Platforms and Networks: Launching Tech Ventures: Part IV, Readings

Saturday, January 8, 2011

Launching Tech Ventures: Part IV, Readings


This is the fourth of four posts about Launching Technology Ventures (LTV), a new MBA elective course I'm developing at Harvard Business School to explore lean startup management practices. Part I provides an overview of concepts covered in the course. Part II describes LTV's class sessions. Part III lists a set of tools and techniques that I think any MBA working in a tech venture should master.

[Addendum, Apr. 10, 2011: if you are interested in lean startup concepts, you should also check out the LTV course blog. Students write blog posts instead of taking an exam. They've done terrific work.]

Below, I've compiled a list of readings — mostly blog posts, but also some books — that cover topics relevant to my course, i.e., lean startup management practices, product marketing/management, and business development. I don't list readings on funding a startup, motivations for founding, or co-founder relationships. For readings on those topics, see my earlier compilation for web entrepreneurs.

Of course, learning-by-reading is no substitute for learning-by-doing — but almost everything on the list was written by people who work or invest in new ventures, so there's a lot of wisdom here. If I've missed valuable readings, please let me know in your comments below.

Lean Startup Concepts

Business Model Analysis
Product Management
Customer Conversion Funnel Analysis/Optimization
B2B Selling
Public Relations
Business Development
Recruiting/Organizational Issues
More Books and Tools
  • Do More Faster, edited by Brad Feld and David Cohen, compiles advice across a range of topics from TechStars entrepreneurs and mentors.
  • Founders at Work, by Y Combinator's Jessica Livingston, collects her interviews with two dozen founders relating their lessons learned.
  • Tom Hulme at IDEO has compiled and crowd-sourced a list of tools for tech startups, organized by function and company life cycle stage; a similar list compiled by Shyam Subramanyam; another list from Jaret Manuel; and my own list of free software tools for lean startups.

30 comments:

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  1. I would suggest the addition of "art of the start" by Guy Kawasaki.

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  2. Thanks, Tej, I agree: Kawasaki's book is what I tell my students who are 1st-time entrepreneurs to read when they are pulling together their investor pitch.

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  3. Great list. I'd also recommend "The Entrepreneur's Guide to Customer Development" by Brant Cooper & Patrick Vlaskovits (http://www.custdev.com/)

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  4. Thanks, Ben, I agree: the book is a very clear and readable summary of Steve's "Four Steps."

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  5. Tom -
    Thank you for including the Innovation Games(R) Product Box on this list. Please know that we have a variety of online and in-person serious games that help entrepreneurs understand market, customer, and channel partner needs that enable clear, direct, and actionable decision making.

    Our games can help:
    - identify new opportunities
    - understand complex product and product ecosystem relationships
    - identify key pain points in existing solutions
    - prioritize features
    - establish system boundaries
    - improve marketing messages
    - understand product usage over time
    - develop product and service roadmaps

    Thanks, again, for including us on this list. It is a great resource.

    --
    Regards,

    Luke Hohmann
    CEO, The Innovation Games® Company
    Author of Innovation Games®: Creating Breakthrough Products Through Collaborative Play
    821 W. El Camino Real
    Mountain View, CA 94040
    m: +1-408-529-0319
    lhohmann@innovationgames.com
    www.innovationgames.com: The seriously fun way to do serious work -- seriously.
    Follow me on twitter at lukehohmann
    Knowsy knows...

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  6. Nice post, Tom. Quite a comprehensive list. Here's another resource non-programmer internet entrepreneurs might find helpful: http://www.slideshare.net/dunkhippo33/ilaunch-get-going-5511229

    It's a presentation my co-founder and I gave at a Women 2.0 partner event a couple of months ago on specific free/freemium tools that non-programmers can use to get their minimum viable product going without coding. (More info on our blog at launchbit.com)

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  7. First off it's an honor to be included in this company, thanks Tom.

    You've got a great list and perhaps the only thing I'd add, or at least parts of it is Web 2.0: A Strategy Guide by Amy Shuen. It is focused on web firms but it includes lots of case studies and discussions on network effects, LTV of a customer, monetization, etc.

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  8. That is an epic and valuable list. Thanks for taking the time and energy to pull it together.
    B

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  9. I'd add Innovation and Entrepreneurship by Peter Drucker. Easily the best book on the subject but for some reason isn't as popular as other 'pop' entrepreneurship books like Good To Great, In Search of Excellence and so on...

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  10. awesome list! read most of the essentials listed above but there are some gems there that I haven't run across before that I'll definitely get to.
    I would maybe add Steve Krug's "Don't Make Me Think" as that had me completely look at design in a whole different way.

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  11. This is a great resource that you have compiled here. I would like to recommend, Business Model Generation, it provides an excellent overview that all entrepreneurs should become familiar with. -J

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  12. http://www.hn-books.com/ is a list of the books most often recommended by Hacker News users (a news aggregator with a strong startup emphasis).

    I think between hn-books and the list posted here, new entrepreneurs have access to an incredible amount of great information.

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  13. Awesome to be in a Harvard B-School reading list. :)

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  14. this post is truly surreal.
    Legions of Startup founders have repeated for years.. stay away from MBA's.. but of course HBS doesnt 'get it'. how can you ? your salary depends on your 'not getting it'.

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  15. Some of this material has little meaning without practical real world experience in the trenches for many years on successful projects and death marches at big companies. Without that type of experience and the background in the politics of groups and companies your startup can self destruct. Analyzing failed startups and what caused them to fail is in many ways more important than knowing what it takes to succeed. Avoiding fatal errors that will kill your company is more important than getting all of the to dos right. If you do not drive over a cliff you can always implement the to dos later.

    One of my friends who runs another startup often reminds me: KISS, hire great engineers, web designers, and marketing people to get the product right, get feedback, don't listen to your own BS but at the same time don't listen to the "torpedoes", build something quickly, get viral quickly, and monetize.

    Hiring (and firing) people is an art that is learned through experience. You learn from your mistakes. After you have hired 50 people you begin to see your mistakes and successes. After another 50 and a couple of years you begin to see a pattern. Then when someone walks into your office for an interview you know how to push their buttons based on your experience and track record you can quickly figure them out. You can then tailor the interview to their responses. Written tests that are modified during the interview based on how quickly they get it, combined with your experience from past hires, can be used to direct the interview and see how they respond to pressure, are they combative, are they going to be a team player, can they dig in and solve the problem under pressure, do they have a bad attitude, do they give up to easily,... Knowing how to identify these traits is critical to hiring good people for startups. But it is not possible to learn how to identify these traits in a document. Only through experience can one learn how to hire for a high pressure environment that requires cooperation while pushing the envelope. And only experience can identify the potential diamonds in the rough, who do not have 4.0 GPA's, are a little rough around the edges, but are master hackers.

