I just read Mark Hendrickson’s post-mortem for Plancast on Techcrunch and the section on sharing frequency hit a chord.
When I meet startups, I mentally run their product or service through this test, which is the test of frequency of product usage by their customers. Simply put, if the frequency is high, then their product idea stands a greater chance of surviving in the marketplace. If the frequency is low, then the probability of dying is much much higher.
What do I mean by frequency of product usage?
When a user uses a product tens or hundreds of times a day, this is the dream – to work on a product that is so necessary by a large customer base that they need to use it that much! An example of this would be email – too bad it was created and set free to the world because someone could have made a lot of money on that, or at least in the early days.
Once a day is not bad either. Once every few days still OK. I read the New York Times email digest and website once a day generally, so I can remember to go there. What about the other news sites? Hard for me to remember which ones I do read when I visit them so infrequently.
Once a week – hmmm – getting to that limit. Once every 2 or more weeks and I think you’re in trouble.
That’s because people forget very easily what services and products they use, especially in this crowded world of me-too products. When your memory is sketchy, it’s easy for someone else to hop in there and supplant you.
Take travel services for example. How often do people really go on vacation? Normals tend to go maybe once a year, if that. If I find your site, use it to plan a vacation, and don’t worry about going on vacation until next year, do you think I would remember to come back to you? If you’re a startup, the odds are against you that you’ll even be alive by then.
This goes for both consumers or enterprise customers – if a business customer doesn’t find a daily or constant use for your product, then how can it find some justification for buying your service?
That doesn’t mean that what you’re working on shouldn’t exist, or couldn’t become a big business. The big problem is that you’re a startup with limited resources and survivability and some lower frequency services should really be done by more established companies. You, on the other hand, need traction and revenue as fast as possible before you run out of money. This is why frequency of usage is critical at early stage; if you have a product that people only occasionally want or want at special situations, you’ll never be able to build enough customers before you die.
So you have three choices. Either you must work on something that has a high frequency of usage, enough to attract users who find you useful enough to use often enough to keep coming back; OR you must find a way to buckle down and exist long enough for enough customers to sign up and generate enough traction and revenue for you to survive as a company. There is one other possibility and that is to add some high frequency elements to your low frequency of usage service to keep interest in and around your main service, despite the fact they may actually use the main service only intermittently.
Any of these could work and convince me to invest but working only on a low frequency of usage service in today’s super crowded marketplace definitely will not.

Charlie O’Donnell of First Round’s NYC team recently wrote a very important post entitled, Ignore startup history at your peril. It was so good and relevant to today that I’m adding it to my list in my post, If We Meet, I Will Ask You….
To summarize his post, he basically loves to ask startup founders why haven’t the previous entrepreneurs in his space succeeded and how did they fail. Given today’s proliferation of clones of every idea out there, or even near clones, it is hard not to be able to find competitors in the near past who have tried your idea and failed. Also, given founders posting a lot about their mistakes, and Techcrunch, et. al. documenting the closure of all these startups, it would seem relatively straightforward to dig up reasons why a lot of similar startups failed. Or, our entrepreneur networks are pretty darn small now; it would not be hard to go and simply ask around and thus find out about any startup out there.
Why would you want to do this? Well, it’s to not repeat the mistakes of the past. And if you don’t go figure out why someone else failed at what you’re working on now, the likelihood of you flailing through mistakes made by someone else is pretty high. I totally agree with Charlie wanting entrepreneurs to not only be experts in their respective spaces, but also students of the history of past startups who have tried and failed, and, by the way, also succeeded.
Many thanks to Charlie for bringing this up and I’m adding it to my list to ask entrepreneurs during pitches.

After I wrote my post Talk About the Problem, Not Just the Solution, I’ve had a series of pitches all characterized by the same thing: a singular focus on how wonderful the product is.
Unfortunately, I’ve got news for you all you MIT/Stanford/super-genius engineers and hot shot designers:
Product development is a commodity.
In today’s day and age, you can build just about anything. There are very few things out there being worked on that really require rocket scientists. But most of them don’t. Most products and services have plenty of models to copy from. Or if you don’t have something to copy, we have all these well defined processes to find solutions such as customer development by Steve Blank, as documented in his classes and in his book The Four Steps to the Epiphany, or Eric Ries’s Lean Startup principles.
So if that’s true, building product is not the problem. In fact, anything that is under your direct control is not a problem for your startup. And that’s why I’m not interested in seeing your product just yet; I want to hear about how you’re going to solve all those problems that you have no control over.
Every startup has approximately 1-3 things that will make or break their business at early stage and very, very rarely is one of them the ability to build the product (by the way, if it is and if it’s something that doesn’t require rocket scientists, you’ve got bigger problems than you can imagine, if you can’t even get your product built).
For example, I’ve recently met some local startups. They all showed nice product design but the real problem lay in how the heck where they going to scale customer acquisition, if there customer was every local merchant down the block, in every city, in every state in the US?
Now that’s worth talking about! Because if you can give me a convincing scenario where you may have a novel solution to this problem where so many have failed, your startup actually has a chance. But if you don’t have a great answer to that problem, your beautiful product is not going to magically leap into the hands of local merchants, and certainly not fast enough to get you enough revenue to survive as a company.
Usually it’s pretty straightforward to figure out what those 1-3 key problems are. If we can get past those, then we should take a look at what you’re building. Assuming you’re doing all the right things, I’m guessing that whatever you build is probably going to be good enough to start, or to get there after you launch.
But until we get past those 1-3 key problems, I’m probably going to keep interrupting you, derailing your pitch, until we do. Or if we can’t get past those key problems, I think you need to go back and figure those out or else it is unlikely that I will invest.

