Don't waste time!

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Startups don't waste time. They typically have one head(CEO) that decides quickly and on the spot. She is not concearned about being right on every decision, making a decission with the given information is more important.

Being a startup  has nothing to do with the size of the company. Twitter is considered a startup, because they are fast. Microsoft is considered to be  corporate, because they are slow. Need more examples? Look at Facebook, they are big and fast.

Interestingly, every single startup or small company that started to implement management models from the big companies changed sigificantly. To the worse.  It doesn't matter if they are implementing ISO standard, project management  or some other methodology that relies on form more than on substance.

The don't waste time rule applies to investors, managers or engineers as well. Good investor will tell you immediatelly what they like or not, good CEOs will be open, clear and decisive, good engineers will solve problems and not explain a list of tasks they did every day.

I think that's one of the reasons why Americans are so much better in startups than Europeans. They don't care about the form and typically, they don't waste time. In the same way, whenever Americans turn to form, they suck at it! Just look at their bureaucratic procedures.

However you put it, it's very clear to me what is a DNA of a successful startup: nobody wastes each other's time. When you see a startup that relies more on form than on substance, or have long endless meetings, or when their leaderships doesn't lead but wants to discuss everything, you know that this is only a small company wanting to be a corporation. It's not a startup anymore!

So for the sake of fun and prosperity: don't waste time!

Related articles

• What is a startup? (spetic.si)

KPIs reporting

Key performance indicators are the startup's dashboard, they are your compass and life saving data pointers. Without them, you're flying blind. Needless to say, setting them up correctly is one of the most important thing you can do. And equally important, you should use the same KPI's that you show to your board. Otherwise the whole discussion looses meaning.

There are different ways of doing it, however here are some rules of thumb:
- limit number of KIPs to 10 or less
- they should natural, and straightforward, if you have hard time explaining them, find new ones
- cover the vital areas of your business, like financial, operations...

One KPI that you will almost certainly on the financial side have is the burn rate. It's the amount of money you burn per month. It's pretty self explanatory. There are really just two ways how to optimise it: spend less or earn more. Unless you have a really good one, there is really no big need to add another KPI from the financial side. From this one and cash in the bank it's pretty easy to calculate your runway and others.

On the sales,  the imagination can run wild. Sales, sales/client, number of deals (if you have standardised ones), recurring clients, all those are good ones, depending what kind of business you're in. Pick one, two or three that really accurately  embody sales side of your business.

From that point on, areas can be very different. If you're in online retailing, gross margin might be it, if you're building destination site, number of users. If you're in freemium business, conversion rate might be most appropriate. If you're building large data sets amd that brings you value, a number from that side might be appropriate.

There are a number of areas that might be appropriate for your business. Think it through and make the best set of KPIs you can.

When you're finished, take a step back and look at the big picture. Are they accurately portraying your business? Is the impact of each significant long term. When each of them declines, remains stagnant or declines, what do they tell you?

If that all makes sense, bring them to your next board, agree on them with your board. If everybody agrees burn them in and keep them for at least six months, to see the trends. If you can simulate them for the past, even better. Now you have your flying dashboard.

The only thing you need to ensure now that they actually get populated without you having to spend two days each month compiling them.

And that's it, that's one slide on your board deck that you should never be without.  

Board reporting on marketing

Unless you're playing in a really niche space, you need some sort of marketing. Marketing in a startup, like everywhere else, is a fairly straightforward exercise, with two distinctive focus areas.

In strategic marketing you think about positioning and target audience. What kind of product or service you want to produce on long term? What is your target audience, how big is the market. What do you need to do to address it. Those questions will influence your product and operational decision.

In operational marketing you think about ways to achieve what you set out to do. Branding, web site, PR are just one of the  tools with which you execute your decisions. 

So how far do you have to go in reporting to your board? That depends on what kind of board you have, however there are some general guidelines. I recommend that you set and revisit your marekting strategy every quarter, do the analysis and challange your assumptions from the previous cycle. Have the assumptions change? If so, what kind of conclusions do you need to draw, does that change your strategy? You can do that on a fairly condense report and share it with your board. Board will look forward for your recommendations and ask a few questions, but bottom line is: should we stay on course, intensify it or change direction?How much will that cost us in terms of money, time and resources.

On operational marketing  your should concentrate on particular campaigns and projects that you set out to do in order to fullfil your marketing strategy. Usually there is enough news on the topic to address it on every board meeting. So put top two or three projects on one slide.

I suggest that you look at everything in marketing as a project and that you measure as much as you can. Examples are: home page, conference presence, rebranding and new version launch. For each such project you need to understand: scope, timeline, needed resources and expected autcome. It's highly likely, that you can list those on one slide, each month, which give's you a nice overview of what's going on marketing.

Financial reporting for startups

There are really just a few key and important data points for the board of directors in terms of financial reporting.

On a simplified level investors are interested in:
- how much money you burn
- runway, which tells you how long can you sustain the current and projected  burn rate
- cash in the bank

Investors are worried that you don't run out of money before they can decide that your business is worth financing further. It's natural, they  really like to be on top of their investment. 

There are  4 spreadsheets that fully encompass your business. 

