Category Archives: Startups

Why Won’t My B2B Client Sign Up for my Awesome Service Today?

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Lately, I’ve encountered more B2B startups. I think it’s a sign of the times, where B2B startups can provide some early revenue much sooner than for consumer startups who have to chase dollars out of elusive internet surfers.
However, I’ve noticed that there is no lack of frustration in the length of time it takes to close a B2B client. This is definitely due to the fact that many entrepreneurs are young and have not worked in big companies before, or certainly not in their current clients’ organizations.
Having worked at IBM, Apple, and Yahoo!, I can tell you that big orgs have their peculiar quirks with respect to doing deals with service providers. Let me take you now into the mind of a big company person whom you’re courting to buy your service…
Meet Mr. Big Company. He might be in any number of occupations, but let’s talk about two types of Mr. Big Company: the IT guy and everyone else. Why do I separate IT guys? They have special anxieties about signing up with your service over and above anyone else in the org. More on that later.
Let’s say Mr. BC (for Big Company) is not the IT guy and discovers your service. He loves what you’re doing; he sees instant value in making his job easier, better, faster, stronger, whatever. But typically, he has no engineering at his beck and call. So he is forced to either sit frustrated or go outside the company to find help. But if he decides to try to implement you, here’s what he’s working with…
Based on where he sits in the management hierarchy, he has the ability to pre-approve up to a certain amount of expenses before having to get approval up the chain. Ideally, whatever your service costs is under that amount, or else he needs to go to his manager, and potentially his manager has to go to his manager, and so on and so on.
Mr. BC’s department has a budget, and the budget is broken out into several categories of expenditures. Woe to he, if he did not ask for the money at the beginning of the quarter, or even potentially at the beginning of the year! If it can be fit into some category of his budget AND he has funds in that budgeting item, then he can potentially spend money for you.
Funny thing is, if he has a budget for something and he didn’t spend it the last year, he may lose the ability to gain budget for it in the next accounting period AND even have a reduced ability to argue for it! So if you can find someone who has to spend his money or lose it, you’re in luck!
If it’s not in his budget, then he has to go through a potentially vigorous process of asking for more money. This can be an extremely time consuming process as he convinces his manager, and then they go and try to convince their manager, and then even potentially the finance person who oversees their department, or even the CFO if it’s a small org.
The more levels of approval it takes, the higher the chance it will get killed. The more skilled the person asking for the money is, the higher the chance that it will succeed. All of this presupposes there is a bucket of money to pull from when they do get approval. Also, the more levels of approval it requires, the more time it takes. This is why it can take the better part of a year to get approval to do seemingly something small.
If Mr. BC is part of a matrix org which depends on other departments to cooperate, then he must also sell all the other department heads on implementing the service. If some marketing guy wants to implement some traffic driver onto the web pages of their website, then he must convince the web team to take some of their valuable time to implement the service. If the visual design of the service needs to be customized, then the design department and brand management may need to review it to make sure it is done to standards.
This will inevitably cause delays both in approval and in implementation.
Mr. BC is excited about your service, but he is also paranoid about you making him look bad. Thus, he will do some due diligence to ensure that you are reputable and that you won’t screw him later on, and that you’ll be worth all the time he put into fighting for budget and other parties’ agreement to implement the service. At any moment, he feels like he doesn’t trust you to do well, he’ll bolt and not bother with you.
However, it can and will take time to build his trust. He may drag his feet to see how your service performs with other clients. It’s no loss to him; he’s not any worse for NOT implementing your service.
OK let’s say he’s a special class of Mr. BC called the IT guy. He’s both the go-to guy and the guy people yell at when things go wrong. He’s never fast enough to fix anything, and he gets blamed for everything that goes wrong. So after a couple months of this he says f**k this and he becomes ultraconservative simply for job preservation.
Along comes you and your awesome service. He may be the one who wants to implement your service, or worse he may be the guy whom SOMEONE ELSE wants to implement your awesome service. If he wants your service, he’s at least like the other Mr. BCs and has to go through items 1 thru 4 above.
But if he’s being asked by someone else to implement your service, then that raises the level of conservatism. Now if you fail, he gets to fail AND gets yelled at by a whole bunch of people.
So he takes his time in evaluating you and your awesome service, tapping into every little bit of your business and product, trying to find any small reason to say you guys suck and that his company shouldn’t implement you. This means more delays, which just overall increases your frustration as your bank account runs lower, and increases the chance that it will just die through the approval process in the company.
If it dies, he’s still OK; problem averted – he’s covered his ass and doesn’t have to take a chance on risking his career and his blood pressure on supporting and implementing you.
But IT guy isn’t done with you after launching your awesome service; he’s gotta watch you forever or at least until your contract ends. He gets to be stressed about you for the life of your relationship with the company. So he’s not only doing his due diligence on you to ensure good service at launch, he’s worried about you providing good service for years to come. Otherwise, it will fall to him to fix whatever mess you got him into by screwing up.
Hopefully by now you can see why the Mr. BC you’re dealing with seems to be dragging his feet. It sucks and it is very, very rare that you encounter an org that moves differently.
How do you combat this?
First you must sell well. The basic benefits must be bought into and hopefully you’re good at this or else your company is doomed anyways.
Second, you gotta go in with the attitude that you will do everything you can do not make your benefactor look bad. How this happens is by:
1. Creating a service that is bulletproof. It doesn’t crash, and will work 24/7 for years, even after a nuclear bomb hits your building. Remember that if you become a key part of someone else’s business, every second that you are down could mean that you are losing another company thousands, if not millions of dollars in revenue. (If you don’t believe this, consider that whenever the Yahoo ad server went down even for a couple of hours, it meant huge swaths of revenue not recognized because ads were not delivered. It could affect quarterly earnings outlooks and incur the wrath of your best customers who may not come back!)
2. Delivering on what you promise and what the service promises. There are two things here. You, as the company rep, are make some assurances that your product is going to deliver to Mr. BC’s expectations. He’s going to buy into this based on his relationship and trust to YOU. Then it’s up to the service itself to deliver to whatever expectations you set for it.
3. Providing great customer service, 24/7 if need be. If a problem happens at 3am, someone needs to get up and do whatever it takes to get the service up and running. You must answer emails and phone calls ASAP. Responsiveness on all fronts is key.
4. Building a reputation of trust, which can be through happy existing customers but also through your own personal handling of the relationship.
Third, you can also do other things like providing as much ammunition for Mr. BC to use within his org to get it approved as fast as possible. Help him sell it within his org! Case studies, stats, referrals, whatever info he needs – you should gather it and send it to him ASAP.
Doing all of the above and having a sensitivity towards the issues that Mr. BC faces within his org will result in better understanding of the issues and hopefully a speeding up of getting your B2B client to sign up for your awesome service as soon as possible.

