Candy or Pain Killer?

One of the quick tests that investors have historically applied to a new product is, “is this product a vitamin or a pain-killer?”  The investment thesis is, pain killers are great investments because they solve a need immediately and thus should gain quick traction.  Whereas, vitamins, although beneficial, are seen by consumers as “nice to have” and rarely get consumed quickly or at high doses.  Typically, if investors conclude that your product is a vitamin, then they will not invest.  But something new is going on…

Not only are non-pain killers getting funded, they are growing up to be some of the most valuable businesses in the world.  The reason is, they are providing candy to consumers.  And candy is nearly as addictive as pain killers.  Think about all of the great consumer web businesses this applies to:

– Twitter – provides candy in the form of 140-character tweets.  Hard to argue the tweets are a true pain-killer for the consumer.

– Zynga games/Angry Birds – solving the pain of needing to have fun?  That’s a stretch to me.  I think this is about pure enjoyment.

– Even the Group Couponing businesses – I mean it is hard to argue that you need that half price pole dancing class or a massage.  It is just enjoyable, so you sign up.

– Facebook – the mother of them all.  Facebook is almost entirely candy – since the most used features of FB are status updates and pictures.  Maybe you can make an argument that facebook improves communication by solving the pain of not having to type out an email to everyone, but that’s a stretch for me.  I think that people check in several times a day to read posts and view pictures for pure pleasure.  That’s pure candy.

These great businesses have proven that if you provide consumers with an enjoyable service that enlightens their day, you can build a loyal and engaged customer base.  I.e. Candy is really addictive.

Guest Post: Cracking the Code: Women, Entrepreneurs and Technology

The following post is from a guest blogger:

When I started my eco-friendly review website, Ecoscene back in 2007 I did not delude myself into thinking that there were tons of female entrepreneurs out there just waiting to take me under their wings. But, I at least thought there might one or two. Four years later and now on to my third start-up I reflect on my time in this space and what I realize is that by and large  women, and the business organization that are supposed to support us, have just not embraced the technology space.

For example, in early 2008 a Chicago women’s business center announced a business planning competition with a $10k prize, so of course I entered Ecoscene.  This women’s business center up until that point basically put all entrants into three categories:  (1) retail stores (2) hair/nail salons (3) daycare centers.   When I submitted Ecoscene, they literally didn’t know how to categorize us for entry.  We almost didn’t get to enter because they didn’t have the correct code in their system and they could not understand how we made money (advertising).

More recently March 2011, I attended a women’s networking group, again here in Chicago, where all of the women were smart and accomplished professionals.  I enjoyed talking to each lawyer, real estate agent, and banker in the group. But, not one person was a technology professional or a non-service based business owner.

Where there used to be the “old boys club” of white shoe lawyers and uptight bankers, there is now the “young boys club” of millennial with a network of “bros” to introduce them to the right Private Equity investor or Venture Capital fund that will provide a couple million in seed capital. So where does that leave the girls?   Trying to find correct codes for $10k business competition.

Why is this?  Is it because I live in Chicago, with a growing but small tech space compared to NYC and Silicon Valley?  Maybe not, Sheryl Sandberg, COO of Facebook, at a recent Barnard graduation speech remarked, “in part because I work in Silicon Valley, let’s just say I’m not usually in a room with this many women.” Or, is it because women shy away from the more math/science world of technology and development?  Do we fear the highs and lows that come with starting a business?   Are we crippled by the difficult decision of family or career? I don’t know and I’m curious to hear from more people out there? Let me know I’m not alone!

So, in the end Ecoscene won the business plan competition, but I swear it was because we were just so different from everything else they had seen before.  So with the $10k I built Ecoscene and sold it back in early 2010. I think every woman should start a business; it is the most humbling and confidence building career move you can ever make. You will never regret it.

Aimee Heilbrunn lives in Chicago and is currently the Director of Online Marketing at Media Chaperone

http://www.linkedin.com/in/aimeeheilbrunn

The Pitfalls of a 1 Person Focus Group

I was talking to an investor yesterday and his comment was, “I just don’t see myself using this service.”  He went on to explain why he wouldn’t use the service.  His comments were very personal about his specific reasons.  Throughout his diatribe, I kept thinking, “how do I politely tell this person that that is a completely irrelevant point.”  Then I realized, telling him how irrelevant his point was, was also irrelevant, because this meeting was dead.  Move on to others who get it.

This is one of the classic mistakes that investors and business people make.  They hear an idea and immediately personalize it.  This mistake can go in both directions too.  You can over emphasize the value of a product because you like it.  I know I tend to do this.  I think it is natural and happens to the best of them.  See this post from the great Fred Wilson.  The key is to look at opportunities in a disciplined fashion.

