How-To — nPost

If you build it, they won’t come, unless…

October 11, 2010 By Jason

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

Ask a technical founder about his startup, and he’ll proudly describe his stunning software — simple, compelling, useful, fun. Then he’ll describe his cutting-edge platform — cloud-based, scalable, distributed version control, continuous integration, one-click-deploy. Maybe you’ll even get a wobbly demo.

“Great,” I always exclaim, sharing the thrill of modern software development, “so how will people find out about this brilliant website?”

Cue sound of cicadas buzzing.
(Or “crickets chirping” but in Texas the cicadas are louder.)

Four uncomfortable seconds later, a smile breaks across the founder’s face. “Here it comes,” I think, “there is a strategy after all!”

Except the “strategy” is a tirade of drivel I’ve heard so many times I can lip-sync as the words spew out the founder’s mouth:

“We’re going to A/B-test AdWords campaigns until we discover our hook.”
“We’re going to A/B-test our landing pages until the right message appears.”
“We’re better than everyone else at SEO.”
“A friend of mine knows how to get popular on Twitter.”
“We’re going to get reviews on blogs.”
“We’re going to start with our own network and grow it from there.”
“We’re going to use an affiliate program so our customers sell it for us.”
“We’re putting a ‘Retweet’ button inside the product to encourage viral growth.”

The obvious problem is that every new startup on Earth says exactly these things. Nowadays the “strategy” above sounds the same as:

“We’ll have a website so people can read about us.”
“We’ll have an email address so people can communicate with us without picking up the phone.”

Yes, you’re going to do those things, but since millions of other people are doing that too, you’re still invisible. Visibility-fail. Anyone-gives-a-crap-fail.

OK, so what can you do to rise above the cacophony that is the Internet? Here come a few ideas; leave more and discuss in the comments!

Infection built-in, not bolt-on

WhenBusy is a bootstrapped startup that lets people schedule meetings with you in currently-available time-slots without you having to share your calendar [disclosure: I'm an advisor]. For example, here’s what the founder’s (Josh Baer) availability looks like:

Instead of trading emails with lists of available time-slots, Josh just sends the link to this page and the other person uses the product to schedule a meeting. This is the viral step: Having trialed the tool, the stranger might use it herself, then more people find out about it, and so forth.

Note that at no point did I say “a button lets people ‘like’ this on Facebook.” I know of no companies who have “gone viral” because of buttons. Buttons are good — why not use them? — but they don’t make your product intrinsically viral like WhenBusy.

Which is OK — not all products need to be viral! But if it’s not viral you still need a killer method of finding customers, and if it is supposed to be viral it better be encoded in the DNA of the application, not bolted on as an afterthought.

Frightening honesty

Balsamiq Mockups is a ludicrously popular wire-framing tool. The software is good — don’t get me wrong — but what sets Peldi (the founder) apart isn’t prescient feature selection or bug-free releases, it’s his startling transparency. He published revenue figures even when they were still pathetic, he pledged loudly and eagerly to give away lots of free copies to non-profits, and he revealed all his (remarkably effective) marketing strategies (updated here) even though it meant competitors would learn them too.

He didn’t just have an “authentic voice,” he made public promises. That’s compelling.

He didn’t just “tell it like it is,” he gave up his marketing secrets and opened his company books. That’s newsworthy.

This isn’t merely “being human” and all that claptrap, it’s almost too much honesty, like when you ask someone how it’s going and they tell you about a weird pustule on their middle toe that’s been oozing since last Wednesday.

In a world where everyone and their brother is “joining the conversation” (oops, I use that phrase constantly!), you have to truly bare your soul if you want to compete on the transparency front. It’s not for everyone, and I’m not suggesting it ought to be, but there’s no sense in half-assing it.

Making Oprah cry

The number one mistake founders make when trying to generate press is talking about what the company does rather than telling a compelling story.

Does Twitter get press when it helps Iranians fight an illegitimate government or when it creates a new internal IT process to increase up-time? Does Apple win the hearts (yes, hearts) of millions because of their obsession with design or because of their development APIs? Does 37signals have over three million users because their software is “better” than the competition, or is it because they motivate designers and entrepreneurs through their writing and philosophy?

Without a powerful narrative, your chances of getting big press and enthusiastic users who spread the word for you approach zero as a limit.

It took me years to figure this out at Smart Bear. At first when someone asked what the Smart Bear tool suite was, I would say:

Smart Bear makes data-mining tools for version control systems.

It’s a description so esoteric that, although accurate, not even a hardcore geek would have any idea what it is, much less why it’s useful.

Years later, when it was clear that code review software became our sole focus, I got better at describing it:

You know how Word has “track changes” where you can make modifications and comments and show them to someone else? We do that for software developers, integrating with their tools instead of Word and working within their standard practices.

Better, yes, and for a while I thought I nailed it, but still no press. Eventually (thanks to helpful journalists) I realized that I was still just describing what it is rather than why anyone cares. I left it up to the reader to figure out why she should get excited.

Eventually I developed stories like the following, each tuned to a certain category of listener. Here’s the one for the journalists:

It’s always fun to tell a journalist like you that we enable software developers to review each other’s code because your reaction is always: “Wait a minute, you’re seriously telling me they don’t do this already?” The idea of editing and review is so embedded in your industry you can’t imagine life without it, and you’re right! You know better than anyone how another set of eyeballs finds important problems.

