Entrepreneur — nPost

What is Your Company’s “Mindset”?

April 16, 2009 By Nathan Kaiser Leave a Comment

I recently had an email exchange with an individual who was recruiting engineers, and someone with PR experience, to get a new startup off the ground. I inquired about the need for broader marketing skills. The response:

“Part of the problem is until you have a really firm idea of what you’re building it’s really hard to figure out how to market it. For example if you start out with the idea of selling a product focused on say insurance there would be two possible markets for it, the customer and the insurance company. The marketing for selling to a company is totally different than the marketing that you would take to sell to a consumer.”

I guess figuring out the product then figuring out how to sell it is more of an engineering mindset rather than a pure marketing mindset.”

The notion – practiced by many tech startups — that we need to choose between either a so-called “engineering” or “marketing” mindset seems to me misguided. Maybe this is because, as an electrical engineer who has spent the past 18 years creating and marketing new technology-based ventures, I have lived in both worlds. But how can you hope to create a real business without, from the beginning, taking seriously the needs of the market and how you will attract paying customers? At the same time, how can you hope to create a product that relies on technology as its underlying foundation without, from the beginning, taking seriously the capabilities, limitations and costs of building it? In any case, my experience is that leveraging the expertise of both engineers and marketers in a collaborative and iterative process — rather than a siloed and sequential process where engineering precedes marketing or vice-versa – results in a better product getting to market more quickly.

The risks of pursing an “engineering” mindset are well understood, the most common being the creation of a product that doesn’t meet the needs of a specific customer segment significantly better than existing alternatives. On the other hand, pursuing a “marketing” mindset can lead to equally bad outcomes, such as defining feature requirements that cannot be built with current technology or resources, or overlooking opportunities where technology can enable breakthrough innovations that are valuable to customers.

When Mark Britton and I started Avvo – a lawyer search website — we took mostly a collaborative, iterative approach. Rather than jumping immediately into product definition, we started with basic market research to help us to deeply understand the customer problem, and then quickly transitioned into brainstorming product features and assessing technical feasibility.

Our market research was relatively quick and inexpensive. We conducted interviews with upwards of 20 lawyers in Mark’s network. Importantly, our conversations didn’t focus on getting reaction to a specific product concept. Rather, we asked general, open ended questions and continually probed to understand the reasons behind the answers. We did the same on the consumer side, asking friends, family, and acquaintances to share their experiences choosing a lawyer. We scoured the Internet for market research, and found a treasure trove of free information from the American Bar Association, the Yellow Pages Association, and our competitors’ web sites. We studied products targeting the legal market, as well as products in other verticals like health care. Finally, we sifted through all the interviews, data, and competitive analyses and boiled them down to a few core insights that reflected our understanding of the opportunity.

These core insights formed the basis around which we brainstormed product features. As we generated ideas we wanted to quickly understand the technical implications, which then enabled us to discard or refine our original ideas and generate new ones (while we recruited a VP Engineering we relied on former colleagues to participate in brainstorming and provide technical guidance). The process was highly iterative: new learnings about the market informed product ideas; new product ideas led to a better understanding of available technologies; and this understanding of technologies led to more, better and achievable product ideas.

We continued this process until we had created a product blueprint that would meet market needs and be technically viable. By the end of the process we were confident that if we executed well we had a good chance to have a real impact in the marketplace.

This cross-functional, iterative process isn’t perfect nor is it easy. There is often an urge to push off market and technical research and jump immediately to product definition. Perhaps most difficult are the organizational and team issues that have to be managed. However, in my experience, it is more likely to lead to a successful outcome than starting a company with a purely “engineering” or “marketing” mindset.

What is your company’s mindset?

Paul Bloom has conceived, launched and managed dozens of new software and online products for consumers and businesses. His most recent entrepreneurial venture was as co-founder of Avvo.com, a lawyer search web site. Paul is currently consulting with technology companies to help them identify and exploit new opportunities for growth.

