Archive for August, 2009

Investors Can Smell Your Fear

August 29th, 2009

I just finished reading Founders at Work (by Jessica Livingston of Y Combinator). I would definitely recommend it to any aspiring entrepreneur. And there is plenty of interest to those with more experience. (I know it came out a while ago. Well, my brother read it first and then it took a while to work it’s way up through my reading list.) Basically, it’s a series of interviews with founders of technology companies. Like good any interviewer, she gets the interviewee to talk a lot so you hear their perspective in their own words. It may not be “the truth” but it certainly has a lot of value to hear all these oral histories. One thing that I liked, is that it includes some founders with a variety of outcomes for investors (going out of business, selling, IPO, etc.).

A couple of the stories include cases where entrepreneurs had bad experiences with VCs. It reminded me of a theory I’ve kicked around before:

Investors can smell your fear.

Sure, it is well understood that investors are much more likely to get involved if things are going badly. Beyond that, I think it becomes a self-fulfilling prophecy for founders to run into trouble with VCs. If they start out with a distrust or a lack of understanding of the mechanics, they’re more likely to make mistakes or put off a sense of fear.

And I think that VCs judge the founder’s business skills in large part by if the way the fund raising process is conducted. Many VCs won’t always have experience evaluating technology or other skills. But they do know termsheets, valuation, and the mechanics of getting a deal done. If the entrepreneur is fearful or does not embrace the process, I think VCs assume that the entrepreneur does not have good business skills. And therefore is much more likely to put in place other management or generally attempt to play a more active role. Which can lead to more mistrust and misunderstanding on the part of the founder. A vicious cycle.

So, as a founder, what should you do? I’m all for raising money from investors if that’s what is needed in your business. Look at your goals and figure out if having the money will raise the likelihood of reaching them. But before you do sign a deal:

  • Learn about the VCs business model and their termsheets (lots of good blogs out thereon this plus you could read the book Term Sheets & Valuations)
  • Learn how to negotiate (say by reading Getting to Yes)
  • If you can, find a mentor who has been through it before and is willing to share thoughts free of charge.
  • And before, during and after, work on your business so that you are as successful as you can be. The better your alternatives are to taking VC money, the better negotiating position you’ll be in and the less desperate you’ll feel. Also, as mentioned when things are going well, you’re more likely to get along with your investors.

If you don’t want to work on this “investment” stuff, have a co-founder you really trust to who will. And don’t expect that you can hire someone to handle this for you who is not a co-founder. It’s rare that the person you hire will be as aligned with you or care as much about the business.

Books and More Books

August 22nd, 2009

Brad Feld and Fred Wilson were have both recently blogged about books.  It inspired me to repost my old list of books and start a Shelfari account.

You see, on my first blog I used to keep a list of books I had read or wanted to read using HomeSite a HTML-editor.  Again, remember, I wasn’t using any blog software and it was very Web 1.0.  I’ve put it back up with some minor tweaks to make it readable.

I also spent about an hour today adding books to my new Shelfari account.  (Part of that time I was on the elliptical and using my SurfShelf.  If you don’t have one, I recommend looking into it.  Allows me to exercise and be on my laptop at the same time.  As long as you don’t mind a little bit of sweat on your keyboard.)

Now, I’ve added the Shelfari widget to my new, now Web 2.0, reading page.

I also wanted to share some of the reading that I have recommended to the Yale Entrepreneurial Institute summer program fellows.

More Angels = More Startups?

August 15th, 2009

I was reading Paul Graham’s How to Be an Angel Investor and I was struck by this section:

So if you want to invest seriously, the way to get started is to bootstrap yourself off your existing connections, be a good investor in the startups you meet that way, and eventually you’ll start a chain reaction. Good investors are rare, even in Silicon Valley. There probably aren’t more than a couple hundred serious angels in the whole Valley, and yet they’re probably the single most important ingredient in making the Valley what it is. Angels are the limiting reagent in startup formation.

If there are only a couple hundred serious angels in the Valley, then by deciding to become one you could single-handedly make the pipeline for startups in Silicon Valley significantly wider. That is kind of mind-blowing.

As part of a larger essay, he makes the point (almost casually) that the number of startups in a given area is limited by the number of angel investors.  Does that mean that if you could increase the number of angel investors you can increase the number of startups?  I doubt that that what he meant, but what if it were true?

At one point, a few friends of mine jokingly formed Project Shepherd to lure a top-name VC firm to step-up shop in New Haven.  Maybe we should have focused on increasing the number of angels.  Has anyone tried that before?

