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Archive for November, 2012

The Series A Crunch: One More Reason to Bootstrap and Skip Venture Capital

Posted by Bob Warfield on November 29, 2012

I’ve talked a lot about bootstrapping on this blog–I am a total convert, and I’m enjoying every minute of bootstrapping my own company.  There are many reasons for my enthusiasm.  Investors these days are going to make you take most of the bootstrap journey before giving you a dime being one of the biggest.  You’ve got to build a product, you’ve got to get customers, and you even have to show some kind of decent momentum.  No more raising money on a slideshow idea and a team.  No more just build a cool product and get money.  You really do have to go quite a ways on your own nickel.

Yes, there’s a little bit of seed money to be had, but what are you really getting for that?  What is that transaction all about?

In the end, it’s about getting very meager wages in exchange for handing over a lot of equity and control to some strangers you’ve just met.  Are you really that concerned about a job?  Should you really be calling yourself an entrepreneur if you are?

I like the 37Signals take on the whole bootstrap thing.  They simply ran a consulting business to pay the bills and agreed amongst themselves they would each contribute 10 hours a week to their startup and they’d make sure it was a solid 10 hours.  By following that journey they produced not only the Basecamp product but Ruby on Rails as well.  Yeah sure, not everyone is as brilliant, but that’s not bad for having paid the bills through consulting.  Why do you need to raise capital again?

Whatever your thoughts on needing the capital, Sarah Lacy delivers one more crushing reason to find another way:  the Series A Crunch.

Folks have been talking about the coming Series A Crunch for a long time.  There simply is not enough later stage VC to support all the thousands of seed companies that have been started.  Lacy says that people she’s talked to suggest only about 20% of those seed companies will get another round.  And trust me, not a heck of a lot more will get the Series B after that.  There’s never enough money for the next stage simply because that’s how the plan works.  The plan is to provide as little capital as possible, get as much control as possible, cut off anyone who doesn’t produce phenomenal results, and then double down on a the very few that are left.  Rinse and repeat until you get to IPO’s.  Growth less than 2x a year is not tolerated.  3X is about right and more is better.  You will be stack ranked against the other deals the investors have seen constantly.

Mike Maples says that every year there are 10 awesome companies created.  John Collaghan of True Ventures says there are about 2000 companies a year getting seed money.  Let’s run the numbers.  For a Consumer Internet play, we’re talking perhaps 5 years and for an Enterprise SaaS play let’s use 7 years.  Further, let’s say we raise enough for 18 months each time.  This is an easy problem to set up in Excel, but I will save you the trouble.  To go from 2000 to 10 in 5 years means 4 18 month rounds and only 17% of companies are getting funded each round–that’s pretty close to the 20% Lacy quotes.  To go from 2000 to 10 in 7 years means only 35% are getting funded.  I’m not surprised, it’s easier to show steady progress in an Enterprise SaaS deal whereas Consumer Internet is more of a hits business.  What you have to keep in mind is the winnowing rate is going to be much worse on the early rounds.  The VC’s have a much lower sunk cost, it is concentrated with fewer investors, and you have a lot less to show for it.  At the later stages it’ll be a lot easier to argue the company is just fine tuning for some minor challenge or other, but that the market and product fit for that market are well proven.

BTW, whichever path you take, you are signing up for a lifetime of clearing some amazing hurdles.  What’s telling is that when asked about what happens to the companies that are merely “Good” and not “Great”, according to Lacy, Maples response is, “Screw ‘em.”  And that’s the problem for the entrepreneur.  Unless you are building a $1 Billion revenue company, and you’ll get the acid test with every round you raise, you’re going to work very hard for low wages and wake up one morning to discover you’re done.  The VC’s won’t put any more in.  The doors are closed.  Note that despite making the Founders millions, and continuing to pay off, with no Board to answer to, 37Signals is merely a “Good” company.  The VC’s would shut the doors on it or sell it off without a second thought.

Welcome to the “Unsustainability of Hyper Growth VC Startups” as I called it in an earlier post.

It’s a crazy world indeed where you can do a fantastic job building a “Good” company and have it be judged inadequate.  If you’re unlucky, you’ll be one of those companies that got to profitability and needs no further investment, but the company just keeps going and going, unable to pay out to the Founders like a true Bootstrap can and unable to achieve a Liquidity Event that satisfies the VC’s appetite.  They’ll be after you to sell the silly company out where their preferences will put most of that return in their hands or to take some extreme risks in order to pivot and have a shot at one of those $1 Billion opportunities.

Here’s a radically different way to think about the capital:

1.  You need to go most of the way through Boostrapping to start.

2.  If you wind up with the kind of wildly successful company that just might qualify to a VC as one of the 10 “Great” companies, you can always raise the money later.

3.  If you are measuring everything the way you should, you will know if you could’ve been “Great” without having to spend the money.  Remember, the VC’s were going to dole it out pretty slowly anyway.  Your biggest obstacle is you won’t have the capital to make it on an advertising model or to give away your product for years while you ponder possible ways to monetize it in your Ivory Tower.  Good luck with that stuff right now anyway.  Andreesen Horowitz VC Chris Dixon says 10 million users is the new 1 million and Fred Wilson says the late stage world is switching to Enterprise which isn’t ad-driven anyway.  Having to actually charge for your product is a small price to pay.

