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How a startup should leverage a virtual assistant

September 1, 2010 By Jason
rob_wallingRob Walling generously allowed me to reprint this excerpt from his new book, "Start Small, Stay Small: A Developer's Guide to Launching a Startup" available in paperback and Kindle from Amazon and in PDF and ePub from StartupBook.net. Rob is one of the most successful "micropreneurs" — creators of small, cash-generating startups frequently sold for cash. He blogs to 10,000 web entrepreneurs at Software by Rob and co-hosts the podcast Startups for the Rest of Us.

Introduction

I receive essentially the same reaction when I mention that I use virtual assistants, and that I recommend them for anyone starting a startup. It's a mix of shock and excitement. They're shocked I've been able to pull it off, and excited at the thought that they might be able to do the same. The conversation almost always turns to questions about where to find virtual assistants and how a startup can use one. This article intends to answer those questions.

What is a Virtual Assistant?

A virtual assistant (VA) is a remote worker hired to complete tasks you should not be doing as the founder of a startup. These can be research tasks, like finding every tech blogger who blogs about cats, repetitive tasks like creating 100 affiliate links for products in a Word document, or ongoing tasks like monitoring a handful of job boards and posting new jobs to your website. The term VA has grown to describe any remote contract worker, including people who help with audio editing, video editing, bookkeeping, webmaster tasks, link building, and so on. A VA can be domestic or international, as long as they have a computer and an email account.

Why Should My Startup Use a Virtual Assistant?

startups-for-rest-of-usOutsourcing to a virtual assistant will dramatically reduce the time you spend on administrative tasks, and increase the time you can commit to growing your business. The value proposition of a VA deals with how you monetize your time. If you monetize it at $50/hour and you can pay a VA $6/hour to handle administrative tasks, this frees up time for you to create real value in your business by developing new features or expanding marketing efforts. Performing tasks you could pay someone else $6 to accomplish is a foolish use of an entrepreneur's time. My VAs have saved me literally hundreds of hours over the past few years.

[Editor's Note: This is especially true for you starting up while still employed where your time is scarce and your existing income should be used to buy more of it.]

Case Study: How I Launched One Month Earlier Using Outsourcing

More than two years ago, my business partner and I discussed launching a hosted version of our ASP.NET invoicing software, DotNetInvoice. We developed the plan and task list, and estimated the effort at around 160 hours including development time needed to make DotNetInvoice a multi-tenant application. But given the heavy competition in the hosted invoicing software market and the level of effort of the task, it was continually placed on the back burner. The Shearing After our initial estimate, every six months for the past two years we've revisited the idea of a hosted version until one day in November of last year. On this day we stopped looking at the hosted version as a new product line, and started looking at it as a market test; to see if we could build enough of a customer base to warrant a major investment in the hosted invoicing market space. With that in mind, things started flying off our "must-have" list. One large piece we removed was automating sign-up and provisioning of a new hosted installation. In an ideal world, when a customer wants a new hosted account they would fill out a web form with all of their information and their new hosted version would be ready in 30 seconds. But that amount of automation — given the fact that we have to create a new sub-domain, a new database, and copy physical files — would take a substantial amount of time to develop and QA. So we tossed it. Another feature we left on the cutting room floor was the need for a custom purchase page; a page where someone enters their details to make the purchase. In a desperate attempt to bring this entire project down to less than two days work we simply utilized PayPal subscriptions. Not the optimal approach, but it works quite well for testing out an idea before we invest another day into this project. Iteration vs. Automation As a developer, the features we dropped seem like a necessity from day 1. Not automating this process creates the ongoing repetitive work that computers are designed to handle. Manual work — this is what computers are supposed to save us from! But by getting over the need to automate everything to infinite scale and putting a VA in charge of manually creating new hosted accounts, the time investment to get this feature launched dropped from 160 hours of work to about 10 hours. I can hear the cries of developers around the world as I write this: "You can't launch a half-baked solution! You'll never go back and fix it!" Most of us have worked in corporate environments where you're never allowed to go back and refactor code. This burns into our psyche that you don't want to launch a semi-functioning solution because you'll never have time to go back and fix it. But the benefits of being my own boss and being a tiny software company are that I can come back to this anytime. In fact, the day the amount of money paid to my VA for handling this task exceeds a certain amount, I will be very motivated to automate it. Ideally, by the time I code it up, we'll have many customers using the platform which means I'll be working on a product I know is viable, and that's paying for the time I'm spending to automate it. Agile Development, meet Agile Business. Through a bit of outsourcing to a VA, you can get to market with less up-front expense and in dramatically less time than if you try to automate everything. Had we chosen to automate everything, the worst potential outcome would have been investing 160 hours of time (a huge amount of time for a startup), and then scrapping the whole thing. When you're working on a small team you can't afford to throw away that much time. The Lesson The lesson is that before you launch your product, think about the processes you can avoid automating. How about reminder emails? How about monthly billing? Could a human being run a report once a month and send emails or charge credit cards? This is not the paradigm we typically think of as developers because we're used to enterprise IT shops where everything has to scale infinitely. As a startup, you'll have plenty of time before you need to scale, and you may never need to scale if the idea doesn't work. Every hour spent writing code is wasted time if that code could be replaced by a human being doing the same task until your product proves itself.

The Two Points When a VA is Most Helpful

There are two key points during the life of your startup where your life will be much easier if you use a virtual assistant (VA):
  1. While proving out your product/market
  2. After your product launch
Let's look at each one.

Point #1: Developing a Proof of Concept

In the DotNetInvoice case study above, I used a VA to short-circuit my product development time so we could begin to prove out the product's concept with much less effort than if we had built everything in code. As I've automated pieces of my businesses, I've noticed an interesting trend: nearly anything I try to automate is easier to outsource first, then automate down the line once the volume warrants it. The reason for this is that at any given time you're likely to have, say 30 tasks on your plate, and you should be trying to remove as many as possible from your task list; both one-time and ongoing tasks. Out of 30 tasks you might be able to outsource 6 or 8 of them tomorrow if you spend 2-3 hours today writing up the processes. Compare that with automation, which can take a week or more to get each task off your plate since it takes a lot of code to automate a task. As a startup, one of your advantages is that you move very quickly. You can roll out new features much quicker your competition. And being able to manually process some parts of a task can often reduce your development time by 50-80% which allows you to get the feature out the door and in front of customers. If customers decide to use it, then you can automate it. If not, you can throw what little time you spent on it away. You develop the minimum required functionality to make the bare bones feature work; nothing more. You scaffold the rest with a human being; your VA. Then, as needed, you improve the back-end automation iteratively. Your startup time plummets to near zero even though your maintenance costs are a bit higher since you're paying someone an hourly rate to handle the task. But that's ok, because every task you outsource to someone making $6/hour is a task that frees you up to develop new features and focus on marketing — things that make you a lot more than $6/hour. In addition, outsourcing provides you with a written process for the task that serves as a blueprint if the time comes later to automate it.

