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.

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. 

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.

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.

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. 

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.

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

Bargaining for Advantage

I'm reading "Bargaining for Advantage" by G. Richard Shell. There are a number of important lessons for negotiators in this book. I'll start at the beginning.

1. Set high expectations.

"High achievement comes from high aims." - King Ching of Chou
"I believe in always having goals, and always setting them high." - Sam Walton

"Transform your goals from simple targets into genuine--and appropriately high--expectations."

"Goals are usually things we strive toward that are beyond our past achievements. An expectation, on the other hand, is a considered judgment about what we can and ought reasonably to accomplish."

Goals give us direction, but expectations are what carry meaning and conviction to our statements. In negotiation, what you aim for is often what you get. Setting specific goals motivates people, focusing and concentrating their attention.

It's important to distinguish between your "bottom line" and your goal, or "highest legitimate expectation." Once a negotiation is underway, people tend to gravitate towards the single focal point that has the greatest psychological significance for them. If you focus on your bottom line, you will consider any agreement reached above that point to be a success. If you focus on your goal (or "expectation"), then any offer reached below that point would be considered a loss.

To make your goal more real, make it specific, write it down and talk about it.

2. Use authoritative standards and norms to your benefit.

"The first duty of a wise advocate is to convince his opponents that he understands their arguments." - Samuel Taylor Coleridge

As part of your preparation for negotiation, you must become an advocate for your goals using the most persuasive standards that you can. You need these standards to give you a fair basis on which to be an energetic advocate for your goal.

Why are standards and norms important? Because people like to be seen as consistent and rational in the way they make decisions.

You maximize your normative leverage when the standards, norms, and themes you assert are the ones that your counterpart views as legitimate and relevant to the resolution of your differences.

If you only advocate your own standards and norms, you will not inspire agreement. The best practice is therefore to anticipate the other side's preferred standards and frame your proposal within them. If you can't do this, argue your position as an exception to their standard. But only attack their standard as a last resort.

Beware the consistency trap: an aggressive negotiator will get you to commit to an innocent-sounding principle/standard, then spring their trap by arguing that your position violates the norm you just agreed to. Probe why these questions are important before committing to anything. If you are pressed into committing, qualify it or say it in your own words and use the broadest possible terms.

Standards and norms have power in negotiation in part because they carry an authoritative message about what the market, the experts, or society has determined to be a fair and reasonable price.

Developing the Leader: Influence, Priorities

Influence

There is no leadership without influence (and power)

McKinsey's 10 methods of influence:

• Explaining
• Legitimizing
• Logical reasoning

• Asking
• Socializing
• Appeal to friendship
• Consulting
• Inspiring
• Role modeling
• Appeal to values
• Stating
• Exchanging
• Alliance building

McKinsey's sources of power (organizational):

• Resources
• Reputation
• Role/title
• Information
• Network

McKinsey's sources of power (personal):

• Knowledge
• Attraction
• Character
• Empathy
• History

The book talks about 5 levels of influence/leadership

1. Position/rights
2. Permission/relationship
3. Production/results
4. People development/reproduction
5. Personhood/respect

• To excel at level 1 (position): Exceed expectations with your job; accept responsibility
• To excel at level 2 (permission): Make those who work with you more successful; see things through others' eyes
• To excel at level 3 (production): Initiate and accept responsibility for growth; develop accountability for results, starting with yourself; communicate strategy and vision of org
• To excel at level 4 (people development) : Place a priority on developing people; be a model for others to follow; attract other winners/producers to a common goal
• To excel at level 5(personhood): Your followers are loyal and sacrificial; you transcend the organization

Priorities

Success: progressive realization of a pre-determined goal
Said a different way--focus, concentration of effort
Too many people are distracted from their goals, or try to take on too many goals and do not succeed in achieving any of them.
Leaders have the ability to focus, concentrate their efforts, prioritize on a small number of goals--and knock them out of the park

Methods of prioritizing:

• Pareto Principle (80/20 rule)
• Importance v. urgency prioritzation
• High importance, high urgency - do first
• High importance, low urgency - set aside time to do these
• Low importance, high urgency - find quick, efficient ways of getting done; delegate to a "can do" assistant if possible
• Low importance, low urgency - put it off as long as possible, indefinitely if you can; if it must be done, batch it up so that you can get it done with all at once
• Initiate, don't react (or said another way, "act, don't be acted upon")
• Don't let other people set your priorities/fill your calendar
• You initiate, you lead, you set your own priorities
• You can't have it all--focus on few priorities
• Time deadlines force us to prioritize--set them for yourself
  

