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November 20
By Rebecca Lovell
A girlfriend of mine has a soft-spot for guys with that ineffable “scrappy” quality. Fortunately when it comes to start-ups, that trait is a bit easier to define. We’ve all heard (and uttered) advice about how important it is to keep burn rates low and focus on revenue, blah blah blah, so I thought I’d dedicate this post to some news you can use. In addition to canceling the ski vacation and-- apologies to our friends in corporate real estate-- officing in that garage for a bit longer, consider the following: Lean and mean
Delaying hires is clearly one way to keep your burn rate under control, but when it comes to actually reducing it, layoffs are imminent. I sat on a panel for the WTIA this past Tuesday, and the overwhelming advice there was to just rip the band-aid off; if you make the tough decision to let people go, cut deep and do it once. Sadly, in the last downturn, I was asked to execute six rounds of layoffs: an unmitigated disaster. As a manager/CEO, you create an atmosphere when no one is ever happy to see you coming…and more importantly, it’s devastating to morale when everyone is waiting for the other shoe to drop. In just this specific kind of breakup, “it’s not you it’s me” is actually true. And for “me,” read the economy. Undoubtedly, depressingly, lots of talented people will be out of work. All 1099’s, all the time? I interviewed a company yesterday employing this interesting and possibly cost-effective strategy, but I would suggest the following caveats: - identify your core competency and keep that in house, and consider contracting/outsourcing the rest on an as-needed basis.
- if you’re fund-raising, you’ll need to demonstrate to investors that you still have skin in the game—that the key people are truly committed to making the business survive and succeed, and not treating it as just another contract.
Eat what you kill
Focus on sales—and though you may stop short of first prize Cadillac Eldorado, second prize steak knives, third prize you’re fired, properly incenting business development could include sales commissions for everyone. But don’t starve
In 500 companies I’ve interviewed in the last 2-1/2 years, I saw a financing strategy this week that I’ve never seen before. Kudos to this creative and sophisticated team; they’ve slashed their valuation, kept their existing investors whole, and have been continually and successfully raising money through the last several months. One financing option they offered was to grant investors a sizable share of profits as the company grew (dividends on steroids, if you will). Generous indeed, but the concern here is this could attract vultures who would rather extract value and potentially suffocate a company, than work with them through an exit where everyone can win. The fanatical focus on revenues shouldn’t be about returning them immediately to your investors, but about building a business that can be sustained through this economy.
BTW: Saving money is hot
Sitting on a panel for Austrade with Wayne Embree last week, a group of Australian software CEOs suggested that nothing about them was sexy, when it came to attracting investment. What I tried to explain was that, in addition to their accents, these entrepreneurs offered something incredibly attractive: significant cost-savings to their target market. This interview cycle we’ve talked to teams who offer storage, intranet/extranet, communication solutions…core back-office business functions, and all at a significantly lower price. Now that’s a turn-on. Note: The author has found that in every other kind of breakup, “it’s not me it’s you” can be remarkably effective.
November 17
By Matt Hulett
One of the frequent comments that I make to entrepreneurs who are in the early stage of their business is how they are defining their Total Addressable Market, or TAM. Your TAM is basically the sum of all of the potential sales that your company could make if it didn't have any competition. So, if you could reach 100% of your customers with your product or service, then that's the definition of TAM. An example would be if you were defining your online ad business you would cite the $20 billion online ad business but then get specific as to your specific service. Using a dummy example, lets say you have a vertical target of all 18-35 year old car enthusiasts. You are now a % upon a % of the overall market size number since you have sliced it down from the broad online ad category by demographic and by psychographic (not just general new and used car enthusiasts).