1.  Who is (are) the entrepreneur(s)?  Is it an A+ team?

2.  Who is the likely user base and what evidence do you have that this is a need?

3.  If you solve the need, how big is the opportunity?  And how defensible is your position?

Another common mistake I have seen is focusing in on detail that you don’t like in an alpha product.  That too is pointless.  The product will ultimately change significantly.  And if you have a good entrepreneur going after the opportunity, then they will adjust accordingly.  So a more relevant question would be, “tell me examples of how you started in one direction, gained market feedback, adjusted the product and gained success?”  Doesn’t that seem more relevant than whether one person would use a product?

Fun at the NYC Disrupt Hackday

I went to the TechCrunch Hackday in NYC yesterday.  It was a great event.  Actually, I would call it “a must attend” if you are an entrepreneur, are passionate about entrepreneurship, an early stage investor or are looking to hire talented, aggressive developers.

For those of you who don’t know what a Hackday is, here is a basic description (as I understand it):

  • It is an open room where developers come and have 24 hours to put together a new product
  • At the end of the 24-hour period, you get 60 seconds on stage to pitch your new product to a room full of developers/investors
  • There is a panel of judges who vote for winners.
  • The one key rule is you have to start fresh, i.e. no coming with a mostly built product and finishing it.  You have 24 hours to go from zero to product
  • You can come with teammates, or you can get paired up.
  • Most new products leverage APIs of popular products.  In yesterday’s event, Foursquare was very a very popular API to leverage, as was facebook.  However, the winner leveraged Gilt’s

Here are my notes/thoughts:

  1. Very good turnout.  There were somewhere around 110 hacks put together.  When I started BYFAD in 2007 (just 4 short years ago) there was nothing like this going on in NYC.  It is awesome to see!  NYC has become a real entrepreneurial force.
  2. Excellent recruiting opportunity.  You get to see someone’s work product, energy and passion in its rawest form.  I grabbed a few people after their pitches and have a few interviews coming up.  Anyone looking for hungry, talented (albeit young) engineers needs to go to these events.
  3. Any company with an api, should have a presence here.  Groupme had people here and they did a hack.  It is a good branding opportunity to be in the trenches.  It also is a good opportunity to see creative minds work on your product.

In short, if you are an entrepreneur, or get excited by talented, energetic developers trying to change the web, then you should make a point to go to one of these events.   It…Is…AWESOME!

Entrepreneurship is Lonely…But I Make it Worse

I had the below email exchange with my father last night:

Dad: You have done a fine job [with this blog]…The emotion that you showed in the first piece was outstanding and a side of you that I am not sure if I have ever seen before.

Steven: Thanks Dad.  Yes, I do believe there is a side of me that no one in my family really knows about.

Dad: So, why are you holding back?

Steven: I am not holding back at all. Just different context. You don’t see me at work. You don’t know how I handle business, because I never talk business in detail with the family.

Hmmm….stop for a minute Steven.  Think about what you just said.

One truism that all CEOs and Entrepreneurs know is that it is a lonely job.  While you are surrounded by employees, partners, investors, customers, etc. you really never have any one person who fully understands all of the businesses context who you can open up to.  I have been lucky enough to build an amazing support system, including some unbelievable mentors.  I talk to them all of the time about pieces.  I talk to my teammates about pieces.  I talk to my very supportive wife about pieces.  But I have never removed the feeling of loneliness in a business context.  I don’t really know why.  Maybe it is because decisions, and the results of the decisions rest squarely on the Founder’s shoulders.  That’s the best that I can explain it.  I am not sure if that entirely explains it though.  It is just a lonely job.  But I am starting to think that I make it worse than it has to be.

What’s weird is that I do not feel lonely at all in my personal life.  I am much more open.  My wife is my true partner and knows everything.  We have this open dialogue where I can share everything with her.  I also have a very close relationship with my family and several close friends.  In my personal life, I am very open.  But I have this dichotomy in my mind between professional (where I feel lonely) and personal (where I am a very open person).  I compartmentalize.  I don’t know why.

For some reason, when it comes to my professional life, I don’t open up to my family.  This fact doesn’t make sense because these are the people on this planet who care about me the most.  It’s not intentional.  I just usually shut down once I get home.  Part of it is probably my body/mind needing some down time.  When you are a leader of an organization, you always have to be “on.”  But when I am home, in front of my family, I can relax.  It is actually a compliment to them, although, I am not sure they see it that way, which I can understand.  I can understand why my dad feels there is a side of me he doesn’t know.  Because I don’t expose it to him.  Maybe this concept that “entrepreneurship is lonely” is a self-fulfilling prophesy.  Maybe I just figured a mechanism I can use to open up more…this blog.  I didn’t anticipate that benefit when I started this blog, but let’s go with it.  If nothing else, it is a start.

