Friday, December 31, 2010

A Rare Find

The old adage that inspiration can be found anywhere is quite true. A bottle of wine, a gift from our good friends Fred & Mariam, provided a great reminder of that wisdom this week. Now, finding inspiration in wine dates back to Antiquity and is nothing new, but finding such inspiration literally on the bottle itself is a whole different story. This is what we found:

The wine was out-of-this-world good (a cuvee called "The Offering", 2008, produced by Sans Liege Wines from Santa Barbara, California -- and not surprisingly, Sold Out at this point). But what took our breath away was the philosophy of the wine maker, Curt Schalchlin, printed in unassuming font besides the label:

"I am free to make the wine of my choosing because I follow no one. Traveling light, all I need is carried inside: a pure heart, a clear mind, and an old soul. Though the sky is dark and the way is lost, with each footstep there is insight; with each breath, resolve." 
                                                                                        -Curt Schalchlin

We would have missed these wonderful insights and inspiring words if my wife had not taken the time to carefully examine the bottle. Inspiration is all around us, as long as we take the time to look.

Wishing Curt and all of you continued inspiration, insight, resolve, clarity of mind and purity of heart in the year to come.

Happy 2011!

Monday, November 22, 2010

Zen and the Art of the Start

Although I am at a loss when it comes to giving a prescription for how to become a successful entrepreneur, I can give it a description based on my observations of a few of my personal heroes: And it is that all successful entrepreneurs seem to be quite Zen!
The way I understand it, the mastery of Zen comes from an acceptance of the way things are, and embracing all contradictions inherent in our human condition, thereby becoming a catalyst of what has always meant to be. A Zen artist enables the manifestation of joy, happiness and beauty in the world. A Zen warrior fights the just cause in many instances without engaging in a single battle. And a Zen entrepreneur succeeds in changing the world without forcing any changes upon it. It is being a walking contradiction that makes sense: actively forcing your mind to be passive, so that life experiences are not tainted by the prejudices, fears and judgments of the mind. It is setting your ego aside, so that something much much bigger can inspire and drive your actions.

As an entrepreneur, you are constantly struggling with sanity and insanity, creation and destruction, calm and anger, fast and slow, among many other things. But unlike the acrobat or tightrope walker who tries to achieve a balancing act by using opposing forces to neutralize each other, great entrepreneurs embrace the extremes and create a union from these seemingly un-unitable forces that is a much stronger creative force than any extremist could achieve. Thus, the successful entrepreneurs seem to have a mastery of how the flow of life comes from a union of Yin and Yang, which is the essence of Zen.

Sunday, October 31, 2010

How to Avoid VC Nightmares

Apropos for Halloween night, I like to dedicate this post to some of the investor horror stories that circulate around the entrepreneurial community in Silicon Valley in hushed whispers. Without naming names, I have been privy to the gory details of a few such stories (Oh, the Horror!), which typically fall into 3 categories:

(A) Our VC forced us to sell too early and we left all of the upside on the table
(B) Our VC stopped us from selling when we should have, and now I have nothing to show for it
(C) Our VC drove me out of my company/business at the worst possible time, leading to its eventual demise

Needless to say, this is not an exhaustive list and textbooks, in multiple volumes, can be dedicated to collecting all the various gripes entrepreneurs have against their investors. Typically, in my experience, the complaints are leveled against professional venture capitalists (VCs) rather than the angel investor individuals or groups, although the emergence of institutional Super Angels may change things in the future. And so, I will continue the rest of this post by focusing on VCs and how you may avoid becoming another cautionary tale in your dealings with them.

Is the "Horror" real?

In my last post, I described how bad investors can kill your company. That horror is definitely real. Anecdotally, the depth and magnitude of grievances against VCs can only compete with one other group of professionals: LAWYERS! With the exception that there aren't as many VC jokes out in circulation because many of us still hope to raise some money from the VCs and don't want those jokes to be digitally traced back to us. (Although, as a former lawyer and VC, I do find the negativity with both professions to be somewhat... hyped).

