Category: Strategy

Last night I had the opportunity to listen to Paul Singh present the 500 Startups thesis at the ATDC. He did a great job outlining how things have changed in the tech startup world over the past 10 years as well as making a great a argument for investing in a large number of startups with a structured thesis.

One of my favorite slides was the 500 startups checklist for investing:

• Product solves a problem for a specific target customer
• Capital-efficient businesses – operational @ <$1M funding
• Primarily internet-based distribution – search, social, mobile, location
• Simple revenue models – transactions, subscriptions, or affiliate
• Functional prototype before investment (or previous success)
• Small but measurable usage – some customers, early revenue
• Small but cross-functional team – engineer, design/UX, marketing

I think this is a great list. One item I’d add: co-founders are working full-time on the business and don’t have day jobs (if they need to wait tables at night to pay the bills, that’s fine). Also, design/UX is critical for B2C startups but Twitter Bootstrap makes it less critical for B2B startups.

What else? What are your thoughts on the 500 Startups checklist for investing in a startup?

Lately I’ve been reading The Launch Pad: Inside Y Combinator, Silicon Valley’s Most Exclusive School for Startups by Randall Stross. A future post will be a book review but I want to touch on a topic within the book first: Y Combinator and TechStars are very different. In fact, I know several people that have gone through each program, and their feedback and insight into the respective programs corroborates the differences.

Here’s information on each program:

Y Combinator

• 60+ startups per class
• Single city location (Mountain View)
• No shared office space
• No third-party mentors
• ~$18k investment for ~6% of common stock
• $150k convertible debt with no cap
• Strong independent team orientation

TechStars

• 10 – 15 startups per class
• Multiple cities (Boulder, NYC, Boston, and Seattle along with affiliates)
• Shared office space
• Third-party mentors
• ~$20k investment for ~6% of common stock
• $100k convertible debt with $3MM cap
• Strong fraternity/group orientation

Now, it isn’t that one is better than the other, only that they are very different. Y Combinator is more like grad students doing independent research projects and TechStars is more like a fraternity with everyone working on different projects in the house.

What else? What are some other ways that Y Combinator and TechStars are very different?

Chris Dixon, one of the best startup bloggers out there, has a new post up today titled The Rise of Enterprise Marketing. In the post, Chris argues that a serious trend with enterprise (business) Software-as-a-Service (SaaS) is that of front-line managers and employees buying software in a bottom-up manner as opposed to the historical top-down manner. Some successful SaaS companies, including Yammer, which just sold to Microsoft for $1.2 billion, use a freemium model where the sales people only call on people already using the free edition — no more cold calls.

Another key point is that instead of sales people leading the charge to the CIO or department heads, marketing is leading the charge reaching out to the end users. With the end users on board, they either buy directly in a low friction fashion (e.g. a credit card) or if enough people get involved they make a traditional enterprise type sale. The sales cycle and cost of customer acquisition is a magnitude lower in this model compared to the traditional model.

As for the title of the post, “The Rise of Enterprise Marketing” isn’t the clearest headline to describe the content. Enterprise marketing has been around since the beginning of business software. This is really enterprise marketing targeted at the end user so that the corporate software can be purchased in a bottom-up manner. Regardless, this is a major trend deserving of serious attention.

What else? What are your thoughts on the rise of enterprise software purchased bottom-up?

Paul Graham’s most recent essay this week, titled Startup = Growth, argues that startups are companies designed to grow with a scalable business model. The idea is that a startup is different from most businesses, like a barber shop, in that they are high growth-oriented from the beginning. So, a startup can be in the early low/no growth phase as well as the rapid growth phase that eventually levels off, resulting in a regular, large business, if the startup is successful.

Another prominent startup author, Steve Blank, argues that a startup is an organization formed to search for a repeatable and scalable business model. The idea is that once the new entity figures out product/market fit and starts building a business, the organization is now a company and no longer a startup. Now, these are fundamentally different: one says that startups are high growth-oriented companies from the beginning through rapid growth stage and the other says that startups are temporary businesses at the earliest stage.

My personal belief is that startups are of the Paul Graham definition (and a superset of the Steve Blank definition). Here’s how I view a startup:

• Large, scalable business potential that isn’t predicated on any one person (most businesses are replicative of an existing model instead of innovative with a new model)
• Significant amounts of change and uncertainty on a weekly or monthly basis (companies like a healthcare provider have change and uncertainty, but it doesn’t manifest itself in such a short time frame)
• Top line annual revenue growth of 30% or more once a modest level of product/market fit has been achieved

To me, startups are about scale and growth with the later being the most important, as Paul Graham clearly articulates.

What else? What are your thoughts on a startup being a scalable growth-focused company?

Recently I was talking to an entrepreneur who’s working on a new open source product for a small but fast growing market. After talking about it with him for 10 minutes, and learning more about the opportunity, I told him that I thought he was much too early. Free doesn’t help if the market isn’t ready.

For our company Pardot, we could give away our software for free and we wouldn’t materially increase the number of active, successful clients. The challenge with our market, and the market this entrepreneur is going after, is that there’s a) a significant lack of market awareness and b) a significant lack of product understanding. The two are related in that the more people use a new technology the more awareness there is of it and a positive adoption cycle continues until it’s mainstream.

Because so few people have used our type of technology, we spend thousands of dollars per customer making sure they’re successful and manually helping them out. 5-7 years from now enough people will have used our type of technology such that a lower cost entrant in our market will be successful by offering a simpler interface with only the most important features and they’ll be able to sign up companies that already have experience, and thus don’t need a comprehensive on-boarding experience.

Free or open source works for an educated market. When the market isn’t ready, these types of distribution models don’t work as well as traditional models.

What else? What are your thoughts on free or open source products in a market that isn’t ready?

Recently I was talking to an entrepreneur about his startup. After about 10 minutes into his idea, I stopped him and said that he was having premature scaling and delivery worries. 95% of startups fail due to a lack of a sales and 5% fail due to a lack of being able to deliver what’s been sold (made up numbers but the idea is still true).

Here are some common premature scaling questions to look our for as an entrepreneur:

• Should I choose Zendesk or Help.com for my support software? Have you sold anything yet? Go sell something first and use plain email until you’re overwhelmed with support inquires.
• Where will I find good operations people? Have you sold anything yet? Good people are readily available once you have revenue.
• How much money should we raise for this idea? Have you sold anything yet? Investors are unlikely to invest in the idea until the startup has some paying customers.

The next time you hear premature scaling worries, focus the conversation on building a repeatable customer acquisition process and defer the scaling conversation until it becomes a high class problem that’s on the near-term horizon.

What else? What are some other premature scaling worries in a startup?