Point #2: After Your Product Launch

The next most important time to use a VA is once your product has launched and you need to begin supporting customers. Customers make it necessary to put processes in place for marketing, sales, support, and back-end admin tasks. Any ongoing work that can be described in a written process can be outsourced to a VA and save incredible amounts of time for the founders. If you do not outsource these tasks, they will get in the way of work that's truly productive for your business. While most entrepreneurs feel like they need to keep the reins on level 1 email support, level 1 sales questions, manning the live chat window on your website, directory submissions, minor HTML tweaks, keyword research, link building, following up on canceled subscriptions, and running month-end reports, getting these tasks into the hands of a competent VA frees up vast amounts of time that can be spent growing your business. And the cost is negligible. Don't fall into the trap of needing to handle everything yourself. You are now an entrepreneur.

Case Studies

Here are two case studies to give you an idea of how you might use a VA in your own startup, whether serving a core business function or as administrative support.

Case Study #1: Market Research

In 2009, I launched the Micropreneur Academy, a private membership community for startup founders. For the launch event I wanted to contact several bloggers in the startup and microISV space. I have a list of blogs that I read and quickly added them to my list to send a personal, targeted email to each. I receive enough pitches each month to know that sending a mass email to bloggers doesn't work. In the back of my mind, I knew there were other startups/microISV blogs out there that I don't read, but I didn't want to spend the time to track them down. More importantly, I didn't want to spend the time trying to find their contact information. Enter my VA. I tasked my VA with finding blogs that deal with startups/microISVs and rank in the top 100k in Technorati. The deliverable was a Google spreadsheet containing the blog URL, blogger's name and blogger's email. The final spreadsheet contained 28 blogs. It was up to me to go through each one and become familiar with their content, determine its relevance to my message, and craft a targeted and personal email. Many blogs dropped off the list after a quick glance, but in the end the time saved by delegating this research task to a VA was well-worth my $12.

Case Study #2: JustBeachTowels.com

JustBeachTowels.com was an e-commerce site I purchased with hopes of a high level of automation. The problem is that beach towel dropshippers are not the most high tech businesses, and none of them offered any kind of API for order placement. All orders had to be manually placed through their web-based shopping carts. In the early days, I planned to build a screen scraper to pull orders from my database and automatically place them with the four dropshippers I used, but realized the level of effort and QA that would be required for this were substantial and the resulting interface would be brittle due to the screen scraping. Instead, I assigned a VA to place all of the incoming orders. I never revisited automation due to the lack of ROI on the time it would have taken to build the screen scraping interface. Running the site using a VA instead of automation saved me time in the long run, as I would never have made back my initial time investment on the 50+ hours required to fully automate the order placement process.

Easing Into a VA

Outsourcing is a learned skill, just like writing code. If you rush into it too quickly, you'll wind up disappointed with the results. This is most often due to the fact that you don't yet know how to work with a VA. One of the plusses of having a VA is that you can ease into them over the course of several months. Since utilizing a VA is a learned skill, you are best to start slowly by finding someone who will work on individual tasks, then move to part-time if needed, and finally to full-time. These hiring arrangements are described below:
  • Task-based — ($3-10/hour overseas, $12-50/hour in the U.S.) You assign your VA an individual task and give them a deadline and maximum time to spend on the task. Since your VA works for other clients, they are in charge of prioritizing all of the tasks they receive. Task-based VA's are a great starting point to learn the ropes of delegating.
  • Part-time — ($2-7/hour overseas, $10-$40/hour in the U.S.) Part-time VA's are dedicated to you for a certain portion of their week (typically 10, 20 or 30 hours). Part-time VA's are cheaper by the hour than task-based VAs, but you need enough work and experience to keep them busy during the time you are paying for.
  • Full-time -- ($1-$5/hour overseas, $8-35/hour in the U.S.) As you might imagine, a full-time VA is a lot of responsibility. While offering the lowest hourly rates, you need 160+ hours of work to keep them busy. If your VA is self-managing, you can lay out tasks a month at a time. If they need supervision, it's probably not worth bringing them on full-time.

The Steps

The key to learning how to work with a VA is experience. The question is: how can you get started easily and with little risk? The steps are:
  1. Find a VA
  2. Start with a single task and gradually increase the amount of work as you gain comfort
  3. If things don't work out, find a new VA
When I began outsourcing three years ago I found that when I received the finished product I was elated that I hadn't spent 3-4 hours doing it. This made me realize how many other tasks I was able to accomplish during that time frame.

Step1: Finding a VA

I've had the best results hiring VA's in the Philippines. This is not to say that the U.S., India, Bangladesh or other countries do not have quality VA's, but the Filipinos learn English in school, do not tend to be entrepreneurial (thus are less likely to steal ideas), and are culturally service-oriented. You may find another country to be more compatible with your management style, but after working with 10+ VA's, I now work almost exclusively with Filipinos. The main exceptions are my audio and video editors in the U.S. and Canada. In my experience, you will be best off with one of a few choices when looking for a VA:
  1. Task-based VAs
    • Search ODesk under Admin Support -> Personal Assistant or Other.
    • Search Google for "virtual assistants." Typically the best looking websites are the firms that have their act together.
    • Search Elance under Admin Support -> Admin Assistant.
  2. Part-time VAs
    • Search ODesk under Admin Support -> Personal Assistant or Other.
    • Search Google for "part-time virtual assistants"
  3. Full-time VAs
    • Search ODesk under Admin Support -> Personal Assistant or Other.
    • Search Google for "full-time virtual assistants"
I've had positive results and have personally hired a VA using every method listed above. My current favorite is ODesk.com. I've had exceptional luck with them, and their project management tools are helpful in making sure your VA is working on your tasks. Their time clock takes screen shots of the VAs screen at random intervals so you can see the task they are performing. A Note: Solo vs. Team Many VA's work in teams, whether under the umbrella of a single company, or in a loose affiliation. Solo VA's tend to be cheaper than team or larger firms. For recurring work that's critical to your business, it's nice to work with a team. You will typically have a primary VA but when he's on vacation his replacement will step in. For ongoing work that's not terribly time-sensitive, I've found solo VA's work out well. When getting started, my advice is to stick with a larger VA firm. You will pay a little more but you will have more reliability, higher security and will be able to easily find a replacement when you need one. How to Evaluate a Potential VA My first piece of advice is to avoid spending too much time worrying about screening your VA before you hire them. In the end, how well they work out depends entirely on how well they accomplish their tasks. In other words, reliability and the ability to understand your instructions and ask good questions are the key factors. Without hiring someone you can't get an idea about their reliability; only about their ability to understand and ask questions. To do that, you need to evaluate their written English (or whatever language you will be working in). This includes hiring U.S.-based VAs; competent written English skills are not a given even for native speakers. If you're looking for general help, the only noticeable difference between the 10 VA's you are screening is their hourly rate and their ability to speak and write English. If you need specialized work performed, you may have an additional requirement that they also know how to edit audio, for example. In that case, ask for samples of past work and experience doing the exact task you will have them to do. The best way I've found to evaluate English skills is to email back and forth a few times, asking 2-3 basic interview questions. This will be a good indication of how well they will be able to understand your instructions, and their responses are a good indicator of how well you will be able to understand their questions. The best approach is to email with 3-5 VA's at once to speed up the process. If you're working with a VA firm, I recommend requesting someone with excellent written English, and performing the step above with that person. If they don't live up to your standards, request a new VA and repeat the process. In the past I've asked for writing samples but this has failed me. The problem with asking for writing samples is a VA can easily send something that's been heavily edited, or a piece written by someone else. During an email exchange you can be certain that you're catching a true glimpse of their English abilities.