Profit and loss statement is the classical one. It's not the purpose of this blog post to explain it, if you don't know it, google it. But you need to have one ready for your investors each month. The good side of it is that it's usually prepared by your accountants, so you really don't have to bother with it too much. But you still need to understand it.

Balance Sheet is the second classical financial statement. Often it gets produced together with PL and you should  just staple them together PL and send it out. It won't get looked as much, since it doesn't reflect short term performance a lot, it's importance is in a long term.

Budget slide is one of the most important documents. It's basically a table for each month, where draw  your limits of operation. A simplified one breaks down costs into 10-20 categories and forecasts them for next 12 months. It gets looked at a lot, particularly with picky investors. More accurately, the promises and actual performance gets compared a lot. I don't want to go into details, but I was at a board meeting when investors raised an issue with one category that got over budget by 3% in one month. Makes no sense, but it happens. 

Cash flow statement is in my view one of the most useful statements in the world. It's a corporate take on a pocket economy. It shows you exactly how you spent your money, you see how much money came in and how much went out and how. They often don't get produced since an accountant needs to  put a bit of effort in and often needs the management for some explanations. But I think it's absolutely worth it. Particularly in a startup environment where cash is king. If you're not familiar with it, check out wikipedia

Finance guys will often come up with another one, the ratios. There are whole bunch of ratios out there that are standard in a financial community, however I don't believe it makes a lot of sense to use them in a startup. If you really need one, put it into KPIs, don't produce a separate statement for them.

So what to put on a deck in term of financial reporting. Here is my take:
- one spreadsheet where actual numbers against the budget are shown
- simplified cash flow statement (I think you can put everything into at most 10 categories, so you should easily get it onto one slide)
- one slide with burn rate, runway, revenue, cash balance on the bank

The Profit&Loss and Balance Sheet should also be produced and part of the deck, but only as an addendum and not as part of the main presentation.
  

Should VCs be entrepreneurs or not?

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To be honest, I don't know. I've been back and forth on the issue on various panels and I kind of cannot make up my mind. On one hand you want to have your investors to have on hands experience, however on the other hand, having to deal with someone who was successful in the past and forces you to do things in their way doesn't really help.

In the past I really looked up at the people who successfully built companies and wanted them to be close by. Over years I learned that this is the wrong criteria. Being successful in the past is not only a function of ability, there are a whole bunch of other factors as well. Some of them have nothing to do with their ability to be a good investor.

One of my best experiences with investors is with those who haven't built big and successful companies, but are rather humble in a way that they really work hard with the founder to built something big and meaningful. Even if they are investment superstars.

So I think it boils down to this: Investors that you want to work with are: intelligent, well connected and respectfully proactive.

You don't want to work with arrogant individuals that sit in shiny offices, come late to the meeting and never switch off their phones during conversation. You owe it to yourself and your business not to take this kind of nonsense.

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Introducing DeckReport

It's been 6 months since I've started to work on a small new project called DeckReport. The idea is to create a solution that addresses a bunch of small but important challenges that burden most of startups, founders and investors alike - board management.

Board of directors are quite instrumental in strategic management of a startup. However the advantage comes at a price - time. Running a board is expensive and hard. Presentations, action items management, coordinating investors, sharing information and preparing analysis can easily take 2-3 days a month from the CEO and management.

That's where DeckReport comes in! It's a solution where you're able to post your board decks, share information and coordinate investors. if you're an investor, you'll be able to interact with all your investments from one account. So no more endless email exchanges and hunting down for the last versions of the deck. Everything in one place. Nice and tidy!

Check it out at www.deckreport.com and follow us on Twitter at @deckreport. We'll launch in private beta in November and go live in January 2011. Sign up for the beta account. 

Board meeting introduction

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Each board meeting should start with three basic slides. They are the slides for a brief and quick introduction and they send a tone for the meeting and provide a framework for discussion while setting expectations:

- highlights: this is an overview of a top news from the past month or period, list the good and bad news, don't hide it. If you want to list it in two columns, color it differently, you can do whatever you want. But pick top 3 - 4 of each and list them on one single slide
- plans and challenges: list the plans and challenges that you expect in the next month. Nothing fancy, just a list of top 3 - 4 things that you expect to happen.
- KPI overview - dashboard: it's a kind of dashboard overview of key performance indicators. You should briefly walk through each of them since this is the stuff you agreed with your investors that you'll measure and track. It's one of the most important slides for you since it shows your performance against your past achievements.

Don't spend half of the board meeting on these, however a solid 5 -10 mins will make the whole difference at the meeting.

Tools of trade

I find it amazing how many tools foe entrepreneura on the internet are free and how available they are. I'm Mac biased, however I'm sure you can do the same thing with Wins or Linux. The point is on cloud based and online tools, not on the computer. Here is my list of tools I use, when I'm sketching out new projects/prototypes for internet services. 

