Converting Content-Audience Fit to Product Traction

Jason Lempkin has a new post out about gaining traction after your product ships.  He says it’s hard, much harder than building the 1.0 product which was already hard, and he makes some concrete suggestions on how to go about gaining traction:

-  Finish hiring your core team.  Presumably you’ve left the sales and marketing until post-1.0?

-  Get attention for your app:  ”Whatever you can possible do.  Go to every conference.  Speak at any possible event you can, no matter how small.  Win every award. Try to get every blog to write about you.  Reach out to anyone and everyone in your space.  Be respectful, but totally, utterly, shameless here.  Do whatever you can possibly think of here.”

-  Hit the pavement and get early customers and partners

-  Lavish attention on every single customer and lead

-  Plan your next release carefully–it may be your last

Wow, put that way, the job seems really tough!

After reading the account, I do have memories of startups that had to solve the traction problem through brute force and shoe leather.  They were painful and very scary.

The thing is, success is about being prepared (with a healthy dose of luck, though chance does favor the prepared mind).  As I tell my kids, “It doesn’t matter how smart you are, if the other guy already did the homework and knows the answer while you’re still trying to figure it out, he looks smarter.”

So it is with achieving product traction.  This is why I wrote my earlier post about achieving what I call “Content-Audience Fit” to tell Founders it has to be their first priority, even ahead of building a product.  Possibly even ahead of knowing what product you will build.  I say this for two reasons.  First, if you don’t know your audience, you can’t build a great product anyway.  While you might think you know your audience, how can you be sure until you have Content-Audience Fit?

If you have Content-Audience Fit, the following things are true:

1.  There is a reasonably large audience that is steadily growing and is consuming your content.  They care about what you have to say in the market you’re interested in.  They are subscribing to your mailing list, following you on Twitter, liking you on Facebook, or whatever other Social Medium works for your market.  Consequently you know what Social means to your market.

2.  You are part of the Conversation taking place on the web for your chosen market.  You are posting in their online communities.  You’re on the blogs of the key influencers (you do know who they all are, don’t you?) commenting.

3.  You are so familiar with the commercial players in the market that you’ve helped the Market Audience understand some of them better.  You’re commenting on their blogs too.  That establishes you as an agnostic authority in the market.

4.  Because of your participation in all the right conversations, and because of the quality of the content you’re producing, Key Influencers will recognize your name.  You are beginning to get folks asking you unsolicited questions as a recognized Expert.

There is a not-so-subtle difference between this Content-Audience fit and “Get attention for your app”.  It’s because you’re getting attention for your content.  You’re establishing yourself as an expert, not a guy shilling your products and company.  Because your content is very high quality and it’s being given away freely, you’re invoking the principle of reciprocity, which is a powerful force when marketing and selling.  You’re laying the groundwork to present your selling proposition from a position of strength, after your prospects have already decided you’re the expert.

Imagine being able to validate your product vision, and eventually early versions of the product with that kind of Audience insight.  It’s invaluable.  It should be a requirement.  Yet so many companies build the product first and consult the Audience afterward.

Second, you need a strategy to make this business of gaining Product Traction easier.  I love the definition that strategy is what you do to make winning easier.  If you ever needed a strategy, it is when you launch your 1.0 product!

So how do we convert Content-Audience Fit to Product Traction?

Back up.  Let’s get the timing right first.  You don’t want to start trying to achieve Content-Audience fit after you’ve built Product 1.0.  That’s way too late.  Here’s a mini-case study:

I took Helpstream, a Social CRM startup, from being invisible to having a successful blog that had achieved Content-Audience fit in about six months.  At the end of the six months, the key influencers knew who we were and were starting to write about us.  For example, Paul Greenberg, the “Godfather of CRM”, wrote a short passage that perfectly signals good Content-Audience fit:

A few weeks ago, I had a discussion with fellow Enterprise Irregular Bob Warfield, who is the EVP of Products for a company called Helpstream. I have to admit, when I saw Bob’s rather cogent commentaries on the Enterprise Irregulars site, I became curious as to what he did and what the Helpstream company dealio was. I asked him and we set up a demo and a conversation between me, Bob, and Anthony Nemelka, the President and CEO of Helpstream and a long time industry veteran.

