How to share secrets in a negotiation

Nivi · November 25th, 2009

Last week, I spoke to a startup that was in discussions to license one of their products to a competitor. The competitor asked for historical sales data about the product, and the startup was wondering whether they should share that information with a competitor. Our conversation went like this:











The book I mentioned in the conversation is Bargaining for Advantage. It answers almost every negotiation question. I read the book cover-to-cover — that’s rare.

The answer to this particular problem starts on page 68 of Bargaining for Advantage and there’s a good summary on page 72:

“The solution here is to take your time and build trust step by step. It helps if you can use your relationship network to check the other party out. If that is not possible, take a small risk before you take a big one. See if those on the other side reliably reciprocate in some little matter that requires their performance based on trust. If they pass the test, you have a track record on which to base your next move.”

Almost every problem you run into in a startup is not unique. Someone else has had the same problem and knows how to solve it. With the right advisors (books, blogs, people), you can solve it the easy way, instead of the hard way (experience and failure). Save the risk and innovation for the important stuff.

P.S. If you’re sharing secrets with VCs, read these posts: Three things you should never tell a VC when fundraising and How to Deal with Skeletons in your Closet (and my comment).

Venture Hacks Bookstore

Nivi · November 24th, 2009

“Buying every book recommended by Venture Hacks.”

– Jonathan Grubb, Founder of Get Satisfaction

The Venture Hacks Bookstore is live and magnificent. Check it out.

It contains 8 of our favorite books for entrepreneurs and we’ll be expanding it over time. We don’t recommend a book unless we refer to it regularly.

We’ve sold $13,385.74 of books since we first start tracking sales with Amazon Associates links. Here’s a little taste of the bookstore…

Negotiation

 Bargaining for Advantage
G. Richard Shell
My favorite negotiation book period. It synthesizes the principled negotiation of Getting to Yes with the psychology of persuasion in Influence. I refer to it often. Among other things, it helps you answer questions like “Should I be the first to open? Should I open optimistically or reasonably? What sort of concession strategy works best?” Our full post →

Product

 Extreme Programming Explained
Kent Beck
Revelatory. Develop your product like this book tells you to, unless you know better (e.g. you have experience building operating systems, space shuttles, Googles.) Buy the first edition. Our full post →

This bookstore is the result of a multi-million dollar engagement with IBM Global Services that was three years late, even before it started. Please do visit and up your entrepreneurial game.

Get the best of the startup blogs

Nivi · November 23rd, 2009

“nicely done as always. i can count on one hand the number of daily emails worth signing up for.”

– Matt Oesterle, Sweepery

We read a lot of startup blogs and share our favorites on Twitter. But not everybody uses Twitter. And the folks who use Twitter follow too many people to catch all our links.

So we’ve put together a daily digest that we’re calling “Startup News”. Once a day, you get links to our favorite posts via email or RSS (if you want to read it on the Web, go to our Twitter page).

Here’s what it looked like a couple days ago:

If you want us to consider including one of your posts, submit it to Hacker News — we read it every day. Or tweet it and include: “Tip @venturehacks”.

Try out Startup News for a few days via email or RSS. And please give us your feedback in the comments.

Thanks to Mihai Parparita, whose wonderful Twitter Digest makes this possible.

3 customer development case studies

Nivi · November 22nd, 2009

If you’re trying to implement customer development at your startup, you’ll learn more from these 3 case studies than anything else I’ve seen. I consider each of these a “must-read”. I’ve quoted some great bits from each case study, but make sure you click through and read each one in full.

1. Using an LOI to get customer feedback on a minimum viable product:

“We decided from the get-go that, while we clearly saw the benefits and necessity of our concept, we would remain fiercely skeptical of our own ideas and implement the customer development process to vet the idea, market, customers etc, before writing a single line of code.

“My partner was especially adamant about this as he had spent the last 6 months in a cave writing a monster, feature-rich web app for the financial sector that a potential client had promised to buy, but backed out at the last second.  They then tried to shop the app around, and found no takers.  Thousands of lines of code, all for naught — as is usually the case without a customer development process. (See Throwing away working code for more on this unfortunate phenomenon. – Eric Ries)

“We made a few pencil drawings of what the app would look like which we then gave to a graphic designer.  With that, the graphic designer created a Photoshop image. We had him create what we called our “screenshots” (which suggests that an app actually existed at the time) and had him wrap them in one of these freely available PS Browser Templates. Now armed, with 4 “screenshots” and a story, we approached our target market, some of which was through warm introductions, and some, very literally, was through simple cold-calling.

