Tuesday, October 23, 2012

Choosing Your Cofounders: How We Fight

Jessica Alter, cofounder and CEO of Founder Dating, recently authored a guest post on Steve Blank's blog titled "How We Fight -- Cofounders in Love and War." Her thesis is that one of the most important criteria for selecting a cofounder is knowing how you fight with them -- how do you resolve differences? When there are disagreements, do you resolve them quickly and move on, or do you remain resentful? What do you fight about, and why? It's important to know the answers to these questions, since startups move quickly and also go through tough times, making it likely that there will be disagreements and fights between the cofounders. If you don't know how you will be able to resolve these disagreements, you're setting yourself up for risk of failure.

One thing that Jessica advised is for you to actual work together with your cofounder for some time before signing up to build a company with them. Work on a side project with them, or maybe even spend a few months working full-time with them. This is similar to what I wrote about a few weeks ago: that it is really important for you to work on a project with your cofounder before starting a company with them. Before we started Dasient, my cofounders and I spent several months building Facebook apps together during nights and weekends. Working on a project together enables you to understand how complementary you are to each other, if each person takes on a fair share of responsibility, what each person's values/commitment level is, and finally how you resolve disagreements and differences. It also allows you to "kick the tires" and take your cofounder for a "test drive" before forming a company together. 

I think Jessica's advice is spot on. Make sure you develop some experience actually working with your cofounders on a project so that you know how you fight (and move on) -- because there will be plenty of opportunities to disagree as you navigate the ups and downs of a startup.

Wednesday, October 17, 2012

Raise at a Local Maximum

Mike Maples from Floodgate, one of our investors in Dasient, once gave us the advice that "you should always raise at a local maximum." What he was referring to was that as a startup grows, it always has its ups and downs. To get the most interest from investors (and therefore the best valuation and terms), you should time your fundraising so that it happens right around one of the "ups"-- or at a "local maximum." 

When we asked him what qualified as a local maximum, Mike mentioned several possible inflection points for a startup: coming out of stealth, entering a new market, winning a big customer/partner deal, releasing a new major product. Basically anything that is news worthy, which creates a lot of momentum for the company, and that also paints a picture that there is huge upside for the business. A recent example was when Instagram raised its $50m round right after it released its Android app (and right before it was acquired by Facebook). Or when Lookout Security raised a $40m round last summer, soon after announcing a big partnership with Verizon Wireless. 

As an entrepreneur, you always want to raise funding at a local maximum. This requires you to be strategic about your fundraising process, since you need to cultivate investors for some time before you formally begin to raise money. One of the biggest complaints from VCs is that they don't want to be approached for a new round at the tail end of a your fundraising process, where they would have to get up to speed on your business and market quickly, and hustle through their due diligence process. Worse yet, they fear being used merely as a bargaining chip against another VC who is ahead of them in the process. So many VCs will just pass on what might possibly be a good opportunity if they don't have enough time to do the work they need to do. 

To approach your fundraising strategically, you need to anticipate what some of your upcoming local maxima will be over the next 6-12 months. And you need to keep building relationships with potential investors at a slow drip, even during periods when you are not actively seeking to raise money. Get to know potential investors, help them to get to know your market and your company, so that they are familiar with you when it's time to raise. If you keep fundraising going at this slow drip even between rounds, when a local maxima is about to arrive, you can "activate" what were previously informal conversations into a formal fundraising process. And hopefully then you will raise a round on your terms, with the wind at your back, rather than when you are up against a wall. 

Thursday, October 4, 2012

Hiring Experts v. Staying Lean

I recently came across a white paper written by Vinod Khosla titled "Gene Pool Engineering for Entrepreneurs." In the paper, Khosla describes a process for creating the right "Gene Pool" for a company by (1) aligning your critical first few hires with the key risks and opportunities for the business, and (2) by consciously hiring for diversity across skills, background, experience, and mindset. By following rule #1, you ensure that you find the best experts that you can that will help you solve the biggest problems for your business. By following rule #2, you include the diverse perspectives necessary to foster creative problem-solving and also prevent groupthink. 