That second sentence telegraphs where we’re going and why Content-Audience fit is so critical to a product launch.  Because of my “cogent commentaries”, Paul asked us for a demo.  Imagine Content that is so good, the key influencers are coming to you, rather than you going to them hat in hand trying to get a meeting.  I would budget a minimum of 6 months and perhaps as long as 12 months to achieve your Content-Audience fit.  Sounds like you need to get started at the same time you start the Product, right?

This is an insight that is missing from many startups.  In fact, many want to do a stealth launch and keep everything secretive.  Feel free to keep your product aspirations a secret, but you’re nuts if you’re not belting out super high quality content for your audience from Day 1.  That means as you sit around the table with your fellow Founders, and you ask the question, “Who is spearheading our drive for Content-Audience Fit and who is writing all that content?”, there had better be a good answer.  That marketing guy you partnered with who has never actually done a blog, he has just simply hired people who did blogs?  We might be past the evolution in how marketing is done for that to be a good idea.  First question I ask any marketing candidate at any level is, “Show me your blog?”  If the response is, “Huh?”, the interview is not going to go well.  It’s no different than asking any question about marketing deliverables.  Would you hire someone who had never had any contact with advertising of any kind?  Content marketing is so critical to small companies, how can it be an afterthought?

As an aside, I recently came across a bootstrap business called, The Wirecutter.  The Founder achieved Content-Audience fit before they ever started this little company by writing for Gizmodo, Wired, GadgetLab, and MaximumPC.  How about grabbing one of the big name bloggers in your space as a co-Founder?  How about at least as an advisor to help you get to Content-Audience Fit?  Have them brutally critique your content until you get it right.

BTW, people like Paul Greenberg have extremely high standards.  There is a reason they get nicknames like the “Godfather of CRM”.  They are trusted and they didn’t get there by being dummies or shills.  If your content doesn’t have something really meaningful to say, you’ll get nowhere with this strategy.  But if you get the meeting because your PR firm pounded hard enough on doors, and then in the meeting you still have nothing to say, you’re going nowhere anyway.  So:

It is critically important to do the work of achieving Content Audience Fit!

That’s it.  Full Stop.  End of Sermon.  Don’t.Mess.It.Up!!!

Okay, now imagine you’ve got that fit, as defined by the 1,2,3,4 list above.  Let’s use it to produce traction.  This is done in the following ways:

The Audience that’s ready to Jump Now is ready.  Invite them in.

There are always those influencers who get an edge by working harder to learn than the others.  Always those prospects who are ready to buy now and want the new new thing.  If you have achieved Content-Audience Fit, all you need do is announce the availability of a product and any of these people in your audience will be likely to check in.  Start with  your Beta Test.  You can keep it as controlled as you like, but put the announcement out through your content channel and be sure to communicate at least your value proposition well enough so people will want to jump in.  If you don’t have a big enough audience yet that having 5% of them answer your invitation, you don’t have Content-Audience Fit.

Give the Early Adopters an Amazing Deal and Make Them Heroes

You don’t need revenue yet, you need credibility.  You put out the call to action, and the right people have self-selected by coming forward.  They like you or else they wouldn’t have come forward.  They’re active in the online world or else they’d have no idea you existed.  They’re raising their hands to tell you they care.  Make it easy for them to feel like that was the best decision they ever made.  Focus your spotlight of attention entirely on them.  Save your bandwidth so you can give them completely unreasonable amounts of it.  Make them heroes and they will make you a star.

