Mentoring Entrepreneurs: My Mindset When Raising Capital

The topic of raising capital has come up a lot in my mentoring sessions. While I am certainly not an expert on raising capital, I have raised 8 different rounds of capital across my 3 companies. So I thought that it would be helpful if I share my mindset. Any VC or Founder friends reading this, please feel free to leave comments. As with everything, below is my evolving understanding of this topic.

Note, there are lots of books written on the topic of capital raising. I am specifically going to focus on my mindset as an entrepreneur with this post.

Know the Landscape

First, it is important that an entrepreneur understands the investor landscape. Here is a simple breakdown:

• Friends & Family:
  • Who: As the name indicates, Friends & Family investors are people who know you very well and love you. They have a high amount of trust in you. They don’t always understand your business, but they do believe in you.
  • Investment Criteria: They love you. They trust you. While they don’t really want to lose money, they give you the huge benefit of the doubt. So they typically just want to see you’re passionate about something. They will invest in an idea.
  • Typical check size: $10k – $20k
  • Use of Funds: This is typically your first money. You need to use this capital to build first version of your product and get some early customers. Be very careful taking this money. Because your family members do not like losing money.
• Angel:
  • Who: High net worth individual who often runs his/her own business, but likes to invest in startups as a diversification strategy. Some do it as a fun hobby. You can find a lot of them at Angel.co.
  • Investment Criteria/Stage: Real product that is working. Customers (2- 5 customers if B2B) using a product that actually works. Note, I don’t know the metrics for a B2C product as that is not my background.
  • Typical check size: $25k – $50k
  • Use of Funds: Build out the product more and get to $25k+ of MRR (for B2B)
• Seed:
  • Who: These are designated funds who invest at early stages. Typical fund size is $10m to $50m. Some get as big as $100m. You can also find them on Angel.co or Twitter. They love to tweet a lot about their investments. Also a simple google search will yield Seed investment funds.
  • Investment Criteria/Stage: These investors want to see real customer traction. Without a track record of prior startup success, you probably need $20k+ in MRR before they will get serious. They may take meetings earlier, but will likely drag their heels until you get into $20k+ MRR. They are going to be very focused on Churn rates, M/M growth rates. Customer interviews. Market size. And need to believe in the founding team. But mostly, they are looking for real customer traction and big markets.
  • Typical check size: $250k – $1m. They like to co-invest with other Seed investors. They will make intros to other funds if they are interested in writing a term sheet. Often they like the validation of other funds joining a round.
  • Use of Funds: Build out the product more. Build a repeatable sales model. Get to $250k+ of MRR (for B2B)
• Post-Seed: This is a new niche of Seed investors for companies with good promise, but need capital before being the size required for Series A. Often these are structured as Convertible Notes as they are a bridge to the Series A.
• Series A:
  • Who:  Typically larger funds. Often a part of a mega fund that can fund you through later stages
  • Investment Criteria/Stage: Series A funds are now looking for $3m – $5m in ARR. With really good churn rates. A repeatable sales model. A big market. Reasonable CAC and a great team.
  • Typical check size: $5 – $20m
  • Use of Funds: Scale, scale, scale. You have proven product-market fit, now you need to get to $10m+ ARR quickly.
• Series B & Later: These rounds are all about scaling and growing (often internationally). If you get here, you will get plenty of advice and you are probably already good at raising capital. So I will focus this blog post on early stages.

My Mindset

Now I want to talk about my mindset when I am raising. I think that this tweet from an exceptional Seed/Series A investor is very illustrative.

**Note, I think there is a typo. I think that he means “500-1,000”, not “50-1,000”.

This ratio has been my experience as well. Given the reality of this low probability process….

