I just finished reading a good analysis of the market opportunity for valet parking startups, written by Charles Hudson. He writes that the real competition for these startups may be public transit, Uber, Lyft and ridesharing services. In San Francisco, where he's based, he notes that these services have cut down on the use of cars, and therefore, the need for parking. However, it was while reading his post that I realized that San Francisco is primarily representative of San Francisco, and that extrapolating from the San Francisco market could get startup founders, as well as investors and analysts, in trouble.
San Francisco has been a parking nightmare for decades--at least from the time that I moved to the Bay Area in 1983. It's hard to find commercial parking, and it's expensive when you do find it. On-street residential parking is a nightmare. On the other hand, despite the many complaints about the Muni bus system, San Francisco has a very good public transit system, with busses, subways, streetcars, cable cars and trains. It was an early Zipcar market, and it's also the home of both Uber and Lyft. The availability of so many transit options grew out of the natural limitations imposed by San Francisco's geography and the concentration of startup talent.
You don't have to go very far to find a counterexample to San Francisco. Los Angeles is much bigger and more spread out than San Francisco, even though its downtown is smaller than San Francisco's. Los Angeles's public transit options range from poor to nonexistent. Cars are essential for getting around Los Angeles--its geography shapes the market for transit options just as surely as San Francisco's does, but in a different direction.
That illustrates a problem that many startups are faced with: There's demand for them in the area where they were founded, but demand tapers off dramatically when they move into different markets. For example, meal delivery services have flourished in both San Francisco and New York. Even though New York is much bigger than San Francisco, both cities have highly concentrated populations and multiple transit options. Both cities also have a proportionally large population of high-income earners, who can afford to pay for convenience. However, conditions are very different in, say, Omaha, Denver and Dallas. That limits the growth potential for those delivery services--they may do very well on the coasts, but find limited viable markets in the rest of the U.S.
There are many other services that you can think of that take advantage of the population concentration, transit options and high-income populations of San Francisco and New York, but that may not play as well in other places. There are also services that target other unique market characteristics--for example, a dating service that targets techies might be very successful in New York and San Francisco but less so in Pittsburgh or Cleveland, which have much smaller young techie populations.
You might say "We did lots of customer development and found that there's high demand for our service." That may well be true, but where did you talk to potential customers? If you only talked to them in your home city, you've probably got a biased sample. It's important to talk to people in multiple cities with different underlying conditions. Only then can you begin to understand where your service will and won't work. That, in turn, will help you to more accurately gauge your Total Available Market, and you'll be able to launch in the markets where your business is most likely to be successful. In short, successful customer development requires that you not only get out of your building to talk to customers, but that you get out of your home city as well.
Showing posts with label startups. Show all posts
Showing posts with label startups. Show all posts
Saturday, August 02, 2014
Saturday, February 18, 2012
There are more important things than getting press
Yesterday, TechCrunch reported that ProFounder, a fundraising platform for startups, has shut down. According to the company's founders, securities regulations prohibited them from offering all the services that they wanted to, and led in large part to the company's failure. However, I don't want to dwell on the reasons for the company's failure, and instead examine the importance of one particular factor: Getting press.
If you look at the ProFounder home page (or the former home page, if it's no longer there), you'll see this near the bottom:
ProFounder, like many startups, worked hard to get press coverage; they believed that the press gave them credibility with customers and investors, and to an extent, that was true. However, startups often go to ridiculous lengths to get press coverage...even when their website is nothing more than a placeholder.
Press coverage can motivate people to visit your website...once. If you're not ready for the traffic or you can't do anything productive with it, getting press coverage is not only a waste of your time, it's actually counterproductive. Consider some of the mistakes commonly made by startups: Using your home page primarily to collect email addresses usually results in a low-quality mailing list. Collecting email addresses but not doing anything with them for months results in frustrated visitors. if your website is poorly designed, most visitors won't take the time to figure it out--they'll simply leave. If it's hard to sign up for your service, or either the sign up process or your service itself doesn't work, they'll leave. Even worse, once they leave they probably won't come back.
Press coverage that comes as a result of running a successful business is far more valuable than coverage pursued in the hopes that it will make your business successful. And, you have much more leverage over how your story is reported when the press is pursuing you, rather than the reverse. In the earliest stages of your business, social media is far more effective than press coverage for reaching potential customers.
If you look at the ProFounder home page (or the former home page, if it's no longer there), you'll see this near the bottom:
ProFounder, like many startups, worked hard to get press coverage; they believed that the press gave them credibility with customers and investors, and to an extent, that was true. However, startups often go to ridiculous lengths to get press coverage...even when their website is nothing more than a placeholder.
Press coverage can motivate people to visit your website...once. If you're not ready for the traffic or you can't do anything productive with it, getting press coverage is not only a waste of your time, it's actually counterproductive. Consider some of the mistakes commonly made by startups: Using your home page primarily to collect email addresses usually results in a low-quality mailing list. Collecting email addresses but not doing anything with them for months results in frustrated visitors. if your website is poorly designed, most visitors won't take the time to figure it out--they'll simply leave. If it's hard to sign up for your service, or either the sign up process or your service itself doesn't work, they'll leave. Even worse, once they leave they probably won't come back.
Press coverage that comes as a result of running a successful business is far more valuable than coverage pursued in the hopes that it will make your business successful. And, you have much more leverage over how your story is reported when the press is pursuing you, rather than the reverse. In the earliest stages of your business, social media is far more effective than press coverage for reaching potential customers.
Sunday, August 28, 2011
Advertising is dead. Deal with it.
Have you ever had the feeling that you were a fly buzzing against a window, not knowing that you could escape if you just moved a few inches to one side? That's how I've felt recently, thinking about how to build an advertising-supported Internet site. I've come to the conclusion that, for all but a handful of sites, it's impossible to build a successful business by depending on advertising.
The classical advertising model was based on an economy with few media outlets and many media consumers. In the U.S., for decades there were three broadcast television networks and three commercial television stations in most markets. In most cities, there were one, or at most two, newspapers. The scarcity of media outlets meant that each outlet had a large audience, and that audience attracted advertisers, who were willing to pay enough to turn the outlets into viable businesses.
The Internet turned the classical model on its head: Instead of having a small number of media outlets, each with large audiences, we have a huge number of outlets, each with small audiences. Only a handful of sites and services on the Internet have been able to attract the audiences necessary to make an advertising-based revenue model work. The cost of setting up an Internet site is tending toward zero, especially if you can convince people to create content for you for free. Operators of these kinds of sites can run them profitably, or at least not at a large loss, right up to the point where they have to pay people for their content and services. That's why The Huffington Post has pushed back so hard against bloggers who want to be paid for the content that they provide to the site. If the HuffPo had to pay for all its content at market rates, it would go bust.
The problem goes beyond the Internet--cable television networks, in the aggregate, have a bigger audience than the broadcast networks, but few cable networks attract a big enough audience on their own to be viable without fees paid by cable, satellite and IPTV services. That's why cable networks and service providers fight so hard against "a la carte" pricing that would allow subscribers to pick and choose channels.
So, what should you do? If you're thinking about starting a business, pick a business and a business model that allows you to charge users. If you're running a business that is advertising-supported, or that you hope to run on advertising revenues in the future, pivot to a business and business model that can be profitable on user fees. If you're an investor and someone comes to you with a business plan that depends on advertising revenues, walk away. In short, if you can't get your users to pay for your service, you're in the wrong business.
The classical advertising model was based on an economy with few media outlets and many media consumers. In the U.S., for decades there were three broadcast television networks and three commercial television stations in most markets. In most cities, there were one, or at most two, newspapers. The scarcity of media outlets meant that each outlet had a large audience, and that audience attracted advertisers, who were willing to pay enough to turn the outlets into viable businesses.
The Internet turned the classical model on its head: Instead of having a small number of media outlets, each with large audiences, we have a huge number of outlets, each with small audiences. Only a handful of sites and services on the Internet have been able to attract the audiences necessary to make an advertising-based revenue model work. The cost of setting up an Internet site is tending toward zero, especially if you can convince people to create content for you for free. Operators of these kinds of sites can run them profitably, or at least not at a large loss, right up to the point where they have to pay people for their content and services. That's why The Huffington Post has pushed back so hard against bloggers who want to be paid for the content that they provide to the site. If the HuffPo had to pay for all its content at market rates, it would go bust.
The problem goes beyond the Internet--cable television networks, in the aggregate, have a bigger audience than the broadcast networks, but few cable networks attract a big enough audience on their own to be viable without fees paid by cable, satellite and IPTV services. That's why cable networks and service providers fight so hard against "a la carte" pricing that would allow subscribers to pick and choose channels.