You need to charge them a little bit or it isn’t a real transaction.  Give them the best deal you will ever offer in your corporate history and make sure they know that in the nicest possible way.  Give them attention and services that will never be available to others in even a year’s time.  Plug every member of your team into the success of these early customers.

When that fire has caught, you can ask them for a favor.  You can ask them to help you get the word out.  At the very least, you need them to be a willing and able reference.  Next step up, you need them to be a case study.  Grand Prize:  you need them to be a source of referrals.  Try to discreetly make sure when you sign them up that they’ll be able to do some of this, at least serve as references.  You can’t ask for that favor up front, but you can find out if they’ve ever been involved with early software, done references, yada, yada.

Earn the Right to Raise Your Price and Sell Bigger Deals

The company I mentioned earlier, Helpstream, had nearly every marketing automation company as customers for our Customer Service Social CRM product.  I remember calling each of these CEO’s, who were all entrepreneurs like myself, and asking them what Helpstream could and should do going forward.  Phil Fernandez, CEO of Marketo, shocked me by telling me, “Bob, I don’t know if I should be saying this, but you should raise your prices.”  Even more shocking was that Phil wasn’t the only one to tell me that.  So we did, after carefully making sure to grandfather existing customers with appropriate agreements so that they were taken care of.  There was virtually no pushback whatsoever, and it helped the business tremendously.

What had happened is we had earned the right to raise our prices by delivering on our promises and raising our credibility.

The ability to price higher comes most from credibility.  Sure, you might have the world’s greatest product, but nobody knows that if you don’t have the credibility.  Can you see where having good Content-Audience Fit is the first step on the credibility journey?  Beyond that first step, it is your conduit for telling your customer’s stories and continuing to build that credibility.

The next step is being able to tell your Early Adopter’s stories.  In terms of closing business, there is nothing like being able to have a prospect talk to a customer that gushes about your product.  At Callidus Software we used to invite prospects to our User Conferences precisely to maximize the exposure to that kind of sentiment.

Startups are enaged in earning the right to raise prices and to sell bigger deals throughout their history.  Successfully getting your first 5-10 reference accounts is just the first rung on that ladder.  Each company you sell to would like to know that they’re not the largest deal you’ve ever sold.  Raising the size of your largest deal earns you the right to sell even larger deals.  Accumulating this asset of referencibility is your primary deal closing accelerant until you’re large enough to point to being the market leader or perhaps to being a public company.  Gordon Moore’s Chasm Crossing can largely be seen as the process of establishing the credibility needed before those who are not Early Adopters will buy.

All along your journey, your Content continues to establish your company’s expertise in its chosen field.  You never walk away from that–you just keep building on it.  If your references are your Sales Accelerant, your successful Content is your lead generation accelerant.  Establish your web properties as the go-to spots to learn about what your customers care about.  All the best marketing startups like Hubspot, SEOMoz, Marketo, and Eloqua are working this way.  Maybe that’s a clue for the non-marketing startups that this is how marketing is done these days?

Lead With Content for Competitive Skirmishes and Insights

Competitors are great for startups.  If you’re the only one in a market, you have to undertake to grow that market all by yourself.  With competition, the cost is shared and the market can grow much more quickly.  In addition, picking a fight is a sure way to add passion to your content and help drive more traffic.  You can’t agree with everybody, but you need to agree with the position your key audience want you to stake out.

Take advantage of that with your Content strategy.  See which conversations your competition are dominating and wade into those conversations with your own viewpoint.  That viewpoint has to carry substance, but when it does, if you win the audience’s hearts and minds who are watching the conversation, they will come your way.  You can’t win them all, but this is where you start stacking up the different value propositions.  This is where you carve up the market into micro-niches that are looking at things each a little differently.  Here’s where you find out which micro-niches matter, and which ones are dead ends best left to the competition.

Passive sonar gained by just passively consuming the content from your space is great, but so much more can be learned through active pinging of the landscape.  See how they respond to your messaging, analysis, and insights.