Step 2: The First Task

Properly utilizing a VA is a learned skill. Very few developers will do it right the first time, which leads many who try it to give up after the first attempt. To keep you from falling into this trap, we're going to look at the best way to delegate, describe and limit tasks in the section below. After determining your VA has solid English skills, the next step is to send them your first task. You should be able to tell after one task if they are going to work out. If you've never worked with a VA, you should assume they are not technically minded. They will have basic computing skills but are nowhere near techies, so you have to prepare instructions for them as if they were your mom or dad (or at least my mom or dad). The following is unlikely to work:

Open a command prompt and type 'ipconfig'

But this should:

In your start menu go to the Run menu, type 'cmd' and hit enter. Once the window opens type ipconfig and hit enter.

With that in mind, here is how I suggest you assign your first task:
  • Back everything up before you let them touch production files. It's unlikely they will be malicious, but they might accidentally break something.
  • Provide detailed instructions in bulleted/numbered format.
  • Screenshots help enormously. Screencasts are even better. I record multiple screencasts each month for my VAs. Jing is perfect for this.
  • Timebox your requests. As an example, let's say you have twenty blog URLs and you want your VA to find the contact information for each one (whether it's an email address or a contact page). Provide the list of URLs to your VA and indicate they should work for 1 hour and then update you on their progress. In this manner you can both check if they're doing it right, and see how long it's taking them. If it's taking longer than you think it should, ask how you can help.
  • Assume they are not as fast as you are. If 1 URL takes you 1 minute, assume it will take your VA 5 minutes at first and they will eventually get down to 3 minutes. They will never be as fast as you are. But at $4-6/hour it's hard to complain.
  • If you have a timeline, spell it out (e.g. "I need these by tomorrow"). If not, let them know you can wait 2 days for the results. They work when we are sleeping so you'll never get anything the same day.

Step 3: If Things Don't Work Out, Find a New VA

Finding a VA is about trial and error. I've worked through more than 6 VA's to find the folks I work with today. It's a similar process when finding a designer, developer, or any outsourcing partner. You can only tell so much from a resume; the best way to evaluate is to try them out, and this means if they don't work out you should make the decision quickly to find someone new. It's critical that you feel comfortable with the person you're working with. It's better to cut someone loose early in the relationship before you've trained them on the inner workings of your business. If you're working with a VA firm it's easy: simply ask for a new VA and if you can, give a specific reason why the first one did not work out. If you're using an individual, head back to your stack of candidates from Elance, Google or ODesk. The odds are low that you will find someone great on your first try. But finding someone great will make a huge difference in the success of your outsourcing effort.

Did you make it this far? Awesome, let's talk some more.

Let's continue the discussion in the comments!
Filed Under: Guest Posts, How-To, Productivity, finance, tools

Good bizdev cannibalizes itself

August 31, 2010 By chris
A few successful websites were built almost entirely through viral growth. The vast majority, however, started off by partnering with other, already successful websites. Even Google began by partnering with Yahoo. As superior as Google’s search algorithm was, it was very hard to get the masses to switch to a new search engine. In the web 1.0 world (approximately pre-2004), integrating two web services involved lots of manual work, such as negotiating legal contracts and custom technical integration. Creating these kinds of partnerships is usually referred to as “business development” or “BizDev” (personally, I usually just call it “BD”). In the web 2.0 world, it became common for websites to create fully functional, self-service API’s with standardized legal terms. This made it possible to drastically reduce the friction of integrating services. My Hunch cofounder Caterina Fake coined the term “BizDev 2.0″ to refer to this idea (and of course Flickr was a pioneer of super robust APIs). There is no question that removing legal and technical hurdles is a win for everyone (except lawyers). However, unless your service is extremely high profile and its value is easily understood, it still needs to be marketed to potential partners. Many websites won’t consider using a self-service API until they’ve seen it working on other sites with measurable results. So how do you overcome this particular kind of chicken-and-egg problem? During his interview process, Hunch’s Shaival Shah, said something that struck a chord with me: he didn’t want to be called “VP BizDev” because, he said, a good BizDev person makes BizDev irrelevant. The idea is to create a number of BizDev 1.0 partnerships while simultaneously building and marketing a full service API.  If you can do BizDev 1.0 with some number of (ideally high profile) websites and demonstrate that it is valuable to them (ideally quantitatively), you can then scale your service BizDev 2.0 style. Maybe this could be called BizDev 1.5. Shaival wrote up a much more detailed post on self-cannibalizing BizDev that is well worth reading.
Filed Under: Startups, hunch, strategy

Company Profiles and Video

August 23, 2010 By Joshua Maher
If you’ve been to a TechCafe in the recent past, you might have seen me diligently taking video… You might have seen some of the videos show up on TechFlash as well and thought it was great to see the content for later review or because you missed the event and wanted to hear the [...] More here >>
Filed Under: Company Profiles, M&A, Seattle Tech News, Startups, TechCafe

No, You CAN’T retire rich at 30 if you sell your startup

August 23, 2010 By Tony Wright

I personally find the people who are in the software startup game just for the money to often be nearly delusional about their chances of success and the likely magnitude of it when it happens. Before I get into the details for founders, let me talk about options-hungry employees. If you are in it for the money and you aren’t a founder, you’re sticking your head in the sand. Full stop. Yes, you can point at your anecdotal evidence at once-per-generation companies like Google, Amazon, and Microsoft. But for the most part, employees never get “I never have to work again” rich doing startups. There are too many mechanics out there to make sure that the folks taking the real risks (investors and founders) make the real money. If you want to read more, read my intro to startup stock options. If you don’t want to start companies, focus on salary and how much you enjoy working at startups.

But even if you are a founder, don’t do it for the money. Do it because you love small teams. Do it because you love your product. Do it because you love playing the startup game (even if you don’t win it). But for the love of God, don’t do it because you think you’ll get rich and retire on a beach somewhere when you’re 30. Because, as crazy as it sounds, when you sell your first company it almost certainly isn’t going to happen.