    What I do not see mentioned in the course materials are all of the great videos that are being put out by VC's that are effectively opening up the black box that the VC world is to entrepreneurs. This material generally is not available in written form and is invaluable.
    Videos are great because you can listen while you code and if you watch you can see the body language.

    Perhaps the following people should also be on the list: Andy Grove, Naval Ravikant/Nivi and perhaps George Zachary at CRV. Naval/Nivi have revolutionized the funding process with angellist.

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  16. Great post! Steve Blank also has a list of startup tools here http://steveblank.com/tools-and-blogs-for-entrepreneurs/

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  17. Thanks so much for including my blog post here, Tom! Much appreciated.

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  18. Hi Tom,

    My name is Karel van der Poel CEO and founder of Mirror42. It's an honor to make your list. Thank you.

    You might consider adding Rework by 37Signals to your reading list. It holds some interesting new ideas on startup cultures, efficient working and the way lean startups can organize themselves in this global economy.

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  19. Now I know I've really ticked off the folks at Harvard...

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  20. This made me laugh. :)

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  • Great to have a list like this! I've read most of the MUST READ (and only a 20%-30% of the total list) and really like the recommendations.

    Something to improve: have 2 must read in each category, maybe they're not in the list yet, but maybe with some crowdsourcing is possible.

    Thank you for putting together this list.

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  • Great set of resources -- here are two more I found really helpful, and much more "how-to", than the regular "fail fast" stuff:

    First is a good reference for *how* to determine where to draw the free / paid line for freemium products: http://bit.ly/limitingfreemium.

    The same author also has an interesting framework for how to find product / market fit: http://bit.ly/pmfmatrix

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  • This is fantastic!

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  • It's great to see those concepts being taught on the east cost now. Maybe some day they'll make it's way across the ocean to europe as well. Having MBAs understand the contects makes everyones life easier. Tom, Keep up the good work!

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  • Thank you, thank you, thank you for putting the time and effort in to save me and others the time! Awesome!

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  • This is fantastic! Wow, thanks!

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  • Great list, Tom. I'm just sad that we didn't have this when I was at HBS. Man, how times have changed in the past 15 years.

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  • Wow, that reminds me. I need to update that taxonomy! Would you mind pointing the link to my new blog?

    http://grasshopperherder.com/the-taxonomy-of-the-lean-startup-pivot/

    We will eventually shut down the startupsquare blog. Thanks.

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  • pete griffithsApr 1, 2012 11:45 AM

    This is a great list. To be honest I'm shocked how current and relevant it is. Lucky students. Good job!!!!

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  • Thanks MUCH for the connection to Paul Graham. His is one of the most thoughtful, honest and inspirational blogs that I have ever read.

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  • Launching Tech Ventures: Product Market Fit – Useful or Theoretical?

    3 comments:

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    1. Shavi: your comment about "borderline crazy" entrepreneurs reminds me of Fred Wilson's remark that "ideas that most people derided as ridiculous have produced the best outcomes." If we accept this, I think your are right to ask whether PMF is a useful or strictly theoretical concept. (By the way, a good theory in the management arena IS useful, but let's save that discussion for BSSE...). The question is whether the audacious vision can be reduced to a series of falsifiable hypotheses, and if decisive tests fail to validate one or more hypotheses, if the vision can be adapted. I'd argue that Cake Financial was on this path, but ran out of runway.

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    2. Prof. Eisenmann: I agree this can be done. I am still exploring whether entrepreneurs who are strongly driven by their vision find it feasible and useful to take the small steps approach with falsifiable hypothesis. I am getting converted as I am talking to entrepreneurs for my second blog. Please stay tuned.

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    3. I would look at this a different way - PMF can be useful to entrepreneurs _because_ it is (at least somewhat) theoretical. For an entrepreneur with a strong vision who is looking to create completely new markets and address needs that in his opinion the customer does not know she has, it helps to step back and have a way to look at his reality in a different way. In doing this, a framework like PMF can serve as a way to (like Tom says) break down the grand solution into smaller bits and see how the customer would like them to be. Thinking of PMF as a tool may help resolve the useful v.s. theoretical question.

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    MoneyBall for Startups: Invest BEFORE Product/Market Fit, Double-Down AFTER. - Master of 500 Hats

    « Marketing, Metrics, & Meaning (4 Pirates, in LA @ BlueGlass) | Main | 500 Startups »

    Friday, July 30, 2010

    MoneyBall for Startups: Invest BEFORE Product/Market Fit, Double-Down AFTER.

    My apologies... this is a long piece (~2500 words).  Not for the faint of heart. If you want the short story, read the abstract below & 3 core assertions, then cut to the conclusions at the bottom.

    Abstract: VC funds are getting smaller (good), & angel investors are growing (also good), but both need to get smarter & innovate. Startup costs have come down dramatically in the last 5-10 years, and online distribution via Search, Social, Mobile platforms (aka Google, Facebook, Apple) have become mainstream consumer marketing channels. Meanwhile acquisitions are up, but deal sizes are down as mature companies buy startup companies ever earlier in their development cycle.

    What does this mean? What opportunities/pitfalls does it present for investors?

    Let's start with 2 intial observations about the current market for investors, and for startups.

    Assertion #1: Most consumer internet investors (angels, seed funds, big VCs) have no clue what the fuck they're doing. Except for a few brand names, most large funds >$150-250M will die in the next 3-5 years... and that's a good thing. Still, smaller investors will need to innovate and differentiate in order to attract proprietary, quality dealflow and survive.

    Recently some very smart folks have been talking about the relative [upside/downside] of being a [small/big] investor in tech, and specifically the changes & challenges going on in venture capital in the last decade. Due to reductions in CapX rqmts & median exit size, it's tough to be a large fund (say, over $250M?) that invests in consumer internet. However, while i agree there is a Moneyball "small-ball-is-beautiful-baby" story going on in venture, that summary is too concise... and it misses a more significant point re: differentiation in investor domain expertise & services (or lack thereof), and the importance of staging follow-on investment based on product/market maturity (more on that later).

    IMHO, whether or not your fund is large or small is not the primary issue in consumer internet investing. While my biased belief is $10M-100M seed funds are a lot easier to manage & more entrepreneur-aligned than "traditional" $250-500M+ funds, there will likely be a few winners and LOTS of losers at both ends of the spectrum. Probably more BIG fund losers than small fund losers, but still there are many other factors than fund size that will predict for success or failure.