4.  Given all that, you’re not talking about an awful lot of personal investment to just build the company until it pays your bills.  If need be, you can follow the 37Signals plan and invest 10 hours a week.  You’re going to be either spending your savings or your spare time, but let’s face it, are you really an entrepreneur if that bothers you?

5.  Fast forward down the road.  You’ve done extremely well.  You paid your bills by year 2 like many Boostrappers have.  You have a company that has doubled beyond that every year for 5 years.  Maybe you did even better.  You’re sitting on a company with less than 20 employees (probably 10 or 12) that’s doing $6 or $7 million a year.  If you have something that could be “Great” in the VC sense, you’re probably doing $10-12 million or more.  Now if you really want to swing hard for the fence, go raise VC money.  Do it like the Github guys did.  Take down $100 million in capital.  Cash out $10 million for yourself and put that in the bank.  Keep running for that brass ring and be secure knowing whatever happens, you not only have the $10M, but you built the company the way you wanted without a lot of interference and you’ve had to give up far less equity because you waited.  Or, forget the VC’s.  Keep putting several million of the company’s $10-12 million a year in your pocket.  Keep doubling every year.  Don’t wait for them to say, “Screw ‘em” because yours is just a “Good” company.  Now you’re the one who can say, “Screw ‘em”.  And remember, the more successful you get, the more easily you can raise money or sell the company to a larger player.

It’s not bad work if you can get it.  Come on–you really going to take those Two Aces (a “Good” hand) and turn them in because you hope for a Royal Flush (a “Great” hand)?

Posted in bootstrapping, business, venture | 4 Comments »

Most Hiring and Investment Decisions are Terrible Due to Pattern Matching

Posted by Bob Warfield on November 27, 2012

pattern matchingOne often hears venture capitalists refer to their decision making process as “pattern matching“.  This reference to machine learning (and a fuzzy match really ought to be pattern recognition, but hey, the techies aren’t using this language so much) is intended to sound smart.  One envisions coupling years of hard-earned experienced with the biggest neural net found between two ears.  Unfortunately, all too often, pattern matching involves making inferences from a statistically insignificant amount of data and calling that a formula for success or wisdom.  It’s just noise, yet we see it so very often at work in making the most important of decisions.

Consider the decision of who to hire.  I recently read two articles that smacked heavily of pattern matching.  First was a write-up in the San Jose Mercury News on Silicon Valley’s Age Bias.  While cultural biases are certainly at work (people of similar ages simply relate to one another better), those making decisions from any greater gap in years are doing so based on pattern matching.  A careful reading of the article yields the best advice for job applicants is to:

- Ditch your wrist watch, they’re Old School–kidz these days use their phone.

- Make sure you have fruit on any electronic devices you’re toting.  No Dell or Blackberries please, if Steve Jobs didn’t envision it, it is a boat anchor holding your career back.

- Shave your head or dye your hair, and invest in as much cosmetic surgery as you can afford.  Wrinkles are Verboten!

- Lose the Bally Executive Loafers grandpa, and don some Converse High Tops.  While you’re at it, forget Faconnable dude, and get a hip tee-shirt.  Maybe I will wear my “There’s no place like 127.0.0.1″ to interviews.

It’s possible those are useful attributes for executive success, but they sound to me like noise and affectation.  In other words, they’re trying to game the pattern matchers.

Jason Lemkin has his hiring pattern matcher running at full song when he advises not to hire CEO’s, Architects, Gamers, or Dualies.  Dang, I’m shot down on two before I even get started since CEO was the very first job I ever had and I have been a “Dualie” (VP of both Engineering and Product Management) on a number of occassions.  I can’t agree with a single one of Jason’s pattern matching rules and the reason is simple–I know too many exceptions for each of them, not even including my own personal work experience.  The reasons why they’re exceptions begins to lay the groundwork for why pattern matching results in so many bad decisions:

When hiring or investing, we want the Exceptions, not the norms.  

But, Pattern Matching weeds out the Exceptions before we even get a chance to consider them.

That’s worth repeating again:  when hiring or investing, we are explicitly trying to find the exceptions.  If asked, we will react very negatively to the idea we’re seeking the mean.  Yet, if it’s exceptions we want, why do we pursue a decision making methodology that is so geared to not adding value because it depends on statistically insignificant noise and often eliminates the Exceptions before we know they’re there?  These ideas, conscious (I won’t hire a CEO) or unconscious (that guy has no gray hair on his bald head so he must be a better specimen than the last guy I talked to), when laid bare on the table, start to sound pretty silly when you think of it in the light of finding Truly Exceptional People or Deals.  If there really was a formula, everyone would be Exceptional and Rich, but they’re not.  Most great success stories are Contrarian.  We can rationalize Google after the fact all we want, but back when it started, it was a contrarian play.  The pattern matchers would’ve argued search was done and over and companies like Excite and Alta Vista had won, much as folks today are arguing the Consumer Internet is done and companies like Facebook and Twitter own it.

Before I go much further, let’s not confuse Selling with Buying.  If you are selling, knowing the Buyer is a pattern matcher and what patterns they’re looking for is a huge advantage.  It tells you exactly how to pitch what you’re selling to win the business.  Always go to school on your Buyer’s tendencies in this regard.  If you can’t get much information, ask questions that will lead to your own pattern matching model of what that Buyer expects.  The mere fact that you can go to school on pattern matchers shows they have an additional  weakness that is endemic to that form of decision making: not only does it give the wrong answers but it is too easy to game.