I generally agree with Khosla's recommended approach-- you should always keep in mind what the key risks are to your business, and which experts (from which "centers of excellence") would you like to recruit to address those risks. And when evaluating any new candidate, don't just think about how they will address the key risk or opportunity that you will point them at, but also think about the impact he or she will have on the "gene pool" of your business.

After reading the paper, though, I remembered the book Getting Real by 37 Signals, which had a chapter of their book called, "Less Mass." In this chapter, the authors advise startups to avoid taking on too much mass, in the form of product features, customers, and employees. The core argument is that one of the greatest advantages that a startup has is its agility, its ability to stay nimble and adapt to new customer needs and changing market conditions. As you take on more mass, it becomes difficult for a startup to change. 

I have firsthand experience with this advice -- at Dasient, we made technology, product, and hiring decisions based on our initial vision of providing web security (in a similar market to vulnerability scanning). However, as we began to see opportunities in the mobile security space, we had taken on too much mass to adapt quickly to take advantage of the new opportunities. For better or for worse, we were committed to the original vision for the business, and it would be difficult to change.

So how do you reconcile the advice from 37 Signals -- avoid taking on mass, avoid over-hiring, stay lean and nimble so that you can adapt -- with the advice from Khosla, which is to identify the key risks to your business and hire people specifically to address those risks? Suppose you start with an original vision for the business, and you hire experts to help you address risks for that vision. But then the company needs to pivot and the experts you had hired for the previous vision are now obsolete? 

Here is a proposal: figure out which risks to your business may cause you to pivot to a "plan B" if the answer comes back a certain way. Think explicitly about what that "plan B" is. If you plan to hire a person to address the risk that has a good chance of becoming obsolete if you pivot to plan B, don't hire that person yet. The founders should continue to address that risk until in your judgment you have more certainty around whether you need to pivot. Only when you are relatively "committed" to a certain path, then make the hire.

Another option is to screen your hire for their "option value": can they help you address the risk if you stay the course with plan A, and could they also be valuable to the business if you pivoted to plan B. Can they multi-task and add value in multiple areas (and delay your hiring someone else)? And, importantly, do they have the experimentation mindset; the scrappy, can-do, entrepreneurial spirit; and the attitude to adapt well to changing conditions, lack of clarity, and lack of resources? 

I believe that rather than treating the risks to your business as static, think of the risks as dynamic depending on whether you stay with plan A or pivot to plan B. Prioritize addressing those risks that may cause you to pivot, and tackle those yourself if possible. If you decide to make a hire, screen them for their option value-- could they be valuable in plan A and plan B? This will help you avoid some of the downside of "taking on more mass." As you become more mature and more certain that you will continue to stay with plan A, you can veer more towards hiring experts for specific risks and opportunities for your business.

Sunday, September 30, 2012

Mapping Customer Pains to Value Proposition

Alexander Osterwalder gave a talk at Stanford in January 2012 called "Tools for Business Model Generation." I have not had a chance to watch the entire talk yet, but I did watch some of the shorter clips. One clip is called, "Mapping Customer Pains to Value Proposition."

In the clip, Osterwalder describes the tight relationship between Customer Segments and Value Propositions. Essentially, he said that it's important to know your target customer well. Explicitly document the "jobs" (or tasks) that the customer needs to accomplish. For each job, describe the customer's "pains and gains." The example he chose was a mom who is shopping for salad. The job is to go to the grocery store, select the ingredients, go to checkout, and return home. The pains could be that the store is out of stock for the ingredients she wants, or that the checkout line is really long, or that she hits traffic on her way back home. The gains could be that the salad tastes fresh and good, that she gets to try a new recipe, that the ingredients are healthy, etc. (Some of these pains and gains are elaborations by me, not actually in the video.)

He then gives advice about how to create the value proposition and map it back to customer pains. First, decide what your "offers" are. The offers could include the product itself, services, or features. For a local business, perhaps part of the offer is convenience (location). Then for each element of the offer, explicitly show how it's either a "pain killer" or a "gain creator." 

To sum up:
  • Figure out who your target customer is.
  • Identify the key "jobs" or tasks that they need to accomplish.
  • Determine the customer's pains and gains.
  • When creating your value proposition, think of the offer as everything that could provide value: the product, service, location, etc.
  • Then, for each aspect of the offer, explicitly map it to whether it's a "pain killer" or "gain creator."

