Archive for the ‘Web Startups’ Category

Don’t Eat the Goose

February 16th, 2010

Despite how applicable the goose / golden egg metaphor is to startups - there is a distinct lack of goose related articles in entrepeneurial writings, so with this post I’m going to try and pick up the slack :-)

At its healthiest, the relationship between entrepreneur and startup is the same as the one between the farmer and the famous golden goose (disclaimer: I don’t actually know anything about farming except what I’ve learned in my son’s popup books). The goose starts out small, gets care and feeding, lays small golden eggs, gets more steady care and feeding - and over time the relationship blossoms until the goose is laying lots of golden eggs.

Unfortunately, in real startups, the entrepreneur and goose don’t always get along so well.

For most of the startups I’ve seen, there is an imbalance between the goose and the entrepreneur that supports one at the expense of the other, and makes it difficult for the goose to grow or the entrepreneur to keep their sanity. This usually takes on one of two forms:

1) Goose Abuse

Way back in my entrepreneur classes (Intro to Entrepreneurial Strategery or something like that) - I learned there are 2 types of companies: lifestyle companies, and growth companies. Lifestyle companies exist primarily to provide a lifestyle to their owner / operator. There is certainly nothing wrong with this objective - but if you’re looking to “change the world”, “rock your industry”, and achieve the big payout down the road, it is hard to commit to growth and lifestyle at the same time.

Beware though - lifestyle is tempting! When my first startup was making an extra $1,000 per month, my partners and I pondered how cool it would be to just “lease a Porsche” and continue to enjoy “being our own bosses” at our nice little lifestyle company.

Fortunately, we chose the growth path and were able to instead build our company to a $10 million sale within 4 years.

Eating the Goose

At its worst, “Goose Abuse” can seriously slow the growth of the goose (and cause shareholders / investors enormous frustration in the process). I’ve seen startups that were just beginning to hit their stride get seriously sidetracked by shortsighted owners who were more focused on pulling cash out of the company to support their lifestyle than re-investing the cash to grow the goose to its potential.

Remember - the goose may taste pretty good, but the eggs taste much better in the long run!

2) Abuse by Goose

The opposite of abusing the goose and diverting its resources to support your lifestyle is to endlessly dump resources into the goose without ever expecting it to produce profits on its own. Abuse by Goose takes 2 general forms - abuse of the entrepreneur and self-abuse by bloat.

Abuse of the Entrepreneur

The most important thing a startup needs to thrive is a profitable business model. That is where you put $1 in, and get more than $1 out. This doesn’t happen on day 1 - but it has to happen eventually or you have a money pit, not a goose. Unfortunately, some entrepreneurs are willing to pump all of their time and resources (and even worse - all of their friends and family’s resources) into a business where the profitable model never materializes.

Unfortunately, you can’t guarantee golden eggs will come out just by continuing to fund a failing goose (and there’s no point pitching investors at this point to feed your money-pit-goose either!)

Self Abuse - The Bloated Goose

Even if the abusive goose isn’t bleeding an entrepreneur dry, it can potentially be stunting its own growth through bloat. A profitable business model requires more than just revenue - it requires that more revenue comes out than cost goes in. Unfortunately, in targeting promising markets, some entrepreneurs scale resources too quickly (to “be ready” for the infinite demand they expect on day 1.)

A budding startup that could have been profitable with 5 developers - may be massively in the red because it hired 20 instead. The marketing campaign that showed promise - may not show enough promise to cover the cost that was spent too quickly.

It doesn’t matter how promising the market is, or how positive the revenue growth looks - if the goose was designed to be fatter than it needed to be - it may miss out on its opportunity to grow to a golden egg-layer because its burn rate was 2, 3, or 5x more than the model could actually support during its growth phase.

So keep your goose lean and mean!

Author: Jeff D'Urso Categories: Startups, Web Startups Tags:

How Business Plans Destroy Startups

January 31st, 2010

Business plans - at their best - are an invaluable tool to help a small startup or growing company plot its path to the next stage of growth.

Unfortunately, most business plans are a complete waste of time and energy - turning would be founders and startup builders into word-smithers and BS artists.

At their worst, it is not uncommon for the business planning process to waste months of effort - or even put the startup (and sometimes the entrepreneur) out of business.

So how did business plans become such an enormous waste of time (and startups)?

