Nat Turner

"Like technical debt, management debt is incurred when you make an expedient, short-term management..."

Sun, 12 Feb 2012 22:48:15 -0500

“Like technical debt, management debt is incurred when you make an expedient, short-term management decision with an expensive, long-term consequence. Also like technical debt, the trade-off sometimes makes sense, but often does not. More importantly, if you incur the management debt without accounting for it, then you will eventually go management bankrupt.”

- http://bhorowitz.com/2012/01/19/management-debt/

Build partners

Sun, 12 Feb 2012 21:02:00 -0500

In startups, I’m a big fan of “you don’t know most of what you don’t know.” This essentially translates into you don’t know anything when you’re just getting started, which many entrepreneurs can relate to. Looking back at Invite, it is utterly amazing at how little we knew about the ad industry, how to build a company, how to run an engineering team, etc… when we were just geting started (and for awhile after that).

One of the ways we tried to shortcut that problem was by accepting that we needed a “build partner,” which was our term for someone extremely knowledge about the space we were entering and was willing to be a “super advisor” as we built the product/company. They weren’t an employee, but were vested in our success via a sizeable equity grant that was more substantial than a typical adviser (and ideally also a personal angel investment if they’re able to).

They key for us entering the ad tech industry, which we knew nothing about, was to find a build partner who knew a ton about that space. They could teach and explain in english who all the different players were and why (often times what companies say on their website differs greatly from what they actually do), introduce us to key players and customers, and most importantly give critical feedback on our product builds. We also knew we needed someone who had experience in general company building, not just ad industry knowledge, as we had never built or managed large teams, sold deals into major companies, etc… It’s hard to find someone who can do all of these things, so typically it’ll be an entrepreneur who successfully built and ran a company in your space (and even better if they successfully exited). It’s also a good idea to get someone who can put themselves in the shoes of your potential future client, so-as to help you achieve “product market fit” (perhaps it’s someone who could actually be a client when the product is ready).

At Invite, we had so many great advisers along the way, but the “build partners” who really stand out were Brian O’Kelly and David Brussin. Both had built and sold very successful companies (Brian’s being directly in our space), were generous with their time, and were willing to take us under their wings to teach us about building a product and company. We couldn’t have done it without them.

So what’s the point? If you’re starting a company for the first time, or even if you’re a successful entrepreneur but is entering a brand new space, sometimes simple advisers aren’t enough (and you definitely won’t be enough). Find a partner who will help you build the product and company as a super adviser of sorts, compensate them with equity accordingly, and treat them as part of the team even though it’s your responsibility to execute.

New Way to Pay Doctors

Sat, 11 Feb 2012 12:47:00 -0500

UnitedHealth, Nation’s Largest Insurer, Is Latest to Announce Fee Overhaul

This is really big, if they actually go through with it and roll it out in a big way. In my opinion, one of the biggest structural problems with our healthcare system is that the incentives are all screwed up. As a result, and as Jon Stewart smartly said, it’s one of the few systems where literally every side thinks they’re getting screwed and not one comes out on top. Healthcare providers think they’re getting screwed by the insurance companies, the insurance companies think they’re getting screwed by the healthcare providers, and patients/consumers think they’re getting screwed by everyone.

The “fee for service” model our nation currently employs to reimburse healthcare providers means that the more surgeries a surgeon does, the more revenue they make. And because there are no caps on overall revenue (just on a per surgery basis in terms of the reimbursement rate card from insurance companies), the incentive for the surgeon is rightfully to do more surgeries. The more MRI’s and PET scans a center can do, the more revenue they make, etc… It’s not aligned to getting patients better.

There are certainly hospitals and groups that put the patient first, such as Mayo and St. Judes, but they are in the minority from what I’ve seen. And while there are initiatives such as bulk paying healthcare providers and the creation of accountable care organizations (ACO’s), these are still struggling to become widespread and lack widespread support in Washington.

Until then, it would be great to see insurance companies try to hold their healthcare provider network more accountable for their results, and I suspect you’ll start to see more providers start to “verticalize” their offerings by introducing their own insurance plans or vice versa. The struggle insurance companies face is that you can’t control the care of the patient if you’re not the provider, and if you’re the healthcare provider you can’t control how much you’re getting paid. Healthcare groups such as Kaiser and GroupHealth have proven that this model can work, and may be the only solution in our current system to truly do right by the patient and control costs.

Ideation

Mon, 06 Feb 2012 22:20:00 -0500

I’ve pretty much decided in my head that no one, except for a few people, have that lightbulb in their head that goes off from time to time with genius, entirely unthought of ideas for new businesses or inventions. It’s cliche at this point, but the concept of “there’s no more white space, it’s all about execution” comes to mind. In my experience, both in starting companies and investing in them (although that’s more recent), most companies evolve and pivot into creatures almost entirely unrecognizable from their initial form, with the initial idea being rendered almost irrelevant.

So, as an entrepreneur, where do you get started if there’s no “white space” ideas left out there? That’s a problem Zach and I have been grasping with, whereby we’re trying to find what’s next. It can also be applied to investors, looking for areas that are worthy of investment. My gut reaction to first-time entrepreneurs looking for something to work on is typically just to get started on anything that interests them, and see where it takes them.