I grew up in San Francisco and during Yale started Higher One in New Haven.  So, I’ve been involved in many a conversation about the resources available in New Haven for start-ups and how it compares to San Francisco.  I agree with Paul that Silicon Valley is a special place and is #1 for startups.  I am not sure I agree it is the only good place.  I’d love to see that you can replicate Silicon Valley at least on a small scale in other places.  Agreed, that may be a 20 or 30 year project.

Inc 500 Respect

August 15th, 2009

Inc Magazine recently published their annual list of the fastest-growing private companies in the United States.  By fastest-growing they mean most revenue growth in a specific time period.  (Some time in the last few years they renamed it Inc 5000 but I still think of it as the Inc 500.)

While I’m always intrigued to read the Inc 500 list when it comes out, I find it sometimes hard to wrap my head around the comparisons between different industries and consider the effects of base years.  The #1 company this year, Northern Capital Insurance, deserve respect and attention for entrepreneurial prowess particularly as newcomers to the industry.  I also wonder if their revenue number of ~$95 million is total premiums collected?  If so, it may not compare well to say #5 ranked IntegraClick.

While it would be silly to try to game the list, since it measures calendar years, the methodology can create strange effects.  The base year has to be over a minimum threshold of revenue (like most of these lists).  Therefore, if you “grow too fast” in the beginning your base year can be higher.  I’m not sure I’m explaining it well, but it’s similar to the effect described in Outliers of birth date on sports performance.  (In that case, if you’re the oldest hockey player in the age category, than you may have advantages and be more likely to be ranked higher.)

Putting industry and time periods aside, I pored over the list and some of the companies caught my attention.

#5 Integraclick – online advertising company founded in 2002 now with over $95 million in revenue.  First I’m hearing of their CPA ad network called ClickBooth.

#18 MonaVie – beverage company (acai berry juice).  Amazingly high revenue numbers to be ranked so high on the list.  Founded in 2005 and now with $854+ million in revenue!  I was looking at Wikipedia and apparently some aren’t happy with their multi-level marketing techniques.  Beverages are a crowded space and growing that quickly is hard to believe.  How did they do it?

And consumer electronics is another competitive industry. These two companies caught my eye:

#14 SkullCandy sells headphones and other accessories.  Seems like that could be a commodity (if they weren’t so good at branding) and doesn’t cost much per unit, so getting to $85 million in 2008 revenue isn’t easy.

#134 Vizio who bills themselves as America’s HDTV maker.  They make high-end TVs but under price the competition.  I’m sure that being aWalmart supplier of the year didn’t hurt their sales.  $2 billion in 2008 sales is an amazingly high number to be growing at that speed.

#35 founded in 2004 to grow to $89 million in 2008.  And it’s always one of my favorite stories when someone starts-up in an industry that seems settled and is successful.  Would you have considered diapers a growth industry in the US?  What about online sales of diapers?  OK, really they sell a lot more than that.

I’m curious which ones were interesting to you.

Entrepreneurs Solve Chicken and Egg Problems

August 14th, 2009

I was blogging for SeeClickFix earlier this morning about chickens and eggs.  You know, which comes first citizen participation or government involvement in using the transparent social technology.

It reminded me of how entrepreneurs solve chicken and egg problems.  I believe that any business worth doing has at least one significant chicken and egg problem.  Sometimes multiple or more complicated ones.

A typical example is that you feel that:

  • Investors Depend on Product
  • Product Depends on Investors

Or another one:

  • Investors Depend on Customers
  • Customers Depend on Product
  • Product Depends on Investors

I’ve seen many would-be entrepreneurs get stuck in this viscous cycle of thinking that they can’t achieve anything because everything depends on everything else.  They say “I can’t build a product, because I have no money to hire people or quit my job.  I could get money if I had customers because investors believe I can build a product but aren’t sure customers will pay for it.  I can’t get customers because they keep telling me that they’ll sign up once they know the product is working for someone else.  Or customers won’t sign-up because they can’t see the product or test drive it.”

There are many ways to solve these problems and create a virtuous cycle of steps forward in each of the key areas.  As I have posted recently, I have an instinct to focus on customers first.  If you’re in a market with enough customers, this is often the easiest place to make progress or at least learn that you need to make changes.  You may be able get a letter of intent to formalize the statement that customers will use the product once built.  This is enough for some investors if they otherwise believe in you.  Or if you’re lucky and good, you can get customers to pay for the product upfront before it is built.  Then you may not need investors or may not need them until you have a prototype and a first customer.

