Saturday, October 29, 2011

Startup Ideas - Part 3

A few years ago I wrote 2 posts about evaluating start-up ideas. They were pretty well received and recently I bumped into them again. It's always fun (unless it's frightening, which it often is) to read your old stuff but it made me think how much has changed and how that's affected how I evaluate start-ups and start-up ideas.

Apart from working on my own start-up, these days I'm an adviser to several companies and am part of a VC-firm's advisory team. The frosting is that I get to hear internet start-up pitches on a regular basis. Then I get to throw in my input as to whether the team, approach, tech, idea, and probably 100 other factors come together to make a company investment worthy.

Of course, like anything else, if you start doing something enough - you start to see patterns. What I'm writing here are some of most noteworthy things that have caught my attention.

Basically, a few questions to ask yourself about your new idea for a startup.

1) Do you see the "Snowball" ?

I pitched an idea a few months ago to the CEO of a rather-mature and happily successful start-up. He was rather intimidating in how fast he understood the big picture. I'm not sure what sort of casual conversation I could keep him interested with at a party but I'm sure that if I had had a whimsical need to immediately know, for example, the half-life of cesium-137 (and google happened to be down), I could have just asked him.

He sat and listened largely emotionless to my idea. At the end of my presentation, he looked at me and said "I don't see the Snowball". He ended the sentence with such a period I not only felt the meeting was instantaneously over, I was waiting for him to push a button and have the floor open up sending me sliding star-wars style outside into the dumpster. The "snowball" as he put it. That is, the very obvious reason this product is going to take off, keep going, and getting bigger. The reason why customers will come - and why they'll come back. Why they'll get their friends to come who will then get them to come again. The "viral loop" is a specific facet of this for social sites - but it applies in every case one way or another.

Interestingly, he didn't ask me "Where is the Snowball?". He fully assumed that if it was there, he should have seen it already. If it hadn't shown it by now, having to ask wasn't going to save me.

This idea is documented across the web in many different names. Viral loop. Customer acquisition/retention. Or even the "Techcrunch effect" - get mentioned on Techcrunch, watch your servers scream and then... nothing. In any start-up idea, you need to be able to see the snowball. And how it overcomes impedances such as cost (if any) and competition.

Spotify - free music, posts to FB to involve friends
Facebook - free gossip, detailed voyeuring of people in your life
Google - free information

Gamification is an artificial method of creating a snowball. The seratonin shot you get from competing with friends and winning at a game that is very easy and has fair, tractable rules for success. Then give them the ability to "cheat" using money while still taking credit for the success.

2) What's the customer effort required to gain what value? Your answer better be "a little" and "a lot".

Every keystroke you require from your users to use your product is a speed-bump to adoption. Every single keystroke. And, for keystrokes that are digits, where those digits together make up a credit-card number are like 20 speed-bumps piled together.

They don't call it the "pay wall" for nothing.

I love to see products that give me value the instant I'm introduced to them. If it requires a lot of work first - I better fully understand the value I'm going to get or it's not likely I'll care to find out.

3) Are you technically defensible?

I bet you're not. And although it's very nice to be, surprisingly you can get pretty far without it.

They say that the more little things in life surprise you - the younger you stay. Well thank God for that. It seems every day I say to myself - "now it's THAT easy?". I am perpetually amazed how radical advances in computing power, storage capacity, and programming abstractions have not so much advanced us as species - but instead made everyone a coder.

Now mind you - all that computing power also made it really really easy to be a bad coder. At least in the computer science sense. But the real bottom line is that it almost never matters until you get a lot of traction. And if you're ridiculously bad performing app starts to die because of too many users - that's what we call a "rich man's problem". In other words, at that point you'll like be making money or be ripe for investment to hire programmers or sysadmins or whatever to fix the problem.

