The long tail of VC blogs

Nivi · November 9th, 2009

Many VCs use blogs to share advice, wisdom, and other thoughts. A few of these blogs capture most of our attention. The rest slog it out in the long tail.

This chart shows the Google Reader subscribers of 131 VC blogs (click it to zoom in). The underlying data is from Larry Cheng’s VC Blog Directory.

I’m not sure Guy Kawasaki (the #1 blog) is still a VC but I left him on the list because he’s a nice guy who answers my emails. Also, Venture Hacks would be #4 on the list, if we were on the list.

I’ll make a similar chart for VCs on Twitter if someone can extract the follower numbers from this list of VCs on Twitter. (Update: Thanks to Tony Stubblebine and Waldron Faulkner for sending me this data — post coming soon.)

Startup Boy is back

Nivi · November 9th, 2009

Naval’s personal blog, Startup Boy, is back. His posts, like The 80-hour Myth and VC Bundling, were an inspiration to me when I first moved to Silicon Valley. His latest post, The returns to entrepreneurship, is a return to form:

“I was at dinner the other night with a group of entrepreneurs. One told the story of a 27-year-old whiz kid whose company will likely exit for $500M – $1B – the business now being less than two years old. You can imagine the effect that this had on the brilliant, hardworking 35+ entrepreneurs in the group, who have had their share of hits, but not at that magnitude and not that quickly.

“These stories are getting more commonplace. It seems that the entrepreneurs who “hit” these days are doing it more quickly, making more money, and doing it at a younger age. Back in the 70s, it took a decade plus to build a company and $10M, even in today’s dollars, was a big victory for an individual. Up until the late 90s dot-com boom, even though these stories existed, they were less common and took longer.

“The storyteller explained that this 27-year-old is more brilliant and more hard-working than the previous entrepreneurs he’s seen.

“That can’t be it. There are only so many hours in the day, and the entrepreneurs of yesteryear worked just as hard as the entrepreneurs of today. And the ones who came before were just as brilliant. Human intelligence has not evolved that dramatically in 10-20 years.

“Rather, I posit that the amount of leverage available to a modern Internet entrepreneur is far, far greater than was available to entrepreneurs of previous generations. The number of entrants has dramatically increased as well. The overall hit rate might be lower, but the ones who win, win bigger and faster thanks to the leverage.”

Read the rest of The returns to entrepreneurship for the exciting conclusion.

Best of the startup blogs

Nivi · November 4th, 2009

We read the startup blogs so you don’t have to.


Jason Cohen explains how to hire employee #1 (practical, tested advice). Fred Wilson explains how to make an email intro without making yourself look bad (this is how I do it). Bill Gurley explains why Google will pay mobile device companies to use their OS. Fred Destin explains why, much of the time, he doesn’t know why he passes on investments (finally someone admits it — I look for reasons to say yes, not reasons to say no). Chris Dixon explains why he’s reassured when Sequoia invests in a Y Combinator company. Fake Steve Jobs is receiving critical advice from Vladimir Putin (from the humor department).

Enjoy the knowledge, understanding, and wisdom.

Lean startups aren’t Cheap Startups

Guest Author · November 3rd, 2009

This post is by Steve Blank, a serial entrepreneur with eight startups under his belt, including two large craters (Rocket Science and Ardent), one dot.com bubble home run (E.piphany), and several base hits. Steve is also the creator of customer development and this is one of his best posts on the topic. If you like it, check out his blog and tweets @sgblank. – Nivi

At an entrepreneur’s panel last week, questions from the audience made me realize that the phrase “Lean Startup” was being confused with “Cheap Startup.”

For those of you who have been following the discussion, a Lean Startup is Eric Ries’s description of the intersection of Customer Development, Agile Development and if available, open platforms and open source.

Lean Startups aren’t Cheap Startups

A Lean Startup is not about the total amount of money you may spend over the life of your startup. It is about when in the life of your company you do the spending.

Over its lifetime, a Lean Startup may spend less money than a traditional startup. It may end up spending the same amount of money as a traditional startup. And I can even imagine cases where it might burn more cash than a traditional startup.