Of course two heads are better than one, but developers traditionally work in isolation, mainly because there’s a dearth of tools which help teams bridge the social gap of an ocean, integrate with incumbent tools, and are lightweight enough to still be fun and relevant.

That’s what we do: Bring the benefits of peer review to software development.

Now the reason for excitement is clear: We’re transforming how software is created, applying the age-old techniques of peer review to an industry that needs it but where it’s traditionally too hard to do. That’s a story.

It took me five years to figure out (a) I needed a story and (b) what the story was. It’s hard. But one story beats a pile of AdWords A/B tests.

Advertising → [transmogrification] → Revenue

Yeah yeah, nowadays marketing is about “relationships” and “authority” and other things which cost time but not money. It’s all I hear about anymore.

But don’t be so quick to throw out the idea of spending money to make money. Advertising isn’t dead; you can still buy eyeballs. I’m not talking about “triage” strategies like buying AdWords linking to a page of ads, I’m just pointing out that most companies on Earth don’t depend on “joining the conversation” to acquire customers.

It sounds simple: The average cost of acquiring a customer is $C (advertising, sales, support, doing demos) and the lifetime revenue you get from that customer is $R, so if C < R you have a business. C can be driven down with cheaper ads, better lead quality, a more efficient conversion rate, and straightforward trials with minimal tech support.

Of course it’s not that simple, and many business plans I’ve seen (unintentionally) omit many of the true costs of acquisition. Read this great interview with Sean Ellis at VentureHacks for a great discussion of how to seek a repeatable, profitable model where C < R, and then optimize and grow. It’s a little heavy on the “huge VC-style company” strategy for my style, but you’ll come away with a strong perspective on how to build a machine that turns advertising dollars into (a greater number of) revenue dollars.

Celebrity Championship

I already beat you to death about how celebrity endorsement can serve as an untouchable competitive advantage, and it’s also an answer to how to burst out of the dull roar of Internet marketing.

Take me. I’m no Seth Godin, but consider what I could do if I were a co-founder in a new software development tool company:

I have personal relationships with the CEOs and other influencers at hundreds of software development companies. During ideation, they would brainstorm. During beta-testing they would be guinea pigs. After release of v3.0 some would be ready to become paying customers.
I have relationships with editors of nearly all software development publications (on-line and off); I’ve already published articles with them. Some would help vet our stories, some would publish our articles.
I’ve bought ads in every major (and quite a few minor) software development websites, magazines, newsletters, conferences, and webinars. So when it’s time to advertise, we’ll come in with the right message for the audience and probably cut a deal.
If you read this blog you’re probably a software developer, so even just a few mentions here might be more powerful than $10,000 in A/B tested Google AdWords.
If we were trying to raise money, my previous success would not only get us the initial meetings but would be a significant bump in our chance of raising it.

While everyone else is mucking about with a new blog, blasting their LinkedIn network with pleading emails, and paying out the nose to test AdWord variants, we’re years ahead in the marketing war.

Let’s generate more ideas

Share the love in the comments section. Let’s come up with more ways to reach customers that isn’t the same as everyone else.

Filed Under: advertising, branding, How-To, lead-gen, Marketing, positioning, social media

How a startup should leverage a virtual assistant

August 30, 2010 By Jason

Rob 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-us Outsourcing 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):

While proving out your product/market
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:

Find a VA
Start with a single task and gradually increase the amount of work as you gain comfort
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:

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.
Part-time VAs
- Search ODesk under Admin Support -> Personal Assistant or Other.
- Search Google for “part-time virtual assistants”
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: finance, Guest Posts, How-To, Productivity, tools

The right way to position against competition

August 23, 2010 By Jason

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:

Claiming you have no competition.
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.

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

Real Unfair Advantages

July 19, 2010 By Jason

This is Part 2 of the series: 5 lessons from 150 startup pitches.

What if someone copies your awesome business idea?

About twenty people on Answers OnStartups have asked this question in one form or another:

When I meet an angel investor, he may ask: “What if a big company copies your idea and develops the same website as yours after your website goes public?”

How can I answer this question?

No, the question is: What are you doing now knowing that a big company will copy your idea?

No, wait, the real question is: What are you going to do when another smart, scrappy startup copies it, and gets $10m in funding, and is thrice featured on TechCrunch?

No, wait, I’m sorry, the real question is: What are you going to do when there are four totally free, open-source competitors?

No wait, I forgot, actually the question is: What happens when employee #2 makes off with your code and roadmap and marketing data and customer list, moves to Bolivia, and starts selling your stuff world-wide at one-tenth the price?

The good news: There are good answers to these questions!

The bad news: Almost no one I talk to has good answers, but they think they do. And that’s fatal, because it means they’re not working towards remedying that situation. Which means when one of the above scenarios happens, it will be too late.

The first step is admitting you have a problem.

Last week I detailed the most common misconceptions about competitive advantages, so go read that if you haven’t already.

To summarize: Anything that can be copied will be copied, including features, marketing copy, and pricing. Anything you read on popular blogs is also read by everyone else. You don’t have an “edge” just because you’re passionate, hard-working, or “lean.”