Let’s run through a common exit scenario. You and 2 co-founders spin up a company (say you’re creating one of Mike Arrington’s “Dipshit Companies that wants to sell to Google for $20m“). You take a smallish seed round and a small-ish Series A round (yeah yeah, you can bootstrap– but the vast majority of 7 to 9-figure exits are funded companies). So after investors and options for employees, let’s say you each own 20% of your company (it can be a lot less or more, depending on what kind of leverage you have while fundraising, how big your options pool is, and how many of those options are exercised/accelerated upon exit). Now let’s say you exit for $20m 3 years into it. Congrats! Light up the cigars and start hunting for beach houses– you’ve now joined the new rich! Except you really haven’t. You see, you (like a lot of folks) aren’t really thinking what it means to retire at 30. You’re not alone. The fellas at AdGrok have the same mental math going on in their head in their “Fuck You, Money” post:

“Before anything else, let’s do the numbers: money market funds yield around 4%. That’s $400K interest on $10MM, which is certainly a living wage, leaving aside inflation. Of course, it doesn’t have to last forever: human life is sadly finite. Crunching more realistic numbers, ‘fuck-you money’ is about $4.2MM for a 30 year old guy who plans on dying at 70 and wants to make $200K/year. Well within the payout picture of a fortunate startup founder whose company is acquired.”

Of course, many of these numbers are strange. 4% for a money market? I’d love a link to that– the best I’ve been able to find is around 1.5% right now for a jumbo money market. Dying at 70? Chances are you’ll live to 90, at least. “Leaving aside inflation”? That’s disastrous (why would you leave aside a number that cuts your 4% by more than half?!). Let’s run through some REAL numbers, using my “Early Retirement Spreadsheet” (AKA “Fuck You Money Spreadsheet of DOOM” – feel free to save a copy and noodle with it).

In our above scenario, our happy founders are walking away with 20% of $20m, or $4m (might be a touch more due to unclaimed options, or a lot less if your investors are the double-dippin’). $4m– we could live on that forever, right? Let’s plug in some variables. 3% for average inflation (a touch higher than the average over the last decade to be conservative). Let’s assume you can get a 5% return (even though the last decade gave us -0.99% for the S&P and the outlook isn’t too rosy). And let’s assume you want to live in a major metro area in a nice house, a couple of kids in private school, and solid travel budget. You’re a millionaire, right? So let’s assume your annual family budget will be $200k. Upper middle class– certainly not in “butler country”, but real comfy, flying first class and living large. Here are our variables:

That’s not too crazy-conservative, is it? Heck, if you’re earning 5% on $4m, that’s $200k right there. No problem, right? You can coast forever with your fat nest egg largely untouched. You’re probably doing what I (and the AdGrok guys above) were doing: “Leaving aside inflation”. Let’s look at what you’ll have to spend to keep your $200k per year lifestyle with compounding annual inflation.

Wait a minute! I’m going to be spending nearly half a million dollars per year when I’m 60 to compensate for a 3% annual inflation? Don’t worry– you’ll be broke LONG before you 60th birthday. Let’s look at how your F@#$ You Money evolves over time with these variables.

You don’t even make it to 50. If you want to be optimistic about inflation and investment income (after all fees) and nudge them to 2.5% and 7% respectively, you don’t make it to 60.

There are a few morals to this story:

  • make sure you freakin’ LOVE what you do. Love the game, love your product, love your co-workers, love your market.
  • If you are going to be a mercenary, make sure to optimize not just for “f@#$ you money” but “f@#$ you influence”– make sure that as you sell your $20m company that you are well positioned to build another company, have a fat executive job, some great advisory roles, paid speaking engagements, and the like. Because you’re still going to want income.
  • DON’T love the idea of living rich AND being retired. You can live rich on $5m OR you can retire early with $5m– but you sure as hell aren’t going to do both… for long.

Note: If you’d like to see the spreadsheet, it’s here. You can make a copy of it if you’d like to noodle with the variable to find your personal “never have to work again” number.

Filed Under: Psychology, Startups, lifehacking

The right way to position against competition

August 23, 2010 By Jason

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This is Part 4 of the series: 5 lessons from 150 startup pitches.

After seeing hundreds of startup pitches for this year's Capital Factory program, I can tell you that the two most common errors in positioning a company against competition are, strangely, opposites:

  1. Claiming you have no competition.
  2. Defining your company's offering and positioning by combining "the best" traits of 6 competitors.

This isn't just a problem when pitching — it's a problem with you defining who your customers are, what they want, and your role in the marketplace.

Let's break down the ways these fallacies manifest and what you can do instead.

There is no competition

Here's what this sounds like in the wild, and my reaction when I hear it:

  • "I have no competitors."
    Either you're ignorant of direct competition, or your not considering alternate solutions like "build it yourself."
  • "No one is doing it like we are."
    Of course you're going to position your company with a unique offering: exclusive features, a distinctive culture, a refreshing pricing plan, an innovative sales strategy, etc.. But uniqueness doesn't imply lack of competition!
  • "There's no competition because this is an industry that has never used software to solve this problem."
    I know that sounds like a good thing, but what this also implies is that you'll have to convince computer-phobic people to trust software, and that's a disadvantage. You're competing against the status quo.
  • "There's no competition because people haven't realized it's a problem."
    If they don't already know they have the pain, the sales process is going to be excruciating. There's a word for that — evangelism — which conjures other words: Expensive, difficult, time-consuming.

If you're tempted to argue that you're the exception, here's how to elucidate the advantages you're seeing, but in a way that actually makes sense as a business strategy:

  • We've carved out a niche specific enough that no one else is actively targeting it. There are similar competitors A, B, and C, but they're not targeting this niche because of X, and would be hard for them to switch into this niche because of Y. In fact, it's quite possible that we'd end up partnering with or being bought by A, B, or C exactly because our idea is similar but out of their reach.
  • We've identified a market too small for the large, established players to address, but big enough to build a company. For example, because an 800-pound gorilla like Microsoft is so inefficient at building new software, it can't go after a market unless there's a billion dollars at stake. We think there's a solid business to be made in this hundred-million-dollar market. However, whereas Microsoft can't afford to build this from scratch, if we show good growth and profits it would be an obvious acquisition target for them.
  • We've created technology so different from the incumbents that we're changing the conversation about how people solve this pain.  Though it's different, our solution is very easy to describe and to use. (Example: Netflix)
  • Our target customer has traditionally solved this pain themselves or just lived with the pain rather than paying for relief. However, a combination of newly-available technology and modern mindset makes this the right time for a new software play.For example, my company Smart Bear created the first commercial peer code review tool. Before us, there was no software competition but there were plenty of alternative processes — looking over someone's shoulder, sending emails with diffs, code review meetings, even "Formal Inspections." By tackling a few specific annoyances with peer code review and leveraging newer technology (like the advent of ubiquitous version control), we completely changed what a "code review" could be.
  • It's true that this industry hasn't yet seen a software solution, but that's not because they hate computers, but rather that it hasn't been possible to address that market with software. Now it is because (pick one):
    • We've built an improbable team that spans geeks and industry insiders.
    • New hardware/networks have just appeared which makes this possible.
    • New attitudes towards the Internet (e.g. ubiquity of Facebook even among traditional technophobes) enables new workflows.
    • This industry is commoditized so giving a player the slightest edge is a big deal.
    • This industry is just now starting to show tangible signs of embracing technology.
    • We have three lead customers signed up for alpha testers; if we make them successful the case studies will be all the evangelism we'll need.