“Once we secured a meeting, we told our potential customers that we were actively developing our web app (implying that code was being written) and wanted to get potential user input into the development process early on.  Looking at paper print-outs of our “screenshots”, no one could tell that this was simply a printout of a PSD, and not a live app sitting on a server somewhere. We walked them through what we thought would be the major application of our product.  Most people were quite receptive and encouraging…

“On the third visit, we pressed those who saw merit in the idea to sign a legally non-binding Letter of Intent.  Namely, that they agree to use it free of charge if we deliver it to them and it is capable of X, Y and Z.  And not only do they agree to use it, but that they intend to purchase if by Y date at X price if it meets their needs.”

The author of this case study is currently looking for a technical co-founder.

2. proof that we’re not (completely) crazy:

“The few customers we talked to had little in common except for the core problem we were solving. Two had very similar job titles, (let’s call them Ditch Diggers), so we ran a facebook ad with the job title at the top of thead, which was roughly, “Ditch Digger? Feeling spread thin? Click here to complete a survey and tell us about it.” Facebook ads were the easiest because we could pick types of people — we have yet to create an effective adwords campaign. We offered $10 Amazon gift cards to complete a 15 minutephone interview.

“What followed next was absolutely amazing. When we talk to a Ditch Digger it’s like every response has an exclamation point. “Yes, that’s me exactly!”, “I can’t believe you’re building a tool for this, thank you!”, “Here are 5 emails of other people that will want this!”, “It’s only (number that was so high we had to force each other to ask)/month? Great deal!”

3. How I built my Minimum Viable Product:

“I filled out a set of hypothesis worksheets in Steve Blank’s book on product, customer, channel pricing, demand creation, market type, and competition. I would recommend everyone formalize this process. My initial scan of the worksheets made me believe I already knew all the answers. I involved Sasha in the process, and discussions that I thought would be 30 minute conversations turned into 2 hour discussions as she questioned almost all my assumptions… Yes, I still love her after that… The biggest mind shift following a customer development process is from thinking you know something to testing everything you know.

“We built out our initial customer problem presentation and decided to target people just like us – busy parents with young kids.

“Our top 3 problems where:

  1. Sharing lots of photos and videos is a hassle
  2. A lot of services downsize the images so the quality is poor
  3. Notifying family and friends of updates was manual and a chore

“We were able to find the initial batch through friends and daycare, and subsequent batches through follow-on referrals. I’ll add that it is very important to talk to complete strangers to keep objectivity in check. Family and friends can be too kind sometimes and really lead you down the wrong path. We debated paying for their time with gift cards or doing a DSLR camera raffle and in the end decided to just lay out our objectives and ask for 30 mins of their time. That was enough.…

“During the interview, we were particularly interested in learning what their sharing workflow was like. We set up the stage and let them tell us everything they did with their photos/videos taking them from camera to shared, what they wished they could change, and the magical pricing questions: Would they use a solution like the one we were envisioning if it were free? Would they use it if it were $X/yr? X changed from customer to customer but we kept it as real as we could.

“We talked to enough people until their answers started sounding the same…

“Our revised top 3 problems were:

  1. Sharing lots of photos and videos is a hassle (stayed the same)
  2. Requiring visitors to signup is annoying
  3. Photo gallery design was too busy or complicated

If you’re crazy for case studies, I’ve found at least a billion at the Lean Startup Circle. Let me know if you find any good ones there.

Weekend reading

Nivi · November 21st, 2009

Some weekend reading culled from our most popular tweets this week.

Steve Blank and I have a good discussion about his and Eric Ries’ new customer development overlay. Regarding the Atlas Developer Beta, John Gruber says that “Access to the beta program is $20” — this is the new way and I like it. Fake Steve Jobs always has better analysis than WSJ, NYT, TechCrunch, Economist, and your mom combined. I don’t think you need operational experience to be a good VC but Mark Suster‘s great new post illustrates the difference.

I recommend you pair these posts with white tea.