Filed Under: Entrepreneurship, Paul Bloom, Startup Job of the Day, Startups, Syndicated

What is Your Exit Strategy? If You Want a Quick Exit, Plan to Get Bought…

April 15, 2009 By Nathan Kaiser 1 Comment

One of the most important questions to consider when starting a company is what is your exit strategy? This is always a question venture capitalists ask before investing in a company as it is not their intention to have their capital committed for tens of years like a stock portfolio. Their objective is to invest their funds and within five to ten years of inception, get a very healthy overall blended return of 30% for their investors. As the founder or participant in a start up, you need to be clear on your exit strategy.

In terms of exit strategies, there are a number of factors to consider if you are preparing for a quick exit. The key factors that will potentially impact your exit strategy are: 1) company performance, 2) financial activity, and 3) personal needs.

Company Performance - Every company that wants to have a positive exit should have performance metrics that make it attractive to a potential acquirer, private equity firm, or the public financial marketplace. Key metrics that normally need to be demonstrated are marketplace adoption?, a plan to profitability or improved operating profits, a topline revenue pipeline, and, lastly, positive, but realistic forecasts. Having solid operations and metrics in place will make your firm a more attractive takeover target versus your competitors. Keeping your team focused on meeting these objectives can help you achieve your financial performance goals faster, making the company a more attractive target.

Financial Activity - It is important to follow significant mergers and acquisition activity in your respective sector and industry. Consider the structure of the deals. Are cash deals being done, or rather stock swaps? When publicly traded companies complete acquisitions, the terms of the deal are made public, so check out shareholder reports or SEC filings. Importantly, note the acquisition premium that is being paid in your category. As an example, in consumer web business, you can approximate the total monetary value of your audience by considering the size of your user base in relation to the last price paid for a competitor’s average user. Combine this value with current advertising revenues to give you a general value for your company. The simplified calculation would be as follows:

Competitive Company Purchase Price/ the number of competitor’s users X the number of unique users in my company = My company current potential value

In terms of more established companies there are a multitude of ways to calculate the current value. Right now the overall market is very depressed. There will be an expectation to pay anywhere between 5-25 X operating earnings, all depending on the debt and other financial conditions of the company. Here a simple calculation to use:

Current Operating Margins Projected for the next three years/3 X 5-25X Operating Earnings = My company current potential value

Keep in mind that public companies are trading on a price to earnings ratio of 5X (Bank of America) versus 28X (Google), so you need to be realistic about your valuation given the times. Market timing, competitive conditions, as well as the life cycle of your company will dramatically impact these expected multiples.

Personal Needs - Every person involved in a start up has different dreams and aspirations behind why he or she started or joined the company. It is important that from the onset, you and your team try to have an understanding of when, why, and how you would want to change your corporate structure through a sale or additional fundraising. By doing this upfront and refining it annually as your company evolves, all can have a clear understanding of the future vision of the company. Misalignment of goals may be detrimental to a company. In one company, if one investor wants to sell and sock away the return for future retirement, but the other key founder/investor wants to go for the “grand slam”, a real strain will be placed on the company, its associates, and investors. Sound advice is to make sure you agree with your partners on what would be cause for a quick exit, or instead, a longer-term play. Overall, annual profits to $1,000,000 or more would be a reasonable benchmark to consider the sale of the company – keep in mind investment banking fees.

At the end of the day, you should be able to see your company as a profitable, viable entity for years to come. Your company should be providing unique value to your customers while achieving gross margins above 50%. In the case of my company, Luxetier, the focus on gross margins greatly impacted how we architected our business, thereby enabling us to achieve robust operating margins above 50%. If you do this as well, you will have the flexibility to exit at your own pace – quickly or more slowly depending on what is best for you, not the potential buyer of your company.