So, what should you do? If you're thinking about starting a business, pick a business and a business model that allows you to charge users. If you're running a business that is advertising-supported, or that you hope to run on advertising revenues in the future, pivot to a business and business model that can be profitable on user fees. If you're an investor and someone comes to you with a business plan that depends on advertising revenues, walk away. In short, if you can't get your users to pay for your service, you're in the wrong business.
Wednesday, August 10, 2011
Startups are not a game
Earlier this week, I attended an event in Chicago where startups gave brief presentations about their businesses and answered a few questions from the audience. On the whole, the event was very disappointing, for a variety of reasons. Of the eight startups that presented, one (or perhaps two) identified viable market opportunities that aren't 1) Irrelevant, 2) Already being served, 3) Impossible to scale, or 4) Vulnerable to immediately being taken over by a bigger company. In addition, many of the presentations were amateurish. You expect demos to crash--that's a given--but most of the presenters hadn't thought through what might happen if they couldn't access WiFi. (And, if they didn't think through a simple problem like not having access to a network, how likely are they to think through much more difficult problems like building a sustainable business?)
What's disconcerting to me is how many people see startups as a game. It's incredibly easy to start a company; the software and services necessary are available for free or at very low cost, at least while the business is in the development phase. Incubators, startup weekends and shared workspaces are popping up everywhere. Yet, the real process of starting and running a business is hard work. There's no glamour and very little fun involved with spending 12 to 14 hours a day raising money, staffing up, talking with customers, writing and testing code, and selling. However, creating a startup is far too often seen as a game that's won when the business raises funding.
Eric Ries has written an excellent post about the "startup winter" that will inevitably come. There's too much volatility in financial markets for venture funding to continue at its current pace. Today alone, five IPOs were delayed or withdrawn. Ries believes that "a shocking number of the current crop of incubators, accelerators, and other startup-support programs will suddenly disappear," especially second- and third-tier programs. Think about how few of the startups spawned from these programs actually mature into successful businesses, and how many of them pivot just in the few months that they're in incubators and accelerators.
Given the low success rate of most of these programs, they look a lot less like incubators for successful businesses and a lot more like post-graduate entrepreneurial education programs. They do have one big difference from conventional educational programs: Instead of charging tuition, these programs pay a stipend to participants. It's not a bad way to learn (depending on who's teaching), but it's not necessarily a good way to launch a business. Don't get me wrong--incubators like Y Combinator and TechStars have had a lot of success; it's the second- and third-tier programs that are much harder to justify based on their track records.
If the flood of capital that's been chasing startups dries up, running a startup will no longer seem like a game and will become what it always has been--hard, risky work. At that point, I expect many of today's startup entrepreneurs to go back to looking for full-time jobs.
What's disconcerting to me is how many people see startups as a game. It's incredibly easy to start a company; the software and services necessary are available for free or at very low cost, at least while the business is in the development phase. Incubators, startup weekends and shared workspaces are popping up everywhere. Yet, the real process of starting and running a business is hard work. There's no glamour and very little fun involved with spending 12 to 14 hours a day raising money, staffing up, talking with customers, writing and testing code, and selling. However, creating a startup is far too often seen as a game that's won when the business raises funding.
Eric Ries has written an excellent post about the "startup winter" that will inevitably come. There's too much volatility in financial markets for venture funding to continue at its current pace. Today alone, five IPOs were delayed or withdrawn. Ries believes that "a shocking number of the current crop of incubators, accelerators, and other startup-support programs will suddenly disappear," especially second- and third-tier programs. Think about how few of the startups spawned from these programs actually mature into successful businesses, and how many of them pivot just in the few months that they're in incubators and accelerators.
Given the low success rate of most of these programs, they look a lot less like incubators for successful businesses and a lot more like post-graduate entrepreneurial education programs. They do have one big difference from conventional educational programs: Instead of charging tuition, these programs pay a stipend to participants. It's not a bad way to learn (depending on who's teaching), but it's not necessarily a good way to launch a business. Don't get me wrong--incubators like Y Combinator and TechStars have had a lot of success; it's the second- and third-tier programs that are much harder to justify based on their track records.
If the flood of capital that's been chasing startups dries up, running a startup will no longer seem like a game and will become what it always has been--hard, risky work. At that point, I expect many of today's startup entrepreneurs to go back to looking for full-time jobs.
Sunday, January 30, 2011
Cloning Silicon Valley is a lot harder than it looks
For decades, cities and countries around the world have tried to duplicate Silicon Valley. With very few exceptions, these Silicon Valley "clones" have failed. The most common reasons given for the failures include lack of venture capital and lack of university support, but there are a number of other reasons why good intentions so often go awry:
- Technology and business centers usually grow organically, as an outgrowth of existing universities or businesses. "Artificial Trees" are "Silicon Valley" clones that are built in areas with no natural growth factors. They're a lot like farms that are built in the middle of the desert: Everything they need has to be imported. As soon as the supply of any essential ingredients (talent, technology or money) tapers off, these "Artificial Trees" die off.
- In some areas, startups get funded on the basis of political clout and power, not merit. Entrepreneurs without connections don't get funded, and if they can't make the necessary connections, they go under. It becomes clear fairly quickly that the startups that got funding did so for the wrong reasons, and the available investment capital dries up.
- Some Silicon Valley "clones" get started with verbal commitments from government or private investors to make funding available. As time goes on, however, those "investors" don't actually make any investments, or the few that they do make are small and ineffectual.
- In some areas, a handful of people have designated themselves as the "go-to" people for creating and supporting the startup community. If other investors or organizers that haven't agreed to work with the "go-to" people try to offer support to the community, the established order works to push them out or minimize their influence. In addition, the startup community defines itself by the mindset of its "go-to" people and rejects ideas and participants that don't fit.
- Sometimes, the "go-to" people are well-meaning but ineffective. The head of a startup development organization I interviewed late last year in Chicago said that his group had spent seven years trying to get the city's largest investors (family foundations and investors affiliated with the Chicago Merchantile Exchange) to get involved with venture investment, especially A and B rounds, with very little success. If you try doing something for seven years and keep failing, you're doing something wrong.
- Startups struggle in areas where there's a great deal of competition for talent from established companies. For example, New York City startups have found it very difficult to compete for technical talent with investment banks and other financial companies that pay enormous salaries and bonuses.
- If entrepreneurs focus on the wrong reasons for doing startups, they're likely to fail. For example, if an entreprenur wants to start a business in order to get rich, without recognizing the high risk of failure and tremendous effort involved in building their business, they're likely to give up as soon as running their business becomes too difficult or expensive.
- If the community puts a high price on failure, either social or financial, startups aren't likely to flourish. In the U.S., 90% of all small businesses fail, and 70% of startups funded by professional venture capitalists fail, so it's essential that entrepreneurs have the ability to fail and try again without stigma or crippling personal penalties.
Saturday, January 22, 2011
Is there too much emphasis on scalable startups?
Enterpreneurs, especially technology-based ones, are encouraged to "think big" and build startups that have the potential to grow to an enormous size. Steve Blank, the father of the Customer Development process, calls these types of business "scalable startups". As he puts it, "A 'scalable startup' takes an innovative idea and searches for a scalable and repeatable business model that will turn it into a high growth, profitable company. Not just big but huge. It does that by entering a large market and taking share away from incumbents or by creating a new market and growing it rapidly."
By definition (and as Steve says in the very next paragraph), "A scalable startup typically requires external 'risk' capital to create market demand and scale." This is the very definition of the role of conventional venture capital: Invest a large amount of money in a startup, with the hope that the business will grow big enough to exit, either through an acquisition and IPO, and pay the investors a huge multiple on their original investment.
Steve calls the alternative to a scalable startup a "small business", while venture capitalists have a more derogatory name: "Lifestyle business". These businesses don't have the potential to become huge (with equally huge valuations), and are therefore bad. Or are they?
Somewhere between a "mom & pop" business like a local hardware store or restaurant and, say, Facebook, there are a lot of businesses that have the potential to grow into valuable companies that can be sold at a good multiple, but don't have the potential to be "huge". In software, there are development tools, utilities, and vertical applications that can be significant businesses. On the Internet, there are countless online services that could grow into significant businesses and be acquired by larger companies. These opportunities are right in the wheelhouse of angel investors.
Consider a startup that an angel invests $100,000 in and ends up being acquired at a 20-to-1 multiple. The angel walks away with $2 million. To a venture capital firm, that's not even worth wasting time on, but it's a good return for an angel. Compare that to a VC that puts in $1 million to get a $20 million return. The VC's financial exposure is ten times as much, and the probability of getting back $20 million is lower than that of the angel getting back $2 million.