Here are three tips that are geared toward defining your TAM for angel and venture capital financers:
1. Show the pain
Express the market pain and what market is being addressed. The key point that you will want to illustrate is defining a large enough market to have significant returns for your investors. If you are looking to buy a tattoo parlor or a dry cleaning business, you obviously are not worried about your TAM. But, if you are building a speculative startup, then the investors are going to be looking for a total addressable market that is large enough where a small % of the market share that your company addresses could be an interesting business. They are looking to see if your opportunity can be a $100M business. If you are presenting an opportunity where in 5 years your $20 million in revenue equates to 50% of the TAM, then this is just too small. Investors will typically want you to have a healthy revenue line in 5 years equating to single digit market share. I was recently talking to a friend of mine who had already reached 20% of their business with their next competitor, which has nearly the same market share. Out of their specific market, their TAM was $100M so their really isn't a lot of room to grow or to hit the specific rate of return that most investors would require.
2. Know the TAM
Understand what a TAM is and what it is not. Many companies make the mistake of defining their TAM as their total industry, market share, or target market. The mythical comment that one tends to hear is, "Heck, if I sell one gadget to everyone in China, then that's a big market." That works great assuming that everyone has the same tastes, discretionary spending, likes/dislikes, etc. You need to get very granular when defining your TAM by showing the specific market opportunity by size and segmentation. Build out the math backed by primary research numbers by demographic, psychographic, SIC code, etc. Another tip is to also study your competition. You can effectively do a bottoms-up analysis from their data even if it’s a private company. Also, layer in specific detail around segmentation growth rates if possible.
3. Tell a Story
You should work hard on structuring all of the data that you have collected on your TAM to tell a specific story. Think about showing the overall market, your TAM, and possibly other comparable competitors. You will want to state very clearly the starting point in year 1 and what year 5 looks like. The goal being that even at single digit market share your business can be a large business.
Remember, your goal is to answer two key questions: 1) whether your opportunity big enough and 2) can your team fill a need in the market they are addressing. An example unrelated to business is T. Boone Pickens presentation on how to reduce this country's reliance on foreign energy. It’s a great example of how slides and a white paper bring together a market view of the energy dilemma. I could definitely see this as inspiration for the next time I present my TAM or present strategic planning materials.
November 13
By Rebecca Lovell
While hosting a table at EU last week, I found that inquiring entrepreneurs wanted to know: what industries would fare well (or badly) in this economy? Let's take a look at where we spend money in a recession. "Alcohol and lipstick" (wisdom from my colleague Jon Jacobson). "Movies, video games and getting hammered" (keen insight from one of my favorite entrepreneurs, who shall remain unnamed). Agreed- we all want to dull the pain, get distracted, and spend money on the little things that make us feel special (I might not be able to afford that Diane von Furstenberg dress, but that Viva Glam M.A.C.lipgloss really pulls an outfit together). How does this translate to angel investing? Having lost track of my crystal ball, I tapped into our mountain of data as well as some local experts. Hot: 15% of Alliance of Angels applicants are in the consumer products and retail space, but so far they've accounted for 20% of our investments year to date. A bit of a surprise, given that brand-building is expensive, the battle for shelf-space is brutal, and margins can be low. It's those rare entrepreneurs who beat the odds and capture our investors' imaginations who have done well. One case in point for affordable luxury is Julep Nail Parlor-- though like everyone else they're creatively cutting costs, Julep is on target to open their fourth location, and bookings are as busy as ever. CEO Jane Park attributes their continued success to the "staycation" phenomenon, and the dfferentiating social aspect of their premium parlor services. Not: Geoff Entress, formerly of Madrona Venture Group and an active angel investor, voices concerns about the area of consumer electronics. "I just bought one of the new Netbooks, which are very cool, but anything consumer-focused is likely to be hit hard (witness Circuit City bankruptcy), and holding inventory is going to be increasingly expensive. In or out? Entress cites limited interest in mobile right now; "long carrier and OEM sales cycles have always spooked investors, which will only be worse now." For the counterpoint, Eric Monsowitz of Maveron (focused on transforming the consumer experience) is bullish on new devices such as the Android, iPhone and RIMM creating "enormous opportunities." Hot: 14% of AoA applicants were in b-to-b software, but this segment represents a disproportionate 25% of our investments to date. I will note that the investments our group made in this space were in companies that were already generating revenue. Entress suggests that here, and with software-as-a-service, there may still be interest for companies with revenue, but not so much if funding is for pre-sales development. Not: 25% of the companies who apply to us for funding are in web services/Web 2.0....yet represent only 8% of year-to-date investments. Why? Given low barriers to entry, it's easier to throw your hat in the ring. Competition will be fierce. You may be convinced you've created a niche in this crowded space, but if you think you're the only game in town, chances are there are four start-ups in the Bay Area doing the same thing. To paraphrase Silicon-Valley-vet-turned-author-and Cornell professor John Nesheim, companies that do well in a recession have customers who "get it", want it , and see your uniqueness, immediately. Five minutes ago: Science experiments. Unless it's clean energy. Entress: I have been surprised to hear many investors I wouldn't expect to be interested in this space to be considering it. Huge market, but maybe they are all "Kleiner - philes" and read the NY Times piece from a few weeks ago.
