Culture: wear it loud

Use your company culture as the first filter in the hiring process. If someone doesn’t like the experience, they are not a fit. Move on.

Culture is a powerful thing and when you get it right, it can be a guiding force in you business — how decisions are made, how innovation occurs, how people are motivated, what they are motivated to do…all culture. Whatever culture you create, it should be intentional, related to your mission and make it obvious to anyone who walks in the door what is important to you as a business.

If you make the culture obvious, make it loud and ubiquitous, you can create experiences for potential hires that expose them to the culture and really evaluate cultural fit — before you hire them.

AND 1 was a basketball company and we played hoops at lunch on the full size court in the middle of the office. Everyone who interviewed for a job over our first 100 hires had to play in the lunchtime run. Most people thought we were evaluating their game but we didn’t care if they could talk trash or hit a J with a hand in their face. We actually cared about the 5 minutes before the game. We cared how they reacted when we asked them to play — were they open to new/uncomfortable situations. We cared how they responded when we took them into the supply closet to pick out shorts, shoes and a shirt — did they love the product and engage in finding a cool hook-up with stuff that matched. We cared how they acted on the court — did they have fun and commit to the game or remain uncomfortable and nervous. For us, this was all about fit.

Recently I saw this piece on our portfolio company Fab.com and I think is shows how they are wearing their culture on their sleeve (and i don’t just mean Bradford’s ink). If I were interviewing potential hires for Fab, I would make sure to meet them at the front door and point them to the person they were going to meet — across the office. If they could walk across that office and not stop to look at something or pick up an item off someone’s desk just to check it out, I am not sure they would be a good fit. The company is all about design, the office is full of amazing design objects. It is totally subjective, but if a potential hire is not drawn to pick up at least one, does not appreciate an image or object for a moment as they head to their meeting, I would question if they are right for the job.(they are hiring by the way)

Creating the culture is the hard part, but once you have it, use it as the primary filter in your hiring process. It will pay off.

(first post from my mobile)

Over the past month, I have spent a lot of time working with companies on their plans for 2012. Everyone wants to do more than their resources allow and getting the most out of limited resources is in many ways what it means to be an entrepreneur.

But, teams often start editing the options before taking the time to fully create. They say no to opportunities before exploring them because the resources to support them are not in the current plans. The decision is obvious in the current headspace — but editing like this, locking in to your current headspace, makes it really hard to understand the value or potential of an effort and to optimize your opportunities instead of allocating your resources.

A simple example of this is travel. At my video game company I was responsible for product, marketing and sales. As the product got close to completion, I started to travel a ton. From Portland, OR, I was working on marketing partnerships in New York, Cincinnati and Chicago. I was also making trips to Seattle, Minneapolis and Bentonville trying to sell a fitness game to any buyer who would listen.

I scheduled all this travel myself and worked really hard to get the most out of every trip. As hard as I tried, there were meetings and opportunities I missed because it was impossible to get from one place to another, through security and across timezones to make it work for both meetings.

Once, I had to choose between meeting the head buyer at Wal-Mart and a national media opportunity in New York. I knew my priorities and based my choice on what I thought was best for the company.

We sent the product to Good Morning America and it was included in a segment (instead of me having my 15 minutes of fame by being on the show). I went to Bentonville to try to sell some games. I made the trade off based on the headspace I was in — a commercial traveler trying to generate revenue for my company.

But what if I had a private jet? How would my decisions and opportunities and priorities change in this new headspace? If I had a jet, I might have taken the time to more fully understand the chances of appearing on the show and the value of a focused segment vs. inclusion of the product in a segment on fitness gaming.

I think I allocated resources rather than optimizing my opportunities.

As you make your 2012 plans, fine people $100 for saying “no” and push them to imagine a world where anything is possible, unconstrained and with infinite ability to execute. Figure out what you would do and where the company would focus to optimize opportunity. Be clear about why.

Use this vision of the biggest opportunity to set your priorities and allocate your resources in the real world.

the pre-mortem, a no BS look into the future

Post-mortems help you do it better next time. In start-ups, sometimes you only have one shot and so I love the concept of the pre-mortem to help you do it better this time.

When I was building product at AND 1, we always did post-mortems on product launches and other strategic initiatives. It helped us get better as a team and build a culture of make mistakes, but never make the same one twice. In lots of start-ups, you see post-mortems in the form of Eric’s 5 whys when things break, when dollars are wasted and when people are looking to improve for next time. This is great, but it doesn’t help make what you just did any better and it doesn’t help eliminate the group think that probably caused the mistake in the first place.

The true “best idea wins” culture is rare in a company of more than about 10 people. As an organization scales, you have more structure and more meetings and often you get conversion around an idea or strategy and lose the highly valuable dissenting opinions.  A systematic post-mortem will help the company make better decisions over time, but to really make better decisions as a group, the institutionalized pre-mortem is one of the best ideas I have heard in a long time.

In a pre-mortem, you get your team together after a strategy or plan of action has been set and instead of asking them to project what will happen, you tell them to imagine it is 12 months from now and the effort was a complete disaster. Their job is to describe, in a detailed narrative, what went wrong and the impact of each mistake. You may not kill the project, but pushing your team to point their creative talent at imagining the things that got messed up a instead of the arguments for going full speed ahead, you will look through the curve and see errors before they happen.