The ignorant VC

Guest Author · November 20th, 2009

Thanks to Atlas Venture for supporting Venture Hacks this month. This post is an interview of Fred Destin — one of Atlas’ general partners — by David Woodward, a journalist and blogger. If you like it, check out Fred’s blog and tweets @fdestin.

A few days ago, I had an interesting chat with Fred Destin, Atlas Venture‘s ebullient technology partner. Atlas bought a stake in the property website Zoopla at the beginning of 2008, which wasn’t exactly a fun time to be involved in the property game. It was also a pretty difficult period to source capital in any sector — all in all an investment climate fit to make even the coolest of VCs twitch. Destin, who has a seat on Zoopla’s board, adds that at that stage, his firm’s investment was in “two people and some PowerPoint slides”, hardly an invulnerable guarantee of success.

It is often said of European VCs that they lack the gumption of the Sand Hill road mob — the kind of formalised chutzpah that turns garage upstarts into grade A businesses. European investors, it is said, need data, data and more data, followed by proof of concept, before they are willing to stump up any capital. And to some extent that remains true. But Destin added an interesting spin.

The problem with European investors, he told me, was that even when faced with unmistakeable proof of concept, they tend to undercapitalise, thus hampering their investment’s ability to scale to its full potential. Put it this way: not many US VCs get accused of undercapitalising a potential winner.

He also did a great job of making early-stage investments sound very much like sticking it all on red and preying to the gambling gods for clemency. Destin says he actually prefers working with unknowns. He says:

“Our job is to manage risk proactively. We don’t think about it as a casino at all. We scrutinise and think about it very hard. But it’s our job to take these shapeless risks. I am early-stage, my natural DNA is around early-stage. It’s tough to make investment decisions without much data, [but] that’s what makes it exciting. Your average market practitioner does not how to deal with that level of risk. You take data away and they panic.”

Conversely, Destin says he revels in a vacuum of information.

“I profess ignorance and I use that as a tool. I can assess market attractiveness. I can assess the management team. We then make absolutely no assumption as to what’s going to work because if you do, you lock yourself into a strategy that you haven’t [yet] proven. You tend to be internally led rather than market led. This is where the risk may seem inconsiderate because you’re willfully declaring ignorance about the market you’re addressing.”

But ignorance allows you to

“…force yourself to be smart. You use what you know in terms of company building, supporting entrepreneurs, discovering the market. We will design the product around what the market needs with an intuition, but then we’ll go and test it. We don’t want to be smarter than the market we are entering.”

And here’s Destin’s view on Europe’s investment weakness. There are, he says, three stages involved in readying a start-up for potential greatness:

“At Atlas we call it ‘prove-build-scale’. You spend very little at the prove stage. You have 6-15 people, spend as little as you can proving the hypothesis. The build stage is [about] scaling up the management team, adding talent, putting in place the technology you need to accelerate. Only when you’re ready can you understand how to scale properly, go into a big investment round and hit the accelerator.

“I think that Europe usually fails on the third category: we tend to undercapitalise the businesses that are doing well. And this is where we get a competitive disadvantage to the US. They have a tendency to overcapitalise early, but when they scale they scale well because they are able to raise repeat large rounds of money to really capture an opportunity.”

If you like this post, check out Fred’s blog and his tweets @fdestin. If you want an intro to Atlas, send me an email. I’ll put you in touch if there’s a fit. Finally, contact me if you’re interested in supporting Venture Hacks. – Nivi

The sultans of startup marketing

Nivi · November 19th, 2009

I recently re-connected with an up-and-coming venture capital Associate who thanked me for introducing her to the masterworks of Steve Blank and Eric Ries. I told her to check out Sean Ellis’ blog, and mentioned that I’ve learned just as much from Sean.

Later that night, she sent me a note: “Sean Ellis is awesome. Thanks so much.” Let me tell you why Sean is awesome.

First, Sean lead marketing from launch to IPO filing at LogMeIn and Uproar. He later worked with Xobni (Khosla Ventures, First Round Capital), Dropbox (Sequoia Capital), Eventbrite (Sequoia Capital), Grockit (Benchmark Capital), Flexilis (Khosla Ventures), eduFire (Battery Ventures)…  the list goes on. So all of his theory is backed by a wealth of experience across a broad range of startups.

Second, his startup pyramid changed my life and increased my bench press by 75 lbs. This is the best model I’ve seen on how to build a startup. Read it.

