Where have all the singers gone...

A couple portfolio companies that I work with have SaaS based products and have recently searched for and hired sales leaders. Working with them on these searches got me thinking about the impact of SaaS on the changes in the sales process and what that means for hiring sales people if you are running a SaaS company.

When I worked at AND 1 Taiwan and China became second homes. Our brand was growing and we needed more factory space for production, we needed more suppliers for leather and more CNC shops for EVA foam and rubber molds. Managing this process taught me a lot, but the biggest change was my tolerance for whiskey and my ability to sing karaoke.

The sales culture was all about relationships. Pricing, priority and product selection/availability were all determined by your relationship with the supplier and specifically with the designated sales representative. Reciprocity of this relationship based decision making was assumed and so Because of this sales process, sales guys spent their “entertainment” budgets and then some. They took us out for fancy dinners, worked hard to make sure we all drank too much and ended the night with trust building exercises at the karaoke bars.

Enterprise software used to be sold as a product. The software as a product was sold to a director or VP, not the end user. This VP had a check list of features that needed to be included in the product spec and they had a static use case in mind as they made purchasing decisions. Often this sale was made face to face and based on a relationship between buyer and seller. “Entertainment” budgets were believed to drive ROI and probably did.

If you are building a SaaS product you know the impact of cloud based architecture on software development and business infrastructure is dramatic and has been covered to death. If you are looking to hire a head of sales for your SaaS based business, you should also know the impact of SaaS on the sales process and the money you will save in your entertainment budget.

As the cloud roles in, SaaS is eliminating the B2B sales approach. Software as a service is delivered at a monthly cost that fits even the most junior discretionary budget. Now it is possible for any employee to enter a credit card and click check-out. With SaaS, every sale is B2C and every sales person needs to understand their product as a user or be out of a job.

The old audience was VP’s and directors who wanted to choose a product that offered the right feature set so they didn’t get fired for making the wrong choices. The new audience are practitioners who want to buy a service that makes it easier for them to get their job done. The old audience was VP’s and directors who wanted to buy from someone they knew and trusted, and could blame if they made a mistake. The new audience are practitioners want to buy from someone who understands the first 5 things they do when they log in on Monday morning. The old audience wanted to be “entertained” and the new audience wants to be educated. This is a critical shift.

When the initial sale is made to an end user, the product is the primary consideration and it will be tested to see if it meets specific needs. The interaction with the customer is typically not face to face. The sale is driven by how well the sales person understands how the product addresses the user’s professional needs and day-to-day pain points.

In this environment, sales people are tasked with making the Monday morning log-in easier rather than selling via the Thursday night log-out. B2B is replaced by B2C and entertainment budgets need to be shifted to sales education budgets.

Look forward to your thoughts on SaaS sales or karaoke in the comments.

What can I getcha?

I had dinner the other night at Anchor and Hope in San Francisco. I was meeting an old friend who I had not seen since his battle with cancer and his significant other who I had never met. It was very important to get a great meal and to be able to talk through the last two years of his life.

The waitress did a fantastic job. She, made great recommendations for appetizers, entrees and desert, helped us choose a fantastic wine and brought the check. At the same time, she managed to disappear into the fabric of the evening by anticipating our needs and making it unnecessary for us to interrupt our thoughts or conversation to ask for anything.

Her ability to anticipate was the magic and it was the difference between good food and a great experience.

In the small part of the conversation that we spent on my work, I mentioned one of our portfolio companies, Swipely. I described the service and my friend said he would love to try it. That night I went into my account to invite him and remembered that I had promised an invite to someone else as well.

I sent both invites out and watched a good product become a great experience because of anticipation.

The first invite I sent resulted in a “thank you”  for inviting someone new to Swipely. The second invite returned a different message. Because in the time it took for me to follow through on my promised invite, this person had gotten an account from someone else.

The obvious endpoint of this user experience path would be a message letting me know the person is already a member. A slightly better endpoint would be a page that allows me to see their profile. Swipely has taken this a step further and anticipated that if I want to invite someone to the service, I am likely interested in following their swipes. Rather than ask, they anticipate and return a message letting me know the person I wanted to invite is already a member and that I am now following them.

With this simple change, a good product experience is made great. By anticipating my needs, Swipely showed me the magic.

If you have other examples of products/services that anticipate your needs, let me know in the comments or @message me on twitter @phineasb

Every product developer needs these tools

Great product feels like magic to the consumer. Great product developers can read the consumer’s mind and anticipate their needs in product delivery.

I had dinner the other night at Anchor and Hope in San Francisco. I was meeting an old friend who I had not seen in a few very tough years and his significant other who I had never met. It was very important to get a great meal and to be able to understand the last two years of his life.

The waitress did a fantastic job. She, made great recommendations for appetizers, entrees and desert, helped us choose a fantastic wine and brought the check as required. But, at the same time, she performed a subtle act of magic. She managed to disappear. By anticipating our needs and making it unnecessary for us to interrupt our thoughts or conversation to ask for anything, she became invisible.