Defining your company by the competition

Your company is defined by its own strengths, values, customers, and products, not by how it compares with other companies. You need a strong position, something that would be equally clear and compelling even if competitors didn't exist.

Here's some ways this mistake manifests:

  • "We combine the best traits of our competitors, letting them show the way to our success."
    I like the idea that you can learn from the mistakes and successes of similar companies, but "combining the best" misses the point. There are specific tradeoffs each of those companies are making; things you see as "not best" might in fact be best for their target market. Why are you sure that your notion of "best" will result in enough customers who not only agree with you, but is so convinced that they're willing to switch to you?
  • The rubric.
    A chart with one row for each "feature" and one column for each of six "competitors." There's checks and X's everywhere, except of course a glowing, highlighted column representing your company which just happens to be full of checks. C'mon, everyone knows this is bullshit; it's insulting.
  • "We're just like competitor X, only we're Y."
    In that case you're betting your future on the fact that Y is overwhelmingly compelling to a large market segment. X automatically has advantages over you (brand, customers, revenue, inside knowledge, a team, momentum), so Y had better be brain-explodingly awesome.
    Oh, and it'd better be impossible for X to implement Y — or even 1/3 of Y — themselves. Talk about putting your fate in others' hands!
  • "We're the same as X, only cheaper."
    Being cheaper is a strategy, but it can't be your only strategy. It's too easy for competitors to change price or offer deals. Typically the best customers aren't as price-sensitive anyway, so you're actually biting off a less desirable segment of the market. Often this claim is paired with "We'll do 70% of the features for 50% of the price," but supplying less for less is not inspirational.

So how do you look inward to establish your company, contrasting with the competition but not letting the competition dictate your identity?

  • We're targeting the market segment defined by X, Y, and Z.  We've spoken with 20 potential customers who match at least two of those criteria, and they agree our product is exactly what they need and that none of our competitors are doing an acceptable job addressing their issues.
  • Our company has core value X that we exude everywhere from our AdWords to our tech support to our product. (Example value: Simplicity. A simple product with few features, low-cost, pain-point obvious, not tackling complex problems, focussed on making life easier rather than on saving money.) We own this value because we're completely committed; this is the one point on which we will never compromise. Our customers know it and value this too, which is why it doesn't matter what features, prices, or advertisement our competitors have.
  • This is the competitive matrix. Note that each player in this space is targeting a different market segment, as is clear from feature selection, pricing, and advertising/messaging. We, too, are targeting a niche; as you can see our offering is consistent with owning that niche, and doesn't overlap significantly with competitors. It would be difficult for any of them to "switch" into our niche, because as you can see they'd have to change the product, pricing, and their company's persona; that's a risk we're willing to take.
  • We're going after competitor X. We know they already have a ton of advantages over us — well-known, well understood, and a deep feature list. However they haven't done anything new in 3 years and we have evidence that their customer base is pissed off. Not only that, they're famous for annoying attributes A, B, and C (Examples: buggy, slow, confusing, must install, expensive, crap tech support). We see a huge opportunity in their wake of destruction, vacuuming up their customers with our overwhelming advantage. They can't do this themselves because they're too big to turn the ship, and anyway the past 3 years shows they're not able to change.

What else?

How do you cope with competition, incorporating it into your strategy while not letting it consume you? Leave a comment and join the conversation.

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Filed Under: How-To, Marketing, branding, competition, positioning, strategy

The bowling pin strategy

August 21, 2010 By chris

A huge challenge for user-generated websites is overcoming the chicken-and-egg problem: attracting users and contributors when you are starting with zero content. One way to approach this challenge is to use what Geoffrey Moore calls the bowling pin strategy: find a niche where the chicken-and-egg problem is more easily overcome and then find ways to hop from that niche to other niches and eventually to the broader market.

Facebook executed the bowling pin strategy brilliantly by starting at Harvard and then spreading out to other colleges and eventually the general public.  If Facebook started out with, say, 1000 users spread randomly across the world, it wouldn’t have been very useful to anyone.  But having the first 1000 users at Harvard made it extremely useful to Harvard students.  Those students in turn had friends at other colleges, allowing Facebook to hop from one school to another.

Yelp also used a bowling pin strategy by focusing first on getting critical mass in one location – San Francisco – and then expanding out from there.  They also focused on activities that (at the time) social networking users favored: dining out, clubbing and shopping. Contrast this to their direct competitors that were started around the same time, were equally well funded, yet have been far less successful.

How do you identify a good initial niche?  First, it has to be a true community – people who have shared interests and frequently interact with one another.  They should also have a particularly strong need for your product to be willing to put up with an initial lack of content. Stack Overflow chose programmers as their first niche, presumably because that’s a community where the Stack Overflow founders were influential and where the competing websites weren’t satisfying demand. Quora chose technology investors and entrepreneurs, presumably also because that’s where the founders were influential and well connected. Both of these niches tend to be very active online and are likely to have have many other interests, hence the spillover potential into other niches is high. (Stack Overflow’s cooking site is growing nicely – many of the initial users are programmers who crossed over).

Location based services like Foursquare started out focused primarily on dense cities like New York City where users are more likely to serendipitously bump into friends or use tips to discover new things. Facebook has such massive scale that it is able to roll out its LBS product (Places) to 500M users at once and not bother with a niche strategy.  Presumably certain groups are more likely to use Facebook check-ins than others, but with Facebook’s scale they can let the users figure this out instead of having to plan it deliberately. That said, history suggests that big companies who rely on this “carpet bombing strategy” are often upended by focused startups who take over one niche at a time.

Filed Under: Startups, geo, strategy

The doers and the DOERS

August 20, 2010 By Nathan Kaiser 2 Comments

I recently ran into someone in the Seattle startup scene and began chatting about the doers and the DOERS. This person was chatting about all the people that are coming to networking events and that it was a great sign for the startup community. To which I agreed, but stated that there is a very real demarcation between the networkers (doers) and the entrepreneurs (DOERS). My point was that the conversion rate from doers to DOERS is probably less than 1%…

Start with:

3MM people in the Seattle region
5% are interested in startups (15,000)
2.9% actually start a company
= 410 of Startups (tech – from the Seattle 2.0 list)

This means that 0.01% of people go on to start a tech company in any given year… This number is even lower if you take out the number that were started in a given year.