Finally, he shares a lot of his knowledge for free on his blog. Here are extracts from a few of his posts. Make sure you click through and read all of them in full. I read his blog from front-to-back when I first discovered it (start with the newer stuff).

When Should a Startup Start Charging?

“I’ve recently changed my long held belief that all startups should charge immediately upon the release of a new product.  I now believe that non-enterprise targeted startups should only charge once you have achieved product/market fit.  As explained in this earlier post, I define product/market fit as at least 40% of your active users saying they would be “very disappointed” if they could no longer use your product…

“For startups targeting enterprises, it actually does make sense to charge before reaching product/market fit.  This is the best way to help the enterprise figure out how to get value from your product (somebody on the inside will be motivated to work with you to unlock value since they’ve already spent the budget).  If you haven’t charged anything, your attempts to engage the customer and find value are likely to be perceived as an aggressive sales annoyance rather than genuinely helpful…

“Startups often delay implementing a business model claiming “we’re focused on growth right now.” But once you’ve achieved product/market fit, most startups will grow faster with a business model (I wrote a post on this earlier).  A business model gives you rational constraints within which you can execute very aggressively – otherwise you are held back by fear that you may be wasting money on paid marketing programs.”

The Startup Pyramid:

“Product/market fit has always been a fairly abstract concept making it difficult to know when you have actually achieved it…

“I’ve tried to make the concept less abstract by offering a specific metric for determining product/market fit. I ask existing users of a product how they would feel if they could no longer use the product. In my experience, achieving product/market fit requires at least 40% of users saying they would be “very disappointed” without your product. Admittedly this threshold is a bit arbitrary, but I defined it after comparing results across nearly 50 startups. Those that struggle for traction are always under 40%, while most that gain strong traction exceed 40%. Of course progressing beyond “early traction” requires that these users represent a large enough target market to build an interesting business…

“If you haven’t reached product/market fit yet it is critical to keep your burn low and focus all resources on improving the percentage of users that say they would be very disappointed without your product. Avoid bringing in VPs of Marketing and Sales to try to solve the problem. They will only add to your burn and likely won’t be any better than you at solving the problem. Instead, you (the founders) should engage existing and target users to learn how to make your product a “must have.” Sometimes it is as simple as highlighting a more compelling attribute of your product – but often it requires significant product revisions or possibly even hitting the restart button on your vision.”

To Pay Or Not To Pay To Acquire Users?

“I recently heard a VC say that startups “should spend the least amount of money possible on marketing.”  This is a healthier attitude than the opposite prescription of undisciplined land grab, but a better approach is pure ROI marketing.  Marketing opportunities that offer a fast payback with additional profit margin are a key component for reaching your startup’s full market potential…

“If your growth is accelerating, you will attract competition.  And this competition will likely be savvy enough to replicate the customer acquisition and monetization approaches that you worked hard to invent.  So it is important to make it as difficult as possible for them to get traction.  I know some of you are saying “but your recent post told us to ignore the competition.”  My point was not to ignore the competition forever, simply to ignore them while you are figuring out a repeatable, positive ROI way to acquire customers. Competition (especially those that are spending irrationally) will distract you from this critical task.

“But once you have optimized the first user experience and introduced a business model that generates sufficient revenue to fund user acquisition, it’s time to focus your marketing efforts to aggressively build new customer acquisition channels and scaling existing channels – both free and paid.”

I am a fan. And so can you.

Extrapolating computing

Naval · November 18th, 2009

Image: Hosting Canada

Remember when mainframes did all of the computing? And workstations were dumb terminals docked to the mainframes? The terminals had less power, but were more “mobile”.

Then everyone got a desktop. And the desktop is where you did most of your computing. And you carried around your underpowered laptop, which had to be synced with your desktop, or docked to a big screen, keyboard and mouse to be usable. The laptop had less power, but it was more mobile than the desktop.

Now most early adopters have a laptop as their main computer. And they’re carrying around their underpowered smartphone, which has to be synced with their laptop on a regular basis. The smartphone has less power but, well, it’s more mobile.

We’ll dock our smartphones to our laptops for a while. But, if we can extrapolate from the history of computing, the laptop is headed for the dustbin.

Which means that Apple will be OK. Google will be OK. But if Windows Mobile is any indicator, Microsoft is in deep, deep trouble.