And then sometimes the entrepreneurs are so deeply hurt (physically, psychologically and/or financially) that they throw caution to the wind and decide to drop a nuclear bomb on their bridge to the VC riches by going after them in the court of law (see, e.g., Epinions founders suing Benchmark and August Capital) or in the court of public opinion (see, e.g., ArsDigita co-founders' revelations). There is even a growing Quora thread on this topic.

In summary, this is spooky stuff indeed!

Antidote: Investor due diligence

Although it is hard to have any real guarantees, should you find yourself in need of VC money, doing your homework on your investors can lessen your risk and improve your chances of picking the right investors.

First thing to remember is that not all VC's are created equal. There are worlds of difference between VC firms and even between partners in the same firm. So, start your preliminary diligence well before you even send out your Executive Summary. And make sure to really dig in before you go too far down the path of negotiating a term sheet, as it becomes exponentially harder (if not impossible due to cognitive dissonance) to switch investors once you have a signed term sheet in place.

Things to investigate during diligence

Although it seems like a daunting task that would necessitate hiring an elite PI agency with former CIA/IRS credentials, most of the important stuff you would be looking for is already out there for you to see.

Reference Checks. Talk to former founders/executives that the VC firm (and more importantly, the partner on your deal) has invested in. Make sure to talk to companies where things did not go super smoothly (names of which you will most likely have to dig out on your own). Try to get a feel for how it is to work with this firm/partner during good times and hard times. Their behavior during hard times is especially important as I had mentioned before.

Portoflio Size and Composition. You need know how many other portfolio companies does the VC firm/partner care about, and whether they actually have the bandwidth to do the things you expect them to do. Also, you need to get a feel whether you fall within the sweet spot of the kind of companies this firm does well with, or you are one of the outliers. Then check against your gut to see how you feel about that. Also, note that typically larger firms with larger porfolio sizes tend to push their investments towards higher exit multiples rather than allow for earlier liquidity.

Porfolio Integrity. This is something that is often ignored. Does this firm have a history of investing in competitive companies in the same field? Some VCs actually do that. You need to know the truth, because as a portfolio company, you cannot stop your VCs from investing in your competitor if they chose to do so.

Number/Amount of Investments. Find out, over the lifetime of the current fund, how many investments the firm/partner is expected to make, and how far they are currently from meeting that quota and deploying the cash invested in them. This matters, because it will determine the amount of attention and care your startup is likely to get over the next few years. Also, if the firm is towards the end of the lifetime on their fund they will be more likely to look for faster liquidity events and will be very distracted during their upcoming fundraising cycle.

Available Funds. You need to have a realistic picture as to how much more cash this investor is likely to deploy into your company, which is a function of how much on average they spend on each portfolio company and whether they have enough cash left in the fund to satisfy that obligation given existing and projected investments.

History of Lawsuits/Disputes. You need to know whether the firm/partner on your deal is or has been involved in lawsuits. Again, those lawsuits can tell you a lot about skeletons in the closet, as well as the distractions that will likely take the attention of the firm away from you.

Risk Profile. Another thing to get a sense for is whether this firm/partner has the wherewithal to take some serious risks and take a market position (the way such firms like Kleiner Perkins or Sequoia Capital do), or whether they like to play it safe and will abandon you/your vision after hitting a rough patch.

Most of the above information is readily obtainable. It does take some investment of time, but can you afford not to spend the time on them?

Happy Halloween!

Sunday, October 24, 2010

Caution: Bad investors kill good companies

Around Silicon Valley, we all believe that having a good idea is not enough, and it is rather the execution that counts. And myths abound about how savvy investors like Sequoia or Kleiner Perkins can make a difference between a blockbuster success and a lackluster startup. I accept all of that. However, what has been left out of the conversation is an examination of the impact that bad investors have on promising startups. Sadly, few entrepreneurs pay much attention to this issue at the time of fundraising. It is time for some healthy debate on this topic, and here is my first stab at it:

What is a "bad investor"?