Notes from Developing the Leader within You

10 key principles:

1. The definition: influence
2. The key: priorities
3. The most important ingredient: integrity
4. The ultimate test: creating positive change
5. The quickest way to gain leadership: problem-solving
6. The extra plus: attitude
7. Developing your most appreciable asset: people
8. The indispensable quality: vision
9. The price tag: self-discipline
10. The most important lesson: staff development
    

Transactional searches

Great post on Jeremy Liew's blog about the nature of searches (http://lsvp.wordpress.com/2007/08/08/monetizing-search/)

There are 3 types of searches:

1. Informational (50%)
2. Transactional (30%)
3. Navigational (20%)

All of the monetization comes from transactional searches. Vertical search engines (shopping, health, local, travel, and video) see a higher proportion of transactional searches than general search.

Luck and the entrepreneur

Marc Andreesen has an awesome post about luck and the entrepreneur here. In it, he talks about the 4 types of luck, and how entrepreneurs can best exploit luck.

Chance 1: Blind luck

The good luck that occurs is completely accidental. It is pure blind luck that comes with no effort on our part.

Chance 2: Motion

In Chance II, something else has been added -- motion. A certain [basic] level of action "stirs up the pot", brings in random ideas that will collide and stick together in fresh combinations, lets chance operate. Motion yields a network of new experiences which, like a sieve, filter best when in constant up-and-down, side-to-side movement... Chance II springs from your energetic, generalized motor activities... the freer they are, the better. [Chance II] involves the kind of luck [Charles] Kettering... had in mind when he said, "Keep on going and chances are you will stumble on something, perhaps when you are least expecting it. I have never heard of someone stumbling on something sitting down."

Chance 3: Recognizing good fortune

We see blind luck, but it tiptoes in softly, dressed in camouflage. Chance presents only a faint clue, the potential opportunity exists, but it will be overlooked except by that one person uniquely equipped to observe it, visualize it conceptually, and fully grasp its significance. Chance III involves involves a special receptivity, discernment, and intuitive grasp of significance unique to one particular recipient. Louis Pasteur characterized it for all time when he said, "Chance favors the prepared mind."

Chance 4: Personal approach to the opportunity

[Chance IV] favors the individualized action. This is the fourth element in good luck -- an active, but unintentional, subtle individualized prompting of it.

Chance IV is the kind of luck that develops during a probing action which has a distinctive personal flavor. The English Prime Minister, Benjamin Disraeli, summed up the principle underlying Chance IV when he noted: "We make our fortunes and we call them fate." Chance IV comes to you, unsought, because of who you are and how you behave...Chance IV is so personal, it is not easily understood by someone else the first time around... here we probe into the subterranean recesses of personal hobbies and behavioral quirks that autobiographers know about, biographers rarely. [In neurological terms], Chance III [is] concerned with personal sensory receptivity; its counterpart, Chance IV, [is] involved with personal motor behavior.

To recap:

• Chance I is completely impersonal; you can't influence it.
• Chance II favors those who have a persistent curiosity about many things coupled with an energetic willingness to experiment and explore.
• Chance III favors those who have a sufficient background of sound knowledge plus special abilities in observing, remembering, recalling, and quickly forming significant new associations.
• Chance IV favors those with distinctive, if not eccentric hobbies, personal lifestyles, and motor behaviors.
  

For entrepreneurs, this means:

• How energetic are we? How inclined towards motion are we? A variation on the "optimize for the maximum number of swings of the bat" principle. (Same thing that Reid Hoffman mentioned in his talk) In a highly uncertain world, a bias to action is key to catalyzing success, and luck, and is often to be preferred to thinking things through more throughly.
• How curious are we? How determined are we to learn about our chosen field, other fields, and the world around us? Curiosity is more important than intelligence. Curious people are more likely to already have in their heads the building blocks for crafting a solution for any particular problem they come across, versus the more quote-unquote intelligent, but less curious, person who is trying to get by on logic and pure intellectual effort.
• How flexible and aggressive are we at synthesizing -- at linking together multiple, disparate, apparently unrelated experiences on the fly? I think this is a hard skill to consciously improve, but I think it is good to start most creative exercises with the idea that the solution may come from any of our past experiences or knowledge, as opposed to out of a textbook or the mouth of an expert. (And, if you are a manager and you have someone who is particularly good at synthesis, promote her as fast as you possibly can.)
• How uniquely are we developing a personal point of view -- a personal approach -- a personal set of "eccentric hobbies, personal lifestyles, and motor behaviors" that will uniquely prepare us to create? This, in a nutshell, is why I believe that most creative people are better off with more life experience and journeys afield into seemingly unrelated areas, as opposed to more formal domain-specific education -- at least if they want to create."