- Gmail and everything G: I host all of my mailing addresses there. Some say that Google is evil and that they don't want to have the Big gBrother checking their mail. Well they are many more ways how somebody could tap into your account than hacking Google abusing it. Unless you're from another planet, you've heard of google docs, forms and other stuff. It's useful and what I really like, it's good enough for me. Price: 0

- gContacts and Isync: again Google, I have my addresses tagged and synced with my phone mac's address book and than it syncs through Isync (standard on mac) with my Nokia, works with everything else out there as well. iSync has a great feature that allows you to sync only those addresses with your phone that have have phone numbers, thus leaving all mailing lists alone. I use gContacts to generate lists who I should contact if i'm in NY, notify if I have something new or just update every 3 months. Checks gContacts tag feature, it's really powerful. Price: 0 

- LinkedIn: I don't use Facebook, because I can't find a good use for it, but I definitely use LinkedIn. It's the source of of my business contacts and I use it frequently when I need to find someone close to my network. Price: 0

- DropBox: the ultimate file syncing tool, I use it on my Mac, iPad, everywhere. It simply works. Price: 0

- iWeb and Google Sites: iWeb is limited to Mac but I use it to generate prototypes for web sites and even production ready web sites. If I need any kind of interaction, like subscriptions or order forms, I simply use gForms. I don't care if it looks slightly lame. It's good enough for low traffic, reliable and it works. Google Sites works well as well, I don't use it, however it's perfect for any kind of site generation/hosting that is occasional in nature and it's aimed at sited that convey information and not interact with users a lot. Price: 0

- Skype: talk, talk, talk, for free

- gChat: yeah I know, again Google. It's free, widely used and it works 

- TechMeMe: the fastest way to learn about important stuff, I'm not fan about browsing through a lot of web sites, I even don't follow TechCrunch. I know I should, but I don't. If something really important happened somewhere I'll stumble over it. It's very unlikely that I'll fail in a business opportunity if I don't read all the blogs. 

- Twitter: I use it as an alert tool for my followers and friends. I'm not a heavy user, and I don't use it to gather information. I use it more to stay in touch with companies I'm interested in, rarely with people. Don't DM me, because it's likely that I won't read it for several days. 

- EverNote: not ideal, but the most useful way to sync your text files all over. Price:0 or a few dollars if you want to have an offline ability on Ipad

What is a startup?

I've heard many definitions about what startup is. Particularly in blogs and tech comunities, startups are becoming synonimous with internet companies. Interestingly, Wikipedia offers a perfect answer: startup is a company with no history!

So how come that the startup concept is so vibrant in the tech community? Because in order for any company to succeed, it needs capital, team and partners. All this is difficult to obtain if you have no history. That's why tech startups came up with inovative ways to obtain those resources.

A significant factor in the story is also the fact that IT and internet advances simplified the way we do business. In fact you need a computer and an internet connection, a few hundred dollars and you're ready to roll, world wide! That's profoundly different to local mill, backery or local delivery business. They all need significant capital investment and when you're there, your set for many years, either your run with it, or you close. In software world that's much easiser.

Given the facts it's interesting to see how tech startups are sometimes rigid and how their investors don't get the difference. It's actually harmful to a startup to demand long term plans as if it was a traditional business.  It locks them in and limits their flexibility and ability to leverage one advantage they have: cost effectivness. I think we need a new model.  

Working long hours

Image via CrunchBase

I've recently came across an interesting quote:


"There are exceptions, but we believe that working over hours as a habit leads to bad work."




It's a quote from the About page of Information Architects, one of the leading design firms. They go even further than that:

• We don’t do free pitches.
• We don’t work on weekends.
• We don’t work crazy long hours.
• We don’t finish presentations five minutes before the deadline.

It actually reflects perfectly how I feel about doing things. Not surprisingly they are a studio with a strong European background. And yet they achieve world class results. 

I actually don't think I should add anything to this!   

Why European startups perform differently

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European founders too often try to mimic their American counterparts. They hire American advisors, have American investors and yet somehow often European startups don't perform as one would expect. I could never rationalise this until I watched very interesting TED talk by Sheena Iyengar.

The idea is that our culture simply makes a huge difference how we perform in different situations. Sheena talks about an interesting experiment that she and here team did with a bunch of kids. Here is a simplified version of it (watch the video, absolutely worth it!):

Researchers asked a a group of American and Asian kids to solve some anagrams. Anagrams were grouped into six themed batches. Some kids got to choose the batches they want to solve and others were told which ones to solve by an authority (a teacher or mother). And than something interesting happened. American kids solved twice as much anagrams when they were able to choose which ones they want to solve, while Asian kids performed exactly the opposite. When they got a chance to choose a batch they performance went down the drain, but they over performed their American friends when they where told which ones to solve. Interesting isn't it?

Now apply this to a startup. Americans absolutely shine when they have more options or when they can come up with new ones, while non Americans might simply execute the ones they have better and go into depth more.

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Who should do the talking at the board meetings

I recently came across an interesting idea about board meetings. Basically, board meetings are a tool that CEO has at his disposal to communicate with investors and other board members. However quite often it's a fairly strict relationship. CEO does the presentation, board members intervene and comment in between and that's about it. I've done it, it's ok, but not great.

However one important aspect of managing the board is to open up the company to the board members.

And one of he best ways is to invite some of the team members from time to time do a presentation on particular subject.  So I'm convinced now that the rule of thumb of who does the talking at the board should be:

CEO: 20%, team members: 40%, board members: 40%

It will benefit the CEO since it will elevate the level of trust the board has in to the CEO. It will change the dynamics of the board and increase the engagement of the team members.