Some entrepreneurs assume that the worst that an investor could possibly do is not to add value. That is not true! As I will explain below, a bad investor (like a bad friend) can totally distract, demoralize, and completely ruin the future of your company. More specifically, a bad investor is one without whom your startup would have actually had a better chance of succeeding.

How to spot a "bad investor"?

Typically, bad investors are those that are disengaged from the startup and the Board when the times are good, but become quite concerned and agitated as soon as the company hits a rough spot (e.g., a key employee departure, a drop in key metrics, appearance of a lawsuit, etc).

What is so "bad" about a bad investor?

The main problem with the behavior described above is that it sabotages your success by putting stress on you when you can least afford it. Here is why:

Every startup goes through ups and downs; it is just a part of the creative process of innovation, as we all know. And "creative" is the operative word here. In a startup, you try things, some work, most fail, and you try to learn and repeat the process with better results next time using as much creativity as you can manage. These creative iterations are to a large part dependent on outside-of-the-box thinking. This is especially true when you need to do some major pivoting work around your business model / customer acquisition strategy / etc. That means you will need to take some major risks. However, whenever you focus on risks, fear enters the picture and your brain literally shuts down its creative parts and goes into defensive/survival mode, which means you become physiologically incapable of finding the creative solutions to your problems. Most of us have first-hand experience of this phenomenon, which is also supported by a growing body of psychology experiments (see, e.g., feeling good increases possibility of insights).

So, here you are, on the verge of losing everything (your reputation, the trust of friends and family who believed in you and perhaps even invested their savings into your company, your employee's livelihood, and the list goes on and on) while trying to keep calm and not panic. And as a savvy entrepreneur, you may be able to push back the internal fears and stress to come up with some creative solutions and insights. But it becomes an order of magnitude harder to do so when you have, at the same time, one or more investors breathing down your neck, distracting, harassing, and perhaps even threatening you and other investors, second-guessing every move and chewing up your remaining brain cycles. It becomes pretty much impossible to be creative under those circumstances, which unfortunately spells disaster for your company, as you will be unable to find a solution to your predicament, no matter how trivial the solution may seem post mortem.

Lots of great companies were second ideas that rose from the ashes of their predecessors. And more likely than not, the investors in those companies were understanding and supportive during the tough times, expressing something like "Hey, I know you guys have been working really hard and it is okay if the startup doesn't make it. We knew the risks when we invested and were honored to have been a part of this journey with you."  And that is the kind of investor you want to have!

Sunday, October 10, 2010

Entrepreneurial angst in “Losing My Religion”

Gabriel Garcia Marquez, “A Very Old Man With Enormous Wings” via Inspiration Room

As an entrepreneur, most of the time you are either confronted with a Sophie’s Choice or if you are lucky, just a Faustian bargain… Except that, whereas our “lucky” Dr. Faustus had the good fortune of dealing with just one demon (Mephistopheles), as an entrepreneur you are haunted by many evil forces, which may be cloaked in the guise of equity investments, outdated regulations, frivolous lawsuits, bad hiring decisions, competitors, etc… 

So, it is no surprise that yesterday, as I was listening to the lyrics of Losing My Religion (the classic obsession song by REM, which only one other song can top in capturing the essence of Obsession: Every Breath You Take by The Police, of course), it instantly resonated with the entrepreneurial side of my brain. 

Here is a sneak peek into that side of my brain. The opening lyrics set the mood perfectly:

Life is bigger
It's bigger than you
And you are not me
The lengths that I will go to
The distance in your eyes
Oh no I've said too much
I set it up

Background: As an entrepreneur, you pour your heart and soul into an idea. And I am not talking about any old, fly-by-night idea. I am talking about that idea which you decide to make the Idea and build the Startup around it. Before you know it, that Startup becomes part of your identity. The boundaries between your life and the Startup get completely blurred. Even at night, your dreams mirror your daily reality, and just like the poor souls in Inception, you start losing your grip on what is real and what is a dream!