Her ability to anticipate was magic and it was the difference between good food and a great experience.

In the small part of the conversation that we spent on my work, I mentioned one of our portfolio companies, Swipely. I described the service and my friend said he would love to try it. That night I went into my account to invite him and remembered that I had promised an invite to someone else as well.

I sent both invites out and felt a good product become a great experience because of anticipation.

The first invite I sent to my friend from dinner resulted in a “thank you”  for inviting someone new to Swipely. The second invite, that I had promised to send a few weeks before, returned a different message. In the time it took for me to follow through on my promised invite, this person had gotten an account from someone else.

The obvious endpoint of this user experience path would be a message letting me know the person is already a member. A slightly better endpoint would be their profile page. Swipely has taken this a step further by reading my mind. They anticipated that if I want to invite someone to the service, I am also interested in following their swipes. Rather than ask, they create magic and return a message letting me know the person I wanted to invite is already a member and that I am now following them.

With this simple change, a good product experience was made great. By anticipating my needs, Swipely showed me the magic.

If you have examples of magic product experiences, I look forward to the list created in the comments.

Sneakerhead (VC) Illustration by Sam Flores for LRG

I changed the name of my blog. I want to explain.

I have been collecting shoes since 1985. As a kid I would do jobs in the neighborhood to earn money for kicks. When the Air Max came out I had to have it and once they were dirty, I cut them apart to learn how they worked. My original Jordan 1′s suffered the same fate. I wore those with two pairs of socks so I could fit a 6.5 and get AJ’s, not the sky jordans that the rest of my friends had to wear in the kids size.

As a ball player I was in the sneaker culture and quickly moved from curious to addicted. Understanding the story behind the shoe, the inspiration, was always the best part. It was not enough to know they were hot, I wanted to know why they had been built that way and I love to talk about it.

After collage I worked at AND 1 and while still a collector, also became a creator. We did the mix tape and the ToChillin. We did trash talk tees and ad campaigns with Spree getting his hair done to the National Anthem within days of choking his coach. Our customers tattooed our logo on their bodies.

The designers had reasons for every shape, stitch, material and color we put into a shoe. As the creative director, I learned how to bring the consumer’s eyes into the design studio and work with the artists to create product that would pop. They taught me the language of design and creativity.

We had to choose from thousands of sketches, hundreds of prototypes and build a line of 10-12 styles every 3 months. Each shoe had to create an emotional reaction from the consumer from across the playground court or the food court and continue to delight with discovery through the purchase and use.

At the end of the day, my job was to work with extremely talented people to help them bring their vision to market. In my role at First Round I do the same thing. My years of addiction, of developing a curiosity and deep appreciation for the creative process and for discovering what a consumer really wants are paying off.

If you want to share your creative vision for a technology product or service or if you want to talk kicks, I am in.

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I was taught to believe messaging matters and in my conversations with entrepreneurs, I always want to learn about their marketing strategy. A trending topic in my conversations about customer acquisition and loyalty is adding “game mechanics” to a consumer internet service. It reminds me of Josh’s post on viral marketing and the more recent article by Dave McClure encouraging start-ups and Vc’s to focus on marketing and design in consumer internet businesses.

Just like “viral” and “social” before it, GAMES ARE HARD TO BUILD and cannot be bolted on to the marketing strategy.

Well designed game mechanics are addictive

The ability to define value for the consumer with in-game rewards that motivate behavior that reveals consumer utility is the magic of game mechanics. Tony Adams makes my point with his list of business models available to Foursquare. Each of these models is dependent on the user’s willingness to expose their location to the system. If Dennis and Naveen had decided to ask users to click a button every time they went somewhere the utility of Foursquare would have never been discovered. They knew this and they built a game. You start out “playing” foursquare and you end up “using” it (as you might use crack).

The fitness game that I built in 2003 (now licensed to Ubisoft as YourShape) and my work with MTVGames taught me a lot about how to use game mechanics to motivate specific consumer behavior. We offered rewards within the game to support consumer engagement long enough for the player to discover the utility of the product. The combined effect of in-game rewards layered with real-world benefit was an incredibly sticky experience.

When I designed the fitness game, here are the three high-level things I focused on:

1. On-boarding: Give them the perception of managable choice, meaningful rewards and at least one clear/obvious path toward the next discovery item. Make the choices easy and include understandable consequences for every action

2. Capture: once the consumer enters, there have to be lots of reasons for them to keep going. Give them managable choice, meaningful rewards and at least one clear/obvious path toward the next discovery item

3. Deep engagement: Create emerging complexity with layers of simplicity that interact so as one is mastered, another is being discovered. Encourage experimentation by making it obvious that you can find your way back to a stable place (allow them to hit CTRL Z).