What I want to talk about is not advice for the Seller, the path there is clear–lean into the pattern matching with gusto.  Rather, I want to talk about how to be a better Buyer.  How to avoid the Pattern Matching Trap in your own decision making.

Step 1:  Write Down Your Objective Criteria

Like I said before, nothing like laying the rules down on the table and shining a bright light on them.

Step 2:  Identify Rules that Are Hopelessly Anecdotal, Perishable, or Symptoms Rather Than the Disease and Eliminate or Rewrite them

Anyone who has worked in machine learning or big data (I’ve done both, having a Genetic Algorithms and an Unstructured Search startup under my belt) will be familiar with the notion of curve fitting, or to use a better term, overfitting.  Testing a predictive algorithm involves feeding it historical data and seeing how well it’s answer matches the historical outcomes.  It is important to always hold out a significant body of historical data that is not used to train the algorithm, but only to evaluate its accuracy.  If you fail to do so, you run the risk that your algorithm embodies no essential understanding of what it is predicting.  Instead it is simply implementing a mathematical algorithm that happens to produce a result similar to the historical data it was trained on.  You have an overfitted algorithm in that case, and it is worse than useless because it provides misleading answers under the cloak of way too much confidence.

For human pattern matchers, it is almost impossible to get enough data points to be statistically significant and to avoid overfitting.  The consequence will be that you can point to several historical examples where some formula worked, but in the latest example at hand you have a bad hire or you’re losing on an investment because it strangely isn’t behaving according to the model.  The grim reality is you’ve based your decision on purely anecdotal evidence and not enough of that.  You overcome that shortcoming by going beyond the pattern to analyze the underlying causes that lead to the pattern.

Patterns are perishable too, because they’re driven by market forces that change over time.  We can go back perhaps 3 or 4 VC cycles to the heyday of the 80′s or 90′s and find all sorts of patterns that just simply are no longer operative.  It doesn’t matter how well they worked then.  To determine whether you have perishable data, you need to have current data points.  This won’t save you if you’re in the absolute midst of a transition, but most of the time the system is stable and not in a punctuated equilibrium.  So make sure you have some current data points and are not just referring to something that happened years ago one time.

Lastly, on the question of Symptoms rather than Disease, it’s pretty simple:

Is that pattern there because it explains something in a deep and insightful manner, or because something hurt at the time, and you’re not sure why, but you want to make sure none of the conditions surrounding that hurt can be repeated?

The latter is a symptom while the former shows at least some understanding of the disease.

Jason, whom I have ribbed a bit for his article on not hiring CEO’s, actually provides his analysis of the underlying disease for each case.  He doesn’t want to hire someone who had CEO on their resume for a small company because he is afraid they’ll be too full of themselves.  He also goes on to further clarify that it is people who were CEO’s of insignificant companies that he particularly worries about, and if you were CEO of a real startup that didn’t make it, that’s okay.  The thing is, having done that analysis, I would skip the whole “Don’t hire CEO’s” thing and instead think about how to objectively determine which candidates are too full of themselves.  “Don’t hire CEO’s” was a proxy for the rule that should have been, because almost any candidate for any senior position might turn out to be too full of themselves.  Avoiding such people is the real insight, and that insight is not captured simply by avoiding “CEO” on resumes.

Step 3:  Focus on Rules that are Objective, Verifiable With Enough Data Points, and Lead to a Model that Makes Sense.  Avoid the Proxies.

Avoid proxies.  A proxy is a rule that sounds right and works for a while, but turns out to be treating the Symptom and not the Disease.  I was in a very successful company one time that optimized all of its behavior around PR.  Turns out that was a great proxy for a while but what Wall Street really wanted was Profits, not PR.  PR was just a tool to be used to generate more Profits and focusing single-mindedly on it led us to take our eyes off a lot of balls that had nothing to do with our image but everything to do with our profitability.  That company went from being a $500 million behemoth to nonexistent in just a few years after that time when PR started to fail.

Let’s consider the hiring question.  Remember, we want to hire Exceptions and not regress to the mean.  Does having some hugely successful company like Google or Facebook on the resume constitute a useful signal?

I would argue no, because there are lots of people that have worked at some big successful company.  We’ve all had the experience of hiring one of them and then wondering why they were ever successful in those organizations (or even were they successful) because they aren’t accomplishing anything in our organization except telling endless useless stories about how things were done at their old company.  Working for one of those Beacon companies is a proxy and what’s needed is some rule that far fewer people can qualify for.  A rule that correctly identifies something more important than fogging a mirror at a Google or a Facebook.

What I like to look for is someone who has played a critical role in accomplishing something amazing at almost any company.  Have you tapped into one of the lead developers on Google’s Gmail?  Now you’re talking.  But how do you know they were a lead developer?  This is a critical role for references.  Track down somebody on the Gmail team–it’s a targeted search so you should be able to find someone the candidate hasn’t given you pretty easily using LinkedIn or some similar tool.  Call them up and be very straightforward about asking whether your candidate was really one of the top handful of developers that made it happen.  If the story is true, your contact should be extremely enthusiastic about them.  If they’re evasive, the story is not true.  Move on.  This is not the Droid you’re looking for.