    No, the primary issue is that investors of all shapes and sizes have become incredibly lazy and complacent over the past two decades, measured by both activity and by IRR.  Meanwhile, the consumer internet has brought a tsunami of technological & behavioral change which has resulted in stunning reductions in time & cost needed to distribute products and services to the over 2-3B connected people on the planet.

    Let's examine that more closely:

    The INTERNET has changed life DRAMATICALLY for BILLIONS around the globe -- yet most VCs & lawyers still close deals via fax & snail mail.

    Fuck. That. Noise.

    Most consumer internet investors, large or small, have no goddamn clue what they are doing. They are getting killed on IRR, and most of them should be put down & put out of their misery... NOW.  Their investment thesis is suspect, their domain-specific skills are limited or non-existent, and their desire & ability to innovate is minimal. They are simply collecting fees, waiting for the next tee time.

    Well ATTENTION K-MART SHOPPERS -- you, Mister VC 1.0, are about to be DECIMATED... and it's a Schumpeterian Fate that is both deserved and overdue.

    HURRY UP & DIE ALREADY, U FRIGGIN' PATHETIC DINOSAURS.

    indeed: most VCs are Dinosaurs, and the World Wide Web is an Asteroid that hit the planet in a slow-motion cataclysmic explosion 15 years ago. It may take another 5 years for the ash clouds & nuclear winter of Browsers, Search Engines, Social Networks, & Mobile Devices to kill all the T-Rexes, but it's a done deal. The marsupials are taking over and in 2015 there will be a lot more investors that look like Jeff ClavierFirst Round Capital, Y-Combinator, TechStars, Betaworks, & Founder Collective than any Sand Hill VC (funny how all the innovation is from non-valley investors, isn't it?).

    Now let's take a look at changes that have occurred, & how to adapt as a Lean Investor 2.0:

    Assertion #2: There is tremendous opportunity in building revenue-focused consumer internet startups for $1-5M that a) attain some level of commercial viability, b) acquire customers predictably using online distribution channels (Search, Social, Mobile), and c) can later be sold for $25-$250M.

    Historically, Venture Capital has been about the use of large, risky, CapX spending to accomplish two primary & typically expensive goals:

    1) Build Product.

    2) Acquire Customers.

    Now in the past, PRODUCT has meant building a variety of expensive things (big iron, disk drives, personal computers, packaged software, computer chips, designer drugs, network routers, browsers, search engines, social networks, etc) with lots of people over periods of years.  We're talking 50-100+ people spending 3-7 years building shit, with no offsetting revenue for quite some time. That's a lot of headcount and expense before you even get to your first customer.

    And to make that even worse, many of the VC-funded startup companies target CUSTOMERS have been large, enterprise companies in tech and/or government entities with looooooong sales cycles requiring expensive, direct, dedicated sales force... that also cost shitloads of time & money.  Or large mass-marketing sales & marketing campaigns conducted via expensive print, radio, & television marketing. And the sales cycle was annual, requiring ongoing efforts to hit quarterly or annual sales targets via license revenue and maintenance support and upgrades.

    Finally, many of these companies were being built/financed to go public over a series of many years and multiple capital raises where the amount of ownership by the entrepreneur was quite small (usually single-digit %'s) and the target exits were huge, hundred-million if not billion-dollar outcomes.

    Fast Forward to Twenty-Ten, and let's take a look at these fundamentals, with a specific lens on the consumer market & internet startups:

    • PRODUCT now typically means a website or service, run on low-/no-cost open source software, hosted in the cloud on low-cost servers, developed in a few months (or a WEEKEND!) by a small team of 1-5 developers, who continuously test & iterate in real-time with online customers
    • MARKETing now typically means using a variety of online distribution channels via paid & organic search (SEM/SEO) on Google, viral/social amplification on new media platforms & social networks like Facebook, Twitter, & YouTube, and the quickly-growing mobile platforms of Apple iPhone & Google Android. With the exception of search, most of these distribution channels didn't exist 5 years ago, yet they now easily reach over 100M-500M+ users, with very low cost and measurable marketing campaigns such that even a small team can reach billions of people globally.
    • REVENUE can now be collected easily via a variety of online payment, transactional e-commerce, digital goods, subscription billing, lead generation, CPM/CPC/CPA advertising.  Many people buy things online now, and many companies are even bought for usage & users ahead of revenue.  In other words: Brothers Are Gettin' Paid, Yo. Cash Money, G. It's aaaaalll goooooood, mah nizzle.

    So to summarize: PRODUCT development cycles are shorter, required materials & resources are free or low-cost, development teams are smaller, and new services mashup & build on top of old services that already deliver terrific value in the cloud via features, data, network effects, & APIs. MARKETing costs are lower, due to a variety of broadly-available, low-cost, online distribution channels, which can be used in more measurable and predictable ways than ever before. high-bandwidth to the home means video and other data-intensive media are commonly available to anyone with cable or satellite TV. REVENUE can be generated simply & continuously, via direct business models & online payment methods that are becoming mainstream all over the world... such as mobile payments even in the remotest, poorest economies.

    Finally, as more tech & internet companies mature and become profitable, they in turn are a larger source of exits & liquidity as they attempt to acquire startups with innovative technology & desirable products & services.  By utilizing their larger customer base as a way to leverage distribution, they can acquire smaller companies who want low-cost ways to access new customers.  However, as more of these companies mature & compete for acquisitions, many startups are getting bought up earlier in their lifecycle at smaller dollar amounts than if they had to grow to IPO-required size.  And as even non-technology companies attempt to acquire innovation & expertise in online services, more but smaller exits is a likely ongoing trend.

    Okay, so that's a lot of crystal-ball gazing into the near-future, but now let's take a look at some emerging best practices & fundamentals for investing in Consumer Internet startups.

    Assertion #3: Startup investment can be staged in 3 distinct phases with explicit goals & outcomes:

    1) PRODUCT = Customer Problem/Solution Discovery (MVP), User Experience / Usability

    2) MARKET = Market Sizing, Campaign Testing, Customer Acquisition Cost(s) & Conversion

    3) REVENUE = Expand Revenue and/or Market Share, Optimize for *PROFITABLE* Revenue.

    Largely, this is about applying techniques in Customer Development (Steve Blank) and The Lean Startup (Eric Ries) to investing, and in particular how to research, improve, & identify Product/Market Fit (Sean Ellis, Marc Andreesen), otherwise known as "TRACTION", before and after you invest.

    This is really the key to my investment thesis: Invest BEFORE product/market fit, measure/test to see if the team is finding it, and if so, then exercise your pro-rata follow-on investment opportunity AFTER they have achieved product/market fit.  It's sort of like counting cards at the blackjack table while betting low, then when you're more than halfway thru the deck and you see it's loaded with face cards & tens, then you start increasing your betting & doubling-down.

