Startable - Healy Jones’ & Prasad Thammineni’s Blog

This is my second post on what makes a good technology platform company, from the point of view of the companies that integrate into the platform. (I’m calling these companies “platformees.”) Here is a link to the first post, “So you want to be a platform? part one.” Again, this is focused on SaaS applications.

Good communication with partners on your platform. In my previous post on what makes a good platform I mention “consistent strategy.” The world is not perfect and companies do need to make changes sometimes! Solid and early communication with platform partners is the best way to prepare your platformees for change. Email seems to be the  best way to manage this, from my experience. It is also very helpful when the platform itself has good internal communication. When a startup (like mine) has a conversation with a member of the partner team at a platform we use that conversation as a basis for making important decisions (like committing time or effort to developmental or marketing plans.) If another person on the partner team at the platform then does something that destroys the effort we’ve spent it is very costly to us. Companies that want to be platforms need to realize that startups have very, very limited resources. We can’t afford to waste effort, because if we are not growing then we are dying. As an addendum to this, I would add that having a person or team that manages the relationships with your platformees is very helpful.

Reliability. When a big platform app goes down and the customer can’t use the little SaaS company’s integrated offering… well, the customer tends to blame the little guy. Telling a customer who is trying to access critical business data that “so-and-so big company is experiencing technical difficulties again and there is nothing I can do” really doesn’t help him/her have confidence in your app. Secondly, if new users can’t sign up then it means I’m not growing through your channel when you are down. Third, and I think a lot of SaaS companies tend to forget about this - we are still early in the adoption curve for SaaS. Most small business owners and many consumers are still not entirely comfortable with using/storing critical applications online. No one is going to be comfortable switching to online services if they are prone to outages.

I’ve got a few more points that I will try to make in the next post on platforms. Until then, happy integrations!

With the explosion of different staged venture capital sources it is becoming difficult to know where to turn for your first round of financing. How is an ordinary entrepreneur supposed to understand which funding group is the right one for her business? Rather than explaining the difference between micro-VCs, angel groups, big-time venture capitalists, growth funds in text, I thought I would draw a helpful diagram (I haven’t done one of these in a long, long time!)

The X axis is the stage of the company seeking funding - from just an idea on the left to a profitable company with a big revenue base on the right.

The Y axis is the amount of capital required - from a tiny amount at the bottom to many millions at the top.

Finding right 1st round investor

My friend from business school, Matt Soldo, has a well written post on MBAs in the tech startup world, “In Defense of the MBA.”

Matt has held positions with a few different internet companies, and is currently with Box.net. I also know he seriously batted around a few legit startup ideas while getting his MBA as Wharton. So I respect his opinions.

Since I was sort of famously quoted in TC on my MBA experience (and my MBAs and Startups post continues to get good traffic) this is a good opportunity for me to revisit my MBA post from last year.

As OfficeDrop has grown I’ve found my MBA more and more useful. Basic stuff like statistics, pricing strategies, etc are particularly useful. I sure that I could have learned this in a book, but there is something about the classroom learning environment that is good for the way I acquire knowledge.

The connections I made during the MBA are very useful. For example, I wanted to test out an idea for a new verticalized product offering at OfficeDrop. I glanced through LinkedIn, saw several classmates who were in the targeted field and had some quick conversations. I could have done this without the MBA, but it was nice to know that there were people who would pick up the phone. And of course the connections were helpful during our fund raise.

I’ve said it before, but my Managing People at Work class was really good. People, outside of the greedy finance world, are pretty fun to manage because it’s not just about the money. My MBA has provided a structure for me to think about this.

I still wish there had been more emphasis on leading sales teams at Wharton. How is this not the most important skill for almost anyone running a company?

The environment of business school is a real problem for people thinking about starting their own company. So many MBAs run for the safety of things like consulting, banking and big corporate positions (and have their post-graduation jobs sewn up with high salaries by the early part of their second year) that you feel strange trying to do anything different. I know for a fact that this atmosphere pulled some potentially great startup people into the boring safe jobs. My friends at Stanford and Harvard who started their own companies said they felt this pressure there too, so I think it’s safe to say this is a pretty standard MBA program problem.

And, finally, business school loans are the bane of anyone looking to start a company because they destroy so much free cash flow.*

Those are my current, unfiltered, thoughts on my MBA. Just as my position has changed over the past year I’m sure it will change again. Would love your comments, and don’t forget to read Matt’s post!

*On a somewhat unrelated note, does anyone else think that student loan situation in the US is the major cause of the educational cost inflation that we have here? In other words, because the federal government makes loans so easily available it is driving up the cost of higher education? I’m starting to think that government policies may be part of the reason that education is becoming so expensive - flood a market with cheap financing and the asset prices will go up??

72 venture capital funds raised $7.5 billion in the first half of 2010. That is an increase of 13% (on a dollar basis) from the previous year. But it’s way less than the $14.2 billion raised in 1h 2008. Dow Jones has more info.

The folks over at Wordstream have just raised additional capital. $6 million in a Series B from Sigma and Egan Managed Capital. Sigma is the return backer; the Egan is the new player in the deal. MediaPost has an interesting story about one of the reasons Egan decided to invest. Worth a read. And congrats to Wordstream, another Boston area company, on the fund raise.

I have just re-read for the third time Steve Blank’s awesome post on business plans vs. business models. I have been thinking about something writing along a similar idea for quite a while, but obviously don’t have the same level of experience as Steve Blank! However, since I’m currently living this I feel like I can justifiably write about it.

