infoChachkie » Launching Venture

When Hiring Entrepreneurs, Ignore Their Resumes

John Greathouse — Thu, 27 Oct 2011 15:00:58 +0000

Note: This is the third installment in the Startup Team Building series. Read Part I HERE and Part II HERE.

When hiring ATM Operators at a Big Dumb Company (BDC), assessing each candidate’s ability to execute predictable tasks is of paramount importance. As such, the recruitment process revolves around applicants’ resumes, which highlight what they have previously done in their professional careers.

What is important at a BDC, because most duties performed at mature entities are repetitive, structured and involve minimal ambiguity. Thus, evaluating the tasks a candidate has previously performed is a valid methodology when filling job openings in relatively static organizations.

Who Not What

When you are interviewing candidates during the early stages of your startup, who is far more important than what, because the tasks the candidate previously performed may be only partially applicable to the role they will play in your adVenture. In addition, the ever-evolving responsibilities associated with their new position will likely be ill-defined, multi-disciplinary and relatively ambiguous.

As noted in Inventors vs. Innovators, early-stage hires do not have to be wide-eyed inventors. In fact, a company filled with inventors would be a dysfunctional mess. However, such early hires should be Bank Robbers with the innate qualities that will allow them to resolve challenges with minimal resources. Reasonable people will attempt to make the best of the status quo – unreasonable entrepreneurs with the proper dose of Confidence, Courage and Conviction will shape the status quo to facilitate your adVenture’s ultimate success.

What a Long, Strange Trip It Will Be

As made clear in Optimistically Pessimistic, most entrepreneurs’ experiences are not linear. Many emerging entrepreneurs have fractured, seemingly random careers. Look past the strange pit stops and extended detours and seek to understand who the candidate is and how you can leverage their disparate experiences to achieve your startup’s goals.

You may inadvertently dismiss a talented contributor if you solely rely on what a candidate has previously done. At Expertcity (creator of GoToMyPC and GoToMeeting, acquired by Citrix), I hired salespeople with disparate backgrounds, including: a bar-band drummer, a customer service agent, a venture capitalist, a financial analyst, a county employee and a technician from a Kinko’s-like store. Per their respective resumes, none of these individuals had relevant experiences which suggested they would excel at selling sophisticated software to technically proficient professionals. Yet, all of them, save the drummer, were successful salespeople during my multi-year tenure as the company’s sales leader.

In order to find out who the candidate is, not just what they have done, consider the following issues:

How did they accomplish the tasks outlined on their resume? Did they build a team, did they go solo, did they dive into the task with relish or did they take on the mantel of a martyr?

Why did they make their professional life choices? Are they willing to admit when they’ve made a mistake? Is their explanation reasonable and thoughtful, given their stage in life and the other choices that were available to them at the time? Do they internalize their failures or do they attribute their setbacks to others?

What did they learn from their life choices? If the applicant cannot articulate meaningful lessons learned, they may not have the self-awareness necessary to Maximize Their Value at your startup.

Three’s Not Charming

I never hired anyone who was involved in three failed ventures. Great people can turn chicken poop into chicken salad. Adequate people can turn lemons into lemonade. Losers can turn fresh angel food cake into rancid devil’s food cake.

One or two failures spread over the course of an extensive career are not relevant. In fact, failures teach self-aware entrepreneurs many lessons that are impossible to gain from successful outcomes. However, people with three or more failures in their history either: (i) have poor judgment evaluating startup teams and opportunities, or (ii) are incapable of salvaging difficult situations. In either case, shun such unfortunate wantrepreneurs.

An exception to the Three’s Not Charming rule is successful serial entrepreneur who has been involved in a series of successful ventures, which far outweigh occasional failures. Gather as many of these successful serial entrepreneurs onto your team as possible, as executives, addVisors and Board Members.

Hiring Is Like Comedy

In comedy, one of the most important elements is timing. The same is true when hiring. A person who would be a great fit for a company in its early stages may not be an effective employee during a company’s expansion stage.

As shown in the chart below, there are various periods in a venture’s life in which certain types of employees are best suited. This may seem obvious at first glance, but properly leveraging this insight in the real world can be extremely challenging.

Several factors contribute to the difficulty of hiring the right person at the right time. For one thing, it is tricky to properly map candidates to the categories noted below. Candidates are complex and two rational, intelligent interviewers could reasonably differ regarding the proper categorization of a particular applicant.

Another factor complicating the startup hiring process is that most adVentures mature in a lurching, organic fashion. As such, it is often difficult to recognize when your company evolves from one stage to the next. The transitions between the various maturation stages are especially challenging, as the definition of the right person changes as the company evolves from one stage to the next.

For instance, in a company’s early stages and during a turnaround, Bank Robbers are an ideal hire. However, as a company moves into the expansion stage, toward its ultimate exit, hiring ATM Operators is appropriate (as shown below). If you hire Beach Volleyball players when you should be recruiting their indoor counterparts, your company’s morale, productivity and culture will suffer dramatically.

Job One

At a BDC, the hiring process is straightforward. A conscribed position exists, candidates who have previously performed the appropriate tasks are interviewed and one of them is hired to fill the open position. At a startup, recruiting is a much more nuanced process. Rather than searching for applicants based on their resume credentials, the primary objective is to recruit candidates who are wily, tireless, and highly talented, irrespective of the specific tasks they have previously performed.

Each early employee, irrespective of their role, will have a material impact on your culture and your company’s ultimate success. Demonstrate to your team the importance of thorough recruiting by ensuring that at least one member of your Core Team meets with all prospective new hires until it becomes impractical to do so (i.e., once your startup exceeds 100-employees).

Just like the entrepreneurs you seek to hire during the early stages of your adVenture, be unreasonable when you recruit. Do not be satisfied with applicants who have outstanding track records but who are only looking for a job. Adapt the world to your reality by drawing together a team of talented winners, including those with seemingly tangential resumes and unconventional track records.

When interviewing such entrepreneurs, set their resumes aside and determine who they are, rather than what they have done. Happy hiring.

Share and Enjoy

Startups Are A Remix

John Greathouse — Mon, 03 Oct 2011 15:00:42 +0000

“Creativity is just connecting things. When you ask creative people how they did something, they feel a little guilty because they didn’t really do it, they just saw something. It seemed obvious to them after a while. That’s because they were able to connect experiences they’ve had and synthesize new things. And the reason they were able to do that was that they’ve had more experiences or they have thought more about their experiences than other people.

Unfortunately, that’s too rare a commodity. A lot of people in our industry haven’t had very diverse experiences. So they don’t have enough dots to connect, and they end up with very linear solutions without a broad perspective on the problem. The broader one’s understanding of the human experience, the better design we will have.”

Steve Jobs, Co-Founder Apple, NeXT Computing and Pixar

Everything Is A Remix – Including Your Startup

If you have not yet discovered Everything Is A Remix, I strongly encourage you to invest the time to check it out. Filmmaker Kirby Ferguson has created a collection of short films which beautifully underscore Mr. Jobs’ definition of creativity (the term beautiful is appropriate here, as the production values are sweet).

In Part I, Kirby illustrates the derivative nature of popular music. Highlighting, among other things, how Led Zeppelin blatantly ripped off numerous American blues musicians. In contrast, many of Zeppelin’s rock-n-roll contemporaries created music that paid tribute to those who influenced them, without completely hijacking the original artists’ inspirations.

Part II explores cinema, pointing out that of the top ten grossing films from each of the last ten years, 74 out of 100 are either sequels, new versions of previously released films, or theatrical adaptations of stories first published in print. According to Kirby, “Transforming the old into the new, is Hollywood’s greatest talent.”