Conclusion

There’s a lot of work required to achieve traction.  But, if you subscribe to my Content-Audience Fit idea, you’ll begin that work Day 1 at your company.  When you’re ready to enter Beta Test, you’ll have a lot more going for you than your sales guy’s contact lists and willingness to burn through shoe leather.  You’ll have an audience that wants to come to you, embrace your product, and help you spread the word.  FWIW, Helpstream wasn’t my first or last experience with Content-Marketing Fit.  My bootstrap company, CNCCookbook, thrives on the notion today.

The Very First Thing a Founding Team Needs to Do: Achieve Content-Audience Fit

A lot of entrepreneurs,  when faced with the question, “What’s the most important thing to do first?”, would answer, “Build a product.”

Big mistake.

The most important thing to do first is to find an audience.  It may be that building a product is an integral part of growing your audience, but you’re not ready to build a product or grow your audience until you’ve found the right audience to start with.

How will you know you’ve found your audience?

There are some important signs.  For example, you can participate in their communities and be well received.  An even better test is you can get their communities to consume your content.  Before you’re going to have much hope of achieving Product-Market Fit, you’d better achieve Content-Audience Fit.  When you have that fit, when traffic to your web site is growing steadily and you’re starting to get some big spikes in traffic from particularly compelling content, you’re close.  When you can measure growth in the audience’s commitment to your content, for example, when your mailing list for your blog is growing and people are clicking through the weekly digest to get to the actual articles, you have achieved some degree of Content-Audience Fit.

Content-Audience Fit is a surprisingly high hurdle.  It is higher than getting a bunch of random people to sign up to try a free software product, for example.  The reason is that there is less value being offered by the content.  People actually have to be willing to spend some of their attention on your content simply because it is that good.  They do it because you’ve demonstrated you understand what they want and that you have something worthwhile to offer.  There are tons of people that will play with some free piece of software for a short time, and you’re probably not even set up to measure how hard they played with it yet.

With Content, all you need is a blog to deliver the Content from and Google Analytics to measure its impact.  Maybe augment that with a MailChimp account so you can actually start to aggregate some followers to your Tribe and use the Analytics there to tell how committed they are.  Anyone who is willing to undertake the hard work needed to consume your Content and decide they like it well enough to want to keep consuming it is a valuable member of your Tribe.  The more you can grow the Tribe, the more voices there will be to help you get your message out, to tell you what problems they need to have solved, and to guide you in the next phase of your journey:  achieving Product-Market Fit.

To be a successful Bootstrapper, you’re almost certainly going to have to be a Content Marketer anyway.  Advertising is typically going to be too expensive before you get some capital and a following.  So do yourself a favor.  Forget the product for a little while.  Focus on achieving Content-Audience Fit.  When your past striking flint and blowing on the tinder, you’ll have a little fire glowing.  It’s a big accomplishment.  So far it’s just kindling, but soon you’ll be ready to throw a real log or two onto that fire.  That’s when you build your product, as soon as the Content Kindling has caught and you can see some actual flames.  The timing will be perfect, because your costs will go up and your available attention for producing product and content will go down as soon as you ship your product.

You can’t afford to be just starting to look for Content-Audience Fit after the product is ready to ship.  That’s too late.  And it’s a terrible time to discover your market has no passion for what you’re trying to do.  That bit of news was tragically knowable with a lot less effort if you had only started out finding an Audience.

Extra Credit Note to Investors:

If you find a team that knows how to create a product, we both know that’s not enough.  You’ve raised the bar on that some time ago.  But if you find a team that has achieved Content-Audience Fit, they’ve demonstrated a critical marketing skill.  At the very least, you know that this team can present compelling content that draws a significant audience.  Combine that Audience Insight and ability to compell the Audience with a decent Product and that’s the essence of a startup that will grow.  I am surprised every time I walk into a startup and ask who in Marketing is a hard core blogger and hear back that basically nobody is and they’ve outsourced that task to technical writers of one kind or another.  Those startups are proceeding on a wing and a prayer that they actually understand their Audience.