Rising tide lifts all ships

Great post by VC Jeremy Liew here. He quotes a McKinsey study that shows the following:

"Within industries, there was very high variability in the growth rates of competitors. For example, ten European telcos saw compound annual growth rates of between 1 and 25% between 1999 and 2005 - a very wide range.

McKinsey found that there were three key drivers of the variance in growth:

1. Portfolio momentum: organic revenue growth from the market growth of segments where they compete
2. M&A: inorganic growth from acquisition or divestiture
3. Market share performance: organic growth from gaining share in a market

Interestingly, market share performance was found to explain just 22% of the variability in growth rates. Portfolio momentum explained 43% of the differences in growth rates, and M&A explained 35%. McKinsey concludes:

Simply put, a company’s choice of markets and M&A is four times more important than outperforming in its markets. This finding comes as something of a surprise, since many management teams focus on gaining share organically through superior execution and often factor that goal into their business plans."

"Plan B"

We met with Randy Komissar again from Kleiner Perkins. He talked to us about a framework that startups should use to make a lot of progress quickly. His working title for the framework (and book that he is writing) is called "Plan B."

The process works like this: the founding team should identify all relevant analogs and "anti-logs" for the new opportunity that is being explored. Analogs are examples of successful companies--not necessarily from the exact same space, but relevant enough that we can glean lessons applicable to our opportunity. The "anti-logs" are companies that were not successful. We want to draw upon the experience of others before us to identify the "knowns" regarding the given opportunity.

Then we identify the unknowns, upon which we wish to take a "leap of faith." These leaps of faith are pivotal for the start-up, and they are where the company should be focusing all of their efforts.

To address the leaps of faith, the startup should follow a 5-step iterative process.
1. Identify what the key questions are that need to be answered regarding the leap of faith.
2. Develop hypotheses regarding each of the key questions.
3. The company should go out and do testing to validate or invalidate the hypotheses.
4. Interpret the data from the testing to generate insights.
5. Refine the original hypotheses based on the insights from the testing.

Iterate steps 1-5 until you have resolved most of the key questions/leaps of faith. Once you have done that, you will have backed into a business plan which you can then execute.

Seems like a pretty simple, straightforward process? The challenge in executing this process well lies in the judgment that needs to be applied at each step.

• What analogs/anti-logs do you select for comparison?
• What are the most important leaps of faith? What are the key questions that need to be answered?
• What are the hypotheses for each key question?
• How do you create and execute the tests to validate the hypotheses? How do you run the tests as quickly and inexpensively as possible?
• How do you interpret the results, and what insights do you draw?
• When do you refine your hypotheses, vs. when do you throw out your test results and try again?

The most successful companies, according to Randy, can get through the process quickly because (1) their hypotheses are usually correct, so they don't have to spend a lot of time and energy iterating their hypotheses; (2) the hypotheses that are wrong fail early, fail often, and fail quickly. So you have to have the experience and judgment to develop hypotheses that are mostly right, and/or you have to be lightning fast with your iterative testing and have your hypotheses fail quickly up front.

Randy then took us through the example of Steve Jobs and the iPod. Jobs had a few different analogs: (1) the Walkman (people were willing to listen to music on headphones in public places), (2) Napster (people were willing to download and share digital music), (3) VCRs (media industry had to settle for "fair use"). He also had a couple of anti-logs: (1) The Rio (a poorly designed MP3 player), (2) Napster (got sued by RIAA because the record labels felt they encouraged pirating). He knew that people would listen to music on-the-go, and that they craved digital music. He also knew that he could design a much better user experience than the Rio, and he could create an ecosystem that would be friendly to the record labels. His biggest leap of faith--would people be willing to pay for digital music? Jobs didn't believe that they would. So what did he do? He hedged his bet. He decided that he wouldn't make money off of music, but off of the hardware. He created a "fair use" case by charging money for the legitimate music, but he also enabled users to download pirated music onto the device as well. The result? Only 3% of music on iPods was actually purchased from iTunes. But the record companies weren't able to sue Apple, and in fact, they cooperated with them.