Of particular interest to entrepreneurs, Part III discusses the creative process of technical innovations. Kirby opens this video by stating:

“Creativity isn’t magic. It happens by applying ordinary tools of thought to existing materials. And the soil from which we grow our creations is something we scorn and misunderstand, even though it gives us so much, and that’s COPYING.

Nobody starts out original. We need copying to build a foundation of knowledge and understanding, and after that, things can get interesting.” (emphasis added)

Kirby goes on to identify the basic elements of creativity as: Copy, Transform and Combine.

Incremental advances often arise from transformations, whereas disruptive, discontinuous and radical innovations are usually the result of combinations. At the risk of undoubtedly offending some readers, here are a few highly subjective examples of each school of musical creativity.

Copier: Led Zeppelin Watch Part I>, Jet, Beyoncé

Transformer: Eric Clapton, Public Enemy, N.W.A.

Combiner: The Beatles, Run-D.M.C., Grandmaster Flash

I implore you to watch Everything Is A Remix, especially Part III. The collective 28-minutes required to view the videos will net you far more than another episode of Modern Family. After you watch the series, please come back and read the remainder of this entry.

Drawing The Line Between Borrowing And Theft

There are a number of actions you can take to mitigate the degree to which your creations are tainted by the perception of thievery. Some of these tactics include:

Novel – If you simply create a derivative of something that has come before, put on your ski mask. Strive to transform what has come before into something that has not previously existed, rather than crafting pale imitations.

As noted in What Color Are Your Elephant’s Sunglasses, the large majority of research and development expenditures are spent on product features (e.g., smaller, faster, cheaper, lighter, etc.) Ironically, studies have shown that the majority of value associated with high-tech innovations involve unique advancements in non-product areas, such as: pricing (SaaS subscriptions vs. licensing), delivery (downloads vs. retail) and customer experience (Apple vs. Microsoft).

Attribution – Although giving credit to your inspirations does not absolve you of theft, it certainly reduces the appearance of pilfering. Lack of attribution is one of the reasons critics have attacked Jet, Led Zeppelin and other derivative musical acts. By not citing the original source of their lyrics, riffs and melodies, they highlight the nefarious nature of their lack of creativity.

Several years ago I passed a staff person’s office which was blaring Snoop’s “Who Am I?” which is based on Parliament’s song “Atomic Dog” (you have no doubt heard it – “Bow wow wow yippie yo yippie yay”). I asked the staff person if he was a fan of Parliament and his response was, “What’s Parliament?”

As we talked, it was clear that he assumed Snoop had written the song. And with good reason, as the complete liner notes of the 1993 release were, “Produced By: Dr. Dre.” Clear attribution by Snoop would have educated the young staff person, and millions of others, regarding classic, old-school funk.

Permission – Written permission is, with or without compensation, a great way to validate the integrity of your creations. Asking permission is just downright polite and might ultimately lead to collaboration.

Collaboration – Share your results, data, customer feedback, fans, etc. with those who inspire you. Such sharing might solicit the input of someone who previously inspired you, which could potentially propel your creativity energies into the powerful third realm of creativity: combination.

Compensation – In the abstract, paying someone for their contribution to your creation is ideal. Unfortunately, most of us live in the real world, where it is difficult to parse creativity and agree upon fair recompense for each party. However, the fact that determining evenhanded compensation can be difficult, does not absolve you from the responsibility of addressing this issue.

If you have previously given attribution, asked permission and shared the results of your work with the part(ies) who inspired you, you will be well positioned to reach an equitable economic outcome.

Creatively Destruct Something

Academics love to espouse the merits of Creative Destruction, which is the obvious (yet valid) concept that business innovations are built upon the destruction of those processes and technologies which came before. Like music, movies and blog entries, startups are a remix of that which came before.

Case in point, in addition to Kirby’s films, this article was inspired by a Malcolm Gladwell article, entitled, Something Borrowed, which I read several years ago. I purposely did not re-read it until I completed this entry, in the hopes that my thoughts would be closer to transformative, rather than mere regurgitation. You be the judge.

Note: On May 16th, 2011, The New Yorker published an excellent article by Malcolm entitled, Creation Myth. It is an excellent adjunct to Kirby’s third video installment.

Image Source: Capital Records’ “Atomic Dog” vinyl release

Share and Enjoy

Lunch With Mark Suster

John Greathouse — Mon, 28 Mar 2011 18:24:59 +0000

I recently had lunch with Mark Suster, General Partner at GRP Partners, blogger extraordinaire and overall cool dude. I am writing this entry at 4:00 AM. Mark’s kindness and insights moved me to roll out of bed, fire up my laptop and share my thoughts while they are still fresh.

Mark recently wrote a blog entry titled “Whom Should You Hire At A Startup” that was forwarded to me by about a dozen people, including several of my former students. If you have not read it, please take a quick moment to check it out. Reading it will provide you with a good frame of reference for the remainder of this post.

Attitude Over Aptitude

Mark and I have been friends for several years and our mutual affinity is no surprise. We sit on RingRevenue’s Board together and we are co-investors in Burstly. We are likeminded in many ways: both of us are serial entrepreneurs who are now Venture Capitalists, we are about the same age (I am a bit older, chronologically and visually!) and we both believe that entrepreneurs do not work at the behest of their investors.

We also share a number of similar views regarding the startup hiring process. As my former students know, I preach that at a startup, Your Greatest Ability Is Often Your Availability, and that you should seek out A+ Players who will help everyone on your team excel. I also tell my portfolio companies that they should, “always be hiring,” great people. Hence the number of people who forwarded me Mark’s post.

I remember when Mark told me that he was going to start blogging. He had previously written a blog when he was a startup CEO several years prior, but at that time, he was too immersed in his company’s daily operations to make the blog a priority.

I wished Mark well with his new blog. At that time, I had been blogging (under the pseudonym Uncle Saul) for about two years. With no promotion, I had achieved a small, but loyal following of readers. My peak monthly readership when Mark launched BothSidesOfTheTable was approximately 18,500, largely due to traffic generated by readers who posted my articles to Hacker News.

Over the following two years, I watched Mark’s blog EXPLODE. His readership is currently approaching 500,000 monthly visitors, making him arguably the widest-read startup blogger on the planet. I now routinely meet people who say, with a bit of wonderment, “You know Mark Suster?” My response is usually, “Yeah, I knew him before he was the Lady Gaga of startup blogging.”

Back To Lunch

During our lunch, Mark and I had a great chance to catch up regarding the VC landscape, our respective investments, the Santa Barbara startup scene, etc. As lunch was nearing its end, I said, “Mark, I know you need to get back to LA, but I wanted to quickly chat with you about my blog.”

What Mark did next was worth gold to me. He leaned back, smiled and said, “John, I have as much time as you need. Let’s talk.” I know that Mark has 10,000 tasks more pressing than talking with me about my blog, but at that moment, he gave me his full attention, something many busy entrepreneurs find difficult to do.

We then spent the next 30 minutes or so discussing how he grew his audience (hard work) and what motives him to write (desire to share). Although I picked up a number of invaluable blogging tips-and-tricks, my primary takeaway was that Mark approaches blogging with a highly defined sense of purpose.

His purpose is not to drive as much traffic as humanly possible to his site. If this were the case, he would not write for third-party sites like BusinessWire or TechCrunch. His purpose is not to make money. If he wanted to monetize his site, he could seek pay-to-play company promotions, sell sponsorships, display ads, etc. His sense of purpose is simple: to expose his insights and experiences to as many budding entrepreneurs as possible, irrespective of the forum or who gets credit for the pageviews.