The only real competitive advantage is that which cannot be copied and cannot be bought.

Like what?

Insider information

They say the only way to consistently make money on Wall Street is to have insider information. Unfortunately it’s not a joke, and although it’s illegal (and people occasionally go to jail for it), those in the know will tell you it’s the norm.

Fortunately, using intimate knowledge of an industry and the specific pain points within an industry is a perfectly legal unfair advantage for a startup.

Here’s a real-world example of how this advantage manifests. Adriana has been a psychiatrist for 10 years; she understands the ins and outs of that business. During a lull in her practice she got a serendipitous opportunity to shift gears completely and ended up leading software product development teams. (Turns out that for big-business project management it’s more valuable to be a sensible thinker and counselor than to be an expert in debugging legacy C++ code.)

Now Adriana has an epiphany: Traditional practice-management software for psychiatrists totally sucks; she knows both the pain points and the existing software first-hand. But now she has the vision and ability to design her own software, capitalizing on modern trends (e.g. a web application instead of cumbersome installed applications) and new interpretations of HIPPA regulation (which allows web-based applications to store medical records like patient histories).

Adriana holds a unique position: Expert in the industry, able to “geek out” with her target customer, yet capable of leading a product team. Even if someone else saw Adriana’s product after the fact, it’s almost impossible to find a person — or even assemble a team — who has more integrated knowledge. At best, they could copy. Of course by then Adriana has moved on to version two.

Single-minded, uncompromising obsession with One Thing

A popular comment on the previous post was that a “Unique Feature” could be a competitive advantage in some circumstances. Some examples of a feature being a company’s primary advantage are:

Apple compromises everything in the name of design. Their products are over-priced (magically being profitable at half the price 12 months after release), buggy (how many iOS debacles have there been?), and every experience I’ve had with their tech support has been atrocious, but man their stuff looks and feels nice! (I’m typing this on an Air and there’s an iPhone in my pocket, so no Apple fan-boy mail please.)
Google’s search algorithm was just better, therefore they won the eyeballs, therefore they were able to monetize. Sure Bing and Yahoo are good now, but the advantage lasted long enough.
Photodex is a little company you’ve never heard of I worked for in Austin in the 90′s. We made an image browser with thumbnail previews so you didn’t have to open each file individually to see what it was. (In the 90′s, y’all, before that was built into all the operating systems!) Our advantage was speed. Not the best, not the most stable, didn’t read the most formats, didn’t have the most features, just “fastest.” For many users of that product, speed wins; Photodex now makes tens of millions of dollars a year, and “speed” is still the only point on which they will not compromise.

However it’s not enough for a feature to merely be unique (like my mini-browser) because it’s still easily duplicated. Indeed, most of the innovations we’ve made at Smart Bear in the art of code review have already been duplicated by both commercial and open-source competitors.

Rather, this requires unwavering devotion to the One Thing that is (a) hard, and (b) you refuse to lose, no matter what.

Google has spent hundreds of millions of dollars on their search algorithm, the single biggest focus of the company even today, a decade after they decided that was their One Thing. They refuse to be beaten by competitors or black-hat hackers, whatever it takes.

37signals can build simple — almost trivial — software and earn three million customers because they absolutely will not compromise on their philosophy of simplicity, transparency, and owning their own company, and that’s something millions of people respect and support. Competitors could build trivial web applications too (as Joel Spolsky is fond of saying, “Their software is just a bunch of text fields!”), but without the single-minded obsession it’s just software with no features.

To remain un-copyable, your One Thing needs to be not just central to your existence, but also difficult to achieve. Google’s algorithm, combined with the hardware and software to implement a search of trillions of websites in 0.2 seconds, is hard to replicate; it took hundreds (thousands?) of really smart people at Microsoft and Yahoo years to catch up. 37signals’ ranting platform — a blog with 131k followers and a best-selling book — is nearly impossible to build even with a full-time army of insightful writers.

“Being hard to do” is still a true advantage, particularly when you devote your primary energy to it.

P.S. For more, here are detailed examples of how this mindset also sets up your sales pitch.

Personal authority

Chris Brogan commands $22,000 for a single day of consulting in an industry (social media marketing) where all the information you need is already online and free. Joel Spolsky makes millions of dollars off bug tracking — an industry with hundreds of competitors and little innovation. My company Smart Bear sells the most expensive tool of its kind. How did we earn this powerful authority, and how can you earn this overwhelming advantage?

I’m a great example of someone who wasn’t an authority on anything, but built that authority over time to the point where now my company (Smart Bear) is untouchable as the leader in both revenue and ideas in the area of peer code review.

Not only was I not an expert on code review prior to building a code review tool, I wasn’t even an expert on software development processes generally! I didn’t give lectures, I didn’t have a blog, I didn’t have a column in Dr. Dobbs magazine, and most interesting of all, I didn’t even know “code review” was going to be what made the company successful!

Unfortunately all this “authority” crap takes years of expensive effort, and even then success is probably due as much to luck as anything else, so is it worthwhile? Yes, exactly because it takes years of effort and a little luck.

Authority cannot be purchased. You can’t raise VC money and then “have authority” in a year. A big company cannot just decide they want to be the thought-leaders in their field. Even a pack of hyper-intelligent geeks cannot automatically become authorities because it’s not about how well you can code.