    Let's face it -- most venture investors are sheep.  We like unfair advantages.  We want to know that there is already customers, revenue, and that elusive thing called TRACTION.  Unfortunately, if it's obvious that there is already customers, revenue, and TRACTION then there will likely be a LOT of other investors at the trough, the competition will be fierce, and as a result the price to invest will be high.

    So how can you invest at low-cost, then figure out when to follow-on to increase your value?

    it's pretty simple, actually.

    INVEST EARLY at LOW COST in people you think are smart and have built some promising products. understand if they know how to iterate and use customer feedback to improve their product and/or marketing.  learn how to understand conversion metrics for their business & customer value.

    then IF you see the metrics improving & customer / business value increasing... then DOUBLE-DOWN.

    however this happens in 3 distinct stages:

    1) PRODUCT: Discover a [large enough] customer segment with a meaningful problem / strong desire, and develop a functional solution for them to use (Minimum Viable Product aka MVP).  I also call this when ACTIVATION happens.  You should also make sure the user experience is compelling enough for them to use it more than once (RETENTION).

    2) MARKET: Test for scalable distribution channels that allow you to acquire large # of customers at cost less than what you will generate (ideally, at <20-50% of annual revenue so you have some cushion).  You may also find you have to go back to #1 and change some things, or discover entirely different marketing campaigns & concepts to get to scale.  If you're lucky you may even discover a way to get your users to spread the word for you (word-of-mouth and/or viral features).

    3) REVENUE: hopefully your MVP is already obviously valuable enough that people will pay something non-zero for it. regardless, the goal is to test & optimize for product/market(ing) combinations that generate cash-flow positive outcomes at scale, over short periods of time (or longer periods if you have financing structure to merit).  i tend to prefer business models with low complexity, such as direct transactional or e-commerce models, subscription billing models, or lead-gen / affiliate models.

    Ideally you'd like to be able to invest in a functional product AFTER the entrepreneur has already got it working, but sometimes they aren't there yet, and often they will have to pivot regardless in order to find an interesting segment that scales & is profitable.  Still, i'd like to think most entrepreneurs who understand their customer can build a functional MVP in 3-6 months, for <$100K. Sometimes it takes longer / more capital, but most times it doesn't.  If they look like they figure it out, double-down.

    Next, you'd like to be able to improve the user experience and engagement / retention, get them to increase their love for the product.  If you can do this well enough, your customers will become your marketing... at very low cost.  Even if you can't get to strong word-of-mouth or viral marketing, you can still hopefully reduce customer acquisition cost by getting incremental social amplification.  Regardless, your job is to discover SOME kind of scalable distribution channel that seems like it COULD be optimized to a point where it's cash-flow positive at some point in the future.  Hopefully this doesn't take more than $1-2M and 6-12 months to figure out.  But most of this spend should be on MARKETING channels & testing, NOT on adding more features... you can pivot to discover new customer use cases, but DO NOT keep adding features.  in fact, you might want to remove them (see KILL A FEATURE). If it looks like you've got scalable distribution, even if not quite break-even, then double-down.

    Finally, now that you have functional product (hopefully AWESOME product with strong activation / retention / referral metrics), and you have some ideas on scalable distribution that converts to non-zero revenue events (or proxy events such as long usage or referral / affiliate / lead-gen behavior, advertising CPM/CPC/CPA), now you need to tune to get to profitability within some finite period of time that you can finance and/or stretch to achieve.  This is where it can sometimes get quite expensive, and it could take years to get to profitability for some businesses, but i'd like to think that my startups can figure this out in $1-5M and 1-2 years. Again, if it looks like you can get there, then double-down.

     In summary, you should be thinking about stages for risk-reduction & company value creation that look like this:

    1) Product: $0-100K, 3-6 months to develop basic MVP that's functional & useful for at least a few customers. Get to small product/market fit.

    2) Market: $100K-$2M, 6-12 months to test marketing & distribution channels, understand scalability & customer acquisition cost, conversion to some non-zero revenue event. Get to large product/market fit.

    3) Revenue: $1-5M, 6-24 months to optimize product/market fit and get to cash-flow positive.

    I might edit this a little bit, as i'm in a rush to finish publishing and get back to other projects, but i think this has captured most of what i wanted to say for now.

    Appreciate feedback & commentary on anything that doesn't make sense, could be improved, or can be streamlined.

     

     

     

     

     

     

     

     

     

    Comments

    FredDestin

    Always such a blast.

    - Decided when to double down -- you may get slightly better info but most of the time you're going to have to dump some capital when you are still in the gray zone. We call it Prove / Build / Scale and the tough bit is building some people infrastructure before your thesis is proven outside of your launch market.

    - not clear on whether you want to have capacity to follow on inside your own fund or whether you want to go for a Founder Collective positioning ?

    Posted by: FredDestin | Thursday, August 05, 2010 at 12:55 PM

    Touchyourdream

    Dave, I think you pinpointed the current situation well, and suggested a reasonable approach method to optimize the investment thereunder.


    However, like both sides of the same coin, all things in this world have both positive and negative aspects. If the principles of economics and standardized rules are rigidly applied to startups, we can accomplish the higher success rate, but we are likely to sacrifice and lose better opportunities which might make us join "The Giving Pledge"

    Thanks.

    Posted by: Touchyourdream | Thursday, August 05, 2010 at 02:40 AM

    SocialMPH

    What a great read Dave. I think you are so right in your take on the industry, and I love the fact that you are so open in sharing....the way you write is the way companies are starting to operate, no BS, honest, value adding. This is why people follow you, and this is why tech start ups that are lean and valuable will succeed.

    Posted by: SocialMPH | Wednesday, August 04, 2010 at 08:12 AM

    Movyloshop

    Hi Dave,
    I'm a mobile serial entrepreneur now launching www.movyloshop.com (SaaS mobile commerce solution).
    I have raised money in the past for other start ups and are not bootstrapping it on my own cause the VCs generated more problems than benefits int he past, so I complete agree with you.
    But my point is: how do you manage the quickness required for product dev & mktg activites with...the slow fund raising? You can create a viable products in a short time, but it's unlikely that you put it live and get millions people on it. And raising money is a full time job that takes time...even raising small amounts.
    That is why all innovations (google, FB, Youtube....) all come from the same locations where the "funnel" is working fine.
    I agree that...smaller investments on metrics and smaller way outs are the future, but...at this stage is easier to create a SaaS viable solution than...having it exploding in the short term.
    How would you close that gap?

    Posted by: Movyloshop | Wednesday, August 04, 2010 at 04:41 AM

    Itzabitza

    Also - you have a potty mouth. Why is that? Do you believe it helps get a point across? (Just trying to understand your style. I could care less about the potty mouth shit).