This is the part where I should take Marcelo's advice and boldly declare the winners and losers. Sorry Marcelo-- sometimes you win, sometimes you lose, and sometimes it rains.
On this rainy day, the experts can agree only that deals will attract dollars when they've demonstrated quicker path to profitability, lower risk, and intuitive adoption by users. Note: In the meantime, feel free to call the author if you need anyone to conduct personal due diligence on a distillery or a new shade of lipstick.
November 12
By Marcelo Calbucci
This time we have the Index Change back and working. Probably the most interesting thing on the list this month is the Pet Holdings, Inc (the makers of I Can Has Cheezburger and many other popular websites) moved to #2 on the list and they are likely to takeover Zillow on the #1 spot.
WidgetBucks has also moved an impressive 15 spot into position #1. Is this a sign that people are looking at alternatives to monetize their website and Google Adsense is not cutting anymore? That's a theory. (Disclaimer: Matt Hulett is the CEO of WidgetBucks and one of the Seattle 2.0 writers).
On the top 50, other worth mentions are Pelago (+36), Jambool (+74), Avvo (+11) and Others Online (+11).
If your company was not listed go ahead and submit it through our spanking new and wittily named Add a Tech Startup form.
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November 11
By Marcelo Calbucci
Blogging can be a fantastic motivator to work harder, to build relationships and to grow your career. Many want to have a blog and have been procrastinating about getting started. Or, they got started and set the wrong goals or expectations for themselves and after just a few weeks or months the initial motivation fizzled out and there is some dust accumulated over there. So, here are a few things for you to think about if you are planning on having a blog (yes, do have one), getting started with a blog, or if you had a blog and need to do some CPR to bring it back to life.
Be Yourself
If you try to write with a different persona then yourself, or if you try to be cute when in real life you’re not, or if you try to be controversial but that’s not you, then you are adding a burden to the blogging process by creating extra work. If you are yourself, you don’t have to over-think. This tip not only applies to the content, but also to the voice you’ll use on your blog. Is it ok to have misspellings? To use expressions from the city you grew up that not everybody will get it? Is it ok make jokes? If those things reflect who you are in real life, then yes. Don’t use the same language you use on a business email to a client. That’s not the real you. The real you is the person talking to friends about that topic on a restaurant table. Every time I have a guest blogger I tell him or her: “write as if you were sending an email to a friend”.
Make it personal
People will not read your blog because they want to know the latest news from your industry. They’ll read it because they want to read about your opinion. Yes, personal opinion. Don’t try to make a neutral-point-of-view writing. This is not a magazine or a newspaper. It’s your blog and your voice/thoughts matter. Because of that, don’t re-post content from others, don’t just copy a news snippet from AP because you find interesting. That’s being part of the echo-chamber and it only decreases the signal-to-noise ratio on your blog.