This is great advice for anyone contemplating a new startup venture. The more explicit you can be about who your customer is, and what their pains and gains are, the easier it will be for you to craft your value proposition. When you are first starting out, you can use a tool like this to document your hypotheses about the customer segment and the value proposition. Then you explicitly test those hypotheses in the market by going out and talking to real customers.

Tuesday, September 25, 2012

Choosing the Right Cofounders

I was fortunate enough to choose two amazing co-founders for my startup Dasient, Neil Daswani and Shariq Rizvi. When people ask me what the most important decision was from my startup experience, I think that the choice of cofounders ranks as probably one of the most important (along with choice of market and maybe choice of investors -- more on this later).

Your cofounders will be like your family for the next few years. You may in fact spend a lot more time with them than with your real family. Like with any family, you will go through ups and downs. You will disagree with each other. You will have fights. You will face difficult decisions together. But at the end of the day, if you can still work together and pull through the "downs," you will have a much higher chance of success. 

So one question I often get is, "How do I choose a cofounder?"

1. Choose someone you know well and trust.

First, I believe that you are better off choosing someone you know well. This is going to be someone you have to trust implicitly, so having known them well for a long time helps. Think back to people with whom you have studied in college, or even better worked with in a professional capacity. I had worked with Neil in a company called Yodlee for two years about 6 years before we decided to start Dasient together. And I knew Shariq from my grad school days at Berkeley-- he was working on his PhD in computer science and I was working on my MBA. We had a history together, which helped to start with a foundation of trust. Plus, with both Neil and Shariq, we had a lot of common friends and acquaintances, which further increased the level of trust. It wasn't as if we had found each other by posting a "co-founder wanted" ad on a job board. 

2. Make sure that you work well together.

Second, screen for how well you actually work well together, and for each person's level of commitment. Although you may have known someone for a while, unless you have actually worked on a project, you don't know how well you work together. We did a bunch of "warm up exercises" to see how well we worked together. In 2007-2008, I worked with Neil and Shariq separately on a bunch of Facebook applications. These did not end up as ideas that we built our business around, but they were extremely helpful warm ups for us to get to know each other's working style. Did each of us take on a fair share of responsibility, and did we deliver on commitments to each other? Were we willing to roll up our sleeves and do whatever it took to build the product? Were we able to solve problems together? Did we have the commitment to spend nights and weekends working on a side project? What was our philosophy about building a company together? We learned the answers to each of these questions by working on the "warm up" Facebook apps together over the course of several months. 

In their book "Getting Real," the 37Signals team have a chapter called "Kick the Tires." Here is a direct quote from the book: "Work with prospective employees on a test-basis first. It's one thing to look at a portfolio, résumé, code example, or previous work. It's another thing to actually work with someone. Whenever possible, take potential new team members out for a 'test drive.'" I think that this advice makes a lot of sense, and I would even extend the advice to "work with prospective cofounders on a test-basis first." (BTW, "Getting Real" is a really awesome read. If you haven't read it yet, check it out.)

3. Find cofounders who are complementary. 

Third, make sure you find cofounders that are complementary to you and that can add value on day 1. One of the big mistakes that I see a lot of MBA-types make is that they find other MBAs to be their partners in a startup venture. Then you have a bunch of cofounders with a very similar skill set, and not enough cofounders with the skill set that is most needed when first starting a venture: the ability to write code. 

When you're first getting started, you definitely don't need more "business cofounders" than technical cofounders. Depending on the type of startup, you're better off with 1-2 technical cofounders and 1 business cofounder. Nowadays it has become easier for even fairly non-technical people to at least make prototypes, if not write fully functional code. Get the business cofounder to contribute to the actual product development by creating mockups/wireframes, or writing some of the front-end code. What you don't need in a business cofounder is someone who is only focused on "strategy," "business plan," or "partnerships." The business cofounder can take primary responsibility for strategy and fundraising, but should also actively contribute to the product development. 