Obviously, any angel would give their right arm to get the return that Peter Thiel got from Facebook ($500,000 invested for a $1.7 billion valuation of his share of the company as of last November, and undoubtedly, more now.) However, the odds of that kind of return are incredibly long, even for the best VCs. The new model is smaller investments in more companies at earlier stages. The larger number of investments, and their small size relative to historical VC investments, compensates for the higher risk of seed investments, as well as lower absolute rewards if and when the companies exit.
To be clear, a startup that has no hope of an exit with a 10X to 20X return to investors won't get funded by angels, let alone VCs. Those businesses have to bootstrap and/or call on "friends & family" for financing. However, there are a lot of "non-huge" startups that can still exit with a good return on investment, and dismissing them as "lifestyle businesses" means closing off a lot of good opportunities to make money.
By definition (and as Steve says in the very next paragraph), "A scalable startup typically requires external 'risk' capital to create market demand and scale." This is the very definition of the role of conventional venture capital: Invest a large amount of money in a startup, with the hope that the business will grow big enough to exit, either through an acquisition and IPO, and pay the investors a huge multiple on their original investment.
Steve calls the alternative to a scalable startup a "small business", while venture capitalists have a more derogatory name: "Lifestyle business". These businesses don't have the potential to become huge (with equally huge valuations), and are therefore bad. Or are they?
Somewhere between a "mom & pop" business like a local hardware store or restaurant and, say, Facebook, there are a lot of businesses that have the potential to grow into valuable companies that can be sold at a good multiple, but don't have the potential to be "huge". In software, there are development tools, utilities, and vertical applications that can be significant businesses. On the Internet, there are countless online services that could grow into significant businesses and be acquired by larger companies. These opportunities are right in the wheelhouse of angel investors.
Consider a startup that an angel invests $100,000 in and ends up being acquired at a 20-to-1 multiple. The angel walks away with $2 million. To a venture capital firm, that's not even worth wasting time on, but it's a good return for an angel. Compare that to a VC that puts in $1 million to get a $20 million return. The VC's financial exposure is ten times as much, and the probability of getting back $20 million is lower than that of the angel getting back $2 million.
Obviously, any angel would give their right arm to get the return that Peter Thiel got from Facebook ($500,000 invested for a $1.7 billion valuation of his share of the company as of last November, and undoubtedly, more now.) However, the odds of that kind of return are incredibly long, even for the best VCs. The new model is smaller investments in more companies at earlier stages. The larger number of investments, and their small size relative to historical VC investments, compensates for the higher risk of seed investments, as well as lower absolute rewards if and when the companies exit.
To be clear, a startup that has no hope of an exit with a 10X to 20X return to investors won't get funded by angels, let alone VCs. Those businesses have to bootstrap and/or call on "friends & family" for financing. However, there are a lot of "non-huge" startups that can still exit with a good return on investment, and dismissing them as "lifestyle businesses" means closing off a lot of good opportunities to make money.
Thursday, December 30, 2010
A peaceful alternative to the "war" for top talent?
The Wall Street Journal ran an article yesterday that merely reinforces what anyone in Silicon Valley has known for some time--there's a war going on between the startups looking for hire top developers and the established companies looking to keep them. (Example #1 of the established companies is Google, which has raised salaries by 10%, gave every employee a surprise $1,000 cash bonus and offered insane stock options to top developers to keep them from defecting.)
According to the WSJ, Okta, the San Francisco-based startup that's the focus of the article, plans to spend 80% of its $10 million Series A round on salaries, most of which will be for developers. Part of the problem is that salaries for developers in the San Francisco Bay Area are dramatically higher than in most other parts of the country; Okta is paying $75,000 for developers just out of school, and up to $150,000 for top developers, while the national median salaries for entry-level developers is $51,000, and $101,000 for experienced, senior-level developers (based on figures from Salary.com).
These costs are driven in part by the cost of living in Silicon Valley, which is higher than anywhere in the U.S. except for portions of New York City. In addition, even though there are far more developers in Silicon Valley than in any other comparable area in the U.S., everyone wants the best developers, and there are only so many of them to go around. That competition inflates the salaries that companies have to pay for talent.
In addition, the decline in IPOs has made candidates skeptical about the value of equity. In the "Dot-Com" years, startups could offer sub-par salaries, even to top talent, so long as they gave them substantial stock options. Today, when the exit strategy for most startups is to be acquired, most of the proceeds go to the angel investors, venture capitalists and founders; very little is left over for employees. So, while startups are very picky as to who they hire, the candidates demand top salaries (and still demand equity as well).
One solution to this logjam is to stay away from Silicon Valley. I've written about this many times before, but moving from almost anywhere else in the U.S. to Silicon Valley will instantly impose an operating cost penalty of 30-50% on your startup. Cities like Austin, Boston, Boulder/Denver, Chicago, Pittsburgh, Portland and Raleigh/Durham/Chapel Hill have excellent quality of life, strong technology bases, top universities and much lower costs of living than Silicon Valley.
Here's the key: These areas don't need to be "the next Silicon Valley" in order to be successful. They don't have to replicate the entire Silicon Valley infrastructure: Money and resources are now global. The biggest investor in Chicago's Groupon, for example, is Digital Sky Technologies, based in Moscow. Moscow is a long drive from Sand Hill Road.
Having lived in Chicago for two years now after 25 years in Silicon Valley, there's not much that I miss. The weather was much more to my liking, I enjoyed being able to drive to the Coast in an hour, and the seafood was far better. On the other hand, I paid 50% more for a semi-squalid apartment, virtually everything cost much more, and state income taxes were three times higher than those in Illinois. For me at least, it's a reasonable trade off.
So, one solution to the "war" for top talent is to stay out of the battlefield.
According to the WSJ, Okta, the San Francisco-based startup that's the focus of the article, plans to spend 80% of its $10 million Series A round on salaries, most of which will be for developers. Part of the problem is that salaries for developers in the San Francisco Bay Area are dramatically higher than in most other parts of the country; Okta is paying $75,000 for developers just out of school, and up to $150,000 for top developers, while the national median salaries for entry-level developers is $51,000, and $101,000 for experienced, senior-level developers (based on figures from Salary.com).
These costs are driven in part by the cost of living in Silicon Valley, which is higher than anywhere in the U.S. except for portions of New York City. In addition, even though there are far more developers in Silicon Valley than in any other comparable area in the U.S., everyone wants the best developers, and there are only so many of them to go around. That competition inflates the salaries that companies have to pay for talent.
In addition, the decline in IPOs has made candidates skeptical about the value of equity. In the "Dot-Com" years, startups could offer sub-par salaries, even to top talent, so long as they gave them substantial stock options. Today, when the exit strategy for most startups is to be acquired, most of the proceeds go to the angel investors, venture capitalists and founders; very little is left over for employees. So, while startups are very picky as to who they hire, the candidates demand top salaries (and still demand equity as well).
One solution to this logjam is to stay away from Silicon Valley. I've written about this many times before, but moving from almost anywhere else in the U.S. to Silicon Valley will instantly impose an operating cost penalty of 30-50% on your startup. Cities like Austin, Boston, Boulder/Denver, Chicago, Pittsburgh, Portland and Raleigh/Durham/Chapel Hill have excellent quality of life, strong technology bases, top universities and much lower costs of living than Silicon Valley.
Here's the key: These areas don't need to be "the next Silicon Valley" in order to be successful. They don't have to replicate the entire Silicon Valley infrastructure: Money and resources are now global. The biggest investor in Chicago's Groupon, for example, is Digital Sky Technologies, based in Moscow. Moscow is a long drive from Sand Hill Road.
Having lived in Chicago for two years now after 25 years in Silicon Valley, there's not much that I miss. The weather was much more to my liking, I enjoyed being able to drive to the Coast in an hour, and the seafood was far better. On the other hand, I paid 50% more for a semi-squalid apartment, virtually everything cost much more, and state income taxes were three times higher than those in Illinois. For me at least, it's a reasonable trade off.
So, one solution to the "war" for top talent is to stay out of the battlefield.
Saturday, October 09, 2010
The value of ideas (hint: It's not zero)
I've read a few articles recently that argued that ideas, by themselves, are worthless. According to these writers, it's only when an idea is implemented (e.g., when a startup takes the idea to market) that it has value. In support of their argument, they cite the belief that angels and VCs pay much more attention to the team than to their idea; a great team with a bad idea can find a better idea, but a mediocre team, even with a great idea, is likely to fail.