So, what is the best way to spur more entrepreneurship? Grow your home grown talent? Bring other entrepreneurs to Seattle (or where ever it is that you live)? Don’t even try?

In my conversation, I said that less than 1% of people that come to events will ever start a company. I stand by that claim.

Caveats:

  1. Yea, these numbers are rough
  2. Many, many more companies are started that are non-tech
  3. I am focusing on tech related startups as those have the potential to scale more quickly than other businesses
Filed Under: Uncategorized

A vote for me is a vote for dipshit businesses everywhere

August 16, 2010 By Jason

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Let's get the self-aggrandizing plea for attention out of the way:

Please vote for my SxSW panel entitled "A Bootstrapped Geek Sifts Through the Bullshit."

It answers questions like "How do I get the courage to just start when I know so little about what it's really like at a startup?" and "How do I balance the utility of learning from others with wanting to go my own, unique way?"

Plus it's ironic; I'm giving advice about how to take advice. You know, like finding a black fly in your Chardonnay. (White flies are harder to see and therefore not ironic, you see.)

OK, now on to the good stuff...

Champion of the dipshits

Michael Arrington wrote an interesting piece today at TechCrunch about how VCs are pissed that great entrepreneurs are taking under $500k of angel money instead of $2m their money.

The real reason they're pissed is that VCs are increasingly unnecessary to get companies started, both because of inexpensive technology and marketing channels and because there are enough angel investors that founders don't have to sell the entire farm for ridiculous amounts of cash they don't really need.

And then, for the few companies that really do need VC-sized investments to take them from product/market fit to explosive growth, by the time they start touring Sand Hill Road their valuations are sky-high; they've already got all the trappings of a successful company, the major risks having been removed during the angel round.

All this is explained in clear detail in Paul Graham's his piece on the future of tech investing — a must-read for anyone interested in financing. He's is biased, of course, because he leads the 200+ company Y-Combinator incubator, but his predictions have already come true for many founders I know personally.

Of course the VCs aren't happy about this. This excerpt from the TechCrunch article made me livid:

The VCs, for their part, fight back more quietly. They point out that very few angel funded startups end up very big or interesting. “An entire generation of entrepreneurs are building dipshit companies and hoping that they sell to Google for $25 million,” lamented a venture capitalist to me recently. He believes that angel investors are pushing entrepreneurs to think small, and avoid the home run swings. And you don’t get a home run unless you swing hard, he says. When you play it safe you nearly always lose.

Rather than provide a cogent argument for why founders ought to take VC money anyway, the response is to call the company a "dipshit" and reveal the astounding arrogance that a few founders selling their company for $25m is somehow a failure.

To understand what's really being said here, you have to replace the word "you" with the actual antecedents.  So: "When you play it safe you nearly always lose" should read: "When founders play it safe VCs nearly always lose."

But founders often win.

That's what gets me about this entire attitude — it's about returns for their fund, not success for the founders. Which is how it should be, understand, because they have a fiduciary duty to their investors, not to the founders of the companies they invest in. It's OK for them — it's their job — but it's not OK for you. "You" being "you, entrepreneur, reading this, the one who matters."

At last year's Capital Factory Demo Day, Mike Maples Jr. gave the keynote address. He gave the statistic that only 9% of the companies they invest in succeeded. And his venture firm is considered one of the more successful ones. (By the way, Maples is now doing super-angel deals. Interesting.)

The math is simple: Only one in ten companies need to hit, but it needs to hit big, like 100x the original investment. Of course no one wants the rest to fail, but every one will be pushed into explosive growth, which means strapping a rocket to the back of each one, even if that means the vast majority will just blow apart.

Great for them, bad for the founders.

The last thing they want is for founders to wake up and realize that this isn't necessarily a good way to build a company. They don't want you to realize that if you shoot for reasonable, profitable growth, it's far more likely to work, far more likely to produce a company that not only pays the bills but is a valuable asset, one that you might sell someday for millions of dollars, like I did.

For them, a little, solid company for $25m to Google is dipshit material. For you and me, it's a life-altering home run.

Until I hear a rational argument for why super-angels, angels, or friends-and-family rounds are worse for founders than a standard A-round from a VC, I'm just going to ignore these emotional, self-serving statements.

And I suggest you do too.

Focus on building a company you're proud of, not how big and disruptive you can be. Focus on getting to profitability as the greatest measure of success. Focus on selling customers, not selling investors.

And vote for that SxSW panel so I can spread the Good Word to others.  :-)

Is my argument healthy or too far the other way? When is it right to take VC money right off the bat? Let's continue the discussion in the comments.

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Filed Under: Essays, exit-strategy, finance, investment, starting

VC insanity, explained

August 12, 2010 By Dan


…or, why VCs do what they do

(Note: this post also appeared as a guest post on Techflash)

VC behavior sometimes looks insane, but generally it’s just sound economics.  It’s crazy but true: if you know how a VC gets paid, you can pretty much read their mind.  Here’s a few examples:

VCs don’t actually seem to want to take any risk.

Dice rollingYou’ll be forgiven for thinking that a VCs job is to take investment risk.  It’s a common misconception.  But here’s the bizarre little secret: the VC takes their biggest risk the day they close their 10-year investment fund.  That single defining moment is the absolute apogee of risk taking.  From that instant forward, the VC’s goal in life is trying to do is safely return the money they’ve taken – hopefully with lots of gravy on top – to the eager hands of their watchful LPs.

What’s an LP, you ask?  It’s another common misconception that VCs are investing their own money.  In fact, most of the money they invest (typically 98%+) comes from Limited Partners like college endowments, pension funds, and even the occasional individual Uncle Pennybags. Even when they invest in their own funds, it’s often just a slight of hand – cash is redirected from their management fee (their “salary”) and shuttled right in to the capital calls.  Folks who put their own dimes on the line are known as angel investors, not VCs.  Venture Capital is strictly a game of other people’s property.

So the day the fund closes is the day our friends at Hypothetical Partners have just committed to invest $135mm of other people’s money in startup companies and, ten years later, return it in spades.  That money will be spent on early stage company investments – their job from that point forward is to meet their commitments in the safest way possible.  Modern venture capital is one shining moment of derring-do taking followed by 10 years of risk mitigation.  It’s sort of like breaking a mirror.

They’re trying to make me take more money than I need.

Big moneyThis is a classic example of behavior that makes perfect sense to someone who understands VC economics, and no sense at all otherwise.  Consider this: average VC fund size in 2009 is about $135mm. if we give our friends at Hypothetical Partners 4 full investing partners, they’ve each got to invest about $27mm.  That doesn’t sound so bad, right?  Well if HyP is a $135mm fund, that probably means they’re investing first in Series A ($2mm) or B ($5mm), allocating a total of $10mm in either case for later funding rounds (C or more) if things go well. So doing the math, each HyP partner has to do about 3 investments from this fund.  Sounds simple – one person can probably handle 5 or 6 boards with no problems.