But how does authority convert to revenue? Here’s one tiny example:

I give talks on peer code review at conferences. My competition pays thousands of dollars for a booth, then spends thousands advertising to attendees begging them to come to that booth, then gives sales pitches at the booth to uninterested passersby who are also being bombarded by other pitches and distracted by the general hubbub.

Whereas, because I’m a known authority on code review and software development, I get to talk for an entire hour to a captive, undistracted group of 100 people, self-selected as interested in code review. After the talk typically 5-20 people want to chat one-on-one. Some head straight to the booth to get a demo; for many I give a private demo of the product on sofas in the hallway. It’s not unusual to get $10,000-$50,000 in sales over the next three months from people who saw me at that talk.

That’s just one example! Now add to that: What’s the effect of a blog that tens of thousands of people read? What’s the effect on sales of my writing the book that’s the modern authority of code review?

Authority is expensive and time-consuming to earn, no doubt. But it’s also an overwhelming, untouchable competitive advantage.

(P.S. I’m hoping that the authority I’m slowly earning from this blog will help when I launch my next venture. That’s not why I blog, but I certainly will leverage it when the time comes!)

(P.P.S. I apologize for blatantly abusing the word “authority,” considering I just lambasted everyone who does things like that.)

The Dream Team

The tech startup world is littered with famous killer teams: Gates & Allen, Steve & Steve, Page & Brin, Fried & DHH.

In each case, the founders were super-smart, had complimentary skill sets, worked together well (or well enough to get to important success milestones), and as a team represented a unique, powerful, and (in retrospect) unstoppable force.

Of course that’s easy to see in retrospect, and retrospect is a terrible teacher, but the principle can work for any startup, especially when your goals are more modest than being the next Google.

Take the success of ITWatchDogs, the company I helped bootstrap and eventually sell (before Smart Bear). The elements of our Dream Team were obvious from the start:

Varied skillsets. One experienced startup/business/salesman (Gerry), one proven software developer (me), one proven hardware developer (Michael).
Common vision. We agreed what the product ought to be and that the ultimate goal of the company was to sell it.
Insider knowledge. Gerry had done another successful startup in the same space, I had deep experience with the language and tools for embedded software, and Michael had decades of experience building inexpensive circuits and processors.

Of course a Dream Team doesn’t guarantee success but it significantly reduces the risk of the startup, and furthermore is difficult for the competition to duplicate.

This is especially true when someone on the team is already successful in their field, e.g. with a massively successful blog or a big startup success under their belt or a ridiculous rolodex. Since those are the kinds of competitive advantages that can’t be bought or consistently created, having that person on the team is by proxy a killer advantage.

P.S. This is the primary competitive advantage in a new startup I’m working on right now (to be announced soon), so shortly you’ll see another example of this theory and — better yet! — you and I both will witness over the subsequent months whether or not this really resulted in a killer advantage! (Yes of course I’ll share details!)

(The right) Celebrity endorsement

Hiten Shah’s third company is KISSMetrics. On the surface, it’s yet another “marketing metrics” company. This is a crowded, mature market with hundreds of competitors in every combination of large/small, expensive/mid/cheap/free, and product/service/hybrid.

But Hiten has something none of those competitors has: Investors and mentors who are celebrities in exactly the market he’s targeting. Folks like Dave McClure, Sean Ellis, and Eric Ries, all of whom not only help via conference call but actively promote KISSMetrics on their blogs, Twitter, and personal appearances.

How much advertising will it take for competitors to overcome Hiten’s endorsements and exposure? Even if a competitor also wanted celebrity endorsement, these guys are taken, and in any field there’s a limited number of widely-known and respected authorities.

Many competitors have more features than KISSMetrics has. I can see the sales pitch now…

The customer objects: “Gee it would be nice to have all those features,” and Hiten responds “Well not really, because Dave, Sean, and Eric all say that those features are actually distractions and don’t add to your bottom line. Our features are the right ones, as evidenced by these 20 companies that have shown increases in revenue.”

Just on the basis of these advisors, Hiten will get hundreds if not thousands of customers. You can’t buy that kind of jumpstart, not even for millions of dollars, because it’s not about faceless leads who saw KISSMetrics in an ad, it’s people who trust Hiten because of his association with other people they already trust.

P.S. If you’re raising money, investors love to see a co-founder or even just an advisor who has been successful before. The VC game is more lemming-like than most care to admit.

Existing customers

…or as Frank Rizzo says: Open your ears, jackass!

Everyone you’ve ever sold to (and those who trialed but abandoned) possess the most valuable market research imaginable, and it’s the one thing a new competitor absolutely will not have.

This is kind of a cheat, because everyone says “I listen to my customers,” which (nowadays) is just as bullshit as “We’re passionate,” but it’s true that if you’re actively learning from your customers and you never stop moving, creating, innovating, and learning, that puts you ahead of most companies in the world.

As a company becomes successful it gains momentum, which means that it’s going in one direction with one philosophy. Like physical momentum, change becomes harder to affect. It’s logical; for example at Smart Bear we have 35,000 users, so making a drastic change to the user interface or typical workflow would mean too much retraining, even if the end result is better.