Another common pattern is to pour your own resources into building a first version of the product, prototype or in someway to reduce the risk that the product will never be a reality.  Work nights and weekends.  Use savings or personal credit to hire someone on Odesk to program or to pay for someone to machine a mock-up of your design.  If you don’t have the skills to build the product yourself, you may be best off recruiting a co-founder who can do so.

And at this point in the conversation, I sometimes hear about a more complicated version of thechicken and egg problem.  They tell me:

  • I can’t build the product because I don’t have the right team.
  • I can’t get the team because I can’t pay them.
  • I can’t pay them because I don’t have a investors.
  • I can’t get investors because investors want to show customers will buy the product.
  • Customers won’t buy until I have a product.

I’ll leave this one as an exercise for the reader.  I agree, these problems are tough.  That’s why it’s rewarding to be an entrepreneur.   If it was easy, everyone would do it 🙂

So maybe it’s time for a new definition: an entrepreneur is a person who solves chicken and egg problems to create financial sustainable organizations?  (You could say companies?)

(BTW, did you see that SeeClickFix put out version 1.0 of the iPhone app?  Pretty neat way to report quality of life issues while you’re on the go.  I hear that more features are in the works, too.)

Reading Quickly Through Technology

August 9th, 2009

Curiosity drives me.  And I wish I had time for reading almost everything.  My friend Christine makes fun of me for my 20+ page Amazon wish list.

I didn’t always read very well or very quickly.  Growing up and didn’t read a grade level until about 3rd grade.  While I was learning to read for myself, I relied on a technology called Mom to get the content I wanted (thanks!).  She read me The Lord of the Rings and Sherlock Holmes to me in full, for example.  Wow – that’s dedication.

In fact, I used to wish for a “reading machine” and I guess Ray Kurzweil and now Amazon built it.  My brother recently got a Kindle and showed me the read aloud feature, which is pretty neat.  You can get some audio content sped up (see Podshifter for example).  But if you really want to get information fast, there’s nothing that beats reading.

I probably read unassisted around 300 WPM.  I’ve toyed with but never seriously practiced speed reading techniques – instead I’ve found technology for it.

Tim Ferriss recently blogged on his approach to getting his unassisted reading speed up to 1000+ WPM.  What do you think?  Does it work for you?

I’ve got RapidReader installed on my personal computer (disclaimer: I got a free copy) and use Reasy Reader for web reading at home and at the office.  Both display words or phrases on the screen at speeds that may be twice or three times your normal speed.

When I talked to the founder of RapidReader, he told me it’s more complicated than just displaying the words quickly on the screen.  To do it well, they modulate the pacing slightly based on punctuation and other bits of sentence structure.

Also, to get your speed up, you’ll want to crank the WPM really high beyond comfortable comprehension so that you’re flooded.  Then you can bring it down a bit.  It’s this process of continually pushing your boundaries that will train you to read faster.

I guess I should give the unassisted speed reading a try again.  Can’t rely on Mom or Reasy Reader forever…

Starting a Company? Talk to Customers

August 9th, 2009

When I talk to entrepreneurs in the early stages, I strongly advocate for talking with potential customers as early as possible.  I believe this to be true in almost any situation or industry, although there may be exceptions.  I’d love to hear about them if you have one.

In particular for online or software businesses, there’s no excuse for not getting customer feedback almost immediately.  If you can build a version of your product in a weekend and have people use it, go for it.  (That’s what we did with SeeClickFix.  We weren’t just seeing if the software was useful to our friends and neighbors, we were also seeing if we wanted to work together.  More on test driving your team another time, perhaps.)

If there isn’t a version of the software or product you can build in a weekend that would be useful, then go try to sell it before building too much.  (That’s what we did at Higher One.  One of the very first things we did was write a summary of our proposed service and go pitch two CFOs of local colleges.  We had nothing built, no employees, no company, no money, etc.)

In the software development world, some call this “customer driven development” or sometimes in a derogatory way “selling vaporware”.  The Lean Startup Circle has a great blow-by-blow in-the-trenches story of how this can work.  If your product is more consumer focused, you can test the market demand by setting up a quick website describing what you’re selling and buying $50 in Google Adwords.  Market it and see if people click on the buy button.  Tell them it is not currently available and see if you can get their email address for later.

