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

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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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