I disagree with the argument that ideas are worthless. Every business starts with an idea, and if it's a bad one, the company will probably fail unless management recognizes the problem in time AND finds a better idea to implement. A good analogy is between potential and kinetic energy. An idea by itself has potential energy that can be released (converted into kinetic energy) if it's implemented properly. The better the idea, the more potential energy it has.
There are great ideas with tremendous potential that can't be released, because they're ahead of the market or the available technology. That doesn't make them worthless--it just means that they need to be put on the shelf for a while. There are equally great ideas that are implemented by mediocre teams and fail, not because the idea isn't good but because the team implementing it bungled the job. The implementation of the idea was bad, not the idea itself.
As for VCs and angels who believe that if a "great" team has a bad idea, it can successfully pivot and find a better idea, consider that for even the savviest investors, 70% of their investments fail completely, 20% survive but rarely return more than their initial investments, and if they're very lucky, 10% succeed and are either sold for a big profit or go public. In my opinion, it's at least as likely that the "great" team will go from one bad idea to another until it runs out of capital or blows apart.
One other point: The definition of a "great team" is very speculative. Enron had a widely respected management team, right up to the point that it imploded. The top management of the major commercial and investment banks were considered "Wizards of Wall Street", even though they didn't understand the financial instruments that they were buying and selling. We didn't find out how incompetent they were until they nearly dragged the world into a new Depression. It's very difficult to identify the teams that are going to work well before they've actually spent a considerable amount of time working together on the idea that's being funded (not based on their previous experience working together at other companies.)
Therefore, the quality of an idea is at least as important as the team executing it. If you discount the value of ideas, you do so at your peril.
I disagree with the argument that ideas are worthless. Every business starts with an idea, and if it's a bad one, the company will probably fail unless management recognizes the problem in time AND finds a better idea to implement. A good analogy is between potential and kinetic energy. An idea by itself has potential energy that can be released (converted into kinetic energy) if it's implemented properly. The better the idea, the more potential energy it has.
There are great ideas with tremendous potential that can't be released, because they're ahead of the market or the available technology. That doesn't make them worthless--it just means that they need to be put on the shelf for a while. There are equally great ideas that are implemented by mediocre teams and fail, not because the idea isn't good but because the team implementing it bungled the job. The implementation of the idea was bad, not the idea itself.
As for VCs and angels who believe that if a "great" team has a bad idea, it can successfully pivot and find a better idea, consider that for even the savviest investors, 70% of their investments fail completely, 20% survive but rarely return more than their initial investments, and if they're very lucky, 10% succeed and are either sold for a big profit or go public. In my opinion, it's at least as likely that the "great" team will go from one bad idea to another until it runs out of capital or blows apart.
One other point: The definition of a "great team" is very speculative. Enron had a widely respected management team, right up to the point that it imploded. The top management of the major commercial and investment banks were considered "Wizards of Wall Street", even though they didn't understand the financial instruments that they were buying and selling. We didn't find out how incompetent they were until they nearly dragged the world into a new Depression. It's very difficult to identify the teams that are going to work well before they've actually spent a considerable amount of time working together on the idea that's being funded (not based on their previous experience working together at other companies.)
Therefore, the quality of an idea is at least as important as the team executing it. If you discount the value of ideas, you do so at your peril.
Tuesday, October 05, 2010
Startups: Getting back to first principles
It's become so easy and inexpensive to launch a software or Internet-based startup that the current "leading edge" of thought is that startups should "fail fast" (make mistakes early) and then "pivot" (adopt a different strategy, or even develop a different product or service) until they land on a viable market opportunity. We've lost sight of some fundamental first principles that startup teams should think about before they write a line of code. These are first principles in the vein of "The Art of War"--how likely are you to survive engagements with customers and competitors.
For example, direct, head-on competition with entrenched competitors is likely to result in failure. If you're building a new search engine, you're likely to fail (see Cuil and endless other companies) unless you've got a parent company that makes more money than it knows what to do with (see Bing.) The best outcome in this case is that you'll develop some unique and interesting technology, and larger competitors will find it cheaper and easier to buy it from you than to build it themselves.
If you're planning to go after much bigger competitors, misdirect them and keep your mouth shut about your true intentions until you're too big to kill. Netscape was growing incredibly rapidly as a browser company, but Microsoft was largely ignoring it. However, as soon as Netscape announced that it was positioning its browser for running applications on any operating system, Microsoft saw it as an existential threat and did everything it could to destroy the company. Since Netscape still had tiny revenues, Microsoft could "cut off its air supply" by giving its browser and Internet servers away. Had Netscape kept quiet about its intention to turn its browsers into an application platform until it was big enough to withstand attacks from Microsoft, it would have survived. (AOL, which acquired Netscape, has abandoned all use of Netscape's brand name and products, and moved out of the last of Netscape's buildings in Silicon Valley in late August.)
Google learned from Netscape's demise and kept quiet about its long-term plans. It was a search engine, and search was at best a minor part of Microsoft's business. It generated advertising revenues, but Microsoft made its money through selling software, so that wasn't perceived as a threat, either. The first iteration of Google Apps was seen as a joke by Microsoft and dismissed. Google hired Andy Rubin, the founder of Danger (the developer of Sidekick mobile phones, which was subsequently acquired by Microsoft) and adopted the funky smartphone operating system (Android) that he had been working on. Again, it was under the radar and not worth Microsoft's time. By the time Microsoft fully realized how many of its businesses were under attack, Google was too big for Microsoft to kill.
If you're going into any market dominated by "old media" companies, position what you're doing as a way for them to retain market share and/or make more money, and make sure that they agree--otherwise, they'll kill you. Napster completely disrupted the business models of the big record companies, and they sued Napster out of existence, but not before they were crippled by music sharing. Apple stepped in and offered the record companies a way to make money from the growth in usage of digital media players. The record companies bought in, which ultimately resulted in Apple becoming the world's largest seller of music, and made the record companies dependent on Apple for their survival.
If your business depends on information or support from entrenched companies, you're going to have an uphill battle. Steve Huffman, one of the founders of Reddit, set off to create an airline ticket comparison service, Hipmunk, that makes it easy to find the lowest fares. This, however, threatens the airlines, which see it as decreasing their potential profits. So, Hipmunk has struggled to get access to the flight and pricing information that it needs for its service. The company has launched, but its most likely exit strategy (if it survives) is to be acquired by a search engine or a larger travel service.
When startups take on entrenched competitors, they almost always roll out the David and Goliath story. The reason that story has so much resonance is that the little guy beat the big guy, when in the real world, the big guy almost always wins. The lesson for startups is to avoid taking on the big guys until you're big enough to fight them as an equal.
For example, direct, head-on competition with entrenched competitors is likely to result in failure. If you're building a new search engine, you're likely to fail (see Cuil and endless other companies) unless you've got a parent company that makes more money than it knows what to do with (see Bing.) The best outcome in this case is that you'll develop some unique and interesting technology, and larger competitors will find it cheaper and easier to buy it from you than to build it themselves.
If you're planning to go after much bigger competitors, misdirect them and keep your mouth shut about your true intentions until you're too big to kill. Netscape was growing incredibly rapidly as a browser company, but Microsoft was largely ignoring it. However, as soon as Netscape announced that it was positioning its browser for running applications on any operating system, Microsoft saw it as an existential threat and did everything it could to destroy the company. Since Netscape still had tiny revenues, Microsoft could "cut off its air supply" by giving its browser and Internet servers away. Had Netscape kept quiet about its intention to turn its browsers into an application platform until it was big enough to withstand attacks from Microsoft, it would have survived. (AOL, which acquired Netscape, has abandoned all use of Netscape's brand name and products, and moved out of the last of Netscape's buildings in Silicon Valley in late August.)
Google learned from Netscape's demise and kept quiet about its long-term plans. It was a search engine, and search was at best a minor part of Microsoft's business. It generated advertising revenues, but Microsoft made its money through selling software, so that wasn't perceived as a threat, either. The first iteration of Google Apps was seen as a joke by Microsoft and dismissed. Google hired Andy Rubin, the founder of Danger (the developer of Sidekick mobile phones, which was subsequently acquired by Microsoft) and adopted the funky smartphone operating system (Android) that he had been working on. Again, it was under the radar and not worth Microsoft's time. By the time Microsoft fully realized how many of its businesses were under attack, Google was too big for Microsoft to kill.
If you're going into any market dominated by "old media" companies, position what you're doing as a way for them to retain market share and/or make more money, and make sure that they agree--otherwise, they'll kill you. Napster completely disrupted the business models of the big record companies, and they sued Napster out of existence, but not before they were crippled by music sharing. Apple stepped in and offered the record companies a way to make money from the growth in usage of digital media players. The record companies bought in, which ultimately resulted in Apple becoming the world's largest seller of music, and made the record companies dependent on Apple for their survival.