Julia Miller is a serial entrepreneur and is now focused on her new startup, Luxetier, which is focused on luxury fashion. If you have questions, please feel free to comment. She will watch and respond to comments.

Filed Under: Julia Miller, Startups

Don’t Get Distracted By Your Data

April 14, 2009 By Nathan Kaiser 1 Comment

From John Dietz at Adometry

As a technology-based startup, we have access to a lot of data. Thanks to Google Analytics, I can see how many visitors I’ve had to my website from Norway in the last month (1), or than 4% of my visitors are using Google’s Chrome browser. But unless I’m building a Chrome targeted web app in Norwegian, this isn’t a great help to me. There’s a lot more than just web traffic that I can look at, here are some examples:

Site traffic – At a minimum everyone should have some idea about the traffic on their web site. This can come from server logs, Google Analytics, Web Trends, Omniture, etc. Understanding how people use your website or application is key to most new businesses.
Sales data – Everyone should keep basic metrics about their sales pipeline, how long it takes to make a sale for various industries, who are making the decisions, what are the price points, where are sales contacts coming in etc.
Advertising data – If you are advertising (search, display, traditional, etc.), understand who you are hitting with your ads and what kinds of responses you are getting.
Search engine data – Pay attention to your search rankings and the kinds of traffic it is generating (which you should be able to get from your site traffic data).
User registration data – You may be collecting some basic demographic data from your users if they have to register. This kind of data can be very valuable in understanding what kinds of users you have, and what kinds of users end up paying for your service.
Operational data – Your application has databases, application servers, web servers, message queues, etc. Your servers can probably report on their resource usage as well: disk space, RAM, CPU, etc.

It can be easy to get sucked up into tracking all of this data somehow believing it will help my business. Here’s what I do:

Know what data is available – Start with what you have or can easily get
Which metrics reflect my business – What metrics do I have that tell me how well I’m doing? This depends on the business, for me it’s primarily my sales numbers and retention numbers.
What metrics affect my business – What metrics are early indicators or drivers of my business? My advertising data and lead conversion data drive my sales, my operational data drives my customer retention (when combined with the right functionality), etc.
Which metrics distract me from by business – Everything else might be interesting, but doesn’t contribute to your business, so limit your efforts in these areas.
Track and monitor my reflective and affective metrics, ignore the distractive metrics – Now that we know what really matters, we can monitor (in some case automatically, like operational metrics) my company’s performance and the leading indicators that affect that performance. These are the ones to focus on, and it’s important to know the difference.

John Dietz (LinkedIn profile) is a co-founder of Adometry, a startup focused on online advertising metrics and writes about online advertising metrics at blog.adometry.com.

Filed Under: John Dietz, Metrics, Startups

Starting a Startup

March 31, 2009 By Nathan Kaiser 2 Comments

Before 2009 there seemed to be a very specific formula for getting a start up going, especially in Silicon Valley:

1) Have a great idea
2) Get seed money from angel investors to build a prototype
3) Use the prototype and get some adoption to secure VC funding and then
4) Have a quick exit

Many companies, including my first company launched in 2005, iBloks, were started that way. But 2009 is a whole new day, and how you approach getting a start up off the ground is an entirely different story. My advice is to think differently and you just may be able to make your dream come true. Here are a few ideas that might help.

In today’s times you still need the great idea, and one that is built on reaching revenue and profitability sooner rather than later. Getting ‘angels’ may be difficult since most are now in heaven or in hiding since the latest financial crisis, so to get your initial idea prototyped you may consider the options below. The good news is there are less ideas being funded today, so your competitive landscape is not as aggressive.

OPTION A) Using Your Own Assets

1) If you and your co founders are employed you may want to keep your jobs and peel off your earning funds to get your own venture up and running, even if this will be a bit slower.

2) Self fund with your own funds on a very tight budget with maniacal focus on getting to revenue and profit.