People who know me have heard me say in the last several months that I’ve “soured on internet deals.” Unfortunately, this has been misinterpreted as “Dave has stopped doing internet deals completely.” But this is untrue.
Internet is in my blood. I’ve been working on internet businesses since 1995 – that’s nearly 16 years of thinking, designing, launching, breathing, living internet. I can’t escape it and don’t want to.
I *will* do internet-only startup deals. But the problem is that the current environment makes it difficult for me to justify investing in internet-only startups. This is because:

1. Competition for internet-only startups is created too easily. Too often I meet an entrepreneur who already has competitors; how do I know that he will be the one who wins?
2. Competition stifles growth potential which can be deadly to an early stage startup who is watching their bank account grow less by the day while revenue and customer growth is slowed by the other similar startups attempting to sign up the same customers.
3. Competition creates confusion in the customer base as much of the company’s differentiation is very incremental or small. To a customer who is inundated with so many similar services, how do they tell who to buy services from? This limits the growth of startups which again can be deadly at early stage.
4. Extending on 3, not enough startups are working hard enough to differentiate exponentially versus incrementally. In today’s crowded marketplace, it is not enough to be just a little better; you have to be exponentially better.
5. New angel investors entering the market are inexperienced but also they have no choice but to invest in what is out there today. This fuels the existence and survival of competition in the marketplace when these startups should have been pushed harder to develop exponential differentiation instead of simply incremental.
6. Valuations are inching upward, while the quality of the startups is dropping relative to the conditions of the marketplace. When valuations rise above what I think the risk potential of a startup’s idea, it’s time I know that I should not play in the internet-only space. Now we are seeing notes without caps, which is the beginning of the end for why angels should be putting up early risk capital and getting little in return later when the note converts into a large up round with a venture capitalist.
7. Hiring is a nightmare across the board. Lack of resources limits a startup’s ability to scale. I have seen many startups who want to do more but simply cannot hire fast enough to do more.
8. SEO and viral don’t work any more. I’ve seen too high a dependence on trying to drive traffic in these ways, but too many people are SEO-ing in the same way, and consumers have way too much stuff to be viral about.

However, that does not mean I won’t invest in internet-only startups. It just means that they have to pass harder conditions. These are conditions like:

1. Little or no competition.
2. Understand what it takes to compete in today’s world and have some sort of advantage. Arguably, in 2011 now, people are competing now with competitive advantages in design/user experience and customer acquisition. This may also mean that you must raise a ton of money to: a) outlast your competitors, who will die because they couldn’t; b) out-market everyone else by spending money to buy customers since free methods aren’t as effective (ie. SEO) or too difficult (ie. viral). The world moves fast; potentially in a few short months, these factors could change.
3. The idea must be *totally* unique. That means if I search around Google or iTunes app store, I won’t even find near competitors of yours. If it is improvement over a previous product, the improvement must be exponential, not incremental.
4. Disruption of an old world industry is always attractive.
5. Some kind of technical advantage is also always attractive.
6. I must have an affinity, interest, and/or expertise in the area. If I’m going to spend time on your startup for a long time, it might as well be something that I think is cool.
7. They must have a world dominating vision and show unwavering determination to take over the world. We must both agree that their vision is a world domination vision. I want the entrepreneur to aim for a lofty goal that is game changing, and not just some tiny goal.
8. Another lofty goal: I want to them to figure out how to make $100MM revenue per year…or more.
9. Ideally, I see valuation at exit for the company in excess of $100MM. Otherwise, it will be hard to make money for my overall portfolio and not just on this one deal, given that many others in my portfolio will fail.
10. The entrepreneur must exhibit great entrepreneurial qualities, be tenacious, adaptable and not quit, because yes it is freakin’ hard to win in today’s internet-only startup world and I don’t want them to give up but instead it energizes them and ramps their creativity further.

I may, therefore, say no to investing in internet-only startups a lot more, maybe even 99.99% of the time now as I adjust my bar so high for an internet-only startup to pass. But I am simply reacting and strategizing to the realities and demands of today’s marketplace, AND the fact that I invest to make money, versus other non-money making reasons.

Who knows where the world will be in another year or two? Perhaps my bar will shift again. But if you have an internet-only startup which satisfies my new super-hard critieria, I would love to meet you.