Most Hiring and Investment Decisions are Terrible Due to Pattern Matching

One 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.

Saw the Microsoft Surface Tablet and Liked It

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.

Gaining the Wisdom of Crowds in a Bootstrapped SaaS Company

When 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.

What Makes Your Business Different?

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…

Entrepreneurship and Leadership is About Eliminating “They”

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”.

The Unsustainability of Hyper Growth VC Startups

Charles Ponzi in 1910

I have 216 subscriptions in my RSS reader as I write this.  While I like to read the Google News page at least once a day, I much prefer blogs for any kind of real insights beyond just news.  I’ve cast such a broad net because I have broad interests and because there are a lot of very smart people out there blogging away their best ideas–it’s a gold mine of inspiration and understanding, and well worth the time I spend sifting through the articles.  My favorite insights come from finding the correlations, connections, and harmonies between multiple seemingly disparate posts.  For today, what got my juices flowing well enough to take out the blogging pen were these two articles:

-  Paul Graham’s ode to growth entitled, “Startup = Growth“

-  Jason Cohen’s potentially career limiting, “The Rise of the Successful Unsustainable Company“

I say career limiting of Jason’s piece because as he mentions in the post, it is going to annoy some people.  This is probably a career limiting post I am writing too, but that’s okay, I don’t want a career with a successful unsustainable company.

Speaking of which, let’s start there.  What is a “Successful Unsustainable Company?”

Whenever people have asked me why I like Enterprise Software startups more than B2C Internet plays, I always use the same response:

B2C Internet plays are all about fashion trends and I’m not an arbiter of fashion.  I can’t tell you whether this is the right time to make millions using sock puppets to sell pet food.  I can tell you how to solve a hard problem that has valuable ROI in the Enterprise.  I prefer the latter as a way to maximize the value of my career investment portfolio.

That’s actually a bit mellower than my true philosophy, which I’ll say more about below, but it’s where I started.

With that said, not every B2C play is a fashion play.  The fashion play is not sustainable because inevitably, fashions will change and it is hard to keep up when that happens.  There are many B2C companies that have sustainably created value for consumers:  Apple, Amazon, and Starbucks, to name a few.

I well remember the first fashion play I came across.  It was a company called “Pointcast”, and many of the hottest VC’s loved it.  I used to see it running on machines in the lobby of their offices.  Pointcast was a screen saver that delivered news gleaned via the Internet to your screen.  It was intended to be monetized via an advertising model.  It made absolutely no sense to me whatsoever:  How can we sell ads that are only “seen” when the computer decides we have walked away from our PC’s?  Yet, they ultimately received, rejected, and regretted rejecting a $400 million acquisition offer from News Corp before they ultimately went bankrupt.

What went wrong?

They were a fashion.  They were solely focused on growth.  They delivered virtually no value.  They were not sustainable.  Most of all, they self-selected users that were not committed.

This is where I start to wonder when I read that startups are about growth, growth, growth, and dare I mention, “Growth!”  Paul Graham is Paul Graham, but geez, isn’t there more to it than Growth?

Fred Wilson is a smart VC, and though I don’t always agree with him, he is careful to point out that while he loves Graham’s article on growth and generally agrees, his firm wants sustainable growth:

One thing that Paul did not touch on is the difference between organic and sustainable growth and temporary stimulated growth. Things like gaming Facebook’s open graph can temporarily stimulate growth that is not sustainable long term. Investors can be faked out by things like that. Gaming Google’s search algorithms is another way that has been done in the past. When we look at growth, we look for authentic, organic, and sustainable growth that is not overly dependent on a single source, particularly a source the startup doesn’t control. That takes some experience to detect. We’ve messed up there as have most investors.

Sustainable and organic growth that can continue for five or ten years unabated will produce extraordinary returns.

