Disruption Tour --- Run To Survive

The 5 Stages of a Consumer Web Startup

Gigom.com

In my years covering technology, I’ve gotten more than my fair share of pitches related to the latest consumer Internet startup. Thanks to this I’ve been able to witness what amounts to be a near-familiar life cycle for these companies. Not every company hits every step, but most of these will be familiar to those of you in the Silicon Valley Social Media/Web 2.0-Something trenches.

 

IN THE BEGINNING

One day an entrepreneur is chatting with his friends, gets an idea, writes about the idea on his or her blog, and then starts coding. A few weeks or possibly days, a beta — increasingly a euphemism for a not-fully-thought-out-product — emerges.

 

THE LAUNCH

Then the buzz builds and the company opens up the beta far and wide. Maybe TechCrunch, ReadWriteWeb, WebWorkerDaily or WebWare write about the product. Either way, this is the first traffic spike and the entrepreneur rejoices. The VCs come calling. If they don’t, the angels will certainly do a fly-by.

But eight weeks later reality sets in. The traffic stops growing or — worse yet– dives. The VCs stop calling and blogs start posting Alexa charts that look like ski slopes or tabletops. But as an ever-optimistic entrepreneur it’s time to regroup, gather your programmers, toss back some Red Bull and…

 

LAUNCH A SOCIAL NETWORK WIDGET

If the user adoption press releases, the widget and subsequent coverage can’t get your site growing again, it’s time for the big guns...the open API. Now you’re a platform! The startup gets a fresh round of publicity, maybe more exposure to new users, and the founder rejoices again. This time the money men get serious because you have shown them you can survive the Silicon Valley jungle and you have a Facebook strategy.

 

12 MONTHS LATER

Maybe the media is getting too insistent with their questions about how this service is supposed to make money. Maybe the bills from Amazon Web Services are getting too high, or the VCs are getting impatient. The blogs are back to posting unflattering Alexa numbers. Compete data backs those charts up! So it’s time for advertising.

If the startup is well-funded or has a famous founder, the ad unit might be something novel like a widget, pre-roll voice ads on a mobile phone, or Beacon. Otherwise it’s generally based on banners and Google AdWords with promises of more to come.

 

THE END IS NEAR

But selling online advertising is hard. If Google, Yahoo, AOL or Microsoft haven’t stopped by with a buyout, it’s time to consider reality. You could always try your hand as an ad network or merge with a competitor, but more than likely it’s time to sell that domain name and user base on eBay or quietly shut your doors. Better luck next time.

ON BANK RUNS 2.0

Michael Parekh on IT

 

A PREVENTABLE MESS

This Paul Krugman op-ed titled "Partying like it's 1929" in the New York Times, gives a timely reminder of a lesson from history:

"Contrary to popular belief, the stock market crash of 1929 wasn’t the defining moment of the Great Depression. What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931."

What follows is a Banking 101 lesson on one of the several contributing factors of the Great Depression, and an  explanation of how it's potentially happening again:

"The financial crisis currently under way is basically an updated version of the wave of bank runs that swept the nation three generations ago. People aren’t pulling cash out of banks to put it in their mattresses — but they’re doing the modern equivalent, pulling their money out of the shadow banking system and putting it into Treasury bills. And the result, now as then, is a vicious circle of financial contraction.

Mr. Bernanke and his colleagues at the Fed are doing all they can to end that vicious circle. We can only hope that they succeed. Otherwise, the next few years will be very unpleasant — not another Great Depression, hopefully, but surely the worst slump we’ve seen in decades."

Part of yesterday's post dealt with a possible solution to slow down this vicious cycle.

Another major contributing factor to the Great Depression of course was the simultaneous Protectionist political sentiments that turned politically expedient wishes into laws, that then lead to  a harsh global financial recession lasting years. 

We have the seeds for the same thing being planted again, with both Democrats and Republicans taking a step back from America's much-needed commitment to Global Trade.  The recent Nafta-bashing populist politicking by the Clinton and Obama campaigns is a case in point.

Sorry to point out what should be well-known history lessons on an Easter Sunday.  But sometimes we need to remind ourselves of some of the basic, presumably well-remembered foibles from our past.  And this is one of those times.

The Man In The Arena

from techcrunch.com

Michael Arrington

80 comments »

Yossi Vardi is one of the people I’ve had the pleasure to get to know since starting TechCrunch. You can find him at technology events worldwide - just look for the smiling, wild-haired guy surrounded by a pack of people.