I look at raising capital the same as I view early customer sales

• • Segment investors like you segment customers. Just because an investor matches your stage, doesn’t mean they are a good fit for you. Find out who invests in your type of company – industry, business model type, etc. Just like you focus on a customer segment for your company sales, do the same with investors. Be efficient with your time. Don’t take meetings with investors who are unlikely to fit.
  • Build a pipeline. As Jason notes above, you are going to have to speak to a lot of potential investors before you get a term sheet. There is a funnel to capital raising just like your sales funnel. Plan on a lot of “No’s” before get any traction.
  • Iterate on your pitch like you iterate on your product. Assume your first few meetings will go poorly. Assume that you will not get funding from the first few investors that you meet. Use those meetings to learn. Ask for feedback.

• • • I want to highlight the “Ask for feedback” point even further. It is really important that you ask for specific feedback. Don’t be afraid to get really specific. Good questions include, “do you have any concerns?” “Do you have questions about topics that I didn’t cover in enough detail?” And most importantly, ask for the order! By that I mean, specifically ask, “Are you interested in investing in my company and want to take the next steps?” If they say, yes, then great, but still ask for feedback on any concerns or flags. Even if they are interested, there are likely concerns. So you should find them out before the next meeting. If they say no, then that’s ok too. Just ask, “why not?” “What concerned you?” Use those meetings to learn. Don’t try to get a term sheet from your first meetings. Adjust your investor pitch based on feedback.
  • Do your homework. Just like a sales meeting, research the fund and investor before. It matters.
  • Project Irrational Confidence. First time founders often make investors out to be mystical creatures. The reality is, they are business people like anyone else. They are buying a product (your stock) with limited budgets and need to show results. Just like your customers. Getting a meeting with them is no different than any other business meeting. Just relax and have a conversation. Project confidence. Own the room. Control the meeting. Investors respect confident Founders who believe that they are going to change the world. Investors do NOT respect humility. Believe you are going to do the impossible.
  • Know the Ask. Know how much you need to get to the next round’s benchmarks…then double that amount. Then add more. Assume that your projections are wrong even though they seem reasonable to you. You are guessing without historical data. So protect yourself in case the projections are wrong.
  • Show the investor what their money will get. Early stage investors like to fund two things: development hires and/or Sales growth. Show them a roadmap that will happen with development hires. Or, if ready, show the investor how you will fund sales & marketing growth. Show them something that is working with sales & marketing at small volumes, but needs capital to scale.

As I said above, there are many books written on the topic of raising capital. But I believe the mindset of the entrepreneur is critical to a successful capital raising process. I hope that you find these suggestions helpful. Let me know if you have other questions. Now, go get yours!

Mentoring Entrepreneurs: Breathe through the Pain

I mentored a very compelling entrepreneur last night. She has a great background and has built a compelling v1 product in a massive market with little competition. In my view, she is on the precipice of greatness. She asked for mentoring time because she wanted to talk through a business challenge. The challenge was so vexing to her that she had lost sight of how much progress she has made and how close to success she was.

As she was explaining the details of her business challenge, I couldn’t stop looking at her eyes. I have seen those eyes before. I have had those eyes myself. There was pain in those eyes. There was sleeplessness in those eyes. There was fear in those eyes. There was exhaustion in those eyes. I could feel all that without her saying so because I have been exactly where she is currently.

One of my favorite entrepreneurs explained it this way:

“Being an entrepreneur is like eating glass and staring into the abyss of death.”

— Elon Musk

As she ended the explanation of her business challenge, she asked for advice. My response surprised her. I said, “first, I can see pain in your eyes, let’s talk about that before we get to your business challenge.” [which is a very common business challenge, one that I have faced many times and is not as serious as she have made herself believe.]

In my view, creating a company is the single most challenging thing one can do in business. Being a Founder/CEO is a lonely, painful place which no one can understand unless you have been there. It is not a place that I recommend for anyone. But if you are brave enough to take the plunge, you have to be cognizant of the connection between your physical and mental health. If your body breaks down, your mind will too. And then you will make mistakes which will cause your worst fears to occur.