This post is by Naval Ravikant. If you like it, check out his blog and Twitter.

How to pick a co-founder

Naval · November 12th, 2009

Update: Also see our 40-minute interview on this topic.

Picking a co-founder is your most important decision. It’s more important than your product, market, and investors.

The ideal founding team is two people, with a history of working together, of similar age and financial standing, with mutual respect. One is good at building products and the other is good at selling them.

The power of two

Two is the right number — avoid the three-body problem. Think Jobs and Wozniak, Allen and Gates, Ellison and Lane, Hewlett and Packard, Larry and Sergei, Yang and Filo, Omidyar and Skoll, Julia and Kevin Hartz from Eventbrite, Jennifer Hyman and Jennifer Fleiss from Rent the Runway.

One founder companies can work, against the odds (hello, Mark Zuckerberg). So can three founder companies (hello, @biz, @ev, and @jack). In three founder companies, the politics can be tough — gang-up votes, jockeying for board seats, etc. — but it’s manageable. Four is an extremely unstable configuration and five is right out. When 4-5 founder companies work, it’s because two founders dominate.

Two founders works because unanimity is possible, there are no founder politics, interests can easily align, and founder stakes are high post-financing.

Someone you have history with

You wouldn’t marry someone you’d just met. Date first. This is how long Bill Gates and Paul Allen have known each other:

Go through something difficult, like a Prisoner’s Dilemma or a Zero-Sum Game. If being ethical was lucrative, everyone would do it!

One builds, one sells

The best builders can prototype and perhaps even build the entire product, end-to-end. The best sellers can sell to customers, partners, investors, and employees.

The seller doesn’t have to be a “salesman” or “saleswoman”. They can be technical, but they must be able to wield the tools of influence. Bill Gates and Steve Jobs aren’t salesmen, but they are sellers.

Aligned motives required

If one founder wants to build a cool product, another one wants to make money, and yet another wants to be famous, it won’t work.

Pay close attention — true motivations are revealed, not declared.

Criteria: Intelligence, energy, and integrity

It’s not the kid you grew up next to. It’s not the person you like the most. It’s not the hacker most willing to work for free.

It’s someone of incredibly high intelligence, energy, and integrity. You’ll need all three yourself, and a shared history, to evaluate your co-founder.

Don’t settle

If it doesn’t feel right, keep looking. If you’re compromising, keep looking. A company’s DNA is set by the founders, and its culture is an extension of the founders’ personalities.

Pick “nice” people

Avoid overly rational short-term thinkers. There are bounds to rationality. Partner with someone who is irrationally ethical, or a rational believer that nice people finish first. Be especially careful with the “sales” person here.

What you don’t know

Business founders who don’t code use bad proxies for picking technical co-founders (“10 years with Java!”). Technical founders who don’t sell also use bad proxies (“Harvard MBA!”). Learn enough of the other side to have an informed opinion. If you’re not seriously impressed, move on.

FAQs

What if the right person already has his own startup? Convince him to work on yours part-time — they’ll drop his idea once yours gets traction.

Breakups are hard

If you’re going to fall out with your co-founder, do it early, recover the equity into the option pool to keep the company going, and recruit someone else great to fill the missing slot. Build in founder vesting (a.k.a. the “Pre-Nup”) to keep the breakup from getting messy. Building a great company without a partner is like raising kids without a…

Nearly everything I’ve written on this topic applies to dating and marriage. Coincidence?

Go forth and multiply.

Update: Also see our 40-minute interview on this topic.

This post is by Naval Ravikant. If you like it, check out his blog and Twitter.

The long tail of VC twitterers

Nivi · November 11th, 2009

We previously posted about the long tail of VC blogs. A few VC blogs capture most of our attention. The rest slog it out in the long tail.

And now, for the first time in the history of mankind, we present the long tail of VC twitterers (click to zoom in):

The underlying data is from Venture Maven’s list of 217 VC twitterers. I removed Chris Sacca, Om Malik, and David Pakman from the dataset because they have too many followers (they were on the Twitter suggested users list).

This widget aggregates all 217 VC twitterers:



(Widget: VC twitterers)

Thanks to Venture Maven for aggregating the underlying data and to Tony Stubblebine and Waldron Faulkner for parsing it.