To understand what he has accomplished, see his wikipedia entry. He is most famous for being the original investor in ICQ, but he’s also invested in over 60 other companies.

Yossi was generous enough with his time to join our panel of expertes at TechCrunch40 last month. At one point in the discussion of a group of startups he quoted Theodore Roosevelt from a 1910 speech given in Paris, and drew an analogy to today’s entrepreneurs:

It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.

I spoke with Yossi this week and asked him about his investment approach. He generally invests in young entrepreneurs and only takes common stock. If someone has failed before he’s even more likely to invest - “It makes them want to win even more,” he said. He generally doesn’t look at business plans at all, and just invests in the individual.

I am not nearly as eloquent as Roosevelt or as smart as Vardi, but the words ring true to me, and it was a very special moment at the conference when Vardi spoke about this. If you are an entrepreneur (or think you may be), forget the critics (even us) and the naysayers and just do what your heart tells you to do. You may be wasting your time, but at least you got into the arena. And if you fail, make sure you fail while “daring greatly.” Then, get into the arena again, having learned from your mistakes.

Elements of Sustainable Companies

from techcrunch.com

Start-ups with these characteristics often foretells the success of a business and the likelihood of it becoming a sustainable, enduring company. We like to partner with companies that have:

Clarity of Purpose
Summarize the company’s business on the back of a business card.

Large Markets
Address existing markets poised for rapid growth or change. A market on the path to a $1B potential allows for error and time for real margins to develop.

Rich Customers
Target customers who will move fast and pay a premium for a unique offering.

Focus
Customers will only buy a simple product with a singular value proposition.

Pain Killers
Pick the one thing that is of burning importance to the customer then delight them with a compelling solution.

Think Differently
Constantly challenge conventional wisdom. Take the contrarian route. Create novel solutions. Outwit the competition.

Team DNA
A company’s DNA is set in the first 90 days. All team members are the smartest or most clever in their domain. “A” level founders attract an “A” level team.

Agility
Stealth and speed will usually help beat-out large companies.

Frugality
Focus spending on what’s critical. Spend only on the priorities and maximize profitability.

Inferno
Start with only a little money. It forces discipline and focus. A huge market with customers yearning for a product developed by great engineers requires very little firepower.

Why Buffett Would Not Buy Google

seekingalpha.com

This weekend on TickerHound.com, a member asked, “Would Buffett really buy Google (GOOG)?”

The question was based on a Fool.com article that quoted this year’s Berkshire (BRK.A) Annual Shareholder Letter where Buffett writes, “It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.”

I could see why this led some to wonder – and the Fool.com even wrote an article about it – if Buffett could potentially invest in Google. This made me laugh if for no other reason than Buffett mentions Microsoft (MSFT) in the same sentence, a company he knows intimately (considering Bill Gates sits on Berkshire’s board) but has yet to ever invest in.

But let’s leave that part out of the equation for a moment. Let’s just look at the Google angle and try to answer the question: Would Buffett really buy Google?

For consistency’s sake, I’m going to analyze this in the exact same way the Fool.com article did:

Is The Business Simple and Understandable?

Definitely!

Google is an ad broker – plain and simple.

We can talk about its technology all we want – and believe me, that’s what makes its ability to broker ad dollars so effective – but at the end of the day, the way the company makes 99% of its money is by putting publishers and advertisers together.

That’s a pretty plain vanilla business to me (regardless of all the sophisticated search technology it has on the backend).

Does It Have Favorable Long Term Economics?

I’m going to skip this for a moment and come back to it at the end. You’ll see why below.

Is Management Candid and Competent?

I’d have to give the affirmative answer on this one as well.

The founders, Larry Page and Sergey Brin, both have the better part of their net worths tied up in Google stock. That means management’s interests and the shareholders’ interests are certainly aligned – something Buffett always looks for in a company he’s buying.

And in terms of candor and competence, their execution speaks for itself. If you’ve read Google’s annual reports and even its S-1 filing, you’d know that they’re candid and up-front about how they manage their business.

So this item gets checked off the list as well.

Is The Price Right?

Here’s where we run into problems…

Buffett’s brilliance isn’t based on the fact that he knows how to value an asset…I know a lot of folks who can value an asset.

My father knew exactly what we should pay for our home when I was a kid.

I could tell you right off the bat how much I’d pay for a new car.

In fact, Finance 101 teaches people basic asset valuation models – more specifically, Discounted Cash Flow analysis.

The ability to value an asset isn’t difficult, you just plug some numbers into the equation and you get your value.