One idea that came up recently in a discussion along the lines of ideation is an exercise of looking at companies that have been acquired about 2-4 years ago, and then assuming the acquiring company has sufficiently slowed down the innovation and developed of the acquired asset. It’s often said in the ad technology space, for instance, that the industry goes in 3-4 year cycles. First you had the ad servers, then you had the ad networks, then you had the ad exchanges, then you had the DSP’s/SSP’s, etc…

For example, Successfactors just got bought by SAP. Perhaps in 2-3 years, the “business execution software” space could be ripe for disruption if you assume SAP doesn’t keep the same speed that Successfactors did? I would take that bet over the opposite happening.

Another exercise for ideation could be to look back (this data may be harder to find) at startups that failed, with the goal being to find startups that were good ideas but just victims of bad timing. I think it’s safe to assume that if an entrepreneur starts a company, gets outside funding, etc…, generally speaking the idea wasn’t insane, it was probably just ahead of it’s time (again, exceptions to every rule). Therefore, and it will take some sifting, maybe a good way to find a business to start is just to look back at the startup ashes for ideas that were ahead of their time.

"The business model has worked to attract young aspiring entrepreneurs who were concerned about the..."

Wed, 25 Jan 2012 17:14:39 -0500

“The business model has worked to attract young aspiring entrepreneurs who were concerned about the risks of a startup – many of them attracted by the Samwer’s focus on “execution innovation” rather than “conceptual innovation”, a model followed more by Silicon Valley.”

- http://eu.techcrunch.com/2011/12/15/rocket-misfires-%E2%80%94-samwers-lose-key-people-ahead-of-huge-fund-raising-to-clone-globally/

betashop: Knock-Offs Are Bad Design

Wed, 25 Jan 2012 17:11:33 -0500

betashop: Knock-Offs Are Bad Design:

betashop:

Here at Fab.com we’re all about good design.

Authenticity is part of our soul.

We guarantee that every product we sell is authentic and that we are authorized to sell it.

We offer our own unique graphic designs on website.

Everything is home grown and original.

That’s what good design is all…

Here’s a cool vintage baseball card I recently acquired....

Sat, 21 Jan 2012 23:08:47 -0500

Here’s a cool vintage baseball card I recently acquired. It’s from 1915 and was inserted in packs of Cracker Jacks. Also featured in the set were players such as Ty Cobb and Larry Doyle. Shoeless Joe, as he was called, is famous for being involved in the Black Sox Scandal in which the world series was rigged.

How to get started

Mon, 12 Dec 2011 12:50:37 -0500

If you want to start your own tech company but don’t know how to get started, the best advice I can give is to go work for one. The earlier stage the better too. Even if it’s just a summer internship, the experience you get from observing how things work (and don’t), doing whatever it takes to get something done, and learning by osmosis is a great starting point. You’ll be glad you did it, as there’s no such thing as lost time when working for a tech startup (even if the company fails).

It’s also a great starting point for plugging into the startup community, networking to find a good co-founder(s), and building up startup skills (which aren’t always the same as big company skills).

Of course, if you already have a great co-founder or can build things yourself and also have an idea that you’re inspired to get after, just get started. What’s the worst that could happen?

Talk to Adaptly: Introducing Adaptly Momentum: Combining Paid, Earned, and Owned Social Media Metrics

Wed, 07 Dec 2011 13:31:51 -0500

Talk to Adaptly: Introducing Adaptly Momentum: Combining Paid, Earned, and Owned Social Media Metrics:

adaptly:

Social network advertising is like no other digital channel that we’ve ever seen before. Each social network is a platform on its own with a completely unique, non-standard ad experience. Standard ad banners are nowhere to be seen; instead, each platform has embraced integrated…

"By its own count, Wal-Mart has 460 terabytes of data stored on Teradata mainframes, made by NCR, at..."

Thu, 27 Oct 2011 09:53:41 -0400

“By its own count, Wal-Mart has 460 terabytes of data stored on Teradata mainframes, made by NCR, at its Bentonville headquarters. To put that in perspective, the Internet has less than half as much data, according to experts.”

- http://www.nytimes.com/2004/11/14/business/yourmoney/14wal.html?_r=1

Adzerk Team Blog: DevOps at Adzerk

Wed, 19 Oct 2011 12:26:30 -0400

Adzerk Team Blog: DevOps at Adzerk:

adzerk:

“A system of local optimums is not an optimum system at all.” - Dr. E. Goldratt

DevOps, the mutant offspring of software development and the subsequent operations to keep that software functioning, is typically an abberaration for most organizations. Most engineering groups create a cultural…

"There are two times in my life the hair on my arms has stood up: The first time I saw the ceiling of..."

Sun, 14 Aug 2011 07:23:26 -0400

“There are two times in my life the hair on my arms has stood up: The first time I saw the ceiling of the Sistine Chapel and the first time I saw Sandy Koufax throw a fastball.”

- http://en.wikipedia.org/wiki/Sandy_Koufax

Startup advice: define who your customers/users are

Thu, 11 Aug 2011 10:08:00 -0400

In a B2C startup, you’re going to have users/consumers using your service. In a B2B startup, you’ll be selling your service/product to businesses. In each case, it’s important to put in the time upfront to define who your customer/user is and revise it over time. For one, your customers will define what your product evolves into over time, based on their feedback and requests. Second, your sales strategy will be much more effective and focused when your sales team knows who your ideal customer is and who isn’t. Lastly, you’re doing your customers a diservice if you’re not organizing them properly and keeping them informed about where the product is headed, and how your product strategy impacts them (as hopefully they’ll come to rely on your service/product).

