Startable - Healy Jones’ & Prasad Thammineni’s Blog

One of the co-founders of my company recently posted his thoughts after attending the Startup Lessons Learned conference, from the perspective of a startup product manager. It’s worth a read!

My occasional co-blogger Prasad Thammineni was recently featured on Amex’s OPEN Forum.com, sharing four intuitive ways that he promotes innovation around the OfficeDrop office. (OPEN Forum is a pretty interesting strategy by American Express to offer their small business card owners a place to share best practices on running their companies.)

Prasad lists a few of the things we try to do at OfficeDrop to be more innovative… As with the OfficeDrop name change process, Prasad makes sure to employ all of the clever minds around the office, not just the over paid ones like mine…

Using the power of Google Analytics, it’s easy for me to see which Startable blog posts were the most read in 2009. Keep in mind that I’m merely looking at the number of views, so stuff posted earlier in the year has a distinct advantage of making it to the top.

10. The hidden cost of down rounds - the antidilution provision. When venture backed companies’ values drop, the pain is not felt evenly amongst the shareholders. With venture backed companies’ valuations falling like rocks due to the financial turmoil and bad-economy-induced-missed projections, I’m not surprised that this post got a lot of traction.

9. 4 Ways to generate business ideas. Prasad’s post on idea generation and ways to come up with innovative businesses and solutions still attracts good traffic to Startable.

8. The Entrepreneur in Residence. The first in a three part series explaining what an entrepreneur in residence does at a venture capital firm. The follow up posts talk about how to deal with an EIR and how to meet with one. I think this post will continue to get good traffic; it is actually the number one search term driving traffic to Startable.

7. MBAs and Startups.  Right when I was fresh from leaving venture capital and starting actually doing the entrepreneurial thing, I responded to a Dharmesh Shah post on 10 things MBA school won’t teach you. Now that I’ve been a “real” entrepreneur for the past 6 months, I agree with what I wrote. This post also had a bit of a TechCrunch boost.

6. Early stage venture capital valuations. Right after I left venture capital I felt that I could reveal the truth (as I saw it) on how VCs value startups. VCs have a target ownership, and the more you raise the higher valuation you startup will get. I continue to stand by this.

5. So you want to be a junior VC. My advice to someone who emailed me asking for tips on interviewing for a non-partner position at a venture capital fund.

4. Angel groups are professionalizing and I’m not sure VCs realize it. I was pretty impressed after attending a meeting of the Northeast ACA (Angel Capital Association.) This isn’t a meeting most venture capitalists get to attend, and I was pretty shocked at the level of sophistication. Angel groups are really getting good. Somehow this post got a lot of stumbleupon love.

3. The venture capital investment memo. Since I worked at a few funds, I thought it would be fun to compile the “average” investment memo put together during the investment process at a venture firm. I get good monthly search traffic to this post.

2. Leaving venture capital. Well, this is when I officially announced I was leaving Atlas Venture. I guess people wanted to read about it!

1. It’s not me it’s you, the real reason many startups can’t raise venture capital. Many, many startups are rejected by venture capitalists for the simple reason that the VC doesn’t have confidence in the founder. However, this is rarely communicated. I list some tips that the founder can use to tell if they are the problem.

Wow, so I’ve written a lot this year. Hopefully I’ll continue to have some good content going forward. I am always available over email or twitter, so don’t feel bad reaching out.

Happy New Years!!

I was invited to judge business plans being presented by students taking the Entrepreneurship and New Ventures class at the Harvard Extension School yesterday. Of all the business plans I judged, the one that stood out the most was Kiwilimon. Having had the experience of pitching Pixily over 25 times to investors in the last 8 months, there are a number of things I found this team got it right:

1. Passion: The most important element of a great pitch is passion. Presenting with passion will demonstrate how much you believe in what you are bringing to the market and also has the positive side effect of grabbing and maintaining the attention of the audience. Passion is something that you cannot put on but is something that comes from  your heart. It is ironic that a passionate pitch is not spontaneous but one that is practiced. If you practice enough times and make sure you keep improving with each pitch, you will start exhibiting passion. Like they say, if you say it enough times, you start to believe in what you are saying.
2. Simple, Short and Concise: A great pitch is one that is simple, short and concise. Of all the pitches that I made, the best ones were those that lasted no more than 10 minutes. Yes, it is possible to pitch your entire business plan in 10 minutes. If the investor does not get your business in 10 minutes it is very unlikely they he/she will get it in an hour. Of course, you need to have a lot of detail and backup information but that is something you can address when questions are asked. Make sure the appendix has all the slides you need to support the details.
3. Pictures are worth a thousand words: The best pitches I have seen are those that tell the story using pictures. With pictures, people can easily and quickly relate to the problem and how you plan to solve it. They tend to remember the details well after the pitch is made. With Google images and  micro-stock sites, you can find pictures for everything that you want to convey.
4. Convey what your business is in 90 seconds: Even though this is obvious, not everybody gets this right. It took a good five minutes before we got what one of the pitching teams was selling. Identify the problem/need and how your solution is the best there is in the first 90 seconds. If you cannot convey what you are selling in that time, you will start to loose your audience.
5. Keep text in a slide to no more than three lines: If you cannot use pictures, make sure you do not include more than three lines of text. Anymore than three lines will take much longer to go through and makes it harder for the audience to remember. With more lines of text, the audience is reading ahead of what is on the slide and not listening to the story you are telling. You want the audience to pay attention to you so that they can get how passionate you are about the business.
6. Target market and market size: As you are defining the need, define the target market. Knowing and conveying whom you are selling to is an essential element of a good business. If you can backup the market need with either primary or secondary research, your story will be even stronger. The size of the market is very important as it tells the audience how big the market potential is.
7. Marketing: These days it is much easier and cheaper to build the product and is much harder and expensive to market it. Spend a lot of time thinking about how you are going to sell the product, what channels you are going to employ, the partnerships you are going to create, and how many customers each marketing program would bring in. For the pitch, focus on the go-to-market strategy and the marketing strategy in the first year.Leave the mid to long term marketing strategy to the appendix.
8. Competition: Research your competition thoroughly, list the top three competitors, what makes them a success and identify why your solution is better than the competition. Also, make sure you are prepared for the “Barriers to Entry” question.
9. Product: If you have defensive intellectual property, make sure you identify it early on. If not, focus on the proprietary technology you have built or what makes your product unique. If you have customer testimonials, this would be a good time to share those.
10. Revenue potential: Identify all sources of revenue, how much they would bring in each year and over five years. Obviously, you are making a lot of assumptions to build this model but you will prove or disprove those assumptions as time passes. Do not be conservative when demonstrating revenue potential. Remember, investors are going to discount whatever you say by at least 100%. At the same time, do not be overly optimistic as the investors will not believe anything you have said.
11. Costs: Identify all the operational and non-operational costs including salaries, data center costs, product manufacturing costs, inventory costs, and customer acquisition costs. Make sure you show which of the costs reduce with scale.
    
12. Team: In a 10 minute pitch, I recommend that you leave the team slide to the end. In the team slide, quickly describe the background of the founding or management team and demonstrate why you are the best team to execute on the plan.

Kiwilimon got all these elements right and delivered the pitch flawlessly. I hope the lessons that I learned first hand and from others  will help you in your pitches. If there are others that I have missed, please feel free to share.

There was some great news this past week for the New England startup scene - TechStars recommitted to another season in Cambridge and The Founder Collective officially announced that they’ve got a $40 million fund to make early stage/seed stage investments in New York and New England. I’ll talk about the Founders Collective tomorrow, today I’m going to focus on TechStars.

TechStars is coming back to Boston!

I was lucky enough to participate in TechStars Boston this past summer. It is a great way to launch an internet company, with solid mentors, great media exposure and a super-crappy office filled to the brim with passionate + smart technology entrepreneurs.

I can’t emphasize enough how great the mentors were for the TechStars program. The companies that had the best experiences at TechStars were the ones that took advantage of the one-on-one time that different mentors offered. These mentors were people who have successfully built real technology businesses. They opened doors for the entrepreneurs by introducing them to distribution partners, technology experts, journalists, etc. They provided strategic and operational advice. They beta alpha tested the heck out of the companies’ products. You can’t get this level of mentorship anywhere else that I’ve seen - not from a venture fund, not from a school - no where.

My advice is to apply to the program if you are a young, first time entrepreneur who has a grea idea and the ability to get it going fast, for not a lot of cash. TechStars is accepting applications now, so get on it. Remember that they are looking for you to show traction with your business during the application process, so set developmental (and if possible customer acquisition) deadlines over the next few months, mention this in your application and hit them.

One of the greatest things about TechStars being in Boston is that it brings talent in from other parts of the country. TechStars recruits from everywhere, and some of the great entrepreneurs from this past summer’s program has stuck around.

The change from the summer to the spring doesn’t really surprise me, but I do wonder if this will cut out some potential student founded companies from the program. Boston does have great entrepreneurial-driven cultures at places like MIT, Babson and other schools. It will be hard for some of these students to commit to full time company-founding during the spring if they are supposed to be in school. I guess they could potentially take a leave but this is cutting it pretty close to the spring for some registrars’ offices I bet.