The difficult part is making sure the NUMBERS themselves are the right numbers.

So now you’re probably asking, “How do we know if the numbers we’re using are correct?”

Well, you’ll never be able to tell if the numbers are EXACTLY correct, you’ll have to use your best judgment. And even then you’re probably going to be off, and that’s why in Ben Graham’s infinite wisdom he taught Buffett – and thousands of other value investors – to apply a “margin of safety” approach to business valuation, but that’s another story.

But here’s the caveat (and this goes back to the “Does the business have favorable long term economics?” question). According to the Fool.com article, because the internet has favorable long term economic characteristics, and Google is by far and away the leader of the internet pack at the moment, they assume that Google will therefore have favorable long term economic characteristics as well.

But that just isn’t so. The tech sector is predicated upon the process of creative destruction. Companies must find new and innovative ways of doing things or they’re destined to become obsolete. I mean, how many times have we seen this happen in the last 10 years?

To argue that Google will ALWAYS maintain a competitive advantage in a space that changes by the hour is foolish (no pun intended).

That’s why Buffett only invests in mature companies that compete in mature industries. It makes the tough part of business valuation (using the right numbers) much, much easier.

So to answer the original question as simply as possible, Would Buffett ever buy Google?

In my opinion…Not anytime soon!

10 Rules for Startup Success

The Financial Times has a profile of French (now Silicon Valley) entrepreneur Loic Le Meur today.

Loic is an accomplished entrepreneur - he founded uBlog (merged with Six Apart), organizes the annual Le Web conference and has now created Seesmic (note that I’m an investor in Seesmic). So even though he’s French, his advice, when given, is worth listening to.

Included in the article are his ten rules for startup success. Reprinted below.

1. Don’t wait for a revolutionary idea. It will never happen. Just focus on a simple, exciting, empty space and execute as fast as possible
2. Share your idea. The more you share, the more you get advice and the more you learn. Meet and talk to your competitors.
3. Build a community. Use blogging and social software to make sure people hear about you.
4. Listen to your community. Answer questions and build your product with their feedback.
5. Gather a great team. Select those with very different skills from you. Look for people who are better than you.
6. Be the first to recognise a problem. Everyone makes mistakes. Address the issue in public, learn about and correct it.
7. Don’t spend time on market research. Launch test versions as early as possible. Keep improving the product in the open.
8. Don’t obsess over spreadsheet business plans. They are not going to turn out as you predict, in any case.
9. Don’t plan a big marketing effort. It’s much more important and powerful that your community loves the product.
10. Don’t focus on getting rich. Focus on your users. Money is a consequence of success, not a goal.

Startups Must Hire The Right People And Watch Every Penny. Or Fail.

from techcrunch.com

Michael Arrington

Yesterday Jason Calacanis, the founder of Mahalo (and, full disclosure, our partner at TechCrunch40), wrote a blog post titled “How to save money running a startup.” Boy was he attacked. Bloggers lined up to take their shots at him. Examples are here, here, here and, especially, here.

Our own Duncan Riley also wrote a post criticizing Calacanis and a firestorm of comments blew in. He took a more humorous approach to make his points, but his opinion on the matter was clear.

I happen to disagree with Duncan and the others criticizing Calacanis, though. Our writers have complete editorial discretion, and I would never ask him to change his overall tone or message. But I do want to chime in with my own thoughts because this is an important cultural issue and worthy of further discussion.

Some of Calacanis’ points were probably written in haste, like his statement “Fire people who are not workaholics” (he later changed it to “Fire people who don’t love their work”). Others were not controversial, like his advice to “Buy cheap tables and expensive chairs.” Overall, I get the impression that if he had spent just a few minutes editing his post, he would have had a 100% different reaction from readers.

I’m not that interested in analyzing each of his 17 suggestions - some I agree with, some I don’t. But I am interested in adding my thoughts to what I believe are (or should be) his underlying messages:

Startups Must Hire The Right People

Startups that hire incorrectly fail. They don’t probably fail, or maybe fail. They just plain fail.

You must hire the right people. In particular, the early employees must be perfect. This is more important than anything else, including the product or business idea. Perfect teams can adapt to failing products or market/competitive issues and correct for that. That’s why great teams tend to work together over and over again, and sometimes start companies even before they know what the product will be.

The most important part of hiring correctly is to not hire the wrong people. The second most important part of hiring correctly is to hire the right people. What that means is that it is better to not hire anyone at all if you can’t find the right person. And if your startup fails, all the perks, time off and general coddling that many outraged commenters called for isn’t all that useful.