The Struggle for Perspective: At some point between the 18th and 24th month of the Startup (not sooner, because you don’t have the luxury to be philosophical about anything during the first 18 months), you realize that it is not healthy to lose your self in an idea, in something that has no guarantee of success or permanence. You realize you are drowning in some invisible quagmire, and the success that you have been striving for may be the very thing you should be running away from. You start fearing that you may never find yourself, your old values and your relationships again if you continue down this path. So you try to put a distance between you (your old self) and the Startup (which has become your new self). And you anchor this existential struggle by referring to “life” as something “bigger” that can provide a perspective from where the distinction between “you” and the Startup can become more clear. ‘Life’s got to be bigger than this Startup,’ you keep reassuring yourself, and ‘I am not the Startup either’ (and hopefully, through some strange transitive logic, you hope you are bigger than the Startup as well...).

Founder Guilt Syndrome: But here is the rub. As you try to put some distance between yourself and the Startup, you cannot help but feel extremely guilty because it was you that “set it up” and created all this mess anyway. And you fear that by putting down your Startup, you may have doomed your beloved idea to eternal failure: If the Founder (or Creator, as you will) stops believing, who will believe and make this a success against all the inherent odds? So, you wonder, are you being smart or just simply sabotaging yourself? Or as the song laments, have you “said too much”? 

Self Doubt: As an entrepreneur, you try to stay strong and confident. But there are also those moments that you project into the future and imagine what success would feel and look like, yet all you see is fear and self doubt. The following lyrics do a fantastic job of capturing those thought fragments (by the way, the phrase “losing my religion” is apparently a southern way of saying I am ‘at my wit’s end’ or ‘going crazy’)

That's me in the corner
That's me in the spotlight
Losing my religion
Trying to keep up with you
And I don't know if I can do it

Oh, the Torture: Entrepreneurs are tortured souls (lawyers have nothing on us; I know, because I have been both!). Again, the song captures that sentiment quite masterfully as well:

Every whisper
Of every waking hour I'm
Choosing my confessions
Trying to keep an eye on you
Like a hurt lost and blinded fool
The slip that brought me
To my knees failed
What if all these fantasies
Come flailing around

At this point, it feels like I am saying too much as well. Please enjoy the music video to the song from 1991 (time flies) and do share your thoughts on how it relates to your entrepreneurial journey!

Friday, October 01, 2010

Coupons are dead; long live the coupons!

My main takeaway from spending the better half of last week at SF TechCrunch Disrupt conference (an event some may call “Silicon Valley’s Academy Awards”) is as follows: 2010 will go down in history as the year a swarm of startups finally managed to kill traditional coupons. 

The “traditional” coupon industry is doomed to die a slow death-by-a-thousand-cuts, inflicted by a gaggle of mobile check-in startups taking advantage of the newly-found access to users’ locations. As each location-based startup came onstage at Disrupt, I could almost hear the Julius Caesars of today’s coupon empire yell out in anguished unison, “Et tu, Brute?”

Of course, the fundamental economics behind coupons (i.e., the concept of using price discrimination to distinguish customers by their reserve price and thereby generating the maximum sales/revenues/profits), has not changed. As a matter of fact, location-based startups are following the same economic principles by hoping to provide an efficient delivery mechanism for providing the ideal discriminatory pricing scheme; a task that is no less ambitious than Pierre Omidyar’s vision for eBay to materialize a “perfect market” (the theoretical economic concept where there is perfect access to information and zero transaction costs). 

Providing location-based coupons is not an entirely new idea. People have been handing out coupons and promotional material on the sidewalks at most metropolitan areas for ages. 

And the concept of virtual coupons is not entirely new either. I recall reviewing business plans at the start of the decade of a number of startups who wanted to send people coupons via SMS based on their location. And, just as I felt ten years ago when reviewing those business plans, I remain highly skeptical whether the new check-in Apps that tap into your social graph and GPS location data can actually overcome the negative emotions associated with someone disturbing your stream of activity by putting a “deal” in front of you (sort of like the feeling you get when as you walk down the street someone suddenly hands you a flyer). 