Hiring and Succeeding in a Multidisciplinary World

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Decades before the coming of the Internet, we could confidently go to school, get a major, and then get a job in that discipline. I could get a BS in Marketing and find a marketing job at a great company, and know I had learned the basics of what I needed to know to start at a job and suceed from there.
Along comes the Internet which turns this all upside down. I see this everyday in the job postings that internet startups post. Some typical ones:
1. UX Designer – Someone that can do visual design, interaction design, usability testing, and also translate visual designs to HTML/CSS code or Flash.
Internally I cringe when I see this kind of post; when people ask for my help in finding this person, I tell them that they should either 1) prepare for a long wait, or 2) prepare to really be hiring four people. Why the long wait? Because it is almost impossible to find people who can do all 4, let alone even 2 of the job description. Visual designers are trained in visual aesthetics, a discipline that is decidedly non-technical and totally subjective in nature. Interaction designers are experts in structure and how users interact with products and interfaces, which has a relation to but does not need to include visual design. Usability testing requires knowledge and training in statistics and testing protocols, which are even more different than the basic skills required for visual and interaction designers. Argubly, usability testing professionals could require no design sensitivity whatsoever to perform their job well.
In years previous, universities have not adequately cross trained people on all the design disciplines. Certainly even peoples’ brains aren’t generally wired for creativity and technical disciplines together; you more often find a propensity towards one or the other but rarely for both.
2. Internet Marketing Expert – Someone who can do SEM, SEO, Word of Mouth blog marketing, brand management, marketing materials for sales, public relations.
Let’s see, that just about covers the entire old discipline of marketing plus the new ones of SEM and SEO! Even CMOs can rarely say they’ve worked in each of the old marketing roles. If we split it into technical and non-technical, we find that SEM/SEO are on one side, and the remaining on the other side. Now we’re requiring marketers, who aren’t really technical and numbers people, to now engage with numbers and to be experts at it. If we add SEO into the mix, now they have to understand what drives search engine ranking and how to wrangle HTML to make it more search engine friendly.
Again, we mix multiple disciplines, with creative and technical angles, into one person who can do it all. Many more examples exist: SEM Engineer, Web Designer (HTML/CSS + Design), Flash Designer (which requires true programming skills to create Actionscript) – the list goes on.
So why do we have this problem now?
In years past, we would go to college and get a degree and be able to find a job. If we had some area of expertise, like in consumer electronics or fashion, then it would make it easier to find a job in that industry. But crosstraining wasn’t required; corporations would hire people good for a task and there were enough headcount to do so.
Along comes the Internet which screws all of this up. So many changes:
1. Marketing becomes measurable! Now marketing isn’t just about getting awareness out there or subcontracting that out to advertising agencies. You could actually setup technology to get you response information on your marketing efforts. Optimization becomes possible on cost, targeting, and effort. Now you can compute the ROI of a campaign and know which campaigns gave you the most bang for the buck. Given the data of viewers of a campaign, you could target only those customers you wanted exactly (more or less) and be much more exact than saying “approximately 35% of the people who pass this billboard on a given day is a woman”. Effort could then be optimized to those channels and programs to maximize ROI with the least amount of effort. Being a marketing quant is now a requirement or else people don’t like you for the fact that you can’t judge the effectiveness of your own campaigns.
2. There is still confusion on where the new roles lie. Even though there is an M for marketing in SEM, does it belong in marketing or is it more a technical function? Marketing departments now require engineering sub-departments to help them function! What about SEO? That has a marketing application, which is to help drive users to a site through search ranking, but it is a highly technical endeavor, and marketing people don’t have access to a site’s code to alter it. However, traditional engineers aren’t even sure how to perform good SEO. So does it belong in engineering or marketing?