So who are the right people and who are the wrong people? It’s not that hard to tell. The right people are the ones that really, really want to work with you. You can tell they’re excited to be a part of the team. They actively look for problems to solve, and then solve them. This is a personality type that is very easy to spot once you know what to look for - they have fire in their eyes. They’re warriors.

I’ll take the fired up warrior any day over the more experienced but otherwise meek alternative. Skills can be learned quickly on the job (excluding certain specialized skills, which mostly means developers for a young startup). But if you aren’t already the kind of person who’ll just get the job done no matter what, you’ll likely never be.

Warning signs to look out for during an interview: people who care about status symbols like titles, people who resent the success of others, people who act like they’re doing you a favor by talking to you. And people who want to negotiate salary endlessly but couldn’t care less about the stock options.

If you hire badly, it isn’t just that employee who’s not performing. They poison the entire organization. If everyone is pushing hard to get a product out the door, but one sulking individual is passive aggressive about working late, morale drops across the company. It spreads like cancer.

I’m not saying you should chain people to the desk. I’m not saying you should make them work 24 hours a day. What I’m saying is that you should hire people who work 24 hours a day because there is nothing else they’d rather do. If you’ve got a product to launch and you’re ultimately trying to disrupt a bigger and better funded company, it’s likely that you are going to need a superhuman effort from the team. I doubt Google’s early employees complained about the hours (and take a wild guess as to why Google gives employees free lunch and free dinners).

If something about this doesn’t sit well with you, that’s ok because you are part of the vast majority of people out there who have an appropriate work-life balance. That doesn’t make you a bad person. It just makes you a bad hire for a resource-strapped startup that needs a team of kick ass all-stars to have a hope in hell of succeeding.

The bottom line is this. The only people in the world that should feel warm and fuzzy around you are your customers/users. Your employees don’t want to feel warm and fuzzy. They want to win. If they are warriors, they’ll respect what you are doing and follow you into the wee hours of every morning to mark their place in history and fill their bank accounts with stock option dollars.

Watch Every Penny

Startups cannot waste money. If they do, they’ll fail. As I said above, they don’t probably fail, or maybe fail. They just plain fail.

That means a really cheap office, to start. Don’t even think about an administrative assistant. Or flying business class. Double up in hotel rooms. And even things like telephones are probably not needed. You have cell phones and skype for that. Matching 401k plans? HAH. Three weeks vacation? Not going to happen. You cannot waste money because every dollar is an amount of time you can keep running the business before you have to shut down. Run out of dollars before you reach profitability or convince investors to double down, and you’re done.

However…you cannot be penny wise and pound foolish. Get your developers the hardware and software they need. Pay your employee’s cell phone bills (the nice thing about reimbursing expenses is that it’s tax efficient to both the company and the employee v. income). Attend the conferences you need to attend to push the business forward (but try to sneak in for free)(unless it’s TechCrunch40).

Here’s another tip - make sure your accountants and lawyers know that you are watching every penny. Bring up cost issues to them on every other call. They’ll be far less likely to pad their bills if you do. But also make sure they know that there’s upside - a successful client that raises venture capital, gets sold, enters into a lot of deals, etc. will generate fees for them down the road. Make sure they see you as a partner, not an ATM machine.

Something else that I’ll pass on - when startups raise their first big round of financing, they are at their most vulnerable point. The new investors want results. Expansion. Market domination. Etc. Too many startups start to spend that money on really dumb stuff - new employees that aren’t needed, new office space, etc. It’s incredible how a company that got to launch on $200k will start to spend that amount every month after they raise $5 million. And the results - bad hires who not only don’t perform, but who also bring the rest of the team down. When and if you raise that money, make sure you are doubly cautious about spending.

Push to the breaking point on everything. Pay money out as slowly as possible. Collect revenue aggressively and quickly. And never miss payroll.

If you do all of these things you will have a 2 in 10 chance of middling success, and a 1 in 10 chance of a serious win. Don’t do these things and you’ll fail.

Fundability: Make (Seed) Money Fast!

 

www.mashable.com

I’ve had funding for projects before.  Sometimes it has been a blessing.  Sometimes it has been a downright curse.  The lingering curse of having once been funded is being constantly approached by friends and acquaintances to find funding for their projects.  Now I have a pat answer for them that doesn’t require me to tell them outright how hard it will be to find funding for a paintball booth for a Halloween haunted house (just one random example from memory).