The original intent of a business plan - to force the entrepreneur to think through all of the issues for getting the startup launched, and to cover all bases - is actually quite sound. The problem is that most entrepreneurs who write business plans are doing it to play the “startup lottery” - writing the plan in the hopes that after the 6 month to 1 year grueling process of begging angels and VC’s for money, they will be amongst the 1% of startups who get funded. This process creates a few major problems:

1) Business Planning turns into “Let’s Pretend”

By definition, any startup faces a sequence of short term and medium term hurdles that are critical to determining if the business model is viable, and then getting the startup off the ground. Generally these “short hurdles” involve testing a market, gauging interest, and determining if there is a profitable business model. If you are using your own money, then these challenges are real - and all of your planning and execution effort is naturally focused on confronting them.

If you are chasing other people’s money, the real and immediate challenges suddenly seem less urgent - and your business plan focuses on how you are going to take over the world after easily sailing over the “short hurdles” (the same short hurdles that ironically spell the death of the majority of “lucky” startups that do raise money). And so your business plan turns into a steaming pile of “Let’s Pretend” - and investors can smell it from a mile away.

2) Time spent schlepping for money is time not spent building the business

Most entrepreneurs who are chasing money are burning their own cash reserves while doing it, and also not focusing on the business. As time goes on, and the business plan is revised, and the financial model is lipsticked for the 18th time, there is little focus on actually getting the business off the ground - and the startup suffers enormously. Maybe it turned out there was a market, and customers would have loved the product; but you’ll never know because you spent time you could have spent launching your startup in the game of chasing money.

Imagine if the Allied forces ready to storm the beach on D-Day put the mission on pause for a few months so they could instead draft the perfect plan for rebuilding Europe after the war. Just like this, millions of entrepreneurs every year wuss out on their own D-Day, deciding it’s better to spend time writing about their business idea than making it happen.

3) Investors can smell a BS plan from a mile away

Having read a lot of business plans over the years, I’ve found the vast majority can be summarized in 3 steps: 1) the startup will lose (amount being raised) in the first year, but discover that everyone loves the product, 2) the startup will somehow break-even in the second year, and 3) the startup will then become amazingly profitable and everyone will get rich.

Though this plan smells the same every time I’ve read it, it is sadly what I’ve come to expect from entrepreneurs who’ve skipped out on their “D-Day” in favor of the money chase. And for all the bad plans I’ve smelled, angel groups and VC groups have smelled many more. On the rare occassion that a plan doesn’t smell like this, it’s usually written by an entrepreneur running a startup that is already taking down milestones and genuinely has a reason to raise money.

4) The “captain gets glued to the ship” the longer the process drags on

Perhaps the only thing worse than the impact the “money chase” has on the startup is the impact it has on the entrepreneur. What was once a rational person who had a potentially good idea is now a stubbornly determined blind optimist who has “bet everything on this idea and has to make it work.” Had they tried building the startup and actually testing the idea 3, 6, or 9 months ago - they may have realized very inexpensively that it wasn’t viable - and thus moved on with their life (and come up with another idea that did work).

But now it’s too late. They’ve got too much riding on the idea, the business plan, and the belief that some investor some day is going to give it a chance and give them the money they need to pursue glory (and now vindication).

The Launch Plan - a Better Way to Start

If your plan is in the 1% that is going to get funded, then just write your plan - don’t waste your time on pressing issues or on building the business :-)

For the rest of us, the key is to use the scientific method (remember from junior high) and break out the most pressing issues you need to solve in order to prove there is a business model. For each of these questions, what is the simplest / smallest thing you can do to prove there is or isn’t a viable product, market, etc? What is the smallest test market you can learn from? What is the minimum set of features you can offer to gauge interest? How much will it cost to acquire attention, interest, and purchases from each customer? Will the purchase cover that cost?

Your Launch Plan should turn all of these questions into an actionable plan for launching the initial product, getting feedback from the market, and determining if there is a viable business model as quickly and as inexpensively as possible. If the answer is no, congratulations, you’ve filtered out an idea on the cheap and can move on to the next idea. If the answer is yes - and there is a viable business - then you can start writing your business plan in earnest knowing it will be based on proven facts and not make believe.