There is even confusion amongst design. In many companies, site design reports to marketing. But designers need to work closely with the product teams in order to be effective. And some design roles require even working closely with engineers to implement design. So should design be in the product organization? The engineering organization? Back to marketing? Even usability testing professionals have a heavy research bent; should that be part of the corporate marketing research group or product group?
Dependent on where the multidisciplinary folks end up, the roles they play and how well they play them are heavily influenced by the orgs in which they sit.
3. Startup fever rises, and everyone needs to be cheap and hire the least amount of folks. So they always look for that one guy to do everything design, or all marketing. Add to that the fact that many entrepreneurs are young and are encountering multidisciplinary roles for the first time, that they do not know that there are multiple areas of expertise that encompass some of these single title occupations.
Even experienced entrepreneurs have to stay cheap, and still try to find that one guy who can help do it all.
4. There is a lack of understanding of these multidisciplinary roles. I find that for design, people want someone to just take care of it all but I end up explaining to them that each part of the design requires different sensitivities and skills and that you can spend 4 years of college and 2 years of grad school becoming an expert in only of the areas, without ever touching the other areas. Even all those disciplines that are lumped under the generic term “internet marketing”, they touch on so many other areas and are sometimes even done better by those who have trained first in another discipline, like engineering.
Yes I’ve been harping on marketing and design, but this also applies to many other disciplines:
Customer Service – traditional customer service department, or marketing communications, or feedback for product team, or customer service via social media?
Engineering – “I want a database engineer that can also do front end engineering…”
Sales – “I want a sales guy who can also do business development, so selling online advertising and also calling on B2B customers…”
…and the list goes on….
The fact of the matter is, for Internet companies, it is almost a must that you be conversant in more than one discipline in order to be successful. Consider two design folks that I know, Irene Au (@ireneau), Director of Google User Experience, and Jason Putorti (@novaurora), formerly of Mint.com and now a Designer in Residence at Bessemer Venture Partners.
Both of them are accomplished designers. Yet both of them have engineering degrees and later got into design. In watching both of them, they were successful because they were able to bridge the gap between design and engineering and create success by melding the two on a variety of fronts, from implementation, to technical understanding, to being able to integrate design and engineering, and being able to simply communicate better with their engineering peers.
Contrast that with some designers on both my old team at Yahoo and in Irene’s team at Google. We both have seen designers who were very talented in their own right but simply could not either survive working on internet projects and/or interact successfully with their peers in engineering and product management. Chiefly we saw this happen to folks that were not able to acquire enough knowledge of other disciplines to be successful.
We can say the Internet has disrupted many old traditional businesses and business models, but I think that the Internet has also disrupted traditional occupations. Companies and their managers need to realize the difficulties of finding multidisciplinary folks and balance that with finding someone with fewer disciplines or doing more internal training to take talented people and adding to their skills. Universities hopefully are adjusting their curricula to reflect that you can’t just teach disciplines the old way; you need to teach them all those new ways that today’s working world requires and demands from its workforce. Workers today should also go out and cross train themselves in multiple related areas, whether it’s on the job or through secondary or self education. Otherwise, you’ll quickly find yourselves out of the job and unable to find a new one…