Wow, the Techstars Boston Investor Day last Thursday was great! I can’t believe the progress made in the past month by the teams. I’ve been a very absent Techstars advisor for the past month, so I didn’t know what to expect. Everyone in the crowd seemed impressed by the startups, and I felt a great vibe and high level of interest from some of the well-known Boston angel investors I spoke with during the event. Andrew Hyde mentioned to me that it felt a lot like Investor Day at the 1st Techstars Boulder in 2007 - and that 3 of those companies have had successful exits. Let’s hope that the good Techstars mojo continues here on the East Coast. To that end, here is my advice to the Techstars entrepreneurs on keeping the positive momentum going post-Investor Day. I guess the gist of my advice is that the hard work hasn’t ended - it’s actually just begun. But you are in such a great spot that you should be excited to keep moving forward and you should continue to take advantage of everything that Techstars has created with/for you - especially the network.

Techstars Boston, photo by Andrew Hyde

1. Don’t take a breather. You have a narrow window to exploit the momentum that you’ve created. Investors and the press are interested in what you are doing, but they have notoriously short attention spans.
2. Follow up with EVERYONE you spoke to. Send emails to each and every investor that you met - ask Shawn for their contact info if you didn’t capture it. These emails should be out by Monday afternoon at the latest - again, people have short attention spans. Did you speak to any of the tech reporters at the event? Heck, even if you didn’t get a list of the reporters (and bloggers) at the event from Shawn and send them a “thank you for attending email.” Include a three or four sentence business description so they remember who you were. Finally, offer yourself up to talk to them about Techstars or ASK for something.
3. Hit up your local tech press if you’re not from Boston - with a “the local tech startup doing something big time” angle and see if they bite.
4. Have an opinion on the terms of your investment round. This will help move the angels along more quickly.
5. Look for an investor “anchor” for your angel round (if you haven’t already raised your capital/got your fund raise going.) You need an angel to set the terms for seed round, so that the other angels will fall into line and step into the mix. I know a few of you have investors approach you and express high interest in the business. Those are the ones to hit up first. Once you have an anchor things become much, much easier.
6. Consider doing a tranched close on your round so you can get money into the company sooner rather than later (this means taking less than 100% of your hoped for fund round and continuing to work toward getting the other % at the same terms in the not too distant future). Angel rounds seem to take even longer than VC investments, so if you can get some of the investment dollars to come in right away that will help you do important things like pay for developers and ramen.
7. Take the free stuff. If Techstars offers to let you stay in the space for a while, take it. You probably had a good routine going pre-Investor Day in the space, so why mess things up? Keep the same schedule going. Cheap or free rent is VERY hard to find. And if Shawn wants you to pay for the space, well, talk him down as much as you can or ask for the first month free or something.
8. Stay in touch with all the other companies! How awesome were these other entrepreneurs? You have one of the best advantages of any startups - a real, legit peer group. Do you know how lonely doing a traditional startup is? You don’t have that problem! Those other CEOs and founders want you to succeed just as badly as you do. They will experience the same issues that you will face, sometimes before you do. Hit each other up for advice, networking and friendship.
9. Keep the weekly email updates going. It will help you stay focused - and you don’t want to lose the connections that you developed during the program.
10. Don’t get distracted. $, PR and continued growth of the business are your near-term goals. Don’t forget about the business while you take advantage of the external momentum. Set aggressive near-term business goals and hit them.

Finally, a bonus tip:

1. HAVE FUN! You are better off than 95% of all startups in the world. Your network is so much stronger than anyone else I know. Your peer group is strong, smart and passionate. You guys and gals are awesome - kick some butt! (And don’t forget about little old me once you hit it big time…)

Link to Andrew’s photos of Investor Day: http://www.flickr.com/photos/bouldair/sets/72157622218729239/

When I was a venture capitalist, I saw a recurring, common mistake made by startup founders who were trying to project their company’s revenue for the coming years. Of course, now that I am actually trying to help a startup create their financial projections from the other side of the table I almost made the same mistake! This issue is particularly important when the startup has a SaaS or viral revenue model.