When you build these three elements into the design of the game from the beginning, the user floats between a sense of mastery (that could lead to boredom) and a sense of overwhelming complexity (that could lead to frustration). Done right, the optimal gaming experience looks like this:

A well designed game experience looks like this

If you are using game mechanics that help users discover the utility of a service or motivate a significant consumer behavior change let me know in the comments, @phineasb on twitter or by e-mail  Phin@firstround.com. I would love to talk.

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I joined First Round Capital as a Principal knowing I would have a voice on the investment team, not a vote.

Keeping you out or fighting to keep you in? Gate keepers can do both...

I have a specific approach to meetings with entrepreneurs and work hard to add value to each founder who takes the time to meet with me. Some of this value is strategic. It is based on my experience as an entrepreneur, as a consumer-focused product development and marketing guy, and pop-culture loving sneakerheadVC who loves to talk with smart people building great stuff. Some of this value is tactical. It is based on my position within First Round, the visibility I have into our deal process, our portfolio and the time I spend with our partners and my peers.

For the founders who are friends with a partner (and I do not mean you have their e-mail address from the bio on our website or some tangential LinkedIn introduction, but real, call you on your mobile on a Sunday to discuss some aspect of cohort analysis and strategies to reduce customer churn type friendship), you don’t need tactical help and talking to me prior to meeting with a partner is a waste of time.

For everyone else, I can help.

I spend my time between Philadelphia, New York and Boston meeting with entrepreneurs who are building companies that are intriguing to me and working with them to see if First Round would be a good investment partner. Some of these companies are introduced to me by a partner at First Round and some of them come from my personal network.  I learn a lot from each of them.

Just like a partner, I try to figure out if I believe the market is big, the team is kick-ass and the approach is differentiated. Just like a partner, I need to understand if our model is in alignment with the entrepreneur’s goals and if our approach is likely to support the evolution of their vision. I have to identify a fit with our investment focus (Internet technology), the stage we invest (seed stage), and the structure of deals we participate in (equity investments).

Different from a partner I also try to decide if I think a specific partner will share my view and if together, we can build passion for the business across the investment team. Each week I participate in pitches with the partnership and spend time talking to them about the deals they are reviewing. I dig into the questions they ask and understand each business that they are evaluating and what is driving their point of view on each investment decision. When I read a plan or meet with an entrepreneur, I usually know how each partner will react to the pitch, what areas they will be excited about and the concerns they will have about the model, the market and the team.

This pattern recognition is valuable for entrepreneurs and I am happy to share it.

Visibility into my thinking and what I have learned from Josh, Chris, Howard and Rob based on the thousands of deals they have seen in their careers will improve your pitch and may help you think about the business differently, identify a larger opportunity or have a better chance of capturing the opportunity you have already identified. The partners trust my judgment and know that I help founders shape their story to resonate with the partnership, provide clarity around the entrepreneur’s hypothesis and define the needs and the opportunities represented by the business. My knowledge of our investment thesis is better than virtually any other deal source and because of this, my conviction around a deal, my voice, is an extremely strong signal for the members of the investment team who do have a vote.

It is natural to view us junior people in the VC world as gatekeepers to the real opportunity. When you are building a company, time is your most valuable resource and if you can be more efficient by going directly to a partner, it is very appealing.

Non-partners on the investment team are friction in the system, but if we do our job well, we can be the friction that keeps you IN, rather than the force that keeps you out.

Since June, I have been hanging out in the New York tech scene (and getting back into the NYC-kicks scene as a sneakerheadVC) and think the environment that cradled jazz and created Hip-Hop is now supporting a new generation of creative talent. For me, the key to the NYC community, what makes it sexy, is a culture that expects to win and to win big. Certainly the urban density and the consumer insight this offers to those who will listen is powerful and the scale required for notable success in this environment sets a high bar for entrepreneurs to judge themselves against, but it is the swagger of NYC, the assumption of victory and pride in the success of other New Yorkers that defines this movement.In my mind companies being built in NYC have advantages and these advantages led an entrepreneur to tell me, “I don’t care what they do. I am in New York, they aren’t. Ultimately, we will win.”

The reality of starting a company in NYC is an environment that shapes your thinking as an entrepreneur:

1. User feedback — surrounded by millions of people who will try shit, interrupt you and tell you what they think. NYC start-ups know they have to iterate early and often or become irrelevant. Stealth doesn’t happen here.

2. Not afraid to jump — you have to have guts to live in NYC in the first place. Starting a company is hard, but the street-smarts required to survive the bright lights and big city serve New York founders well.

3. Really big pie — when the center of the universe is outside your front door, you don’t view ideas or the entrepreneurial ecosystem as a zero sum game — collaboration, not competition, is the dominant approach. Entrepreneurs in The City know each other, help each other and root for each other. They are also honest with each other.