There is a fine line between annoyance and value. I get annoyed when I am distracted, but I love it when someone anticipates what I need and puts it in front of me (something Google tends to do very well with their search advertising). Whoever manages to get closer to the latter of the two will likely be quite successful. I, however, have not found such a service yet, and find all of the current location-based check-in Apps to be either useless or extremely invasive. In fact, the only "price discrimination" these Apps currently provide is to generously give discounts to folks who need them the least, as the iPhone/Android/smart phone demographic is among the least price sensitive demographic you can find!

Monday, September 20, 2010

Entrepreneurial Paradise Lost?

The recent flurry of seed activity and the rise of Super Angels has lately inspired great deal of debate and even pure entertainment in the tech community and beyond (just watch the installments of Super Angel / VC SMACKDOWN on TechCrunch!).

The Super Angel / VC debate fundamentally touches the core of what today's Silicon Valley culture is starting to define as successful tech entrepreneurship: One camp (occupied mostly by traditional VCs) believes that successful entrepreneurs are those who aspire to, and succeed in, building B.I.G. (aka Google-size or at least Facebook- or Twitter-size), industry-changing, behavior-defining, money-making behemoths, whereas the Super Angel camp believes that successful entrepreneurs are not in it for the money, but for the love of the game, and therefore should rationally desire to build moderately successful ventures that can be flipped at a $50M exit or thereabouts, so that founders can make their F.U. money, as Dave McClure eloquently puts it.

In other words, the VCs tend to place the normative weight of entrepreneurship on the size of the total outcome, whereas Super Angels tend to place it on rational risk optimization for size of the proverbial "founders' pie".

But as an entrepreneur, neither of those measures of "success" sits well with me; in fact, they seem to fundamentally miss everything that I stand for, and in the process somehow even insult me!

For starters, we all know plenty of successful entrepreneurs who have not set out, nor been successful at, building billion-dollar companies. We also know plenty of successful entrepreneurs whose essence is defined by defying the odds, rather than making the safe bets. I know plenty of successful entrepreneurs for whom any kind of financial calculus is at best secondary to their primary motivation, if not a total buzz kill (will discuss in a later post).

Instead, the primary motivation that all great entrepreneurs seem to have in common and which uniquely sets them apart from others seems to be their will to overcome.

The desire for financial independence (aka, McClure's F.U. money) and the desire to topple monopolies and change the world (something that the good VCs tend to pick up on), are only two different manifestations of that "will to overcome". Other manifestations can be seen in ways that people approach hardships for themselves and for fellow human beings, and in lessons learned from past experiences. But such manifestations cannot simply be assumed to be the proxy for the real thing!

So therein lies my uneasiness with the Super Angel / VC debate:

Being a big dreamer or a risk optimizer does not necessarily mean that you are an entrepreneur, as you may very well still be lacking that entrepreneurial will to overcome!

And therefore, an investment philosophy that puts any significant weight on those factors would be optimizing for the wrong variable and is statistically doomed to fail.

But there is even a greater danger: The ethos of the American Dream are fundamentally at risk here: The American Dream (at least the way I understand it), is not about some materialistic outcome, but rather about the life journey and the attitude one takes along this journey. Do you want to be your own boss? Do you want to have control over your own destiny? Do you want to change other people's lives?... Or simply put, do you want to overcome existing limitations? If your answer is yes, then I think you can safely be considered an entrepreneur. And the strength of your will to overcome will have a direct relationship to how successful you will become (at least, so I believe).

Sunday, September 19, 2010


I know, I know, I know... I have been a very bad blogger... It has been over 3 months since my last post, and I gave no forewarning about this absence, nor offered any interim details. And as we all know, these are all indeed very big blogging sins!

I know excuses are a dime a dozen, but in my Apologia suffice it to say that a combination of personal and professional obligations made it extremely hard to even find 5 minutes of free time to write something down without feeling extremely guilty about neglecting one of the two aforementioned obligations. So blogging was competing in time with other daily necessities, like sleep, shower, gym (and my Doctor gave me an earful about the last one on Friday).

So, I am hoping now to get back on track with resuming my semi-routine of posting at least something substantive per month.