Lets see why.

The Price of Mistakes are Inversely Proportional to Available Capital

In times of abundant venture capital if you miss your revenue plan, additional funding from your investors is usually available to cover your mistakes — i.e. you get “do-overs” or iterations without onerous penalties (assuming your investors still believe in the technology and vision.) In times when venture capital is hard to get, investors extract high costs for failure (down-rounds, cram downs, new management teams, shut down the company).

The key contributors to an out-of-control burn rate are 1) hiring a sales force too early, 2) turning on the demand creation activities too early, 3) developing something other than the minimum feature set for first customer ship. Sales people cost money, and when they’re not bringing in revenue, their wandering in the woods is time consuming, cash-draining and demoralizing. Marketing demand creation programs (Search Engine Marketing, Public Relations, Advertising, Lead Generation, Trade Shows, etc.) are all expensive and potentially fatal distractions if done before you have found product/market fit and a repeatable sales model. And most startup code and features end up on the floor as customers never really wanted them.

Therefore, when money is hard to come by, entrepreneurs (and their investors) look for ways to reduce cash burn rate and increase the chance of finding product/market fit before they waste a bunch of money. The Customer Development process (and the Lean Startup) is one way to do that.

Repeatable and Scalable Sales Model

In Customer Development your goal is not to avoid spending money but to preserve your cash as you search for a repeatable and scalable sales model and then spend like there is no tomorrow when you find one.

This is the most important sentence in this post and worth deconstructing.

  • Preserve your cash: When you have unlimited cash (internet bubbles, frothy venture climate) you can iterate on your mistakes by burning more dollars. When money is tight, when there aren’t dollars to redo mistakes, you look for processes that allow you to minimize waste. The Customer Development process says preserve your cash by not hiring anyone in sales and marketing until the founders turn hypotheses into facts and you have found product/market fit.
  • As you search: Customer Development observes that when you start your company, all you and your business plan have are hypotheses, not facts — and that the founders are the ones who need to get out of the building to turn these hypotheses into customer data. This “get out of the building” activity is the Customer Discovery step of the Customer Development Model:

Customer Development

  • Repeatable: Startups may get orders that come from board members’ customer relationships or heroic, single-shot efforts of the CEO. These are great, but they are not repeatable by a sales organization. What you are searching for is not the one-off revenue hits but rather a repeatable pattern that can be replicated by a sales organization selling off a pricelist or by customers coming to your web site.
  • Scalable: The goal is not to get one customer but many – and to get those customers so each additional customer adds incremental revenue and profit. The test is: If you add one more sales person or spend more marketing dollars, does your sales revenue go up by more than your expenses?
  • Sales model: A sales model answers the basic questions involved in selling your product: “Is this a revenue play or a freemium model going for users? Something else? Who’s the customer? Who influences a sale? Who recommends a sale? Who is the decision maker? Who is the economic buyer? Where is the budget for purchasing the type of product you’re selling? What’s the customer acquisition cost? What’s the lead and/or traffic generation strategy? How long does an average sale take from beginning to end? Etc.” Finding out whether you have a repeatable, scalable sales model is the Customer Validation step of Customer Development. This is the most important phase in customer development. Have you learned how to sell your product to a target customer? Can you do this without running out of money?
  • Scale like there is no tomorrow: The goal of an investor-backed startup is not to build a lifestyle business. The goal is to reach venture-scale (~10x return on investment.) When you and your board agree you’ve found a repeatable and scalable sales model (i.e. have product/market fit) then you invest the dollars to create end user demand and drive those customers into your sales channel.

If you confuse Lean with Cheap when you do find a repeatable and scalable sales model, you will starve your company for resources needed to scale. Customer Development (and Lean) is about continuous customer contact/iteration to find the right time for execution. (Ed: In other words, eliminate generic startup risks in the right order.)

The Customer Development Venture Pitch

At this point I often hear entrepreneurs say, “We don’t have the money to scale. We’ve been running on small investments from friends and family or angels. How do we raise the big bucks?”