Advising with Influence and Resonance

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Being an advisor is tough. It’s all about influence. None of the entrepreneurs I work with have to do anything I say and it’s all about convincing them that something I say is worth listening to and executing on.
I had breakfast with my life/executive coach yesterday to catch up and she mentioned she was working on how to be a more effective influencer. In doing some research on the topic, she found that it is actually more about personal charisma than just straight intelligence and knowledge. For example, she related to me that smiling a lot and charm have a great effect on whether you are successful at influencing somebody or not. So it’s a lot like what effective salespeople are good at, which is using their personality to charm you while you inadvertantly hand over your wallet!
Towards the end of my tenure at Yahoo, I managed to land into two roles that were all about influence. The first one involved getting all the product teams to revamp their site designs to implement larger more monetizable display ads. The second role involved implementing worldwide a more disciplined and quality oriented product development process. Both required me to become a salesman and evangelist, two things I was definitely not. But I learned about how to get things done via influence and how much I still had to learn.
If you’ve ever worked in a role where you had to get things done with influence, you will agree with me that it can be very frustrating. Nobody ever reports directly to you and so you can’t force people to do anything. They may even agree with you at a meeting but then when everyone walks away from the meeting they go back to doing their usual thing and not what you asked them to do. In fact, I had even vowed that if I were ever to take another permanent role, that I would only do it if I had direct control of the team and my destiny.
But here I am, thriving as an advisor to 20+ startups over the last 3.5 years and enjoying my work solely built on influence.
A lot of entrepreneurs look to me to give them the answer. In fact, in times past I have delivered an answer but I have found problems with this approach:
1. The answer is often “my” answer but not the entrepreneur’s answer. This is because, given my experiences and expertise, that I would tackle the problem in a certain way and because it was me executing, I could probably make something out of it. However, if an entrepreneur doesn’t have similar experiences, then they have a greater chance of failure.
2. The early stage world is incredibly random and I have often found answers that I would not have done but yet have been successful. So what exactly may seem an answer today may quite often not be where you end up.
3. There are often many answers to the same problem. Again, back to point 1, what may be the answer for me may not be the answer for you.
This is why I hesitate to throw an answer out there unless someone is smart enough (like yesterday!) to ask the right question, which is “if this were you, what would you do?” This is important to frame the answer correctly so that the questioner realizes that my answer to the question is more about me than him. If I were the entrepreneur, this is how I would do it – but you’re not me!
My approach has morphed to a more “throw ideas out until one sticks” method, basically putting so much out there until something resonates with the entrepreneur and team.
This resonance is very important. Everyone comes to the table with strengths and weaknesses and all the experiences they have. Thus, whatever idea they run with has to be something they are resonant with and can run with because they will be the ones living with it day and night to make something worthwhile out of it. I am only there intermittently but can’t direct them every minute; it’s their project so they have to own it through and through.
The unfortunate side effect of this is sometimes I can sound vague or perhaps even dodging their question of “what should I do next?” I have found over the last 3.5 years of advising that my biggest help to startups is to guide them like a teacher, teach them general concepts and help them translate them to whatever they are doing now, and to help expand their thinking as a lot of entrepreneurs tend to get very myopic in what they are doing and have a hard time keeping track of innovation outside their own project. So instead of providing them with “the answer”, I provide them with ways to look beyond themselves and perhaps find an answer for themselves within that process.