When I offer this approach to people, I often hear one of four concerns:

  • They will steal my idea
  • It does happen occasionally that someone will copy you.  Yet, most start-ups I run across have much more to lose from obscurity and irrelevance then from the chance of creating more completion.  It’s tough to create something new and most people are too busy with their own projects to worry about doing yours.  They’d rather tell you why it will never work.  That’s much easier for them and valuable information for you.My suggestion is to find a way to describe the business and the product that leaves out any special sauce.  It’s fine even to say that you have a secret that powers the business without saying what it is.  You can tell people the benefits and the outcomes.

    For example, Google does not reveal all details of its search algorithm, hardware management or clustering technology.  Yet, as a customer, you know the outcomes of fast relevant queries and associated ads.

  • I’ll look silly
    Yes, you may.  So, what?  As an alternative to feeling silly for a few minutes, think about spending years of your life raising money, and building something that no one wants.  I’d rather fail fast, while there’s still time to figure out how to be successful than fail slowly.  (I joke that Higher One still does not have a Connecticut client because I talked to customers early on… We do have clients in 40+ states and I’m sure one day we’ll work with a client in Connecticut.)
  • It doesn’t feel honest
    I understand where you’re coming from with this one.  Conducting business with integrity is important to me, as well.  (BTW, a great book on values in business is Conscious Business)  You’ll have to make your own choice about how much information you feel required to volunteer.  When does it become dishonest to not blurt out every problem, issue or lack of feature?You’ll be surprised how open people will be to the concept of your product not being completed.  If you say it’s under development, most people won’t push you to know how far along things are.  And if they do, it is probably a sign they want to start using it.  Maybe they will give you money upfront to make things move faster!The main thing, is to pick a level of detail you want to share about the product development process and get out there and talk to people.  You can say these are screenshots (perhaps implying to some that the software is working somewhere rather than just an idea) or you could say these are mock-ups or design ideas.  Just say something so you can start the conversation and get real feedback.
  • I’ll waste my one chance with Mr. X

    I know people who hold back on their “connections” and do not reach out to those that could help them because they want to be further along and more polished. They wait for the perfect moment which never comes.  It’s good to be prepared for a meeting.  Yet, if you never call upon a connection, it withers.  I think you strengthen connections by talking.  Not by hording them.  (Read Never Eat Alone for more tips on creating and building relationships in business and life.)
  • OK, maybe there is an exception if your potential market is 3 customers.  Question – why are you in this market?  If the answer is that you are an expert in it and know all the players, then you can probably have already talked potential customers in other settings and have an idea what they want.  You probably can follow a process like this anyway.  If the answer is that you’re not sure why you’re in a market with only 3 potential customers, may you should pick a bigger one.

One caveat – by listening to customers I’m not suggesting that you have to solve every problem in exactly the way they describe to you.  In early conversations with universities about Higher One, no one told us the solution.  Rather they told us about problems, we suggested various solutions and we learned from their reactions.

It isn’t the customer’s job to invent the solution.  That’s where you come in.

Blogging Third Time Around

August 9th, 2009

I’ve started and stopped my personal blog twice already.  And I’m thinking I’m ready for a third time around.  I hope you’re ready to join me.

My first blog was a manually updated HTML page with 15 to 50 word posts.  Almost like a psuedo-Twitter feed of links that interested me.  Apparently, I hadn’t heard of services like Blogger at the time.

First blog circa 1999

First blog circa 1999

One of my favorite posts from June of 1999: “Google and its business plan? Not a portal, they say, but they have a secret weapon to make money? And they won’t partner to sell search results to a portal. Not planning to be bought out? Come on, what are you up to?”  Now we know that the secret weapon was AdWords.

As rudimentary as it was, it helped me connect with Sean Glass.  We started the Yale Entrepreneurial Society (YES) together and then went on to start Higher One together with Mark Volchek who we met though YES.

My second personal blog I ran in 2002 and 2003 with topics like artificial intelligence, start-ups, evolution, lean manufacturing, software development and robots.  I think I stopped about the time I started dating my now wife.  Is that a case study in how being too nerdy and dating don’t mix?  I hope not!

Second blog circa 2003

Second blog circa 2003

I’m starting to blog a third time because I want to participate in online dialogue again in a meaningful way.  If I speak up, I’m hoping that will attract the attention of those with similar interests.  And who knows, maybe we’ll both end up learning something or maybe we’ll end up starting a business together.

Looking forward to hearing from you.