Made to Stick

We've already talked about Simple and Unexpected as 2 key principles for why ideas stick. Now we cover 2 more:

1. Concrete - use of simple, vivid language. The opposite of abstraction.
2. Credible - use of internal or external authority to make your message more believable.

Concrete

Easy visualized nouns ("bicycle" or "avocado") are easier to remember than abstract ones ("justice" or "personality").
Use personas to make your customer more concrete.

Credible

Have someone that knows the intended recipient spread your message for you. We believe our family and friends.
Use authorities--experts, aspirational figures, or "anti-authorities" (people who truly embody the essence of the message)
Internal credibility comes from relevant details, statistics (using the human-scale principle: "in other words, you would have to drink 200 glasses of OJ to get the same Vitamin C"), the Sinatra test (if you can make it here, you can make it anywhere).

The last point re: internal credibility--I've seen this at work in a few different situations. At McKinsey, I noticed that the most effective folks were the ones who had a phenomenal memory for details. They could surface extremely specific, relevant details at the right moment. Lars, one of my EMs, also told me that you should have the numbers in your model at the tip of your fingertips. This also goes to the point of statistics. People--especially analytical people in business--tend to be persuaded by numbers and quantification. Finally, regarding the Sinatra effect--we used this at Yodlee. We would say, "Our security has been audited by the top 10 banks, companies like Merrill Lynch, American Express, and Bank of America. Don't you think we could pass your security audit process?"

Learnings from 4-Hour Workweek

Principles in book:

1. Retirement is worst-case scenario insurance.
2. Interest and energy are cyclical.
3. Less is not laziness.
4. The timing is never right.
5. Ask for forgiveness, not permission.
6. Emphasize strengths, don't fix weaknesses.
7. Relative income is more important than absolute income.

Quotes:

"The first principle is that you must not fool yourself, and you are the easiest person to fool." - Richard Feynman
"I can't give you a surefire formula for success, but I can give you a formula for failure: try to please everybody all the time." - Herbert Bayard Swope
"Everything popular is wrong." - Oscar Wilde
"Action may not always bring happiness, but there is no happiness without action." - Benjamin Disraeli
"The reasonable man adapts himself to the world; the unreasonable one persists in adapting the world to himself. Therefore all progress depends on the unreasonable man." - George Bernard Shaw
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity." - Bruce Lee
"It is vain to do with more what can be done with less." - William of Occam
"Perfection is not when there is no more to add, but no more to take away." - Antoine de Saint-Exupery
"What gets measured gets managed." - Peter Drucker
"Learning to ignore things is one of the great paths to inner peace." - Robert Sawyer
"Do your own thinking independently. Be the chess player, not the chess piece." - Ralph Charell
"Genius is only a superior power of seeing." - John Ruskin
"I not only use all the brains that I have, but all I can borrow." - Woodrow Wilson
"Companies go out of business when they make the wrong decisions or, just as important, make too many decisions. The latter creates complexity." - Mike Maples

Comfort challenges:

1. Practice gazing into the eyes of others.
2. Learn to propose--stop asking for opinions and start proposing solutions.
3. Get phone numbers
4. Revisit the terrible twos--say "no" to all requests
5. Use the criticism sandwich
6. Find Yoda--call at least 1 potential superstar mentor per day for 3 days

Community Next Take-Aways: Slide.com and Meebo

Keith Rabois, VP Business Development, Slide.com

• Was involved with PayPal, Yelp, LinkedIn, and now Slide.com
• Common trait: original business model/idea was wrong
• Yelp: original idea was to spam friends with email on where to go to eat
• Try something, iterate until it works
• Start with value proposition, eventually people will find out about it
• YouTube, for example--didn't set out to be a video sharing site; people watched videos and cut and paste code into their email client (like Outlook); YouTube hit upon a consumer need (an easy way for people to keep in touch was to send something cool and interesting that they watched on YouTube)
• Most successful companies have an obsession with metrics--you won't be able to find out what's working until you have metrics
• Viral marketing is a way to hedge against strategy; if you don't know what your revenue model is, you have to acquire users cheaply; if your marginal cost of user acquisition (and user support) is $0.01, you should be able to generate more than $0.01 in revenue
• Only 3 successful types of Facebook apps: (1) intuitive judgment from recent college grads about product needs (e.g. free gifts), (2) widget makers (Rock You, Slide), (3) convert fully to focus on Facebook (iLike, Flixster)
• Yelp: paid reviewers in new cities to write reviews; only good if you can get the right people to do it, otherwise you don't inspire the right contributors later

Martin Green, VP Business Development, Meebo

• There is a difference between recruitment and retention
• Meebo focused on retention: delight and satisfy people who use the service
• Company mindset: wiki, forum, customer service--everyone in the company is on those
• Can't always predict what users want: most popular color was pink
• Who is the target user--get them in, show them mock-ups
• How do you get user feedback? Need to be them, or interview them all the time
• We have a short list of people we show stuff to. Tweak it until they say, "I would use that.
• Listen to how they describe things: "If you said it like this, I would use that."
• Get a 16-year-old to look at the product
• Like MySpace, does not emphasize Meebo marketing itself: "We want someone to send a message out inviting a friend to Meebo. We want this to happen through an actual person, not through our product."

CommunityNext Take-Aways: PBWiki

David Weekly, Founder and CEO of PBWiki

• Make it as easy as possible for people to put their unique information on your service
  
• Provide users/contributors with tools to share that information with others
• Let other people interact with/change the information that the user/contributor has shared
• Provide the user/contributor with updates on when his information has changed
• The web has matured: the relationships between 2 data objects was web 1.0 (hyperlinks); the relationships between 2 people was web 2.0 (social networks, UGC, sharing)
• But we still need a lot of maturity wrt relationships between people and data
• One fundamental need: How do I get alerts when information is changing?
• RSS helps, but it doesn't take care of filtering
• Facebook mini-feed is a step in that direction

CommunityNext Take-aways: MySpace and RockYou

Attended the CommunityNext conference today in Sunnyvale. Here are some of my key take-aways:

Jason Feffer, 3rd employee at MySpace

• 2 kinds of MySpace page creators: exhibitionists and marketers
• People like to be exhibitionists
• MySpace provided tools for these exhibitionists to bring other people in
• People would invite others to check out their MySpace page
• Only 1 year after launch did they think to give people their own URL
• 1 exhibitionist brings 5K-10K voyeurs
• Other type of creator: marketer
• Bands started to market themselves using MySpace

• MySpace became a tool for people to brand themselves
• It wasn't "come look at MySpace." It was "come look at me."
• They didn't stress MySpace--users infected others with themselves.

• "MySpace became a utility for people to infect others, and then we branded that utility."
• Brand was really important to MySpace--turned down opportunity to be promoted by a party in Vegas ("If we throw a party, it's our brand, it's our party, not someone else's"). Stayed in LA to project the brand of being media/entertainment company (not tech).

• MySpace was totally user focused. They hired people who used MySpace, who were part of the MySpace crowd.

• Jason's new venture: Sodahead. Way for people to create polls and embed rich media (videos, photos, etc.). It becomes a way for people to express themselves in polls.
• Created a polling widget that you can put on MySpace. Users can register for Sodahead directly from within MySpace.
• Marketing strategy--attach the poll to celebrities, leaders.
• Celebrity creates a poll, fans embed it within their MySpace pages

• Other MySpace marketing learnings: demi-celebrities were early users, they brought many other users with them. Get the hardcore users that attract others.
• YouTube, Photobucket were successful widget examples--people saw them at MySpace, wanted to use as well.
• Niche vertical targeting at MySpace--focus on vertical ("inch wide, mile deep")

Jia Shen, CTO and Founder, Rock You

Rock You is all about self-expression widgets
~14% penetration on MySpace, ~25% penetration on Facebook
43M uniques, 450K widgets/day; slideshows (100K/day)
14 people--never did any marketing

• The premise: you don't want to look like everyone else; you want to stand out, look cool
• Leverages people's desire to accessorize
• Self-expression (earrings, sticker on backpack)
• Rock You's first widget, slideshow, was created because there was no easy slideshow app created for the average user
• Existing method was very cumbersome, required some technical knowledge

Understand your user

• Know demographic (for Rock You, it's young non-technical female who wants to accessorize)
• Do market research (get magazines, hang out online [MySpace], see how people talk and interact)
• Do user studies--interview high school students every day

What's the use case

• Replace something existing (slideshow replaced existing marquee HTML process)
• Benefit of replacing something existing--users "totally get it"
• Study the MySpace page: 3 components
• About, interests, comments
• About--something really personalized, people spend average of 30 min creating slideshows
• Interests--not going to spend a lot of time, quickly create items (Flixster, quizzes)
• Comments--quick creation, have to be small (Rock You's "glitter text"--5-sec creation process)

Viral channels

• MySpace
• User bulletins
• In page profile: "That looks cool, how do I get my own?" Make the call to action obvious to the user. Users embedded a slideshow--was really cool, other users could create their own.
• Facebook
• Minifeed: in-profile experience less important; little icon must look really good. Call to action should be in the mini-feed.
• Invite: send to people who will actually convert over.