SMASH Conference Prep Dinner

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Last night I went to yet another great dinner hosted by Dave McClure at the hip Clift Hotel in SF. It was a precursor to a conference series on social marketing called SMASH Summit. If you follow Dave, you’ll know that he is big on the fact that marketing and design in startups are key elements for success, and that most startups don’t do either well.
SMASH is an acronym standing for Social Media And internet Strategies and Hack-tics. A bit forced, but the concept is pretty cool.
Speakers included Matt Cohler of Benchmark, Rashmi Sinha CEO of Slideshare, Stew Langille from Mint.com, and Jeremiah Owyang of Altimeter Group. It was a great round up of information presented, showing the various ways folks are using social media marketing.
Last night’s dinner was actually a preparatory step to a one-day conference series Dave is going to put on both in SF and in NYC. After dinner, the tables had a discussion on what they have done in social media marketing and the goal was to generate some possible topics for discussion at the SMASH summits. As official notetaker, I wrote down some ideas and listed them below, so that you will get a possible taste for what you may see at the SMASH summits:
Marketers that work for sites that are democratic – how do you tell what succeeds or fails with the crowd?
How to gain trust for novice social networkers for social marketing?
How do you manage novices facing more technically savvy social media users? Ex. forum users ragging on novice posters for not knowing a tech solution.
How to use our customer base who are more technically savvy to support call center people?
How do you use cross channel communication?
How do you connect developers with passionate customers?
What’s better than focus groups? What do you use instead?
How do you overcome corporate/executive fear of talking to your customers?
How do you track/prove ROI of social media? Ex. We only have anecdotal evidence of more sales via positive social media response.
What metrics of social marketing are important?
Panel idea: Bigger companies’ overall experiences with implementing social marketing/media (success/fail stories, case studies, techniques, etc.)
Panel idea: Experiences with integration of old school organizations with new social media (more specific than previous: talk about organizational difficulties and how to solve, how to win over the old regime, how to deal with people protecting their turf, etc)
Where does social media belong in the organization?
I’m looking forward to checking out the first SMASH summit for great discussion on these topics and more!

Lasting Two Years

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An interesting observation I’ve seen amongst early stage internet startups is that more and more of them are requiring closer to two years to get to breakeven. This is because of many factors, one big one being the fact that there are too many me-too products and that distribution is the number one problem facing entrepreneurs today. But also, many startups end up in someplace different than where they started. They may find that their initial theses is wrong and need to twist/turn/adapt into some other product to be successful. This also takes time.
I talked with an early stage VC and she mentioned that she had seen the same thing, which was a large percentage of them coming back for bridge rounds after working for about a year. We talked about the fact that they always seem to raise money for about a year or runway, but yet most of them just need a few months more to get to breakeven.
Even in my own startups, there are a number of them that “just need a bit more time.” If only they had a bit more runway, if only they had a bit more cash, if only they could raise more….we are seeing that startups with mediocre metrics aren’t finding it easy to raise cash so they are dead in the water, and soon to die in totality.
I talked with another investor about whether or not we should get more of our startups to raise more cash at the beginning. He actually was less of the opinion that we should demand startups find a way to last 2 years from the get-go. It was an interesting conversation and I think the difference in perspectives comes from the fact that I’m an angel investor with limited resources, and that this investor had far more resources to bring to bear on successful versus mediocre or dying startups. Also, given that this was my own money I’m investing, it was far more important to me than investing someone else’s money. Strategically, it makes sense for them not to care as much. We already know startups will die; it’s a ruthless culling process that startups experience. A professional investor can just move on and invest in the next big one, or invest in the winners in his portfolio. But given that my personal money is at stake, I care more about startups lasting long enough to make something with their businesses.
I’ve been tooting the “last 2 years” horn ever since the economy tanked. But universally I have been ignored. Remember that there are two levers to apply here: one is how much money to raise, the second is the burn. However, I never see anybody produce a 2 year plan ever. A host of reasons why not:
1. Entrepreneurs are unwilling to reduce their burn. There are a number of reasons for this, ranging from families that need support to those unwilling to reduce their lifestyles, to inability to hire people at low salaries.
2. Entrepreneurs are unwilling to go out and raise more. Yes, begging for money sucks and takes too much time and is not fun. Entrepreneurs just want to get back to work building.
3. Entrepreneurs are unwilling to take the dilution. They already have sold part of the company and don’t want to sell more.
4. An investor assures an entrepreneur that they will give them more money if they need it. Entrepreneur decides to trust investor.
Great reasons all, but the reality is that a huge majority of startups are all taking 2 years to get to a good place. The marketplace for products and for investment is not like it was 2-3 years ago before the economy tanked. In previous years, you could go raise money on no revenue but a ton of users. Now it’s near impossible. Second chances are hard to come by. Raising money on mediocre metrics is near impossible.
One last appeal: Entrepreneurs, do what you can to last 2 years. Expect it. Raise enough money and/or adjust burn assuming no revenue. It’s become unfortunately the norm.

Betaday09 11-17-09

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


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



..as was the latest footwear fashions:

Before the festivities:


John Borthwick giving the opening remarks to full house:



Gary Vaynerchuk on how social distribution is changing media:



Is the Web page dead?