I relayed a story to this entrepreneur which I recently learned. I recently got into hot yoga. When I started, I thought it was a good way to sweat a lot and stretch my aging body. What I have come to learn is that yoga isn’t about stretching. Yoga, in my current understanding, is about holding a pose until the Lactic acid starts to burn in your muscles, and as your brain shifts focus to that pain, having the mental strength to remind yourself to breathe through the pain. To control your breath and focus on it. If you are a yogi, you know what I mean. What you find is that when you control your breath, the pain leaves your mind. After a few breaths, you might be reminded that your arms are supposed to hurt and then they start hurting again. But if you breathe again and focus on your breath, the pain goes away again. I find this phenomenon to be amazing. The Lactic acid build up will slow down with better breathing, but it doesn’t just go away because of breathing. On the contrary, as you hold the pose longer, it is building up more. However, if you control your mind, you can convince yourself that there is no pain.

As you start a company, you are going to be constantly faced with painful reminders of how far you need to go and how close you are to failure. The pain is going to be excruciating. You will feel like you are being punched in the stomach daily. If you are married and have children, the pain is going to be more excruciating. You will feel the weight of the world. My best advice: breathe through the pain and keep moving forward. Focus on what you can control and ignore things beyond your control.

Mentoring Entrepreneurs: Why Customers Don’t Purchase

I had a great mentoring conversation with Boyede Sobitan. He is the Co-Founder & CEO of a startup in the food delivery space, OJAExpress. His business offers food delivery for specialized grocery stores. It is a very interesting business idea for a number of reasons, including what should be a customer base with great word of mouth referral potential. Its pricing model is that they charge a transaction fee. So not a recurring revenue model. We talked about a few challenges, but his biggest challenge was that the sales cycle to convert grocery stores was too long. Once he had grocery stores onboard, OJA could monetize them. But Boyede wanted to speed up the process to convert the supply side of the network.

I asked him, “why are they not signing up?” He didn’t have a great answer. So my advice was to simply ask the customer. Crazy right? Why not just ask the customer why they are not signing up?

At Validately, we did customer research called Sales Win/Loss Analysis. It is a simply as asking customers who recently purchased your product, “Why did you purchase our product?” Or for prospects that didn’t purchase, “why did you not purchase our product?” We hired a User Researcher to conduct the customer interviews, which allows the customers to speak candidly. Note, this is research, not an extended sales process. However, we also asked other sales related questions (such as budget, competitors considered, sales approval process, etc.). And it was GOLD!

How can you do this? Follow these steps:

1. Hire a researcher on an hourly basis to do this project. You can find one on freelance sites like Upwork. It is worth the investment of hiring someone that the customers/prospects will view as independent.
2. Create a list of 15 customers who recently purchased and 15 who have not purchased. If they have been in your sales pipeline for a year, it is safe to assume they are not buying.
3. Create a test script. Questions to consider:
   • What were the top reasons that you chose to purchase our product? (or the flip for losses)
   • What other options did you consider?
   • Why did you choose (or not choose) our product over those options.
   • Walk me through the decision process at your company. Who is involved?
   • What was the most important criteria in your decision?
   • There are many others that you can think of….but you should get the gist by now.
4. Have the User Researcher reach out to the list of won customers and lost prospects with an email that you draft asking for 30 minutes of their time for a $50 gift card. Tell them that you want to conduct this research to make your product better. It is purely for research purposes. Also, note, you should NOT join the conversations. The goal here is to learn, not change minds. Which leads me to…
5. Have the Researcher record the session and prepare a summary report of the key findings with video clips. Tools like Validately are great at that, but you can use cheaper tools if you are on a tight budget. Key is to make sure that they record the session for you to watch with your entire team.
6. Share the videos with your entire team. Schedule a time to discuss their takeaways. It is worth the time to have them stop what they are doing and watch the customers/prospects speak.