So, thank you for reading and your understanding :)


Sunday, June 13, 2010

Entrepreneurship Lessons from Seinfeld

I have always been a great fan of Cosmo Kramer in Seinfeld, and now I know why. But before I get into that, I would like to start this post by repeating a question that is on our collective minds these days:


Has no one ever really thought about a solution to this kind of problem? Not even someone at BP? It is hard to believe that this is such a mystery, especially when you compare this problem to so many other, much more complex obstacles that mankind has been able to overcome with flying colors (say, putting a functioning robot on Mars as an example!), not to mention the fact that even celebrities (e.g., James Cameron) seem to have their version of the solution to this problem these days. And when you put all that together with the fact that BP has almost infinite resources as the fourth largest company in the world (prior to this accident), things don't quite add up...

Anyhow, this Gulf oil spill crisis reminds me of one of my main takeaways from my experience in the venture capital world: That there is a BIG difference between an inventor and an entrepreneur, and that the valley between innovation and entrepreneurship is filled with the rotting corpses of innumerable great ideas that never see the light of the day.

I am convinced that the proverbial "mad scientist" dwells in the minds of each and every one of us, and although our innovative scientist comes up with great solutions to everyday problems as we encounter them, most of us rarely ever do anything about them. And the same exact phenomenon happens all over the world in academia, corporations, startups, governments, oil companies... you name it! People constantly come up with great ideas, and those ideas are soon shelved (or less affably, tossed) in the circular file.

Given this overabundance of brilliant ideas, the question really becomes Why aren't these solutions put into practice, productized, or mass marketed? Just like the Gulf oil spill, there are so many "unsolved" problems out there, and the solutions aren't there not because no one has figured out the solution in their head/lab/company/department, but because no one has so far effectively executed on the solution.  It is one thing to innovate and to find the answer to a problem, but it is a completely different thing to breathe life into that innovation and to bring it to the market, which is the essence of what we call "entrepreneurship".

In that sense, Seinfeld's Kramer was a true entrepreneur despite his crazy ideas (remember, he actually made his Coffee Table Coffee Book and it eventually became a movie!), whereas the main character, Jerry Seinfeld, was at best a mere innovator, with tons of opinions and brilliant insights into everyday problems, but never really doing much of anything about any thing (but I suppose we can forgive him, as he was just a comedian after all).

The Gulf oil spill tragedy, and many other everyday tragedies resulting from unsolved questions, is symptomatic of the fact that as a society we have put so much more emphasis on innovation to the detriment of entrepreneurship (see, even the show was called "Seinfeld" and not "Kramer", as I would have liked it!). There is constant talk of promoting R&D, or a "culture of innovation" at all levels of government and corporations worldwide, but FAR LESS resources, time and money is spent on promoting a "culture of entrepreneurship": For example, a simple google search for "culture of entrepreneurship" returns barely 200,000 results, whereas "culture of innovation" returns over 1.5 million results; Or consider the fact that we have volumes of laws that protect innovators' rights (aka Patents), but can you point me to any law that tries to protect entrepreneurs? And some laws that even try to come close to promoting entrepreneurship (e.g., Startup Visa) face fierce opposition in legislative bodies for some unknown reason; and the list goes on...

I think it is about time that as a society we start giving entrepreneurship its due, if we really care to have effective solutions to our problems. What do you think?

Friday, April 16, 2010

Ning's Problems Totally Unrelated to Freemium Model

By now, everyone has heard of Ning's internal announcement yesterday that they have decided to focus on paying members and discontinue their free offering. (See Ning's CEO post on Ning's Blog for the official announcement today).

Some may see this as a move spurned by investor pressure for monetization after pumping $120 million into the company at astronomic valuations, others see this as a vote against the advertising model, and some have even gone as far as questioning the viability of the freemium model.

What I like to point out is that Ning's problems are totally unrelated to the viability of the freemium model for startups.  As a matter of fact, I think the problem with Ning is not a reflection on the viability of the Freemium Model, but rather the dangers of raising too much money, too quickly (a problem that is not commonly shared by many startups, fortunately!)