The death and rebirth of search:

Stowe Boyd moderating niche membership and birth of mass amplification:


A lively discussion on crowdsourcing:





Another fun packed, informative day with betaworks!

Talking People Out of Being Entrepreneurs

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In the last few months, there have been a number of people whom I’ve tried to talk out of being entrepreneurs. I tell them it’s really a test to see if, after hearing about how hard it is, whether or not they actually still want to do it.
There are many who are newcomers to entrepreneurism. I think this is great. But I think most of the newcomers underestimate what it takes to start a company and make it successful.
So I let it all out. I tell them how it requires some serious soul searching about what kind of person they are. You have to be natural risk taker. You must be willing to throw all caution to the wind, because you never know what’s going to happen. You must be willing to throw away all levels of comfort in hopes of some huge gain later on. Are you OK with leaving your current job and its consistent pay, health insurance, and sense of direction in your life for a lot lower pay and the chaos that accompanies typical startups?
I talk about the time commitment. I talk about my early Yahoo days when there were just a bunch of us, and we worked our tail off for years. I talk about the long hours we spent building Yahoo back in the day, the stress, the do-everything-yourself mentality and the chaos of not knowing what’s coming next. I tell them about the fact that relationships have broken up due to training for Ironman, which even at its peak, doesn’t equate to time commitment spent at a startup and for a longer period of time. I go through the inevitable ups and downs that come with relationships and families of entrepreneurs; it’s not an easy place to be when your work and family demands collide.
I make them take a hard look at themselves, and I also gauge their reaction to what I say. I can see it in their eyes and in their replies if they are unwilling to give it up. My intuition is running high in sensitivity as I sense whether or not they have what it takes to go the extra distance to be a successful entrepreneur.
Don’t get me wrong; I am not judging what’s good or bad, but only what’s appropriate. I am not making a judgement call on whether you’re a good or bad person if you have or do not have what it takes to be an entrepreneur. For some people, it’s just not the right path to take. Yes it’s disappointing, but I think we need to be realistic that entrepreneurism isn’t for everyone. Or perhaps your life stage is now not the right time for a startup – for example, having a family and/or dependents, and/or a lifestyle which requires steady income may not make it appropriate for you to jump into a startup.
This is really important. We investors are betting on you to take our money and build something big with it. We are looking for those who are willing to do anything it takes to make something successful so that we all win, and that means sometimes driving yourself into the dirt and dealing with the stress of knowing that your bank account is about to run out and that if you don’t do something fast/creative/better, you’ll not be able to feed yourself or have a roof over your head anymore. This kind of passion/adaptability/drive for building a great company is what we’re looking for.
If you’re going to quit as soon as the risk is too high for your own personal livelihood, then it’s best that we just don’t start. It’s not positive for either of us. Find an occupation that allows you to live the life you want, at the stage you’re at now and be happy about that. Don’t try to start a company on the assumption that you’re going to just have the same kind of life you did when you worked at a bigger company.
One of the big problems I’ve seen over the last 3 years of angel investing and with entrepreneurs is that they will raise money and then compensation goes to near market levels for the people in the startup. They think that they can be in a startup and have their old lifestyle not be threatened. The reality is that startups are not a place where lifestyle can be guaranteed. This ranges from the “working lean and mean” philosophy (how can you pay yourselves market rates and still be lean?) to execution speed (you can’t work at speeds seen in large organizations; you’ll get crushed by other startups) to just the simple fact that the risk of failure is tremendous (you don’t get the comfort of stability in a startup that you would get at a larger more established company; that’s the price you pay for constant salary versus the chaos of a startup).
So if you pass my test, which is, after my whole tirade about the risks of startups and the downsides of what it’s like to be an entrepreneur, you are still fired up about being one, then more power to you. Let’s take this conversation further. But I am getting better at spotting hesitation, fear, and reluctance after hearing my speech. So let’s not kid ourselves in being somebody we’re not.
It’s sexy being an entrepreneur. The rewards are great. The upsides are what everyone sees, and nobody sees the downsides. Dealing with the downsides is where the rubber meets the road and where you’ll be tested sorely on whether or not you are a great entrepreneur. But if you’re not entrepreneur material, you’re not and that’s that, whether it’s your personality, life stage, or otherwise. You’re not a bad person; it’s just not for you and we should all just realize this, and not fool ourselves into thinking otherwise.

What the Heck Do All Those Terms Mean?