Rather than group think, you have institutionalized dissent.

The term was created by Gary Klein and I heard it in the video below where Daniel Kahneman talks about the concept and how to apply it (the whole thing is good — the topic is how to think of decisions as products and implement quality control mechanisms, but the specific part I am referencing is from about 13:00 minutes left to about 8:30 left). Let me know if you try it and if it works for you (or doesn’t).

This past weekend at Y-combinator start-up school Ron Conway said, “Design and user experience are the new IP, not algorithms…”  (see the tweet here) I think this is true for a most start-ups and believe that customer centric, design driven businesses will create a ton of value by building brands in the coming years. But, because a design can be copied, this shift also means there is no way to “protect” this IP.

As more start-ups focus on design and user experience, the clones will darken the sky like locusts.

the plague is coming...

The power of (X)aaS to drive costs down and reduce the friction in getting products out to market is only going to accelerate as more elements of the technology stack are converted to commodity tools — the clones will run faster, they will multiply and generate more and more noise. These creative leeches sign up for your service, study what you have done and launch a copy. They see your pixels and your user flows.

Expect that your marketing messages, feature set, colors and fonts will all be copied. Your customers will be targeted and your brand name will be bought in AdWords campaigns. The press will compare you to the followers and imply you are the same or that your collective existence indicates a new trend. You will be furious.

Be aware of the clones, don’t be distracted. Learn from the way they tweak your model or your product, but do not pay attention. Clones copy the pages you build, but they don’t understand your customer like you do or why you made the decisions you made. They copy the result, but they don’t understand how you drive the process.

To keep the clones in your rear-view mirror, trust the consumer to know the difference. If the market is yours, own it. Be smarter. Care more about your customer and deliver more of what they love. Leverage excellence in execution and deeper passion for your product and your consumer to build the brand that matters in your category.

Investing in design is a winning strategy (AAPL)

Modern tech is continuing to make it possible to build more and more for less and less (time and money) making it easier to test your product and iterate towards consumer needs, but also easier and faster for copies to chase you. In this world of fast followers, companies that view their product (feature sets and functionality) as commodity and see design as THE way to differentiate will win.

At AND 1, we used the same suppliers and factories as our competitors and sold product through the same channels. We had to find a way to take the same rubber, foam and leather that Nike and Adidas were using and craft something that resonated more deeply with the consumer. In the consumer products space everyone embraces the design driven consumer centric thinking that builds brand because it is brand that builds loyalty and loyalty that drives value in commodity product categories.

Like any technical talent, design is a skill set. But, at my favorite companies design is also a mindset. Investing in design changes the way companies do business by bringing a primary focus to the consumer. Investing in design means valuing the design mindset in every aspect of your business. Companies that are built for design find a way to do four things really well:

1. Bring the vision holders closer to the consumer – Help everyone feel how they impact the consumer with what they do everyday. At AND 1 we didn’t just tell people to deliver the “damn factor.” We would bring them out in the market and let them see kids react to the product first hand. We included everyone from designers and developers to sales, marketing, customer service and operations so they could experience that feeling of consumer love, understand it and deliver it daily.
2. Give them the freedom to move the crowd – Empower individuals to own the experience they deliver. At Birchbox, customer service people are able to create solutions to problems as they arise rather than implementing solutions handed down to them by management. The editorial team understands the mission of surprise and delight and has the freedom to engage with their audience and drive the conversation.
3. Embrace “edit, undo” – Create a culture of individual creation and group editing where there is no ego and the best idea wins. At AND 1 our Trash Talk T’s were created by committee, but to get in the room you had to come with 5 slogans each month *that you would put in stores* As a group, we would edit to the production slogans of the month. This decision making process spread to every area of the company and created a lean forward culture of participation where the best ideas rose to the top. We got products into market for real tests and when they worked, we were right as a team and when they didn’t we learned from it as a team. “I told you so” did not exist.
4. Honor craft – Everyone (product, marketing, sales, operations, engineering, service etc) internalizes the mission of the business and then works to understand differences in priorities, approaches and process with a common goal. In my fitness gaming company we leaned on this a lot — surprisingly, the majority of game developers where not that into fitness — To bridge this gap we had developers pair up with game designers AND personal trainers. They would work together on product in the office and they would work out together to better understand the product they were building and consumer they were building the product for. This structure and the mutual respect and understanding that it supported helped us build a better product and made us a better company.

In May I wrote something about Investing in Design. Last week I got a chance to talk about it at Web 2.0. I have loved design and the way designers think about consumers since my first week at AND 1. I carried this love with me to my video game company and continue to feel it as an investor.

Here are the slides:

The video for my effort at Ignite is below. I called it Tilting at Windmills and the search for the next $Billion Lean Start-up. I think the lean start-up methodology has fundamentally changed the way companies are being built and investors need to adjust their strategy to fit this reality. In this world where anything can be built quickly and cheaply by leveraging modern programming languages, cloud platforms and social distribution, hyper-efficient brand building is the best path to defensible value creation. A return to the craft of start-ups and a passion for product is needed on both sides of the table and I hope to be part of this transition through the First Round Platform and our laser focus on supporting entrepreneurs as their companies grow from 4 employees to 40.

anyone can put sugar and water in a bottle...or stuff in a box

Building a brand requires consistent delivery of a simple value. At AND 1 we built our brand on attitude and we infused everything we did with the trash talking swagger of an NYC point guard. Birchbox is building a brand by delivering delight from content to commerce.