3) If you are not working but have assets- like some savings and collateral, consider getting a traditional bank loan from the small business administration (SBA). They are getting more aggressive to support small companies in this time.

4) Find a failed start up company that had some revenues but is out of business and negotiate with the current owners to “restart”. They will have a bit of momentum & code to get you started – you may be able to get started for a percent of equity or pay for the assets overtime.

OPTION B) Using Other People’s Money

1) Leverage Your Current Network of Friends and Relatives – This is still a great way to go but, one important piece of advice is have the agreement in writing written up by a lawyer that has done investor deals before (not a friend who is an attorney) . Make sure it’s clear if is this a loan to the company or to your personally. Understand if you are you personally guaranteeing the loan if the company does not succeed and plan for how would you honor your commitment if the company was not successful. In California you can get a company with share holders set up for about $1500. This is well worth the money to make sure everyone understands from day one what the agreement is, who is in control and how decisions will be made.

2) Approach & Sell Your First Potential Customers – Selling the promise of delivering the solution they need and getting a contract gives you real-world – real-time learning about your idea. You will gain an early initial validation of your proposition; however you’ll need to be a great salesperson.

3) Align with Strategic Partners – You can approach firms and offer them a small equity stake in exchange for capital. If you are coming from business this can be a great approach; go to the companies you partnered with previously and get them to invest in your company. Your reputation, previous knowledge of the category and insider’s view of the problems can help justify this type of approach.

4) Apply for Grants- There are many organizations out there including the federal government giving grants even now. Be prepared to wait though, it takes awhile for the approvals and there is a fair amount of paperwork .

5) Get Private Equity vs. Venture Capital- Mostly private equity is from very wealthy individuals or groups that have funds to invest. New York is the place to do this, as there are loads of private equity firms located there. The advantage with private equity is they tend to be more hands off then VCs.

OPTION C) Venture Capitalists

1) The old school way still works, but be prepared for lower initial valuations and a lot more hands on VC involvement then&nb sp;in 2008 and earlier.

As for me, I recently started another company Luxetier, and this time around, with learning’s from previous ventures, I opted to self fund. My best advice is to take your personal situation and timing into account and decide what is best for you. There are lots of great ideas out there but the ones that will be successful are those that are prepared to get to profitability faster.

Filed Under: Entrepreneur, Entrepreneurship, Funding, Julia Miller, Startups Tagged With: Add new tag, Julia Miller

Be Capital Efficient

March 11, 2009 By nathan kaiser 1 Comment

Here’s one statement you don’t want to make as an entrepreneur: ‘I wish my company had been more capital efficient.’

Over the past six months, capital efficiency has been thrust further into the spotlight and startup CEOs are making moves to extend runway. The most heavily-publicized actions in recent months? Headcount reductions. While having an impact on the expense line, let’s not hand out any capital efficiency gold star awards for those moves. They now spend less – but is that an indication of those companies becoming more capital efficient?

By improving efficiency – output per dollar spent – runway is also extended. This of course assumes that output and revenue generation are well aligned in your business model. There’s a side benefit to improving efficiency as well – it invigorates a team. It’s always more enjoyable to score more points, land the bigger fish, <enter your favorite metaphor here>.

Like many other young companies, Smartsheet already operated with a lean team and didn’t have significant program spend. Our personnel related expenses represent close to 80% of our total expenses. In working towards getting maximum return on the capital, we had to look closely at improving the returns on existing spend versus cutting expense.

Here are three things we’ve done in the past three months that any startup can take on:

Optimize your landing pages. Then do it again. – Back in 2007, we engaged with Widemile on a landing page optimization project. The results exceeded my expectations and the project paid for itself in only a few months. Applying those best practices, we were able to achieve 11-14% click to sign-up conversion rates over the following two years. Those metrics were deemed acceptable for quite some time – until the pressure to produce more with less became more pronounced. The early results from the latest optimization changes? The conversion rate in our largest ad segment leapt from 12.7% to 22.9%. That provides the luxury of either halving your ad spend and maintaining lead flow – or nearly doubling lead flow without spending a dollar more. Whether you engage with a company like Widemile or allocate in house resources to utilize a free tool like Google Website Optimizer, don’t settle for what has ‘worked well’ so far.