4. Culture of winning — success is expected in NYC. Home to the world’s most famous arena, Wall Street, Hip-Hop, Madison Ave. and the fashion industry–if it is not a big idea it is not getting airplay in NYC. But everyday new ideas spring up and take shape as smart, highly motivated people are inspired by their environment and informed by their community.

5. No sleep ’til Brooklyn — the answer to “what do you do?” in NYC is your job. In New York people live to work, love to crush and the entrepreneurs find time to have a blast doing it. I have been lucky enough to work hard and play hard in NYC this year and I can’t think of a better place to do it or a better group of people to do it with.

If you have other reasons that NYC is creating so many sexy companies with such great commercial potential, I would love to discuss in the comments and if you want to include me in your hard work or play in 2010, shoot me an e-mail (phin@firstround.com) or find me on twitter @phineasb

Early adopters tend to be taste-makers. They like to try new stuff, but they also like to introduce people to the new stuff they are using. This group is fanatical, they are loud and the way they use the product and the features they request are typically not market appropriate.  They will love you and hate you all at once. It is a teenage crush, you should listen and learn but you should not create new building blocks for them.

I believe the customers that should drive your product development are the second wave, brought in by the early adopters. These customers are savvy, they will become loyal or churn through your service based purely on their experience, and while their feedback can be harder to illicit, it is also a much better leading indicator of where you should go. This is your first true love, embrace it and make it last as long as you can.

This love grows with focus and attention to the details of why you fell in love in the first place. Be true to this consumer and discover other verticals that they will love but that also make them love your first product, building block number one, more. At AND 1 the best example of this was the MixTape.

As a basketball footwear and apparel company, producing a Streetball video and placing one foot firmly in the entertainment world could have been a distraction. Instead, this new vertical generated significant revenue, expanded our audience and made our core consumer love us even more deeply.

Our decision to enter the kids market also resulted in significant revenue and expanded our audience, but it made our core consumer question our brand. We thought if we could capture the consumer earlier, we could extend the relationship and become a bigger company. Instead, we found that the larger our presence was in kids, the less passionate our adult consumer became –We became a brand to grow out of, not into.

The experience in the slip-on market bridged these two extremes. Our first few SKUs were very successful and exploded into a $50M business with close to $25M going straight to the bottom line. Our performance business grew as well and we watched our customers engaging with the brand on and off the court for the first time as revenue in footwear crossed the $180M level. We tried to grow the slip-on line by adding SKUs and deciding to highlight the product in our marketing efforts. The result was a bigger slip-on business, and for some time the overall business grew as well, peaking at $200M. However, this also drove a shift in brand perception and as the sales volume continued to shift from performance to slip-ons, it was only a matter of time before the top line numbers began to fall as well. We had turned our back on the core customer in order to chase a fashion customer. We cheated on our true love and paid the price.

It is key to understand both who your best customers are and why they are valuable to you.  Once you know this, it will become clear how you can pursue Spencer’s building blocks approach to expanding your offering and also maintain your focus, increase your conversion rates and expand the customers who love you with the new alternatives.

In my new role as an investor in the technology space, I make a similar distinction between inventors and innovators and while I love to meet with inventors, if you are not also an innovator, it is unlikely I will want to be an investor. Here’s why:

Merriam-Webster defines “invent” here as “to produce for the first time through the use of imagination.”

“Innovate” is defined here as “to introduce as or as if new” and “to make changes, to do something in a new way.”

Inductive charging, one type of wireless power transfer, is a cool invention with many potential applications. Wikipedia describes inductive charging here and lists the convenience of charging mobile devices on a “contact plate” instead of with a wire and plug as one of the benefits.

This has recently been popularized by the “powermat” This product is technically innovation as the producers did not invent inductive charging, but the mindset of this product team is more inventor than innovator.

You can see in the image above that one of the ways to use the powermat is a cube with a mini-USB charging cable. This offers zero marginal improvement for the customer over a traditional wired charging experience, but it utilizes the inductive charge capability of the mat. – inventor mission accomplished. In general, the powermat is not better than a well organized approach to the wired solution like this box.

the "powerbox"

Alternatively, the video at the bottom of this post illustrates an understanding of the consumer and if integrated into a line of furniture would create an entire new experience and offer significant utility. Thanks to Darren Murph at engadget for bringing this to my attention with this article and including links to a full “how to.”

Inventors create technology for the first time through unprecedented imaginative effort. Because inventors create things that have never been seen before, value accrues to the first person or team to make the technology work and the process is driven by the original vision. Innovators introduce concepts “as if new” implying iteration and the integration of external data – such as from consumers – and value accrues to the first person to discover product-market fit.  Inventors tell the market what they have while innovators listen to the market and deliver what it asks them to create.

Wood Induction Charger from Jason V on Vimeo.

If you are an innovator or an inventor or both, I hope you will continue this in the comments.