Even “cool, agile” companies like 37signals are trapped. They’ve been so clear and confident in their philosophy of “do less,” they cannot go after markets where “less” is not more but, actually, just less. For example, with more than a few sales people in a traditional sales organization it’s impossible to use Highrise — the folks-of-many-signal believe pipeline reports and geographic domains and integrated campaign management are unnecessary complications, but actually it’s Highrise that is unnecessary.

Of course the world is changing, and in particular your customers are changing. Normally this leaves room for the next competitor, but if you’re already entrenched you can leverage your existing status, insider knowledge, and revenue stream as long as you’re willing to change too.

You have more money, you’re better known, you have existing happy customers to help spread the word, you have employees to build new things, and you have more experience with what customers actually do and actually need, which means you should have the best insight.

Any new competitor would kill for just one of these advantages. If you’re not using them, how silly is that?

Zoho made exactly this argument to explain why they’re not terribly worried that Microsoft is now a direct competitor:

Companies don’t get killed by competition, they usually find creative ways to commit suicide. Office 2010 will be the end of Zoho, if we stop innovating, stop being nimble and flexible in our business model. Then again, if we stop all that, Zoho will die anyway, no Office 2010 needed to do the job.

37signals is trapped inside their self-imposed philosophy, but you don’t have to be.

Go git ‘em

Imitation might be the sincerest form of flattery, but it’s still sucks when someone does it to you.

Of course you can still battle it out in the marketplace, but you need something that can’t be duplicated, something they could never beat you on, then hang your hat on that and don’t look back.

Don’t despair if you don’t have an unfair advantage yet. I didn’t either when I started Smart Bear! But I built toward having some, and eventually earned it.

What else? What other competitive advantages can’t be easily copied, or if they are copied it doesn’t matter? Leave a comment and join the conversation.

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

5 Lessons from 150 startup pitches

July 11, 2010 By Jason

I just reviewed several hundred startup pitches for Capital Factory. Most were on paper and video; 20 were invited to pitch in person.

Interesting patterns emerged:

Everyone makes the same classes of error.
Those who avoided just one of those errors stood out in the crowd.
These are problems with the business concept or the founder’s attitude, not specific to raising angel money.

You’re probably making a lot of these errors too.

Not that I blame you! After all, these became clear to me only after seeing hundreds of applications; you don’t have the luxury of that perspective.

So for the next few weeks I’m doing a series on these mistakes and what to do about them. This post serves as a hyperlinked table of contents, so either bookmark this page or subscribe by email or RSS to get notified when new articles get posted.

Here’s the list:

Invalid competitive advantages
“Superior SEO” and “unique features” are not competitive advantages.
Lacking an unfair advantage
You need one killer advantage that no one on Earth can beat you on. (‘Cause you might get beaten on everything else!)
No one said they’d buy it
You don’t need statistically-significant studies before you begin, but it’s astonishing how many founders blaze ahead before they’ve found even a single person willing to give them money.
Incorrect positioning against competition
The two faults here are opposites: Believing that uniqueness means competition doesn’t exist, or defining yourself by the competition instead of constructing your own message.
No significant route to customers (coming soon…)
If your marketing strategy is to run A/B tests and build RSS subscribers, you’ve already lost.

There’s also this list, equally common but I didn’t feel the urge to write an entire blog post on each one:

Unable to describe the company in 60 seconds.
We’ve all heard of the elevator pitch, but when asked to produce it almost no one succeeded. This is important whether or not you’re raising money because it means you understand your customers and why they buy your stuff.
Building for yourself instead of the market.
“Scratching your own itch” is how many great ideas begin, but it’s not a business strategy. Often you assume your customer is the same as you — sees the problem the same way, wants to solve it your way, and wants to pay for it. But you’re explicitly not like your customers; for one thing, you have enough initiative and insight to quit your job to start a company. It’s easy to let your idiosyncratic preconceptions prevent you from observing what the larger market will accept.
Pretending your faults don’t exist.
You have all sorts of shortcomings: First startup, inexperienced, ignorant about how “sales” works, buggy software, whatever. None of it’s a problem if you’re willing to acknowledge and cope with it, but if you persist in lying to me and your customers about it, that’s a problem. (And a lie by omission is twice the lie.)
Don’t know what you don’t know.
I don’t care that your resume doesn’t prepare you for a startup — mine didn’t either! But if your answer to any question is “How do I know? I just do,” then I know right away you’re not only ignorant but incapable of fixing that ignorance. How do I know this will result in your business drifting aimlessly until you finally run out of money? I just do.

Stay tuned! The first post in the series goes up Monday.

Filed Under: advice, capitalfactory, competition, customers, How-To, investment, Marketing, positioning, starting, strategy

Bending over: How to sell to large companies

May 24, 2010 By Jason

This is a guest post by Steve Hanov, who blogs about programming and startups.

For a micro-ISV, selling to big businesses can be more lucrative than selling to consumers. Instead of making a few dollars per sale and hoping for thousands of sales, you sell to only a few customers, and charge much higher rates. But the rates are high for a reason. It takes more time and money to sell to businesses, especially the big ones.

Legal Issues

Consumers rarely read software license agreements. Most corporate customers don’t read them either, but some have legal departments that must approve any agreement that the company makes, no matter how small. Your EULA will be examined with the same fervor as a billion dollar acquisition.