Hiring the young is a particularly pernicious proxy for this kind of criteria.  If you’re 22, you haven’t had much time to make a huge contribution to an impressive project.  Even if you did, you have probably only been able to do so once.  Perhaps you’re even still in the middle of finishing doing so.  OTOH, if you have a 40 year old, you can start to look at statistically significant trends.  By 40 you will have had a shot at at least 4 five-year stints.  People say if you stay longer than 5 years, something is wrong, but that may be just another false proxy.  Out of 4 five year stints, how many were successful?  At age 40, I’d had 2 successes, 1 failure, and had started in a role for a company that would eventually be my 3rd success with an IPO.  Now do you want to hire the youngster who may have done it once but mostly just sounds really smart, has done a lot of hacking, and is out of Stanford, or a guy who actually had a 67% success rate?  Apparently, VC’s and others want the former.  They just don’t realize that Old Age and Treachery Always Overcomes Youth and Enthusiasm.  That and they probably don’t want to sit on a board with a CEO who has tons more operating experience than they do and is hence less “coachable”.

I’ll close with a final pattern matching example.  In a great post, Fred Wilson recently exposed one of the big sources of the herd mentality among Silicon Valley VC’s.  In “What Has Changed?“, Fred talks about what’s different with today’s deals, and is talking primarily about the growing sentiment there is a shift away from investing in Consumer Internet deals.  He mentions three causes, but the most interesting is this one:

The momentum/late stage investors have moved from consumer to enterprise. there is a large pool of money in the venture capital asset class that is opportunistic, momentum driven, and thesis agnostic. this pool is driven largely by the public markets. this pool of capital was “all in” on consumer web/social web in the 2009-2011 time frame. it drove a lot of activity throughout the venture capital markets because each layer of the VC stack (angel, seed, Srs A, Srs B, Srs C, etc) needs to be aware of what the next layer up wants to fund. when the momentum/late stage wanted web/social, the layers below gave them web/social. now that the momentum/late stage wants enterprise, we should expect the layers below to give them enterprise.

To put that in the context of this article, the early stages are trying to game the pattern matching of the late stages to give those investors what they want.  Dave McClure, a seed stage investor from 500Hats, reacts pretty negatively to that thesis by saying, “If true, this is a huge error.”  He’s right and both Fred and Dave go on to suggest that those who have a clue (and both do) will continue to focus on their core investment thesis regardless of what these late stage funds see in their pattern matching crystal balls.  Unfortunately, the nature of VC is that it is a universe whose physical laws are constructed to maximize the likelihood of bad pattern matching.  After all, an industry where one deal in 20 or 30 makes a fund will focus on the statistically insignificant by design.  They lose track of minimizing the failure of the other 19 to 29 deals and focus entirely on finding the next One.  This precludes the model of a fund that is pretty good at minimizing loss and making solid singles and doubles and focuses entirely on home runs.  Ironic that Moneyball says that’s exactly the wrong thing to do and VC returns are doing so poorly these days.  Clearly separating the Cause and Effect of Successes and Failures is just one more way of saying avoid too much Pattern Matching.

Conclusion

Much of the world works through pattern matching.  It’s a bad approach to decision making, but one you will have to deal with.  Your skill will be in getting your signature to fit the pattern matching key of your buyer, and in avoiding the pattern matching trap for your own decisions.  In the hiring world, it’s figuring out how to identify the truly exceptional before you’ve already weeded them out with banal pattern matching rules.  In the investment world, it’s figuring out what the market really wants and needs while dressing that up to fit the pattern matching of your Board and Investors.  Having to endure that task is one reason they say it is lonely at the top.  If you’re pattern matching, you’re doing what many others are doing and you’re susceptible to being gamed.  You’re not being Exceptional, so try another strategy.

The other approach for entrepreneurs is to keep the pattern matchers out of your life as much as possible.  As an entrepreneur, you don’t need to get hired because you can create your own job.  But, one of the important secrets is you don’t need investors either.  There’s a big world of bootstrappers out there and today’s investors are going to insist that you take most of the bootstrapping journey before they’ll help you anyway.  On the subject of entrepreneurs creating their own jobs and not needing investment, ironically, most potential entrepreneurs I talk to that are worried about getting investments are guilty of following another proxy.  What they really want is the job and salary that they perceive as coming from the investment.  If you are in that category and you’re honest with yourself, you will have realized you are not an entrepreneur after all.  No harm in that and your decision making will be a lot clearer once you realize what you’re really after and quit trying to pattern match your way into being a founder.

People who see beyond the surface patterns to the essential truths (hey, maybe they’re all just increasingly successful patterns) are called Visionaries.  They’re the ones that Win Big more than once.

Posted in business, strategy | 5 Comments »

Saw the Microsoft Surface Tablet and Liked It

Posted by Bob Warfield on November 26, 2012

Microsoft Surface

I was at Houston’s Galleria mall during the Thanksgiving weekend and got a chance to spend some time in both the Microsoft and Apple stores there.  I had read a few articles praising the device, such as Jeff Atwood’s piece (which fairly gushes), but was skeptical.  I’m not at all an Apple Fan Boy nor a Windows Fan Boy.  There are things I like about each platform and things I don’t like.  I loved the 17″ Mac Power Book I had at my last job, but hated its lack of Del and other keyboard keys I’m used to as well as its $4000 price tag (the reason I didn’t buy one after leaving and probably the reason they didn’t let me keep theirs, LOL).  I love my iPad and my iPhone, but I stubbornly stick to having the most-powerful Windows machine I can buy (actually build) on my desktop.  I really dig the Apple monitors, and will eventually have to deal with writing the check for one to attach to my crazy homebuilt PC.  You get the idea–I’m all about Best of Breed for each device.