Try it. I believe that you will be blown away at the candor that customers will have. They will tell you everything about their purchase decision. You can co-opt their words for marketing material. You can focus on their stated priorities on your home page/marketing material/sales calls. We used the information to change our messaging on sales calls too. Knowing what better to prioritize for new prospects. For customers we won, it was really valuable because it opened the dialogue on getting customer feedback in the future, which we wanted. In general, I have always found customers to be very willing to give feedback if you ask them. Don’t try to sell to them. Just listen. You will be amazed!

 

Mentoring Entrepreneurs: Customer Financing

I am passionate about entrepreneurship. I truly love it. And I deeply believe in equality in our society. And so I decided to put those two beliefs together when I sent out the below tweet:

 

Before I hit send on the Tweet, I thought that I would only get a few responses. I do not have a lot of followers. But it blew up. The response has been overwhelming. I started the mentoring yesterday and the first sessions have gone well. I wanted to share the advice that I shared because I am sure that it is applicable to other entrepreneurs.

The first mentoring conversation was with Jose who is running a SaaS business to generate customer referrals, ReferralVoodoo.com.  He has a nice start to his business. He and his partner have bootstrapped it to 80 customers and 7 employees in only 10 months post launch. Really nice growth without any outside capital! Well done Jose. He has grown his referral software company in a very crowded space by focusing on small, service providers, such as Doctor’s offices. Jose said that he wanted to discuss capital raising. He had just raised some money and was thinking about raising more.

After discussing his business in a little more detail, I suggested a different path than a Seed Round…using Customer Financing. Customer Financing is when you get your customers to fund your growth. That’s the best form of financing because you are not selling equity in your company. So how do you get customer’s to fund your growth? Sell annual licenses.

During our conversation, Jose mentioned to me that almost all of his customers were on monthly plans. Also, the ASP was about $250 – $400/month. He offered a 20% discount to purchase annual plans, but few customers took him up on it. I told him one possible reason that few customers chose that option is because it isn’t worth $50 – $80 in savings to give up the flexibility of being able to cancel the contract at any point. The savings are just not a significant enough incentive. I suggested that he run an experiment. Take a cohort of prospects and only offer them annual plans. Tell them that monthly plans are no longer an option. Do it for just a cohort as an experiment. Guess what happened…

 

At the end of the day, ReferralVoodoo was a great product at a fair price. Taking away the option of monthly plans didn’t change the customer’s intent to purchase. They chose the Monthly option because it was easier and it was given to them as a choice. But that choice was NOT required to close deals.

The real benefit of an annual plan to Jose and his team is that pre-paid annual licenses create negative Working Capital. Meaning, you have cash for a contract that has not been fully used yet. Said differently, you have a year’s worth of cash flow from a customer up front. This allows you to invest that money in growth.

I knew about this option because I did it myself at Validately. Switching to annual only licenses for my SaaS company was the single best operational decision that I made in my entire career.  We immediately went from NEEDING to raise capital (which we likely wouldn’t have been able to do given our churn metrics at the time) to being cash flow positive. We used the cash flow from customer’s pre-paying for annual licenses to grow the team. Our ARR went from ~$350k at the time of the switch to ~$4.5 million at the time of our exit only 3.5 years later. Also our cash in the bank was at its highest level at the time of our exit. It was double the cash in the bank at the time of our prior capital raise.

One word of caution is that you should focus on the word EXPERIMENT in the advice above. I am a big believer that successful startups have to constantly be experimenting. And not just with product or UX, but also with pricing, sales and marketing. Hide the monthly option on your public pricing page for a quarter. See what happens. If it works for your business, it will dramatically change your company for the better.

If you try it, let me know how it goes.

Lessons Learned from Startup #3

Wow, it has been a long time since I last blogged here. Guess I got so wrapped up in my last company that I didn’t have time for blogging. But since I sold Validately in June, I now have time to share my thoughts on entrepreneurship. 

I will re-enter the blogging world by sharing my lessons learned with Validately, my 3rd startup. Here is my top 10 list of lessons learned. I will go into more detail with individual blog posts that I will link to this one.