Lady Gaga In The Shower

After saying goodbye to Mark and walking to my car, I realized that my blogging sense of purpose was writing content that interested me, without an emphasis on proactively sharing it with emerging entrepreneurs. This is akin to Lady Gaga singing in the shower and never attempting to garner an army of “Little Monsters.” While a lifetime of shower sonatas might be entertaining for her (and her neighbors), it is hardly a lofty sense of purpose. If she viewed her music solely as a means of self-entertainment, few people would have been exposed to her “talents”.

The music industry is similar to the startup world. To excel, entrepreneurs need an aggressive, lofty purpose. Without one, your adVenture is likely doomed to be a self-fulfilling hobby from which few people will ever benefit. We can all learn from Mark’s blogging success. Combining talent, diligent effort, and a motivational sense of purpose is a powerful recipe.

A Mark Suster Blogging Tip In Action: If you are not yet following me on Twitter or Quora you can do so here and here. You can also receive my posts via email here.

Share and Enjoy

How To Make Freemium Customers Generate Revenue For Your Startup

John Greathouse — Thu, 03 Mar 2011 18:00:25 +0000

In the summer of 1999, Expertcity (creator of GoToMyPC and GoToMeeting, acquired by Citrix) released a free service called BuddyHelp. In the spirit of the “land grab” mentality of the day, we emphasized usage of our screen sharing technology with no thought applied to how we would convert such users into paying customers.

The Internet Should Be Free

In addition to the “eyeballs at all cost” mindset of 1999, there remained a very strong feeling within a subset of the tech community that, “The Internet Should Be Free.” Other than the access fees charged by Internet Service Providers, the era of paid Internet services was nascent.

BuddyHelp was launched in this proto-Internet environment and was immediately used by businesses to provide hands-on technical support. At companies such as SaskTel, Gateway and Cablevision, customer support agents used BuddyHelp to access their customers’ computers and handle their technical support issues.

As shown in the screenshot below, the initial launch of BuddyHelp did not restrict commercial usage. Anyone, including well-healed, Big Dumb Companies, could offer state-of-the-art technical support for free. Wonderful… except we were stuck paying the bandwidth charges, purchasing servers to handle the growing load of users (in those pre-Cloud days) and fielding support questions – all from a group of users that generated not a single dime of revenue.

As noted in B-side Entrepreneurial Hits, Expertcity’s initial business plan of allowing independent experts to utilize our technology for the purposes of providing technical support proved to be a great business model for raising money ($34 million at a pre-money valuation of $80 million with zero revenue), but a lousy business model for making money.

Thus, we became one of the first ASP (aka SaaS) companies, by selling subscriptions of our screen sharing technology to customer service departments – the same market segment which had adopted BuddyHelp. One would assume that once we began licensing our technology, we immediately shut down BuddyHelp and effectively forced the freeloaders to pay for our commercial offering. Unfortunately, there was a contingent within Expertcity, which believed that BuddyHelp should remain a free service, even after we launched DesktopStreaming (the genesis of DesktopStreaming’s terrible name is described in, Lousy Products Might Break Your Bones – But A Name Will Seldom Hurt You).

In order to jumpstart our DesktopStreaming licensing efforts, it became imperative that since we intended to continue offering BuddyHelp at no charge (which was not my preference), we had to transform the free service into a source of qualified DesktopStreaming leads.

The first step was to identify who was using the service. As we did not require users to sign in, we were forced to correlate IP addresses with company names, which, in 1999, was an inexact and very manual science. Once we located a company that we suspected was using BuddyHelp for commercial purposes, we then sent emails to any senior executive we could identify (using the techniques described in Infiltrating Big Dumb Companies), hoping to eventually contact someone in the customer support department. Not surprisingly, our success rate was abysmal.

After some healthy wrangling with the “The BuddyHelp Should Be Free” folks, we eventually made a slight modification to the site, as shown below.

We still allowed anyone to use the service but we added text indicating that BuddyHelp was a consumer product in the hopes of making corporate users feel slightly guilty about ripping us off. This change did cause a handful of companies to contact us and license our commercial solution. Unfortunately, most of the freeloading entities continued to use the service and ignored our plaintive emails, which simultaneously encouraged them to license DesktopStreaming while threatening them with potential legal action if they did not stop using BuddyHelp commercially.

After more cajoling, those of us interested in generating revenue convinced the “BuddyHelp Should (Still) Be Free” contingent to place an email address field in the page flow. Even though this field was not required to use the service, many users assumed that it was a prerequisite for use and provided us with a surprising number of valid email addresses. We then sorted these email addresses by company and initiated targeted sales campaigns wherever we identified a critical mass of users.

For instance, if we identified a group of users from IBM, we contacted them as a group, and notified them as to which of their peers were also using BuddyHelp. We then asked them to encourage IBM to license DesktopStreaming on their behalf. Although this approach was imperfect, it allowed us to leverage BuddyHelp as an inelegant source of qualified DesktopStreaming leads. In the course of a few months, despite the cumbersome sales cycle, we finalized deals with a number of former BuddyHelp users including CompUSA, Blackbaud and Cox.

With the release of GoToMyPC in January 2001, we finally drove a stake through BuddyHelp. Not surprisingly, we received a litany of hate email from freeloaders admonishing us for taking away their free service. Shame on us for allowing people to believe BuddyHelp was an entitlement we were obligated to provide for free and in perpetuity. In its final days, the site continued to drive substantial traffic from would-be freeloaders, which we leveraged by displaying advertisements for DesktopStreaming (now known as GoToAssist) and GoToMyPC.

Ways To Make A Freemium Service Work

The concept of a Freemium solution was not well founded when we launched BuddyHelp. Precursors certainly existed, including games such as Doom, which allowed players to access the first few gaming levels at no charge. The Freemium approach is now widely recognized as an effective product rollout strategy in which one version of the solution is offered at no charge, while other versions of the product require payment. However, in 1999, the free-to-paid rules were still largely unwritten.

Just because we did a dismal job of turning BuddyHelp into a revenue-generating asset, does not mean that it was impossible. Experience is what you get when you do not get what you want and we got a whole lot of experience from BuddyHelp. In fact, the lessons we learned allowed us to effectively convert the majority of our 50,000 free GoToMyPC Beta users into paying customers.

With the advantage of hindsight, listed below are a number of actions we should have taken to convert BuddyHelp from a channel conflict nightmare into a lead generating machine.

Clear Communications – The primary reason we caused our BuddyHelp users so much angst is because they perceived that we changed the rules in the middle of the game, which, in fact, we did. GoToMyPC was a successful free Beta because we made it clear from the outset that it would only be free for a limited time. Thus, when we flipped the switch to a paid service, no one was surprised. We failed to apprise our BuddyHelp users of our plans to charge for the use of our technology, thereby eliciting their wrath and feelings of betrayal.

Logical Upsell Plan – We were forced to change the rules on our BuddyHelp users because we launched the service without a strategic plan. We literally said, “Let’s put it out there and see what happens.” What happened should not have been a surprise. We gave away a valuable service and our users revolted when we tried to force them to pay for it. Avoid this mistake by crafting a logical plan by which users are charged for the service, either after a trial period or in exchange for other benefits, such as no advertisements, more features, extended use privileges, etc.

Consistent Rules– Freemium services result in satisfied users who have a higher propensity to pay when they feel that the rules are clear and consistent. Most users are ethical and willing to pay once they begin using the product in a manner which they know qualifies as “commercial use.”

Make Cheaters Work – Resign yourself to the reality that some users will pride themselves on cheating. These users will sign up for multiple free trials with a variety of email addresses and user names simply to avoid payment. Such unscrupulous users will never pay. Thus, it is not worthwhile to erect barriers to impede committed cheaters as such constraints will undoubtedly cause friction for honest users. Hold your nose and make it difficult, but not impossible, for such nefarious users to freeload.