Putting that all aside, I walked into the Microsoft store with an open mind and low expectations.  The first bit of good news and bad news was there weren’t many people there so I got to spend a lot of time with the Surface RT and equally I had a very helpful salesperson do a demo so I didn’t have to struggle learning all the secret gestures folks are complaining about.  It didn’t take long to figure it out and once having done so, I don’t think I’d mind Windows 8 at all.  The biggest issue with it is what others have already said–it’s intended to be used in a touch environment and if you don’t have a touch screen, you’ll be left continually wishing you did.  The bad news was that there weren’t many people.  I went from the Microsoft store to the Apple store within the span of about 45 minutes and the Apple store was completely mobbed.  The big attraction was the tablets, and I got a good look at the new iPad Mini which was also very cool, but I didn’t get to put hands on to any of the pads.  There was a line everywhere I looked.  Clearly the world is thoroughly pre-conditioned at this stage not to bother even stopping in at the Microsoft store, which is a major problem they will have to fix.

Getting back to the Surface RT, I spent a good 20 minutes with it, including the demo.  I got to try both keyboards.  The short story on the keyboards is that they’re both light years ahead of Apple’s touch screen keyboards which I universally hate and avoid unless I absolutely have to get text into one of the devices.  The iPad is truly read only for me.  I will triage email so that anything requiring more than a sentence is left starred in Gmail and waiting for me to get back to my desktop.  With the Surface RT, not only could I type without a problem on either keyboard, but I was doing so in Microsoft Word.  What a joy for someone who writes as much as I do!  The Touch Cover is the thinnest and comes in all those crazy colors.  It’s actually not to bad and I found I could touch type decently on it.  I had read complaints about keys being in weird places and such, but didn’t really notice a problem there.  However, the Type Cover was a revelation because it is a real keyboard.  I had to keep lifting it up to check how thin and light it is because I couldn’t believe they could build that nice a keyboard without having it weigh down the Surface too much.  It’s not a problem.  By all means, try out both, but if you’re anything like me, you’ll want the Touch Cover.

The overall device is super slick.  Apple has little or nothing on Microsoft in terms of the hardware aesthetics.  The touch screen looks great and works great.  I know it isn’t a retina display, but frankly, it looked fine to me.  I loved having access to MS Office, and the demo person was quick to point out that there is a tile that corresponds to the Start menu, so all that gnashing and moaning about the demise of the start menu seems unfounded.  I suspect there are probably some subtle differences that will occasionally be maddening, but it all seemed to hang together really well.

Based on this experience, there were really only two issues I could identify with the Surface.  First, this was a Surface RT, and you really want a Surface that’ll run any Windows software.  That’s coming, and the demo person actually steered us to think hard about waiting for it.  She was very straightforward about trying to understand what we wanted to use the device for, and one of us was looking for a much lighter and slicker alternative to a laptop.  When further queried on which apps she runs most of the time, the salesperson told us the upcoming device would be much better for her.  I think that’s probably true for me too, so I’ll be waiting for the “real” Surface to make a purchase.

The second issue was the troubling difference in traffic to the Apple Store versus the Microsoft Store.  It doesn’t matter how great the device is if nobody knows about it.  It’s early days yet, but I’ll make a prediction.  Once people start seeing the Surface (and not the RT) turning up in work situations and people find it is far lighter but works just as well as a laptop, that’s when it will take off.  It’ll be the workhorse device for what we all used to call Knowledge Workers.  I think Microsoft will have a very nice level of success with it if they handle it reasonably well.  There are shades of the old, “Microsoft wins with the Third Release” rule, and this time it is taking 2 releases as the RT is not the winner.  It’s just kind of a placeholder platform that shows the potential.

The real interesting story will be watching how Apple responds.  Despite all the kvetching about Windows 8, Microsoft now has a unified platform that spans devices.  Yes, it has a UI tuned for tomorrow’s PC’s moreso than today’s through it’s extensive optimization for touch, but historically, betting that tomorrow will get here sooner than expected has been a good bet.  Steve Jobs had been known to roll those very same dice more often than not.  Apple has the challenge that OS/X and iOS are not a unified platform.  They’re vaguely similar platforms.  For now and some time, they have the luxury that their installed base is so large most developers will build for iOS first.  Win 8 has the luxury that a ton of software is already built for it.  It also has the luxury of potentially being the best corporate or business platform.

The other interesting story will be watching who patented what.  Clearly Apple and Microsoft both have huge patent portfolios.  If Apple can patent rectangles with round corners maybe Microsoft can patent tablets with built-in keyboards.  If one gets a decisive patent wedge in, that’ll make it much harder for the other.  I hope there isn’t too much of that because I am firmly in the camp that patents stifle innovation.

It’ll be a great competitive race and consumers can’t help but win from it.

Posted in business, microsoft surface, mobile, platforms, strategy, user interface | 2 Comments »

Gaining the Wisdom of Crowds in a Bootstrapped SaaS Company

Posted by Bob Warfield on November 19, 2012

Beta Survey FormWhen you’re bootstrapping a small company, sometimes it’s hard to do the things larger organizations take for granted, like making sure you’re listening well enough to your customers.  On the other hand, you can take advantage of your nimble nature and the availability of some great technology to do some things that even a lot of larger organizations don’t manage to pull off.  At CNCCookbook, my small Manufacturing Software company, I’ve had to think long and hard about how to register the wisdom of my Crowds to make sure the company is on the right track with its products.  Lest you think small companies with fewer employees than you can count on one hand don’t have Crowds to learn from, CNCCookbook gets over 1 million visitors to its site every year and we’ve had over 15,000 machinists use the software to date.  We count some of the world’s largest manufacturers on our Customer List as well.  In short, there’s plenty of Wisdom to be had from our Crowds, it’s a matter of finding the right ways to capture it and put it to use.