How to raise real money with a Customer Development presentation in the next post on steveblank.com.

Customer development by the book

Nivi · November 2nd, 2009

Ash Maurya‘s new blog documents his journey through customer development. This is the most by-the-book application of customer development that I have ever seen. I am following this blog very closely; it’s thoughtful and well written. Some highlights:

Is AdWords the right MVP for your product?

“For Timothy Ferris, his MVP for testing new products that don’t yet exist (micro-testing) comprises of a landing page, signup page, and Google Adwords to drive traffic. However, this approach presupposes that:

  1. You can create a good landing page
  2. You can write good adwords copy
  3. Adwords is a viable distribution channel for your product

“Unlike a book title or some other other physical product, startups are usually characterized by products where the problem and solution are unknown and have not yet been validated which makes writing good landing page copy hard, and good Adwords copy even harder (you only get 25 characters for your headline!). At best, you can guess. But starting with that approach is a surefire way of dumping a lot of money on Google Ads fast. Plus the return on learning is low – When your click-through-rate is low, or the bounce rate high, you get zero visibility into why. Was it poor copy, poor product/market fit, or both? And don’t even get me started on how expensive CPCs have gotten in competitive markets.”

Have you ever stated or revised your problem hypotheses?

“Our top 3 [problem hypotheses] were:

  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…

“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. At that point we had a pretty good idea of what our product’s unique value proposition should be, a list of other benefits, and a price to put on our signup page.

“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”

Have you ever collected feedback from your customers with, like, your ears?

“By now we had also heard of the merits in listening to your users and decided to follow a release early/release often model. The only problem was we didn’t know how to listen. In the interest of efficiency and productivity, I generally avoided face to face meetings and phone calls and preferred email. Many people were struggling with the software (desktop apps are hard) but we didn’t know how to engage them. After they’d cancel their account, we would send them an email to learn why but many times it was too late.

“We were getting a lot of feedback over email but didn’t know the best way to qualify them. If more than one person asked for a feature and it sounded like a good idea, we built it. The reverse was also true, if the feature didn’t meet our model of “the vision”, we ignored it no matter how many people asked for it. And that’s how we kept busy for a while till I realized we still had a lot of leaky buckets despite all the listening we were doing.

“Determined to get to the bottom of this, I got an 800 number which I put on our website and also started calling on users directly. The findings were staggering. Most of our paying users were using a very small percentage of the application. We had built up a lot of bloated features or waste which had only taken time to build but also continued to create ongoing work with regression testing, feature dependencies, etc.

Thanks to Eric Ries for the link.

Our first online workshop: How to pitch investors

Nivi · October 30th, 2009

We’re teaching our first ever online workshop about “How to pitch investors” on eduFire — a platform for live video teaching online. Sign up here. I’ve taken classes on eduFire and it works really well; here are some recordings of their classes.

(Update: This class is full so I’ve opened up a second class. Sign up here.)

(Another update: The second class is also full. E-mail me to get on the waiting list for the next class. And if you want to buy a recording of the class, e-mail me or contact me on eduFire. We obviously won’t be able to work on your pitch with a recording, so it’s half the price ($49).)

What you’ll accomplish

You could be building the next Google — but investors won’t know it if your pitch doesn’t sing. You’re going to “walk” out the workshop with:

  • A great pitch for your startup.
  • A list of things your startup will need to accomplish before you can raise money.
  • An understanding of the fundamentals of pitching so you can revise your pitch anytime and teach your friends how to do it.
  • A copy of our Pitching Hacks e-book.

First we’ll cover the fundamentals:

What investors want to see
How to get intros to investors
High-concept pitches
Elevator pitches
Decks and presentations
NDAs

Then we’ll work on your pitch as a group. You’ll get lots of hands-on advice from me and other students. I’ll also be sharing some of my latest pitching techniques which we haven’t published anywhere.

This is the first time we’ve ever done anything like this and I’m psyched.

