We’ve all had a great idea for a product that would solve a pain we feel directly. It used to be impossible to convey that insight to anyone who might be in a position to act upon it. But that’s all changing because of the Internet.
Of late, it’s becoming increasingly easier for consumers to share their ideas for great products and bring them to market. One great example of this is a company called Quirky which solicits ideas from a community of people all over the world. It refines the ideas, prototypes them, leveraging the insights of the community and then manufactures these products and sends them to retailers. Quirky solves many of the challenges in bringing products to market.
I believe great product design and simple connectivity will be the defining principle of success for connected consumer products. For many products, connectivity to the Internet breathes magic into once static objects. That’s the vision behind one of Redpoint’s investments, Electric Imp.
Combining the product design expertise of Quirky with the magic connectivity of Electric Imp enables regular people to dream of new ideas and work with Quirky and Electric Imp to create and bring these new inventions.
As a founder, you’re always selling. You’re selling yourself, your team, your product, your company. But your pitch is likely missing one of two key components.
A pitch needs to accomplish two goals to be effective. Most pitches solve the first, but omit the second. First, the pitch must convince the audience who might be investors, employees, recruits, or customers of some premise. Second, the pitch has to equip your champions, now convinced of your argument, to sell on your behalf.
No enterprise software is ever bought unilaterally. No candidate is ever hired in isolation. No investment decision is ever made by one person in a VC firm.
Whomever you’re pitching will need to convince another person or group of people. So your pitch should be structured to enable those champions to be effective by providing a be simple, relatable and intriguing argument to build momentum within whatever organization is making the decision whether a VC fund, a family or a business.
How do you structure such an argument? One approach I’ve found that works well is a three pronged argument delivered in less than a minute.
A change is inevitable, that change implies a big opportunity, and this is the right team or product to help us take advantage of that change.
In your sales pitch, ideally at the end of the pitch, equip your champion with an argument like this. It will empower your champion to be more effective and help you close that sale.
Sitting on a bench overlooking the South Beach marina, I asked an entrepreneur how he had been since he founded his company. He replied with a conundrum:
Looking back I can’t believe it’s only been a year but if I think about every day, it’s taken forever.
That’s a really succinct way of communicating how it feels to grind. Cementing each brick, each hire, each line of code, each product feature seems like just an incremental step, just another day. But taking a step back and looking at the structure you’ve built as an entrepreneur, it seems to just fly by.
Whenever I have a second thought about picking up today’s brick, I think of Thomas Edison who said “most people miss opportunity because it’s dressed up like hard work.”
Every SaaS business must to decide how to charge for the service. Pricing plans are some of the most difficult decisions to make. Equally important to the price is determining the point at which the customer pays - the conversion point.
There are a four different models that I’ve experienced: up front payment, freemium, limited free trials, money back guarantee. Picking the right one depends on a number of different factors. Below is a table that summarizes these four approaches.
Pricing Model
User Value
Product Complexity
End User Buys
Avg Seat $
Freemium
Increases with time
Simple
Yes or No
Low
Limited Free Trial
Increases with time
Complex
Yes
Low/Medium
Up Front Payment
Immediate
Simple
Yes
High
Money Back Guarantee
Immediate
Complex
Yes
High
Freemium
Freemium is a strategy for products whose value proposition is simply conveyed and whose value increases with time. Evernote’s value compounds with the data the user enters into the database. Expensify’s utility increases with the number of expense reporters on the system.
Freemium businesses must target markets with very large user bases because the conversion to paid rates vary between 2 to 4%. To drive $50M in annual revenue at that conversion rate and $100/year subscription, you would need 17M users.
Sometimes, the end users are buyers (typically in consumer services). Other times (for enterprise customers), end users are sales prequalifiiers who create a groundswell within an organization to convert to paid. Given enough users of a product in an organization, the enterprise can be upsold to a company wide license. Freemium distribution enables a company to acquire those users inexpensively.
Limited Free Trial
The main difference between freemium and trial products is product complexity: trial products are more complex and need time for the user to gain a deeper understanding of the value. CRM tools like Salesforce and 37Signal’s HighRise both use limited trials. The goal with these marketing mechanisms is to drive customers to explore the product for a brief period of time and then force a conversion. Allow too much time to pass and the customer will forget the value proposition.