Some examples of how to break out customers could be how large of a company they are (based on revenue, # of employees, etc…), geo location, business model, public or private, etc… Or perhaps it’s that you’d prefer that the ideal customer have an existing team in place who could use your service and/or has previous experience with a different product (which may require research/exploration to find out). Or any combination of these.

Some reasons for doing this could potentially be needing your first few clients to be located near your office for easy-access support. Or perhaps your technology isn’t able to be operated internationally yet. Or perhaps you realize that it’s harder to scale a business to long-tail customers with what you’ve built, so you need a higher “revenue to sale” ratio (i.e., each sale you make has more dollars behind it) until you are able to build a self-service version for smaller businesses that scales better. This definition can and should also change over time as your service/product/team matures and grows (presumably over time your goal is to grow revenue, which probably means needing to support a wider group of customers).

From a product perspective, it can be very dangerous to be undisciplined at who you sell your service to and provide access. For instance, if you have a set of customers that falls into the minority, they’re going to provide feedback on what they want to see in the product (as they every right to do so having been given access), and that will ultimately affect the majority. For some reason, the clients you shouldn’t be listening to are often the most vocal at what they want in the product. Most startups also do not have a very disciplined product management process (i.e., which features should we build and under what overall product strategy), as they’re quickly iterating and still figuring things out, so you’ll often find yourself listening to any feedback you can get and building towards that. Remember, just because a customer of yours is asking for it in the product, doesn’t mean you should build it.

At Invite, we make a habit now of at least twice a year sitting down and trying to articulate and verbalize who are customers are. It’s surprising what you’ll learn by doing that. We learned that early on (pre-acquisition) we had been undisciplined with who we sold the system to and ended up having a group of customers who ultimately weren’t a great fit for where we (and the majority of our customers) wanted the platform to head. Perhaps that was because we were a startup and money was money in terms of new clients, or perhaps it was because we didn’t put the in the time upfront to define who our customer was going to be. Like any business relationship or otherwise, it’s tough to go back and fix things like that once they’re started, so it’s important to get right first and ultimately better for both to be transparent. It also should have been no surprise to us that most of the “features we shouldn’t have built” in the platform were from requests we acted on from clients who are no longer on the platform and ultimately weren’t a great fit.

So here’s what I’d recommend. If you’re doing a startup, take the hour or two with your co-founders/key folks in one room and try and articulate and write down who you think your ideal customer is. One time we asked each person in the room to write their own definition down first, and then we went around the room and started the conversation that way. There is likely to be some dissent and disagreement, which is healthy in this exercise (with sales folks typically wanting as broad of a focus as possible, and engineers wanting the smallest). The goal should be to make the definition as simple to understand and as short as possible, kind of similar to how you should be able to describe what your business does in one sentence. In a very disciplined company, this could be paired with financial and market size analysis, but startups do most of this stuff using gut and instinct (and probably should). Next, share this definition with your board and key advisors to get their opinion, and revise if appropriate (and bring back to your internal group). If you have experienced operators in this group, they’ll appreciate the need/desire to focus your attention on a common set of customers. Then, revisit this definition as needed, but no less frequently than annually, to make sure that as your product develops that you don’t need to either expand or contract the definition (again, with appropriate financial and market size analysis as needed). A strong sales org and leader will eventually instill this same sort of discipline on a larger sales team, but this is more for startups.

Startup sales strategy

Thu, 07 Jul 2011 01:32:14 -0400

If you’re starting a company, you’re going to have to sell your product/service to potential customers (at least if you plan on making any money). This especially applies to enterprise software companies or B2B companies in general, as you’re selling to someone who’s job may ultimately be on the line for the “who we’re going with” decision (related post: The IBM effect). Your company’s strategy and style of how you sell your product is extremely important, and like many other things in your startup’s life cycle, is critical to be aware of and get right. It’s the first impression you make on customers, may be the deciding factor on if you get the business, and depending on the company may end up being a major part of your culture.

First, I’m going to assume you’re building a product to the best of your ability and have built an effective product management process. This post is squarely about how you put that product in customer’s faces and win deals. At Invite Media, the company I co-founded, the core concepts of sales strategy became drilled in our head as we faced the market and encountered competitors. We learned we needed to be conscious of how we sold our product and the first interactions customers had with our company, very specifically, and needed to develop a sales strategy that we could teach others as we scaled the organization. In other words, it wasn’t enough to build the greatest platform we could. We by no means perfected it and more sales-focused organizations probably can do this stuff in their sleep over time, but we definitely came to appreciate it’s importance. Over time, as our sales strategy evolved, it ultimately influenced many other functions at our company, such as how we recruited people and raised money. Overall, the day we figured out how to put ourselves in our customer’s shoes was the day we learned how to effectively sell.

My first piece of advice on sales strategy at startups is to not oversell your product. Aggressive sales tactics piss people off, and set a bad first impression. There’s nothing worse than a salesperson who doesn’t take no for an answer and talks out of his ass about the product and promises the moon, and worse is selling a shitty product to begin with. If your product sucks, fix your product. In other words, fix the root cause, don’t rely on sales to win deals. Companies who rely on aggressive sales tactics in order to win business in general are probably compensating for a weak product, at least in my experience (or are knowingly selling a scam). Even more disappointing is when a company has a great product but uses aggressive sales tactics and steps on their own toes with customers, as that’s something that was entirely avoidable. This unfortunately isn’t uncommon in startups, as many founders decide they can’t or shouldn’t sell and “check the box” by hiring a sales person, which can be extremely hit or miss and hard to do without prior experience (a topic for another day).