Prop Up Your Value – A convenient and effective way to segment Freemium users is to denude the value prop of the free service. However, as noted in MVP², care should be taken to not reduce your value prop so much that your free offering besmirches your overall brand. A worthless / worth-little free product will be an ineffectual lead generation tool.

There are a variety of ways to reduce the utility of a free service, such as:

Limited usage – Dropbox offers 2GBs of storage free and eFax allows users to send 30-pages free each month.

Limited features – LogMeIn offers remote access for free, but charges for additional features.

Market segment – Give .edu and .org users free access, but make users with a .com email address pay

RightScale combines the last two approaches by conscribing its free product’s use to individuals and limiting its functionality

Making Free Users Pay

The most common method of transforming free customers into paying customers is by offering a free trial for a limited time period. If you decide to offer a free version of your solution and elect to not utilize a trial period as a means of spurring paid usage, seek non-intrusive ways to monetize free users, at least to the extent that you negate the costs associated with delivering the service. There are a variety of ways in which you can generate income from otherwise free users, including:

Lead Gen – As we learned once we began to effectively harvest BuddyHelp users, free users can be an inexpensive source of paying customers. Such users have self-selected your solution, are familiar with its value proposition and (hopefully) have received utility from your free offering. As such, the sales cycle can be compressed by calling upon such pre-qualified users.

To effectively execute this strategy, ensure that you obtain sufficient information before users can access your freebies, similar to the email field we put into BuddyHelp’s screen flow.

Advertising – Companies such as, eFax and YouSendIt generate significant revenue by presenting relevant ads to their respective free users. However, this model requires large numbers of users to generate meaningful revenue.

Co-Registration – When users sign up to your free service, offer them complimentary services from a select group of partners. You can generally negotiate meaningful cost per acquisition rates for such co-registered users. Such revenue can offset some of the costs generated by free users.

No Help From BuddyHelp

Properly launched, BuddyHelp could have been an effective Freemium lead generation source for Citrix. However, because of the BuddyHelp Should Be Free vestige that underlied much of our 1999 thinking, we angered and frustrated most of the BuddyHelp community with our inconsistent messaging and lack of a thoughtful plan. Despite our repeated blundering, BuddyHelp did generate some substantial commercial customers. However, a proactive coordinated approach would certainly have led to fewer frustrated customers, more qualified leads and less internal discord.

Share and Enjoy

Balance Minimal Product Viability With Maximum Utility: Maximize Your Startup’s Value Proposition – MVP²

John Greathouse — Tue, 01 Mar 2011 20:00:10 +0000

With a few exceptions at the end of their career, the Beatles did not include songs that had previously been released as a single on their UK albums. According to George Martin, The Beatles’ Producer, “At the time, I didn’t want to shortchange the public. Assuming the fans had bought the single, I figured they wouldn’t want to hear it again on the album.”

Although this approach was common in the UK, it ran counter to the then current Conventional Wisdom in the US music industry. However, by the release of Sgt. Pepper, the Beatles had gained complete control over their creative works in the US and curtailed Capital Records’ prior practice of including singles on US albums.

This tactic provided the Beatles with a strategic advantage over American musicians, as fans knew that if they purchased a particular single, they would not have to pay for it again on a subsequent album. In essence, the Beatles offered a product with a higher value proposition as compared to their American counterparts.

Double Your A-Sides

In addition to not including previously released singles on their albums, the Beatles further enhanced their value proposition by creating the Double A-side single, in which both songs were hits in their own right. The Beatles introduce the first Double A-side single in 1965, with the release of Day Tripper and We Can Work It Out. The Beatles went on to repeat this phenomenon twenty six times, in which both sides of a single entered Billboard’s Hot 100.
This strategy was unprecedented. In the succeeding 40-years, only a handful of artists have emulated this approach.

Minimally Viable Product Does Not Mean Minimal Utility

Much has been written regarding the benefits of crafting a minimally viable product (MVP) as a means of accelerating the product validation process. An MVP is defined as the initial product iteration that has the ideal number of features to ensure it will be easy to use, while still providing adequate utility to the end user. A common mistake when deploying this approach is to release a product which misses the narrow MVP range and is either not sufficiently viable or is not easy to use. Such a non-minimally viable product tarnishes the product’s brand and adds friction to the product validation process.

As discussed in What Color Are Your Elephant’s Sunglasses?, when we initially released GoToMyPC, we struggled to balance the product’s minimal feature set with its overall utility. We debated the merits of releasing two products, one at a lower price with fewer features, but we ultimately decided that the value proposition of the cheaper version was so minimal that it would potentially damage the GoToMyPC brand.

The key to launching a successful MVP is to properly define “minimal.” If Mark Twain had been a technologist, he might have revised his famous quote to say, “If I had more time, I would have included fewer features.” In other words, it often takes longer to adequately determine the ideal number of features, rather than simply cramming as many features as possible into a product’s initial iteration. Force yourself to slow down long enough to understand the features that must be in the product’s initial iteration to achieve a sufficient level of utility and which features can be included in subsequent releases.

MVP² = Minimally Viable Product With The Maximum Value Prop

As shown in the chart below, an MVP² product arises when the following characteristics are present:

Fast Time To Market – The product development cycle is relatively short and mature distribution channels are readily accessible.

Utility – The product’s value proposition is readily apparent, does not require a significant change in users’ behavior and is meaningful enough to overcome the natural inertia associated with anything new.

Easy To Use – The product is intuitive: the average target market user can access the product’s full utility without training.

To facilitate a successful product rollout, balance ease of use and clarity of positioning with enough utility to elicit the intended reaction from your target user. Do this by ensuring that the definitions of sufficient and minimal are congruent in the minds of your intended users. If minimal does not equal sufficient, you will need to add more features / complexity / utility, which may require you to reassess your go-to-market strategy. For instance, a more complicated feature-rich product might require a hands-on sales approach carried out by enterprise salespeople, as opposed to a simple product that can be sold online.

Even if your product can be developed quickly, market penetration might be delayed if missionary sales tactics are required to properly educate users regarding the product’s utility. In such cases, a Freemium solution might be the appropriate initial market foray. To learn how to not launch a Freemium solution, see Making Freemium Customers Pay.

A Valuable Brand

Growing up in working-class families, the Beatles wanted to provide their fans with as much value as possible. While other artists included throwaway songs on the flip side of their singles and then put all their previously released singles on their albums, the Beatles provided maximum value to their customers with each of their releases. However, the Beatles also had to be objective arbiters of their creative output, releasing only those songs which were the most impactful and provided fans with the greatest entertainment utility.

Follow the Beatles’ lead. Deliver the maximum utility to your customers, balanced by your product’s complexity and the time required to get it to market.

______________________
John Greathouse has held a number of senior executive positions with successful startups during the past fifteen years, spearheading transactions which generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses.
______________________

Share and Enjoy

UnVenture Capitalists: Seek Investors Aligned With Your Interests, Not Their Egos

John Greathouse — Wed, 10 Nov 2010 00:03:13 +0000

In the early 1970s, the Seven-Up Company devised an ingenious plan to market its flagship soda. The campaign was so successful it eventually catapulted 7-Up’s sales to rival that of both Coke and Pepsi, making it the third most popular soft drink in the US.

The company hired the Dominican actor Geoffrey Holder, who delivered the commercial’s signature tagline with memorable panache, “Maaarvelous, absolutely maaarvelous.” Overnight, “maaarvelous,” spoken in an exaggerated Caribbean accent, became a national catchphrase.