These kinds of products tend to require significant user behavior change so these products must market a promise and then use the conversion to paid event to enforce that behavior change (carrot + stick). Because of the behavior change, these products are marketed to decision makers who select the software for their teams: product managers, tech leads and heads of sales. Many of the tests I’ve seen have indicated shorter trial periods are better: 7 days is better than 14 days is better than 30 days.
Up Front Payment
To pursue up front payment, you need an established brand with a clear value proposition and you sell the product to the end-user. Adobe’s Creative Suite is a canonical example. Customers know what the software can do and if they need it, customers will pay for it. The same is true for AutoCad, MS Office, and operating systems. Most of these products are high cost per seat products. Because they are well-known in the market, they command a price premium.
Money Back Guarantee
For products lacking an established brand, but offering an immediate value proposition and charging a high average seat value, there is no better solution than the money back guarantee. It mitigates the customers commitment phobia but establishes a billing relationship at the outset. This pricing strategy requires contact with a sales or account management team which implies a higher cost of sales. Ideally, higher conversion rates mitigate these costs. In other words, the up front commitment is a sales pre-qualifier. Your sales team will have fewer, higher quality leads. Plus, your sales team will have direct product feedback to share with the product team. Oracle offers this for many of their products as do Eloqua.
While each product and target market have some unique attributes, consider the time to value, complexity of the product, product complexity and your sales model (freemium vs sales) when you do price your startup’s product.
In his Stanford GSB lectures, Peter Thiel spoke about secrets. But he defined secrets for startups in a different way than one might expect.
A secret is not an unknown. Rather, it’s something just not widely believed to be achievable or feasible. In other words, it’s an insight, a thesis that isn’t widely held. Exploiting that secret should be the aim of every entrepreneur. Leveraging the secret means disruption and ultimately success.
Before you start a company, find this kind of secret - an insight that will help you maximize leverage against your competitors and that doesn’t oppose strength with strength.
How do you do that?
I think about it like Judo. There are two basic tenets of judo:
First: never to oppose strength with strength.
Second: maximize leverage.
You can’t compete with Google by building a better search engine. Google will put 100x the engineering team, leverage their 1,000x greater click data and out spend you on marketing by 10,000x. Don’t oppose strength with strength. Startups shouldn’t rely on more manpower, bigger ad budgets or data access advantages in fields where there is a large incumbent. During its infancy, Google won with distribution. Most internet companies believed search wasn’t valuable. Google thought differently. They offered to power all the major portals' search engines and eventually dethroned them. This was Google’s secret.
The question, then, is what to leverage. Startups' advantage is speed which means they can explore new technologies (mobile apps, Node, Meteor, Cassandra, RedShift) which build better products, new distribution channels (mobile and tv app stores, virality, OpenGraph) which reach customers more cost effectively or novel product designs (Path, Dropbox, Expensify).
Many companies are now using distribution as their secret - mobile app stores and Facebook Open Graph enable startups to access hundreds of millions of users in ways that incumbents simply aren’t prepared to leverage. Expensify uses mobile app stores to acquire hundreds of thousands of SMBs in ways that their market’s incumbent, Concur (market cap $3B), simply can’t copy.
Find your secret and you’ll be well on your way to disrupting a huge market.
NB: Thiel does mention other kinds of secrets. For example, PayPal’s financial losses due to fraud which are secrets in the traditional sense. It’s important to think about the judo principles when deciding whether to keep these secret. Simply put, if a competitor can gain leverage by using the secrets you disclose, keep them closely held.
There are three types of vision that a successful startup needs: product vision, business vision and team vision.
Product vision is the dream. It’s how your company changes the world. It’s the problem that you’re solving and the solution to that problem. Product visions don’t end on launch day. They extend for years through the company’s growth. A product vision isn’t a certain feature or even a completed product. It’s the state of having solved a problem for a user or providing an experience for a user. The best product visions last for decades. Think Apple.