1. Whatever is wrong with your business metrics, the reason is product. 
   • Marketing not getting enough leads…the reason is product
   • Sales not closing enough deals…the reason is product
   • NPS sucks…the reason is product
   • Usage metrics not growing fast enough…the reason is product.
   • Customer support tickets growing…the reason is product.
   • On-boarding conversion rate too low…the reason is product.
   • Churn rate too high…the reason is product.
2. To get explosive growth, a company needs organic expansion MRR.
3. Pricing is one of the most important aspects of a startup. I learned a ton about pricing, including:
   • You discover the right price by raising your price until you see behavior change. Never ask customers what price they want to pay. Give customers a decision to make on pricing and observe any change in behavior. That means, constantly raising your prices. I will say this again…keep raising prices.
   • Price based on a Value Metric, which means aligning your pricing with how a customer gains value from your product. That also means that as a customer’s usage grows, their fees grow organically.
   • Annual only pricing is game changing. First, it changes the cash flow dynamics of a startup. Second, it raises the bar for the product. The best business decision that I ever made was when I switched to annual only pricing and killed the monthly pricing option. It changed the company forever. 
4. Great Product = Great UX + a limited set of valuable features that solve real business needs + Great engineering
   • The answer is never…that one more feature on your roadmap.
   • User Research is critical. Measure twice, cut once.
   • Include your team in all user research.
   • Cross functional teams focused on outcomes, not outputs is the only way to build a great product. Give a cross functional team a goal and a vision.
   • Ask customers to purchase before building. If you are building something valuable, they will agree to purchase upon delivery based upon a review of a prototype. 
   • Ship early and often. Short dev cycles.
   • Strive for Continuous Deployment, not sprints. 
   • Invest in automated QA early.
   • Invest in IT security early.
5. Culture is critical 
   • Culture starts with the Founder(s), but is impacted by every hire. A talented asshole on your early team can destroy culture. He is not worth it no matter how talented he is.
   • Experiment with everything before committing resources. Build a culture of experimentation. Your team will love it and it makes the Founder’s job easier if the team uses experimentation to discover optimal solutions.
   • Build a culture of performance by sharing business data openly. Give teams goals and have them determine how to measure success. Then have them share those measurements of success with the entire company. It will foster collaboration towards achieving the goals.
   • Remote work and flexibility is highly valued. If you build a performance culture with data and cross-functional teams that our outcome focused, you don’t need to micro-manage by having everyone in the office together. 
6. When scaling Sales, hire the VP of Sales first. Let her build a sales team. Don’t try to scale a sales team on your own unless you have experience building and managing a sales team.
7. Don’t try to solve every problem. Empower your team with opportunity and data to help you solve business problems. Hiding data because you are afraid of data getting out in the pubic is a very bad decision. Trust your team with the company’s business data.
8. Firing an under performer will be welcomed by your team. They know he isn’t doing his job well.
9. Don’t fall in love with raising capital. Keep burn low or become cash flow positive. Control your own destiny. The funding environment is finicky. It can change on a macro event outside of your control. The best time to raise capital is when you don’t need it. If you need capital, you are in trouble unless your metrics are sterling (rare).
   • Be as capital efficient as possible – remote development, work from home, measure everything, experiment before over committing resources, etc. 
   • Constraints force a focused product. 
10. Spend half of your time with customers/prospects. No matter how big your company gets, spend the majority of your time with your customers/prospects.
    • Lead sales opps all the way through closing and on-boarding
    • Answer customer support tickets
    • Join customer research

So that’s my top 10 list of lessons learned. I will got into much more detail on several of these lessons in individual blog posts. Please feel free to leave comments…especially if you disagree. 

 

Why a Founder Sells

I had a “conversation” with Keith Rabois yesterday on Twitter about why a Founder sells his company.  Our conversation was in a response to a blog post by Bijan Sabet in which Bijan makes the case that selling a startup allows a founder the opportunity to create something new. Keith responded that founders only sell a company “out of fear”:

@spcohn @bijan it was the root cause of every one I have ever witnessed. Which is probably 40.