It is a simple promise. It is hard to deliver.

When we first partnered with Katia, Hayley and Mollie we fell in love with their vision for a new eCommerce model. The subscriber count was less than 500 and the founders were folding the pink tissue paper and tying the bows in every box. They were 100% focused on consistently delivering delight to their customers at every touch point. Their vision was clear and the mission was simple. They were building a brand that would define a category.

Yesterday, Birchbox announced a new round of funding that will help them continue to scale the business and deliver on their brand promise. The coverage of the funding has focused on the company’s early success: the number of subscribers, the number of brand partners and their future plans to enter verticals beyond cosmetics. The growth has been incredible, but for me, the real story is not how fast the business has grown, but the way the founders have managed to scale even faster.

They hit product market fit and hyper-growth as fast as any company in our Community but managed to remain laser focused on delivering delight. The subscriber base is in the tens of thousands and the quality of the product and diversity of brand partners keeps getting better. Engagement with content is stronger than ever and the Birchbox voice, now spread across an editorial team, remains fresh and relevant to their customer. The total team has grown from three to well over 35 people and the sense of teamwork and ownership over delivering on their brand promise is as strong in the most recent hire as it is in the founders.

Regardless of department or role, employee, customer or brand partner, everyone is inspired by the Birchbox brand. It has deep meaning. It has a ton of value. I am honored to work with them and I can’t wait to see what happens next.

Brand building for the win!

When they fall, pick them up and pull them back in...

I got an e-mail the other day from a friend explaining that he was shutting his start-up down and would be joining a big company as some kind of VP of something. The role he is taking sounds very close to the job he left in the spring of 2010 to #beafounder. I tried to talk him out of it, but it was too late.

Having to give up on your company sucks for a month or two and it hurts forever, but it is not failure – if these teams are absorbed back into the world of cubicles and are allowed to return to the jobs they walked away from in the first place, that will be failure, and failure at the community level. When you meet the founder of  a failed business, reach out your hand, pick them up and do everything you can to keep them involved in our community…because our community depends on it.

My friend’s story is not unique. He had an idea, raised 12 months of runway from angels in the middle of 2010 and was unable to get significant traction or raise more capital. I am sure most of you know a few people who are facing something similar right now. I have been there, it is the worst. But how the community values the experience of a shut-down and the doors that it opens or closes for the founders is what really matters.

I think we will hear a lot more of these stories in the coming months and my prayer for NYC is that we all remember that the business may be a failure but the entrepreneur is not. Don’t forget, founders of failed companies had an idea and they pursued it. They quit their jobs (at big companies), convinced investors to provide the required capital and persuaded talented team to embrace their vision. The teams shipped product and learned from customers. They iterated on market feedback, they tested methods of customer acquisition and everyone that worked on the business learned more from their mistakes in the last 15 months than they could have from success in their 9-5 job.

The success of an emerging start-up scene depends on keeping homegrown talent in the game. We should treat the experience of a blow-up as a badge of honor. The scars of a failed company deserve deep respect and affirmative action from investors and start-ups starved for talent.

If you are one of the lucky founders who has hit escape velocity and can’t hire fast enough, make it a point to seek these people out. If they don’t want to join you, do your best to help them try again. It will come back to you in a stronger, deeper community supporting your efforts.

Recently, I have been thinking a lot about the healthcare space and see a Gil Scott-Heron style revolution coming there as well.

First Round’s investment in Mother Knows is a great example of the disruptive forces I am seeing in health care and I am really excited we are involved in bringing fresh blood and a consumer product midset into the health care space. The Mother Knows team has deep consumer DNA and they are building an elegant solution for a specific customer: new parents. The product closes the information gap between parents and care providers and helps the parents understand their child’s development from the first days. Mother Knows helps track development milestones and manage immunizations, growth charts and general health records. As a subscriber, your child’s medical data becomes actionable, portable and easy to understand – a God send in an emergency and a dramatic improvement in understanding and meeting the day to day needs of your baby.

Back to Gil Scott-Heron, KRS-1/BDP and the NIKE revolution commercial for inspiration…

A revolution is coming to health care, but it will not come from the practitioners or the coordinators or the administrators. The revolution will come from the imagination of patients who create products that will be user tested, iterated and UX optimized. The impending disruption of the gazillion dollar health care market will be consumerized.

The revolution in health care will not be created with words like efficacy or double-blind. It will not come from labs or be funded by big pharma. The revolution will be touched by screens you can touch and pushed by pixels that have been A/B tested and shaped by paper prototypes that make Eric Ries stand-up and say Amen. The health care revolution will be consumerized.

The revolution in health care will not require the entry of social security numbers in triplicate with each visit just so they can be transposed via carbon copy, read into a series of dictations on mini-cassette tapes by doctors and transcribed into digital form by the same person who handed you the form when you showed up 15 minutes early for your doctor who was running 45 minutes late. It will not require pencil and paper or photocopies of insurance cards and the memorization of group numbers and co-pays. The revolution will know who you are and remind you where you have been, what treatment you have had and how you got better. The health care revolution will be consumerized.