The license agreement’s primary purpose, then, is to get past the customer’s legal team quickly, because they stand between you and a sale. It helps if it is fair and well balanced at the start. That way, if they add crazy one-sided terms, you can negotiate without sounding unreasonable.

Some terms that you may be asked for:

“If you go out of business, we get all of your source code.” The request is common. The customer sees it as an insurance policy in case a smaller supplier disappears, and the assurance it provides may be so important that they are unwilling to drop it. Source code escrow services will hold on to your source code for a fee (hint: get the buyer to pay). Opt for a more informal arrangement if they don’t specifically ask for this service.

[Editor's Note: When this has come up I've always used the same line: "We're happy to put code in escrow. You set up the escrow agent and bear all costs." Every time this policy was accepted without a fight, and never did a customer actually set up the escrow!]
“If someone sues us over your product, you have to pay our legal costs.” Indemnification is also a standard clause that is difficult to get removed. If you can’t stomache any risk of personal bankruptcy, incorporating your micro-ISV is a must.

[Editor's Note: Incorporating isn't enough because usually lawsuits with small companies name the primary owners as well as the company. You also need an umbrella insurance policy for yourself. You have to allow the indemnity clause, but your lawyer can help you craft words that ensures, for example, that damages cannot be greater than the money the customer spent, or that they can seek damages only if the customer themselves are successfully sued for damages, and not just that they got sued at all.]
Support details. Are you going to be providing free technical support for this product in perpetuity? I hope not.
“What happens if the product is defective?” It’s only fair to offer a full refund if the customer is not satisfied.

A good software license agreement that you can re-use in a variety of situations can cost anywhere from $1000 to $5000. It pays to shop around.

[Editor's Note: Most small companies start by copying a EULA from a similar company, possibly even a competitor. That's a copyright violation, but perhaps you can use it as a guide with a lawyer of your own.]

Quotes

A quote looks just like an invoice, except that it has an expiry date. Sixty days ought to be long enough for the client to make a decision, even if the whole department goes on consecutive vacations.

Even if you publish your prices on your website, many companies require a formal quote anyway. This is a document they can put in their system, not something fleeting and changeable like a website.

Make sure you get this right; if your eventual invoice deviates from the quote they’re going to scream bloody murder.

Evaluation Version

The purchasing process can take a long time, so you might be asked to provide an evaluation version while the details of the sale are worked out. It is unclear whether the customer acknowledges any of your license terms during the evaluation period, so the product should have a time limited expiry and other technical measures to ensure compliance.

[Editor's Note: It's impossible to be strict with an evaluation timeline. There are counter-arguments to the following (and please leave those in the comments), but in my experience big companies move slow regardless of how much of a hard line you want to have with the evaluation period.

However you can still use the timeline to your advantage. Still have a time limit, then when they inevitably need more time, you have an excuse to say things like, "Well I could try to get permission to extend the deadline, but I need to tell my boss something. Is there progress on getting the sale done? Are there any technical barriers we need to remove?" In other words, gain information about what they're doing and at least secure another step forward in their purchasing process.]

Purchase orders

You and the end users of your software have patiently waited for five months for the company’s legal team review your license. Now, the signed copies have been faxed (yes, faxed!) back and forth. At last, they’ll click on that Paypal button on your order page…

Think again. Once a large business has agreed to buy your product, you are expected to send it to them for free. They do not have to pay you a dime until they feel like it. Instead, they will send a purchase order — a document saying they intend to pay eventually.

The good news is that purchase orders are a legally binding promise to pay you, after all of the terms have been fulfilled. Here is a diagram to illustrate the procedure:

Click to Edit on WebSequenceDiagrams.com

If you are lucky, they will use PDF files for the purchase order and invoice. But you will probably have to send and receive some more faxes.

[Editor's Note: "Waits exactly 29 days" is optimistic. Often they pay much later than the stated deadline. Yes you can try to impose late fees, but good luck collecting on those. Probably not worth your time anyway.

Another mistake I made early on was to send invoices before the PO (Purchase Order) was received. Invoices that don't include a valid purchase order are automatically rejected.]

“Please read this 100 page document about our invoicing process.”

Sometimes, after everything is agreed, you’ll be asked to perform some kind of insanely complex invoicing procedure. The instructions are laced with stern, upper case warnings that if the invoice doesn’t follow the proper format, lacks item category labels (found in document B), or is submitted during the wrong hours, it will be ignored.

If you have priced your product appropriately it will be worth it to spend a few hours to learn their codes and procedures. If the price is too low, you can try your luck and (politely) ask if there are any other options. (Do not mention why!)

[Editor's Note: Companies with complex purchasing procedures are also used to spending more for software. It's OK to ask about what their purchasing process is like before you send the original quote. If it sounds complex, it's appropriate to add extra charges to deal with it. However, mask it as something like "installation support" and not "coping with your ridiculous payment system."]

“We will release the funds after you provide your US social security number.”

US customers will sometimes ask for a Taxpayer Identification Number (TIN). If you are not a US taxpayer, you don’t need one. Once you point this out, they may be okay with it, or they will ask you to fill out a US form W-8BEN and send it to them. The form is scary because it states that your “income” will be subject to a 40% withholding tax. Don’t worry: the purchase price is not “an amount subject to withholding”, and sellers do not need to start doing US taxes (if they aren’t already). Some US businesses feel that they must keep this form on file for all suppliers, and it’s easier to comply than argue. Here’s some more information.