You can't make lemonade with this kind of Lemon

Michael Arrington recently called out Offerpal and the like in his series of Scamville posts the most recent of which suggests a class action lawsuit may be in the works. This series is a great example of journalism and it focused our attention on a doomed market before the failure occurred, however, his focus on the end consumer as the victim only tells half the story.

The inevitable failure of this market and the companies that profit from it should have been obvious from the initial business plans – and not only because consumers would get fed up and stop signing up for offers but because the existence of dishonesty in the market will drive out the legitimate businesses. As an entrepreneur, understanding your ability to differentiate your service and the quality of your good from those of your un-ethical competition could be the difference between success and failure.

Here is why:

The economist George Akerlof wrote a paper in 1970 called “The Market for Lemons: Quality Uncertainty and the Market Mechanism” that describes the fundamental problem with the business model of Offerpal et al. In the paper Akerlof explains the inevitable “no trade” equilibrium in a market where:

a)    Inferior goods exist

b)   Buyers cannot determine the quality of the item prior to purchase

For Zynga and the other social gaming sites, the consumer lead is the good being traded and the value of each lead is dependent on the average revenue it brings to the buyer. They should know better than to head down this slippery slope and they should know the problem is the Lemons. (see Wikipedia for more here)

-Assume a market with 100 total leads where all leads are known to be the same to both the buyer and the seller and all leads generate marginally more than $10 to the buyer. This total market of 100 leads will clear at an average price of about $10 creating a total market of $1,000.

Hate them becuase they ruin markets...

-Now assume that some number of leads (for simplicity let’s say 50) are actually worth $0 in revenue to the buyer and that there is no way to tell the difference between a $0 lead and a $10 lead. If the buyer realizes that there is a 50/50 chance of getting a $10 lead and a $0 lead, the price they are willing to pay drops to the average value of the lead or $5 – 100 leads are still traded, but this shrinks the total market from $1,000 to $500.

-As the average price drops from $10 to $5, sellers with leads that are actually worth $10, with no ability to signal this value to the buyer, are forced to exit the market or sell their leads for less than they are worth.

-Over time, as sellers exit the market, the average price of a lead will continue to fall forcing more and more sellers to pull out. In the end, this process leaves 50 leads all worth $0 and a market in equilibrium with no value and nothing traded.

Akerlof warns us that “The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”

The market for leads created by the OfferPals of the world fits this description exactly and if Zynga and others who monetize through offers (or profit from the advertising Zynga buys) want to stay in business, they should read Akerlof’s article and clean up their markets before they reach the point of “no trade.” It is the right thing to do for the consumer, but it is also the only thing to do for the business.

Find and Filter = Gourmet Content Buffet

The acceleration of content creation on the web, both social streams and traditional outlets, has created a situation where I almost always feel behind in terms of my ability to consume the information and overwhelmed by the effort required to pull the relevant stuff from the irrelevant. I have trouble with the find and filter process and either get bloated by consuming too much or end up content starved. The right balance lies in becoming a content gourmet — and this balance has so far eluded me.

The velocity of content creation has driven me to the point of a binary decision: read or ignore. I bvelieve content should be surfaced and prioritized by relevancy, but I found that I had retreated into my twitter stream and was really skimming for links (to forward to myself via e-mail and read throughout the day). I also would pull out specific terms and the @replies and DM’s via tweetdeck. Twitter had become my IM and RSS in addition to the baseline “twitter stream” of real-time conversation about “what are you doing?”

I have struggled with what I call “Find and Filter” since about 2003. Back then I created the chart below that laid out my ideal solution to the problem – let me choose my content curators based on my knowledge of them and then give them a way to highlight the content that they think is most valuable around a given topic and have the system push it to me. I also wanted to be able to discover other people who pulled this same content out of the “feedtank” and view their profiles/subscribe to them on the given topic. The idea was to find and filter my sources and let them, in turn, find and filter my content. I called it editoRSS.com and never did more with it than what you see here:

Over time, lots of solutions to this problem have emerged including FriendFeed, Google Wave and Glue as well as the Facebook NewsFeed and the Twitter stream. I would also include the latest entry from Google in the form of social search (see video here), but I am still feeling overwhelmed by the effort required to find and filter the content that I really want without consuming too much or missing out by consuming too little.

In an effort to work on my process, I have changed my Twitter follows to people I know and interesting people who’s tweets go beyond what I can get via RSS feeds from their blog. (Did you know that the url for an un-follow on twitter is twitter.com/friendship/destroy ??) I am going to re-invest in my NetNewsReader for articles and longer form news and try to re-engage in the twitter stream as conversation rather than news fire hose.

If you are willing to share how you solve this problem or are working on a solution to it, I would love to hear about it in the comments or an @reply on Twitter.

Who's the MVP?

On Wednesday night I had the opportunity to attend the Lean Start-up meet-up in NYC to talk about best practices in Minimum Viable Product development practices as described by Eric Ries. The iterative process of the MVP development cycle makes a ton of sense for early stage technology companies and I would encourage anyone building a web service or other product that can be updated with frequent releases to pursue the minimum viable product strategy.