I’ve got a new favorite question to ask entrepreneurs during their pitches. The question is:
“How do you get to $100,000,000 in revenue per year?”
After they go through their entire pitch, I zing them with this question. I hear their plans, their projections, and what they want from me; then I take all that they just said and ask them if they were to take everything they were doing, how can they get to $100MM/year?
More than anything else, this is an interesting thought exercise.
Let’s say nothing substantially changes from their plans, which is highly unlikely given what we know about startups, but just for now let’s hold it all somewhat constant. We take that and generate some revenue assumptions per customer. Then we take $100MM and divide it by that number to figure out how many customers we need in a year.
This is where the interesting part begins.
Sometimes we’ll look at the number of customers per year and melt at the impossibility (ie. “We need every person on the internet to be on our service to get to $100MM/year”). Then we have to adjust something. It may even point to potential inevitable pivots.
Or we may adjust that number to some realistic number of customers per year (ie. “Well, we can’t the number of users that visit Facebook every year, so let’s say that it’s some percentage of that, and then we’ll take a percentage of that which we can monetize.”) Then we adjust upward the amount of money we need to generate per customer. We take a look at that number and see if that is achievable.
We continue to adjust a bunch of variables and see if somewhere there is some believable outcome from our fiddling.
With one entrepreneur I recently met, he had never done this thought exercise before. And the result actually surprised us; we came up with a number that didn’t look insurmountable at all! Wow!
Most of the time, though, we come up with some maximum potential revenue number that is less than $100MM. Sometimes it’s not bad, like above $10MM but less than $100MM. Sometimes, we just are struggling, trying to get to even $5-$10MM.
I think more entrepreneurs should go through this thought exercise with their projects. I believe that this is essential to creating a fundable startup and eventually a world dominating business. While there are many investors who are OK with someone working on experimental or feature level projects, or those that aim for smaller outcomes, I just don’t have the right resources to support a whole bunch of them, knowing that a ton of them will fail for me as an investor (by failure here, I mean that it will not give me a substantial return on my money; certainly success of the startup can mean a ton of other outcomes, like even a talent acquisition). So I must work with those startups which can get to some large size, like targeting $100MM/year in revenue.
So adding another item to my post, If We Meet, I Will Ask You…, I will begin asking each entrepreneur to go through the thought exercise with me on how they can take their projects and build a $100MM/year business.
If you go through the thought exercise, you maycome up with some seemingly impossible looking outcomes which can be discouraging. But sometimes, you may even surprise yourself in that it may even be in the realm of the achievable.

After blogging about a variety of topics, I find that they form the core nucleus of the things I care about before investing in a startup. Yes, I also care about the usual stuff like smart entrepreneurs, great idea, etc. But I think there are things that I’ve been focusing on assuming we get past the basic stuff.
So if I meet with you, you can expect discussions on:
1. What’s your world domination plan (and more on why it’s important to have one)? How can you avoid just becoming another small business which is not a reason for not existing, but does bring danger to us investors?
2. I’m most likely going to try to talk you out of being an entrepreneur.
3. Most startups I meet are working on me-too products, even if they don’t think so. How can you not be about just developing a me-too product?
4. Are you planning on lasting two years? If you aren’t and you need time and money to pivot, you won’t be able to raise money in this climate because second chances are impossible to come by.
5. How are you going to make money? Please, no more projects that are just going to gain lots of users…
6. If I were to envision the The Ultimate Product (and Part 1.5), would what you’re building be that product, or on the path to that product?
7. How are you going to gain customers – distribution is by far the number one problem facing internet startups today (see me-too post and my combining startup investing and distribution post).
8. [UPDATED: 2/4/11] How will you get to $100,000,000 in revenue per year?
9. [UPDATED: 6/14/11] Study past startups and competitors and learn from their mistakes and successes. Tell me how and why you’re not going to let history’s mistakes repeat themselves.
My hope is that not only you will have great answers to all these questions, but you will also internalize and truly believe in those answers yourself, and that your answers aren’t just lip service. Hope to see you soon at a cafe near you!

OK I should build IKEA furniture more often. Spending the last 2 hours building a new dresser from IKEA meant that my mind kept drifting back to The Ultimate Product and why it makes me feel uncomfortable when the Ultimate Product doesn’t match what the entrepreneur is actually building.
I think it means the probability is high that they will need to pivot at some point because they are off target from the Ultimate Product. While pivots are a fact of life for entrepreneurs, the problem for me is at early stage where I invest.
Most entrepreneurs only plan to last for a year on their current fund raise to my chagrin. If only they had planned to last 2 years, it would mean that they have time and money to pivot. But they will die before they can because they will run out of money and begging for more isn’t going to work in today’s funding climate.
So if they are, in my mind, off target from their initial mission and the resulting Ultimate Product, the chance of pivot is very high and they will be out of funds by the time they realize that what they are building isn’t going to be widely accepted by consumers and can’t pivot. Thus, if they don’t plan on lasting two years, it makes me not too confident that they will last long enough to get somewhere stable and growing. As an investor, this doesn’t make me want to invest…!
Do I believe this is a certainty, that if they aren’t quite on target to what I think is the Ultimate Product that they will surely pivot? Of course not. I recognize that I could be wrong, and that a better product than the imagined Ultimate Product could arise which also satisfied the consumer/market need. I think this is all a probability game and I’m just trying to increase the odds of success. This is definitely something the entrepreneur needs to weigh as well, especially if they are off target from the known Ultimate Product.