Time and Cost

The workshop costs $98 (just like Wal-Mart) and there are only 3 2 slots left (uh, somebody signed up while I was writing this). It consists of 2 sessions on Tuesday Nov 3rd 5-6pm Pacific and Thursday Nov 5th 5-6pm Pacific. You go to both sessions. Sign up here.

(Update: This class is full so I’ve opened a second class on Wed Nov 4th 1-2pm Pacific and Friday Nov 6th 1-2pm Pacific. You go to both sessions. Sign up here.)

(Another update: The second class is also full. If you want to buy a recording of the class, e-mail me or contact me on eduFire. We obviously won’t be able to work on your pitch with a recording, so it’s half the price.)

Reviews

We’ve helped startups raise tens of millions of dollars from investors like Sequoia, Benchmark, Bessemer, etc. See the reviews of our pitching advice from entrepreneurs like Adam Smith at Xobni and Jonathan Grubb from Get Satisfaction.

Prerequisites

The only prerequisite is determination. You’ll be even better prepared if you read the fundamentals above.

Contact me on eduFire or email nivi@venturehacks.com if you have any questions and sign up here.

Notes from Startup School 2009

Nivi · October 29th, 2009

Mark Bao has posted his notes from this year’s Startup School. Here are my favorite parts (everything below is cut-and-pasted directly from his notes — read the full collection):

Mark Pincus, CEO, Zynga: My Startup Experience

  • what really matters is that YOU CONTROL YOUR BOARD. Mark Zuckerberg claps.

How? (1) Create a board that reflects the ownership of the company. (2) Make a new board seat for a new CEO, (3) Do a term sheet tune-up.

Mark Zuckerberg, Founder and CEO, Facebook: Q&A with Jessica Livingston

  • he says he never pitched Facebook a lot. Just got introduced to people because already had x00,000 users

Traction solves every problem. Profit erases every sin.

  • cognizant of the fact that engineers tend to move around companies. Facebook is a place to learn; he’s cool with moves.

That’s a neat solution: retention is a problem — so we “don’t care” about retention. Jeffrey Pfeffer and Bob Sutton from Stanford offer other solutions for retaining employees.

Twitter Founders Biz Stone and Ev Williams: Q&A with Jessica Livingston

  • motivation behind Twitter: two week hackweek at Obvious. they built, used it over the weekend, and they were passionately engaged

Hackdays are a great way to boost morale, clear out the ideas you can’t stop thinking about, and build small, low-priority, high ROI features and products.

Tony Hsieh, CEO, Zappos: Delivering Happiness

  • Zappos’ Committable Core Values are grounds for hiring and firing, very serious about it

Greg McAdoo, Sequoia Capital

  • good recession-era startups “buy the cash register early,” — they execute their pay business model earlier to generate revenues earlier and bank earlier
  • enterprise sales tip: promote and talk about the HARD DOLLAR ROI. it’s the most important thing to talk about. make them scared to reject your product. make them think “if my boss ever found out we could have saved 50% on software X, he would be pissed.” make them fear that the competition get the product in their hands and beat you out.
  • startups that gain revenue early are disciplined earlier, and get used to being an actual business earlier, and generally are better and more recession-proof

Also see Fred Wilson’s post on Portfolio Screens.

Jason Fried, CEO, 37signals: Funding and Charging for Your Product

  • the difference between a boostrapped and funded company is easy to understand.
  • the bootstrapped company starts off thinking: we need to make money.
  • the funded company starts of thinking: we need to spend money. these investors have given us x million dollars—we should spend it!
  • funding is like crack. it’s an addiction with names like Series C. Don’t keep going back for more and more funding; it’ll make your addiction worse.
  • sorry, failure is not a rite of passage. you don’t have to fail. failing once doesn’t prevent another. Fried thinks the idea of “you have to fail once” and having to “learn about failure” is ridiculous.
  • learning a lesson from failure is learning what not to do. learning what to do is a lot better than learning what not to do.

Read all of Mark Bao’s notes.