My startup, OfficeDrop, doesn’t have the traditional 30 to 60 page word processor written business plan. We’ve written a lot down, but haven’t created a traditional 60 page business plan to supposedly guide our growth. And the writing we do do is usually done in a slide deck.

Steve writes about capturing a business model on slides. We’ve sure got a lot of slides! They are a good way to put our thoughts together and communicate them with each other and our investors.

I think the most important document in our startup is our financial model, which is build in a spreadsheet. It “memorializes” our assumptions and contains our results from operations. (I say memorializes in quotes because our assumptions change pretty quickly.) I call it our “business model.”

I prefer spreadsheets for business models, probably because of my financial background. I like the ability to put the important assumptions into a “living” sheet, so that when an assumption is changed the entire output changes and then compare actuals to our key assumptions. You don’t quite get that flow in a PowerPoint presentation or a Word doc.

We need to know how much experimenting we can do with our current pot of cash. We also need to carefully monitor the cash we gain from our revenues. As the marketing guy, I also need to understand the cost of acquiring a customer and how much they are worth - (stuff like churn rate and average monthly revenue per customer really matters to me.) A spreadsheet allows me to automatically update at the end of each month and compare against the assumptions. Oh yeah, and understanding the initial cash flows of our startup is pretty important. Spreadsheets do that, not Word docs or PPT.

Spreadsheets do have problems capturing some of the pivots a startup has to do. For example, we have just release a free desktop scanning software download that helps get paper scanned directly into Google Docs from most standard scanners. This is a pretty big departure with our current model of providing subscription scanning services and online document management. But it is a test that plays off our all of the technology we developed and all our experience in cost effectively scanning small batches of paper documents.

What is the problem with a spreadsheet as the basis for a business model during a pivot? Well, I think we understand the costs of launching our desktop software, which are captured in the spreadsheet. But the upside is a lot more complicated. The issue I find when introducing a potentially major change in a business model captured in a spreadsheet is that it takes a freaking long time to create a legitimate Excel model vs. a legitimate potential strategy captured in a PowerPoint slide. But as we test our assumptions and generate data, I’ll be sure to fill out our spreadsheet and see where the chips are falling.

On a side note:

I do think business plans have a purpose and could be useful for a traditional set of startups. If I was launching a restaurant or a law firm, I’d probably write a business plan. Obviously I like to write, and putting things down in a structured business plan could be helpful when business innovation is less important than finding a way to make an existing business concept work. The nice thing about a lot of the business plan templates floating around is that they are a bit like Mad Libs for starting a business. But I’d still build a financial model spreadsheet!

Rapportive screen shot

I’m really getting into Rapportive, which is a simple CRM built into gmail. Basically, it looks up the person with whom I’m exchanging emails and lets me know a bit about them. The source mainly seems to be LinkedIN and Twitter - it’s very interesting to see the person’s most recent tweets…

Rapportive is helping me quickly understand the people who are emailing me. I’m optimistic that the team at Rapportive has found a good venue for developing a cool point of view on the next generation of CRM applications. I’d encourage gmail users to check it out!

This is a funny and surprisingly high quality video by the grasshopper.com team. You’ll get a kick out of it if you are into the social media scene - or if you are into making fun of the social media scene…

Congratulations to Mike, Bruce, Sandro and Bill of DataXu for raising a Series B investment from Menlo Ventures, a well known Silicon Valley venture capital firm. Atlas Venture and Flybridge, the Series A investors, invested in this round as well. I got to know the DataXu team when I was with Atlas and worked on the Series A investment. Mike has a great team and some solid technology.

I think it is great that important West Coast VCs are making follow on investments in the  Boston area - another prominent investment like this is Scale Ventures investment in Hubspots most recent round. When Boston companies are doing well enough to attract capital from outside the region then you know something good is happening.

Also important - while Boston may the the number 2 venture capital pool in the world, it is nothing compared to the capital available in Silicon Valley. When venture firms from San Francisco supplement local New England funds this means that there is more early stage capital available in the region to support innovation - a really good thing! Let’s hope for some more great companies like DataXu and Hubspot. Actually - let’s try to make them ourselves!!!

Betaworks is another newer seed fund with a different model, as mentioned in PEHub. The group focuses on “new media” opportunities. They are really innovating with the structure of their fund - they are actually not a fund. Instead, they have organized as a company. It sounds like they want to be some sort of new media holding company, with some operations internal to the business (either by acquisition or by founding it internally) or by making seed investments in startups.

When making seed investments (as quoted in the PEHub interview) they “invest as little as $25,000, though our average is in the hundreds of thousands of dollars. We mostly join rounds that are a million dollars or less altogether, and we typically participate with early-stage investors that we work with again and again and again.” This is a great spot, as it is clearly underserved.

It’s clear that they focus on internet and online media companies, with investments/ownership of bit.ly, Stocktwits and Twitterfeed.

I think this is an interesting model. I kind of like it. Build it, buy it or invest in it. Pretty fun options.

I guess my one fear as an entrepreneur pitching to this group is, will they try to develop the idea on their own, since they have developer resources and ambitions of becoming a holding company? I’m assuming they will try to handle this sort of an issue like top tier VCs do, and try to avoid these types of conflicts - but it’s to say from their web site how they approach such competitive issues when evaluating investment ideas.

Their web site is not at all like the traditional VC or angel investment group. I appreciate all the cool stuff on the site, but it is a bit confusing to figure out what their thesis, check size and current areas of focus are.