The Hidden Pain of a “Lean” Approach

When I quit my job in 2007 to start a company, I felt prepared.  I had relevant work experience and training.  I felt I was as ready I was going to get.  I just didn’t realize how completely un-prepared I was for hardest challenge that I would face…the personal financial stress of starting a company.

When I left IBM to start BYFAD, Julie and I had a plan to deal with the financial challenges we would face.  You know the saying about what God does with plans.  Well within a few months, our plans changed dramatically.  We had decided it was best for Julie to leave her job and not too long after that we were blessed to have her become pregnant.  All of the sudden, my plan to not take a salary for the first year while I was bootstrapping it didn’t seem like such a good idea.  But we kept going with the plan, even while our bank account kept going lower.

At month 8, one of my co-founders tapped out due to the financial stresses.  I was disappointed, but understood.  The pressure of tight finances was too much, plus he wanted to buy a home for his family.  Hard to argue with that logic.  But I was all in.  I couldn’t give up.  The product was not yet ready to raise a big round, regardless of my desire to get paid a livable wage.  So I kept going…even while my bank account kept going lower and my wife kept getting more worried (rightfully so).

At month 13 (early 2008), I had drained my savings and started withdrawing from my IRA.  Yep, a really inefficient way to finance, but my best (read: only) option at the time.  The business had started achieving modest success, so I didn’t want to give up.  My wife got (rightfully) more stressed about our financial situation.  Our baby was coming soon.

I will fast forward to January 2009.  The “Great Recession” slammed our business.  Our customers put their programs on hold or killed them.  Customers who were highly interested in new programs stopped calling me back.  I was hearing crickets on the other end of the phone.  Do you remember how bad the economy was in January 2009?  At that point, Julie was “done with BYFAD.”  “Time to get a job Steven!  You have obligations to your family.  You have paid your dues to your investors and gave it all you had, but the terrible economy tanked your business.  Not your fault.  Time to move on.”  Boy, was this stressful.  I went to work and it was stress.  I came home and it was worse.  Julie had a good point.  I needed to provide for my family and the money was getting really low.  To make matters worse, prospects were not looking good for the business.  But I knew I had to create an exit before I could move on.  It was my fiduciary and moral responsibility.  I kept focus and two months later we sold the business and my investors are now looking at a great return.

I share this story because I talk to entrepreneurs all of the time about funding.  The Lean Start-up is all the rage right now.  I just talked to two different entrepreneurs yesterday who are married (one with a new baby).  They are both considering doing a Lean start-up approach (aka bootstrapping it).  I am not saying it is a bad approach.  There are real benefits to it.  But I am saying, there is a personal toll that all first time entreprenuers are completely un-prepared for.  And it’s a doozie.

A start-up’s #1 competition…The Back Button

Whenever you are pitching an investor, it is a good sign when they want to dive into the potential competition for your new company.  It means that they buy into your product, market and team and are looking for reasons why this story won’t play out.**  However, while it is a good sign, and a reasonable question, I do think that some investors can over-emphasize this point for a start-up.

A friend and adviser, Yanda, summarizes it well, “a start-up’s main competition is the back button.”  Meaning, you need to capture the customer quickly and provide value right away.  If you don’t capture a customer’s attention within the first 5-10 seconds on his first visit to your web page, then he will hit the back button and go back to browsing last night’s box scores or celebrity wardrobe malfunctions.  It is only once you get them to sign up for your product and begin using it, that you need to figure out how to differentiate from potential competitors who enter the space.  Don’t get me wrong, you should have some vision on how you will differentiate and build a barrier to entry in your product or GTM design.  I am not saying focusing on competition is an irrelevant question.  Rather, my point is, that a grand long-term differentiation strategy doesn’t much matter if you can’t acquire users with version 1.0.

I also like Yanda’s point because it is the right framing for a start-up.  A focus on the back button is an implicit focus on competition, because it is a focus on product differentiation.  But it is a focus on the competition through the lens of the customer, which I think is the right lens to view the challenge.

One last point on competition and your BTE, since most start-ups change dramatically from pre-launch to scaled version, the answer to the competition question will also change dramatically. In some cases, making the initial answer moot.  Start-ups are mostly a bet on entrepreneurial teams.  You have to believe that the team will out-innovate a big company that enters the space late.

In summary, if you have a time block allocated to thinking about competition for your start-up, my advice is focus on the back button for 95% of that time block.  That is certainly your fiercest competition.

** By the way, if they don’t believe in your product, market or team, they probably will NOT spend any time talking to you about your potential competition, and that is decidedly a bad sign.

The Brilliance of Apple is…

I took a class in b-school called Managing Service Operations.  The punchline of the class was that great businesses are integrated and consistent throughout every touch point – internal, external client facing and even outsourced partners.  No where along the process does the focus on the mission stray.  Seems like a simple point…but for some reason it is really hard to get it right.