[Editor's Note: In the US there's never a reason to give out your SSN. Instead, get an EIN (Employer Identification Number) from the IRS. This is what will appear on all your legal forms with customers as well as your corporate tax returns. You don't need to incorporate first.]

“We only pay using Bankers’ Scrolls made from papyrus”

Many companies have a policy against using Paypal. It’s best to use an old fashioned check if you can. You can suggest, but never insist on a method of payment. Money is money! Some international customers only use bank transfers. If so, call your bank for the information that you need to provide them, and expect about $30 of the payment to go to fees.

[Editor's Note: Smaller banks often have ridiculous multi-hop procedures for accepting international wires. If you must use a smaller bank (e.g. maybe a smaller one offered you a bigger line of credit), still have a working account at a bigger bank for things like international transactions.]

Resellers

Imagine you are asked to buy some software from, say Adobe.

You go to their web site,
try to find the link to buy,
figure out how to pay,
get to the checkout page,
then stop and search Google for “adobe coupon codes”,
go back to step 1
keep refreshing your email for the link,
download the software.
Keep of record of the receipt somewhere.

Now imagine you have to do this for 1000 different items, at 1000 different web sites. It gets to be a very large job. Some companies have outsourced their procurement to resellers.

A reseller is simply an intermediary who pays you and provides the software to their client. It’s also their job to ask for a discount, but there is no need to provide one. They have been told to acquire your product, and have already been paid a fee as a percentage of your price.

[Editor's Note: Never never never never give these guys a discount! Was that clear enough? :-)

They might go down easy or they might use sleazy hard-sell tactics to get you to lower your price. Some will even say they have the power to block the sale. That's not true; they don't get their useless, stinky paws on the order until it's already approved.]

Keep smiling (in public)

Selling to big companies can be frustrating. Throughout the process, it is important to stay professional and pleasant. Sometimes, it may appear that your customer is trying to screw you. Even if they are, is your job to be jovial, point it out, and assume that it is a simple oversight. It makes no business sense to throw money away because of a rude email.

What else?

What other techniques do you have? More stories from the field? Leave a comment and join the conversation.

Filed Under: finance, Guest Posts, How-To, pricing, sales

Solving the "marketplace" business model

May 10, 2010 By Jason

A sizable percentage of Capital Factory startup submissions take the form of the “marketplace.” In fact, 3 of the 10 selected companies from the past two years have followed this business model.

Marketplace companies are notoriously difficult to start, so I’m constantly amazed that so many entrepreneurs chose this route. Maybe it’s the “go big or go home” mentality? If there’s a business plan less likely to succeed than a restaurant, this has to be it.

But it’s not impossible; here’s some of the pitfalls and how to address them.

A marketplace is born

A “Marketplace” connects buyers and sellers who otherwise have trouble finding each other.

Cow salt and pepper shakers Let’s say someone owns a two miniature porcelain cows ironically dressed as farmers and performing the very functional task of salt and pepper shaker. Of course the owner wants to sell these (because now he’s sober), but how?

Halfway around the world, someone else is proudly admiring their collection of 167 cow-themed salt and pepper shakers which, 82 years from now, will be on an episode of Antiques Roadshow where it will be valued at…. (I won’t spoil the surprise!). She wishes she could expand her collection but how?

eBay converts these complementary desires into transactions. It’s a “marketplace” in that they “create a market” in which sellers connect with buyers because eBay provides a sufficient quantity of both.

More examples:

Priceline connects leftover rooms to bargain hunters.
Expedia connects airplane ticket buyers to fares and routes.
uShip connects specialty shipping companies with people who need to ship things UPS doesn’t accept (like motorcycles or horses).
SpareFoot (a Capital Factory graduate) connects available public storage units with people trying to find units online.

These companies typically make money either by charging sellers for listing (akin to the yellow pages) or by charging a sales commission (akin to a “finder’s fee”). It’s easiest to charge sellers because they’re the ones trying to make money.

So what’s the problem?

The hardest part of any business is the beginning, but this is especially true for marketplace companies because you have a classic chicken-egg problem.

Specifically, buyers don’t visit the site because you’re obscure and lack inventory, but sellers aren’t interested in listing because there’s no buyers.

It’s worse than it sounds because you also have what I call the double company problem: You’re trying to build two companies at the same time, and both have to succeed or you’re dead.

For example, Priceline has to sell each hotel chain on the value of their service, create integrations between hotel management systems and their database (in real time), and negotiate legal and financial details. At the same time, they also run television ads (with celebrities), are expert at SEO and AdWords, built a user-friendly web site, and do tech support for consumers.

These are distinct operations — different clients, different technology, different sales process — almost like two separate companies. The effort is doubled and the risk is quadrupled. After all, if you get sellers but not buyers (or vice versa), the marketplace is a failure!

This all sounds dismal, but here’s a handful of strategies to overcome the obstacles.

Forget automation: Do everything manually

One of the allures of the marketplace business is that once you reach critical mass, you should be able to “sit back, relax, and let the money roll in.” Automation is the key; buyers and sellers have to find each other and perform transactions without requiring additional human beings.