This is laudable, but I’m not sure it really captures very well what I think of as Sustainable Growth.  For one thing, he telegraphs one of the key drivers of the rush to Unsustainable Growth–his firm plans to get out in five or ten years so the rest doesn’t matter so much.

Jason Cohen’s article chronicles the career of Bill Nguyen’s awesome track record at building unsustainable growth.  Putting aside his most recent one, Color, which blew up $41M without accomplishing anything, Jason offers the following list:

• Forefront — IPO’ed in 1995 by CBT — CBT stock fell 85% in 1998 and prompted class-action lawsuits.
• Freeloader — On $3m invested, sold for $38m in 1996 — shut down in 1997.
• Support.com — On 2.5m invested, IPO’ed in 2000 for $32/share — stock price now $2.
• OneBox.com — On $60m invested, sold for $850m 18 months after launch to J2 just before market crash — score!
• Seven — On $60m invested, still private, cancelled an IPO.
• Lala — On $35m invested, sold to Apple for $80m — shut down in June.

Much sound and capital ultimately signifying nothing.  They cashed out, got acquired, and achieved liquidity by any means possible and then died suddenly.

What’s with these deals, and why do so many deals recently look destined to follow the same path?

There are at least two problems endemic to the system that are guaranteed to produce a lot more unsustainable hyper growth companies with unhappy ultimate ends.

The Use of Other People’s Money Leads to Bubble Exits

As a generally financially savvy culture, we have a shockingly limited menu of options when it comes to investing in companies.  We either take debt with its associated meager interest returns and a desire to only take debt in stolid safe organizations, or we make an equity investment and expect skyrocketing growth to let us bail out with enough return to justify the risky business we’ve engaged in.  Despite much evidence that momentum investing is fundamentally unsafe, nobody wants to follow Warren Buffet’s strategy of buying and holding forever.  What a pity given he is the most successful investor of all time.

Most of the exits are engineered to be bubbles in this world.  The IPO is designed to either take as much capital off the table now and sink as Facebook did, or to sandbag the heck out of the value of the company so all the early investors feel so good that the stock can’t help but rise, as Workday did.  Both are bubbles, it’s only a question of who profits–company with more capital raised or subsequent investors and underwriters with more headroom to profit from.  Nobody wants to be in the middle and price at a fair multiple that doesn’t immediately take off in one direction or the other after the opening bell.  IPO markets are dynamically unstable systems.  They are undamped oscillators.  Some of our best fighter planes are dynamically unstable too–it gives them an edge in maneuvering against adversaries when they want to snap suddenly in one direction or another.  It also means the pilot ejects and they crash if the fly by wire system fails because humans can’t fly aircraft that are that unstable.

But moreover, what a shame that we haven’t managed to invent some way of sharing the returns so that we don’t have to create a bubble exit and we can enjoy buying and holding forever.  As a proponent of bootstrapped companies that never raise capital, I believe those companies are awesome.  Yet, I have yet to see a viable structure for how to invest and profit from them in a way that will keep their founders happy as well.  We live in an age when many new models (Kickstarter, anyone?) are being invented, so perhaps it will come to pass.

Meanwhile, the use of Other People’s Money leads to Bubble Exits.

This is due to the inefficiencies of the distribution and management of the capital.  VC funds expect to get lousy returns on most of their ventures.  Ironically, it seems the later they wait to invest in the interest of reducing risk, the lower the returns of the industry seem to go.  But this is no matter because the biggest players still catch enough Google and Facebook-sized waves to prosper and new funds keep rolling in.  Perhaps if you really aren’t that confident in predicting who the real winning companies are the best proxy is to pick the fastest growth companies who will be in a position to monetize at the end of the shortest window of risk exposure.  Hence we’ll be less and less interested in those long-term SaaS plays.

So, we are self-selecting bubbles because we think that minimizes the risk profile, because the other money middle men already set up the IPO markets and such to work as bubbles so they make their returns, and because only the bubbles return enough to win for the portfolio.