    Posted by: Itzabitza | Tuesday, August 03, 2010 at 04:45 PM

    Itzabitza

    loved the post. What would be super-duper is if you understood more what went into developing an Internet service. One WEEKEND to design/develop a service that scales up to 1M? Your points seem much stronger from the MBA view. The challenge I have is you are devaluing what it really takes product wise. THAT IS NOT TO SAY A LOT of money has been wasted on development. I agree with that. Your knowledge of product development (as noted above) loses the article's credibility.

    Posted by: Itzabitza | Tuesday, August 03, 2010 at 04:43 PM

    Nathan Beckord

    Fun post. I am particularly keen on your Assertion #2. Along with the shift toward "microVC" / "superangel" / "seed accelerators" / "etc." will come a rise in the importance of "micro M&A" for startups...deals that are well under the normal threshold for big i-banks, but that can provide meaningful returns to founders and angels (but not always VCs).

    I think we'll see this scenario play itself out more and more, particularly in the web world: once founders have raised some angel$ (from 500Hats fund, natch), achieved product/market fit, and hit some initial traction, they'll come to a fork in the road...either swing big and raise multiple rounds of VC, or focus on a dual BD/acquisition strategy with strategic partners.

    I think in many cases founders can actually make MORE money by exiting early (while still controlling a hefty share of equity) vs. going for the big score (fueled by multiple VC rounds and concurrent dilution). Plus, exiting early at $50m after 2-3 years means founders can quickly repeat the cycle, vs. hanging on for the typical 6-8 years it takes most VC backed co's to achieve.

    In a nutshell, "Small VC is the new black" and "early M&A is the new exit."

    (Of course, this oversimplifies things and is a very rational way of looking at it....it overlooks the hubris that many founders get when things are growing fast and they start to get courted by name brand VCs...but I'm convinced we'll see more small exit deals, particularly if some of your thesis holds true); I put a related deck on the topic of startup exit strategy up on slideshare: http://bit.ly/dnmrLH

    Nice job, Dave
    Nathan Beckord
    ps sat at your table at S2S "Art of M&A" last week-- great panel! good times!

    Posted by: Nathan Beckord | Tuesday, August 03, 2010 at 03:04 PM

    Konstantin

    Hey Dave, very interesting article, I enjoyed reading it, thanks! It's cool how you make fun of old VCs, and it's probably true. I'm a web developer and the startup I'm in right now has gone the "dinosaur" way, but we're a service business, which makes things a little bit more complicated.

    Anyways, thanks again!

    ~ @kovshenin

    Posted by: Konstantin | Monday, August 02, 2010 at 11:32 PM

    Baba12

    This fine and dandy when it comes to some product/service that runs online on a network and hardware already built and paid for by previous startups like Cisco/Intel etc.
    I don't think you can develop a new materials technologies or semiconductors or bio tech ventures with this model that you put forth.
    For those ventures still require a lot of heavy lifting and there are not many VC's of the ilk you mention like Y-combinator etc to fund such ideas/startups.
    The kind of startups you mention take advantage of lot of the heavy lifting already done to create this platform.
    I would like to see First Round Capital or USV or you invest in seed stage in Biotech startup or in a new energy technology venture.
    The stakes are much higher and it is not for faint hearted, maybe Governments are the best suited to these investments, cuz private enterprise is least risk averse.

    Posted by: Baba12 | Monday, August 02, 2010 at 04:35 PM

    www.facebook.com/profile.php?id=663873744

    The same principles apply when investing your own capital.EVERY entrepreneur considering a start up or even those considering a new business line should read this. The big established VCs will probably blow this off because the implications for their business model are too horrible to contemplate.

    Posted by: www.facebook.com/profile.php?id=663873744 | Monday, August 02, 2010 at 08:18 AM

    Zenx

    A lot of what you say is true, and I'm unqualified to comment on the rest. But, as an entrepreneur (wannabe) it'd be nice to see it from this side of the fence. Since startup costs are low, what do I really need investors for ? Mentorship (which is very suspect, for now), connects (useful) - so I guess the "smaller" VCs will need to be more part of the team than someone sitting across a desk peering at numbers (dis)approvingly.

    Posted by: Zenx | Sunday, August 01, 2010 at 09:06 PM

    Swagner2

    Dave:

    Great points. We took a year to build out our app and business model with paying customers. We're finally nailing down the Revenue side and need to raise some money for our sales team.

    Any suggestions on positioning the story at the Revenue stage (and the others) of the game to angels?

    Posted by: Swagner2 | Sunday, August 01, 2010 at 07:29 PM

    Madjammy

    Very interesting article, for the most part we are in full agreement.

    Here in Boston we feel as if there is a total lack of innovative early stage investment in any type of novel SAAS applications.

    We feel it's not for lack of opportunities or for that matter talent, but a mindset that is closed to early stage companies with original concepts.

    We find that without the site being fully fleshed out and a market already developed, there is a general lack of investment interest.

    Dave are you planning on coming to Boston any time soon?

    Posted by: Madjammy | Sunday, August 01, 2010 at 04:01 PM

    abm

    ThruDispatch - turned down by every VC in the Valley after 1000 independent mobile service customers surveyed positive. This was in 05-07.

    Fucking A

    Posted by: abm | Saturday, July 31, 2010 at 08:52 PM

    Zafirkhan.wordpress.com

    Dave, you do a great job of analyzing the implications of the idea that web 2.0 technology has democratized startups - the cost of getting off the ground is much lower and reaching customers is more accessible.

    I agree with Rick Bullotta's comment, though, that a lot of the startups who meet the criteria you've outlined tend be copycat, fad-driven companies. I wonder why tech innovation is so focused on gaming, more targeted search advertising, etc. when these tools could be used to address problems in other domains. Healthcare, for example, is devoid of interesting companies that take advantage of social media and search to bring better information to consumers.

    I'd like to see a response from the perspective of the so-called "dinosaur VCs" you mentioned...

    Posted by: Zafirkhan.wordpress.com | Saturday, July 31, 2010 at 08:23 PM

    Mike Nelson

    Looks like you dont have guts to take candid feedback, you deleted my comment. What do you have to cover up!

    Posted by: Mike Nelson | Saturday, July 31, 2010 at 12:02 PM

    Mike Nelson

    This is great post ? God save America.

    Keep it simple asshole (your language), Example investment thesis - startup costs are down, hence smaller fund and I have guts to make quick decisions. If you had built worth while startup before, you would have known, what they mean by focus, focus. And also dont say exits are small, it will hurt your future portfolio, you never know.