As previously mentioned in my last post, in a freemium business the entire organization needs to focus on the fundamental metrics of the business, and then do rapid iteration to improve those things such as conversion rates, which may not seem as important if you are sitting on $100 million war chest. Freemium is an exercise in cold, hard, mind-numbing analytics. Not as glorious as throwing Hollywood parties and meeting with celebrities, but nonetheless essential to success.

There are many examples of startups that have successfully figured out the freemium model, but I like to mention my company Webs as the closest example to Ning:

At Webs, with a small team of 40 and having raised only $12M in venture capital, we have been able to create a social website creation tool that became cash flow positive and has been quietly used to build and host over 50 million websites (yes, that was not a typo, FIFTY MILLION!). In fact, before raising venture capital, we grew the company profitably to 6 million users by bootstrapping it with only $2,000.

Do those numbers sound surprising to you? Well, that's because we used our limited cash and resources to focus on the fundamentals of the business rather than PR and marketing. Happy to report that the freemium model is alive and well!

Sunday, March 28, 2010

The Freemium Manifesto - Insights from the Freemium Summit

The full-day Freemium Summit in San Francisco on Friday managed to exceed the expectations of mine (and everyone else I talked to), thanks to a stellar set of speakers and panelists (special kudos to organizer Charles Hudson).

If you search for #freemiumsummit on Twitter you will get a taste of the firehose of stats and insights shared, and there have already been a couple of blog posts about the event (here and here). Having been an advocate of the freemium model for the past 5 years (evangelizing freemium mobile calling at jaxtr and now freemium website building and hosting at Webs), I left The Summit with a stronger sense of purpose and deeper conviction in the following set of ideas -- my "Freemium Manifesto": 

Freemium is as virtual as the Web
Freemium business models work only when your marginal cost of delivering the service to a new user approaches zero. In traditional goods and services industries, such utopia cannot exist as delivering any physical good or service has real costs associated with it. This is not so in the virtual world as processing, bandwidth and storage costs approach zero. The best you can get in the non-virtual world is "free trial" or "first-one-is-free" type of offers, but those are really marketing tactics and not fundamental attributes of the product or the business model. That is why online businesses that got started in early days of the Web opted for the "free trial" model as they faced steep storage and bandwidth costs (e.g., legacy web hosting companies).

Freemium is  a product concept, not a marketing problem
Unless you build the DNA of your product around Freemium, it will never work. That's why approaching it as a "marketing" problem would be disastrous. Freemium needs to be built into the Product, and every feature developed, the user experience, flows, funnels, upsell paths, etc., all need to be evaluated in its light.

Freemium is a disruptive business model
Products and services that are not built on the freemium model have a very hard time changing and adopting to the freemium model. Just as the case of disruptive technologies, established non-freemium businesses have a serious heartburn over cannibalizing existing revenue lines by giving away things for free. Entire departments would have to be laid off and/or retrained, and the business would have to take some time off to learn the new tricks of a new way of doing business. In other words, lots of time, money and ego has been invested in building the existing business model and its projections, which means real inertia. So, few Boards would seriously advocate such change to the way things have been done. Which leaves ample elbow room for startups to come and take away market share. This is what Skype is doing to the Telco industry, Zoosk to the Online Dating industry, and my company Webs to the Website Building and Hosting industry.

Freemium is the future
Although all of the panelists and speakers at The Summit kept emphasizing that freemium may not be right for everybody, I believe that for online businesses, freemium is the future. As the costs for delivering virtual goods and services drop, it is just a matter of time before someone in your particular industry starts figuring out how to give away something for free online, FOREVER, while building a successful business on top of it. If freemium is not part of your business model, now is the time to challenge yourself!

Do you agree or disagree? Please share your thoughts in the comments below.