But this isn’t HyP’s first time around.  They’ve probably raised a few funds before – 3 would be on the low side. HyP I is probably mostly done by now, but HyP II and HyP III have companies going strong (or weak), and each partner had 3 investments in each of those funds.  So it’s very possible, even likely, that our partner may have 5 board seats already, and there are some pretty tight demands on their schedule.  Golf games may be in danger of abbreviation.

So once they finally decide that you are the least risky place to stash their funds for the next semi-decade – the more, the better.  It increases their ownership percentage meaning that they get more of the good result they think you’ll produce.  It reduces a big area of risk (running out of money). And if they invest enough, they may get themselves out of doing an investment later, which means fewer board seats, less time in due diligence, more time to see the company succeed before the fund expires, and potentially a measurable improvement to their golf handicap.

They raise big funds, but small ones perform better.

The verdict is in: Silicon Valley Bank researched hundreds of venture funds over a period of decades, and found that small funds outperform big ones (the original data is here).  Yet absent market forces forcing otherwise, VCs tend to raise enormous, ever-growing funds.  Why is this?  Isn’t it in everyone’s interest for the fund to perform better?

The answer lies in a little secret called the 2-20 rule.  It says that VCs get 20% of the fund’s profits – and 2% of the fund’s investment.  Each year.  For ten years.  Fred Wilson has laid the economics of his venture fund bare for the world to see, and it makes the point quite clear.  If HyP raises that $135mm fund, they get $2.7mm each year – enough to cover modest salaries, travel, and a nice office for the partners.  But if those same six partners raise a $500mm fund… well, let’s just say that a case could be made that their investment management skills are now of secondary importance.

They don’t appear to be particularly interested in making large amounts of money.

Mo' money album coverYou’re about to pitch HyP on an outstanding plan: a virtual certainty that they will get a 100% ROI in two years.  It’s a double-your-money sure thing.

Before you can even start, they tell you – truthfully – that they’re not interested.  It’s not that they don’t believe you (although that’s probably true as well); it’s that they actually have no interest whatsoever in doubling their investment in two years.  Why?  Because their LPs want to make 9% annual returns.

You see, VCs operate within three peculiar rules:

Rule number one is that the fund is 10 years long.  They need to provide 9% returns over the course of a decade, not next year.

Rule number two is that there’s no recycling.  Once they cash out of a deal, the money goes away – never to be invested, for the rest of the decade. So your 100% return gets divided by 10 years, not by 2.

And rule number three is that those returns have to take in to account the compounding interest they would have received on both the principal and the management fees.

A little math: to get 9% per year, a hypothetical $100mm investment must increase to 100*e^(10*9%)=$246mm.  But $20mm of the principal (2%/year) goes to management fees and can’t be invested.  And the VCs get 20% of the profits (the carry).  So actually, $80mm invested needs to yield $290mm, a 3.6x return.

Suddenly you can see that your deal actually sets them back significantly (never mind the risk that the “sure thing” might not be).  When you hear that VCs aim for a 10x return, it’s not greed – it’s because if a third of their companies fail and a third just barely get them their money back, a 10x return on the winners puts them in the same place as the S&P 500!

They don’t let you sell the company, even though it’s enough to make everyone rich.

Remember that target of 10x?  Yeah, there’s another catch.  It’s not a 10x return on what they invested.  It’s 10x return on what they reserved to invest – a bigger number that takes in to account the total amount they predicted you’d need over the course of your company’s future, set aside so that they don’t come up dry during follow-on financings.  By the time your company exits, it’s probably too late to invest those reserves, so they count against you when calculating return.

Consider this: HyP invests $2mm in YouCo at a premoney valuation of $2mm, meaning they own 50% of a company worth $4mm.  Someone offers $40mm for the company.  Hallelujah!  A 10x win!  You each get $20mm!

Not so fast.  If they invested $2mm and reserved $5mm for a follow on investment, it’s probably too late to invest the other $5mm.  They’re actually getting just shy of a 3x investment on their allocated capital – not even the 3.5x they need to approach the S&P 500. No deal.  If they let you sell the company and pocket that cool $20mm, they would actually be coming out behind.  The simple economic calculation is to block the sale, and force the company to take additional investment.  Consider: if the second round is under duress, best case it’s a flat round: that means $5mm on $4mm premoney, and voila!  They own 78% of the company.  For the very same purchase price a day later, $40mm (plus $5mm for the $5mm in the bank), they now get 78% x 45mm = $35mm, or a 5x return – not 10x, but enough to clear their 3.5x requirement.

They all invest in the same things.

Lemmings video gameIt makes no sense at all to invest in the fifth URL shortener, or social network, or group purchasing site.  You’re wading in to a pot of competition, and there may be more than one winner – meaning the pie gets split.  Better to invest in novelty, where you can have the field to yourself!

Sounds good, but it ignores two things: thesis risk and excuses.

You see, before a VC makes an investment, they’ve got to do a ton of background research on the market to create their investment thesis.  How big is it? How fast is it growing? Who are the competitors?  Is there a “venture scale exit” (10x ROI) here?  Now, there’s two ways to do it.  One is a lot of work.  The other involves copying your neighbors’ homework, which is usually a very poorly kept secret.  If your neighbor is someone who does a lot of work putting together their investment thesis – and on Sand Hill Road, everyone’s everyone else’s neighbor – it’s probably a lot easier to borrow their thesis and just fund something else along those same general lines.

The second reason happens when the sector blows up and everything goes sideways.  If you took the leap to invest in caffeinated soap all by yourself, good luck explaining that to one to your LPs.  But if you and everyone else thought that Push Technology would be the next big thing, well, you’ve got an excuse that hopefully gets you forgiven for having your investment explode next to 31 others.

So perhaps VCs aren’t crazy.

In fact, I’ve sat on boards with a dozen partners representing funds sizes ranging from $10m to $10bn, and there wasn’t a kook in the room.  They were smart, likable, helpful folks with an unusual job.  In fact, if there was one thing I’d say that set them apart from the average technology business person, it would probably be that they all seemed to have an outstanding grasp of advanced economics.  No surprise, then, when they act just the way their pocketbooks would predict.  Remember that next time you see otherwise-inexplicable behavior… like news reports wondering why a VC pushes aggressively for the sale of a promising portfolio company… that happens to sit in a fund that is nearing the end of its 10-year life.

And before you take money from a VC, make sure you have an open conversation about just where their money comes from and what strings they have attached.  There’s simply no way a person can surprise you if you know how to read their mind.

Disclaimer section

To keep this short and help it read well, I glossed over a lot of details.