Having come from a Social CRM background at Helpstream, the value of harnessing the Wisdom was not lost on me.  It was something that had worked well for me throughout my career and something I very much wanted to do well with at CNCCookbook.  Here is a brief history of how I went about it and which tools, techniques, and technologies were put to work to do so.

Phase 1:  Forums and Web Analytics

Right from the very start I deployed a set of User Forums which I called the “G-Wizard User Club” (CNCCookbook is our company and web site, G-Wizard is the software brand that labels our products).  Much as I miss the sophisticated capabilities we had at Helpstream (they haven’t been rivaled by any product since), I had to make do with what was available and what fit my budget.  I knew I wanted a SaaS-based service.  However easy it might be for me to install and administer phpBB or some other Open Source bulletin board, it would be one more thing for me to do.  As the sole person working in the company at this time, I made the decision to focus as much of my time as possible on things that were uniquely differentiated for our company.  Deploying phpBB wouldn’t even come close, so I went with an alternative that was both a SaaS service and ad-supported called ProBoards.

It has worked reasonably well, and served its purpose.  I moderated membership and got a lot of mileage out of the boards.  They continue to be popular to this day, and we have not quite 2000 members there today.  To make sure every User was aware, I also instituted an in-app button to take open the browser and take them to the User’s Club.

You can see there’s more than just the User’s Club there on that Login Bar, but it started with just the User’s Club and grew to encompass a number of resources every User needs to be aware of.  While our app doesn’t run in a browser (it’s an Adobe AIR app as disconnected running is often important to our audience), it behaves in every other way like a browser-based SaaS app and we have embraced a lot of the design concepts for such apps, such as seamless access to the important parts of our web presence and incorporating that presence as a first class citizen of our navigation structure.

Another critical source of the Wisdom of Crowds is your Web Analytics.  We use Google Analytics, and there is a wealth of information to be gleaned.  For example, our User Guides are entirely online and we can see from the Web Analytics which parts of the product are more interesting than others just by watching the traffic patterns.  As we do each new release we write a blog post that discusses the new functionality in the release and again this provides a framework for using Web Analytics to understand what’s going on with the product.

In app access to Getting Started Resources, our Support Portal, and the User’s Club Forums…

Phase 2:  Blog Comments, Social, and Surveys on the Web Site

CNCCookbook started as a plain old web site and went for quite a while like that.  We had an area where articles were presented in a quasi-blog format, but it wasn’t really a blog.  It didn’t take long before we’d outgrown that format and it was time to add a real blog based on WordPress.  If I had it to do over again, I would recommend that every company simply start with WordPress and eschew the plain old web site phase.  It’s a fantastic content management system that has a rich ecosystem supporting it.  In keeping with my SaaS philosophy (why would I spend my scarce time maintaining a commodity like WordPress instead of focusing on what makes our company different?), we signed up with page.ly to host WordPress for us.  We spliced the blog into our plain old web site using DNS Made Easy, a SaaS DNS service that’s been excellent.

This transition marked a big step up for us in a whole lot of ways.  There were obvious SEO advantages that were very visible in the Google Analytics reports.  It became much easier to manage our content and we did a major upgrade to the site’s look and feel (it’s getting close to time to do another, I think).  Best of all, we now had comments on every post and could deploy a host of social widgets to help harvest as much feedback from our audience as possible.  One of the first things I did once WordPress was up and running was to go out and survey key sites to see what sorts of plugins they were using with WordPress.  My approach was to use a variation of a Blackjack card counting strategy I had perfected to decide my Social Widget strategy.  I’ll say more about the Blackjack in a future post, but suffice to say I analyzed the widgets used by a number of top marketing blogs on the theory that these people should know.  I went to companies that clearly had lots of experience with conversion and A/B testing like Unbounce.  I went to specific marketing gurus like Neil Patel’s Quick Sprout blog.  It was an excellent way to focus my efforts and populate the CNCCookbook blog with what I think are an excellent set of Social plug-ins to maximize engagement.

Having done that, I turned to Surveys.  While it was kind of an expensive luxury, I bought two different tools.  I wanted a survey tool that would be innocuous and unobtrusive.  I hate visiting a site and getting hammered with a full stop “please answer our survey” ten seconds after I get there.  At that point, I have formed no opinion but a negative one about the damned survey.  At the time, KissMetrics had an awesome tool called KissInsights that would slide up from the bottom of screen in a very low key way.  That tool is now sold by Qualaroo and works great.  It’s biggest issue, and the reason I don’t use it for all my surveys, is it is limited to simple surveys.  So, I also subscribed to SurveyMonkey.

I use the Qualaroo tool to derive a Net Promoter-style feedback score on the overall product (ours is very high) and I use the Survey Monkey to do more detailed surveys aimed at understand the details of my audience.  For example, I have done surveys of which CAM software they use or which CNC control is on their machines.  Not only is this invaluable data (sort of like surveying which PC, OS, or browser a PC software audience uses), but it makes great content to publish on the blog.  Some of my all-time best traffic articles are just the results of such surveys.  Apparently others also want to understand the Wisdom of Crowds.