The revolution will not be installed on a circa 1995 piece of equipment and rented out for thousands of dollars a night. It will not get processed and printed onto a billing statement to be mailed to your home and then forwarded to your insurance provider only to be rejected and re-submitted over and over. The revolution will be found in an appstore and it will run on your smartphone for free. It will capture data, motivate action and enable the treatment of the causes of disease not the symptoms. The revolution will help us all become consumers of wellness through better behavior and enable patients to walk in and demand that their doctor treat them as a person rather than a set of symptoms. The revolution will be consumerized.

If you are part of this revolution, I would love to learn more about what you are building.

A first step in discovering product-market fit

Imagine showing up for a job interview late, without doing any research on the company, or even looking up the people you were meeting on LinkedIn or Twitter….do you think you’d get the job?

No way, right?

And yet….VC’s do this all the time.

I think the pre-investment product, the VC product most entrepreneurs experience, is broken and there is a market opportunity to fix it. This hunch started 8 years ago, when I was trying to raise money for my fitness gaming business. I experienced the VC product as a consumer. It was not a delightful experience, to say the least. I will never forget feeling like an unwelcome salesman rather than a potential partner. The pain of meetings that started 10 minutes late and the smile and nod routine as the excuses and apologies ate up another 5 minutes of my pitch. Once we got started, the recognition that I was starting cold as my initial intro was followed by the blank stares and blackberry distractions. The withering moment, after laying heart and soul on the table for 30-45 minutes through disinterest, distraction and doubt, when they say, “We’ll discuss and get back to you…” and you both know they never will.

At the time I thought I was talking to the wrong people, but now, having been in this market for a few years, I hear about this buy-side mentality all the time from founders who have experienced the industry standard pre-investment product.

At the end of the day, investors are service providers.  But the accepted buy-side vs. sell-side power dynamics of the initial VC-entrepreneur meetings let us get away with minimal preparation, if any. Investors frequently approach first meetings with extremely limited knowledge of who they are meeting, or what they are meeting about. And, to date, industry norms support (or certainly don’t penalize) investors who are late to meetings, and then spend the remaining time distracted by their phone/e-mail.

To be clear, I’m not innocent here, but that doesn’t mean I can’t say it should stop.

As an occasional perpetrator of this buy-side behavior, I know it can feel more efficient for investors to operate this way, forcing “cold-start” meetings by pushing the work onto the other side of the table. But I believe this buy-side mentality and lack of up-front preparation on the part of the investor wastes time and is inefficient for both sides – a little preparation can move the conversation in a first meeting deep into what is typically accomplished in two meetings. Up front work can also identify hurdles that cannot be over come and save everyone the effort.

I have spent my career on the sell-side. From trash talk t’s, shorts and shoes to video games, and I believe if you deliver a product, you are selling. Now I am delivering a product as an investor and I am iterating my way towards the Damn Factor I can deliver to the market.  I am not there yet, but wanted to share the feedback mechanism I am testing on my way to finding product-market fit with my “first meetings.”

First meetings would be much more valuable for everyone involved if investors adopted a sell-side mindset and did these five things:

1. Be on time
2. Understand the background of the team and read the materials that have been sent prior to the meeting
3. Spend some time on the website or using the service if it is live
4. Have a few questions or key concerns prepared to guide the meeting
5. Be focused and engaged throughout the meeting

Chris Dixon of Founders Collective points out that the most impressive pitch meetings he’s seen involve entrepreneurs that have used his products, and come with solid feedback for his product. (see point 6, bullet #2 here) I think it should go both ways.  If an investor doesn’t show up with solid feedback at the first meeting…your eyebrow should be raised.

To validate or dis-prove my assumptions about the brokenness of this product, and my proposed solutions, I have started sending out a survey to every entrepreneur I meet with.

It provides an efficient and anonymous way to give me feedback and helps me continue to improve. I’ll publish results in the coming weeks as the data set gets bigger but so far the feedback has been really helpful – especially the criticism.

For now, if we meet and I’m not on time, prepared and focused, I hope you will let me know in person and in your response to the survey.

This past weekend, Mark Suster wrote a piece for TechCrunch on valuation and encouraged entrepreneurs to seek valuations at the “top of normal.” Near the end of the piece, Mark mentions the danger of, “getting ahead of your inherent valuation.”  In my mind, this is the thing founders should focus on the most and work the hardest to avoid. I agree that optimizing for valuation is a bad strategy, but assuming all sources of capital are equal, I can’t see why you would raise money at a valuation below “market” either…as long as you raise enough.

To determine how much capital you should raise to protect from future funding environment risk, I think it is helpful to think about how much credit the market is giving you for the future value of your business. In public markets this would be the growth premium, but for start-ups, you can think of it in terms of months of credit.

Here is what I mean:

For simplicity, call the inherent value of the business $5m and let’s assume you will add $1m in enterprise value a month if you hit your milestones. 18 months from now, assuming success, the inherent value of your business is $23m.



Simple model, linear growth

If it is a boom market that will give you credit today for 14-18 months of future success, you will see valuations in the $19-$23M range.  Sweet.

Now assume you raise the normal 12 months of operating capital, meaning you will be fund-raising again in 9 months. Assuming success in our simple model, the inherent value of your business will be $14M. (Note: I am ignoring the value of the capital invested for simplicity).

If the market is still giving you credit for 14-18 months of future success, you will see valuations in the $28m-$32m range. Sweet.