Beyond my reading and my experience managing the development of websites and interactive media strategies and my reading about MVP, the conversation at the meet-up took me back to my roots in product development when I was carrying a bag of samples for AND 1 Basketball in 1998. I spent a lot of time in Footlockers and at playgrounds talking to kids about the shoes I had in the bag. I would lay the shoes out on a bench and watch the kids check them out. Some would talk and others would just look, but everyone had an opinion.

For me, this exercise became like a language study. I had to learn how to hear the meaning behind the words and find the common patterns and key themes that could inform our product development efforts. I would take my notes from these product testing sessions and head to Asia where I would work with the factories to build “what the kids want.” While samples were being built, I would spend time in Japan and Europe looking for trends and working with designers to sketch concepts based on what I saw. When the samples were complete, I would meet the Fed Ex truck at my hotel in NYC and head back up to 155^th and 8^th to talk to the kids again.

Soon these consumer conversations were allowing me to provide direction to the design team, to help the development team focus on the most relevant new processes to achieve new looks, support the factories in Asia with execution by limiting the sample requests through a more refined market perspective and elevate the brand by delivering more relevant products that were closer to the consumers’ needs and desires.

Looking outside your industry can be a source of inspiration and lead to real innovation and the tech world should learn from the best practices of consumer products companies that have been practicing MVP development for years. I have never had the handle to be the MVP at Rucker Park but if you are building technology and think my experience at AND 1 could help you implement the MVP process, I would love to talk.

There is no i in team, unless you are talking investment

There are two sections from Brad’s post that apply to the entire curve

a)    Team

b)   Fit with the fund

Team:

Once an investor understands the business and has formed conclusions about the biggest potential pit-falls, the next step is to identify the members of the team who have experienced similar challenges in the past and learned from them. When practicing your presentation around team, try to match the strengths of your team with the areas of concern or weakness in your plan. Your investor knows that you will need to adjust along the way. The strength of the team is the key to identifying the proper time to adjust and the new path to follow. The discussion of the team is also a time to show your prospective investor that you know what you do not know and a plan for the learning process.

WHO IS YOUR MANAGEMENT TEAM?

-Who is the management team?

-What is their experience?

-What pieces are missing and what is the plan for filling them?

The numbers may be a waste of time, but the calculations are not

Fit with the fund:

As a founder the most valuable resource you have is time and fundraising can be a massive drag on this resource. It is extremely important to maximize the efficiency of this process and select potential investors to target based on a sense of how well your company fits with the fund. This includes understanding the portfolio as a whole, the specific investments that a given investment professional is involved with and the expertise of a firm or specific investor. Understanding of the shape of your curve and a sense of how close it is to other investments that the firm has participated in historically is a good filter as well. This analysis starts (and often ends) with an answer to the question, “How much are you looking to raise?” Brad’s list on fit is below, and I have added one to the end.

HOW DO YOU FIT WITH THE PROSPECTIVE INVESTOR?
- How does this fit w/ the investor’s portfolio and expertise?
- What synergies, competition exist with the investor’s existing portfolio?

-**Does the shape of your curve match those of the investor’s existing portfolio?

Friends who read this blog have told me that this series is too wonky and that what is really important is great entrepreneurs with big ideas. It is also true that at the early stage where I focus my time at First Round, every number in a financial projection is going to be wrong – either high or low – and so detailed projections are often a waste of time for founders who could be focused on building cool product. While this is true, ultimately the investor is buying shares in a company, not the consumer product or service and must believe in your ability as an entrepreneur to deliver a shape that fits the fund by focusing your energy in the space you have chosen for your innovation.

The view is unknown, but understanding the possibilities can help you choose your path to the top

For the fifth entry in this series of posts about why investors ask the questions they ask I am focusing on competition and other things that could erode the value you have worked to create. To start from the begining, please go here.

The defensibility of your business speaks to its long-term value as a stand alone entity or as an acquisition target. As you are building a company, it is important to know what is on the other side of the cliff you are scaling. Building a business is one of the hardest and most rewarding thing you can do professionally and thinking about the view at the top while you climb can help you choose the best path. Your strategic decisions will be different if you believe you will enjoy green fields at the top of a mesa or be faced with a steep and dangerous decent forcing a traverse along a knife edge ridge (aka – Pivot).

When you speak with a potential investment partner, competition should be well researched and conclusions about the strategy they will pursue should be supported with historical evidence or facts about their dependencies. When an investor is asking about competition and other surprises that may exist in the business they are looking for both specifics about your business as well as your general knowledge and approach to the industry.

WHAT IS YOUR VISION?
- What is your big vision?
- What problem are you solving and for whom?
- Where do you want to be in the future?