Phase 3:  Ideation and CRM

For Phase 3, I wanted some Social and Conventional CRM.  It was time to get a Trouble Ticketing system going.  I chose a vendor called UserVoice for several reasons.  First, it comes with a very nice Ideation App.  Ideation gives my audience the ability to suggest new features and vote on them, like Dell’s Ideastorm.  This is an extremely powerful capability for a small organization to use to focus scarce development resources.  The results will often surprise you.  Ideation is one aspect of what we had at Helpstream, so it was nice to get some of that back.  Second, it’s SaaS.  And third, I got a great deal on it via AppSumo.  BTW, AppSumo has yielded several good deals for my bootstrap venture.  I’ll warn you in advance, they’re very spammy in their email and you really have to know what you’re looking at when you consider the products they push, but if you are patient about wading through some spam and have a clear idea what your business needs, you’ll find some great deals to keep the overhead down.

One of our products, G-Wizard Calculator, is much more mature than our later products because it has a 2 year head start on them.  While I still have a lot of ideas about where I want to take that product, it has a solid conceptual foundation.  What I mean by that is that it is ready to be steered to a much greater extent by customers.  Ideation tools are a great way to do this as they force customers to ration their votes.  On our site, they get to use 10 votes, and can vote no more than 3 votes on any given idea.  Submitting a new idea uses up a vote.  Once the votes are used, they have to wait until the fait of an idea is decided, they are either implemented or rejected, at which time they get the votes back, or they can redeploy the votes.  This scarcity of votes gives a clearer signal of what really matters to your tribe.  Any time I am preparing to do a new release of the Calculator, I always start with our Customer Support Portal and look over the Ideation results.

Phase 4:  In-app Feedback and ET Phone Home Telemetry

This brings me to our current stage of evolution–In-application Feedback and Telemetry.  In keeping with our theme of making the product behave like a web application, we added a Beta Survey popup such as you see above.  This has been a very useful way to monitor our progress from Beta to release-ready.  After spending 10 days focusing development entirely on issues raised in the Beta Survey, we’ve been able to move to 81% of respondents scoring the app during the last week as either “3 – I could use this” or “4 – GWE rocks!”  For the period older than 1 week, the score was only 47%.  Clearly, users were able to tell us what they needed that was missing from the app.  We intend to continue for a while longer until we see a point of diminishing returns and then we’ll declare the Beta done.

In addition to the Beta Survey, we also receive what I call, “ET Phone Home Telemetry.”  This is basic telemetry on which parts of the app are actually being used and how well they perform.  For example, the centerpiece of the application is a complex 3D graphics simulation that shows how the machine tool cutter will move as it executes the g-code program loaded into GW Editor.  We monitor and report back the longest runs so we can get an idea of how the system is performing and whether we need to do more work on performance.  We also track usage information like how many times the user has logged into the app.

The technology that makes the in-app telemetry and Beta Survey easy is something called “Mandrill” that is offered by the MailChimp people.  Rather than having to build back-end server infrastructure that loads all this data into some form of database using an API, the app simply emails it back to us with Mandrill.  The volumes are such that it is very straightforward to collate the information in Excel for analysis.  Building a full-on database application for a 2000 person Beta test would have been needless complexity and time taken away from our focus on doing what differentiates our software.  Mandrill is what MailChimp calls “transactional email”.  I take that to mean email generated by machines, rather than by people, and that’s exactly what we’re doing here.  MailChimp has a Freemium model, and at our level, Mandrill is essentially free.  Not only was it very easy to implement, but it doesn’t cost us anything.  For bootstrappers, that’s a hard combination to ignore.

Conclusion

Just because you’re bootstrapping and have minimal budget and resources is no reason to ignore the Wisdom of Crowds.  In fact, I’d argue that having the Wisdom of Crowds helps you to allocate your scarce resources where they will really matter.  Towards that end, what we do differently at CNCCookbook as bootstrappers is build as little software as possible.  We want to focus every line of code written on problems that you simply can’t get solutions for elsewhere.  Problems that are unique to our audience of CNC machinists.  The more of those problems we can solve, the more value we bring to our customers.  Everything else is just overhead.  Towards that end, we have relied heavily on SaaS, on the Amazon Cloud, and on our ingenuity to lash together the available off-the-shelf technologies to give us the ability to deliver an overall User Experience that is arguably better than almost everywhere I’ve ever worked.  This despite every where else having vastly more budget and resources at their disposal.

I’ll give one last plug to SaaS and the Wisdom of Crowds.  We do as much testing as possible, but again, as a bootstrapped organization, we don’t have large numbers of testers.  Our software quality is therefore a focus of three things.  First, unit testing is important.  Whenever complex new subsystems are added to the software, we make sure there are unit tests.  I personally believe in single stepping the debugger until I’ve seen all the lines of code executed and verified the intermediate results are good.  Unit Tests not only help tee up the execution of all the paths, they also ensure that down the road we can validate intermediate results as changes are made.  Second, we release often.  I don’t like to change too many things without doing a release.  This means that the amount of testing per release is relatively contained to new functionality and our scarce testing capabilities can be focused.

Lastly, we use what I call a “feathered” release methodology.  Each time we release, there is a 7 day cycle.  On each day, we expose an additional 1/7 of the user base to the availability of the release.  Customers that insist on having the latest and greatest can change a setting so they see every release immediately, but most stick to the default.  This ensures that if anything is too badly broken, we’ll hear about it before a very large fraction of the installed base is exposed to it.  In this way, we’re also using the Wisdom of Crowds to help safeguard the quality of our software, and it has worked extremely well to date.