— Keith Rabois (@rabois) October 7, 2013

With all due respect, I think that Keith misinterpreted those situations. Here’s why:

Founders Live in A Constant State of Fear
Founders are always scared. It never ends no matter how much you grow. We live in constant fear of growth stopping, employees leaving, running out of cash, of messing it up somehow or a dozen other things. It is the reason we don’t sleep, but it is not the primary reason we sell.

One Crazy Fucking Journey
It is impossible to explain the emotional roller coaster a founder goes through to a non-founder. It takes an insane amount of courage to risk everything and do it in the open. A founder puts her personal reputation on the line, not to mention the money of her friends and family. Those early days are so hard. Sean Parker likened it to “eating glass.” That’s about right.

The Breakthrough Moment
And then it happens. Product/Market fit. The moment you realize, “I have proof that I am not an incompetent idiot.” Oh damn, it feels so good. Your family is going to make money by believing in you and you don’t look like a fool. You sleep well that night.

The Right Hook
Oh crap, I didn’t see that coming. That hurts a lot. I thought it was going to be smooth sailing, but now it feels like this boat is taking on a lot of water. What happened? Well, I am not going to feel bad for myself, time to put the war paint on again. And shame on me for ever taking it off.

Rinse and Repeat
This battle goes on and on. Starting a company and building it is really hard. And it is really EXHAUSTING. The constant fire fighting, the constant highs and lows. It takes a toll.

And Then One Day..
You look backward. You look at the journey you have been on. The victories and the defeats. Maybe your are now married or you now have kids. Or you feel that running your company isn’t as much fun as it used to be. Founders are adrenaline junkies, and releasing version 7.12 just isn’t the same as 1.0.

How It Ends
The Founder intuitively knows when it’s over. They intuitively know what their company is capable of. What battles it can win and which ones it can’t. More frankly, a founder knows what battles she is capable of winning, or frankly wants to wage.

We Don’t Sell Based on Fear
I have just listed several legitimate reasons why a founder concludes it is time to move on to another battle. There are many others. But one you won’t read is fear. The reason is that we have faced fear for so long by that point that we are numb to it. We take risk in stride by now. Actually, it kinda turns us on in a sick way.

What Keith Heard
There is zero doubt in my mind that Keith heard fear in every single conversation he referenced. Founders love to talk about their fears to advisors. It is a great way to vent. But fear of a new event is just a trigger that forces us to ask ourselves whether we want to fight this fight. The reality is sometimes you just want to take your chips off the table and play a new game. And as Bijan wrote, sometimes that is a great thing for everyone.

What @Dens can teach John Boehner

The shut down of the US government is a great case study for Product Managers and Entrepreneurs. It is a case study on signal vs noise.

Power Users
There is no doubt that all Congressmen have a very loud and ardent set of “customers.” Pick the issue, and you have passionate believers on both sides. These people are absolutely sure that they are correct and anything short of complete capitulation is a sign of incompetence.  Product Managers/Founders often face the exact same phenomenon, although we don’t hold Town Halls that get televised.

The Hard Part
The challenge for any leader when dealing with a group like this is that a Power User’s views are very rarely representative of mass market. [If you need to understand why, read “Crossing the Chasm.” Great book that explains the psychology of a customer base.] Any leader with passionate users faces a constant struggle to objectively analyze data in the face of overwhelmingly loud voices from a niche user base.

FourSquare Example
FourSquare has this problem in spades. For those that don’t know, FourSquare is a mobile app that let’s users “checkin” to locations, thus notifying friends (and keeping a record of) where they visit. It has a gaming mechanism that has inspired a cultish following among a niche group of heavy social media users. As FourSquare has tried to evolve to a mass market product with a business model, every effort to move away from the “checkin” has been met with strong push back from the power users.  The product team wants to be seen as a location search product like Yelp and TripAdvisor. Yet the power users have very strong opinions and are constantly fighting FourSquare’s move away from gamification and checkins.