    Posted by: Mike Nelson | Saturday, July 31, 2010 at 11:55 AM

    RickBullotta

    Dave, the downside of the "web-enabled insto product" mindset is that a shitload of startups are copycats. Walking through the aisles at the TechCrunch thing in NYC a couple months ago, 95% of the companies started their pitch with "we're like XXXXX, but...". Like, "we're like Facebook, but for pets". Please. Spare me.

    There is a middle ground for "real innovation" that will require a bit more capital than copycats and "applied technology" startups. If we don't find a way to fund real primary research and technology innovation and are just focused on following social fads with lightweight "insto startups", we're fucked as a country over the long term.

    Schumpeter rules.

    Posted by: RickBullotta | Saturday, July 31, 2010 at 11:09 AM

    100Gigabit

    Venture Operating Expense will never produce the returns Venture Capital used to. Startup finance is in dire need of some innovation.

    Posted by: 100Gigabit | Saturday, July 31, 2010 at 10:30 AM

    Antonejohnson

    Brilliant post, Dave, written as only you could write it. You make a good case for the strategy behind my startup law practice -- "invest" in building client relationships with entrepreneurs at the pre-seed stage, before they've achieved product-market fit, doing their startup work for much lower rates than the big firms charge, with the goal of retaining and building on those trusted relationships when the successful ones reach the "double down" stage. Also, bring to bear a product-centric world view with deep specialization in one area (consumer/social Web in my case). Going after many clients at the earliest stages, who have the smallest amount of cash available to pay their lawyers, is probably the hardest way to build a practice (vs. the traditional pursuit of fat-cat corporations with huge legal budgets), but in the long run, I think it's the smartest way to thrive in the brave new world of disruptions in the VC ecosystem that you describe.

    On a related note, I'd be curious to hear what you and other readers think of the Series Seed approach to streamlining documentation and reducing legal fees for seed rounds. I posted my (admittedly skeptical) thoughts at http://bll.la/55.

    Posted by: Antonejohnson | Saturday, July 31, 2010 at 08:27 AM

    Paul Ward

    This is a good analysis. VC will take too long to pick it up unless, as he says, they're innovative. The reason is that they distrust cheap assets. They want their money to buy expensive, protectable assets. And yet expensive and protectable are two concepts that can be separated. It's far cheaper to get a new company up and running in ways that are differentiated from a brand standpoint, and lawyer up on protecting the brand, than to do patentable stuff.

    I would want a version of this article that looks at the root cause of increasing total return to shareholders. This is essentially what gives VC their exit ... it creates an argument for the future value of the cash flows that VC can sell to people whose money will replace theirs (next tranche, IPO). So, the problem to solve REALLY is creating measurable, increasing total return to shareholders.

    What are the drivers for that? 1. Compelling and engaging value prop - for social media plays, this means solving a problem, engaging the imagination, architecting a user experience that is easy to adopt AND YET NOT GENERIC (god, I hate those 'don't make me think' UI people who make everything so 'web 2.0' that it's all the same vanilla cr*p), lowering barriers to recommendation, allowing co-creation and sharing, and enhancing the customer's reputation. 2. Cognitive sophistication in customer experience management. 3. Well-designed multitouchpoint ecosystem, including partner ecosystems, that are measurable. 4. Hella analytics. 5. Lots of experiments, well-designed and targeted to increase customer engagement (see Gallup and Carlson).

    Done.

    The rest of the argument can fit with what I outlined. Remember, the goal is NOT to make it cheaper, or to engage customers sooner, or even to get revenues. Cheap can be bad. Engaging early adopters is not enough. And revenues can be expensive - that is, you have to have PROFITABLE revenues that are ALSO early indicators of FUTURE CUSTOMER VALUE.

    All that equals ... increasing total returns to shareholders.

    THAT you can get funded.

    Posted by: Paul Ward | Saturday, July 31, 2010 at 08:21 AM

    Appmatcher

    Great job Dave. Rackspace is hosting an event on October 7th for B2B SaaS apps. I assume your event in SanFran on the 8th would preclude you from being able to be one of the judges in our start-up session FundMyApp, but I wanted to still ask if there are any very early stage (what you call "product") firms that you could encourage to come and pitch during this session. Ping me back at andy.schroepfer [at] rackspace [dot] com.

    For those reading this that have or know of a B2B SaaS application firm (of any size) that would like to attend, please contact me at the email above. Thanks, Andy

    Posted by: Appmatcher | Saturday, July 31, 2010 at 05:40 AM

    jasonspalace

    SICK! You've just written the filler for many venture slide decks now through 2015...

    Fuck.That.Noise.

    =)

    Posted by: jasonspalace | Saturday, July 31, 2010 at 02:26 AM

    Phil_hendrix

    Discovery-driven Planning and Agile Market Research - An Antidote to Doubling Down Prematurely?

    Dave, good post. Should provoke a lot of discussion. I'd like to share some supporting perspectives and offer alternative solutions.

    Two academics - Ian MacMillan (Wharton) and Rita McGrath (Columbia) - have examined many of the issues you raise in their discussions of innovation, uncertainty and investment. MacMillan puts it succinctly when he recommends "spending imagination before you spend your money and... engineering the risk out of uncertain projects..." In a nutshell, the process he and McGrath advocate involves 1) creating tests to probe and reduce the uncertainty ahead of investment; 2) staging the investment tranches, contingent on intermediate outcomes; 3) postponing investment until (some of the) uncertainties are resolved.

    Useful sources on their perspectives include notes from a conference last month at Wharton http://bit.ly/aIihsF; a video in which MacMillan and McGrath explain the rationale and benefits of the approach, which they call "Discovery Driven Growth," at http://bit.ly/dxJdwi; their book http://amzn.to/cZeLIW; and McGrath's blog at http://bit.ly/cL1AG8. Several readers have pointed out the parallels between their perspectives (developed over the last 10 years or so) and the "lean startup" notions of Eric Ries (http://bit.ly/hSVtd) - these complementary perspectives are crucial to avoid the pitfalls you've identified.

    Another important and useful resource is what we call Agile Market Research. Entrepreneurs often make bold assertions re: market potential, e.g., how the market will respond to their product, conversion rates, projected ASPs, etc. These hypotheses and others can be tested in advance of significant investment and commitments. While "listening to customers" and "build it and (see if) they will come" can be informative, more accurate methods can be used to predict market response and are recommended when opportunity costs, investment and/or uncertainty are high. Data can be obtained and a predictive model generated relatively quickly and at lower cost, compared to a market test - the model is also more robust (e.g., allows for the testing of many different configurations, price points and business models, not just one or a few). While predicting consumers's response to "very new" products (e.g., iPad; Twitter; etc.) is fraught with challenges, it's not impossible (for further discussion, see http://bit.ly/9kJ1tZ).