But, by raising the normal amount of capital in a boom market, you add a new risk to your business: funding-environment risk.

If it is a bubble and the world is going to fall apart sometime soon, you want to be able to operate through the down-turn on the capital you raise today at today’s valuations. If you can’t, it can be very painful for all involved.

Back to the simple model:

Assume that 9 months in the future, the market is no longer in a boom, and is only giving you credit for 6-9 months of future success, you will see valuations in the $20m-$23m range. A flat round after hitting all your milestones. Not so sweet. If it is worse, the bubble just burst and you can only get 0-3 months of credit if you can raise capital at all, valuations could be as low as $14m-$17m. You will have delivered against your plan, hit your milestones only to be faced with a down round.

Alternatively, when the market is booming, you could choose to take some more dilution and raise 18-24 months of operating capital.

going from red to green really really hurts at 9 months

Dilution is painful at any price, but raising more capital mitigates some of the funding-environment risk by allowing you to wait for a sudden down market to bounce back. More importantly, raising more capital when you are in a boom gives you the runway to earn your way back into your current valuation in a prolonged down cycle and limits operating risk by supporting multiple passes over the target if they are required.

By raising more capital in a boom, you are seeking a new round of funding in month 15-21 and in my simple model, you have built $20m-$26m in enterprise value. Even if the market has shifted from giving you 18 months of credit for future success to no credit at all, you have earned a slight up round.

If the current market is a boom and the world is set to explode into hyper growth sometime soon, the incremental capital, and dilution, is still worth it. In a boom, it is more likely that you will be faced with an opportunity to dramatically increase the trajectory of your business. It will probably take capital to go from adding $1m per month in enterprise value to adding $2m or $5m a month and you need to focus on your business in order to catch the wave. If you raised 18-24 months of capital, when the opportunity comes to accelerate the business, you will be able to step on the gas without the distraction of fund-raising.

Timing the market is impossible, but boom to bust with some period of normal in the middle is certain. If you are going to pursue the top of the top, good luck and Godspeed, but make sure to raise enough to earn your way back into the valuation you get today no matter what the market does tomorrow.

If you prefer spreadsheets to graphs:

You don't need milestones until the route is obvious

A lot of my time is spent in board meetings and in preparation and follow-up from these meetings. Most board meetings consist of reporting the results of the previous month and setting the goals for the next month. The conversation is framed around results and specific business metrics — milestones.

At the seed stage this is often a mistake because milestones imply the route is obvious, and it often isn’t. If your business is still finding its way, you need to fill the tank with gas, forget the milestones, and start reading the map.

About a month ago a company I work with re-framed the board meeting and with a subtle shift in how we talked about the business, the founder drove a dramatic evolution in how the entire management team thinks about the business going forward. He moved all of us from the standard:

what we did last month and our goals for next month

to

what we learned in the past and the new hypotheses we are planning to test in the future

The sky opened up and light filled the room…epiphany! (or one of the four steps…). Steve Blank talked about this in his presentation at Start-Up Lessons Learned conference (Slide 54 is a good summary) and he is right.

Accepting that the route is not clear and re-framing the conversation from milestones to tests and learning focused the room on the things that mattered most for the business right now. The board dove into the tests run in the previous month and the data the tests generated. We engaged on the emerging hypotheses about the business model, customer acquisition strategy and product direction. We pushed on assumptions and discovered what needed further testing and helped the team think through new tests to run in the coming month and how to prioritize these tests.

As a board, we stopped looking for milestones and started helping the team navigate the map. The founder re-framed the conversation and dramatically improved the effectiveness of his board. You can too.

The juice IS worth the squeeze...

To build a shoe, you need to create molds for all the plastic and rubber parts and dies to cut the patterns for the leather and fabric pieces. When I started at AND 1, every shoe required the services of a designer, a developer, a materials engineer, mold technician and a pattern expert. It took 10 months and countless hours to get to a final product that could be tested, modified and put into production.

6 years later a designer could press print in Portland, OR and a CNC machine in China would carve production ready molds out of a block of aluminum. Technology product replaced the services of 4 people and allowed the vision holder to cut the metal. No translation or interpretation needed. The time from vision to actual product was shortened by a factor of 10 and we could now go from design to a production ready shoe in 30 days.

The most innovative designers, developers and engineers, drove creation and adoption of new technology platforms in the footwear industry. They leveraged technologies to move the vision holders closer to the consumer and redefined the steps in the product creation process. They also redefined the skills that were critical to a company’s success and drove a shift in resources from the steps required to build a single product to the process of product innovation – test and learn as fast as possible.

I see the same thing happening in technology today as some of the most innovative people across the industry produce products out of what used to be services. Platform as a service businesses from telco, to location, to mobile and infrastructure as a service businesses may serve as layers in the technology stack, but they are also compressing the innovation stack. The building blocks are getting bigger and more easily manipulated and this revolution is evident in modern programming languages like Ruby and Node.js and open source resources like GitHub and others.

In the footwear industry, the most effective companies leveraged platforms and products to free their best people to focus on unique, innovative solutions that were proprietary and built enterprise value. Ben Horowitz describes the power of a change in product development focus in the technology industry as the shift from mainframe to client/server computing lowered the effective cost of CPU cycles and drove adoption of relational database architecture instead of hierarchical database architecture:

By moving to the relational model, developers were released from the tedium of navigating hierarchical databases and used their new found freedom to rewrite every existing application…

Platforms replace people and redefine what is commodity by converting services into products. When this happens, the most creative people are empowered to unlock incredible innovation and dive more directly into the product. Iteration becomes cheaper, minds become focused and products become better, faster. However, if your company is not actively compressing the innovation stack and leveraging platforms to create direct connection between vision holders and customers it is game over.