Business vision is the go-to-market: it’s the way the product arrives in customers hands. Each company’s business vision is a unique. It might be a flavor of freemium. It might be enterprise direct sales. It could be viral ecommerce. But it’s not just a buzzword. It’s the process to mechanize the revenue engine for the company.
Team vision is also called culture. Culture is the feeling of the workspace, the language in meetings and the values extolled by the company both internally and externally. Team vision also encompasses organizational structure - how the company is constructed to solve its customers problems.
Exceptional founders possess all three kinds of vision. More often, founding teams forge these three visions by complementing each other’s strengths. Sometimes advisors or board members can help clarify visions. But it’s problematic for an outsider to engender them altogether because these visions are more than ideas or dreams. They must be present every day in every decision made, every feature built, every marketing message delivered. These visions must begin in the founding team or the management team.
Of course, these visions may need to be tweaked with time if the market place impacts them, particularly product and business visions. A product might need to be redesigned to better suit meets customer needs. A distribution strategy may not work for a product because the ecosystem may have changed. But the essence of the vision shouldn’t change.
When you build your startup’s team, look for co-founders who can transform those visions into reality.
When the core teams of a startup work in harmony, they create tremendous leverage for a business. I saw this last week with one startup I work with, Axial, a New York based company enabling private companies to access debt, equity capital and strategic acquirers.
Next, the product and engineering teams refine a product that welcomes users, organizes them into certain key segments and qualifies them for the sales team.
Last, the sales team uses data collected by the product to inform and prioritize the sales processes improving close rates and customer satisfaction.
Although I can’t share the data, I can assure you that startup case studies like this one reaffirm Aristotle’s aphorism that the whole can be greater than the sum of its parts. It’s awesome to see a team working together, building harmony and driving a business forward.
Reference checks are part and parcel of the VC diligence process and most hiring processes. They are also one of the two most important analyses in hiring, next to the interview. Below, I’ve outlined my standard question set. I’m curious to hear feedback on what other questions or techniques might work.
Types of References
I find it’s valuable to speak to references who have worked with the candidate in different roles. Below is a list of typical roles in rank order.
Peers provide fair feedback. They often competed or worked closely together and are often the most impartial checks.
Managers offer the best insight on day-to-day interactions and work quality.
Direct reports tend to be a bit more positive than others. But they provide insight about culture, team building and mentoring.
Close colleagues are the least valuable checks. Friends at work don’t have much direct experience to share save for personality.
Reference Check Outline
Below is a list of questions prefaced by the rationale for the question. I’ll describe the referencer as the person I’m chatting with and the referenced as the person who I’m considering.
Background questions provide context for the referencer. My goal is to understand the referencer’s background (technical/manager/etc) which informs the types of questions I can ask. I’m also looking to understand the referencer’s perspective on an organization. A sales manager will observe different characteristics than an engineer.
Questions Where do you work? How long have you been there? What kinds of teams do you manage?
Relationship questions establish the biases of the referencer toward the referenced. At this point, I’m also looking to establish whether referencer will provide a balanced reference. A skewed reference either entirely positive or exclusively negative is basically worthless and should serve only as a directional data point. Also, I look to establish the recency of the relationship.
Questions: How do you know the person being referenced? How long did you work with them? How did you work together? How long ago?
Work questions elucidate the type of work the referenced performed. I’m typically matching up the actual work to what the referenced has represented and also making sure it’s a fit for the role in case of a hire, or the sector, in case of an investment. Management experience is best examined here.
Questions: What was the referenced’s role in the company? Could you share some examples of the kinds of work the referenced performed?
Strengths should be matched to the demands of the role or company. These are self-evident. A PM should have good communication and management skills. Engineers should have relevant technical skills. Examples are critical here.
Questions: Where does the referenced person shine? What kinds of work the referenced prefer to do?
Complementary skills. Asking for weaknesses tends to put the referencer on the defensive, as if he or she is sharing something illicit. Instead, I ask the referencer the question below. Everyone has strengths and weaknesses. And most jobs require teamwork. The best team members complement each other’s weaknesses. This is an indirect path at reaching the same answer. It doesn’t always work, but it’s my preferred route. I spend the most time of the interview on this question.
Questions: What kinds of people does the referenced need around him/her to be successful?