The reason this is important is that in ad technology (and in most spaces probably), we learned that the best platform/technology doesn’t necessarily win every deal. Like in sports, that’s why they play the games (i.e., don’t declare a winner based on who has the best team at the start of the season). In startups, sales strategy is an important part of the game. You obviously have to have a great product to ultimately be successful, but you also have to be smart about how you sell it. In other words, the winner of a deal will have a combination of both a great product and a great sales strategy, and rarely does one win being extremely heavy on one side. As an investor or acquirer, if you did have a company on one end of the spectrum and thus wasn’t properly balanced, you’d obviously love to see a company on the “great product, horrible sales strategy” side, as fixing sales strategy is way easier than fixing a shitty product. This even applies to companies with no actual sales people and a purely self-service system, whereby the sales strategy ends up becoming your accessible messaging, how you offer the product online, etc…

At Invite, our sales strategy was very simply “educate the potential customer on the Invite platform, answer any and all questions, and be confident that we have the best platform and that they’ll ultimately chose us.” As a side note, that doesn’t mean we took the initial meeting and then just sat around and hoped they emailed us back; we did our fair share of following up on next steps and checking in if we had mutual expectations to move the process along, but we made sure to never cross the line of being aggressive. Ultimately, if the customer picked someone else because the platform was lacking in an area they required, either we needed to decide to fix that in our product or decide that client wasn’t a fit for us because what they were asked for wasn’t going to be in our roadmap (and both happened a lot). That’s why things like the product feedback cycle (i.e., reducing the number of “layers” between a client’s product feedback and your engineering team) are important, which I’ll mention again later in this post. These are the kind of questions you’ll need to go through, and it took us while to get there (and still wasn’t perfect).

My second piece of advice is think extremely hard about the incentives you give your sales team. The world is run on incentives. You as a startup founder are incentivized to work until midnight because you own equity in what could become a valuable company (if you work hard). Sales people you hire by nature are highly motivated people just the same, largely motivated by their short-term monetary compensation (like we all are at the end of the day). They’re often the most highly paid employees at companies, for both good and bad (if not managed correctly) reasons. Because of how companies have structured sales teams for decades or longer now, things such as commission plans and financial incentives based on sales success have become standard parts of packages. Don’t accept this standard if it will create problems for your sales strategy. I’m not saying hire sales people and don’t hold them to quota’s and such. But maybe you should think about creating metrics or key objectives that you can track with your sales team that align with your goals (which could change over time) that make sense for your company. For instance, if your goal in the first year is to educate the market and bring on a few early adopter clients, try and make your incentives focused on a mutually agreed upon goal of “bring on 2-3 clients who fit the following characteristics”. Or, figure out how to politely get feedback from clients on how happy they are with their choice of picking your product and incentivize your sales team on those results. My favorite pay packages for patient and confident sales strategy companies are where there’s a defined separate bonus amount that is released upon a mutually agreed upon set of goals, set no more frequently that quarterly and no less frequently than yearly. You may lose some people to this structure who perceive it to have less upside and be more subjective, which is fair, but maybe those aren’t the people you want. Of course, the best cure-all for many of these issues is to put off hiring a sales team and do most of the sales yourself as the founder. This can only last so long as you need to grow faster, need to focus on other aspects of the business, can only do so much as one person, etc…, but founders who sell know the product better and can generally do a great job of it if they have the right personality and sales demeanor.

If you do hire sales people, hire sales people who can discern what clients are asking for in your product and can effectively work with your product and engineering teams to improve the product based on that feedback. That doesn’t mean hire a sales person who can code, as that’s a rare thing, but hire a sales person who is comfortable with technology if you’re a technology company, is smart enough to dig into basic tech details, and is a willing and capable listener but also communicator (what good is listening if you do a crappy job of explaining what you heard to the person who needs to build it?). It’s always a scary thing when you see a young company with a product that’s still evolving put a junior or incapable sales person in front of their early clients, and the customer provides all sorts of valuable product feedback that you know won’t ultimately get back to the engineering team in a meaningful way (or worse yet, doesn’t get the feedback in the first place because he didn’t know what questions to ask or didn’t given the customer a chance to speak). Customers really appreciate sales people who understand their needs, understand the product, take the time to listen, and can trust that what they’re telling them is actually being taken back to the engineering team properly. This will build confidence in your product and team that the customer can rely on. It all starts with that initial sales strategy. That’s another reason why it’s great to see founders do a lot of the initial sales, as the product feedback is never more important than then and the founder(s) should know their product better than anyone else at the company.