It's best to rotate presentations of the team members, so that on each board meeting, one or two team members do a presentation on the current state and future of various topics like product, marketing and other (depending on their area of expertise). It's actually quite easy to open 30 or 45 mins of time for team presentations and discussions. The topics need to be discussed anyway, why not just include the ones who have most hand's on experience with them.

Board meeting action items

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Board meeting is an intense 90 minutes event that happens every month or every second month. It's the time when you get all  your investors, observers board members and management in one room, reflect on past few weeks and steer the course of your startup in the future.

One interesting side effect of such brainstorming is that even though boards often tackle more strategic issues, there are quite a few operational ideas sprouting in the same time,  like intros, sharing some docs and others. It's crucial for the CEO or whomever is taking down the minutes to adequately organise them and follows up on them with the board members. Otherwise things get forgotten and potentially helpful idea goes down the drain. 

So in order to do it right, do the following:

1. write down every single action item, if possible with a due date and the owner of the item

2. send out follow up emails to participants with their action item lists, don't expect investors to write down what they promised; I even suggest that you send one email, CC everybody and list action items per each participants

3. in due time, or every week send out gentle reminders on to each participant; in this case don't CC everybody, you don't want to make them look like kids that needs to be reminded constantly

4. on the next board meeting, report on the non executed action item, and thank your board members for the executed action items

If in Rome, do what Romans do!

I was on a panel yesterday, where there were quite a few founder wannabes. An interesting question was asked: "Where can we get the information an knowledge about having a startup?"

Effectively there are two things one should do:
1. start reading blogs about startups
2. move to the Valley

The first one is obvious, I guess I don't have to expand it further.

The second one needs a bit more explanation. If you're a model, you want to be in Milan or Paris. If you're a car designer, you want to be in Germany, Italy or Japan. If you're Egyptologist, you want to be in Egipt.

Got the idea?
I'm not advocating that you should move permanently. On a contrary, I respect European lifestyle too much.  But a few months gig in the Valley for any internet startup is a must and very eye opening.

How investors value startups

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Startup raise money in order to leverage their businesses. However when and how much to raise is always a source of misunderstandings and false expectations amongst founders. A road to break even can be divided in 4 stages, and investors value various stages in different ways:

1. Idea - valuation is 0, nada, null...I don't know how else  to put it, however ideas don't get financed. They're are a necessary element in one of the next stages, but on their own, they're practically worthless.

2. Technology/Product - up to a  few tens of thousands of dollars. In a few cases a bit more, but not much. This would a typically  be an angel round, where founders have some code and a prototype, but they need an engineer or two to get it a bit further.

3. Distribution - when the technology is ready and service/product done, you want this thing to spread like a virus. It might take to recode the service several times, change focus, poke the market.... You need to demonstrate that the thing is growing and gets used on a massive scale. This is quite often  a strong angel, or early stage VC stuff. If you're really successful, you'll raise up to 2M USD. More realistically you're looking between 0.5 and 1M USD.

4. Revenue - You need to have significant revenue, closing in on profitability with a reasonable team,  payed properly, 6+ guys, and you can already smell the profits in the following months. That's the VC's sweet spot. If you can show that by adding 2 sales guys or a product + sales guy or something in that sort, you can significantly increase revenue, you hit the jack pot. That's a proper A round and  you're looking at 3-5M USD.

That's it. As always, things are not black and white, stages overlap, however the concept is there. The lesson is that it's worth to set your expectations.

Planned vs. market driven product development

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European startups, particularly the ones with strong engineering team, tend to plan their product development. They trust themselves and meticulously plan all details of the product. That's fine if you have time for it, but it gets worse. There is a fine line with planing  and over planing. When a CEO explain that they "just need to add one more feature" I know something is wrong. I've seen startups postponing their launch month over months, due to that "just one more feature" reason.

Valley based startups tend to be much more market driven. They launch, test, measure, iterate. At the end of the day, that's what small lean startups are designed to do...Move really fast (we're talking about days, not weeks), and check for every clue from the market.

There are pros and cons to both approaches. Europeans would benefit from a bit more flexibility, and Americans from thinking things through a bit more from time to time. A startup must find it's own balance, as always the right answer is somewhere between the two extremes.

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Are you ready to fundraise?

Quite a few startups want to fundraise just for the heck of it. I think that's wrong. I partly blame the whole social networks phenomena, when it's hip to receive funding.

However business is supposed to be a rational thing. There is a set of criteria, where one can decide if they want/need to fundraise or not:
- Can added funds be significantly leveraged? e.g can adding 2 engineers, or 2 sales people to the team at least quadruple revenue, or adoption. Can you prove it, or it's a hunch? Do you have 1 sales guy that already does X and two more will do X*3?
- Can adding the investors really help you with finding the right answers, connections? In other words, are these investors the right ones, or are they just bringing money and you already know everything?
- Are you willing to give up your company for fame and wealth? It's very simple, having investors is great, if you sort this one out in your head: It's not your company anymore! Typically after normal fundraising process you give up around 30% on every proper rounds and by the time you get to an exit, founders hold less than 20% and that's without liquidation preference and other legal mess. It can still be a fun ride though:)
- Do you want to have a lifestyle business or make it big? That seems obvious but can significantly change your preferences and your decision. Lifestyle business is safer, slower more secure, and you don't fundraise for it. Venture type business can be big, very risky and you want to fundraise for it.