Influence. Understanding how a person is influenced is important. Everyone responds to a different approach. Some are very rational and respond to data. Others react to vision and passion. Still others might be consensus driven.
Questions: How is the referenced persuaded or convinced? What kinds of motivation does he/she respond best to?
Day-to-day personality. This line of questions aims at understanding the person’s culture in a work environment: serious, funny, team-oriented or individual contributor, darker or sunnier outlook. My purpose is to match working styles.
Questions: What is it like to work with the referenced day-to-day? How would you characterize your typical interactions?
Ethics is a checkbox question. It’s uncomfortable to ask but important to rule out any bad actors.
Questions: Any questions of ethics?
Social proof. Ask the referencer about their willingness to work with the referenced again.
Questions: Would you hire or work with this person again? How highly do you regard this person? Top 25%, 10%, 5%, 1%?
Suggestions?
Do you have any suggestions or ideas for how to improve this outline? Or other tips on reference checks?
I have been writing for three years now and it’s been a ton of fun. I hope to continue to write for many more. Along the way so far, I’ve learned a few lessons on frequency, content type, idea generation, voice, titles and distribution.
Frequency
There are two schools of thought on blogging frequency: high frequency vs high quality. At this point, it’s unclear to me which is better for building an audience because both work. Each camp has its exemplars of success.
In the frequency camp, Fred Wilson posts every day and I suspect this is because when he started seven years ago it was essential to write daily to train an audience to visit avc.com. Today social media (twitter, hacker news) generates most of the traffic for a blog by bubbling up the best content. Building a core audience that visits tomtunguz.com every day is important to me, but I post every day because each writing book I’ve read recommends it. And I figure if I’m writing a blog post, I may as well publish it.
I write sometime between 5 and 7am each morning when it’s quiet and I can focus. Flights are also good times for blogging.
Representing the other point of view, Chris Dixon and Paul Graham pen monthly essays and posts which are better revised and often succinct, witty and always very well written. This technique concentrates engagement, maximizes social media reach and ensures great content.
Content Type
I never can predict with much accuracy which content will resonate with readers who tend to be startup founders and employees. But the most successful posts tend either to create an emotional connection through a personal story or share some detailed tactical advice. The best posts enable readers to see a reflection of themselves in the story because they have or are living through something similar.
Writing every day demands lots of ideas. I jot down notes during conversations, sift through my calendar, read the news, and examine what’s trending on social media. Sometimes, I don’t have any ideas and to jog a stream I search for a strong opinion or reaction I’ve had recently. That seems to help breaking my writer’s block.
I keep a list of these ideas in draft blog posts. Sometimes I just jot down a title and other times it’s a jumble of ideas. Then I’ll go back the next day or in a few days to complete the content and edit the post. At any given time, I’m working on 3 or 4 drafts. I might hold onto a draft/idea for a month or two to let it mature a bit so I can better express it or gather examples.
After a few weeks of practicing, storing and retaining ideas becomes part of a daily routine. Nevertheless, some days, I feel like I’m wading through mud to write a few paragraphs.
Voice
Blog readers respond to strong individual voices. A blog shouldn’t resemble the Economist or the New Yorker whose editorial teams use style guides to ensure a consistent tone which is larger than any individual writer. The whole point of a blog is to hear a real human voice. It’s something I forget sometimes so I try to write the first draft the way I might speak and edit that output. Hemingway is my inspiration for human tone.
Titles
Titles matter. I spend lots of time on my titles but I didn’t always which was a big mistake. Looking back through the first year or so of my blog titles, I can see now they were awful. Here’s an early one: “Binary pointillism - the intersection of Seurat and Felton.” Barf. Who wants to read that? It sounds like a dissertation.
Dan Shipper taught me the best titles read like tweets. My goal is to drive as many retweets as possible so I shouldn’t ask the user to construct an interesting tweet on my behalf. Instead, I should make it easy for the reader to just hit a button and share something interesting.
I often write the title as the last step. It’s easier after having written the conclusion to summarize the point in 140 characters or fewer.