Author: Jeff D'Urso Categories: Startups, Web Startups Tags:

10 Top Startup Killers

August 16th, 2009

Top 10 lists are popular, so I couldn’t resist the urge - but since I’m positive these 10 aren’t the only 10 or necessarily the top 10, I decided to call this 10 Top Startup Killers. So stay tuned for 10 More Top Startup Killers :-)

Now down to business…

There are unfortunately many more ways to kill a startup than to make it succeed. The 10 below are some of the worst startup killers - violate these at your own risk.

Market Doesn’t Really Exist

So you were walking down the street, and inspiration struck - now you’re obsessed with the world’s greatest idea. Problem is - no one else thinks it’s a great idea; and it turns out - maybe it isn’t.

It’s always horrifying to me watching shows like “Shark Tank” and “American Inventor” and seeing people who’ve literally wiped out their life savings chasing an idea without ever validating whether a market existed for it. Validation isn’t always easy, but you absolutely must spend some energy determining whether there is a market and a need before investing huge resources building out an idea.

If you believe in the “Measure Twice, Cut Once” axiom, then now is a good time to “measure” the market.

“Nice to Have…” vs “Gotta Have!”

Although the “Market doesn’t exist” problem strikes many an entrepreneur, often terrible ideas are easy to stop in their tracks - especially if you have a loving spouse or trustworthy friend who’s willing to break the news to you before you waste too much energy on it.

The problem is, many ideas aren’t terrible, they’re “pretty good” - and these can be just as deadly.

When picking companies to invest in, VC’s try to determine whether your customer base deems your offering “nice to have” or “gotta have”. If it’s the latter, they will be interested, if it’s the former - they will run as fast as they can away from your idea. And maybe you should too.

The problem with “pretty good” ideas, is that prospects are more than willing to give you positive feedback until it’s time for them to take out their wallets. Or even worse - a small segment of prospects are willing to take out their wallets, but the mainstream will never care enough to pay to solve the problem.

Know whether your idea is “Gotta have”, or “Nice to have”.

Can’t profitably target your market

Even if a market exists, and even if they are willing to pay for your service; if it costs you more (or much more) to attract a customer than the customer is willing to pay you for your service, then you are in big trouble.

To determine if you can profitably target your market, you not only have to know where you can reach them (Internet locations, media, etc); you also need to know who you are competing with for the customer’s attention. I.e., you aren’t just competing with the “competitors” you envision who offer your service to the same customers - you are also competing with other companies who are trying to gain the attention of those very same customers.

If you can target your market cost effectively, you can win. If you can’t - then it doesn’t matter if they “need” your product, you simply won’t be able to attract enough customers without running out of cash.

Lack of Development Horsepower

If we take a simplistic view of a startup company (and especially a web company), then it is safe to say the company needs development (geeks) and sales (suits) to succeed. To argue which of these two is more “strategic” or critical to succeed is to miss the real answer. If either is lacking, your startup is destined to fail no matter how stellar the other side is.

The developer or development team (although if you’re a startup, chances are the “team” should start out as 1 person) needs to be the “A Team”. They should be passionately excited about the product; they should understand the business objectives; and - oh yeah - they should be good at developing (and you should keep in mind that ~80% of developers are not good at development).

If you have the world’s greatest salesman, and the real pulse on the business potential - and then you hire the B, C, or D team to develop your product; you are all but guaranteed to fail, unless your vision of the startup doesn’t go beyond a “pitch deck”.

Lack of Sales Horsepower

 Equally frustrating to “Lack of Development Horsepower” is lack of sales horsepower. You can have a great market, and a killer product - but if your sales person / team lacks the chops to get it sold, you are in for a world of hurt. Your killer product will die on the vine, and you will constantly hear the sales team saying “if only it had x feature, it would sell like crazy.”

In the ideal world, your product will be ultra-viral like Facebook, and you won’t need any sales people to spread the word - but for the 99.999% rest of us - if sales is a factor in connecting to your market, you absolutely must make sure the sales team can sell.

No Plan

Like a game of chess (from what I’ve heard, I’ve never actually played :-) ), you need to think several moves ahead when you are launching your startup. If you are only gunning for the next milestone without thinking about what will come after that, you could end up hitting the milestone only to find out that you can’t go on because you ran out of resources from lack of planning.

It’s a cliche - but business plans (the kind that you actually use to run your business) are critical.