Another important step is to as the founder, lead and help craft a definition of and a list of characteristics of who your ideal customers are. This is especially important in B2B companies, as every company is different and can be highly complex. If your industry is small enough, this may be an actual list of potential customer names. Making mistakes here are hard to fix if you bring on a customer that isn’t a fit (for both sides). It’s kind of like a golf swing and alignment. You could have the greatest swing in the world, but if you aim at the wrong target and still make the perfect swing (or perfect sales strategy), you’ll still miss. Do you work with agencies or advertisers, or both? Each has it’s own implications for sales strategy and ultimately servicing if you win the deal. Do you only want to work with customers who have a certain number of employees? Or who are or aren’t using a particular piece of software or have previous experience with it? You can always update this definition and/or hit list, and should. The more effort you put into defining who is your ideal customer upfront, the better focused your sales team will be and the less time you’ll waste of your potential customers. Why meet with a company/prospect and confuse them and/or sell them on something you have no intention of delivering or isn’t a fit if you could have known that upfront?

My last piece of advice is to track as much as you can, as you can’t improve something you don’t measure. Figure out close rates on deals for starters. If you have multiple sales people, track performance and patterns across people. Use systems like Salesforce to organize and track stuff like this. If you have a really low deal close rate, you could either have a shitty product, a shitty sales strategy (and/or people), or you could also even be pitching the wrong clients (or all of the above). Figure out what it is. Use data to help you figure out how to adapt and evolve your sales strategy. In this process you may learn that your market is too small, or that you’re building the wrong thing, or that your definition of who an ideal customer is was too broad or too narrow, or that your sales people aren’t effectively able to sell your product. Always be learning.

As a final note, this isn’t re-inventing the wheel and hardly scratches the surface on the topic of sales strategy. There are plenty of better articles on the basics of things like aggressiveness and the concept of sales strategy as a whole that are extremely helpful and way more in-depth than this post. I highly suggest doing your research on the topic of sales strategy as much as anything else.

Thoughts on building startup technology

Wed, 22 Jun 2011 16:31:33 -0400

About 3-4 times a week I get the privilege of talking with soon-to-be or first time entrepreneurs, most of them still in school. It’s a great thing to see and support, as I agree with others that many of the great new companies are founded by younger folks. As I’ve written about before, it’s not surprising given that starting an innovative new company often requires fresh thinking, lots of time, and the ability to focus with few life obstacles getting in the way.

However, in a large percentage of these chats, the question is asked “I have an idea, but how do I build it?” Generally this question comes from founding teams who lack the technical ability to build what’s required to launch their startup idea. It’s a fact of business that it’s way easier to come up with an idea than to build one out, so it also shouldn’t really be that surprising to hear this question a lot. To be fair as well, this question isn’t exclusively asked by student entrepreneurs, and is probably just as common if not more so from older founders who didn’t grow up using Facebook. So, this post is about that next post-idea step on options you have to build your startup technology.

Outsourcing startup technology is risky, hard to manage, and should only be temporary.

One of the most common options a first-time entrepreneur will first explore when they think they have a great idea but can’t build it themselves is to look to outsource it to someone who knows how. You see this a lot from business school students with no technical background but lots of classes in classic management and case study analysis. In more than one of my early companies I tried this path, and learned a lot. I’m sure there are plenty of examples of this working out, but let me highlight the risks:

Training and managing outsourced teams takes time. This is true for any project you have to outsource. First, you need to train the team who knows nothing about your idea (and potentially space) so they have the right context to build the right thing. Then, you have to manage the entire process (generally remotely) to make sure they do it correctly. Often this will take more time than it would have taken to look to find and bring on technical folks as either co-founders or employees in-house (which I’ll explain is the optimal path). In short, outsourced projects are huge time-sucks and are really hard to manage.
It’s slower and takes longer to implement client feedback when your tech team isn’t right next to you. Without question you move slower if you outsource your tech. You simply cannot look over your shoulder to your co-founder to implement a product change or fix (or do it yourself) when your team is outsourced. Startups require speed of development to succeed, so this is a major risk. The product-feedback cycle needs to be as short and fast as possible.
The quality of work may be sacrificed. Outsourced teams aren’t incentivized like you are. They’re typically project-based consultants, incentivized to get the job done, get paid, and then move on to the next project. You could always try and bridge this gap by giving equity to the development shop, but that doesn’t always work and the numbers may not make sense. Because of this, expect corners to be cut and general quality to be lower than had you done it yourself.
It’s a red flag to potential acquirers. It’s no surprise that a large part of your company’s value will probably end up being its technology, especially in the software industry. Potential acquirers are also heavily buying teams these days, with a huge emphasis on engineering. As such, fostering your own engineering team and building your technology in-house will end up being a huge asset (and said conversely, a huge liability otherwise). I know first-hand that when we were being acquired, our potential acquirers were extremely interested in how our technology was built and who built it, and largely based their “who to buy” decision on that.
It’s a red flag to potential investors, for the same reasons listed above.
Spreading around your idea to people you don’t know. Ideas are cheap these days, but it generally is a risk to openly discuss your idea with people you don’t yet know or trust and who are also capable of building. Angels and VC’s who have a major reputation to upkeep and who likely cannot easily build your idea the next day are a different story (and often times are beneficial to openly discuss with), but a small development shop no one has heard of may be different. This may be overly paranoid, but I’m sure an entrepreneur has seen his/her idea built by a development shop he/she thought was building their prototype (Facebook anyone?).
IP rights. Be sure that you own any IP that an outsourced firm may build for you. It may seem obvious, but you’d hate to see that development shop be able to claim one day that they own the code that you’re in the process of selling to a major company in an acquisition. Make sure you have rock-solid contracts protecting against this and defining who owns what.
It costs money that you may not have. Outsourced firms are consultants, and consultants need to get paid. While hiring a firm to build your tech may seem like your only option available at first, many entrepreneurs (especially students) may need to raise angel money just to be able to afford to hire an outsourced tech firm. As mentioned in #1 above, I’d rather see that entrepreneur spend that money and their time finding and hiring someone to do this on their team in-house.

With all that said, I have seen hiring an outsourced tech team to build out a startup idea work in one scenario: to build out the initial demo and then eventually transition to a full-time team. Even then it’s highly ill-advised in my opinion, but if that’s the only option available and that’s what it takes to get a proof-of-concept, it’s better than not doing anything at all I suppose.

There will also be tons of things you then need to consider and questions to answer when you look to start transitioning the tech in-house, such as language compatibility with whoever you hire and potential service disruptions. Also, just like with needing to train an outsourced tech team on what to build, it’s going to be very costly for your full-time engineer(s) to learn and break-apart what is probably a lightly-documented and rushed codebase built by someone else. It’s very likely you’ll end up entirely scraping whatever tech was built by the outsourced team once you bring on full-time tech folks, which is often the case no matter what, so don’t get too attached to what you paid for.

In summary, my major recommendation is to only use outsourced tech teams to get a first demo/prototype done, and only work with outsourced teams who come heavily recommended. I cringe as an angel investor or adviser when I see a startup hiring someone off of rentacoder or elance.com to build out their startup idea, and with no solid plan on bringing things in-house.

Building your startup technology in-house

This is without question the path you should try your damnedest to go down if you’re starting a technology company. It may also seem like the least possible if you and your co-founders aren’t technical. It’s no surprise that many big name VC’s and incubators only invest in startup teams who are technical and can build things themselves, and there are plenty of reasons why. So, how do you do that if your team isn’t technical?

Learn to do it. Probably not practical and will take a ton of time, but worth calling out. Malcome Gladwell famously said that it takes 10,000 hours to become a professional at something, and becoming technical enough to build out a startup is not something that happens overnight. It’s generally something that started when you were very young, went to school for it, etc… So, if you’re super young and reading this, start learning. If you’re not, read on. Stipulation: no matter what, if it’s a lost cause to become technical enough to build out your idea yourself, you will still need to constantly learn enough and as much as possible to understand how things are built, why they were built the way they are, etc… so that you can keep up in conversations and know your own product in and out.
If you’re in school, use all methods to find a technical co-founder. When you’re still in school you have a HUGE advantage in finding a technical co-founder. Hopefully, your school has an engineering department, and if not there are always a few kids who aren’t majoring in engineering who are extremely technical (often because they don’t need to take those classes). Do everything you can to meet those people. Give equity to engineering professors as advisers and in return ask them to give you the names of their smartest and best students. Start an entrepreneurship club and encourage engineering students to join. Ask engineering professors if you can stand up in front of the class before it starts and give the elevator pitch of your startup and solicit help. Note: many business school students fail miserably at this with their approach and inability to realize their idea won’t get done without this person, so put away your suit and swallow your pride and get to work.
If you’re not in school, work the hell out of your network to find a technical co-founder. If you work at a company, even an investment bank, that company probably has engineers working for it. Do your best to meet these folks and network. Obviously keep in mind things like non-solicit agreements. Go to local startup and tech meetups. Do whatever you can to put yourself in a position to run across someone who is technical and could be your co-founder. Serendipity is a word that could be used to describe how most co-founding teams find each other and come together.
House-keeping, but make sure everything is legally tidy. In other words, just like with outsourced engineering teams, make sure things are well documented as to who owns what and company ownership. Companies these days are built around the principles of any IP and work done by employees is owned by the company, and employees (especially co-founders) own shares in that company. If that’s not the case, you are a contractor, and in that situation make sure you know who owns what in terms of the contracted work. In summary, as soon as its possible and makes sense, make sure you and your co-founders sign the right paperwork to clearly define and structure out the company and IP ownership (and related, establish things like stock vesting). Many startups explode when co-founder relationships dissolve, often creating issues of “dead equity” and worse, who owns what in terms of what has been built or discussed (and they’re not mutually exclusive).

In summary, do whatever it takes to find a technical co-founder(s) who can be in the trenches with you and can build out the startup idea with you together, and obviously make sure things are legally setup correctly. I have written before on best practices on hiring and recruiting which are also applicable here, and there are plenty of good startup lawyers out there such as Fenwick & West, Gunderson, Lowenstein & Sandler, etc…

I hope this helps somewhat answer the question on how to get started when you have a good idea but no technical ability to build it among your co-founder group.

A nice little Brown Trout caught on the West Branch of the...

Wed, 15 Jun 2011 10:53:21 -0400

A nice little Brown Trout caught on the West Branch of the Delaware in Upstate NY

Thoughts on best ways to manage a VC round

Thu, 26 May 2011 09:31:00 -0400

We spent too much time raising money at Invite. Raising money when running a startup is extremely distracting, because every minute you’re fundraising you’re not working on your product. Sometimes I like to think about what else we could have done at Invite if we didn’t spend probably a third of our company’s lifespan fundraising, either full-time or part-time.