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I was just talking to a new entrepreneur about a term sheet and I realized that trying to understand all those dang terms on a term sheet was super tough because of all the legalese there, and also it’s hard to know the implications of terms if you haven’t experienced them first hand. It took me 2+ years of investing to get to some basic understanding of the terms and I’m still not even close to being an expert at it.
Searching on Google, I found some excellent posts from Brad Feld that explains some of the basic terms in a more easily understood way. Here are links to them:
Information and Registration Rights
Anti-Dilution
Redemption Rights
Liquidation Preference
Drag Along Rights
Protective Provisions

The Rise of Small Business on the Net

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A few years back I worked on a tiny startup that was attempting to jump on the affiliate marketing/blogging bandwagon. It was all the rage that people were making $100Ks per year just writing articles and doing a good job on driving traffic and purchases to marketers. It was a site about how geeks were cool because they were buying cool products, and so we would write about these really cool products and then drive affiliate traffic to places where you could buy them.
Our venture didn’t get that far, but so many others’ did. And the list is growing.
As everyone working on projects on the Net knows, the cost of building a business has dropped dramatically over the years. It started with blogging software which would could install on our own servers or use the hosted versions. Now, you can go out and find shareware for just about anything; stuff that would have cost a big company millions of dollars and a team of 100 to build in the past could now be found and deployed for a tiny fraction of that cost.
It’s also easier to deploy web applications now. Previously you had to be a computer scientist to do so; now just about anyone can figure out how to deploy it, or using hosted versions just fill out a signup form and point your domain at it and you’re off and running.
So now, just about anyone can throw up a website which has some advanced functionality. And people are doing it too. In the startup world, we see the internet has gotten super crowded over the last few years. Very few truly unique business/product ideas have emerged, and many are just clones of each other. Or once someone puts up a good idea, the clones emerge quickly because it’s so easy and fast to put up a website. Thus, it’s now less about the idea but rather how many customers you can grab and whether you can monetize that traffic to balance out your burn.
Thankfully, the internet crowd is enormous. Grabbing a small slice of that traffic and monetizing it effectively can mean a sustainable business that pays its employees a decent salary. In the past, we called these businesses microbusinesses or lifestyle businesses where a single person could make a decent living managing a website. However, in today’s world, I call this phenomenon the rise of small business on the net.
Many startups we encounter have plans that we know can reach this stage. With great execution and effort, we can easily see many businesses growing to great small businesses. They will have revenue from several $100Ks a year to small millions. They have a small teams and all of them are well compensated for their work. All the employees will have great lives supported by this business.
The effort is comparable to opening up a storefront on your favorite street. In the old days, you’d go find a great physical location with lots of foot traffic. You go get a small business loan from your local bank and open up shop. Then you go and acquire customers and build your business from there. In today’s world, you can do it on the internet without a physical location and tap into customers from around the globe.
From an investor’s standpoint, we’re finding that this creates a number of problems. Our model is dependent on finding those startups which will go big, much bigger than small business size, and find a way to return our investment with large gain through some mechanism like M&A or IPO. However, the ease at which startups can reach small business stage makes our job harder; we’re seeing many businesses reach a certain level of growth and then breaking through that level is tough due to how easy it is for competitors to enter your market, and how hard it is to acquire the attention of users.
Some of us are thinking about change in the way we support some startups. I find parallels in the area of restaurant investing, where the investment is all about cash return and not ownership. What kind of restaurant would go IPO? Highly unlikely. But could we make 10-20% on our investment? Infinitely possible.
I wonder about how the structure of deals we do for internet startups might mimic restaurant investing. Instead of caring so much about ownership, perhaps we should find a way to get a healthy return on capital invested through cash flow, if the startup monetizes efficiently and does it well.
The problem with traditional investing in startups here is that these small businesses may never attract an acquirer and certainly the chance of an IPO is even more remote. Driving these small businesses to activities to return an investors’ capital in that manner may take a healthy sustainable operation and turn it into something unsustainable and problematic as it reinvents itself to attract an M&A event or IPO. That seems dumb; the business is thriving and its employees well paid and happy – why destroy this?
I think the world of investing should think more about the rise of small business on the net. Many more businesses each day are showing up that are great sustainable operations supporting employees and their customers. They are never going to be superstar Googlesque success stories and we should not attempt to turn them into one. In today’s crappy economy, the world needs more small businesses to show up to employ the masses and make them money. We as investors should find a way to invest in and help these companies to grow, and just be comfortable in the fact that they will never be Google but still can help us make a healthy return on our money.