Founders at Work: Yahoo, del.icio.us

Take-aways from Tim Brady, 1st non-founding employee of Yahoo:

• Directory button on Netscape linked to Yahoo (for free)--"That was big. It sent our traffic through the roof."
• (Echos of Reid Hoffman's talk: in consumer web, it's distribution, distribution, distribution)
• (Distribution was how Excite got big)
• Thought of themselves as a media company, believed they could outsource search because "it was going to be a leapfrogging game. No one is ever going to be able to get so far ahead that we'd ever be in strategic risk of kingmaking a full-text search engine."
• Advice to someone founding a startup: "Know yourself. Try to do as much thinking up front as to what your breaking points are... Before I joined, I knew where the line was, when I would quit, at what point, and so when I was in the game, it never crossed my mind. I also knew why I was involved, what motivated me, and I didn't spend a lot of time perseverating on that stuff."

Take aways from Paul Graham, founder of Viaweb

• 2nd start-up after 1st one went nowhere: "We spent a lot of time trying to convince these people to use something they didn't want."
• 1st web-based software--"I was excited, because it meant we could start a company without having to learn Windows."
• Started Viaweb in July '95, had first demo in early August.
• "We felt like we had to have five or six customers to launch. And for these first customers, we basically would do whatever they said in order to get them as customers. We gave them the software for free for as long as they wanted. We built their sites ourselves."
• "If you're writing applications for end users, you have to remember that you're writing for an audience that has been traumatized by bad experiences. We worked hard to make Viaweb as easy as it could possibly be, and we had this confidence-building online demo where we walked people through using the software. That was what got us all the users... The other thing was, we had good graphic design. Our secret weapon was that we know that e-commerce was really about graphic design, not transaction processing."
• "It's never a deal till the money's in the bank... Before we ultimately got bought by Yahoo, we probably had nine or ten different acquirers that we were talking to, and things always went wrong for one reason or another."
• On raising money: "The advice I would give is to avoid it. I would say spend as little as you can, because every dollar of the investors' money you get will be taken out of your ass... The way not to have to raise money is not to spend money. Do everything as cheaply as you can."
• Advice for startup founder: "Make something people want. If you make something users want, they will be happy, and you can translate that happiness into money."

Take-aways from Joshua Schachter, founder of del.icio.us

• del.icio.us began as something Schachter built for himself--he needed a way to organize his collection of 20,000 bookmarks, and he hit on the idea of "tagging" them with brief text phrases to help him find links later
• For the first several years, Schachter worked on del.icio.us and other projects, like Memepool and GeoURL, while working as a quantitative analyst at Morgan Stanley. But all the while, del.icio.us was growing. By November 2004, a year after its release, it had 30,000 users
• Tried several different start-up ideas before del.icio.us worked
• Chose not to leave Morgan Stanley for a while because "the economics didn't make sense. It still made sense to keep the day job."
• Worked in many small increments: "I could be done for the day in 15 minutes. So if I could get one thing done a day, I was happy... So it moved pretty slowly. I worked on it for years."
• Why did del.icio.us succeed when many previous others failed: "First of all, because it was not a venture to start. I was building a product and that's it... I think in general being overcapitalized is a path to failure. The VCs want you to spend... I think the competitors had disappeared by then. The tagging thing was probably essential."
• On the invention of tagging: "There was no point at which I said, 'I'm inventing this wonderful new thing.' I just sort of realized that I had evolved my own filing system, and it worked for me. I'd used it for a long time before del.icio.us even showed up. This was the codification of that practice."
• On designing new features: "I think people ask for features--they want to do something, but they don't say, 'I want to do that something.' They translate it into some feature that typically they've seen somewhere else and ask for that instead... It turns out there's some better way to do that. So, stuff that people ask for, I tend to try and dig to the root cause, before reducing to practice."
• "Constraints breed creativity." (referring to having only 15 minutes/day to work on del.icio.us)