A schedule that works
The biggest mistake of new bloggers is to set a schedule even before they have a feeling for how long it takes to blog. First of all, don’t set a schedule for yourself, but set goals -- say that you’ll try to write 4-6 blog posts per month instead of saying “every Monday”. What if there is a Monday that you are busy and don’t feel like writing? Then you’ll have a feeling of failure and from there is just downhill to not blog anymore. Give yourself some time to find the sweet spot. Maybe you’ll find you got addicted to it and you’ll blog 5 times per week. Maybe you find that you are really capped at 2-4 posts per month. Either way, don’t set a schedule on the first few months. Be spontaneous.
An idea queue
What if you run out of ideas to blog about? If you are like me, you’ll never do. Every time I’m in a meeting, or grocery shopping, or just wandering the Internet and I have an idea that would make an interesting blog post, I send myself an email with a 1 or 2 sentence description of it. Then I organize all my ideas in a single place (on my case a draft message on Outlook). Every time I find myself w/ 20-30 minutes to spare I check my list of ideas for blog posts and write about it. My current list has 10 items. The list grows when I go to all day events, meet new entrepreneurs or investors or hit a new challenge on the business.
Have a theme
A typical mistake of new bloggers is to write about “everything that I’d find interesting and I’d like to read myself”. On that case you’ll have an audience of one. Yes, you are a marketer, but you also like to cook, build model airplanes and are really into astronomy and salsa dancing. You need to pick the central theme of your blog and stick to it, otherwise you alienate your readers every time you go off topic. It’s very common for Tech Startups bloggers to veer too much into the technology aspects and forget the startup side of things. If you start writing about a new script testing tool you are not writing about tech startups, you writing a technology blog an that’s a whole different beast.
Title matters
Most of your readers will only read the title of your blog post -- the same way people scan newspaper until they find something that attracts them. Avoid titles without context (“Another win”, “We are back”, “Tough week”, etc.). Think about what would your reader get if she read only the title. These are a few good titles “Tips on how to market your startup in a recession”, “How will Obama affect startups”, “Acme releases new tool to count coyotes with a twist”.
Content style
Having pictures on your blog post dramatically increases the number of people that read your post. Seriously. I can’t explain why, but it’s well known by many bloggers. If you have a picture or image at hand, go ahead and add it to the post. But don’t make it a burden (like trying to find a LOLcat image for each post you do). Also, do bold important pieces of text to make it easier for the people who read by scanning (same reason you should use numerals instead of spelled out numbers), but don’t emphasize every other sentence.
Size matters
Contrary to when you are writing an article, a blog post can be as short as one paragraph and as long as you want it to be, but the sweet spot is between 1 and 4 paragraphs. And by sweet spot I mean post length that maximizing the number of people that will read it fully. The only two exceptions I can think of to write longer posts is if you are doing a Q&A type of post or if you are doing a list (“12 reasons to …”). The reason these are ok is because they are easy to scan and for the reader to get the gist of it (like this blog post you are reading right now).
Have fun
Don’t panic if you don’t get hundreds of readers on your first week. Be very happy if you get five readers. You should be doing this for the long run, so like anything that takes time, it’s much more palatable if you are having fun along the way.
Here are a few things for you to read next to get your blog going:
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November 11
By Matt Hulett
You might have seen my guest post on TechFlash yesterday. In the blog post, I made the case that Web 2.0 companies are more prepared, stronger, and smarter than their counterparts in the Web 1.0 days. Some interesting data didn't make the final cut of the blog post, so I thought I’d include them here:
On the point of less capital invested in now in startups, Madrona Ventures' partner, Matt MacIlwain, pointed out to me that "perhaps the best illustration is that $100 billion was invested in venture-backed companies in 2000 and closer to $30 billion in 2007. That alone suggests that there is $70 billion less of capital invested in companies in the year prior to a big downturn."
On my point about today's companies having business models, I asked a local venture capitalist (who wished to remain anonymous) to give me a real-world apples-to-apples example to exemplify this point, see below:
One example isn’t representative of every situation. But, I know that this represents how most early stage companies have grown up over the years. This was such an interesting datapoint that I couldn't not let it be published. Thank you to the two gentlemen for supplying me such interesting data for this article.
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