  • Some funds do allow partial recycling (re-investing proceeds from exited companies) – typical constraints are only during the first 5 years of the fund, and/or an amount equal to the management fees.
  • There are some funds that have significant investment from their partners, but the standard is 1%-2%.
  • I didn’t get in to capital calls, where VCs don’t get the money from their LPs until it’s needed, and the interaction between that and management fees.  I think, but I’m not sure, that the VCs don’t get their management fees unless the capital is actually invested.  I’ve also heard that at least some firms don’t get management fees after a company exits, which adds fuel to the “don’t invest in a company that will exit next year” fire.  Perhaps someone can add more information in the comments.
  • Some firms build a brand out of entrepreneur-friendly behavior.
  • These are generalities based on averages; the exception is the rule.  Big funds look for smaller multiples with a higher likelihood (e.g. low-risk 3x returns).  Funds near the end of their 10-year life look for companies that will exit fast.
  • I’m a startup guy, not a VC.  This is all hearsay and second hand, and I hope folks who know more about this than I will chime in and correct what I’m sure are many mistakes.

And perhaps the most important point: Acting against economic interests and in favor of relationships is quite common, even the norm.  It helps deal flow, which helps fund economics, if you have a reputation as being a nice person, and… most VCs I know actually are nice people.

But… when you come across a bit of the insanity described here, try not to be too surprised.

Filed Under: Startups

Yes, but who said they’d actually BUY the damn thing?

August 9, 2010 By Jason

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This is Part 3 of the series: 5 lessons from 150 startup pitches.

your-mom-not-test-market

Of hundreds of startup pitches at Capital Factory, almost none had unearthed 10 people willing to say, "If you build this product, I'll give you $X."

Meditate on this: Hundreds of people ready to quit their day jobs, burn up savings, risk personal reputation, toil 70 hours per week, absorb as much stress as having a baby (believe me, I've done both)....  all without identifying even ten measly people actually willing to pay for what they're peddling.

Short-sighted, no?

If you can't find ten people who say they'll buy it, your company is bullshit.

Aren't you sick of every startup blogger on Earth badgering you about this? Steve Blank says "get outside the building," Eric Ries says "seek validated learning," Sean Ellis says "seek product/market fit," Drew Houston says "the only way to learn on a $0 budget is to talk to people."

I say "find ten people who say they'll buy." I say "get off your ass and produce hard evidence that customers are in your future light cone."

But you're still not listening. You repeat these mantras at Lean Startup Meetings but you're not doing it.

You're understandably scared of been proved wrong, especially now that you're all worked up about the new business idea, and extra especially after you've already told friends and family you're doing this and they're expecting you to complete your quest.

But jeez people, you're not even trying. And worse, you're inventing lame excuses for why you're not trying.

Full power to forward shields y'all, I'm coming for you.

"I'm scratching my own itch. Since I'm my own target customer, I already know what to build."

Oh! I didn't realize your typical customer is observant enough to recognize monetizable pain, creative enough to invent products, able to convince others to work for free and invest money and time with you, and passionate enough to quit her job to pursue unproven ideas.

Fooey! By definition, if you're a startup founder you're explicitly not your customer.

"Scratching your own itch" is how all three of my companies started, but it's only that — the start. It's the spark of inspiration, not the strategy. It's the grain of sand tickling the oyster, not the pearl.

Look! Smart people agree:

"Be a user of your own product. Make it better based on your own desires. But don't trick yourself into thinking you are your user."  —Evan Williams, founder Blogger & Twitter

"If the VP of Engineering thinks the target customer is just like him/her, you're doomed.  If the VP of Marketing thinks the target customer is just like him/her, you're doomed."  —Cranky Product Manager

"Our customers did a lot of stuff that I would never do. We think differently. We solve our problems differently. We have different needs and wants. Repeat after me: You are not your customer."  —Eric Ries, Lean Startup leader (repeating a conversation with a startup founder)

In fact I challenge you to find one founder of a real business who thinks "I'm the customer" is the only market validation you need.

"There are millions of potential customers, so it doesn't matter what only ten of them think. I need to just start; later I can survey and learn something statistically significant."

If there are millions, it's trivial to find ten. If you can't find even ten, then either there's not millions or those millions aren't interested in you.

Businesses don't start with millions of customers, they start with one, then ten, then a hundred, and then a thousand. But most don't get past ten.

If you haven't gotten ten to at least say they'll buy, where do you get your hubris to proclaim that thousands actually will buy?

"My customers can't understand mock-ups. I have to build it first."

You shouldn't need screenshots or PowerPoints to convince someone in your target market that what you're doing is compelling. If your concept is so esoteric that you can't describe it in 30 seconds at a cocktail party, it's either too complex or you don't understand it yourself.

Even if I concede that some folks can't grok mock-ups, remember that your first customers will by definition be early-adopters who are OK with alpha software. If you can't find a few of those and get them excited about your product, maybe your product isn't exciting.

"I suck at sales/marketing; I need to build a product so compelling it sells itself."

The world is filled with decent products that make no money. You know this!

Oh fine, you want empirical evidence? Here's a list of the top 100 Twitter clients, and here's some more. Now:

  • How many do you suppose are decent pieces of software that basically work?  (My guess: 80%)
  • How many do you suppose produce any revenue?  (My guess: 5%)
  • How many do you suppose produce enough revenue that, after hosting and marketing expenses, they result in a profitable company where the owner doesn't need a day job?  (My guess: <1%)

Conclusion: If your goal is a business (not a hobby), building charming, novel software isn't enough.

You and I know you have the ability to build cool new software. We agree that will be fun and exciting. But that's not going to create a business.

Writing code is what you love, so you myopically decide that's what you'll do. But what you should do is just the opposite: Attack the part of the business you're least sure of, you're least qualified for.

If you're still not convinced, think of it as project risk management. In a big software project do you tackle the high-risk, ill-defined stuff first, or do you postpone that to the end? Obviously you address the unpredictable stuff first — most of the project risk is due to the unknown, so the earlier you can sort out uncertainty the more time you have to deal with the consequences.

I'm making the same argument, except the "high-risk unknown" is "everything that's not code." Your code will be good enough; it's the other stuff that will probably sink your ship — unable to find customers or unable to convince the target audience they should open their wallets.

No sense in postponing it.

"My friend/brother/co-worker/dentist thinks it's a great idea."

Your mother thinks you're smart and good-looking, but that doesn't mean I do.

It doesn't matter what non-entrepreneurs think because they're not versed product/market fit, squeezing blood from evanescent budgets, and using Facebook for advertising instead of sharing the latest FailBlog movie.

In fact it only barely matters what real entrepreneurs think, because they're not expert in your problem domain, they might have outdated notions, they might be biased against certain ideas and technology, and they carry baggage from good and bad experiences (due as much to timing and luck as anything else).

The only thing that matters is that people are willing to give you money! Business "experts" can argue all day long that it makes no sense to buy shoes over the Internet, but as long as people give Zappos $1 billion per year, it doesn't matter what experts say.

When ten people say they'll give you money if you build this thing, that's the only validation that counts.

What else?

What other excuses have you heard? Which excuses are you using now? Leave a comment and continue the conversation.

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Filed Under: Essays, customers, feedback, finance, investment, pricing, sales
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