Second Chances

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I was just reading 10 Huge Successes Built On Second Ideas and it motivated me to write this post, as I’ve been thinking a lot about the fact that entrepreneurs often end up in a place very different from where they started. It’s gonna be a bit random, but here’s what I’ve been thinking about:
1. How we pick startups to fund.
Time and time again I hear seasoned investors talk about betting on smart people because smart people will adapt and twist and turn to make their journey worthwhile. It is less about what they’re building, although that is what brought them to the investor in the first place. Rather, the bet is that the person is good enough to figure something big out of whatever it is they pitched you.
I guess it’s just me, but I place more emphasis on the idea than others, as there are many smart people working on stuff that doesn’t have a chance, and is almost certain to require…a second chance.
The problem I see is that money only goes so far, and second chances don’t come by easily. Most people don’t raise enough money to allow them to twist and turn later; they only have enough to get them to barely a market trial of their initial idea. That’s why I push entrepreneurs to raise at least 2 years of capital now, while their attraction is hot. Trying to raise more money later on mediocre to poor metrics is next to impossible in today’s market. Otherwise, the entrepreneur will have to (usually painfully) adjust burn to last them further into the future or…just die.
2. Helping startups change/enhance what they’re doing now.
I was talking to a venture capitalist the other day who said that you had to bet on entrepreneurs who knew what to do whatever the situation, and that if you had to help them then this was a sign of trouble. I find this to be somewhat not true, as I’ve built my business on sitting with entrepreneurs and helping them shape their products. I’ve found out that even smart entrepreneurs appreciate you throwing them ideas and opportunities that they can use, especially when they are in a bind. Finding smart people is fine, but everyone needs help once in a while and it’s the smart ones that know they need help and accept it.
It’s happened a few times now, where startups are now figuring out what to do next. One has changed completely, and others are in the process of reinventing/rethinking what they started working on because it hasn’t worked out as well as they thought it would. I find the more I insert myself in this process, whether I ply coach-like skills to help give them some process in reinvention, or I’m throwing a constant stream of ideas at them until something sticks, the faster they will get on a new and potentially better path before their money runs out.
3. Raising money is a tough process for second chances.
This is tough for a variety of reasons.
a. Dealing with existing investors can be difficult. Already you have some invested in your company. But yet, now you’re out there raising more money to continue – if your metrics are mediocre, then this could mean a sideways or down round to keep working on your current idea, and you must take into account the fact that your investors already own a piece of your company, and now more money is coming in and ownership and control issues arise. They best condition would have been if they invested into a note without a cap, which I would never do, because then you have total control over what happens to them.
b. Raising money on mediocre metrics is next to impossible. If you’ve gotten to a point a year in and your growth is not so great with little or no revenue, it’s next to impossible to get another set of investors to bet on your idea in today’s economic climate. They often assume that your idea and/or team isn’t right.
c. If you’re working on a totally new idea that may be great, but you and new investors still have to account for the fact that there are existing investors already, and what kinds of ownership and control issues exist and how they will change. Potentially it could also mean some questions will arise as to why your previous idea tanked and if whatever those reasons were make you look bad, then it will be hard to raise more money.
4. Mentally it’s hard.
Yeah it’s tough as hell. You’re all gung-ho on your initial idea, you’ve got your investors and everyone around you excited about where you started and now you gotta change. That sucks! And you often beat your head on the table trying to figure out how and where to go next.
As many smart people I’ve met, they have often shown that they are often not equipped to continue on these projects in the face of adversity. This is both situational and internal.
Situational means that they may have real life needs for capital, like a family to support. I say situational because dependent on their life stage, the situational needs may be completely different like, for example, during when the time they were just coming out of college.
Internal refers to elements of one’s psyche to enable them to deal with the harsh realities of entrepreneurism and what it often takes to build a business. So being smart is one great metric, but it’s not enough by itself. You need to be creative, adaptable, able to withstand change and adversity and find solutions in chaos. Many people can’t do this. Over the last few years, I’ve noticed that many people think they can just start a company and it’ll be an easy ride to Google style riches. Time and time again it’s proven wrong to me, having been through it at Yahoo and watching countless startups now.
All I can say is second chances (or twisting/turning/adapting from their initial idea) are tough. I am one for doing a little upfront planning for having enough time to twist/turn/adapt as far as second or maybe even a third chance, since it happens very often. Raise enough money early in the process and create a plan to go for 2 years, assuming no revenue or progress. Be prepared for it mentally, celebrate when your initial plan pans out, and buckle down the hatches when you have to shift.