To win a war you have to win hearts and minds

Fighting the war for talent with iPads, doggie day care and mac cinema displays may get you warm bodies, but it will not attract the superstars you need to build a great company or to create the great legacy that Nat mentions in his discussion of recruiting and spawning a “mafia.” For that, you need love.

Eric Koger, CEO of our portfolio company ModCloth, once told me there are three types of employees at every start-up:

1. Those who can scale with the organization
2. Those who can’t
3. The special few who scale faster than the high growth company they are a part of

I think he is right and I think the best companies in the world are the ones that attract a greater proportion of people in group three than their competition. This group is always a few steps ahead of the organization and represents the future leaders of the most critical parts of the business. These people will challenge everyone, including founders, to be better and push to think bigger. This group is the foundation of success and the key to scale.

These are the people you need at every level and recruiting efforts should focus on winning their hearts and minds to win the war for talent.

In 1999 we decided to get serious about footwear at AND 1, the industry was crazy and perks and compensation packages were outlandish for developers and designers. We opened an office in Portland and started recruiting a group of designers and developers from Nike and Adidas. We could not compete on perks or benefits. We could not offer the support staff or systems they were accustomed to and there was significantly less job security.

What we did offer was a culture of best idea wins with no ceiling on their role or level of responsibility. We offered a very clear attitude and approach that started with the consumer, ended with our CEO and touched everyone in between. We offered them the chance to push the limits and make mistakes and the promise of support so long as they did not make the same mistake twice. We offered a place to work harder than they had ever worked in the pursuit of something they believed in more deeply than they thought possible while having more fun than they could imagine having at work. We did not sell perks; we sold the vision. We did not convince them to join us with compensation; we captured their imagination with our conviction. They were compelled to join our mission and the decision was made with their hearts more than their heads.

Collectively this group changed the face of the company and created hundreds of millions of dollars in sales over their time at the company.

I don’t believe the best people, the transformative minds, care about the iPad or the free snacks as much as they care about the mission. They know a start-up is a place to go all in, not a place to take a job. They want to absorb everything they can, contribute everything they have and immerse themselves in the mission. Some will eventually start their own companies but the best training is not introductions to investors or lessons on how to raise money. The best way to prepare to #beafounder is to experience the singular, all encompassing pursuit of a mission motivated by an irrational love.

To recruit the best, to win the war, fight with love, not money.

I will miss her...her smile, her interests, her taste in products...her spending habits...

When I started my game company, we targeted “Soccer Moms” and tried to find them with all our marketing. This general definition of our consumer helped us decide where to promote our product and which publishers to target with our advertising. At AND 1, we were trying to reach the core influencers within a larger, more general basketball consumer audience. In order to do this we identified specific other interests, like music, cars and video games that when combined with an interest in basketball indicated a high likelihood of being receptive to AND 1 marketing messages.

Today, the soccer mom and her friends 9-5 Joe and the Baby Boomer are dead. My only regret is they worked for the publishers. With these definitions no longer useful what happens to content creators? Is there an advertising technology that will speak for the publishers?

The online advertising world is moving from a focus on publishers and their average audience to targeting specific users as members of distinct and often unique segments across publishers. In short, it will be hard for publishers to get paid for the differentiated value they create in the form of unique data. As the ad industry moves toward audience management, we already hear a lot about data attribution and the revenue consequences of “data leakage.”

I think we are a long way from achieving accurate, cross-publisher and cross channel attribution for a few reasons:

1. Audiences must be defined and aggregated for advertiser reach i.e. commoditized
2. The data responsible for the marginal lift in response must be identified and agreed to by both advertiser and publisher
3. The marginal value of this lift must be attributed to a specific publisher raising questions of cookie vs. context etc.
4. Measurement must be established to prove out cross channel impact of unique publisher data

The buy side bottleneck today is finding the audience, at scale and the current solution for advertisers is scale in their publisher network and management of the data across the sources. The goal is a multi-dimensional view of the customer on an impression by impression basis. In this world, how you aggregate the data and define “audience” creates value, not the data itself. Publisher data has to be normalized to make it consistent and predictable for advertisers, but this also makes it commodity and potentially undifferentiated across publishers.

There should be an opportunity to factor in the publisher data– proprietary data that lifts inventory value – and to create a rating system for the inventory that avoids the commodity pricing issue. Maybe something multi-factored like a diamond – cut, clarity, color, size – to let people optimize for what they care about – currently optimization only occurs on price and the system is broken for the supply side.

Thanks to Adam Bain for the diamond analogy and am excited to discuss further in the comments.

three is better than two but with both, you are really cooking with gas

First Round portfolio company Click Equations is a classic SaaS business. They offer complete search engine marketing platform that offers management, bidding, and reporting. The management team has well worn copies of Bessemer’s being sassy (PDF) on their desks. The service they provide optimizes a critical piece of the customer’s marketing mix and is often tested, trialed and then ramped up to a feature rich implementation against the full search spend of each customer.