What you want to do?

Setting the pace for a board meeting

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Board meetings are strange beasts. On one hand the CEO is talking to his investors, which is by definition an asymmetrical relation, on the other hand it's the CEO who's responsible to control the meeting and make sure that things don't get out of hand.

Investors are typical quite chatty and it's occasionally hard to stop them and move on to another topic. However, if the meeting runs out of time without touching on all topics, it's a failure.

So here is one suggestion how to deal with it:

1. make sure that you know how much time each participant has for the meeting (aim at 2h, expect 1.5h), start on time, even if somebody is missing
2. on the first slide show agenda with allocated time slots; it frames the discussion and sets the expectations
3. keep time, or better, have one of your team members do it, but be sensitive to where the discussion is going
4. while the time for certain topic is running out, summarise the key points; that puts everyone in the summarise mode and moves them away from the details they often like to drill into

Temptations of power

There is a story today on Techcrunch, probably a "breaking" story about a bunch of super angels trying to find a way to block off others from their turf (the Valley), or at least to control the prices. As Michael Arrington points out, if true, it's at least illegal, amongst other things. However, it illuminates an interesting phenomena that happens in every market where there is a huge difference between buying (investors) and selling(entrepreneurs) power.

Entrepreneurs, particularly the first timers are the weakest party here. During their fundraising process they get bombarded by new concepts, new names, new environments.  I guess it's cruel, but natural. You're lost, and at the end you cling to one thing that you can at least related to: the brand. That's why well known investors get the upper hand, they bring brand, experience and network. And that's why you're after. 

I've raised funds from a couple of top investors (like Fred Wilson and Saul Klein) that brought me and Zemanta incredible advantage and experience, by actively working with us. Price was almost never under discussion! But it was fair. We might get a better price from somebody else, but it would never brought us the non-monetary advantages we had.

If I put aside the legal side of the argument, and if  the super angels are really trying to arrange the environment in their own favour, it's a shortsighted attempt. Money that's invested it's always invested in business and they can much better leverage their investment by working with the entrepreneurs and actively help them. At the end of the day, they call themselves angels, aren't they?

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Kings of efficiency, rulers of lifestyle

Image via Wikipedia

A few days ago, Fred Wilson wrote a post The Office Matters.  I agree with him in almost everything he wrote, except of one thing. He says:

When you are less than ten people, it is hard to invest in stuff like this. All you can do is focus on getting your product right and launching it. 

I heard that argument many times when talking to American startups and investors. I think it boils down to cultural differences.

It's perfectly natural for an European startup to provide free coffee, drinks, snacks (like fruit, nuts), parking space, occasional picnic, sometimes even unlimited cell phone use, and a bunch of other toys. In terms of legal environment people get fired or quit with 2 months notice, get full dental and health coverage, pension benefits and other stuff. You hire people by providing interesting job and not environment.

In American startups, you see people buying their own coffee, negotiate details of their health plans and vigorously negotiate for salaries and other compensation. They quit or get fired much more quicker than their European counterparts, with 2 weeks notice. They eat their lunch at the desk and don't jointly watch famous sports event during an office hours.

Which one is better? I don't know! Americans are kings of efficiency, while Europeans rule in terms of lifestyle.

But it still interesting to hear Europeans bragging about the latest achievements in terms of speed or volume, which would come standard for their American counterparts. And, vice versa, it's interesting to watch Americans talk about the new perk they provided for the employees as if it was the latest and the most innovative thing in the world!

My opinion: healthy dose of both worlds would be best. The big question is how to find the right balance.

Paying VCs for being on your board

Recently I talked to an entrepreneur who just closed his first round and got a VC for a board member. All good and well, however the VC asked to be paid for sitting on the board.

I think that's really strange, because:
- it's immoral: VCs give founders money, than take it away to their own pockets! I wonder what their LPs are saying?
- it's misaligned: First rounds are meant to prove the product or leverage revenue generation, not paying the VC.
- it's wrong: VCs should help their companies, regardless of the fact if they are directors, observers or just investors in the company! It's their job to grow the companies they invest in and they are already being paid for that.
- it's pointless : founders and VCs become partners on the project - the startup. If they start charging each other, the whole point get's lost. Should startup charge VC for their services?

I'm not naive and understand that non-executive director get paid in a well established companies even if they are investors, however with a startup, there is whole different story in my view. Every single friction point is potentially dangerous, and a startups don't need insiders bringing new ones up!

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Hollywood pitch

Hollywood pitches are a new hot terrm for online description of your business. In most cases taht means that you compare, mash on or two known services or brands and define the relationship.

Like: 4square for products! Facebook meets yelp for goldfish...

It's designed to grab attention of investors and clients, and more importantly help them remember it and pitch it to others when they describe your business.

Enterprise vs. SMB sales

I'm hearing a lot of startups dreaming of selling to enterprises. That's fine if they can pull it off, however not very likely to be able to do it fast.