Distribution
Once I post, I tweet the post, submit the post to Quibb and Hacker News. Then I monitor the reactions. If after 45 minutes, I don’t see many retweets or much engagement, I’ll try another title or two. Sometimes the post is to blame, but more often, I haven’t allured the reader with the right title.
One blogger recommended ignoring the Google Analytics and Feedburner stats to me. I find that it helps quite a bit not to be so metrics focused. Then I’m not so concerned about the daily fluctuations but more on monthly stats, which is a better indicator of success. Nevertheless, I still haven’t figured out how best way to measure the success of this blog.
Patience
Honestly, it takes forever to build a blog that people know or read about or care about. For some, the reader base grows much much quicker than it did for me. Nevertheless building any kind of brand on the web through content or otherwise is a slow, incremental process. Every once in a while, I’ll reach the front page of Hacker News or spike on LinkedIn and I get an increase in readership. But it takes patience.
I find the more content I have produced, the more the blog pays dividends. Most of my posts are evergreen, timeless, so they appear in Google searches or are randomly resurrected in social media from time to time, rediscovered through some stroke of luck.
Ultimately, blogging helps me refine my thinking and share it with people who are interested or curious. I hope this post helps motivate you to write.
h/t to Stefano Bernardi @stefanobernardi, who inspired this post.
Below is my general outline for a typical diligence process.
First meeting
When I’m meeting a startup for the first time, my goal is to understand as much about the business and team as I can.
Founders/Team: How do the founders know each other? How do they interact with each other? Are they passionate? How qualified are they? What would it be like to work with them?
Business: In some form, I walk through the Business Model Generation framework: value proposition, key activities, key partners, major assets, channels of distribution, customer segments, cost structure and revenue streams. Is the problem worth solving and if the startup succeeds, how valuable would it be?
Go to market: Can the company articulate their value proposition simply? Can the team explain how they will go to market? Do they have a good understanding of the competition?
The angle: What secret, what insight has the founding team made that the rest of the market hasn’t yet realized? What discontinuity in the market can they leverage to win large share?
After the first meeting
After a startup has left and I’m “doing diligence,” I want to test some of the assertions made by the company.
Market Size Validation: The first thing is to verify market size and whether it foots with the data the company presented. Then, I try to dig deeper into the nuances of the market. How concentrated is the market? What kinds of moves are the incumbents making and how they change the market? How might a startup disrupt this market?
Pitch-it-myself test: I stop a few partners in the office and give them the pitch to test their reactions. I do the same with my wife. In a sense, I’m getting their cursory opinions and some skewed market feedback, but I’m also testing the pitch, the go-to-market and the top level attractiveness of the company. It helps me think through a lot of the business and test my assumptions.
Six degrees of separation. I look up the founders on LinkedIn, send a few emails for references and then wait to hear back on some initial reference calls.
Second and third meetings
Follow up meetings are dedicated to metrics and the future.
Pipeline: Let’s get to brass tacks and some numbers. How many customers/users? How often are they using it? What are CAQ, LTV and churn metrics? How do those compare with industry benchmarks?
Product roadmap: I know it’s early and hard to forecast, but I’m looking to be convinced the founder have a good sense of where the company is going and why.
Financing plan: What are the major buckets of expenditures? How do they change over time? Is the revenue plan reasonable? What are the key metrics for the business?
Industry: I’ll call a few friends in the industry who can help me better understand the dynamics in the sector.
Additional meetings/Full partner meeting
At this point, I’m really interested and I’m trying to understand the investment risks better.
Key issues analysis: After a founder has met several partners, I gather questions and dig deeper to answer them as best I can. If I don’t have the material to answer the questions, I diligence some more: data, reference calls, and more meetings.
After the term sheet:
After the term sheet is signed, the lawyers step in.
Legal diligence: I’m interested in learning how well formed the company is, if there are skeletons in the closet like fired co-founders or large debts or consultants who are owed shares or pending lawsuits. I’m also curious to see how a founder negotiates (though this comes through after the term sheet has been issued).
Each fund raising process is unique. Sometimes investors will have deep experience in a sector or know the team very well both of which can accelerate the process significantly. But I hope this general outline sheds light on the key steps and questions answered in the fund raising process.