WHO IS YOUR COMPETITION?
- Who is your existing & likely competition?
- Who is adjacent to you (in the market) that could enter your market (and compete) or could be a co-opted partner?
- What are their strengths/weaknesses?
- Why are you different?

WHAT PARTNERSHIPS DO YOU HAVE?
- Who are your key distribution and technology partners (current & future)?
- How dependent are you on these partners?

OTHER
- What assumptions are key to the success of the business?
- What “gotchas” could change the business overnight? New technologies, new market entrants, change in standards or regulations?
- What are your company’s weak links?

As an entrepreneur it is your job to see what others do not and to innovate around your vision. A business strategy is a best guess, and honesty about this, knowing what you do not know, is good. If you can also articulate a plan for learning what is currently unknown while keeping your options open, this is even better.

**My friend Jon Steinberg has written about this in the past and I agree with his push for execution and product focus, but would include potential consumer shifts such as the healthy trend that hurt Coke as one of the red arrows in my diagram above.**

For the last post in this series I will talk about the two areas investors care about that apply to the whole curve, team and fit with the portfolio.

Blazing a trail to the top

This is the fourth in a series of posts written to expose the analysis behind investor questions and to propose a simple framework to help entrepreneurs guide pitch meetings more effectively. I invite you to read the first, second and third posts as well.

The size of the opportunity and your ability to capture it are the drivers of investment and are the primary focus of my conversations with entrepreneurs. When we have both done our homework, this is the most enjoyable part of my day because I get to learn about a new technology or service that may change the world from the person who is passionate about making it happen. When I was out raising money, this was my favorite part of the pitch because I got to talk about my passions and the cool thing I was building.

Investors will typically lead with these questions because the opportunity size is a primary screen. If the market is not big enough, there is no need to evaluate the risks of a given investment or come to any conclusion about the ability of the team to capture it.When you pitch, you know that accurately sizing the market and understanding the key drivers of customer adoption help frame the opportunity for an investor. Because of this, clarity about what you are building, how you will sell/distribute it and comfort with both top-down and bottom-up estimates of the market are extremely valuable. Starting off a meeting by showing that you are attacking a big ass market with a kick ass team (Rob Hayes’s “two asses” theory) is the best way to frame the conversation. Your excitement for what you are doing and the reasons you have been compelled to build a company around your idea needs to carry you through the parts of the meeting focused on evaluating the investment risks. This is your time to shine as a founder.

DESCRIBE YOUR PRODUCT/SERVICE
- What is your product/service?
- How does it solve your customer’s problem?
- What is unique about your product/service?

WHAT IS YOUR VALUE PROPOSITION?
- What is your value proposition to the customer?
- What kind of ROI can your customer expect by using buying your product/service?
- What pain are you eliminating?
- Are you selling vitamins, aspirin or antibiotics? (I.e. a luxury, a nice-to-have, or a need-to-have)

WHAT IS YOUR MARKET OPPORTUNITY AND HOW BIG IS IT?
- How big is the market opportunity you are pursuing and how fast is it growing?
- How established (or nascent) is the market?
- Do you have a credible claim on being one of the top two or three players in the market?

One you have chosen a path and climbed the mountain, staying on top, defending the business from competition and copy-cats through continued innovation and customer loyalty will become the primary focus. The next post in this series will look at some questions investors ask to understand your approach to maintaining the value you have created.

How are we going to take this hill? How will you know when it is time to go to plan B?

Investors will usually ask what you believe it will take for the business to achieve the transitions from revenue generating to cash flow positive to monthly, quarterly and annual profitability and the key development milestones along the way. The actual outcome has a significant impact on the type of investment the fund is making, but your sense of the road ahead is the most valuable piece of information. It is impossible to predict with much accuracy so understanding the team’s approach to discovering the optimal path for the business (i.e. is it lean start-up?) is the goal of these questions in an early stage meeting.

When learning about a new business, questions about the business model and the market should really illuminate the entrepreneur’s approach to learning about the market and the customer and adjusting to create product/market fit.  The projected period between funding and revenue and the associated product milestones can reveal the emphasis being placed on market feedback and iteration as well as the ability to identify appropriate pivot points. As most start-up successes come from the pivot, not the blueprint that was funded, clarity around the process for discovering market fit and potential revenue models is key to evaluating the risk in an investment.

As you answer the questions below, imagine crossing a river with your investment partner by jumping rock to rock. With each question, he is trying to judge the distance to the next rock and decide if the team can make it without falling in the water. He is also trying to see how you choose your path and how you learn from your previous choices.

WHAT STAGE OF DEVELOPMENT ARE YOU AT?
- What is your stage of development? Technology/product? Team? Financial metrics/revenue?
- What has been the progress to date (make reality and future clear)?
- What are your future milestones?