Hyper Growth Requires Eliminating Friction, But Commitment is Friction in and of itself

This one is a bit awkward to express and bit abstract, but it is the more important of the two points, so bear with me.

If growth is the only yardstick, then we should design the entire Customer Experience to promote growth.  One way to do that is to minimize the friction while maximizing the viral desire to help get the word out.  Twitter is my favorite example of this.  Among all the Social Software, it requires so little commitment; there is almost no friction.  A signup is needed to get credentials, and then just the occasional 140 character Tweet.  Who can’t come up with 140 characters to say about something, even if only what they had for lunch?  Combine that with making it easy to follow, and we’re off to the races.

There are many examples of engineering for friction-free participation.

Pinterest is great fun, I love it, and the friction is even less than for Twitter.  With Pinterest, I don’t even have to be creative enough to come up with my own Tweets, er photos.  I can borrow everyone else’s photos.  I may not have ever uploaded a single photo, yet by simply pointing and clicking I can assemble some phenomenal boards.  It is stamp collecting for the New Millenium.

Or, how about LinkedIn’s recent business of having everyone endorse each other’s skills.  What a wonderful use of the principal of creating obligation.  You get an email telling you that people are endorsing your skills.  You’re gratified, you want to see who is being so kind, suddenly you feel the obligation to endorse a few of their skills, but of course you get handed random people in your network to endorse.  Chances are you wind up endorsing more people than were in the email that came to you and got you started, so the viral factor is going strong.

We’ve learned a lot about how to do this sort of thing, but along the way with all of this single-minded focus on growth, we have minimized commitment.

Just because I have pinned a few photos of Ferraris does not mean I am a Ferrari customer.  Just because I Tweeted 140 characters does not mean those are my most profound let alone my most monetizable thoughts.  What we have is the New Millenium no-ROI marketing.  All those kazillions of dollars spent by the Madison Ave Mad Men are still being spent on the Internet trying to use vehicles like these to move the masses to buy our products.

Seth Godin does the best job of anyone I know teasing apart the value of having customers who are truly committed and not just brand following sheep.  He has endless posts about the subject.  A great recent post is, “Nobody ever bought anything on an elevator.”  I read it as a cautionary tale about gradually building a following and not trying to close the sale too soon.  You can’t close the sale with 140 characters or a picture.  But you can get millions or even a billion people to do something.  Is it something of value?  Is there real scalable ROI?  By scalable ROI, I mean we can keep writing bigger and bigger checks and make more and more profit?

The conundrum is that valuable commitment is a form of friction all by itself.  People are skeptical.  They need convincing before their hearts and minds will fall into line.  They need even more convincing before they go out on a limb and tell their friends.  Look at all that Apple has investment over so many years to build their level of customer commitment.  Sure they see hyper growth in new products now, but it took years to build the foundation of committed customers that enable that kind of growth.  It just might be that when you see a company that is too new to have achieved that level of commitment, that you should decide there isn’t much commitment there.  And if there isn’t much commitment, there can’t be much value being created.

The reason hyper growth is so unsustainable yet so lucrative is it lives in the unique intersection of these two issues.  It revolves around getting more and more people to do something, however trivial, with the promise that later they’ll do something that is not trivial, while being secure in the knowledge that you can exit before that is ever put to the test.

How to Position a VC Startup for Acquisition: You Can’t

Whaddya mean you want to sell?

How do you position and maneuver your VC-funded startup for acquisition?

The short answer is, “You can’t.”  

The VC’s didn’t sign up for an acquisition.  They are seeking a billion dollar revenue opportunity because that’s what it takes to move the needle on their portfolio.  If they are willing to talk about an acquisition at all, it is either a totally insane IPO-level valuation, or they have serious deal fatigue and you’d better watch out lest you find yourself walking the “sell-it-before-the-next-round-or-we-shut-the-doors-or-replace-you” plank.  Those sharks below the end of that plank look mighty hungry and the water there is cold.