When deciding to sell to enterprises consider the following:
- long sell cycles: be prepared to work long time to secure a deal. Decisons are almost never made by just one person in large companies.
- custom made: enterprises won't adapt to your solution, you will have to do it, which will increase your cost and more importantly take the developees away from their code activities
- almost no repeatability
- lawyers!
- great for branding: big names are great for name dropping
- lucrative, if successful

On the other hand selling to small and midsized business:
- scalable: if you hit it right
- painful feedback: customers vote with their feet
- short sales cycles
- repetability designing once, deploying many times
- cheaper sales, for lower price

They are both valid approaches, however one has to be careful when setting the product and sales strategy. Enterprises and SMBs are different beasts.

Knowing what to sell

I'm spending this week in London. Mentoring at Seedcamp Week. It's amazing too see how startups and even established companies are focused on sales. Which is good. What's bad is that quite a few of them actually don't know what they sell. They want to cater to the enterprise, some government agencies and local shops. That doesn't makes sense to me. I think defining the product and segmenting your customers is very imporant, actually crucial!

I had a chat yesterday with a CEO that gave me an honest answer:"I'm afraid that if I let those opportunities go, I might be missing on some lucrative revenue." True, but the responsability of the CEO is to take care of the bottome line, not just revenues.

Being scattered all over the map with numerous products and services adds costs, direct and indirect ones. Profits come from repeating the same thing and selling it a lot of times. Not by doing one time projects. Even if they sound really sexy.

Investors invest in different stages

I'm mentoring at Seedcamp in London. I learned that a lot of first time founders don't understand at investors invest in different stages.

Angel investors are weathy individuals that invest small amounts of money in business that they (generaly) understand. Commonly they invest in packs (5, even 10 at a time). It's usually in a very early stage, paperwork is simple and idealy at least some of them bring more to the table than just money. They bring experience and network. Typically an angel round won't be enough for the company to bring it to profitability, but it's a great start.

Incubators are quite common organised as a small fund and their main advantage is networking. I actually think that accelerator is a better name. They'll invest a small amount of cash, but mainly they'll bring in mentors and primarly network. Examples would be Seedcamp, Y Combinator and others.

Seed stage VC are smaller funds that behave as a proper VCs, give relatively smaller round, but big enough to take the company through the first year. The paperwork is already annoying. Quite often they have really cool partners that understand early stage risks. You can always call them for advice or opinon and often you'll get great feedback. They are not a lot of them, but those who are, are absolutelly instrumental for a success of a small early stage firm. Guys like First Round Capital, Union Square Ventures or The Accelerator Group are in this league.

Later stage VC tend to be more about money than anything else they won't invest less than a properly sized A round (typically 5mio usd). They have the whole infrastructure in place, controllers, annoying lawyers and everything else. They don't invest in early stage first time founders.

So know in which class the person you're pitching too falls into.However there is a small trick. Investors know each other. They talk. So, if you're pitching an early stage startup to a late stage investors,do it properly, you never know with whom he'll have a lunch after your meeting.

How to figure out which investors are in your space

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I've written a few things about selecting the right investor, but recently somebody asked me how to find the investors.


Well, here a couple of strategies:
- find 20,50, 100 of companies that are roughly in the same space as you are, check who are their investors are and make the list of the ones that invested in a couple of them
- check lists: thefunded.com, venturehacks.com, Ycombinator, Seedcamp, TechStars and others, get a big list and do some smart matching with the companies
- find top 20, 30 bloggers in your space and check their blogroll, any interesting names there? Not? Read their blogs, bloggers like to stroke each other's back, particularly if they are investors as well

It's a tedious process, however necessary if you want to play the game. Do your homework and select a list of top 50-100 investors that you might have a chance with. Use any kind of database, spreadsheet, even whiteboard if you want. Involve your cofoudners. You'll feel like generals planning the invasion of Normandy! It'll take you a week, but suddenly you'll realize that the investing space is not an unknown void anymore. Names will become familiar. And you'll feel much more confident.

Importance of sabbatical

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As you saw, I stopped blogging for 2 months. It was not intentional, but it was natural. I actually stoped doing anything. Went for a vacation in the beginning of July and just stayed there (with a brief one day trip to London, where I bought my Ipad and loaded it with Kindle books :). And it felt good. I'm recharged and ready to do new things. During my prolonged vacation I managed to read a lot, and more importantly started a few new things.


In fact I took an unplanned sabbatical. Etymologically, according to Wikipedia, sabbatical comes from from Latin sabbaticus, from Greek sabbatikos, from Hebrew shabbat. Interestingly in all languages it means ceasing. And that what I did. I simply stopped.

Somewhere between a reading in the shade and evening BBQ I remembered TED lecture by Stefan Sagmaister. Check it out:
http://www.ted.com/talks/stefan_sagmeister_the_power_of_time_off.html

I consider myself fortunate to be able to do that. I did that once 9 years ago and now I did it again. I strongly encourage everyone if they can to do it. It's simply something we all need.

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Balanced Scorecard

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I've spend a fair share of my life as a consultant. Management consultants usually have a bag of tricks and recipes for every possible situation that can happen in business. Unfortunately mostly for large corporations (they can pay!) and not startups.

However  there are ways to adapt them and make sense of it. Let's look at the Balanced Scorecard. It's a strategic performance dashboard where you track your strategic performance through time. The idea is to  mix quantitative and qualitative KPIs onto one sheet.