Firms outsource key components to those who don’t get their vision but are cheaper, others under-invest in customer facing resources, some simply lack the discipline to enforce this focus everywhere in the chain.  Some firms even lack the understanding of the need, and design a flawed go to market plan.  But not Apple.

Yes, they have beautifully designed products that are elegant to use/play with.  Yes, they are leaders in bringing new innovation to market, and innovators usually capture the lion share of a market’s profits.  And yes, a lot has been made about Job’s incessant focus on a closed system.  However, what makes Apple so amazing is this maniacal focus at every touch point.  I was in the Apple store this weekend and was impressed again about the experience.  But one thing stood out among the rest.  They offered a mail in discount for an HP printer to go along with the Mac Pro I just purchased.  But instead of handing me a receipt, they actually helped me fill out the mail in rebate in the store.  The service was impeccable up to that point, but this really topped it off.  I left happy that I just spent a lot of money and felt completely satisfied (not a common feeling for me after I spend money).

It seems that almost every day I read another story about an iPad killer or another threat to Apple’s share.  And let’s be honest, Apple hasn’t cornered the market on great designers or technologists.  But as long as they stay maniacal about a focus throughout the chain, they will continue to be one of the most valuable companies in the world.

When its smart to take a LOWER valuation

A friend of mine recently raised a second round from insiders. No new money. I knew he had strong demand from new investors, so I was curious why he didn’t take fresh money to set valuation. When I inquired he told me something that blew me away – he also took this round’s money at a significant discount to what outsiders valued the business.  What?!?  You turned down a significantly better value at basically the same terms?  My response was, “I am really intrigued to understand why.”

His answer changed me from “that’s crazy” to “that was really friggin smart.” Here were his reasons:
1. Taking insider money at a discount allowed him to keep exit flexibility. Meaning the exit value he needed to provide a great return for his investors was much lower. Current investors were averaging up, but still had a basis significantly lower than fresh money. He is in a highly competitive, fast growing industry. Who knows what the future will hold?  So he kept complete flexibility to hit “eject” when he feels the market is right.
2. He didn’t have to give up a board seat.
3. Speed. No doc negotiation. No management distraction. No hassle. Just get it done and keep focus on the business.

So there you have it. I am convinced he made the right decision. How about you?

Strategics in Seed Round?!?

I am out raising a seed round and I have recently heard from a number people that the venture arms of large media companies are investing and seed rounds and want to talk. My initial reaction was..”what?”  My second reaction was “those guys don’t belong at the dance.”  But then I cooled down and have been thinking more about the pros and cons of taking money from a company that is not a pure investor this early in the product/company history.

Case against:

I must admit upfront that my bias is to stay (far) away from big companies this early in a product development (i.e. our alpha version is launching in a few weeks). I have a few concerns:

First concern: big companies and entrepreneurs typically mix like oil and water, if not oil and fire.  There are a few reasons for this:

1. Big companies typically don’t get entrepreneurs, and vice versa.  After working at both big companies and start-ups, I believe that the main reason they don’t “get” each other is that the skills it takes to be successful at a big company are diametrically opposite of what it takes to be an entrepreneur.  This is not a knock on either side, just a statement of fact.  Entrepreneurs have to break things.  They have to do things that don’t initially make sense to most people and often don’t have a near term (or clear) monetization plan.  They have to start one way and pivot quickly. Big companies have big brands that most of the time have been around (and consistent) for a long time.  A very different beast.  Here is a test: if you are a person that gets excited about stealing a few points of share by better packaging or a great ad campaign, then you are not an entrepreneur.  You are a great big company executive, which is awesome.  But if you want to disrupt an industry and look at an entrenched incumbent and want to take 100% of their customers and revenue, then you are an entrepreneur.

2. Big companies often don’t have the patience to let the product mature while delaying monetization. They think quarterly numbers are more important than investing in the future.  Which is not to say they don’t think investing in the future is important.  Just of lesser importance.

3.  Big companies have big brands to protect, and thus don’t have the same tolerance to push the boundaries or break things that a venture-backed team has.

When I worked in DoubleClick’s M&A group, we did a couple of these deals.  And I don’t think they ever worked out as desired (for either side).  Simply put, companies optimize for products they own 100% of, and that makes sense.  Big companies optimize for big products that they own a 100% of, and that too makes sense. Heck, big companies often kill their own young, let alone a minority investment.

Second concern: there is also the risk of losing neutrality that could turn off users or potential partners.  Let alone a potential acquirer.

Case for:

I can think of two benefits for taking money from a strategic early on.

1.  They can bring value beyond cash, i.e. potential product integrations.

2.  Typically they add a level of credibility that can help with market validation.

I recognize that my above analysis is heavily text weighted towards the cons, so I would love your thoughts…