If your business depends on information or support from entrenched companies, you're going to have an uphill battle. Steve Huffman, one of the founders of Reddit, set off to create an airline ticket comparison service, Hipmunk, that makes it easy to find the lowest fares. This, however, threatens the airlines, which see it as decreasing their potential profits. So, Hipmunk has struggled to get access to the flight and pricing information that it needs for its service. The company has launched, but its most likely exit strategy (if it survives) is to be acquired by a search engine or a larger travel service.
When startups take on entrenched competitors, they almost always roll out the David and Goliath story. The reason that story has so much resonance is that the little guy beat the big guy, when in the real world, the big guy almost always wins. The lesson for startups is to avoid taking on the big guys until you're big enough to fight them as an equal.
Saturday, May 29, 2010
Startups: Tentpoles and pollination
One of the most effective mechanisms for creating startups is a successful startup that turns into a big business. eBay is an excellent example of s startup that became successful and made a lot of people rich. Those people turned around and invested their money in their own startups and those of other entrepreneurs, which created a new generation of startups. I call these big, successful startups "tentpoles", the same term used in the movie business for a motion picture that's expected to be wildly successful and to spin off a series of sequels. In Silicon Valley, Hewlett-Packard and Fairchild Semiconductor were two of the earliest tentpoles; Apple and Intel sprung from them, and the current generation of tentpoles includes Google and eBay.
Tentpoles go through their own lifecycles, however. Early in their lives, they tend to attract engineers who are likely to go off and do their own startups. As they get bigger and more bureaucratic, however, they attract employees. Employees don't want to be entrepreneurs. They want a steady paycheck and good benefits with no risk. Employees crush the startup spirit of the tentpole with bureaucracy and hierarchy. Potential entrepreneurs who do join tentpoles by the time they reach this stage either leave quickly or get trampled down in the organization. As the Japanese say, "The nail that sticks up gets hammered down."
There's another model for startup creation, and perhaps its best exponent is Jason Fried, the co-founder of 37signals, the Chicago-based company that offers Basecamp, Backpack, Campfire, Highrise and other web applications, and that developed Ruby on Rails. Fried and Ruby on Rails developer David Heinemeier Hansson recently wrote Rework, a book about creating and growing small, sustainable businesses. Rework has gotten a lot of attention, and Fried often speaks about his concepts to groups of business founders and potential founders.
Companies that apply the concepts in Rework are unlikely to ever become tentpoles, and that's just fine with Fried. He believes that companies should grow organically from their own cash flow, and shouldn't depend on venture capital. Companies following the Rework model are likely to look a lot like 37signals itself--small (almost always under 100 employees), virtually organized (utilizing team members wherever they're located), very efficient, extremely flexible and a little bit opportunistic.
I call this model "pollination", where a set of concepts, or even a single idea or meme, can pollinate startups around the world. It doesn't depend on a tentpole, local universities or an active venture capital community; all it needs are motivated people who want to start their own businesses. The companies that develop out of this pollination are unlikely to ever get big enough to go public and score huge paydays for pre-IPO founders and employees, so they're probably not going to spin off lots of startups themselves. But, if they're successful, they encourage others to follow in their footsteps.
The tentpole model is the way the startup environment has grown for the past 50 years, but when it costs less to start a new technology business today than ever before, and when more resources are available in more places around the world than ever before, pollination makes more sense. It doesn't depend on the existence of a local tentpole to spin off more startups, and it doesn't rely on a local concentration of resources. People have been trying to build Silicon Valleys in their regions for decades, largely without success. Perhaps the Internet and its related technologies have made it unnecessary to replicate Silicon Valley, but it also means that there's not likely to be another concentration of tentpoles in one area like Silicon Valley in the future.
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Tentpoles go through their own lifecycles, however. Early in their lives, they tend to attract engineers who are likely to go off and do their own startups. As they get bigger and more bureaucratic, however, they attract employees. Employees don't want to be entrepreneurs. They want a steady paycheck and good benefits with no risk. Employees crush the startup spirit of the tentpole with bureaucracy and hierarchy. Potential entrepreneurs who do join tentpoles by the time they reach this stage either leave quickly or get trampled down in the organization. As the Japanese say, "The nail that sticks up gets hammered down."
There's another model for startup creation, and perhaps its best exponent is Jason Fried, the co-founder of 37signals, the Chicago-based company that offers Basecamp, Backpack, Campfire, Highrise and other web applications, and that developed Ruby on Rails. Fried and Ruby on Rails developer David Heinemeier Hansson recently wrote Rework, a book about creating and growing small, sustainable businesses. Rework has gotten a lot of attention, and Fried often speaks about his concepts to groups of business founders and potential founders.
Companies that apply the concepts in Rework are unlikely to ever become tentpoles, and that's just fine with Fried. He believes that companies should grow organically from their own cash flow, and shouldn't depend on venture capital. Companies following the Rework model are likely to look a lot like 37signals itself--small (almost always under 100 employees), virtually organized (utilizing team members wherever they're located), very efficient, extremely flexible and a little bit opportunistic.
I call this model "pollination", where a set of concepts, or even a single idea or meme, can pollinate startups around the world. It doesn't depend on a tentpole, local universities or an active venture capital community; all it needs are motivated people who want to start their own businesses. The companies that develop out of this pollination are unlikely to ever get big enough to go public and score huge paydays for pre-IPO founders and employees, so they're probably not going to spin off lots of startups themselves. But, if they're successful, they encourage others to follow in their footsteps.
The tentpole model is the way the startup environment has grown for the past 50 years, but when it costs less to start a new technology business today than ever before, and when more resources are available in more places around the world than ever before, pollination makes more sense. It doesn't depend on the existence of a local tentpole to spin off more startups, and it doesn't rely on a local concentration of resources. People have been trying to build Silicon Valleys in their regions for decades, largely without success. Perhaps the Internet and its related technologies have made it unnecessary to replicate Silicon Valley, but it also means that there's not likely to be another concentration of tentpoles in one area like Silicon Valley in the future.
Friday, May 21, 2010
Three scorpions in a bottle, and a great opportunity for startups
As several writers have pointed out, yesterday's keynote session at Google's I/O Conference was an Apple bashfest. It's increasingly looking like Apple, Google and Microsoft are three scorpions in a bottle, focusing all their attention on each other, with Adobe and Yahoo acting like smaller bugs in the bottle, desperately looking for a ride on one of the scorpions' backs to avoid getting stung.
This represents a great opportunity for startups. The big guys are focusing on each other, rather than customers. They're reacting to each other's moves, and that means that they're even less sensitive than usual to the activities of companies outside the bottle. As Bill Gates said years ago, his biggest fear was two guys in a garage doing something that Microsoft hadn't anticipated. He was right; the two guys were Sergey Brin and Larry Page, and although they were at Stanford, not in a garage, they thoroughly blindsided Microsoft. Now, Brin and Page, along with Steve Jobs and Steve Ballmer, need to watch out for the next "two guys in a garage", who are likely already working on the next big thing.
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This represents a great opportunity for startups. The big guys are focusing on each other, rather than customers. They're reacting to each other's moves, and that means that they're even less sensitive than usual to the activities of companies outside the bottle. As Bill Gates said years ago, his biggest fear was two guys in a garage doing something that Microsoft hadn't anticipated. He was right; the two guys were Sergey Brin and Larry Page, and although they were at Stanford, not in a garage, they thoroughly blindsided Microsoft. Now, Brin and Page, along with Steve Jobs and Steve Ballmer, need to watch out for the next "two guys in a garage", who are likely already working on the next big thing.
Saturday, May 08, 2010
Should you get an MBA if you want to do a startup?
There's a continuing thread of discussion about the value of getting an MBA if you want to do a startup. Some people think that it will give you valuable business knowledge, while others believe that it will put you in a financial hole that will take years to recoup.
You need to know a little about my background in order to put my opinions in perspective. I've got a BS in Management as well as an MBA in Marketing and Management Policy. I went directly from undergraduate to graduate school, something that was common when I was in college but is very rare with MBA programs today. I don't have an engineering or CS degree, but as of this summer, I will have been programming for 40 years (although I earned a living as a software engineer for only a few years.)