I’m not going to spend a lot more time trying to convince you of that truth.  I’ve written about it before, and I have lived it more than once.  You may think you’re doing your investors a big favor offering them an early 10x return, but you’re not, so don’t kid yourself.  VC’s are VC’s, they don’t mean anything by it, but they have a job to do and they try hard to be good at it.  Don’t get cross-ways with those gears.

In particular, don’t think you can decide how much money to raise in a way that keeps your options open.  Your options will be determined based on how the VC’s feel about your company’s prospects.  If they’re bullish, they won’t let you sell absent a major hostage terrorist negotiation (been there, done that, do not want any more of those T-shirts).  If they are not bullish, you have much worse problems than deciding to raise a little less money to preserve your options.  Your first problem is you won’t have the luxury of raising less if they aren’t bullish.  At best, they will agree to participate pro-rata if you can find some new sucker to set the price and pony up.  At worst, they don’t go pro-rata and it becomes nearly impossible to raise any money.  I had the joy of trying to operate under those conditions in the wake of the 2008 crash, Sequoia memos, and the rest of the gloom and doom.  One of my VC’s would go pro rata, the other wouldn’t, having already invested in larger competitors.  I walked the plank.

So forget that idea.  It’s a non-starter.  The only way to win is to figure out how to fly faster to the goal, not slower.  And hasn’t that always been true for your startup?

The other reason it is a non-starter is that companies are bought and not sold. Unless you’ve already been in talks that convince you that you have the opportunity to be bought, forget about it until you do have those talks. If you’re thinking you need to preserve the option for talks later, reread the first part of this article where the VC’s are going to decide anyway and then do as follows:

Raise enough to be able to accomplish something in the next 12-18 months that significantly reduces risk and raises the valuation. That aggressive risk-reducing goal you intend to accomplish is central to a good pitch anyway. This is a proposition your Board will understand and can buy into, it is a prudent use of capital, it is a good test of whether everyone is wasting their time (you are if you can’t figure out how to significantly reduce the risk with a defined mission), and it still sets the stage for acquisition talks as the acquirer is acquiring to reduce their own risk, which is almost always the case. If you reduce your risk, it either reduces theirs too or it positions you as closer to the top of the list they could acquire to solve their problem.

Raising less than enough to significantly reduce risk is a sure recipe to show up the next time you need money without having made enough progress. That’s not going to go well at all. See the various excellent posts out there on dilution. Some of those meetings where you need to raise more without having accomplished enough are inevitable, but why set a plan in motion that guarantees it?

Google Still Doesn’t Get How to Beat Microsoft Office

I just saw the announcement that Google is backing away from support older Microsoft Office file formats.  In many ways, this is a non-event.  It only affects people that use both pre-2003 Microsoft Office and Google Apps.  On the other hand, it is symptomatic of why Google doesn’t take a lot more share away from Microsoft Office–they don’t understand compatibility and the user behavior patterns associated with switching core products that have persistent data formats.

Compatibility is an all-or-nothing prospect.  If you’re trying to take a powerful incumbent out, you have to make the transition frictionless.  Not being able to load a file is about as much friction as you can ever hope to see.  Having it load imperfectly so you have to manually deal with the differences is almost as bad.

I’ve written about this problem before.  It isn’t that hard to build a product that’s 100% compatible with Microsoft Office.  It’s been done before by companies a lot less successful than Google and Microsoft moves so slowly it’s not like it is a moving target they’re shooting at.  The mystery to me is why Google doesn’t just buckle down and get it done.

Probably a typical Big Company Fail:  Google Apps doesn’t have the priority to ramp up but they don’t want to cancel it or they’re just too arrogant to see their problem and think this will force a big wave of adoption of Google Apps.  More likely it’ll just force more people to buy later versions of Office, or sign up for the relatively inexpensive new Microsoft subscription service.