How to NOT project SaaS revenues

Probably the number two or three mistake startup founders (and me, almost) make when estimating their revenues is to assume they acquire their customers in a linear fashion during the year. Many, many CEOs project revenue by the following formula:

(Number of expected customers at year end) X (monthly subscription revenue) X (12 months) X 50% = Anticipated Yearly Revenue

The 50% discount attempts to take into account that you haven’t acquired all of the customers on January 1*, but instead get some of them month 1, some month 2, some month 3, etc. However, this creates a major assumption - the assumption is that you get the same number of customers in month 1 as month 12. Usually this is not the case if you are a startup ramping up your marketing and sales programs. Typically you get more of your customers in the final months, and many, many fewer in the first couple. This effect is more pronounced the greater number of marketing programs you are layering on during the year.

To illustrate how this 50% discount will over-estimate your revenues, consider the following example. I am over-simplifying everything to make a point, so please don’t make too much fun of this. Although it is so simplified as to be comical.

Assume a startup has 12 different marketing programs that will run for at least 12 months each. The CEO anticipates that these will result in one new customer per month that they are running. The team will have bandwidth to launch one new program per month, so one new program will be launched each month. The company’s service is so amazing that no customers will churn; assume the service costs $100 per month. Customer acquisition will be as follows:

1st Month: 1 new marketing program. 1 new customer
2nd Month: 1 new program, one old program. 2 new customers, plus 1 existing customer = 3 total paying customers.
3rd Month: 1 new program, two old programs. 3 new customers, plus 3 existing customer = 6 total paying customers.
…
I think you get the picture. By the end of the year the company will have 78 paying customers.

Running the formula above for expected revenues, we get $46,800.

The problem is that the company won’t actually have that high of revenue. Revenues will really be only $36,400. 77.8% of the amount projected. So, even if the company hits their customer acquisition plan they will miss their revenue target. Obviously this could have serious implications to their cash flow, etc. The level of your revenue miss will be even greater if you have a viral product, since your growth will be even more exponential.

It’s a much better idea to identify the specific marketing programs that you will be implementing, the months that you’ll be rolling them out and the anticipated customer acquisition by month from them. I realize this takes a long time, and you are probably pretty busy trying to actually get your company going. But projecting your cash flow is such an important part of the success in the early life of your startup that I’d suggest you do it and don’t fall into the trap of making such simple revenue forecasts that you misjudge your cash needs.

*Or whatever your fiscal year day one is

Should startup founders spend time creating a crisp elevator pitch? Yes! Let me explain what got me thinking about this…

I recently received an email from a student in Texas who is thinking of starting a business. He stated, “I’m 23, I have my eyes on an idea with IP that’s protected, I’m piecing together a business model, and I’m doing all in my power to make this happen. The problem is that I’m so young I don’t have many industry contacts and, even though I’ve yet to try, I think it would be difficult to get a VC to sit down in the room with me and listen to my proposal because I’m so young. I think because of my youth they may not take me seriously even though the idea is solid, potentially very profitable, and has IP security. ”

My advice to him was that if his idea was good, and if he could articulate it well, then he could make smart people interested in helping him. First he should get together a smart elevator pitch and then approach potential advisers who could help him evaluate his idea’s probability of success, firm up the business plan and then introduce him to capital sources and team members. I really think a crisp elevator pitch will be critical in getting experienced people to lend him a hand. (I guess I just articulated it better here that I did in my emails to him! Sorry Steve!)

What is an elevator pitch?

Venturehacks has a great post on how to prepare an elevator pitch for an investor and says, “the major components of the pitch are traction, product, and team.” If you are preparing to raise venture capital you must read their take on the elevator pitch.

But I think that an elevator pitch has an importance greater than just impressing investors. If you are a startup, no one has ever heard of you. No one knows what you are doing. No one knows how or why they should lend you a hand or buy your product or make an introduction to someone who could join your team. You need to be able to let people know what you are up to quickly, and interest them enough to get them thinking about how they can help you build your business.

An elevator pitch is a short description that will help the entrepreneur quickly explain the purpose of their startup to someone who has not heard of the company before. I think you should have a single elevator pitch (that you occasionally tailor to a specific audience, such a customer or investor or potential team member). You will need to have practiced this pitch to the point where you can recite it in your sleep, because you never know when you’ll be in front of the CTO of a potential customer or find the VP of Sales that you’ve been dreaming of for months. Make that first impression a solid one.

Here is my take on how to get a good elevator pitch put together:

1. Problem definition
2. Size/magnitude of problem
3. Your solution, including why it is better
4. Your company’s traction
5. Who you are

I don’t think your elevator pitch should be more than 30 to 45 seconds long. (And you probably don’t want to talk at light speed, unless you are pitching a speed speaking product - lame joke.) If the listener is interested then they will ask you questions and you can elaborate on the points that interest them.