So, whether you’re a bootstrapper or a big company, think about how you could take advantage of the Wisdom of Crowds.  Not only will it make a big difference for your software, but it’ll show your audience that you care and that they have a voice.

Posted in bootstrapping, business, customer service, saas, software development, strategy, user interface | 7 Comments »

What Makes Your Business Different?

Posted by Bob Warfield on November 8, 2012

Wanted to vector you onto a business strategy post from my other blog, CNCCookbook.  It goes like this:

Having founded 4 Silicon Valley startups and participated in success and failure at 3 others, I’ve learned a little bit about making a business successful.  I write another blog called Smoothspan that specifically discusses business strategy for entrepreneurs, but I like to do a post here every now and again when I have something to say that is particularly suited to the CNC, machining, and manufacturing world.  I know a lot of you out there either have your own businesses or have considered starting a business, so I want to pass along whatever I can.

Every business needs a difference in order to stand out, get noticed, and attract customers.  If you don’t know what’s different about your business or idea for a business, it’s time to get busy creating a difference.  We do a lot of things differently here at CNCCookbook.  Some of the most obvious differences have to do with our approach to marketing, our approach to pricing, and what we try to do differently with our software.

With marketing, we try to avoid overt hard sell tactics, or what I would view as spam.  We send email, but mostly it is a digest of the articles from this blog.  The closest we get to a hard sell is to send an email letting people know we’re running a sale.  We also give away a ton of information that has nothing whatsoever to do with our software.  We believe that all things CNC, manufacturing, and machining are interesting and that the job of our marketing is to attract a community of individuals who agree with that proposition.  If we built our software right, some of you will also decide to be customers.  But we’re very patient about that.  We get folks buying the product more than a year after trying it, and that’s fine with us.  A lot happens in a year and it may take that long before you develop the need for it.  Given that we get over a million visitors a year to the site, I’d say this strategy is working well.

Our approach to pricing is different than most of the CNC software world.  We don’t believe in a big up-front fee.  We analyze the market, decide who the competitors are, look at their prices, and then charge a fraction of that as a subscription.  Eventually, we’ll make more money, but we have to keep you happy enough to keep subscribing for years.  If you’re a hobbyist with a hobby-class machine, you can quit subscribing and keep using the software with a horsepower limit that matches your machine’s capabilities.  And you will have paid less than the competition’s up-front one-size-fits-all pricing.

Read the rest…

Posted in bootstrapping, business, strategy | Leave a Comment »

Kickstarter Says they Don’t Ever Want to IPO or Sell. Good Luck With That.

Posted by Bob Warfield on November 5, 2012

Kickstarter CEO Perry Chen says he doesn’t ever want to IPO or sell Kickstarter.  He wants to build a company that lasts for generations and stays small.  At the same time, his company is funded by VC’s like Union Square Ventures, Betaworks, and others, as well as by numerous angels.  Both AllThingsD and GigaOm published the story, but neither one asked the difficult question:

How do you plan to get an exit for your investors if you never IPO or sell?

Is this one of those deals where they just keep selling to other investors like Facebook did until they finally have so many they have to go public?

I think Kickstarter is very cool and have backed a couple of things there, but I just have to wonder at a CEO making a splashy claim like never IPO’ing or getting acquired when he has a Board to answer to that consists of some number of people that have every intention of IPO’ing, getting the company acquired, or finding some other way to show their own investors they made a profit on the capital invested.

Good luck on not showing those investors an exit.  And, if you have reinvented the game in some way so you can show them the exit without an IPO or acquisition, please tell us more.  Lots of companies could use that new model to good effect.

Postscript

Fred Wilson responded to a comment of mine that Union knew about this going in and that, “there are more ways to get a return than selling out.”

I don’t recall seeing a company that found an alternative, but I’m sure many entrepreneurs would love to hear how that’s done and responded to Fred along those lines.

Posted in business, venture | Leave a Comment »

Entrepreneurship and Leadership is About Eliminating “They”

Posted by Bob Warfield on November 2, 2012

Something to think about for Bosses, Boards, and Workers:

“They” don’t think we ought to be in that market.

“They” won’t give us the budget for that program.

“They” insist we focus the next release on mobile and have it out by Christmas.

“They” believe we have to focus on attacking the competition.

“They” are skeptical about whether we deserve another round.

“They” are replacing our manager, Jim, with someone they’ve worked with before.

If you’re constantly dealing with “They”, “The Boss”, “The Board”, or some other nebulous force in your organization, one whose edicts are executed not because they’re right and make sense but simply because they are “They”, you are not an entrepreneur.  You are an employee.

Even if “They” exist, if you charge ahead and get it done without waiting for “They” to decide how or if, you are an entrepreneur.  If your organization won’t tolerate that, you’re still an entrepreneur.  Many don’t fit in.

If, on the other hand, you are given the opportunity to participate in the decision making and be bought in, but you choose to let “They” decide without putting yourself out there at risk, then you are also not an entrepreneur.  But you could have been.

Too many are too concerned about making sure “They” get to make the decisions without regard to the effect this has on those who have to execute.  It doesn’t matter how right you are, if you can’t make them entrepreneurs who are eager and not waiting on you, you’re not a Leader.  You’re just a Manager.  You are one of “They”.

Posted in business, strategy, venture | Leave a Comment »

 
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