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:

WHY ON EARTH HASN'T ANYONE BEEN ABLE TO 'PLUG THE DAMN HOLE' YET AND AVERT ONE OF THE WORST ECOLOGICAL DISASTERS OF OUR TIME?

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?

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!

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.

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 Mint.com’s rapid rise to prominence and ultimate acquisition is the quintessential Silicon Valley success story. Yet, the Mint.com 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 Mint.com 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.

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.

Is there a Silicon Valley advantage?

One of the advantages of being in the "job market" is the opportunity to gain some distance and reflect on some fundamental assumptions we take for granted. One such assumption for me was that "You have to start an Internet startup in Silicon Valley!" I have now come to realize that this assumption not only is false, but can be quite an impediment to success in building and growing your company.  Here are some data points that have helped me reach this conclusion:

1. There are plenty of very impressive, financially successful Internet startups that are headquartered outside of Silicon Valley, even outside of the US. Examples abound, but some companies off the top of my head are Whitepages.com (Seattle, WA), Club Penguin (Vencouver, Canada), Metro Lyrics (Vancouver, Canada), Cymax (Vancouver, Canada), and Webs.com (Silver Spring, MD). You may not have heard of some of these companies, but that may say more about the media coverage bias rather than actual financial success or user adoption.

2. Many successful Bay Area startups are recruiting heavily from outside of the Bay Area rather than locally, and have found the candidates from outside of the Bay Area to be as technically competent, with very strong work ethics coupled with a dose of humility to boot. As an example, social dating site Zoosk, which recently closed on a $30 million financing round, has recruited most of their employees from outside of the Bay Area.

3. Many Silicon Valley venture capitalists are looking outside of the Bay Area for investment opportunities. The math is as follows:

Lower valuations + lower labor/infrastructure cost + more available resources = higher likelihood of survival and success.

4. Most of the founders of successful Bay Area startups are not "locals", but first generation "immigrants" from other parts of the US/world.

Certainly, the above does not mean that in order to succeed one should sever all ties to Silicon Valley. The ecosystem of entrepreneurship that exists in Silicon Valley does not have a close second in the world and every successful startup should have a strategy about how to plug into the Valley ecosystem. But doing so does not necessarily mean you should headquarter the company from inception in Silicon Valley.

Indeed, for some startups, the right time to establish a presence in Silicon Valley may be many years after founding the company, reaching millions of users, and obtaining that elusive positive cash flow. As a matter of fact, as of December 1, I myself have joined one such startup (Webs.com) in order to help them plug into the Silicon Valley ecosystem through partnerships and collaborations now that the company has reached the scale, user base, product and platform stability that can credibly support such efforts.

So, next time you are thinking about where to start your company, don't automatically assume it has to be in Silicon Valley.

P.S. This will likely be my last post of 2009, so I wish everyone Happy Holidays and an auspicious start to 2010!

To Succeed, Tear Down Those Walls

And I mean this literally: If you want your startup to succeed in today's hyper-agile and über-competitive environment, you've got to tear down those office walls. Why?  

Because in a startup environment, communication trumps privacy!

Over the past ten years, I have visited the offices of well over 100 startups in Silicon Valley, and looking back, there has been a very strong correlation between those startups sporting an "open office" layout and their ultimate success. Here are some examples:

Powerset (acquired by Microsoft as foundation of their Bing natural language search engine) started with the whole company huddling around a large conference room for the first year in CommerceNet headquarters in Palo Alto. No executive offices, no cubicles, not even individual desks.

(Which, coming to think of it, reminds me of another quite innovative, albeit a bit older startup)

Facebook Long rows of tables with monitors facing in every direction has been characteristic of Facebook offices from the humble beginnings in scattered offices throughout downtown Palo Alto, to their new digs at the former Agilent building in Palo Alto. Here is a skateboard video tour of the new office, which illustrates that they are still true believers in the open office philosophy:



Google When they outgrew the garage and moved to 165 University Avenue, Palo Alto (also known as the "lucky building", home to other notable startups such as Logitech, Paypal and Danger) with their 8 employees in 1999, they didn't have any offices. They are still trying to maintain the open office feel, although it gets a bit harder to do once you have over 20,000 employees worldwide.

(Larry and Sergey in their startup garage. Pic from http://bit.ly/JnL9x)

Of course, just having an open office layout does not guarantee you overnight success, yet without one, you are putting your company at a distinct disadvantage versus your competitors, as they will be able to innovate and move much faster than you can. In startups, every nanosecond counts. Your employees need to be in constant communication with one another, and your job as founders/executives is to eliminate any barrier and friction in that process (coincidentally, this is one main reason it is usually not a good idea to outsource/offshore development in a startup, regardless of the immediate financial benefits).

As for those employees who come to you and tell you they need a cubicle/office because it is getting too loud for them to be productive, well, you may just want to offer them a pair of noise-canceling Bose headsets before you make any rash decisions.

Mathematical explanation of entrepreneurial bug

Not all things in life are quantifiable (you know, things like justice, love, or your experience of the color purple), but the proverbial "entrepreneurial bug" is not one of them.