The Scorecard is divided into four sections:
- Financial: how business perform
- Customer: how customers see us
- Internal: how our processes run
- Growth: how do we improve

For each section decide on 3-5 KPIs that measure respective aspects and indicate important aspects of your business. I.e. for the Customer section you can measure retention, pageviews and similar. For Growth you can watch sales pipeline, investments in education, number of programmers using your API and others stuff that makes your business  better and bigger.

When you set it up, you can than observe changes on various aspects of your business in time and see where you have to put more emphasis in your business and where you excel.

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Big Ego Leaders

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Big ego leaders are not the same as strong leaders. They are loud, outspoken, do millon things at the same time, however often the things they do are not linked to their business, but often designed to boost their personal brand. In fact I think that often than not, some big ego leaders are a threat to their business. I'm often surprised how that are praised just  because they are so visible.

Let's think through what big ego leadership brings to the table:
- confidence: That's the positive side of a big ego. Confidence is an essential part of a leadership. All great leaders had it, have it and will have it.
- promotion: Having a big ego forces the leader to be present everywhere and have opinion about everything. I think that's actually bad for the business, though many argue that any promotion is good. Take same visible CEOs of internet startups who have blogs, organise conferences, have opinion about everything. What about their business track records? Usually not so bright. Often they have one thing in common: they got lucky somewhere in the past, usually during the internet boom. Which is good in itself, but doesn't really makes them a good leader.

However there is one criteria that distinguishes good big ego leaders from bad ones. Steve Jobs or Larry Ellison comes to mind. They have a big ego, but the also have substance, they built business, not just self promotional platforms.

Trouble is that in my view quite often startups fall into the big ego trap. Either founders try to mimic the visible people with big egos or, even worse, think about hiring some sort of big ego leaders. Here I get nervous. Big ego means very little in terms of increasing the value of the business. Might be good for short term promotion, but that's about it.

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Basic Rules of Startup Presentation

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I often see presentations by startups that even if they are content wise thought through, they fail on some basic presentation rulse. So here they are:

- do not read from slides... present them!
- 3 items per slide ... exceptions are possible, however people tend to remember three things not 4, 5 or 6...so help them remember your presentation
- use one liners on slides,  not whole sentences, explain the lines if they aren't completely straightforward
- 2-3 minutes per slide...do not jam 15 slides into 5 mins presentation
- product ...show the product, you do not need live presentation (screenshot is enough)
- readable fonts, 4 fonts changes per slide/presentation max! font change is anything that changes a font: size, bold, italics!

That's it, it's very simple, but often neglected. Check your last presentation you did and try to apply the above rules. You want you're listeners to be engaged not annoyed.

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Motivating with share options

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Quite often European startups get their first taste of share options only when US or UK investors step in. In most cases investors recommend founders to set aside options for the team and require that the management issues options to all team members. There is nothing wrong with it per se, however there is and important difference in the goals they try to achieve. 

Options are a part of compensation in US. They are just something extra in Europe. They bring no motivational value to the developers, simply because the culture is not developed yet. Employees get motivated by the thrill of the environment, a chance to work for an international start up, exposure...they aren't motivated by options, since it has only an abstract value.

It gets worse. In quite a few European countries tax law is totally unprepared to handle employees with options, to the point that in some countries people get tax at the time of grant!

So what to do in environment where share options are a novelty:
- trust the managerial instinct, how would management motive employees, would it come up with option scheme on their own?
- top management team members should get inline with world practices, so get options, since they'll be the ones who'll promote the concept further
- for employees from environments where option based compensation is the norm, offer competitive packages
- if you really want to issue options to everyone, offer to grant a generous amount of option for a 10-15% salary cut ... in that case options will get value
- check how your country handles options, can it be substituted for share grants? There is nothing worse than a promise of something for which you have to pay additional money for after some period.

All in all, don't stubbornly pursue models that work in some environments and try to cut/paste them to your environment.  Think what motivates your employees, particularly engineers, offer things that produce leverage!

KPIs

Key Performance Indicators are the primary abstraction for investors. The concept is simple. KPIs are basically performance measurements, ratios or can even be soft goals. They have two characteristic, both of them useful, but can be problematic as well:
- they are simplification of the situation
- they have a tendency to be superficially comparable

Simplification is actually a good thing since it makes life easy for everyone involved. In an interent business its easy to say "our conversion (eg. trial to payable users) ratio is 30%". And that's good.

The trick is that quite often people compare KPIs that have the same name, but actually mean different things. Let's take number of users. This is one of the most abused KPIs. First you start to ask:"in which period"?, unique?, if unique how do you measure unique - within an hour, day, week?... all sorts of problems arise from something that at the first glance look really straightforward. However every time you read news, they just say that a company has X million of user.

KPIs are a great tool for making and tracking company performance. You just need to understand what they mean.

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America vs European Investor Relations

I've learned that there is a significant cultural difference between European and American entrepreneurs in respect to their relationship to investors. In Anglosaxon culture, the management runs the company and even though investors often have some formal rights in respect to approving certain decisions, it's usually expected that the management makes up their own mind. If investors really don't like the way the startup is run, they have the ultimate power to change the management.

In Europe investors are perceived as coowners of the business, so they have the right to influence daily decisions. Quit often if a coowner (particularly a powerful one) suggest something, it's perceived as an order, even if the management isn't quite aligned with it. It will get executed.