    Dr. Phil Hendrix, immr and GigaOm Pro analyst

    Posted by: Phil_hendrix | Saturday, July 31, 2010 at 12:39 AM

    MikeDuda

    This post validates what I've been banking on doing for the past couple years. Thanks. This made my day BIG time.

    Posted by: MikeDuda | Friday, July 30, 2010 at 06:34 PM

    TipperaryP

    Hi Dave--long time since FSV and early SVASE. What if it takes more than $100K to get to product, but less than $1M to get to revenue/profitability in 6-12 months? Is that still worth a seed investment?

    Posted by: TipperaryP | Friday, July 30, 2010 at 06:18 PM

    Subbu4

    Great post... in concert, with the sea change occurring with this startup funding paradigm, there is a shifting mentality among entrepreneurs... the best entrepreneurs are hopefully looking for the intangibles that the angels bring to the table, more so than the actual cash. That is something worth giving up equity for. As a first time entrepreneur, i really do subscribe to that thought.

    We are currently bootstrapping our product development in a pre-revenue environment, after raising friends and family money 3 years ago - with those coffers now depleted. While figuring out ways to keep our operations moving forward, and always *thinking* we're so close to hitting profitablity, I'm not at all interested in diluting our equity for cash... but I'd do it in a heartbeat to get access to someone who's done it before - that's the angel that I want... I would get the best of everything without entertaining VC-level equity dilutions.

    Posted by: Subbu4 | Friday, July 30, 2010 at 02:24 PM

    Ay_o

    Well written Dave; not experienced enough to speak for the metrics you attached to each stage, but the breakdowns into stages (Product/Market/Revenue) and what to focus on in each, are useful particularly for first-timers like myself. Bon courage.

    Posted by: Ay_o | Friday, July 30, 2010 at 02:19 PM

    hypermark

    More coffee, man! I mean that in a good way. Seriously, though, well-constructed in terms of your staging out thesis.

    I think that where in practice things get potentially more complex is that in doing Seed or being a micro fund, you have to have a clear plan (and powder) on deals where you find yourself in the realm of liking the deal but being in the gray area between Seed and Series A readiness (in eyes of VCs).

    You have to be clear if you are REALLY prepared to be the Lead Investor if you believe in the venture.

    For VC's, I wholeheartedly agree with the Dixon analog of treating this as a Call option on Series A since they specifically want to be the lead in Series A.

    By contrast, many Seed Round investors aren't prepared or capable to Lead, and that lack of preparation puts them in a position where they either drain their coffers or miss out on the double-down scenario when subsequent phases play out.

    Mark

    Posted by: hypermark | Friday, July 30, 2010 at 02:18 PM

    CDunnSD

    Refreshing and insightful Dave. Having sat on both sides of the line (VC & Entrepreneur) I fear the once revered VCs have all but become irrelevant. Have done the dance many times with these guys and music hasn't changed a beat - while the web world has evolved exponentially.

    Best of luck with the new venture.

    Posted by: CDunnSD | Friday, July 30, 2010 at 02:15 PM

    Irina Patterson

    Hi Dave,

    We would like to interview and feature you on the Silicon Valley blog, Sramana Mitra on Strategy: www.sramanamitra.com

    My interviews focus on seed and angel financing for entrepreneurs.

    I already interviewed Mike Maples, Jeff Clavier, and many many other very smart people here: http://www.sramanamitra.com/2010/05/19/irina-patterson So, you'll be in a good company...

    If I can provide any added value for you, after serious talk on seed investing, we can talk funny hats too, that is my side gig: http://mylifeandart.typepad.com/

    But seriously. Could you get back with me regarding scheduling a serious talk on seed financing first, hats second. I can be found at @mylifeandart or 12irina34[at]gmail.com Thanks in advance -- Irina

    Posted by: Irina Patterson | Friday, July 30, 2010 at 12:49 PM

    Mattharrell

    This makes so much sense to me. Would you say that KissMetrics's investments so far serve as a good example? It appears so. http://techcrunch.com/2010/07/22/kissmetrics-conversion-funnel/

    Thanks for the insight and laughs!

    Posted by: Mattharrell | Friday, July 30, 2010 at 12:38 PM

    Tomkuhr

    LOVE the Blackjack metaphor, Dave - simple and accurate.

    The more ideas that get that early, pre-market/product fit investment, the better. That's a really big hole in angel "strategy" right now.

    Posted by: Tomkuhr | Friday, July 30, 2010 at 12:27 PM

    Pennygrabber

    This is a brilliant writeup! I like the points you've hit on, and how you specify how to change them for the better. As a startup in the consumer Internet space currently raising seed capital, I can attest to the Product > Market > Revenue strategy.

    Although we are raising a total of $300k, the bulk of our cost will be in the Product development stage. I've been given estimates of ~$118k to have just the e-commerce engine developed. Luckily for us, once this is done, we will pretty much be cash flow positive within our first month of operation.

    The one thing I am noticing across the board with the VCs we've spoken to is the prevailing sheep mentality you alluded to. It's an unfortunate fact indeed, and one that most certainly contributes to the increasing demise of the traditional VC investor, and the rise in the angel investors, and those VC who participate in early round funding. Thanks for the write up, Dave. And I wish you much success on your 500 Startups venture fund.

    Posted by: Pennygrabber | Friday, July 30, 2010 at 12:21 PM

    Bruce Christensen

    Money, Money, Money...
    That is all those investor types are interested in...
    What about solving the problems of consumers for the benefit of the masses and....

    Oh, wait.. I am interested in money too!

    I agree with your suggestion that you invest early and help good solutions grow into great investments.

    Posted by: Bruce Christensen | Friday, July 30, 2010 at 10:57 AM

    Alain94040

    Welcome to VC 2.0: VCs with a plan. Refreshing.

    Posted by: Alain94040 | Friday, July 30, 2010 at 10:44 AM

    Fijiaaron

    You are right about the dinosaurs and asteroid, but folks like YCombinator, Techstars, etc. aren't real investors and they aren't in it for investing. They're either

    A) Attention seekers who got lucky in the first internet wave

    or

    B) Hucksters looking to make a few bucks off of people's dreams. They don't really even care if any company they back "makes it" because they're all about collecting fees on the way up.

    They'll go the way of the dinosaurs faster than the big lizards, though there'll always be a snake oil huckster trying to sell beans to people trying to sell milk cows. And it always works.

    Posted by: Fijiaaron | Friday, July 30, 2010 at 10:32 AM

    Borismsilver

    Fantastic post. Feels like many tech investors are looking for bond-like risk, with early stage return and it just doesn't work that way. You nailed it -- got to invest before the traction if you want to get the right pricing.