What made the commercials noteworthy was not their charismatic pitchman. It was the fact that the Seven-Up Company defined its product by describing what it was not, via the “UnCola” label. When evaluating a potential Institutional Investor, entrepreneurs should consider what they are not, as much as what they are. Entrepreneurs in search of startup capital are well served to seek an UnVentureCapitalist (UnVC), an investor who understands and appreciates the unique benefits of capital efficiency.

Collapsing Startup Costs

Because of the advancements in cloud computing by companies like RightScale and open source software such as MySQL, the costs to create a scalable web service have decreased by a factor of ten since the year 2000. When we launched GoToMyPC in 2001, we were forced to purchase hundreds of servers and pay expensive hosting fees to third-party datacenters. We also incurred substantial software licensing charges from Sun Microsystems, Microsoft and Oracle. The disappearance of these legacy costs has spawned a legion of Capital Efficient Startups (CESs), described more fully in Pour And Stir. Founders of a CES should pursue investors that are best described as not sharing the traits of traditional venture capitalists, as described below.

Company Friendly – Seek investors who demonstrate with their actions, and not solely their words, an entrepreneur-centric approach. For instance, a company-friendly investor will typically only participate in a follow-on funding round beyond their pro rata participation with the Founders’ explicit approval. In this situation, the company-friendly investor will maintain their agreed upon relative position in future funding rounds. For example, if they own 15% of the company in a Series A round, then they will only invest an amount in the Series B round such that their overall investment remains 15%

This approach ensures that the investors’ advice regarding future funding events is not self-serving. Investors that do not invest beyond their pro rata share are relatively indifferent as to a follow-on funding round’s valuation. Investors that insist on investing more than their pro rata allocation in follow-on rounds have an incentive to compress the company’s valuation, in order to maximize the percentage ownership acquired by their investment. Such depression of funding valuations increases the entrepreneurs’ relative dilution.

Small Rounds, Aligned Interests – CES entrepreneurs who have previously participated in large funding rounds with high valuations appreciate the direct correlation between the post-money valuation of their latest funding round and the range of financial outcomes that will be acceptable to their investors.

Although it may initially sound counter-intuitive, large funding rounds at high valuations can actually decrease your chance of success, rather than increase it. For instance, I recently met a young CEO who had previously founded a company that raised a sizable round at a $30 million pre-money valuation from two large, Bay Area VC funds. Shortly thereafter, the company received an acquisition offer which would have put over $15 million into the Founder’s pocket.

When the CEO excitedly called his venture capitalists, he was shocked when they literally laughed in his ear. When their laughter subsided, they condescendingly explained that they did not invest in his company to get a “2 or 3x multiple on our money.” The company was subsequently sold for far less than the total capital invested in the business. Rather than walking away a decamillionaire, the Founding CEO lost a significant amount of his own money, as well as that of his friends and family. This CEO is now looking to fund a CES and he is not interested in a large round or a particularly high valuation.

Funding Paths To Profitability, Not Burn Rates – UnVCs do not encourage entrepreneurs to develop large cash burn rates that must be fueled with future funding rounds. Although this can be an effective way for large Institutional Investors to efficiently deploy their capital, it reduces the spectrum of acceptable exits and significantly dilutes the entrepreneurs’ ownership stake, as depicted in the following chart.

Assume your investors will not be satisfied with anything less than a 5x return. Thus, if they invest $10 million and own 35% of your company, your adVenture’s exit must be at least $140 million (($10 million x 5) / 35%). Per the above data, such exits account for less than 30% of all recent VC-backed exits. Conversely, if you execute your go-to-market strategy with investments totaling $3 million, you disproportionally expand the spectrum of potentially acceptable exits without limiting the size of your exit.

Smaller funding rounds with modest valuations often results in less dilution for the Founders and their employees. However, the most effective way to minimize dilution is to extract capital from customers’ pockets. CESs often devise short and direct paths to revenue as a means of balancing dilution with funding an optimal growth trajectory.

Management Is Not Fungible – UnVCs tend to invest in serial entrepreneur teams, not market spaces or ideas. Such firms do not typically enter into investments with the intention of replacing members of the management team with either their own executives “in residence” or from their professional network. This approach actually increases the company’s execution risk, as significant uncertainty is inherent whenever an ad hoc team is formed. When a senior executive is “transplanted” into an existing team, the risk that the transplant will be “rejected” should not be underestimated.

When entrepreneurs are viewed by investors as their partners and not their subordinates, a healthy, long-term and mutually beneficial relationship often develops. When entrepreneurs feel they serve at the whim of their investors, trouble (especially for the entrepreneurs), usually ensues.

Multiple Winners – Certain markets lend themselves to one or two companies owning their space, such as eBay, You Tube and Twitter. UnVCs do not demand that entrepreneurs pursue such winner-take-all strategies. Many large-fund venture capitalists overly value grand slam outcomes, as they can be career-building investments. An investor looking for a career-making deal might encourage you to take imprudent chances in the hopes you are the sole winner in a highly competitive and capricious market. If you fail, their downside is minimal. They will remove your company’s logo from their website and try to forget they ever made the investment. For you, the impact of a negative outcome is a bit more tangible and dramatic.

Bring In The Fences

The fact that capital efficient businesses raise modest amounts of money does not necessarily result in smaller outcomes. You can achieve “homerun” returns with such adVentures, without having to hit the ball as far. By minimizing your dilution and aligning your company with investors who appreciate the decreased risk associated with a broad spectrum of outcomes, you effectively bring the homerun fence in from 400 feet to 40 feet. What would be a double or even a pop fly at an overly capitalized business can be a homerun at a CES.

Double Hit Of Lithium Please

Venture Capitalists are held in low regard by many entrepreneurs for a reason. Money and power are strong corruptive agents. However, even at the most traditional of venture firms, UnVCs are emerging.

When Charles Grigg invented 7-Up in 1929, he originally called it “Bib-Label Lithiated Lemon Soda” in homage to the mood altering lithium, which it liberally contained. The formulation proved effective as its initial positioning was as a hangover cure. Unfortunately for stressed out CES entrepreneurs, lithium was removed from 7-Up in 1950.

Geoffrey Holder’s tagline was eventually changed to, “Maaarvelous, the smell of success is never too sweet.” As any CES entrepreneur can attest, with enough sweet success, you will never pine for the days when 7-Up was lithiated.

Share and Enjoy

De-risk Your Startup By Doing It Again: The Joy Of Getting The Band Back Together

John Greathouse — Wed, 07 Jul 2010 20:46:16 +0000

In 1980, following the breakup of the American band The Eagles, Don Henley was asked when the group would reunite. His response, “When hell freezes over.” Surprisingly, hell froze over 14-years later, when The Eagles launched a highly lucrative tour and TV special. According to Guitarist Glenn Frey, “We never broke up, we just took a 14-year vacation.”

The story is familiar. A young band gets into music for the sex, drugs and fame. They record a few songs, have a couple hits and then hit the road. The rigors of touring, along with the instant notoriety and unending public scrutiny cause the band to disintegrate, often to the point of declaring they will never work together again.

In many cases, once the money (and sex and drugs) run out, the band members forget the days of rancor and only recall the “good old days” when creating something from nothing was fun. Eventually one of the band mates swallows their pride, picks up the phone and proposes a reunion tour. A similar phenomenon occurs in the startup world, without the drugs or drama endemic in the music industry.

It is not uncommon for successful entrepreneurs to work as a team, take some time off for a victory lap or two and then “get the band back together” in order to build upon their prior successes.

At Rincon Venture Partners, the single most important facet we consider when contemplating a new investment is the quality of the Serial Team. One way to assess quality is the degree to which the team has demonstrated success in an adjacent market.

Rincon’s Fund I portfolio is comprised of a number of such Serial Teams, some of which include:

Alma mater, Rent.com: sold to eBay for $430 million. After nailing lead generation in the apartment listing space, they are now killing it with respect to lead generation for higher and career education.