Often initial deals do represent monthly recurring revenue, but they do not represent the full MRR potential for an account.  This discrepancy between MRR and the total MRR opportunity at an account can make it difficult to reconcile sales and service priorities and can limit a CEO’s ability to get an accurate picture of the business.

What about deals that close on one date, but need time to implement? Are you accounting for implementation risk? What about deals that close as tests or where the current monthly revenue number represents only a small portion of the full revenue potential of the customer? Do you prioritize these accounts based on their current state or their potential? Do you discount the potential by some probability weight?

Depending on the level of customization you are offering and the complexity of the software tools you have created, it may take your support team some time to roll out the service that your customers need. It may also take some time for your customers to figure out how to utilize the tools you have created and see the full power of your platform – delaying the effectiveness of sales time for follow-up and up sell.

If you evaluate the MRR in the pipeline based on full implementations, not trials or tests you will over project and under close. If you project based on the MRR initially available from specific accounts, you may under service an account and miss a larger opportunity to scale an existing customer as you prospect for incremental accounts.

To bring transparency to this piece of the business, the team at Click Equations started tracking MRRR (Monthly Recurring Revenue Ramped). This represents the full MRR potential of an account assuming integration is complete and a full implementation across the business. Comparing this measure to current MRR highlights the revenue gap over time. Implementation of MRRR allows evaluation of the time to close the revenue gap, throws up a red flag if the gap gets larger and aligns workflows across the organization with a single prioritization lens.

Monthly Recurring Revenue Ramped worked for Click Equations and I hope it is helpful to you if you are running a SaaS business.

(Thanks to Lucinda, Craig and the rest of the CE team for letting me post this here and for coming up with this addition to the SaaS dashboard)

“There is no fertilizer like the owner’s footprint in the fields.”

Regular inspection makes for fertile ground

My grandparents had a nice business raising cattle. The market for free-range beef drove growth in their business and they cleared more fields and shifted resources to produce the feed they needed for the larger herd over the winter.

The business soon required more work than two people could handle and they decided to hire permanent help to support the daily operations of the farm, maintain the fields and tend to the hay and corn production required for the winter.

The spring and summer went well with crops planted on time and the cattle remaining healthy under new management. Revenues were up and my grandparents thought they were getting what they expected.

They went to Florida.

Returning in March they noticed the herd seemed smaller. Inspecting the numbers, revenue was flat but revenue per head was down. When pressed, the farm manager said the cattle were not keeping weight like they had in the summer. Inspecting further, my grandparents found that the management team had only turned the hay field twice, instead of the three turns they used to achieve. Also, the professional crew had not used proper fertilizer reducing the yield in the corn crop. To make it through the winter feed was rationed and the cattle had lost weight. To meet revenue targets, the one well understood metric for the business, the number of cattle sold per month had been increased.

This was not sustainable. The need for more granular metrics was obvious.

My grandparents assumed that by inspecting revenue they could expect the other measurable aspects of the business to be managed properly. They did not think to set targets for turns of the hay fields, corn yields and total volume of feed projected based on weekly growth. They did not set targets for herd size or average weight per head and did not measure this key driver of revenue sustainability at regular times throughout the year.

In our world of technology start-ups someone once said

“You get what you inspect, not what you expect.”

As your business scales, farming your data can drive significant value. Set goals and measure success against the data that flows out of daily operations. A culture where metrics are transparent and everyone is empowered to take action based on the data is a culture that scales. When this works each team member leaves fertilizing footprints in the fields and, as a founder, you may get what you expect without being inspector and chief.

Defining the data to measure can be difficult, but there is a lot of guidance available. This piece from Josh on cohort analysis is great as is the SaaS metrics PDF published by Bessemer. No matter what your business, a data driven management approach can help you succeed. If you have specific metrics that you use to manage your business or other resources you feel are good sources of guidance I would love to discuss best practices in the comments.

This is an example of previum.

In a previum model, the customer gets the full experience for free in a limited way. In the freemium model they get a limited experience for free in an unlimited way. Both models leverage the power of free for customer acquisition. The critical difference is the previum model forces the user to cross back over the penny gap and become a customer or accept a tangibly limited experience. The freemium model is less effective because it asks the consumer to adopt a limited version of a product and then encourages them to cross back over the penny gap with the promise of a better experience.

Sony has filed for a patent in the video game space that includes a great graphic to illustrate this point. Ask yourself which is more convincing — the Freemium Model:

Freemium: Pay me and I promise to give you a bigger sword. Did I mention, it is WAY bigger!?!

or the Previum Model where you get to experience the big sword and see how much better it can be:

Previum: What's wrong, want the big powerful sword back? You can have it for the low price of...

In the previum model, the consumer gets to see everything you have to offer and to experience it in full, for free. After some period of time or number of uses, you ask them to pay for the services they are enjoying.

The hardest thing you can do in any business is close a sale. You basically have two dials you can turn to get someone to pay:

1. increasing the perceived value of the product (marketing)
2. decreasing the cost or of the product (pricing)

In the digital world we have taken this to the extreme with freemium and decreased the consumer cost of the initial offering to zero. The penny gap helps you acquire users, but when potential consumers experience your limited offering at no cost the power of free may work against you.