I've seen I think one pitch in the last year where I thought the technical hurdles would cause a strong deterrence to competition. That was Flashsoft. Phil Karlton famously said "There are only two hard things in Computer Science: cache invalidation and naming things" and Flashsoft is doing cache invalidation.

Now mind you, technical hurdles don't mean "no competition" they just mean it takes a sophisticated (and crazy smart) team to be up to the task. But we all know - those are more common than you'd expect.

In full contrast, I saw a pitch this year where the team had a nice (web) GUI and then showed their technology. As they demo'd it became immediately clear to me how to recreate what they were doing. They were (pardon the technical jardon) making one call to Amazon's API, making one call to Facebook's API, and showing the results.

So, unless you count "call Facebook, get result and give to Amazon" as technology - they had none. There was no analysis, no intelligence - no nothing. Without the GUI (which was very very nice) - this was without exaggeration 20 lines of Ruby code.

It might be a shame to call this company a technology company, but as I said earlier, their technology might not have mattered. Execution and team still win the day. Sadly, their team would not have filled the gaps which was enough to rule out investment, but the "lack of tech" wasn't the only factor.

As a final counterpoint - GroupOn, AirBnB and Taskrabbit are 3 companies that have in my estimation completely uninteresting "technology". If you're a developer is there really anything there you couldn't see how to create with just a moment of thought?

4) What's your plan for moving off of Facebook?

Ever heard of a Remora? It's that fish that literally attaches itself to sharks as they swim around. Sharks don't mind apparently as they provide a mutually-beneficial relationship. They clean off parasites and sharks provide implicit protection and for the most part the shark doesn't even notice them.

If you watch some videos of them latching on to Sharks however, you'll notice something, it's not often you see one swimming in FRONT of the shark. It's probably some sort of well-known unwritten code among remoras - latch onto any darn thing you want - except near anything resembling teeth.

Sure, there were probably a few rebel mouth-latching remoras that flaunted convention throughout history - but they're gone now. And whatever gene they had that said "Hey.. try latching on the mouth - no competition and plenty of yummy parasites!" disappeared along with them.

I'm not saying Facebook is a shark. They're just a bigger company trying to grow their own business. In that way, they're no different than Apple (tons of iphone app developer "get squashed" stories) or Microsoft or anyone else.

Creating a mutually-beneficial relationship is what it's about. Regardless of what stage you're at - bringing and/or keeping users on Facebook makes Facebook happy. However at some point, you'll hopefully grow big enough where Facebook notices you. That's sort of like the "rich man's problem" from above except that people are trying to kill you and money doesn't change their mind.

Starting out partnering with a big company is usually good. Facebook or Apple or whoever. If your dream comes true however - you likely get two courses of action.

Get bought by them - or have a plan for surviving without them. For Facebook it's usually that you keep it as a customer acquisition mechanism, but not your only one. For Apple, you usually migrate to Android and/or Web.

No need to name names but most every big company has purposely or accidentally stepped on a few start-ups along the way.

5) Your business model is advertising? no. really. What is it.

Despite the incredibly obvious and utterly overwhelming evidence to the contrary, Facebook as an advertising platform never felt right to me.

For example, when you go to google to do a search. You are, literally - going to in order to, as quickly as possible - LEAVE

Marissa Mayer's super clean homepage is great, but you're going there to find out something specific and move one. Like, what was that train movie where the guy keeps waking up in someone else's body?

If almost everyone comes to to find something and then leave, then some percentage of those people will find what they're looking for via an ad. You have to leave somehow - once in awhile you'll leave via ad. At times, the ads are exactly what I was looking for.

Facebook however is different. You go to Facebook to stay. I'm not sure I've ever clicked a Facebook ad. Sure I've clicked photos of Aunt Edna's 75th birthday and videos that cousin Willy linked to. But I go to Facebook to find out family/friend gossip. Not do product research.