Alma mater, CallWave: 2005 IPO. At its peak, CallWave generated $55 million of recurring subscription revenue in the Internet telephony space. The team has applied its deep understanding of telephony and online marketing to create an infrastructure which allows advertisers to track phone calls like clicks.

Alma maters, Traffic Marketplace and Tagworld: sold to Vivendi and Viacom, respectively. The team is applying its ad network and ad serving insights to the emerging world of mobile advertising.

Alma mater, Overture: sold to Yahoo. The team is leveraging its expertise in search infrastructure and optimization to dramatically increase the reach, relevance and profitability of search campaigns.

The Upside

Focusing on serially successful teams and not individual serial entrepreneurs offers investors a number of advantages, including;

Group Dynamics – Serial Teams have already resolved potential interpersonal issues. The chances that the team will blow up because of personalities and/or office politics is significantly diminished. Roles are understood and the team is able to efficiently leverage each member’s strengths while shoring up individual weaknesses.

Shared History – Serial Teams can draw upon a common history that facilitates communications and problem solving. However, as discussed below, this advantage can also prove to be limiting, especially if the team does not embrace a diversity of opinions, as described in Dirty Team Building,

Fox Hole Mentality – Social bonds made under duress are extremely resilient, as evidenced by well attended military reunions decades after the soldiers fought together. Although clearly not on the level of battle-tested warriors, Serial Teams who toil together often form life-long social bonds which motivate them to ensure the team’s mutual success, even at the expense of personal gains. This deep mutual respect also serves as the cornerstone of a healthy corporate culture, as described in Core Values.

The Downside

Serial Teams also entail certain risks and disadvantages. Although the advantages usually outweigh the potential drawbacks, the negative aspects of Serial Teams should be heeded in order to minimize their impact:

History – Serial Teams speak in shared code, based on their prior collective experiences. This common set of experiences facilitates communication but can be bewildering to new entrants to the team. Such history can also cause adVentures to apply inappropriate solutions to new problems, based on what worked in the past.

Cronies– It can be difficult for new executives to assert themselves within an existing Serial Team. Even when an explicit effort is made to incorporate new talent into an adVenture’s executive staff, the institutionalization of the company’s approach to problem solving can make it difficult for a new executive to express their opinions without forcing them to sharpen their elbows and excessively raise their voice.

IP Risk – The closer the Serial Team’s new adVenture is to their prior successes, the greater the risk that they may be accused of infringing on their former company’s intellectual property (IP). Thus, care should be taken when crafting the band’s reunion tour to ensure they do not inadvertently run afoul of third-party IP rights.

Diapers – It can be difficult for junior members of Serial Teams to grow into positions of greater authority. This phenomenon is partially due to the fact that the senior members of the Serial Team, much like a parent, fail to realize that the younger team members have matured and are no longer as inexperienced as they were when they first joined the Serial Team.

Let The Lead Singer Go Solo

In highly successful bands, it is not uncommon for one of the more visible members of the band to abandon the rigors of touring and enter into a state of semi-retirement. In other cases, such frontmen leave the band and go solo.

The same phenomenon occurs in the startup world. In many instances, one or more of the senior members of the Serial Team generate enough personal wealth to take a permanent vacation from their careers as operators. As such, when a Serial Team reforms, it is often comprised of operational lieutenants, such as Vice Presidents and Senior Directors rather than C-level executives, (e.g., CEO, CFO, etc.). Ideally, the members of the Serial Team should be senior enough to effectively operate a fast-paced startup, yet are sufficiently financially hungry to deploy the requisite time and energy required to make their adVenture a success.

Be A Roadie

The factors that cause Serial Teams to be good investments for venture capitalists make them equally advantageous for young entrepreneurs. A team of proven winners that self-selects to work together again usually create a healthy environment in which to learn and grow. Serial Team mentors will make fewer mistakes than a comparable adVenture led by inexperienced people who are learning on the job. Thus, young entrepreneurs are well served to seek out the company of Serial Teams.

Hotel California

“Relax” said the night man, “we are programmed to receive.”

“You can check out any time you like, but you can never leave!”

The Eagles, Hotel California

As discussed in The Fringe, entrepreneurs are pathological. Most of them simply cannot help themselves and are thus repeatedly drawn back to the startup world. They often temporarily “check out” from the startup treadmill but many of them “never leave”. Savvy investors and young entrepreneurs take advantage of this phenomenon by joining Serial Teams and helping them leverage their past successes to achieve new startup victories.

Share and Enjoy

Past Is Prologue As New Industries Emerge: It Ain’t Gonna Be Different

John Greathouse — Tue, 02 Mar 2010 19:00:11 +0000

In 1933, baseball card collectors were frustrated. For some reason, they found it impossible to complete their Goudy Gum 240-card set. No matter how many packages of cards they purchased, they failed to find card number #106, which featured Napoleon Lajoie.

Enterprising collectors who wrote Goudy and voiced their frustrations were rewarded by receiving the Lajoie card in the mail. All other collectors were out of luck.

What was behind the mystery of the missing Lajoie card?

Capital Cards

In 1976, at the age of 14, I Co-Founded a Sports Memorabilia company with my friend (and future brother-in-law). We pooled our resources and each invested $50 into the adVenture, which we named Capital Cards, due to our proximity to Washington, DC. Over the next six years, we grew the company into a thriving mail-order business, with assets conservatively estimated at approximately $250,000. Not a multimillion dollar exit by any means, but a fantastic learning experience and a lot of fun as well.

Our strategy was simple. Each week, we placed a small classified ad in the Washington Post, simply stating, “Turn your cards into cash. We will purchase your old baseball cards.” During the mid-1970’s, the sports memorabilia industry was nascent and highly inefficient. It was a great time to start a sports memorabilia company. The hobby was driven principally by collectors who were primarily interested in completing sets. There were very few card dealers and no card investors. There were no price guides, standardized rating systems or baseball card stores. People with vintage cards essentially had no means to convert their cards into cash.

We quickly built upon our meager initial capital by buying and selling cards that otherwise would likely have ended up in landfills. Each weekend, we drove all over the Washington beltway in search of lost treasures. In many cases, we came across cards which we had never seen and had no way to estimate their value. This ambiguity put us on a level playing field with the card sellers.

We were also one of the first card companies to purchase cases of cards directly from Topps, the only company that produced sports cards at that time. Our parents had to sign on our behalf, as we were not of legal age to execute purchase orders.

Each case contained 12,000 randomly sorted cards. We enlisted the help of our families and friends and arranged the cards into complete sets. We then sold the sets at card shows held in small towns all along the East Coast. At each show, we were far and away the youngest participants. Fortunately, my brother-in-law was old enough to drive, so we were able to attend the shows without our parents’ involvement.

Because our labor was essentially free, we undersold all the other dealers at the shows. In fact, in one instance, a dealer purchased all of our sets in order to “take them off the market.” We were happy to accommodate his request, as the money derived from the sale of the sets allowed us to purchase vintage cards via our weekly newspaper ads.

As noted in Small Ideas, Big Benefits, Capital Cards was an exceptional experience for both me and my brother-in-law, as it allowed us to hone our business skills, while competing with people who were more than twice our age.

At heart, we were idealistic and somewhat sanctimonious collectors. We loved sports and valued the cards because of the players’ achievements. Card collectors and card investors have very different motivations. Card investors seek cards which they believe will increase in value and are often indifferent regarding the players and teams depicted on the cards. My Partner and I eventually closed down Capital Cards when baseball card collecting morphed from a hobby into an investor-driven industry.