The problem with VC motivation

Guest Author · October 28th, 2009

Thanks to Atlas Venture for supporting Venture Hacks this month. This post is by Fred Destin, one of Atlas’ general partners. If you like it, check out Fred’s blog and tweets @fdestin. And if you want an intro to Atlas, send me an email. I’ll put you in touch if there’s a fit. – Nivi

Many VC’s, particularly in Europe, are disappointing in their (lack of) intensity. They are not 24/7, passionate advocates of the businesses they fund; neither do you meet them at random conferences scouting for new companies; nor do they necessarily come across as particularly engaged at board meetings. Why is that? Let’s talk VC compensation and motivation for a second.

My motivation as a VC

Introspection is as good a place as any to start. Here are my top motivations for being a VC (leaving out the personal stuff):

  1. Company building: Every VC is different, some like doing the deals but don’t really care for the long-term relationship that ensues. With me it’s the “deal management” (as we call it) that provides me with the greatest satisfaction. An engaged relationship with the management team and co-directors towards building a great business. That’s when I feel I am part of a greater whole, of creating jobs, of the whole great forward human movement of innovation and entrepreneurship.
  2. Intellectual stimulation: I am a fairly consistent guy, but I do get bored. As a VC you get to see 100’s of new projects every year and meet a ton of creative people, and understanding each one challenges your (dwindling number of) neurons in a different way. Every company you invest in is different, and requires fresh thinking. So being a VC keeps me entertained, frankly. This is the primary reason why I never started a company. The trade-off is that you work through others (the management teams you fund) and hence never quite get that satisfaction of achievement in the same way.
  3. Personal recognition: Let’s face it, I love being recognised for what I do. Thankfully my wife keeps that ever-burgeoning ego firmly in check.
  4. The Hunt and the Deal: I don’t think you can be an effective VC if you do not like to be a Hunter, to be always out on the move looking for the next big thing, to want to win the confidence and trust of entrepreneurs and co-investors to take your money and no-one else’s. Inking that term-sheet and closing that deal gives me a great buzz every time. After all, I grew up on a trading floor !
  5. Money: More on this below.
  6. Lifestyle: I work hard, but on my own terms, when and where I choose. The less glamorous reality is that I spend 2/3 of my time on the road and that they greet me by name at hotels in at least 3 different cities, but I remain a master of my own destiny.

That’s my list.

Let’s zoom in on money

Here is the issue with venture capital as a way of making money:

  • It’s easy to get a comfortable lifestyle (say $300,000+ a year, often multiples thereof).
  • It’s (really) hard to make it really big (say $20,000,000+).

The not-so-secret fact about venture capital is that it has not made serious money for 10 years now. That means many, if not most, venture capitalists have not seen a large carry check in a decade. For those who don’t know venture economics, the partners in a fund contribute the first 1-3% of a fund with their own cash, which means most of us write checks worth > $100,000 every year to our own funds, sometimes a lot more. So if you are a VC in a median return fund, you keep writing these checks vaguely hoping you will make your money back; some will tend to get more and more focused on the nice salary they can take out every year.

To generate real carry, you need to work hard with no obvious improvement in the probability that your fund will be a wild success. In other words, the marginal return on effort expanded is not obvious and may well be zero. You won’t know until much later… And that, my friends, is the core problem with VC motivation.

Because it takes a very long time to know whether you are a good VC, partners can keep taking comfortable salaries for a decade or more before any form of verdict is placed on their money-making abilities. In the meantime, they manage their own calendar and work at their chosen intensity, with no immediately obvious return on effort expanded. Q.E.D.

The Solution

The solution is not simple. As an LP you would only want to invest in partnerships that provide:

  • Accountability
  • Meritocracy
  • Paranoia
  • Professionalism
  • Absolute hunger
  • True Passion for the business

…and of course, deal picking skills, deal building skills, and returns!

Paul Kedrosky at Xconomy has considered this problem from the LP angle with the following recommendation: pre-agree on budgets and/or find out what your chosen partnership uses its money on. Good advice, with plenty of practical problems, but clearly sound.