It's the conflict of the two concept that causes many troubles in quite a few occasions, particularly with first time entrepreneurs. Management is responsible for running the company, investors may suggest something, however management should view that only as an advice, not as directions. Investors won't take responsibility for the actions, but they will demand it.

As with all cultural conflicts responsibility to overcome them lies in hands of both parties. Investors should be aware that in the eyes of European entrepreneur they have more power than they are used to. And entrepreneurs should constantly demand themselves that investors are partners, not the owners with ultimate power. After all if they new how to run the business they wouldn't just invest in it... they would run it.

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Should advisors be paid?

Short answer is no. Long answer is: it depends!

The idea of an advisor is to advise, not to work. When you ask an advisor to work for you, she might expect to be paid. Of course it boils down to the definition of work.

Advisors are usually paid with equity and it's my views that that's the right way to do it. Amount of reward depends, but I think somewhere in the sub 1-0.5% range is the right amount.

For that you can reasonably expect your advisors to:
- have a meeting with you, call or email exchange from time to time (eg. once a week, but short ones)
- read short documents and give you opinion, from time to time (eg. once a month/quarter)
- intros (if an advisor doesn't introduce you to anyone that he could, fire him)
- be your champion when appropriate  wherever they happen to be

You cannot expect an advisor to do the following for you for free:
- make your presentations
- negotiate for you
- giving you extra benefits from their daily business (though if you really go along well, that's often the case)
- generate ideas for you

Think of an advisor as a wise man who can jump up and help you out when you don't know what do to. But be reasonable with what you expect. Whatever you asked them to do, don't be a time hog. Advisors answer questions, preferable closed ones (where they can answer Yes or No). Be smart. Use them wisely.

Advisory Board

Advisory board is a fancy name for a group of wise man. In my experiences, there are two type of advisory boards:
- shiny ones
- hands on ones

In a shiny advisory board you'll have a bunch of well known names that you can put on your web site and use them for name dropping. Some investors are particularly eager to push startups to signup big brand names. In a lot of cases people used in such boards have the ability but quite often don't have time to work with you.

A hands on advisory board is a group of people that are willing work with you. Those are the ones you want to talk to and sign up. As a startup you'll need all the help you can get. You can expect them to go through your product, make some calls and do intros, read through some one pagers and give you their opinion.

When to setup advisory board? Well, first it's not a formal structure that you have to establish right at the beginning. Recruit the advisors you need as you need them.  Advisory board are more or less a name on the paper. They usually don't  meet or have a structured form. It's just a name for a list of people that you work with on a non regular basis.

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Virtual Real Estate

One of the most popular models on the internet is advertising. Effectively companies managed to figure out a way how to create real estate. Virtually all big services have that kind of model. Look at CNN.com for example. Their main business is to have: a) as many readers as possible and b) as many pages as possible on which they can run adds on. That's it. They virtually create new real estate that catches views.

Analogy of the real world is building new building and putting a bilboard on it's side. Marketers quite often figure out how much that bilboard is worth. They look at the numbers of people that passess by each hour, location, correlation with other bilboard .... And it's exactly the same on the internet. We look at the number of unique users, page views and other.

As with classical marketing it's the numbers game. Since it's not worthwhile for you to put up a marketing sign in your living room, it's not worth to base a modestly visited side on ads. Unless you can build a really big site with a valuable real estate.

Why Free Service?

Startup often offer free service as an investment into marketing. With that they hope to get as many users as possible, that will allow them to monetize them later. A classic example is Facebook or Google. It's free for users, however in exchange, the company creates real estate, virtual real estate which they monetize.

Another example is freemium model. A service is free, but for premium features, users pay. An example would be Skype. Skype-Skype calls are free, but when you want to call  a number outside the Skype world, you pay.

The trick is that all mentioned examples have a very clear strategic path from financing adoption (giving the service for free) to monetizing it.


On the other hand there are quite a few startups that want to go out and start giving the service away for free, without actually having a monetization path. In a small number of cases that might make sense, but much safer bet is to understand the mechanics of the service first and than target marketing, promotion and monetization efforts accordingly.

Virality and it's misuses

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One of the key features of consumer oriented online services is virality. It's the cheapest form of distribution... if you hit it right. Unfortunately it's extremely hard to design, since you never know if something is viral or not.

Americans often recommend three step process: iterate, iterate, iterate! Europans often take more time and want to think things through. I believe that the truth lies in between. You should think and iterate fast.

Virality is achieved when users promote the service to others while getting a utility by using it. 

It's a white hat version of a pyramid scheme, only that's legal. In fact it relies on the same mechanisms. You get rewarded in some way for promoting the service, while using it. It's a neat scheme and can be used often. Quite often people try to force virality on business that are actually not viral at all. Even worse, they start to design viral features, just to get recognition and not improve the business.

Non viral products examples:
- clients for social networks are not viral, underlying networks are
- stand alone products Apache, Firefox, MySql

Viral services examples:
- Skype: having others using Skype extends my utility
- Social networks: viral almost by definition :)

Don't get me wrong. Non viral products can use some tricks to complement their distribution strategy (e.g Gmail with invitations), however if they based their strategy solely on virality it would cause the team to misfocus their product development from creating utility to focus solely on distribution features.

Unfortunately that's often what some startups choose to do.

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