But Our Hobby Is Different…

During the early 1980’s, the popular press discovered baseball card collecting and began to publish articles touting sports memorabilia as a great “investment”. Many baseball card collectors believed that the sports memorabilia hobby would not follow the evolutionary path of other hobbies which became investor centric, such as stamp and coin collecting.

However, as the number of non-collectors entering the sports memorabilia market in pursuit of financial gain increased, the dynamic of the industry changed and evolved in a manner similar to other mature collectible markets.

For instance, the range between what a collector could sell a card for versus what they had to pay for the same card from a dealer diverged significantly. In addition, rigid grading systems were established by professional grading services. This dramatically increased the value of the highest graded cards and depressed the prices of all other cards which did not meet the exacting standards of the grading services.

In the early days of collecting, the various grades, Mint, Excellent, Very Good, Good and Poor, were highly subjective. As such, the relative difference in value between a Mint and an Excellent card was not significant. Many collectors, whose primary goal was to complete their collections, were content to have an Excellent or even a Very Good card, which ensured broader demand for lesser grade cards. The advent of investors and grading services drove up the demand for near-perfect cards while suppressing the value of all other cards.

As the industry matured, several new companies began competing with Topps by producing their own sports cards. In the collector days, Topps would generally issue a single set of cards each year. As the collector centric hobby morphed into an investor-driven market, several card companies began producing multiple sets annually. This resulted in a saturation of new cards which eventually suppressed the value of all non-vintage cards.

Eventually, card buying speculation drove prices ever higher. A prime example is rookie cards, which were priced like Initial Public Offering shares of stock. Investors were willing to pay a premium for a card of an unproven rookie in the hopes that his future performance would cause the price of the card to increase over time. Conversely, collectors tended to value the cards of proven, Hall of Fame players.

No Really, Our Industry Is Different…

Card collectors were in denial during the late-1970’s. Even as we saw our hobby began to change, we believed it would never become an investor oriented industry. Over time, our belief dissolved into hope, which eventually became dismay. Despite our desires, the sports memorabilia hobby changed in the same, predictable manner as other popular hobbies.

It is not uncommon for the pioneers who drive emerging industries to believe that their industry will not follow the “rules of the road” of related more, mature industries. Gary Kildall, who refused to Conform To His Customers’ Realities, felt that the parameters of the personal computer industry would be defined by the passionate PC hobbyists who drove its early development. He failed to realize that the industry would eventually attract mainframe and minicomputer industry veterans who would bring market strategies and doctrines based on the legacy industry’s orthodoxy.

In the early days of the Internet, the ad market seemed to be completely different from any media which had preceded it, primarily due to the unprecedented ability for advertisers to track the effectiveness of their campaigns, as discussed more fully in Managing Your Cost Per Customer. However, as the Internet advertising industry matured, it became populated with traditional media veterans who infused old-world jargon (e.g., Insertion Orders, Trafficking, Flight Dates, etc.) as well as old-world pricing, such as cost-per-thousand views, which was based upon print advertising metrics. Eventually the industry matured and hybrid pricing schemes were developed, such as cost per action, cost per click, etc. However, the fundamental tenets of the online ad industry are akin to those established in the pre-Internet world.

Hoping your industry does not change is unrealistic. Instead, anticipate how your emergent industry will mature by analyzing the structure of adjacent and legacy markets. As your industry grows, it will attract refugees from these related markets, who collectively will strongly influence your industry’s transformation. The challenge is to anticipate which innovative aspects of your industry will survive this inevitable maturation.

The Joy Of Lajoie

Napoleon Lajoie’s scarcity was the result of Goudy Gum intentionally not including the card in retail gum packs. They knew that collectors are driven by the desire to complete sets and that a missing card would cause them to purchase additional packs. Ironically, in the modern, investor-driven baseball card industry, Lajoie’s card is prized not because it is key to completing the Goudy Gum set, but because of its propensity to appreciate. Few modern-day card investors attempt to complete a Goudy Gum set, but all of them long for the rare Lajoie card, as its scarcity ensures it is an investment that will increase in value over time.

Share and Enjoy

Pour And Stir I – In Pursuit Of The Ideal Business Model

John Greathouse — Tue, 20 Oct 2009 20:22:59 +0000

Note: This is Part I in a three-part series on The Perfect Business Model. Click here for Part II, and Part III

Authentic, hand-crafted Persian rugs always include intentional imperfections. They are said to be, “Perfectly Imperfect, and Precisely Imprecise.” The same is true with many crafts and architecture created in Muslim cultures.

I am not a Muslim scholar, but a layman’s interpretation of this tradition of intentional errors is that it arises from the belief that attempting to emulate God’s perfection is sinful.

Fortunately, entrepreneurs need not fear running afoul of this sin when crafting their business plans, because all of them are inherently imperfect and imprecise.

Attributes Of The Perfect Business Model

Although entrepreneurs need not fear offending God with their flawless business plan, it remains a worthwhile ideal. Falling short of perfection may result in a business with enough positive attributes to succeed.

At the most basic level, the ideal business model is simple: Pour and Stir (P&S). As is true with most business axioms, this formula is straightforward – the more money you deploy, the more money you generate. As shown at left, pour your money into a customer acquisition funnel, apply a bit of gentle stirring to generate a steady flow of mo money, mo money, mo money.
A number of online business models lend themselves to such P&S wealth generating chicanery.

No matter how well honed your P&S business model, every money making machine has its limits. If you pour too much money into the top of the funnel too quickly, it will be wasted, running over the sides and never reaching the bottom. If you fail to deposit adequate cash into the top of the funnel, your results will be suboptimal. The trick is to modulate the inflow of cash with the ever changing market conditions in order to maximize your financial return.
The essence of the Pour and Stir model is represented by the following simple formula:

The cost to acquire a customer < lifetime value of a customer

Although the P&S formula is clear-cut, it presupposes that you have insight into your customer acquisition costs, as well the revenue generated by each customer.

Ideal Business Model Attributes

Some of the market and product attributes which lend themselves to the P&S business model include:

No Inventory – Inventory sucks. It must be manufactured and shipped, it becomes obsolete, employees steal it, it must stored, customers break it, it malfunctions, and it tends to injure your most litigious customers.

Not A Service – Services suck. They must be carried out by humans, who require pesky things like paychecks, vacations, sick time and personal days. Services do not scale, as the more services you provide, the more humans you have to hire. As noted in Pressure, you can create a comfortable lifestyle business by delivering services, but services preclude you from utilizing the P&S business model.

Highly Trackable – Trackability does not suck. If you cannot track the cost required to acquire your customers and their lifetime values, you will be unable to take advantage of P&S. The more aspects of your business that you can quantify and measure, the closer you will come to perfection.

The stirring process involves a bit more than a simple hand crank. To properly operate the P&S model, you need a dashboard akin to a 747 control panel. The more dials you monitor, the greater your insight regarding how market factors impact your business (i.e., competitors, customers, costs, technology, etc.). However, for the dials to be meaningful, you must have the means to accurately track a variety of real-time data.

A bias toward trackability will force you and your team to justify each marketing dollar in highly quantifiable terms. If you cannot mathematically demonstrate that a particular dollar spent on customer acquisition yields more than a dollar in revenue, then do not spend that dollar.

Salient Value Proposition – The more clear and concise your value proposition, the cheaper it will be to communicate. With GoToMyPC, we honed a very clear message, “Access Your PC From Anywhere”. As discussed in How Much For A Rib, understanding your customers’ perception of your value proposition is vital to crafting a profitable business model.

Click, Click, Try, Buy – Ideally, customers should be comfortable purchasing your solution online, without picking up the phone. If this is not possible, offer customers a risk-free trial to utilize your solution before purchasing it. If you cannot offer a trial, capture enough information online so an inside salesperson can readily contact your prospects.