The answer is Fundability. I’m not absolutely 100% on it’s effectiveness yet, as it’s been a largely under the radar company, or at least largely under my radars.  What they claim to do, however, is genius. Dubbing themselves a “web based deal flow marketplace for entrepreneurs and investors,” their goal is to match projects with investors via various social networking functionality and algorithmic matching.

If you’re an investor, you can set the system up to send you pre-screened deals sent to you by creating your ‘Investor SweetSpot,’ or join a virtual investment group, which allows you to distribute to groups of investors deals you find.

For investors, they can have pre-screened deals sent automatically to them by creating an “Investor SweetSpot.” They can also join or start a Virtual Investment Group and syndicate deals with other groups or angels.

All this isn’t free, however.  Fundability gets theirs by charging the entrepreneurs who want the money a $49.99 a month fee to find themselves a funder. If the system does what it and their case studies claim, though, that $49.99 a month could be money very well spent.

Alarm:Clock says they’ve just raised $3M from Velocity Ventures in January, though no word on whether that money was raised using their own system (my money says no).

ShareThis

No Bubble Here: VCs Invest $29.41B

GigaOM.com

Slow and steady wins the race. Given the VC industry’s penchant for hockey-stick growth charts, it’s far from their slogan, but when it comes to a slow annual growth in funding data, it’s a welcome sign. The PricewaterhouseCoopers/National Venture Capital Association MoneyTree data is out for 2007, and the $29.41 billion invested in companies is the highest level since 2001, when VCs plowed $40.62 billion into businesses. What they don’t say in the release is that before this, 2006 was the highest level since 2001 — and before that, 2005. Venture investing has risen almost steadily since the incredible drop seen between 2000 and 2001, when the $105.11 billion that went into startups fell by 60 percent. This is pretty good news for people worried about the next technology bubble. It’s not to say that technology companies big and small won’t be affected by the current weakness in the economy, but venture investment doesn’t have as far to fall. Sure, there are what seems to be a hundred new startups popping up, but most of these haven’t raised $25 million in Series A like some of the telecom copycat deals of the late 90s. Some quick math with dollars invested and the number of deals shows that the average deal size today is about $7.7 million compared with $13.3 million in 2000. That points to more reasonable amounts getting put into deals and given the smaller amounts put on the line, investors are likely anticipating a more reasonable M&A exit while still hoping for the home run IPO. Those exits should become clear in the next year or two. Last year 1,168 firms received later stage funding, or 31 percent of the total number of deals. The year before, 1,006, or 28 percent of total deals, scored late-stage funding. Typically those firms are about a year or two away from an exit, and since many are becoming pessimistic about technology IPOs in 2008, it will be worth watching to see how many of those companies get picked up in M&A deals.

Get Venture

Doing Due Diligence On The VC Posted: 09 Jan 2008 11:09 AM CST Managing a startup is a tremendous undertaking in itself. Managing a startup, while raising money, is typically a Herculean task. By the time that the due diligence is complete, an entrepreneur is usually pretty exhausted and eager to be done with the fundraising process. However, this is a key time for entrepreneurs to ensure that they are working with the right partner. In my post, Your Company Is Who It Hires, I describe the importance of hiring the right people. This principle holds true for your investors too. Investors offer more than money, they offer operating assets (e.g., contacts and ideas) and they also become affiliated with your company in the minds of outsiders. As a result, having the right investors can really help you and having the wrong ones can really hurt you. Bad investors can be too controlling, create unnecessary headaches and make decisions solely for their personal short-term financial gain; a bad investor takes more than they give. Furthermore, a bad investor can deter good investors from getting involved in the future. As a result, in order to make sure that the investors can truly be a value-add, both with internal operations and external perceptions, you will need to conduct due diligence on VCs. The best way to do this is to ask the VC for references that can vouch for the VC. Typically these come in the form of entrepreneurs that the VC has backed in the past. It’s important to note that few entrepreneurs conduct due diligence on VCs. This is probably because they both don’t have the time, don’t have more than one potential investor and have already asked their trusted advisers about the VC in question. As a result, VCs are not entirely accustomed to facilitating this type of due diligence, creating a need for you to broach this topic somewhat carefully as you might catch them off-guard. Ultimately, you should use your best interpersonal skills to find a friendly way to ask for some references. These references can prove to be valuable even if the VC is your only potential investor and you intend to take their money regardless of the feedback you hear. References can help shed light onto the VC’s strengths/weaknesses and overall style. This can help prepare you to interact with them effectively when they join your board.