Sunday, February 28, 2010

It's OKAY to "pull a Patzer", if you have founder-friendly VCs

 There was an insightful guest post on TechCrunch today about some sobering lessons learned by Tod Sacerdoti, CEO of BrightRoll (a video advertising network), while raising his recent Series B round from Sand Hill Road. To his surprise, Tod found many VCs were worried that he would "pull a Patzer" and wanted to get comfort that he wouldn't commit such sin. This is how he puts it:
By most accounts’s rapid rise to prominence and ultimate acquisition is the quintessential Silicon Valley success story. Yet, the acquisition brought to light an interesting phenomenon, one I’ve coined the “Patzer Problem.” Prior to submitting offers to invest, three separate VCs wanted to confirm that we had no intention of “Pulling a Patzer,” modern-day Sandhill Road parlance for selling too early.
Here’s why: with large funds being raised on Sand Hill Road and returns from previous funds underperforming, investors are becoming increasingly desperate for that single homerun investment that returns $1B or greater. Even though was a huge success for the founder and team, generating $60 million in equity value per year, many VCs believe they sold too early and left too much potential value on the table.
I believe the "Patzer Problem" has always existed in the VC community and is not specific to our current, dismal economy - although of course the terminology is a Post-Mint pheonomenon. This is an inherent problem of BIG VC FUNDS who are more or less HIGHLY LEVERAGED PORTFOLIO MANAGERS, rather than company builders. I have even heard the less charitable term "Spray and Pray" applied to many such big funds in the past (but I won't name names).

If a VC fund makes 10 or more investments per partner, and the expectation of each partner is that only 10% of his or her investments will truly "make it", then of course unless the return on investment for any one portfolio company is pegged at over 10x, the fund could not return its capital commitments. However, all VCs are not created equal, and for every BIG FUND, there are plenty of smaller, founder-friendlier funds who invest in a much smaller number of portfolio companies and therefore, are happy with smaller returns.

In fact, as a rule of thumb:

# investments / partner = Expected breakeven multiple for the fund / investment

That is, the lower the ratio of investments per partner, the lower the multiple you will need to hit before you can get the wholehearted, enthusiastic nod to an acquisition from that VC firm. And such firms typically tend to be more "founder friendly" as they allow the founders/executive team to be in the driver's seat when it comes to the acquisition decision, and also have a lot more bandwidth to help the founders build great companies, something that the big funds are not particularly positioned to do.

P.S. The above formula is a "rule of thumb" and not an absolute statement. It just shifts the burden of proof unto the VC to give comfort to the entrepreneur as to how they would help the entrepreneur achieve his or her dreams.

Sunday, January 24, 2010

Ambition: An Entrepreneur's Dilemma

So here is a classic dilemma. We all know that true entrepreneurs, by definition, are an ambitious bunch. And proudly so. But this "pride" sometimes turns into "hubris", which if unchecked, unfortunately leads to the demise of a company in a not-so-glorious downward spiral. This hubris is the founders' over-estimation of their own and their company's competencies by a far margin.

In many instances, hubris is not easy to detect, as it disguises itself beneath a veil of confidence. But there is one place hubris cannot hide, and that is in the company's monetization strategy (aka Business Plan).

You are suffering from a serious case of hubris if you believe:

(1) Your startup with less than 20 people can have multiple revenue streams, such as advertising and subscription revenue. When you rely on multiple competing revenue streams, that means you don't appreciate the complexity involved in making correct optimization choices when optimizing one stream will inevitably adversely impact the other, and the divisive ripple effects this would have inside your organization.

(2) You can have better conversion rates than your competition within the first 2 years of launch. Having better conversion rates is a matter of time and analytic disciplines. There is no magic formula. If your competition started 2 years before you, it is so much harder to keep up with them because they have lots more data in their analytic arsenal. And unless they sit around and do nothing, you will always be playing catch up as far as data is concerned. And at the end of the day, data is everything (read next point for the "why")!

(3) You don't think you need a dedicated analytics person/team for your Internet startup. Building an Internet application is all about delighting the users in a way that generates revenue better than your competition. And no one knows how to do that a priori. You need tons of empirical data and perform A/B tests to arrive at the solution, and then do more tests to keep up with the changing times. Hence, the need for superstar analytics talent on your team from very early on.

Do you agree? If you have encountered other tell-tale signs of hubris, please do share with us in the comments.