However, the flip-side is that if you’re building a startup there’s a pretty damn good chance that you’re going to need to raise money. So, this post is dedicated to how you as the entrepreneur can best manage the fundraising process in order to accomplish two things: (1) get what you want, and (2) get it as quickly as possible. Here’s what I learned:

Know what you want before you start the process. This requires preparation, which often isn’t something entrepreneurs make time for when running a startup. You have to force yourself to prepare for the fundraising process. This includes a few things. First, know how much money you want to raise before you start raising. Don’t be put in a position where the VC is telling you how much you should raise and why. This will require that you have done the necessary financial planning to know what the next big milestone/inflection point is, how many new people/resources it will take to get there, how much money those things cost, etc… There are all sorts of posts written on this preparation, including the golden rule of “take how much you think you need to raise and double it”, all of which should be taken seriously. Second, and for example, you will want to know going in what kind of board structure you want after a fundraising process (since it will likely change). For instance, do you want to keep the size of your board the same? Do you want to add someone representative of your customer to your board? Do you want one of your existing investors to leave the board for whatever reason? Planning for what you want to get out the process makes things so much easier and less stressful.
Set goals/milestones, and track them. This simply means that you want to set some sort of goal for key aspects of the process, and measure them, as you can’t improve anything you don’t measure. For instance, talk with your board and management team (if applicable) around valuation expectations. Setting negotiation tactics aside, this will help set context for various meetings you’ll have and what you’re expecting. It’s well-known that negotiators who have goals ahead of time generally have higher and more favorable outcomes. Also set goals and milestones around how long this whole process will take. My goal at Invite near the end was one month of intro/get-to-know-you meetings, one month of (hopefully) pre-term sheet diligence, partner meetings, etc…, and then two months of post-term sheet diligence and closing (for a total of four months). It may be different depending on what stage your company is at.
Manage the process using Excel. I learned this one from Josh Kopelman of First Round Capital. You’re most likely going to be talking to a lot of VC’s in this process, so you’re going to need to stay organized. Start with an Excel sheet that has a column for the VC name. Add all the VC’s you’ve talked to, one per row, and then add in the ones that you haven’t talked to but most likely will or want to. This list probably shouldn’t be more than 25-30 to start. The next few columns should include basic stuff, such as their location, who you know there, what stage they’re in (ex. seed-stage, late-stage, etc…) since you don’t want to waste your time with someone from the wrong stage, and then other logical columns such as who introduced you so you can keep it all together. Then, also have a column for current status, such as “intro phone call setup” or “partner meeting setup”, as well as an “other notes” column. Then, the most important column, have a “Bucket” column that assigns an A, B, or C rating to each row/VC, whereby A represents a VC who you are highly confident in seeing things progress positively, has a high likelihood (more so than others) of doing a deal with you, you liked the fit with the firm, etc… B represents those who you haven’t written off yet but also aren’t highly confident that you could ultimately expect a term sheet from them either because you either don’t yet know enough or haven’t spent enough time with them. C represents everyone else, which would include those who have said no, those that aren’t a fit due to stage or other reasons, etc… Generally speaking, you don’t want more than 5 in the A bucket and 10-15 in the B bucket (and the rest in the C bucket). The point of this process is to be able to focus your time on the A and B group, and most definitely the A group, and as you learn more from a VC move them into the appropriate bucket. This will help you manage your time and learn to say no.
Be upfront with your process and timeline. This one can backfire if you’re an asshole, so don’t be an asshole. Instead, be polite and upfront that you’re trying to minimize the amount of time you spend fundraising, which anyone can appreciate, and that you hope to complete this process on a timeline of X. See #2 for my example of a timeline, which you can choose to make shorter or longer. You may also consider telling them upfront exactly how much you’re looking to raise, which is generally a great idea and why you prepare (see #2). This will allow you to not only keep them on their toes and organized (which they’ll appreciate), but you’ll also learn things faster. For instance, when you tell them that you need to raise money by X date, you may learn that they can’t move that quickly. Or, when you tell them how much you need to raise, they may tell you that’s out of their range or too small. All of these are good things to know as early as possible.
Get the first term sheet. This a well-known one. VC’s generally act like high-school girls, whereby if one likes you they all do. As such, you’ll be amazed at how much more and quickly other VC’s will start to like you once they learn someone else gave you a term sheet. It’s literally a tipping point. So, you want to put a heavy emphasis on getting that first VC to cross the line.
Make sure you manage each VC to be at similar points at similar times. What I mean by this is, make sure you are giving VC’s a similar amount of information and access at similar phases and on similar timelines, so that when that first term sheet comes across you can call the other VC’s (again, setting aside negotiation tactics), hopefully all the ones in bucket A (see #3) and reasonably expect them to be able to act. Term sheets are temporal things, so if the other VC’s you’re talking to aren’t “up to speed” and able to act (and believe me, they’ll always use the “we don’t have info info/data” excuse) then you may be stuck with just your one term sheet. The same goes eventually for managing the M&A process. This may involve slowing some VC’s down and speeding others up, which is fine and why you are managing this in a spreadsheet so you can keep track of it all. Cross-track all of this against #4 (your intended timeline).
Don’t cross the streams. A golden rule of fundraising. Simply, don’t tell other VC’s which other VC’s you’re talking to. Again, don’t be an asshole about it, but say very politily that “you’re having conversations with others” and feel free to (per #6) share what phase of the process you are with others. Keep them on their toes and tell them if they’re too slow. They’ll ask who else you’re talking to so that they may “compare notes” or whatever else, but at the end of the day you only stand to hurt yourself (read: collusion). It also makes things more complicated, as VC’s have this funny tendency to want to “team up” and make complicated syndicates. There’s a time and a place for those (and plenty written about it), so know if that’s something you want upfront and manage for it.
Be upfront with the potential investors. Taking money from a VC is a lot like getting married. You’ll be going through good time and bad times together, and also spending a ton in a combustible room (board meetings, etc.). Part of the fundraising process should be that you mutually get to know each other. Not only do you need to raise money from them, but you need to be able to work with them if you do end up taking your money. As such, be upfront with your concerns and ask them to do the same. Are you concerned that they’re west coast and you’re east coast? Are you concerned that the partner leading the leading the deal doesn’t have operating experience and that’s something you’re looking for? Again, feedback delivered constructively is almost always a good thing.
Learn to say no. You’ll need to do this more than you think. This may include saying no to a crappy term sheet. Or could include saying no to a meeting request from a VC who either isn’t a fit or is too late. It’s hard to say no, but you’re going to need to in this process more than a few times.
Don’t over-optimize. It’s very hard as an entrepreneur to leave money on the table. But, on the flip-side, it’s very easy to blow up a deal over something that in reality is very marginal. Look objectively at things you’re negotiating for or thinking about doing. Is it really worth potentially burning a bridge with a VC who has given you a good but maybe not perfect term sheet? Think about all of the costs involved, most importantly of which is your time.
Get an adviser who’s done this before. For better or worse, fundraising is very much an art and not something that can fully be taught/learned without doing it yourself. As such, I think it’s very important that you get someone around you who has done it before. They’ll be able to help you think through things correctly, recognize traps, help you maximize value and keep timing moving, and simple things like how to word an email reply to a curious question. We used to joke that the fundraising process is hard for a reason, which is that if you as an entrepreneur can’t navigate the murky waters and get what you want, then how the hell are you going to do that in the open marketplace with competitors? I’ve come to think that’s true and that it may be a good thing that raising money isn’t simple, but either way you should get an adviser who’s done it before.