My bottom line is that if you've already got a BS in Engineering or Computer Science and you didn't take any business courses in undergraduate school, a MBA degree can be very helpful, but not necessarily in the way that you might think. Yes, you'll learn about the business essentials: Management, marketing, finance, economics, accounting, business law, advertising, market research, etc. However, what's even more important is the network of contacts that you'll make and your access to the school's alumni programs once you graduate. These contacts and services can help you throughout your career. Getting into a highly-regarded MBA program is disproportionately valuable, not only because the reputation of your school will rub off on you, but also because the contacts that you make while in school are likely to be of a higher caliber.
If you can't get into one of the top 20 programs, I'd suggest going for the most cost-effective program you can get--possibly a college or university with a good regional reputation. You'll still get education in all the business essentials, but you won't have to pay the huge tuition and fees that many MBA programs charge. Some of the top schools offer night programs that are less expensive and time-consuming, but are still taught by the same professors and lecturers as their full-time programs.
If you're still in undergraduate school or even just at the point where you're thinking about undergraduate school, you should take business courses along with your EE or CS major. A lot of people will disagree with me, but in my opinion, there is very little difference in the information you'll learn in undergraduate and graduate business courses covering the same topics. If the school that you're going to has a good undergraduate business program, and many engineering schools do, you can get an excellent business education while you're learning engineering.
My experience is that undergraduate business courses are better at teaching you about how to really do things than are MBA courses. Students graduate from top MBA programs ready to be CEOs in big companies. They're far less ready to get into the trenches and do the grunt work, but that's exactly what you'll do in a startup. If you're part of the founding team in a startup, you may have to shift your thinking from development to finance to sales to hiring to marketing to legal, all in one day. You're going to be doing the work, not a cadre of subordinates and staffers.
So, do you need an MBA in order to do a startup? Absolutely not. Is getting an MBA counterproductive? Probably not, but it may take a long time to pay back your student loans. Should you get some kind of business education? Yes. It will help you to understand concepts and avoid mistakes, and can save you (and your startup) an enormous amount of grief.
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You need to know a little about my background in order to put my opinions in perspective. I've got a BS in Management as well as an MBA in Marketing and Management Policy. I went directly from undergraduate to graduate school, something that was common when I was in college but is very rare with MBA programs today. I don't have an engineering or CS degree, but as of this summer, I will have been programming for 40 years (although I earned a living as a software engineer for only a few years.)
My bottom line is that if you've already got a BS in Engineering or Computer Science and you didn't take any business courses in undergraduate school, a MBA degree can be very helpful, but not necessarily in the way that you might think. Yes, you'll learn about the business essentials: Management, marketing, finance, economics, accounting, business law, advertising, market research, etc. However, what's even more important is the network of contacts that you'll make and your access to the school's alumni programs once you graduate. These contacts and services can help you throughout your career. Getting into a highly-regarded MBA program is disproportionately valuable, not only because the reputation of your school will rub off on you, but also because the contacts that you make while in school are likely to be of a higher caliber.
If you can't get into one of the top 20 programs, I'd suggest going for the most cost-effective program you can get--possibly a college or university with a good regional reputation. You'll still get education in all the business essentials, but you won't have to pay the huge tuition and fees that many MBA programs charge. Some of the top schools offer night programs that are less expensive and time-consuming, but are still taught by the same professors and lecturers as their full-time programs.
If you're still in undergraduate school or even just at the point where you're thinking about undergraduate school, you should take business courses along with your EE or CS major. A lot of people will disagree with me, but in my opinion, there is very little difference in the information you'll learn in undergraduate and graduate business courses covering the same topics. If the school that you're going to has a good undergraduate business program, and many engineering schools do, you can get an excellent business education while you're learning engineering.
My experience is that undergraduate business courses are better at teaching you about how to really do things than are MBA courses. Students graduate from top MBA programs ready to be CEOs in big companies. They're far less ready to get into the trenches and do the grunt work, but that's exactly what you'll do in a startup. If you're part of the founding team in a startup, you may have to shift your thinking from development to finance to sales to hiring to marketing to legal, all in one day. You're going to be doing the work, not a cadre of subordinates and staffers.
So, do you need an MBA in order to do a startup? Absolutely not. Is getting an MBA counterproductive? Probably not, but it may take a long time to pay back your student loans. Should you get some kind of business education? Yes. It will help you to understand concepts and avoid mistakes, and can save you (and your startup) an enormous amount of grief.
Monday, April 19, 2010
What's the real impact of government vs. culture on new businesses?
I was at an entrepreneurial conference in Chicago this weekend. The keynote speaker started off with the requisite witty anecdotes, followed by statistics about the impact of new and small businesses on the U.S. economy. To wrap up, she barreled into an Objectivist rant demanding that government get out of the way of new businesses. She may have thought that her screed was motivational, but it only left myself and most of the people in the room thinking "WTF?".
So, what's the real impact of government on new business formation? Government can stimulate new businesses with R&D tax credits, accelerated depreciation and taxing capital gains at lower rates than regular income. However, tax rates themselves have very little to do with either encouraging or discouraging new businesses. Consider that Chicago's "structural environment" is, in many ways, superior to Silicon Valley: At least as many top universities, excellent infrastructure, significantly lower state and local taxes (a 3% personal income tax vs. 9% in California, for example), and a more lenient, business-oriented regulatory structure. Chicago is physically closer to many more U.S. markets and to Europe, and is only a few hours further away from Asia.
Nevertheless, even with all those advantages, the rate of startup formation in Silicon Valley is one to two orders of magnitude higher than the rate in Chicago. Why? The reason is cultural, not governmental. Silicon Valley has a culture that, for several generations now, has inculcated the belief that it's better to have control over your own destiny than to give control to your employer. If you're happiest when you're getting a regular paycheck with good benefits, you're not likely to try to start your own company, and if you do try, you're likely to fail.
Chicago's culture is far more the norm for U.S. big cities; most people are perfectly happy with regular paychecks and don't have the "fire in their bellies" to go out and change the world, or at least a little piece of it. The problem with that thinking is that the regular paycheck and benefits lifeline is going away. Companies are moving away from permanent employees and toward contractors, temps and outsourcing. As Daniel Pink wrote a number of years ago, we're becoming a "Free Agent Nation."
So, the biggest reason why Chicago doesn't rival Silicon Valley as a startup formation mecca isn't government policies, it's a mindset that believes that if we do a good job for our employers, we'll be taken care of. Until many more people here believe that they can do a better job of looking out for their own best interests than can an employer, Chicago won't become a startup mecca. The speaker at last weekend's conference got a part of the Objectivist pitch right; it's just that the problem isn't government vs. startups, it's dependence on big business to provide support vs. taking responsibility yourself.
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So, what's the real impact of government on new business formation? Government can stimulate new businesses with R&D tax credits, accelerated depreciation and taxing capital gains at lower rates than regular income. However, tax rates themselves have very little to do with either encouraging or discouraging new businesses. Consider that Chicago's "structural environment" is, in many ways, superior to Silicon Valley: At least as many top universities, excellent infrastructure, significantly lower state and local taxes (a 3% personal income tax vs. 9% in California, for example), and a more lenient, business-oriented regulatory structure. Chicago is physically closer to many more U.S. markets and to Europe, and is only a few hours further away from Asia.
Nevertheless, even with all those advantages, the rate of startup formation in Silicon Valley is one to two orders of magnitude higher than the rate in Chicago. Why? The reason is cultural, not governmental. Silicon Valley has a culture that, for several generations now, has inculcated the belief that it's better to have control over your own destiny than to give control to your employer. If you're happiest when you're getting a regular paycheck with good benefits, you're not likely to try to start your own company, and if you do try, you're likely to fail.
Chicago's culture is far more the norm for U.S. big cities; most people are perfectly happy with regular paychecks and don't have the "fire in their bellies" to go out and change the world, or at least a little piece of it. The problem with that thinking is that the regular paycheck and benefits lifeline is going away. Companies are moving away from permanent employees and toward contractors, temps and outsourcing. As Daniel Pink wrote a number of years ago, we're becoming a "Free Agent Nation."
So, the biggest reason why Chicago doesn't rival Silicon Valley as a startup formation mecca isn't government policies, it's a mindset that believes that if we do a good job for our employers, we'll be taken care of. Until many more people here believe that they can do a better job of looking out for their own best interests than can an employer, Chicago won't become a startup mecca. The speaker at last weekend's conference got a part of the Objectivist pitch right; it's just that the problem isn't government vs. startups, it's dependence on big business to provide support vs. taking responsibility yourself.
Wednesday, April 07, 2010
Internships: You have to pay for what you get
It's Springtime, and both employers' and students' thoughts are turning to internships. Companies see interns as a way to get cheap help, and students look at internships as a way to get work experience and a "foot in the door" for a future job. However, it's very important for employers to recognize that they have to pay interns for their work. Both the US Federal Government and many state governments are cracking down on unpaid internships. Employers that are caught may be liable for back wages for their interns, unemployment and Social Security taxes on those wages, and penalties.