What to do?

Just like FourSquare, the GOP has a challenge on their hands.  They have a very, very passionate set of customers who are not representative of mainstream Americans but are fighting extremely hard to pull the GOP to its direction.  And like any product manager, the leaders of the GOP have a decision to make.  Do they follow the passionate niche or do they find a way to placate them while not turning off the masses. This is the essence of leadership. Dennis Crowley (the Founder of FourSquare) is doing an admirable job with this challenge. If only John Boehner would follow him on Twitter, he could learn a lot and maybe our government would be functioning as smoothly as the FourSquare team.

How To Avoid Being The Idiot

I wrote last week that there are three categories to any market: the Innovator, the Imitator and the Idiot. This pattern happens over and over again. Once a product shows success, rational people follow with a 99% similar product, aka a “me too.” And while it may be rational, it is a stupid decision. The market always punishes the copycat.

Think Differently
HOWEVER, this post is NOT to suggesting that you can’t enter a market once there is an established leader. Suggesting so would be heretical from a multiple time entrepreneur like myself. The key to second mover advantage is to think differently.

What “Think Differently” Means
This is best explained with a case study.

A group of products were launched in 2011 under the theme “Instagram for Video.” SocialCam was the Innovator, Viddy was the Imitator and there were a lot of idiots. These companies found a loophole in Facebook’s OpenGraph, pirated video from YouTube and growth spiked at an astronomical rate. If you opened their app to do anything beside watch a video of cats, you saw an abundance of features. There were so many buttons it was hard for me to figure out what to do…and I build technology, so I’m not exactly a Normal. Once Facebook shut down that OpenGraph gimmick, all of these companies shrank just as dramatically. And the complex user experience of both products couldn’t engage users. Recognizing this house of cards, the Innovator (SocialCam) sold for $1 per user to a complete sucker, whom I am sure deeply regrets catching a falling knife. That asset is probably worth zero right now, or worse. The Imitator hasn’t been so lucky. The Founder/CEO of Viddy got fired and they had to distribute a huge chunk of cash to existing investors, which is not a good sign for a startup. Because it is video, they are probably burning cash at a extremely high rate. At the end of the day, employees will likely get zero for their efforts. This is a case study in what happens when you do NOT think differently. The key point here is video is different then pictures. Trying to “copy Instagram” larded up the product with features and a confusing user experience.

The Winner
Vine is a mobile app that was founded in June 2012, acquired by Twitter in October 2012 and launched in January 2013. For this example, ignore the tragically bad corporate decision to sell the company prematurely. This case study is on product decisions, not M&A.

Once you opened Vine, you immediately noticed something different. Rather than add features, they removed features. The UI was so basic. All you could do is press a big red button to record. But the biggest change is that Vine only gave a user 6 seconds of recording time. Contrast that with Viddy and SocialCam where videos were often long.  Vine didn’t offer all of the editing features of Viddy and SocialCam (or Instagram for that matter).  It was just a basic app >> a simple screen to capture 6 seconds of video and a simple feed to play it back.

Growth spiked dramatically and hasn’t looked back.  All of this growth was based on users loving the product, rather than a Facebook API gimmick.  If Vine hadn’t sold out, it would be worth as much as Instagram was at the time of its purchase.  And the buyer wouldn’t have buyer’s remorse.

Instagram Copies Vine

In June 2013, Instagram launched a video feature.  Not surprisingly, Instagram’s video feature worked a lot more like Vine than like SocialCam/Viddy.  They set the max video to 15 seconds long and had the typical Instagram filters, but otherwise, it was very much like Vine.  And even with this stiff competition from the leader in pictures..Vine still flourishes.  It is still growing very fast.

The Key Takeaway

Just to make it painfully obvious, the key point here is that Vine won by removing features and simplifying the product.  In short, they did the exact opposite of all of the apps that tried to be “Instagram for video.”  That’s how you win when you enter a market after there is an established leader…Do The Opposite!