    Posted by: Borismsilver | Friday, July 30, 2010 at 09:45 AM

    Klochner

    This reads like a playbook for the @cdixon observation that seed investing is a call option on the series A:

    "Basically big VCs are spending 5% of their budget generating captive leads for their real business: investing $10M into companies at the post-seed stage."

    Posted by: Klochner | Friday, July 30, 2010 at 09:41 AM

    Janhorna

    A long piece but still worth of reading :)

    I really share your view and would like to add a small note. What I see as a typical T-Rex behavior is a local investing, e.g. most investors invest only in the Bay area.

    I like your GOAP idea where you and likes explore opportunities outside the U.S. Of course it's going to be riskier business to invest "somewhere" in Europe or Asia.

    But if you, or better say any investors, go the extra mile then you can invest at really low cost compared to the U.S. values. So it might be really win-win situation for both investors and foreign startups.

    Posted by: Janhorna | Friday, July 30, 2010 at 09:17 AM

    Poornima

    I like the point about investors knowing the space. As an entrepreneur its been hard for me to find good investors who know and understand the space I'm in (SMB) to be comfortable enough to put in small amounts of capital. I've had to bootstrap my venture for the last 7 months. In doing so I actually came to the realization that if I start to make revenue that will cover my operational costs then I don't need to take investment or can hold off and give my employees better equity based compensation. I'm wondering if there are other entrepreneurs out there who are starting to think like me and hold off on taking investment.

    Posted by: Poornima | Friday, July 30, 2010 at 09:01 AM

    twitter.com/startupcfo

    Dave, your diplomatic skills are as finely tuned as ever. One question: How do you structure sub $100K deals? Common? And do you do the full shareholder and purchase agreement bit? What are transaction costs on that type of deal?

    Ok, that was more than 1 question

    Posted by: twitter.com/startupcfo | Friday, July 30, 2010 at 08:52 AM

    The comments to this entry are closed.

    Getting to Product-Market Fit

    Getting to Product-Market Fit

    I’m very excited about this guest post and confident that it will be a huge help for anyone struggling to find Product-Market fit. Enjoy! Sean

    Guest Post By Patrick Vlaskovits

    Sean asked me to write a guest post to help startups achieve Product-Market Fit since he primarily advises startup after they’ve already reached it (during their transition to high growth businesses). Actually getting to Product-Market Fit is an important topic since the vast majority of startups never get there, making it virtually impossible to drive sustainable growth.

    I’ve just completed what amounts to a comprehensive study on the topic of getting to Product-Market Fit with Brant Cooper, culminating in our book called The Entrepreneur’s Guide to Customer Development. The most important insights were gained from successful serial entrepreneur, Steve Blank, who encouraged us to write the book as a primer to the first step of Customer Development. Customer Development is the startup framework he codified in his landmark book, The Four Steps to the Epiphany. If you haven’t read the book (you really should), Steve’s many insights are deep, but the core takeaway is that most startups fail not because they don’t manage to develop and deliver a product to the market; they fail because they develop and deliver a product that no customers want or need.  The ramifications of this deceptively simple observation are manifold and underpin much of what you will read below.   Sean has provided a free survey that should be helpful in validating if you have created a product people want or need.

    The Entrepreneur’s Guide to Customer Development also folds in the work of Eric Ries.  Eric has built upon Steve’s work and expanded it with his concept of “The Lean Startup.” A Lean Startup is one that combines fast-release, iterative development methodologies (e.g., Agile) with Customer Development concepts.

    Wherever you are in the process of taking your product to market, the following Lean Startup and Customer Development concepts can help you achieve Product-Market Fit.  Nothing else really matters to a startup other than getting to Product-Market Fit as fast as possible.   Below is a brief outline, based on The Entrepreneur’s Guide to Customer Development, which will hopefully help you do just that.

    Identify and document your assumptions

    The sooner you understand and accept that you, as a entrepreneur at somewhere pre-Product Market Fit with your startup, are operating in near-chaos, where all your assumptions/hypotheses about how you gratify your users, who they are, how you will acquire and monetize them – are simply that, untested assumptions, the better off you are.

    With your assumptions documented and in-hand you will:

    “Get out of the Building” to validate (or invalidate) your assumptions

    You must find, meet and speak with prospective customers about your product and ascertain the validity of your assumptions. This is the crux of Customer Development.  Only by speaking to these people will you have any sort of understanding about “their reality” as Dan Martell likes to put it.  What problems do they face?  How do they solve them?  What matters to them?  What is a must-have for them?

    As you speak to potential customers, you should:

    Identify the risk factors in the opportunity

    Are you facing significant technology risks?  Or more of market risk?  How can you test and validate these (starting with the most risky)?  What market testable milestones can you build that would result in sufficient evidence to induce you to pivot or move forward? A proof of concept? A letter of intent?  A prototype?

    As your understanding of the market betters, the risks will begin to crystallize, if certain risk factors prove insurmountable, you must:

    Pivot but not jump

    By changing an element of your customer-problem-solution hypotheses or business model, based on actual learning from a customer. As Eric Ries writes “by testing, each failed hypothesis leads to a new pivot, where we change just one element of the business plan (customer segment, feature set, positioning) – but don’t abandon everything we’ve learned.

    The way to test and learn from your market is to build an:

    MVP (Minimal Viable Product)

    Don’t forget that an MVP is a product with the fewest set of features needed to achieve a specific objective and that you should require a trade of some scarce resource (time, money, attention) for the use of the product, such that the transaction demonstrates the product might be “viable”.

    For non-paying milestones, you must define the currency (the scarce resource) and your objective (what you are trying to learn). For example, intermediate MVPs might include: landing page click-through that prove there’s some amount of interest in a product; a time commitment for an in-person meeting to view a demo that shows the customer’s problem being resolved; or a resource commitment for a pilot program to test how the product fits into a particular environment.

    Once you have users using your MVP, listen for and tune into the:

    Must-have signal

    that demonstrates the core product functionality that your customers absolutely must have, while testing your assumptions and learning the characteristics of your market segment that will allow you to reach out and acquire them efficiently.  Sean’s survey, mentioned earlier, can be useful in finding your must have signal.

    Once you successfully developed a minimal viable product and have found the must have signal, it is time to:

    Double-down and strip away the unnecessary

    Now you know what your customers want, you need to focus with laser-like intensity in building a gratification engine that does not disappoint.

    If you can do all of the above successfully and throw in a hearty amount of luck for good measure, there is a good chance you can get to Product-Market Fit.  It may take a significant amount of time and persistence, but potential customers always hold the answer to creating a must have product.

    Posted in Customer Development, Product/market fit. RSS 2.0 feed. Both comments and pings are currently closed. -->