I’m not convinced that my formula for a good elevator pitch is perfect, nor is it the only way to create an effective pitch. I’d love to hear other people’s ideas on elevator pitches that have worked for them.

Having spent some time over at TechStars, it is pretty clear that the TechStars founders take the elevator pitch very seriously. The teams are forced to play with their elevator pitch over and over -  practice, modify, get feedback on and practice. These pitches are not focused for particular audiences - rather they are generic pitches that would be interesting to customers, investors and people who might want to pitch in with their time or introductions. My experience at TechStars has really re-inforced the impression that an articulate elevator pitch is very important for pretty much any entrepreneur. After all, you never know when you’ll bump into the person who will somehow help your startup take over the world!

Wow, there is an incredible amount of customer feedback that can be collected through a customer support number. I’ve learned some interesting stuff by listening on conversations the Pixily team has had with users of their service. This got me thinking - why don’t more internet-based businesses have phone numbers?

I guess it’s pretty simple to understand why Google doesn’t have a help desk. Think of the calls they would get: “Hey, I can’t find the address of the restaurant I’m going to on Google Maps,” or even more likely, “Why isn’t my company at the top of your search results?” (Or me a few weeks ago: “what the hell just happened to gmail?” This afternoon at TechStars I attended a talk by Nitzan Shaer, who was at Skype for a few years, and he mentioned that Skype consciously did not have a customer service number available because there was no way the service could handle the number of calls they would receive. I can buy that.

But what about smaller/startup internet companies? Can they have a help desk and actually not get overwhelmed helping customers? Should they? I’m starting to think that maybe… I’m pretty sure that for each customer who cares enough to contact a startup there are many, many other users who don’t bother. When you are trying to get something totally novel accepted by an as-of-yet undefined market, any customer feedback that you can get sounds pretty good, even if it is negative feedback. Early product decisions should probably be based on more than just the founders’/programmers’ gut instinct. Most startup internet companies have such a short runway to develop a product that will actually be accepted by the market that minor tweaks to the UI, content, etc. can have a huge impact on customer acquisition and retention.

I realize that actually talking to people is sometimes scary. And constantly picking up the phone can be very distracting. But you may be able to carefully expose a customer support phone number and not only help your business but also help some customers.

I’d imagine that the right way to have a customer service number starts with an easy way to REMOVE the customer service number. After all, if you end up having a Skype level of user adoption you just can’t support a support line very easily. So I’d go with one of those easy to throw away 800 services for the original number. I mean, you don’t want mooches like Mark MacLeod constantly bugging you… On the other hand, if you are an accounting software company and a well known startup CFO is constantly raving about how great your service is, maybe you do.

I’d also think that you will want your developers/product managers to answer a lot of these calls. I know this will slow them down, but on the other hand get the customer info into their hands asap. Also, if they build something that sucks shouldn’t they be the first to hear?

The feedback you get should also be taken in the context of customer segmentation. Maybe the particular user group that you are targeting just can’t “get” your product. Or maybe you want a help line specifically for bigger or corporate customers, or as a way to differentiate your free vs. premium app.

I obviously don’t have most of the answers on this topic. I’d love to learn from others who have or have not had a successful experience with their customer support line.

Prasad and I had an interesting discussion with Siamak Taghaddos, co-founder of Grasshopper (formerly GotVMail.com), a provider of phone number and voicemail services to entrepreneurial companies. Siamak and his team have done a very impressive job bootstrapping Grasshopper into a successful company. He is known in the area as a very savvy marketer, which is why Prasad and I wanted to meet with him - he’s the guy who sent out thousands of chocolate covered grasshoppers recently. We were looking for any advice he might have on how to continue to increase sales at Pixily since he was able to grow his own sales so effectively without a big ad budget in the early days of his company.

His advice was pretty interesting, and is something that I think maybe needs to be reiterated in today’s go-go world of internet based marketing. I was expecting him to mention some sort of a viral online campaign or SEO tactic that really helped get things going back when his company was just a tiny startup. I was wrong. Instead, he said:

1. Figure out the right pricing
2. Get the positioning correct

Then worry about promoting/advertising the service. No one will sign up for your service if you can’t convince them they will get value for what they pay. He even went so far as to say that RAISING the price can be a good thing, if you can simplify your pricing structure. Customers don’t like to worry about overage charges or special fees, even if that means they pay a bit more - a predictable/stable bit more. And a higher price, in the funny world of the internet, can be a signal of quality. If it’s too cheap businesses owners may be afraid that the service is not up to par.

Of course, Siamak is totally right. And of course, his advice is totally obvious. But it was so refreshing to hear from someone who is walking the walk everyday that I thought I’d share it.