WHO IS YOUR CUSTOMER?
- Who are your existing customers?
- Who is your target customer?
- What defines an “ideal” customer prospect?
- Who actually writes you the check?
- Use specific customer examples where possible

HOW ARE YOU SELLING?
- What does the sales process look like and how long is the sales cycle?
- How will you reach the target customer? What does it cost to “acquire” a customer?
- What is your sales, marketing and distribution strategy?
- What is the current sales pipeline?

In part 4, I plan to talk about identifying the opportunity size. This is where the investment conversation typically starts.

How deep is the hole?

one quetsion before I jump...How far down is it?

Early stage investing is about the excitement generated by a big idea in a big market being built by a great team. But it is also about understanding how much capital the company will require over its life and what this means for the value of the current investment in terms of dilution (or required follow-on to avoid dilution). These questions also helps set reasonable expectations for the entrepreneur’s ability to de-risk the business with the current financing. For example, a business currently raising 10% of its total projected capital needs may not be able to significantly de-risk the business prior to raising additional capital and may want to think about getting a little more runway to be able to make more progress before raising more money.

The outside capital needs of a business help investors assess the level of “fit” that the business has with the investment model. In my time with First Round, I have seen lots of great ideas that we were not able to fund because of the long-term capital needs of the business or industry.

When an investor asks some of the following questions from Brad’s post, they are really peering down a hole and looking for the bottom.

WHAT ARE YOUR PLANS FOR FUND RAISING?
- What funds have already been raised?
- How much money are you raising and at what valuation?
- How will the money be spent?
- How long will it last and where will the company “be” on its milestones progress at that time?
- How much additional funding do you anticipate raising & when?

HOW DO YOU ACQUIRE CUSTOMERS?
- What is your cost to acquire a customer?
- How will this acquisition cost change over time and why?
- What is the lifetime value of a customer?

WHAT IS YOUR REVENUE MODEL?
- How do you make money?
- What is your revenue model?

As an entrepreneur, targeting potential investors who are comfortable with the capital requirements of your business and have knowledge of the industry you are entering will make this part of your meeting much more successful. You will find the fit with someone who understands why you are raising the level of your current round, agrees with how you plan to utilize the money and the time you are allowing your team to iterate and learn in order to show meaningful progress prior to the next round of fund-raising begins.

The next step is figuring out how long we will be working to climb to success and if the core methodology of the team will allow for the learning required to discover product/market fit. Eric Ries has written about this here and here.  I hope to add to this conversation when I put together my thoughts on the climb toward sustainability tomorrow.

If you force the fit you may lose the feel

Over the past few months I have looked at hundreds of potential investments and I have had to say no to all of them. I knew this would be the case when I made the transition from entrepreneur to investor (see Josh Kopelman’s thoughts on this here). In a meeting with an entrepreneur last week, he told me that another VC had described their job as saying no. I disagree. The job is to say yes, but finding the right fit is difficult. Over the years many people who are much smarter and who have much more experience as investors have written about the questions that an entrepreneur should expect from a VC and I have linked to my favorite example from Brad Feld, here. I love what Brad wrote and have looked to it as a guide for my meetings with founders. But after I have answers to these 15 questions, in the work after the meeting, the analysis and decision making, I am really focused on five questions that determine how well a given investment opportunity fits with our model at First Round.

1. How deep is the hole we are climbing into?
2. How long will it take us to climb out (to sustainability)?
3. How far to the summit?
4. How is the view?
5. Is it a match?

The first four questions are loosely based on the return on invested capital curve developed by David Wessels in his book on valuation.

Return on Invested Capital = (Net Income – Dividends)/Total Capital and is reported as a percentage. The goal of investments is to generate ROIC that is higher than the weighted average cost of capital (hurdle rate or WACC). Andy Metrick’s research (chapter four in his book) suggests that the WACC in VC is about 15% and so I have labeled the graph that way, but this can be anything north of the risk free rate in reality.  The curve below illustrate the ROIC over the life of a company assuming outside equity investment and long-term success.

It's a hell of a ride

I will try to group Brad’s 15 conversational questions with by the five investment analysis questions over the rest of this week in separate posts. I hope the series of posts serves as a form of translation tool and helps provide incremental transparency into the VC decision making process for entrepreneurs. I also hope it helps founders think through how to sell investors on the value in their company, not just the product or service the company is selling.

1926 ad for The General Electric Company

I saw this GE ad from 1926 and it made me think of Google in 2009. In 1926, the world was figuring out the best ways to use electricity and was willing to pay for new appliances that would harness the power of electricity and help make people more productive. In 2009, the world is looking to leverage the web to make people more productive, to communicate in new ways and to solve problems in new ways (as Josh Kopelman has pointed out here).

If you read the text of this ad and replace “electricity” with “the web” and replace “the General Electric Company” with “Google” it would read like this:

“To make available tremendous power at the touch of a switch, to help lighten thousands of human tasks, and to increase production — these are the services of the web. Google makes apparatus by which the web performs its useful work…” Not quite a perfect parallel, but pretty close in my mind.