The days of monetizing through solely ads are sort of over. I don't mean that by saying ads are dead (phew - heck no). I mean that as there are far more options now than simply showing adsense.

a) Companies like Viglinks and Skimlinks will affiliatize every last link (that can be affiliatized) on your site. Wordpress and Ning do this to great effect. b) Install the browser plugin Ghostery and watch how many sites get to know where you are browsing. Tracking user movements is big money and imgur likely monetizes not through ads, but by selling advertising data companies the data that you were there at all.

Simply - more than ever, if you have a few million eyeballs a month - the baseline ways to monetize are better than ever.

5) How does this get to $100MM? (helpful hint: It's nice if the market size has a good size number followed 'B')

I alluded to this earlier, but it's important to point out that even if you think a company has a wonderful chance at being successful, that doesn't necessarily make it a good investment. Many factors surrounding that success help determine that.

One pitch I saw fell for this exact reason. I liked the product a lot. It felt like one of those products that you can throw off a cliff and all by itself - it will crawl itself back to the top still generating revenue. It worked. It was going to work.

But examining the market - I couldn't see how it could get past a certain level of revenue. This included factors of market size, competition, and strategy. This is one reason market-size is always part of pitches - if its big enough - then we can skip a few details in worrying that the company can get to a needed size.

So what's a needed size? That depends on your investors and how much money you're going for. It's another good reason to start with angels. If the company grows to Zynga size - great, we've proved the model and we can add investors as we go along. But if it doesn't, we've taken a good amount of cash for what we need to do.

Walking into Sequoia asking for you iniital funding round of 10MM might be cool. And you just might be the right person to be able to do that. But your projections better better warrant the round. Yes, everyone knows those projection numbers are shot from the hip. But they still better be there - and with a story that could theoretically make sense.

Simply - different investors need to make particular sized investments with expectations of particular sized returns.

Incidentally, this works for job offers too. Some of the hottest startups in the valley make great offers but you also always need to do the math. Being part of a hugely successful start-up is great, but sharing in that success is rather nice too.

6) Revenue is King. And so is Traction.

Ok, that's not a question. But seriously, everytime someone makes a list of questions - one of them has to not be a question with a sentence following saying "Ok, that's not a question".

If the rubber is meeting the road it gets harder to argue. In fact, if you have traction (and maybe even revenue) then investors only need to consider how you might get squashed somewhere along the way (see "getting off of Facebook" above).

Waiting until you have these two things is a great way to improve the interest and terms you'll see from investors. If you don't have them - investors will be looking a lot harder at you and trying to guess if your idea could someday get these things.

7) What's your customer acquisition and business development strategy?

As a disclaimer, I'm a complete techie. I started my first start-up with 2 other complete techies and you're not going to believe what we did - We sold our products just like a few complete techies would sell products like. (no.. I re-read it, that sentence is ok)

Maybe our worst sin was thinking we were kicking ass. When we finally hired a bizdev guy and with extreme skepticism - he changed everything.

Our pricing model was wrong. Our marketing was wrong. And most notably to me - he changed our company from selling products to selling solutions.

If you don't know what that means, you too may benefit from gaining the help of someone who's acquired customers and positioned products before. Put simply - we went from selling things for little bits of money to selling bigger things for bigger bits of money. All the while bringing more value to our customers.

It's really amazing what a small pivot can do for a product to bring it to new customers and to expose a much higher value to those customers. This should probably be filed under - "do what you're good at and more importantly, admit what you're not good at". And hire people in those roles.

Pitching is an art - and so are start-up ideas. I still get a few ideas a week I quickly kill for lots of reasons. The ones that make me the saddest are those I think people would love and use - but that I can't see how to turn it into a scalable business. I'd love to do those things for fun assuming time was an infinite resource.

Making web sites has absolutely never been easier. All you really need is to know how to code in some very high-level language and leave all the computer science and engineering problems for when you have scale. Getting the right idea, the right positioning, and the right go-to-market strategy that "can" get to scale however is still the tricky part.