Leverage Pay-as-you-grow Infrastructure – We’ve used Amazon Web Services (AWS) since late 2006 and have recently expanded our usage with Amazon CloudFront and Mechanical Turk. We’re big fans of the pay for what you use model. Although we use AWS for important elements of the solution, we spend considerably more money to operate a non-AWS managed service environment (translation: much more expensive hosting infrastructure). With Amazon and others closing the gap between what the managed service providers offer and what’s available in an on-demand model, the traditional hosting companies are feeling the pinch. Use the threat of readily available cloud infrastructure to your advantage. Negotiate lower monthly fees, establish price locks on additional equipment, and jettison onerous contract opt-out terms. Don’t feel that you need to wait until your current contract expires to have the discussion either. Depending on the provider and current contract structure, a 15-30% rate decrease should be achievable.

Value your time (literally) and outsource more work – One of the catalysts to improving capital efficiency is increasing employee productivity. That’s fairly obvious – too bad it’s also one of the most elusive. We all have different styles, different ways of processing information, and different strengths and weaknesses. However, everyone has a value of time. Values may differ – but everyone has a number. It’s up to you how to set your formula…your fully loaded cost divided by available hours in the year? A more comprehensive model may include opportunity cost and value of work performed. Whatever your approach, recognize that there is an ever-growing marketplace of on-demand workers. If someone is better suited to do the work than you or if it frees you up to work on higher value activities – take advantage of it. Since launching our Smartsourcing offering (powered by Amazon Mechanical Turk) last month, our internal team and our customers have outsourced a diverse set of requests to on-demand workers. Outsourcing carries the stigma of contracts, offshore challenges, large projects, and a high minimum entry cost. The new brand of outsourcing options is wholly different. Targeted, no contracts, and at low enough price points where a single request can be asked of many – enabling you to pick the best response.

Whether you follow these three tips or pursue other strategies, maintain a mindset of expense control and improved efficiency… and avoid second-guessing yourself twelve months down the road.

Mark Mader is CEO of Smartsheet, an online service for managing personal, team, and crowdsourced work.

Filed Under: Mark Mader, Startups Tagged With: Burn Rate, Capital, Financing, Startups

Quick 2008 Recap

January 5, 2009 By Justin

I can’t believe it’s been 3 years of entrepreneurship. It continues to be an experience I cherish and whole-heartedly recommend. Being your own boss and having the flexibility to work on what you want, when you want and from where you want really is priceless.

2008 brought some great new milestones for us:

Redesigned Menuism and got it to a nice level of profitability.
Got The Wedding Lens up and running with a professional design after soft-launching in 2007. Did you know what we’ve stored over 50,000 photos for wedding couples with some couples hitting almost 2,000 photos for their wedding!
1st full year of pay from our revenue-generating properties (no consulting necessary – yay!).
Launched PickFu in less than 2 weeks.
Launched the Greener Good blog.
Joined forces with Chuck Templeton to form Delta Beans, LLC, the new holding company for all our properties.

All in all a great year! While our properties are now owned by Delta Beans, the two-bit blog will stick around as way to continue to document the experience. Each day always brings more learnings as we try to grow and juggle an increasing number of projects.

Personally, here are some goals I have for 2009:

Document the startup/entrepreneur experience better. I’m tossing around the idea of doing this in a wiki/e-book format.
Be much greener. Greener Good helps with this.
Eat less meat and be healthier.
Read more. Books, not blogs.

I’m not even going to try to promise blogging more since I don’t want to make a promise I can’t keep, but you can always connect with me on Twitter and I’ll try to do better about blogging .