As a corollary to a well-known math problem called the two-envelope paradox, it is perfectly rational for an individual to want to start one company after another and expect a higher reward after each iteration, even if the expected outcome associated with each of these endeavors is completely random (as I would argue is the case every time you start a new company)! To understand that mathematically, this is how the two-envelope paradox works (taken from the latest analysis of this paradox on PhysOrg.com):

In the two-envelope paradox, a player must choose between two envelopes, one of which contains twice as much money as the other. The player can open the envelope they choose, and then they have the option of switching envelopes. The other envelope, of course, has either twice the money or half the money as the first envelope, but the player does not know which.

It may seem that, since a player has a 50-50 chance of choosing either envelope, they have an equal chance of gaining or losing money whether they decide to switch or keep the original envelope. However, probability theory seems to confusingly show that it’s always better to switch.

For example, say the first envelope you pick has $10, so that the other envelope has either $20 or $5. Then you can calculate the expected value (i.e. the probability-weighted sum of the possible values) of the second envelope, assuming that each possibility has a 50% chance: (0.5 x $5) + (0.5 x $20) = $12.50. Since $12.50 is more than $10, it makes sense to switch. No matter which numbers you use, you always get an expected value for envelope two that is 5/4 higher than the value for the original envelope: if c is the value of the original envelope, the expected value of the second envelope is (0.5 x [0.5c]) + (0.5 x [2c]) = 5/4c.

This counter-intuitive mathematics can explain very well why so many first-time entrepreneurs try again, regardless of the success or failure of their first attempt. And why it is perfectly rational for investors to expect a higher payoff from a not-so-successful serial entrepreneur than a first-time entrepreneur.

Do "good guys finish last" in business?

I remember a few years ago the CEO of a then-successful startup told me in confidence he couldn't afford to care about ethics in his business because "you know, good guys finish last"!

That statement was shocking because that individual on a personal level had high integrity and good moral character. But market pressures combined with the demands of the Board had somehow convinced this CEO that doing right by the shareholders demanded that he put personal morality aside and do "whatever it takes" to increase the company's bottom line and competitive positioning.

This was not an individual driven by Enron-style greed or Madoff-style excesses, but someone who was merely trying to survive; someone who was simply afraid of finishing last. Was he being a good CEO or a lazy one?

When all your competitors are getting ahead through less-ethical practices (such as buying positive reviews for their product on the App Store or other social media outlets), what do you do? Do you sit back and concede the market to your competitors or do you also join in the game and start an arms race? How do you competitively price your product when your competition uses various schemes (ahem, scams!) to hide the real price of the same product from their users to give them the appearance of a bargain (as is a common practice in the calling card industry)?

The answer to these questions depends on whether you are trying to build a long-term, sustainable business or whether you plan on making a quick buck and run for the border. Because if you plan to stay in business, in the post-twitter information society, transparency is becoming the name of the game and your reputation as a trust-worthy business one of the single most determinants of survival: Sooner or later, the non-ethical businesses are found-out and abandoned by users/customers/partners/employees (I am not going to even talk about the legal dimension of unethical business practices here, and some argue that there is really no line between illegal and unethical to begin with).

My above statement is not a hypothetical or game-theoretical proposition (although there is plenty of academic literature around the topic of reputation effect in repeat-game vs. end-game scenarios - just google it), but an empirically proven observation: For instance, in ecommerce, many studies and A/B tests have proven that perception of "trust" has a very strong correlation to the conversion rates of your website. And just as an eBay-seller would not make it far without a positive reputation score, your company or service will not make it far without an overall online reputation that is positive.

Being one of the "good guys" will not ensure your success, but without it, you are guaranteed not to succeed.

Revisiting Alchemy, Valley Style

Let's be honest about this, the quintessential Silicon Valley entrepreneur is not that different from your typical alchemist dating back to the Persian Empire of 2500 years ago, as described by Wikipedia:

Alchemy (Arabic:al-kimia) (Hebrew:אלכימיה al-himia) is both a philosophy and a practice with an aim of achieving ultimate wisdom as well as immortality, involving the improvement of the alchemist as well as the making of several substances described as possessing unusual properties.

But wait, what about those less noble pursuits such as greed and let's-make-gold-out-of-cheap-metals bit?

Well, when you look at it closely, any human endeavor that can promise to get you close to "ultimate wisdom" and "immortality" (which apparently some believed to be possible through gold back in the day as the Wikipedia entry goes on to explain), inevitably becomes mixed up with financial gain and material success. And such, seems to be the lot of us Silicon Valley entrepreneurs as well.

So it is not surprising that many entrepreneurs find inspiration and motivation in Paulo Coelho's international bestseller, The Alchemist. As a matter of fact, I started my last company (jaxtr) after reading that book and finding it to be completely appropriate to quit my well-paying corporate attorney job and pursue a dream (thank you @paulocoelho).

This blog will not be about jaxtr, but about what I have learned from that experience, as well as my reflections on encounters with many other entrepreneurs, ideas and practices.