More complex sales, as well as those involving higher price points, are well served by soliciting trackable calls. Companies like RingRevenue offer advertisers the ability to track calls like clicks and thus extend the P&S model to a broader array of products and services.*

At its most elemental level, there are two macro dials you must control to execute the P&S strategy; lowering your customer acquisition costs and increasing your customers’ lifetime values. These issues are explored more fully in Parts II, and III of the P&S Series.

Perfect Imperfection

Unlike a Persian artisan, there is no need to intentionally include imperfections in your business plan. No matter how hard you try, your adVenture’s constantly evolving business will always fall short of perfection. However, by understanding the principles of the P&S approach, you may create a business in which you consistently convert a dollar into a dollar and change. Once you accomplish this, your P&S business will create significant wealth for you, your employees and the remainder of your Stakeholders, إن شاء الله.

Full Disclosure: I sit on RingRevenue’s Board in my capacity as a Partner at Rincon Venture Partners.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses. He is also the author of an award-winning entrepreneurial blog infoChachkie.com. You can learn more about his experiences at johngreathouse.com
______________________

Share and Enjoy

Fast Follower III – First Mover Disadvantage

John Greathouse — Tue, 29 Sep 2009 22:49:01 +0000

This is part III of a three part series. Click here for Part I and Part II

John Fitch was first. He spent the majority of his adult life fruitlessly attempting to capitalize on the novelty and uniqueness of his invention. Unable to raise funds from wealthy individuals, he solicited $300 from a hodgepodge of small businessmen, including tavern owners, grocers and physicians.

In a matter of months, he developed technology that was superior to that created by the world’s leading scientist over the prior 15-years, despite his lack of a formal education.

He debuted his technology in Philadelphia at the 1787 Constitutional Convention. It exceeded his expectations and thrilled those who witnessed it, including a number of prominent Founding Fathers. However, he was still unable to secure adequate funding to commercialize his technology.

Fitch spent the next three years traveling the country repairing clocks as a means of surviving, all the while saving money for the eventual launch his venture. In 1790, he began offering a service that eventually transformed world commerce and generated trillions of dollars of wealth. Unfortunately for Fitch, his adVenture folded 18-months after it began.

In 1798, at the age of 55, a frustrated, destitute Fitch scrimped together enough money to purchase a handful of opium pills, which he used to end his life. His suicide note was prophetic:

“The day will come when some more powerful man will get fame and riches from my invention, but no one will believe that poor John Fitch can do anything worthy of attention.”

First Mover Disadvantage

The alleged First Mover Advantage asserts that companies which are the first to exploit a new technology and/or market have an inherent advantage. Clearly, the allure of being first is significant. Who remembers the second man on the moon, the second person to fly an airplane or the second person to reach the North Pole? However in business, being first is often a disadvantage.

As noted Fast Followers II, fast-follower entrepreneurs must have a solid point of differentiation in order to succeed. In most instances, small companies do not have the financial wherewithal to bludgeon the competition and establish market share through brute force. Thus, it often pays to develop points of differentiation which are not based on product features. In fact, it is often more advantageous for an entrepreneurs to differentiate their offering through an alternative disruptive means.

In long-distance foot races, some teams deploy the “rabbit” strategy. A runner who has no chance of winning the race is designated as the rabbit and is instructed to set a very fast initial pace. The intent is that the runners from the opposing teams, not sure whether or not the rabbit can maintain her aggressive pace, will push themselves to keep up, while the rabbit’s teammates conserve their stamina and eventually pass the rabbit and their exhausted competitors.

Many first mover companies are rabbits. Unfortunately, they do not have teammates who can win the race on their behalf. It is important to identify such rabbits in business, as well as on the racetrack, so that you do not exhaust your company’s resources attempting to maintain pace with such competitors which have no chance of winning.

As discussed in Competing From The Fringe, a fast-follower strategy requires patience and ego containment. The following chart details a number of factors which determine whether you should attempt to exploit a first mover advantage or bide your time and enter the market as a fast follower.

Fitch To Fulton

John Fitch’s invention was the steamboat. He did not just create an esoteric, proof-of-concept prototype. Rather, during its first season, his ship travelled over 2,000 miles. In commercializing his technology, Fitch perfected the tubular boiler (some claim he and his partner outright created this invention) which decreased the weight of a conventional boiler by over 7,000 pounds. During a publicly witnessed time trial, his first steamboat travelled an astounding 8 miles-per-hour in still water.

In contrast, Robert Fulton, who had an advanced education and significant financial backing, was only able to achieve a speed of 3-miles per hour 13-years after Fitch’s maiden voyage. Another 3 years later, Fulton’s famous maiden voyage of the Clermont between New York and Albany traveled at less than 5-miles per hour, with a handful of passengers and no cargo. If Fitch and Fulton had raced to Albany, Fulton would have lost by 52-miles. It was not until 1812, 25-years after Fitch, that Oliver Evans, creator of the high-pressure steam engine, eclipsed Fitch’s speed record, by achieving a sustained speed of 9-miles per hour.

If Fitch’s technology was first to the market and was so vastly superior to that which came before (and for a long time after), why did he fail while Fulton succeeded? Some of the key factors which lead to Fast Follower Fulton’s success include:

Competition – The topography of the Hudson Valley in which Fulton launched his first commuter steamboat made land travel more difficult than travel by boat. In contrast, Fitch’s Delaware River Valley was relatively flat and the high-quality roads allowed land commuters to travel more quickly than those who traveled by boat. As such, Fulton’s market offered consumers fewer competitive substitutes.

Technology – Unlike Fitch, Fulton did not spend his time or financial resources building a steam engine. He used his political connections to export a top-of-the line engine from England, which generally maintained a tight embargo on the exporation of its leading technologies. In addition, craftsmen and metallurgists had made significant advancement with respect to machining capabilities and mechanical materials in the 20-years after Fitch’s failure.

Capital – Fulton secured adequate financial backing early in his adVenture’s life, thus allowing him to focus on perfecting the then state-of-the art technology and not waste time or management attention raising money.

Pragmatism – Fulton was more skilled organizer & a better mechanical designer than Fitch. Fitch was a visionary inventor, as described more fully in Inventors vs. Innovators, while Fulton was a practical innovator.

Theft – As Harold Evans declares in They Made America, Fulton “realized the promise of the known” by canvassing the discoveries made by others and selectively adapting them to apply to the specific requirements of water travel. In contrast, Fitch was forced to develop many of the core aspects of his technology.

Market Segmentation – Fulton capitalized on the novelty of river excursions and catered to wealthy individuals who valued their time and wanted to travel in luxury. The glamour associated with the riverboats of the late 19th century originated with Fulton’s gaudy, garish accoutrements. Conversely, Fitch targeted a utilitarian market, charging 50% of comparable land travel and placing no emphasis on passenger comfort.

Corporate Structure – Fulton created an organizational structure akin to a modern corporation, with department heads reporting to him. Fitch, along with his partner, were effectively a two-man-band, carrying out all the responsibilities of the organization.

Social Optimism – Fulton expected people to like him…and they did. As described in PsyBlog’s The Acceptance Prophecy, individuals who assume people will like them tend to have positive social interactions. By Fitch’s own account, he was, “wretched, haughty, imperious, insolent and petulant”, hardly personality traits which would result in a socially optimistic proclivity. Hudson has been described as “confident”, “handsome” and “charming”, traits which lend themselves to a socially optimistic outlook.

John Fitch’s dying prophecy was not entirely correct. He has not been completely forgotten. Although they may not realize it, the thousands of commuters of the Philadelphia and Trenton corridor honor the inventor of the steamboat daily, as they traverse the John Fitch Parkway.