Planning to Plan

The opposite of no business plan can be equally deadly and costly. Many entrepreneurs spend weeks, months, (or years even) perfecting a business plan without ever working on their business, exhausting all of their resources in the process.

If you want to be a writer, be a writer - don’t start a company. Business plans are useful, but businesses are more useful. Make sure you spend the vast majority of your time actually building the business, not “planning to plan”.

Chasing VC Dollars instead of Customer Dollars

Often the biggest driver for the “planning to plan” crowd is the dream of VC dollars coming in to make everyone rich as the company goes through the roof (or in the later stages of planning to plan, the dream is the VC dollars coming in to save the day).

Here’s how it actually works.

If you can’t convince customers to give you their dollars, don’t waste your time pitching VC’s about how if only you had their money you could sell customers. They don’t want to hear it. For the vast majority of deals, customer revenue MUST come first, then (maybe) VC revenue (might) come later.

Premature Ramp-up - or hiring “just in case”

In the world of “if we don’t build version 15 immediately, some huge competitor is going to eat our lunch”, it is easy to get caught up in the pressure to build out a huge development team to handle the influx of “imminent sales”.

The problem is - whenever this is done, the only thing that ends up being “imminent” is the constant onslaught of developer salaries.  I’ve seen too many companies that actually could have organically found their path and grown into great companies - but they ramped up too early, got stuck with a devastating burn rate - and ran out of cash.

A better strategy - keep your development team as light as possible (remember: A team only), and only ramp development capacity when sales justify the need.

Confusing a Pitch with a Product

You might have a huge idea, a powerful set of slides, and a sheet of numbers that show how easy it will be to scale into the billions of dollars in revenue.

But if you don’t have a product (or a “Beta product” as I’ve written in previous posts), don’t kid yourself - you only have a pitch.

I’ve seen way way way way WAY too many entrepreneurs tell me about a great idea and get me excited about a great pitch; only to return 6 months later to tell me about their great pitch.

If your pitch is really so great (and thus the product you are pitching is such a great idea), then first “buy it yourself” and build the thing already! :-)

Author: Jeff D'Urso Categories: Startups, Web Startups Tags:

Warning for Entrepreneurs: If your idea is not yet in Beta, it’s just an idea!

July 28th, 2009

Ultimately, it’s big ideas that change the world (and make loads of money in the process). eBay, Google, Amazon - all of these started out as “big ideas” - and all of them have great valuations.

But it takes a lot more than a “Great Idea” to achieve great value.

If you have a great idea, in a great market, with a great presentation, and maybe even a great business plan - then what is it currently worth? The only accurate valuation method I can think of is that ideas are worth “a dime a dozen” - therefore your (unlaunched) idea is currently worth just under 1 cent.

And sadly many entrepreneurs spend weeks, months, or even years stuck in the “Idea” stage.

The old axiom “Measure twice, cut once” certainly is true in the game of entrepreneurship. Before spending enormous time, money, and resources building out an idea - it is worth researching the market potential and receptivity to the idea. But there’s a reason why it’s “Measure twice”, and not “Measure 500 times”.

Don’t get caught in the “Presentation” / “Great Idea” feedback cycle.

Once you’ve determined you have a good idea, you will likely put together a presentation and start getting feedback from friends, associates, and others - and the feedback will inevitably be that you have a “Great Idea!” Now that it’s a “Great Idea”, you can double your valuation to 2 cents, and then:

Build out a Beta site already!

Some of the greatest web success stories (including eBay) were up and running in Beta within days or weeks of the initial concept. Then the real magic began. What started as a “Great Idea” quickly became a proven idea, a proven model, and a proven business.

In the case of your idea, there will be 3 possible outcomes that you can get from your Beta launch. 1) the idea is the next killer app and you just need to add water, 2) the idea is “close” and needs some tweaking and iteration to get closer to “hitting a nerve” with your target audience, or 3) the idea is not good.

Now for the key take away…

It’s less important what the outcome of Beta is, then how long and how much it took to get there. If it takes twice as long as it should (or longer), and costs more than it should have (and remember that time is money if it took too long to get here) - then welcome to the land of lost opportunity.

If instead you got to Beta fast, and found out that “the idea needed tweaking”, then you have not exhausted your resources and can tweak away and get it right while the momentum is still there.

Author: Jeff D'Urso Categories: Startups, Web Development, Web Startups Tags: