If you don’t meet them now, you may never get a chance to interact face to face with them again. If you have more than one founder, split up and meet more people! There are 20+ teams this time; everyone is going to be competing for attention of the audience. Get in there and meet!
3. As you get business cards, make notes on the back of their cards as well. Stick them in a safe place and don’t lose them! I’ve met many people who simply lost my business card and somehow found me later. Bad!
4. Regarding reporters: you probably have never gone through media training but it’s not hard. You should just prepare some great sound bites for reporters to hang onto and include in their writeups. These are simple sentences that sound great, and of course promote your product/company/service.
5. Be lively, upbeat, friendly, excited about what you’re working on, and excited about future prospects. I think that engineering types tend to be very introverted. Unfortunately, this doesn’t serve you well here! So go out and be an extrovert. Force yourself to go out and meet everyone and to be Mr. Fun and Cool with the best product in the world to talk about. People react to and engage with people they like; boring, uninteresting people get left behind. It sucks but it’s true.
So psyche yourself up for some power smoozing and have a positive attitude about it. This won’t be the last time you’ll be power smoozing for your business!
6. Gauge whether a conversation is going nowhere or somewhere. Lack of interest, conversation seems to slow down or feel strained, etc. all are signs that you should disengage gracefully and move on to the next person. Shake their hand, make eye contact and say nice meeting you and move on!
Definitely stay with someone a bit longer at least if they are interested in you and what you’re doing. But don’t extend the conversation too long as you only have about 2-3 hours after the presentations end to talk to all the people you want to talk to. People start trickling away after an hour of smoozing; remember many people have other meetings and places to go. It’s very rare that people stay all the way to the end! Again, disengage with set action items to follow up, and with contact info exchanged.
AFTERMATH:
1. Write a follow up email to everyone you met! Say hi, it was nice meeting up and you’d love to get together to talk further. Remind them with what you and he discussed.
Keep in the mindset of the folks you meet – remember that we’re going to be totally talked out and our brains won’t be able to remember all the conversations and people we’ve met. We’ll have gone through so many people in so little time; it’s overwhelming and you will want to rise above the noise by following up.
2. Keep an email list of everyone you met for updates. This is to keep reminding everyone of the progress you’re making. Don’t spam this list; just put out an update once a month or every two months. This is also to keep in everyone’s mindshare. Even if someone doesn’t invest in you today, they may invest in you tomorrow when you’re bigger. Or they may contact you for a deal, or to acquire you. They won’t do any of that if they forget about you.
3. Pursue those follow up meetings! Get feedback on why someone isn’t investing and improve yourself, your product, and your pitch. It’s amazing how I’ve had to contact people afterwards and chase them down. But that also signals poorly; aggressive fund raisers who don’t give up are those who succeed in raising the money they need. Passive entrepreneurs only increase the risk that they will fail, because they aren’t aggressive.
A lot of this is basic smoozing, or “How to Work a Room” 101. I just wanted to bring it up because while some of this is basic, it’s been obvious to me from attending past Demo Days that many YCers either haven’t learned it, or maybe forgot about it in the heat of prepping for Demo Day.
Looking forward to Demo Day next week!