On the flip side, I have seen many really talented engineers who don't appreciate the value of having a business cofounder. These same engineers will often pursue a startup opportunity for the wrong reasons-- it seems cool and sexy, or it's something that that they are excited about, for example. (Being excited about an opportunity is, of course, really important, but should not be the sole reason for pursuing a startup.) At the end of the day, though, does the opportunity represent a large enough market opportunity? This is where having a business/product cofounder can help. The business cofounder can help identify customer pain points, size the market opportunity, ensure that the positioning is correct. These skills are probably more important for B2B tech opportunities than consumer. 

My point is that each confounding team should have cofounders whose skill sets are unique and complementary. So when looking for cofounders, make sure you don't find clones of yourself.

In a future post, I will share some stories about how having good cofounders made a big difference in my startup experience, and how having bad cofounders can destroy startups. 

Wednesday, September 24, 2008

Notes from "New Rules of Marketing and PR"

I have been reading a copy of "The New Rules of Marketing and PR" by David Meerman Scott. In the old world of marketing, you could only reach buyers via expensive ads or 3rd-party ink. With the web, you can reach niche buyers directly with very targeted messages that only cost a fraction of what it would cost you in the old world. You have to stop marketing exclusively to the "head" of the tail; with the web, you can actually market to the "long tail" as well. "Instead of a one-size-fits-all Web site with a mass-marketing message, we need to create many different microsites--with purpose-built landing pages and 'just right' content--each aimed at a narrow target consitutuency."

Also, instead of using interruptive ads to reach customers, you should offer valuable content that helps buyers make decisions. This follows the overall trend in media: the most effective ads are the ones that are perceived as content.

You don't need to rely on 3rd-party ink to reach buyers. You can talk directly to them with the web. How do you do it? By publishing a blog and offering useful content. As buyers search on Google while they do research, they may stumble upon the content you have created. Now that you have established some kind of relationship with them by giving them valuable content, you can sell them on your product. Let the world know about your expertise. Participate in conversations in your industry or market by commenting on other people's blogs.

Create buyer personas, and then develop content specifically for them. "Who are my readers? How do I reach them? What are their motivations? What are the problems I can help them solve? How can I entertain them and inform them at the same time? What content will compel them to purchase what I have to offer?"

Blogs are used:
1. To monitor what people are saying about you and your product
2. To participate in those conversations by commenting on other people's blogs
3. To begin and shape those conversations by creating and writing your own blog

Make sure that your "news releases" speak directly to your buyers (rather than press releases that speak to journalists). Write news releases that are replete with keyword-rich copy. Issue news releases often. Place links in releases to deliver potential customers to landing pages on your Web site.

Tuesday, August 12, 2008

Bargaining for Advantage (Interests and Leverage)

My 2nd post on "Bargaining for Advantage."

3. Effective negotiators can see the world from the other party's point of view.

"It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interests." - Adam Smith

"If there is any one secret of success, it lies in the ability to get the other person's point of view and see things from that person's angle as well as from your own." - Henry Ford

To succeed, you must learn to ask how it might be in the other party's interest to help you achieve your goals. You must determine why the other party might say "no" so you can remove as many of his objections as possible.

Skilled negotiators focus on areas of shared or complementary interests during planning; less on conflicting positions on issues. By doing so, the skilled negotiators developed about twice the number of possible settlement options. The following steps will help you focus on what the other party wants and how these interests can be used to advance your own goals.

1. Identify the decision maker
2. Look for common ground. How might it serve other party's interests to help you achieve your goals? (Role reversal)
3. Identify interests that might interfere with agreement: Why might the other side say no?
4. Search for low-cost options that solve the other party's problems while advancing your goals.

4. Use leverage during negotiations.

"Every reason that the other side wants to needs an agreement is my leverage--provided that I know those reasons." - Bob Woolf

"You can get much further with a kind word and a gun than you can with a kind word alone." - Al Capone

Leverage is your power to reach an agreement on your terms.

1. Who controls the status quo, and who is seeking to change it? Leverage often flows to the party that exerts the greatest control over and appears most comfortable with the present situation.
2. For whom is time a factor?
3. Who has the most to lose from no deal? Create a vision that the other side has something to lose from no deal.

Positive leverage: needs-based. Every time the other party says, "I want," or "I need," your leverage has gone up. "Leverage is having omething the other guy wants. Or better yet needs. Or best of all, simply cannot do without." - Donald Trump

Negative leverage: threat-based