Consumers are educated by the tangible thing they experience as they engage with your service and it gets harder and harder to convince a consumer to cross back over the penny gap with the promise of value added services. Eventually, the free product defines your business and 90% of your consumers decide the free version is good enough without ever experiencing the full product.

In the non-digital world companies have used previum models to acquire customers for a long time. Auto-dealers will let you take a car home for the weekend and gas stations offer a free car wash with the purchase of a full tank of gas. Restaurants give away food at happy hour and at physical retail you can try an item on before purchase. In each example, the perceived value of the service you are buying is higher because you get the full experience before you buy.

I think more digital products/services should be sold with the previum model and hope to discuss it further in the comments.

Relative sizes of policies on privacy

The New York Times did a great job exposing the complexity of the new Facebook privacy policy. In the same week, they also covered the Diaspora project emerging out of NYU. In the confines of the discussion of privacy on Facebook, user control of data as described by The Times and the reported shift in consumer tolerance for “living in public” is a big deal.

Bottom line, the current online privacy environment is messy, lacks transparency and does not offer some consumers enough control. The black and white issue is not public vs. private at the network level but transparency and control at the individual user level.

Facebook is leading the way in rapidly adjusting  their privacy policies in response to new opportunities and as they do this, more opportunities for innovation are created — both leveraging consumer data and helping consumers control its use. Politicians also see opportunity, but the path towards regulation is often littered with abandoned innovative efforts.

Diaspora* is not alone in seeing an opportunity to serve consumers who want more transparency and control around their data. The private sector response to privacy concerns is not just about Facebook, it is much broader. In a recent announcement of the product vision for FireFox 4, Mike Beltzner describes one of the three key features as

“Empowering: putting users in full control of their browser, data, and Web experience.”

For me, this is proof of the efficiency of the private market and I hope Mr. Boucher and the rest of Washington take notice, give a friendly nod to the entrepreneurial community and get out of the way.

Facebook’s privacy policy and default sharing settings have evolved over time and the images below from Matt McKeon do a fantastic job illustrating this…

The "evolution" of Privacy on FaceBook

The comparison of the extended Facebook policy to the length to the US constitution is appropriately snarky. However, the draft of the Boucher bill (PDF) is 5448 words across 27 pages and my guess is the legislation will get longer in the process of becoming a law, not shorter. Worth noting, it is already just 400 words short of the new Facebook policy and shares the distinction of being longer than the US constitution by a good margin.

Both the Boucher bill and these private sector efforts are focused on providing consumers with control and transparency around the use of their data. The difference is the start-ups are innovating at a rapid pace and their goals can be described in 11 words and 1 word respectively.

The Boucher bill will not take effect until one year after it is enacted, the Diaspora* project and FireFox 4 will be available to everyone by the fall. The Boucher bill spends all 5,500 words describing what companies can’t do with consumer data. The entrepreneurs efficiently focus on what consumers want to do and will deliver a viable mechanism for transparency and control of data to the market. This is a case of regulation vs. creation and the winner is clear.

+1 for entrepreneurs.

Everyone else is just lean-washing. In my experience lean-washing and the abuse of the lean start-up approach is out of control. Mis-understood and mis-used, I see the “MVPs” coming out of the lean-washing movement as the Most Visible source of Pollution on the web.

The concept of iteration informed by consumer feedback and usage data is powerful and it has been utilized in product development for a long time. In physical products you are forced into step-changes because of long feedback loops. The web allows us to shorten the product cycles and smooth the curve of product improvement. In this environment we can iterate based on a constant stream of customer actions.

However, innovators from Henry Ford to Steve Jobs have offered their perspective on customer feedback and Seth Godin’s archives include advice on taking customers too literally. He reminds us

Letting your customers set your standards is a dangerous game, because the race to the bottom is pretty easy to win. Setting your own standards–and living up to them–is a better way to profit..

The biggest danger is the customer might actually like it – and then you get New Coke.

You can’t be a perfectionist but the first product should embarrass you only after you learn from customers and release a far better version, not before. If you are embarrassed prior to release, you could have done better with the time and resources available.

Lean-washing is not hard to detect and here are some symptoms you can look out for:

1. Product vision and refinement has been replaced by random test and repeat
2. Iteration does not answer a specific question
3. User feedback is general, conflicting and taken at face value
4. Consumer data is not studied or actionable
5. The team spends more time talking about lean start-up methodology and best practices than it takes to crank out an MVP at other companies

Customers (and the data they generate) are there to help us validate or disprove specific assumptions on the path toward a defined vision. Testing and learning without a specific direction is a waste of time. Keith Nowak recently wrote a very thoughtful post-mortem of Imercive and described the start-up development process as running down a series of dark alleys.

Getting through the dark alleys before it is too late requires concerted dedication to going through the process of attempting, learning, and correcting as quickly as possible.

A start-up is a race against the clock and the value of disciplined execution is supreme.

Based on my own experience building things that people will buy, I do not believe customers should be asked to teach what product development skill, marketing acumen, market insight and entrepreneurial gut already know. At best, customers can react to your product and tell you what they think they want, but it is the entrepreneur’s job to understand what they mean and execute fast enough to build what they need.

In every product development and marketing decision we make, the last question should be what does the consumer think of this and is this confirmed by their behavior data. The problem with lean-washing is you ask the consumer first and in many cases the vision is lost in the echo chamber of consumer queries, buzzwords and un-analyzed data.