Startable

A partner who I work with, Eric Hjerpe, has posted an article on xcomony that speaks to how entrepreneurs create VC interest in their startups. I can vouch for Eric’s post, as I’ve seen the basic tenants he espouses in full force. VCs are competitive, and we waffle between frenzied overconfidence in our ability to make money and boot-shaking fear of losing it all. Eric highlight this contrast between fear and greed and explains how a startup founder can use it to create excitement around the startup and drive that excitement to venture funding.

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The cost to acquire new customer/users will change over time, particularly if you are using the web to acquire users. Companies I meet with often have difficulties projecting what their cost to acquire customers will be as they first launch their product. It’s a lot like riding a roller coaster in the dark. This is completely understandable - if you are doing something truly new you’ve got to make a number of assumptions based on really loose information. Experienced executives operating in their native industries can make very good guesses at customer acquisition cost, especially if their companies have a sales force component. Younger internet CEOs are often playing in a completely new environment, so experimentation is usually required to develop better visibility.

(I’ve gotten some feedback that a few of my posts are a bit long, so I’m going to break this one up into two posts. This is part 1)

I am lucky enough to work with a number of startups over an extended period of time and I get to see some pretty similar patterns emerging around customer acquisition costs. These patterns tend to be accelerated for internet companies but also seem to hold for other technology startups. I’m sure there are plenty of examples that do not fit into the framework I’m proposing below, and welcome comments from readers! I could also be ripping off some theory I was taught in business school – if so, sorry for restating the obvious. Since this is a blog about events early in a startups life-cycle, I’m talking about the cost to acquire a new customer during the time frame of a company’s early launch.

Patterns in customer acquisition costs:

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Yesterday I got a post on my Facebook wall from a FB friend… he encouraged me to visit a web site with live web cams, ladies and, well, you get the picture. He’s not sure how it happened, but he pasted the offer on at least 5 of his friends’ walls. Anyone else seen this?? I thought FB had limitations on the sort of “spam” applications could send, but this seems even more spammy than offers to send virtual gifts or take Likeness quizzes.

I won’t put the entire post here, but it started:

“hi Healy, mate i just found a site…girls…” then it gets a little nasty.

If you were wondering where the “E” or the co-host of this blog is, here I am. No, I have not been vacationing, even though I wish I was. I have been super-busy preparing to launch my new startup Pixily and only now I have had a chance to get some time to do my part towards Startable.

I am a serial entrepreneur and spent majority of my adult life in the Boston area. Pixily is my fifth startup which I co-founded with Anand Rajaram and Vikram Kumar in August 2007 shortly after graduating from Wharton. Prior to Pixily, I founded and ran jPeople from 2000 to 2007. jPeople is a high-end technology consulting firm providing technology leadership across all stages of a project for clients like Fidelity and IBM. Some of the projects we provided leadership include Fidelity NetBenefits and Fidelity.com. We were considered experts in a number of technologies that powered the web and that experience is proving very useful with Pixily.

I got my start with entrepreneurship accidentally in 1995. I was playing with a beta version of Windows 95 and realized that it lacked a Launch bar - yes, the launch bar we have come to depend on in windows XP was conspicuously absent.  Sensing a need, I started developed a launch bar and released it for free on the web under the name Launchpad 95. Soon people started downloading and giving great feedback. They wanted to know how much it cost. After doing some research on the web, I started charging anywhere from $9.95 to $29.95. By the time I stopped maintaining the product, I had sold over 10,000 copies all over the world.

This entrepreneurial experience taught me some great lessons in market segmentation, pricing, packaging, product development and more importantly customer service. I still use these lessons today.

I met Healy while at Wharton and got to know him quite well while working on the stage as a Stage Manager. A lot of people volunteered to work on the stage but he was one of the few who showed up when he said he would and worked hard. I strongly believe in “do what you say” and not “say what you would like to do”. Commitment and delivery are must have qualities for entrepreneurs since meeting milestones is so integral to the success of a startup. I am happy that he moved to Boston and I am co-hosting this blog with him. 

I live in Boston now with my wife Shivani Grover, who is a big support in my endeavors and without whom I would not have gone to Wharton nor would I have this much progress with Pixily. 

If you’ve decided that your startup is going to need venture funding to succeed you NEED to determine your valuation creation milestones and create a time-line on how you will hit them. Entrepreneurs (and MBA students who visit with me) are constantly asking how venture firms value startups. Entrepreneurs care because this impacts their dilution during a fund raise (MBAs care because… well, likely because they are nerds for that kind of stuff.)