But just because automation is the goal doesn’t mean it’s the way to start. The good thing about automation is it’s efficient; the bad thing is you cannot learn because you’re not involved in the process. And at the start, learning is where you should be spending most of your time!

For example, when SpareFoot began they weren’t sure how to charge storage companies. Should it be a $20/month listing fee? Or a flat “finders fee” per lead? Or a commission on leads which convert to sales? Could they charge extra for a “premium” listing? Should purchases go through SpareFoot so they can extract their cut, or should they bill storage companies separately?

If they had picked a strategy and automated it, there’s a low chance they would have picked the right one. All that time spent writing and debugging code, worthless.

Instead SpareFoot decided to automate nothing. When a potential buyer made a search, they grabbed their email or phone number and said “Thanks, we’re going to find you a great deal by Thursday.” Then they banged the phone all day, calling up regional storage facilities. Their pitch was awesome: “I’ve got a lead for you; his name is John Doe and he’s looking for a 10×20 with air conditioning. If your rate is competitive, we can do the deal today. By the way, if you want us to send leads like this to you all the time, it’s $20/mo to list with us.“

The bold phrase in there is damn compelling, right? And of course they varied the offer based on current pricing theory or in real-time based on the interaction with that particular storage facility.

None of this — determining the pricing structure and amount, building relationships with facility managers, and ensuring buyers’ success — would have happened if they started by writing code or any other sort of automation.

Happy buyers before the network effect

Clearly the value of a marketplace increases as it grows — both as a business and to the buyers and sellers.

This is most apparent with companies like eBay and Craig’s List: The immense variety of listings facilitates long-tail transactions that would be impossible with a smaller, more specialized marketplace.

But at first your marketplace won’t be large, so to get started you have to deliver value even though you’re small.

To see this done right, consider Threadless, a bootstrapped marketplace matching people seeking unique T-shirts with people who invent them. Even if the site contained only ten T-shirts, as long as they were awesome buyers would still be able buy a cool T-shirt. In fact, the site’s initial obscurity would be a virtue, because part of what makes a T-shirt “cool” is relative scarcity.

As another example, consider Etsy: A marketplace linking people who create handmade goods with people who appreciate the craftsmanship and uniqueness that can’t be found at Walmart and who want to subsidize creative arts. Even with just ten items for sale, buyers would still be purchasing a handmade product and supporting an artist; marketplace enormity doesn’t increase the pleasure of the buyer.

eBay and Craig’s List are counter-examples: Their value-proposition is “you can buy anything,” which works only when the seller network is immense. If you’re bootstrapping and your value proposition includes the words “anything” or “anyone,” you’re probably reaching too far.

Solve the seller side first

It’s typically easier to solve the seller side of the equation than the buyer side.

After all, the value proposition to the sellers always boils down to “You’ll make more money,” whether that means a new sales channel or a way to monetize surplus inventory. Sellers are often already selling, which means they’re easy to find and they answer the phone. With the right proposition there’s little reason for them not to try you out.

What could “the right proposition” look like?

You build their listing for them.
Their listing is free for 12 months.
They pay only if the lead to provide completes a sale.
They get a low price lock-in for one year.

And you could ask for a few things in return:

They complete a survey (your customer/market research).
They agree to a public testimonial (after the first sale).
They agree to let you A/B test different ways of presenting their offering.
If you start bringing monthly X traffic, you get to start charging them $Y.

Another reason to start with the sellers is that if you do attract even a few buyers and there’s no inventory, they’ll have a bad experience (e.g. “I tried a search over the entire state and found nothing!”). They’ll never return.

Whereas if you at least have inventory, each consumer could not only potentially buy something, but might spread the word that your site really works.

Why waste time and money acquiring buyer traffic if you can’t capitalize on it?

Use a novel strategy for attracting buyers

The buyer side of a marketplace often boils down to a numbers game: If you can get N visitors per month and P% of them buy, it works. Typically P is small, so N has to be really big.

Unfortunately that puts you into the same position as every other website on Earth — competing for traffic.

If your answer to how you’ll attract big N are things like SEO, Google Ads, and word-of-mouth, that’s an automatic fail. First of all, this is what everyone else is doing, so none of this is a competitive advantage. Second, you can’t directly control any of these things, so it’s do-and-pray, not a strategy.

To have any chance at success on the buyer side you need superior strategy. As an example of one, take OpenOfficeSpace, a new startup that’s a marketplace for partial office spaces like subleases and co-working; the Priceline of office space. There’s no way they could compete on keywords like “office space” or “subleases,” neither in SEO nor AdWords.

So instead, they wrote an amazingly useful guide to leasing commercial real estate, aimed at the small business audience. There’s a butt-load of important advice in there, some of which was new to me and some I’d learned by screwing it up a few times — things like how to root out all the actual leasing costs, what parts of the lease are negotiable, move-in conditions, how to deal with brokers, and techniques for finding space.

This is so valuable, you know people are going to bookmark it. Many will spread the word through Twitter and Facebook just because it’s genuinely useful information. Bloggers (like me apparently!) will promote it.

This produces a steady stream of new eyeballs — all people pre-qualified to be interested in the marketplace aspect of the business. The chatter even helps with SEO — that link I gave them kicks some juice their way, and deservedly so.