The Innovator, The Imitator & The Idiot

There are three “I”‘s of every product category: the Innovator, the Imitator and the Idiot. You can clearly see this pattern in any product category.

Why it Happens
There are many reasons that products follow a herd mentality.
– Strategic reasons (ie to cover a flank).
– Desperation (ie we are failing and have no better idea).
– Bad Timing (ie we were planning a similar product unknowingly and they beat us to market)
– Ego (ie I am awesome and I can do the same thing better)

Once one company in a particular space shows success, the Imitator quickly follows and then the Idiots enter. This strategy rarely works for the 4th or 5th entry. No industry is big enough to support that many products. The common theme among most of these entrants is that their product is a “me too.”

What’s a “Me Too”?
If you try a product and can’t clearly and compellingly understand within the first 30 seconds how it is different then the market leader…that’s a Me Too product. It should be obvious within seconds why someone should switch from the leader to your product. Or at the least clear to a non-user of the market leader why they should choose your product over the leader.

What Scares A Founder The Most

Founders take a lot of risk. They constantly live on the edge of failure.  It gets a little better after achieving product-market fit.  But before then, you are doing a dance with failure.  And during this highest risk period there is nothing that scares founder more than…False Positives

What’s A False Positive?

False positives come in many forms. Here are a few examples:

• “I would totally use that product.”
• “Dude, that idea is sick, I would use it for sure.”
• “Everyone I know would use that.”
• “If you added this feature, I will use this product.”

The common theme among these quotes is that they all come from people not using your product.  The quotes feel great when you hear them. But you must resist every urge to believe them.

Who gives false positives?

• Your friends
• Your family
• Many investors
• Customers that aren’t asked to commit to anything
• Random people you interview or poll that are not asked to make a hard commitment to guarantee fulfilling poll responses

Why is this the scariest thing?
Rejection isn’t scary.  Actually, rejection is great for a founder. Getting “no” is the point of an MVP in my opinion. Founders are resourceful people, and can fix most issues. But one thing we can not do is create time, and time is your most valuable asset. Founders don’t have many swings at the plate. So we must optimize the first attempt at starting a company.  Chasing false positives is deadly.

Why Do False Positives Happen?
This is actually easy to figure out. Founders fall in love with their idea. It is often something they have thought about for a while. And so they (unknowingly) have a confirmatory bias in doing research. They either dismiss negative responses or don’t set up real tests to invalidate assumptions. This last point is the key to avoiding false positives.

How to Avoid False Positives
While it might sound simple in a blog post, I guarantee you avoiding false positives is very hard to do. It is very hard to be a founder and also be willing to learn that your idea or product is not needed by the market. Often you have been successful at everything you have done, and so it seems odd that this would be different. That being said, these are good steps to take:

1. Never put any weight in what your family and friends tell you. They love you too much. They are biased. Ignore everything they say because they are not representative of your customer. This seems obvious but I can’t tell you how many first time entrepreneurs tell me, “everyone I have told this idea to thinks it is amazing.”
2. Always ask for skin in the game for a “yes” from a tester. This is the point of an MVP. To test assumptions based on willingness to make a firm commitment. A commitment from the customer can come in many forms:

• An upfront financial commitment is the best signal. This is hard to get, but a site like Kickstarter is a great option if it is a consumer, non-service product. The story of Zappos’ MVP is a great example for an e-commerce site.  But there are other great examples here.
• Time commitment is also a good signal. People’s willingness to continue to use your MVP is a demonstration of value creation.
• Reputation commitment is a good signal, especially for B2B products. Finding a person willing to advocate for your product to their boss/peers means you have identified a pain point. People are often more concerned about their reputation than time and money.

But You Gotta Ask!
It is amazing how many young founders that I meet are unwilling to ask for a commitment from their testers. Some don’t even disclose what the price will be. They are simply afraid of the answer and this makes their worst fear come true.

In summary

What people say and what they do are two totally different things.  Ignore everything people say.  Without a commitment, you have nothing.