The truth is that venture valuations are not the hard and fast science that business school professors suggest. Valuations of pre-revenue/early stage companies are not easily determined by typical valuation frameworks. Instead, venture investors typically look for key milestones that indicate that a startup is on its way to becoming a profitable, at-scale business. In the mind of a venture investor, as a company achieves these milestones they increase in valuation, as it clearly demonstrates the company is marching towards becoming a viable business and increasing its valuation along the way.

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Prasad, my so-far-silent blog co-writer, just got some great coverage in the Boston Globe. Read the Globe’s coverage of Pixily or see the Pixily interview on video.

If you wonder why Prasad has been so silent it’s because he’s busy launching Pixily, and it’s looking pretty good these days.

One of the biggest failings I’ve seen in startup CEOs is a failure to fully think through their business plan. I’ve talked to technologists with cool technologies who have identified huge addressable markets, but who have not fully thought about how to collect the dots. Big market opportunities and/or amazing technologies don’t always mean good businesses. Just because you can make something cool and the fact that there might be a large number of potential users does not lead to a fundable business idea. It is of the utmost importance to fully think through all the steps in the business plan as you are preparing to create your startup. I am sometimes surprisingly reminded of a great South Park episode with the underpants gnomes…

One of the characters is convinced that tiny people sneak into his house and steal his underpants. Of course, no one believes him until late one evening the gang actually witnesses one of these underpants gnomes running off with one of their underwear. They follow gnome back to his lair and discover a huge operation processing stolen underpants.

Stan asks one of the gnomes why they are stealing underpants, and the gnome tells him that this is merely phase one, with phase three being profits. Unfortunately, there is no phase two…

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Knowing how to build your technical team when you’re founding a startup up but don’t have a technical background is challenging. I was reminded of this while I was having a few beers with Ariel Diaz, founder of YouCastr, a local startup focused on online sports broadcasting, and Todd Galloway, co-founder of Fafarazzi. Ariel is not a programmer or techie, but has managed to put together a solid technical team; Todd is technically solid and has also successfully hired several programmers. We were talking with another young CEO starting a business who had deep domain expertise and contacts, but who needed a technical person on his team.

When you are a non-techie starting a technology business, you’ve got two basic problems when you try to make your first technical addition to the team: 1) you haven’t got the network to easily find the right people; 2) you don’t know enough to evaluate the people you do find. (A third question is employee vs. co-founder, which I take a stab at below.)

Ariel’s basic advice was to acknowledge that you don’t know what you are doing, so you need to find the people who can help you. He aggressively networked with friends who were starting companies and he recommended using connections with schools you’ve attended (assuming they have a computer science department or an equivalent department focused on the technology you need.) If you’re luckly/good you can get them to help with both issues.

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Amazon’s and others cloud computing and storage have unleashed a new wave of productivity in the internet startup world. It’s very exciting to see how entrepreneurs are leveraging these powerful (yet oh-so-affordable) resources to create rapid innovation. One of the obvious first business models to be born from these web services is remote storage and backup - essentially putting a skin on Amazon’s S3 storage and letting consumers and businesses upload their documents. Since monthly storage and bandwidth costs are something like 15 cents per gig, and customers seem to be willing to pay $5 to $20 per month, many of these business models appear to be quite profitable.

Unfortunately, this market opportunity was so obvious that a ton of startups were founded to attack it. IBackup, SOSBackup, Mozy, Carbonite, FolderShare, AlwaysSync, GoodSync, Megaupload - this is just a random sampling of companies I know of in and around this remote data access/backup/storage/sync space, listed in no particular order (the order is actually from a competitive landscape analysis I did about 8 months ago, and this was the most copy-paste friendly list in the report - I identified another score of companies, but those box charts don’t paste so well.) Note that not all of these companies are using S3 or an outsourced provider of storage, some of them have developed in-house storage… expensive, but once you reach enough volume stored it makes sense.

So what’s a poor little venture investor to do when faced with such a huge number of competitors in a still infantile industry?

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One thing you must do before starting a new business is to talk to potential customers. Make sure you can answer the question, “who is going to buy/use this?” Figure out as much about your potential customer base early in your startup idea generation and then apply that knowledge against what you are trying to accomplish. Sitting down with and listening to potential customers before beginning your startup can help you justify all the effort you are about to expend, can help you focus your development on the exact solution that the market needs and can help you understand how to create a the right product positioning.

For some reason some consumer focused startup CEOs like to tell venture capitalists, “even my Mom/Dad will use it!” Of course your relatives will use your product; they’re your parents! Your Mom is not a focus group. Use online surveys. Find expert or passionate bloggers in the space that you are targeting and speak with them. (Yes, these people will likely talk to you, and if you’re eventually going to talk to venture capitalists about funding your business, you’d better get to them first, because VC’s will make those calls while they are evaluating your opportunity…) Talk to sales people targeting similar users. If you’re selling to big corporations, have you reached the people who will be buying your solution?

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