Many years ago, it was common for companies to offer unpaid internships in return for college credit and/or work experience. Today, however, in most areas you have to pay at least the prevailing minimum wage for the hours that interns work. I'm seeing many postings around the web soliciting unpaid interns for startups and small businesses. If you're an employer, that "free" labor isn't free and could cost you much more than if you simply paid an hourly minimum wage.
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Many years ago, it was common for companies to offer unpaid internships in return for college credit and/or work experience. Today, however, in most areas you have to pay at least the prevailing minimum wage for the hours that interns work. I'm seeing many postings around the web soliciting unpaid interns for startups and small businesses. If you're an employer, that "free" labor isn't free and could cost you much more than if you simply paid an hourly minimum wage.
Tuesday, March 23, 2010
For startups, it's money that matters (in different ways, at different times)
So you're thinking, "Of course money matters! Isn't that the point?" For startups. money means different things at different stages of development, and using it for the wrong things can be very dangerous. At inception, seed and early stages, money means investment in development and growth. The purpose of capital raised early on should be to develop the startup's products and services, do customer development, find a good product/market fit and have the means to pivot if you have to in order to find a good fit. However, for a good number of startups, especially in the dot-com boom days, early-stage money went for big offices, lavish furnishings, expensive cars and other unproductive uses. The goal of money in this stage is to invest in order to generate revenue.
At later stages, money can be used to invest in the business for rapid growth or, as Ben Horowitz puts it, to "crush your competition." It's also at these later stages that the emphasis shifts from plowing money back into the company to compensating investors for their investments and employees for their hard work. As I've written previously, successful startups have lots of exit strategies. If the company goes IPO, that provides the liquidity event for everyone. If the company is acquired, that may provide a decent return for the investors and something for the employees--it depends on the acquisition price. However, even if the company remains private and independent, it still has to put money back into the hands of its investors and employees.
It's at this stage where it's okay to start thinking about paying competitive salaries, creature comforts, and the other niceties of having money. If a startup continues to skimp on salaries, benefits and the like at this point, and if it refuses give investors a decent return, even if through dividends, it will lose key employees, increase employee turnover (which always increases cost and decreases efficiency) and tick off investors. Those startups that start cheap and stay cheap end up paying for it, sooner or later.
So money means different things, and should be used for different things, at different stages of a startup's development. Early on, use money to invest in the business; later on, use money as a reward.
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At later stages, money can be used to invest in the business for rapid growth or, as Ben Horowitz puts it, to "crush your competition." It's also at these later stages that the emphasis shifts from plowing money back into the company to compensating investors for their investments and employees for their hard work. As I've written previously, successful startups have lots of exit strategies. If the company goes IPO, that provides the liquidity event for everyone. If the company is acquired, that may provide a decent return for the investors and something for the employees--it depends on the acquisition price. However, even if the company remains private and independent, it still has to put money back into the hands of its investors and employees.
It's at this stage where it's okay to start thinking about paying competitive salaries, creature comforts, and the other niceties of having money. If a startup continues to skimp on salaries, benefits and the like at this point, and if it refuses give investors a decent return, even if through dividends, it will lose key employees, increase employee turnover (which always increases cost and decreases efficiency) and tick off investors. Those startups that start cheap and stay cheap end up paying for it, sooner or later.
So money means different things, and should be used for different things, at different stages of a startup's development. Early on, use money to invest in the business; later on, use money as a reward.
Sunday, March 21, 2010
Focus.
I visited a startup in Silicon Valley a couple of months ago; for purposes of confidentiality I won't name them. They're executing a business plan that calls for them to develop an online eCommerce service, client software and a new hardware platform. They started from scratch on all of it, and their goal is to get to market about a year after the company was first conceived. They're well funded, but they're obviously not generating any ongoing revenue, and they're still in stealth mode.
The single most important thing that a startup has to do is to focus. There's never enough money, time or resources. The three things that this startup is trying to do--Internet services, client software and hardware--would be big challenges for three startups, but they're trying to do it all themselves.
The irony is that they don't have to do everything they're trying to do. There are plenty of software clients out there that do what they need, or they could contract out for the client's development. The hardware segment they're focusing on is one of the most active and rapidly evolving areas in consumer electronics. There are (or certainly will be by the time they launch) tons of platforms that they could support, but they've deliberately chosen to build their own hardware platform. They could focus on their eCommerce service, which is going to be a big enough challenge in itself.
By trying to do everything themselves, they're scattering their resources and dramatically increasing the risk of failure. Also, by staying in stealth mode for so long, they're running the risk of coming to market with a poor product/market fit. They think that staying in stealth mode will protect them from competitors, but competitors don't need them to understand what the market needs.
The single most important thing that a startup must do is focus. Focusing helps you to conserve resources, pivot more adroitly, and leverage external partners and technologies. It decreases the potential points of failure. The company I just described is one of those "fat startups"; being fat has enabled it to unnecessarily scatter its efforts.
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The single most important thing that a startup has to do is to focus. There's never enough money, time or resources. The three things that this startup is trying to do--Internet services, client software and hardware--would be big challenges for three startups, but they're trying to do it all themselves.
The irony is that they don't have to do everything they're trying to do. There are plenty of software clients out there that do what they need, or they could contract out for the client's development. The hardware segment they're focusing on is one of the most active and rapidly evolving areas in consumer electronics. There are (or certainly will be by the time they launch) tons of platforms that they could support, but they've deliberately chosen to build their own hardware platform. They could focus on their eCommerce service, which is going to be a big enough challenge in itself.
By trying to do everything themselves, they're scattering their resources and dramatically increasing the risk of failure. Also, by staying in stealth mode for so long, they're running the risk of coming to market with a poor product/market fit. They think that staying in stealth mode will protect them from competitors, but competitors don't need them to understand what the market needs.
The single most important thing that a startup must do is focus. Focusing helps you to conserve resources, pivot more adroitly, and leverage external partners and technologies. It decreases the potential points of failure. The company I just described is one of those "fat startups"; being fat has enabled it to unnecessarily scatter its efforts.
Thursday, March 11, 2010
The Chicago startup scene is starting to take off
I attended an event in downtown Chicago tonight called MidVentures25, a presentation and competition for 25 startups from Chicago and other parts of the Midwest. One company that participated came all the way from Athens, GA. The event was very well-organized and equally well-attended. The organizers took over 22,000 square feet of "see-through" space in an office building across from the Willis (Sears) Tower for the night.
Each of the startups had a separate display area, much like a trade show. The judges (drawn from companies such as Groupon and Google, as well as VCs and local entrepreneurs) visited all 25 tables, got demonstrations and then chose their five favorite startups to present in the final round. The winner got $16,000 in cash, goods and services. UPDATE: One thing that I forgot to mention when I wrote this post last night is that the startups didn't have to pay a dime to enter the competition or for exhibit space at the event. The event organizers and sponsors picked up all the costs. The TechCrunch50 was the first major startup competition that chose not to charge the selected startups. MidVentures25 has picked up on that trend, and I hope that it becomes the rule, not the exception, in startup competitions in the future.
What's so exciting about this is that Chicago is starting to feel like a viable place to base a startup. There still isn't much of a VC community in Chicago; I'd like to see a "Sand Hill Road East" spring up somewhere in the city, even if it's only remote offices for a handful of VCs from Silicon Valley, New York and Boston. As I've written before, just about everything needed for a vital venture community is here, and the costs of operation are very low compared to Silicon Valley, New York and even Boston.
Tonight's turnout indicates that there's a lot of interest in startups, even though the local culture hasn't exactly been supportive of the startup mindset. Three new incubators recently opened in Chicago, so there will be more opportunities for entrepreneurs to pursue their dreams.
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Each of the startups had a separate display area, much like a trade show. The judges (drawn from companies such as Groupon and Google, as well as VCs and local entrepreneurs) visited all 25 tables, got demonstrations and then chose their five favorite startups to present in the final round. The winner got $16,000 in cash, goods and services. UPDATE: One thing that I forgot to mention when I wrote this post last night is that the startups didn't have to pay a dime to enter the competition or for exhibit space at the event. The event organizers and sponsors picked up all the costs. The TechCrunch50 was the first major startup competition that chose not to charge the selected startups. MidVentures25 has picked up on that trend, and I hope that it becomes the rule, not the exception, in startup competitions in the future.