In a good partnership, paranoia and professionalism mean that emulation keeps everyone on their toes. And your passion for the business keeps you working all the time. And you really want to make a ton of money. And you want to be remembered for all the great business you contributed to. All of the above!

Hence:

VC is only a lifestyle business if you do not fundamentally care about being wildly successful. Now how do you screen for that, when every manager that comes into your office sings the same song?

Thanks for reading. If you like this post, check out Fred’s blog and his tweets @fdestin.

10 examples of minimum viable products

Nivi · October 27th, 2009

“Entrepreneurship in a lean startup is really a series of MVP’s”

– Eric Ries

“We kept to minimum feature spec. I think that is always very important. It is hard to determine what to do until you launch.”

– Immad Akhund

Do minimum viable products seem abstract? Here’s 10 examples:

  1. “If Apple can launch a smartphone without Find or Cut-and-Paste, what can you cut out of your product requirements?” – Sramana Mitra
  2. USV-backed foursquare uses Google Docs to collect customer feedback. No code, no maintenance.
  3. Fliggo sells it before they build it.
  4. Grockit puts up a notify-me-when-you-release form on steroids.
  5. Auto e-commerce site uses manualation and flintstoning for their backend.
  6. Semiconductor company uses 5 people and FPGAs to build a $100M semiconductor product line.
  7. Consumer company uses fake screenshots to sell their product.
  8. Allicator uses Facebook ads: “Ditch Digger? Feeling spread thin? Click here to complete a survey and tell us about it.”
  9. ManyWheels uses Microsoft Visio to build clickable web demos for prospective customers.
  10. Cloudfire uses a classic customer development problem presentation.

Work in small batches. A minimum viable product is simply the smallest batch that will teach you something. What can you release in one day?

“The first version of Gmail was literally written in a day.”

– Paul Buchheit

Please add your favorite MVPs in the comments. Don’t be lazy.

Even more MVPs

  1. RightNow uses phone calls to iterate on their MVP.
  2. The team that started Isilon spent a year meeting high level execs and researchers and engineers around the world to understand the broad requirements of the mobile industry.

"Real wealth creation will take founding, seniority, or staggeringly large exits."

Nivi · October 26th, 2009

We wrote a lot of comments on other people’s blogs this week. Then we shared them on Twitter. I think you’ll like them. Here’s the top 4:

How do you raise money if you’re a very early stage companies with no product, traction, or track record? Some thoughts: http://j.mp/Uy0iR. (345 clicks — on the weekend!)

If you want to be a founder, but you’re going to be an employee for now, should you join a startup or non-startup? See http://j.mp/XTpYr. (274 clicks)

Why create a new market if you can resegment an existing market? See http://j.mp/e7wnN. (255 clicks)

Does Sequoia’s investment in Y Combinator hurt YC companies? My thoughts: http://j.mp/1Iytwx. (251 clicks)

Links

And here’s the top 5 links we shared on Twitter this week:

“Startups… punish effort that doesn’t yield results.” – Eric Ries (@ericries), http://j.mp/qI5FE (283 clicks)

“10 Disturbing Similarities Between Dating & Raising Capital” by SEOMoz founder, Rand Fishkin. Video: http://j.mp/1WfnSv. Thanks @zoransa. (234 clicks)

“Real wealth creation will take founding, seniority, or staggeringly large exits.” – Aaron Cohen’s advice to employees, http://j.mp/2CypaP (198 clicks)

Meet a CO-FOUNDER at Founder Dating in the Bay Area: http://j.mp/35teD7. Great idea, great name. (195 clicks)

An oldy but goody from ex-VC Bill Burnham: “Understanding Why Your VC Is Acting Crazy”, http://j.mp/1nswtZ. (166 clicks)

Tweet browser

Chris Turner took our entire tweet archive and categorized the tweets with his tweet browser. I’ve been having fun reading our old tweets — I particularly like reading through the books we’ve tweeted about.

Never miss another tweet again if you subscribe via RSS or email (no more than one email a day; unsubscribe anytime). Of course, you can also follow us on Twitter.