I hope this helps. I’m sure I’ve left very important things out, as this is one topic that can be approached in many different ways, and like any form of art is hard to exactly define. Feel free to expand upon it in the comments.

"Most of us young kids who play [online poker] at nosebleed stakes don’t really have any clear idea..."

Tue, 24 May 2011 08:26:00 -0400

““Most of us young kids who play [online poker] at nosebleed stakes don’t really have any clear idea about the actual value of the money we win or lose,” Cates says. “Most of us see the money more as a points system. And because we’re all competitive, we want to have the highest score. But really, we don’t know what making $400,000 or losing $800,000 means, because we don’t have families or whatever. This blind spot gives us the freedom to always make the right move, regardless of the amount at stake, because our judgment isn’t clouded by any possible ramifications.””

- http://www.nytimes.com/2011/03/27/magazine/mag-27Poker-t.html?pagewanted=3&_r=1

SOTD: R.L. Burnside - Someday Baby (feat. Lyrics Born)

Mon, 23 May 2011 10:44:46 -0400

SOTD: R.L. Burnside - Someday Baby (feat. Lyrics Born)

Don't assume people are smart

Sun, 22 May 2011 15:16:00 -0400

I learned this one from my co-founder Zach. It may be a controversial/touchy post. We were walking out of a meeting one time and he goes “Wow, that person was actually smart.” I didn’t realize until someone had pointed it out, but he had grown by default to assume someone wasn’t smart. His approach isn’t meant to be rude or arrogant, it is (in my opinion) a very simple and smart way to save time and avoid mistakes of working (or hiring) people who aren’t smart. And he’s probably right, the majority of people probably aren’t what someone would define as “smart.”

All too often, people give other people (including us) the benefit of the doubt for being intelligent. This post suggests that you should flip that thinking around and start assuming someone is not smart until proven otherwise. Why is this important? When you’re running or working for a startup (or many other situations), you’re going to get a lot advice and feedback from all over the place. You’ll also be putting your company on the line with the people you hire (and we all know it’s all about the people). You’ll be choosing to strike partnerships with other companies run by people. You’ll be taking investment from people, and so on.

The truth is, not everyone is smart but way too many people are able to “fail upwards” and get credit when credit isn’t due, or are just really good at faking it. I can’t tell you how many times someone assumes someone is smart because “they worked at company XYZ” or “went to university XYZ” or said “he invested in company XYZ, he must be smart,” or my favorite “he/she has an MBA.” Bad advice taken seriously can be as dangerous as good advice that was ignored. Hiring someone who isn’t smart can detract value from your company and bring down others who are. Taking money from someone who consistently gives bad advice and direction at the board level can be down-right destructive.

I’m obviously not suggesting you use this strategy out in the open and voice your findings. I’m suggesting that this way of thinking can be useful if you internalize it when judging and sizing up the people you’re working or interacting with, which we all do (and should do) in startup building. When in meetings, second question things either to yourself or openly if the situation calls for it. Dig into the numbers and data when available to validate something. Get in a habit of double-checking references when it matters from people you trust (and not only for people you’re interviewing). When interviewing someone, do your best to find out how much of their previous company’s success had to do with them, or if they were just in the right place at the right time. I personally love it when an entrepreneur is pitching me as an angel investor and questions some piece of feedback I give and challenges me on it. Like anything, as long as you do it politely and open-minded, it’s not a bad thing to fight someone on something to get to the right answer.