What's so exciting about this is that Chicago is starting to feel like a viable place to base a startup. There still isn't much of a VC community in Chicago; I'd like to see a "Sand Hill Road East" spring up somewhere in the city, even if it's only remote offices for a handful of VCs from Silicon Valley, New York and Boston. As I've written before, just about everything needed for a vital venture community is here, and the costs of operation are very low compared to Silicon Valley, New York and even Boston.
Tonight's turnout indicates that there's a lot of interest in startups, even though the local culture hasn't exactly been supportive of the startup mindset. Three new incubators recently opened in Chicago, so there will be more opportunities for entrepreneurs to pursue their dreams.
Saturday, February 27, 2010
Why "Pay-to-Pitch" makes no sense for anyone
Over the last few months, a firestorm has erupted over angel venture funding groups and "deal-finders" that charge startups to pitch to their investors. The battle has been led by Jason Calacanis, who's declared war on pay-to-pitch. The most recent pay-to-pitch scheme to come under the spotlight is from New York Angels, led by David Rose (not the one with the orchestra.) New York Angels charges $150 as an application fee for a chance to pitch to whichever members of his group decide to show up that night. That's a lot less than some other groups and finders who charge thousands of dollars, but it's still pay-to-pitch.
In defense of why his group charges an application fee, Rose said the following: "The reason we charge a fee is because we're between a rock and a hard place. The unfortunate but accurate fact is that 90% of all companies requesting funding are simply not fundable, by anyone, anywhere...no matter how earnest the entrepreneur might be. The larger VC funds get upwards of 10,000 plans each year, but that's ok for them because they either completely ignore over-the-transom submissions, or have them read by a paid associate." (Click here for a link to his complete response.)
The problem with this logic is that $150 isn't going to spell the difference between a fundable startup and one that's not, and New York Angels is taking money from all of them. Assuming that Rose and his team only actually present the plans that they think are fundable to investors, they're effectively collecting $1,500 for every startup that gets to pitch. On the other hand, if they're letting startups pitch that they know aren't fundable, they're misleading the startups and wasting their investors' time.
If I were an angel, I'd want to screen my own deals, rather than let someone else tell me what's good and what's not. I wouldn't put any more trust in Mr. Rose than into a stockbroker or investment banker who's trying to get me to make an investment.
I don't begrudge Mr. Rose or his logic; I just think that it's wrong. Pay-to-pitch doesn't open up any real funding opportunities for startups. Investors involved in pay-to-pitch schemes either a) could do better by screening their own deals, or b) are motivated by the money they make from pitching fees, which means that they're not serious investors.
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In defense of why his group charges an application fee, Rose said the following: "The reason we charge a fee is because we're between a rock and a hard place. The unfortunate but accurate fact is that 90% of all companies requesting funding are simply not fundable, by anyone, anywhere...no matter how earnest the entrepreneur might be. The larger VC funds get upwards of 10,000 plans each year, but that's ok for them because they either completely ignore over-the-transom submissions, or have them read by a paid associate." (Click here for a link to his complete response.)
The problem with this logic is that $150 isn't going to spell the difference between a fundable startup and one that's not, and New York Angels is taking money from all of them. Assuming that Rose and his team only actually present the plans that they think are fundable to investors, they're effectively collecting $1,500 for every startup that gets to pitch. On the other hand, if they're letting startups pitch that they know aren't fundable, they're misleading the startups and wasting their investors' time.
If I were an angel, I'd want to screen my own deals, rather than let someone else tell me what's good and what's not. I wouldn't put any more trust in Mr. Rose than into a stockbroker or investment banker who's trying to get me to make an investment.
I don't begrudge Mr. Rose or his logic; I just think that it's wrong. Pay-to-pitch doesn't open up any real funding opportunities for startups. Investors involved in pay-to-pitch schemes either a) could do better by screening their own deals, or b) are motivated by the money they make from pitching fees, which means that they're not serious investors.
Tuesday, December 15, 2009
Where should you locate your startup?
I monitor the Lean Startup Circle group on Google, and a member asked for some suggestions on how and where to find a contract development team. The discussion quickly turned to relocating to where the team is (the member who asked for advice was in Denver); Silicon Valley came up a few times, and one person even suggested relocating to India. My suggestion was to stay right where he was, find a qualified developer locally to run development (I found some good resources in the Boulder area, and other members in the area offered their help), and go from there.
So, where should you locate your startup? (I'm assuming that your business will be technology-based.) If your customer base is concentrated in one geographic location, the answer is simple--go where your customers are. However, if your customers are spread out all over the place, should you stay put or move? It depends on who you (and your partners) are and what your expertise is. If you have the experience to develop at least a portion of the product or service yourself, and you're comfortable managing a development team, you can locate wherever you're comfortable and where you can find the other business and technical resources you'll need.
If you're not a developer or engineer, you need to have at least one person on your team who can run development. That person should be a full member of the team, not a contractor or consultant. No matter how good or committed a contractor is, they're always thinking about the next client and the next project. The work is always done better when the person who does it has skin in the game. It may not be as hard to find that person as you think. If you live in or near a major city, there are always developers that might be interested, or who might know someone qualified who would be interested. Search on Google with your city's name and terms like "startup" and "venture" to find local groups and events where like-minded people congregate, or use a service such as Meetup.com.
That's fine, you say, but why not move to Silicon Valley? I spent more than 25 years living and working there; I consider it my home. You'll find experts in just about every skill set you can imagine. I love the weather; not too hot, not too cold, and you're no more than a few hours from the beach or the mountains. Now for the downside: Silicon Valley is an incredibly expensive place to live, work and run a business. I would easily have to pay 50% more than I pay now for a condo comparable to the one I rent in a suburb of Chicago. If I wanted to buy a home, I'd pay at least three times as much in Silicon Valley for a home with comparable square footage and yard space. Taxes are very high, yet the quality of schools is poor, and parents pay big premiums to live in cities that have good schools, such as Los Gatos and Palo Alto.
Just about everything else is more expensive as well: Food, gasoline, utilities and so on. Office space is much more expensive. People have to earn more money in order to have a decent quality of life, so salaries are much higher. It all adds up to a much higher burn rate than in other, less expensive places to live.
I've never understood why venture capitalists push their investments to move from lower-cost areas such as Texas and Chicago to Silicon Valley. Yes, investors can keep closer tabs on their investments if they can drive over to them, but airfare is truly not that expensive, and teleconferencing is effectively free. If I could run my business successfully at a 30% to 50% lower burn rate simply by staying right where I am, why would I move?
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So, where should you locate your startup? (I'm assuming that your business will be technology-based.) If your customer base is concentrated in one geographic location, the answer is simple--go where your customers are. However, if your customers are spread out all over the place, should you stay put or move? It depends on who you (and your partners) are and what your expertise is. If you have the experience to develop at least a portion of the product or service yourself, and you're comfortable managing a development team, you can locate wherever you're comfortable and where you can find the other business and technical resources you'll need.
If you're not a developer or engineer, you need to have at least one person on your team who can run development. That person should be a full member of the team, not a contractor or consultant. No matter how good or committed a contractor is, they're always thinking about the next client and the next project. The work is always done better when the person who does it has skin in the game. It may not be as hard to find that person as you think. If you live in or near a major city, there are always developers that might be interested, or who might know someone qualified who would be interested. Search on Google with your city's name and terms like "startup" and "venture" to find local groups and events where like-minded people congregate, or use a service such as Meetup.com.
That's fine, you say, but why not move to Silicon Valley? I spent more than 25 years living and working there; I consider it my home. You'll find experts in just about every skill set you can imagine. I love the weather; not too hot, not too cold, and you're no more than a few hours from the beach or the mountains. Now for the downside: Silicon Valley is an incredibly expensive place to live, work and run a business. I would easily have to pay 50% more than I pay now for a condo comparable to the one I rent in a suburb of Chicago. If I wanted to buy a home, I'd pay at least three times as much in Silicon Valley for a home with comparable square footage and yard space. Taxes are very high, yet the quality of schools is poor, and parents pay big premiums to live in cities that have good schools, such as Los Gatos and Palo Alto.
Just about everything else is more expensive as well: Food, gasoline, utilities and so on. Office space is much more expensive. People have to earn more money in order to have a decent quality of life, so salaries are much higher. It all adds up to a much higher burn rate than in other, less expensive places to live.
I've never understood why venture capitalists push their investments to move from lower-cost areas such as Texas and Chicago to Silicon Valley. Yes, investors can keep closer tabs on their investments if they can drive over to them, but airfare is truly not that expensive, and teleconferencing is effectively free. If I could run my business successfully at a 30% to 50% lower burn rate simply by staying right where I am, why would I move?
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