My post on saying “no” to grow generated some great conversation in the comments. It also got me thinking about the problem from the other side: How to find the right things to say “yes” to in your development plans.

I was out west this week for our E-commerce Summit and asked leaders from our portfolio how they manage strategic priorities. It was portfolio power in action and the thoughts below are the result.

When you dive down to the weeds, make sure you know how to get back up

Adjusting the focus from high-level corporate vision down to strategic initiative and on to project definition and then to tactical next action and back up as quickly as possible is something I wish I had been better at as an operator. Founders can get stuck firefighting and micro managing, for months on end because the company is an embodiment of something that has been in their heads for years. Speed and agility are critical to a start-up and the ability to switch altitudes fast can be the difference between failure and success.

We can force altitude switching with 6 questions and when done right, the quality of the decisions will skyrocket.

1. Why are we doing this?

Clarity of purpose and explicit alignment with the vision for the business are critical to these decisions. Try to imagine the initiative is a success in every way and then imagine what that means for the business as a whole. If you are happy with the impact, it is something to say “yes” to.

2. Why haven’t we done it before?

Once you decide to pursue something, asking why it hasn’t been done already is a great way to expose constraints and limitations. Breaking the initiative into components and evaluating the goals of each component will also help you see if the team is working on pieces of the problem already or, equally importantly, has decided not to pursue it. The need to re-prioritize existing efforts in order to push the new initiative forward is important to recognize and communicate.

3. How will we do it?

This is about creative thinking and generating as many ideas as you can. “Brainstorming” is a topic to itself, and everyone has different takes on the most effective ways to manage creative sessions. (IDEO has some great slides on this) In my experience the most important thing is to get away from “No, because…” The goal is to capture the details of what success will look like not evaluate barriers to achieving the success you envision. No judgment, most ideas wins.

4. What is the best way for us to get there?

Once you have a lot of good ideas, you need to organize them through a process that accounts for your current position, team strengths and areas of weakness. This is a curation process. No ego, best idea wins.

5. Have we left anything out?

Repeat the “create” and the “curate” process again (and maybe again).

6. What should we do first?

It is critical to prioritize the projects and next actions if you expect anything to get done. Decide what should be dropped if anything, and decide ownership and accountability for what remains – who is responsible for each project and next action, and who will play supporting roles (if any) on each.

Access to this advice would have helped me say “yes” to the best ideas and eliminate the rest more quickly in my former life. I hope you all find it helpful. Also, thanks to everyone in the portfolio who helped me with this and I look forward to suggestions for improvements and refinement of these six steps in the comments.

***A shout out to Eric Koger at ModCloth for pointing me to The Natural Planning Model as described by David Allen in Getting Things Done for additional reading. If you don’t want to read the whole book, there is a good summary on this MindZone wiki.***

There are so many ways to say it, but none of them are easy.

In the world of agile development and minimum viable product, teams of really smart people can build, test, learn and repeat un-constrained by technical or financial limitations with little to no funding. Powerful learning organizations are being built and the impact on the start-up community has been significant. However, once the corporate mission has been established, the success of any lean start-up depends on the CEO’s ability to say “NO” more than any other factor.

Recently I was working with a company in the First Round portfolio that has fully embraced the lean start-up process. The company has a fantastic team of experienced engineers who embrace the process and actively seek to discover both consumer problems as well as product solutions. They manage their product cycles in hours, not months. They test more hypotheses in shorter amounts of time and with less capital because of their approach, and the result has been extremely high quality product that consumers love. Their development process is a great example of The Lean Start-Up as described by Eric Ries.

Over the past week a competitor identified a new consumer problem and our team immediately saw a way to leverage our technology to create a solution. It was built and tested tested. Consumer response was mixed. After multiple iterations, the team had achieved product/market fit, and the new service showed meaningful user growth—more importantly, it was a major source of new customer acquisition.

But…it was also a major source of difficulty for the company because the CEO did not question the impact of these customers on the rest of the business. The product development team created an elegant solution to a real consumer problem that the other areas of the business depend on ignoring. It is the CEO’s job to protect the team from this type of effort by evaluating the hypotheses being tested and saying, “NO” if the possible answers do not move the business forward in alignment with the mission.

When I was managing product development teams, the challenges of an iterative problem solving process paled in comparison to the effort required to fend off the in-bound product suggestions and feature requests. As these companies grew I had an increasingly difficult role in saying no to the distractions created by new customers, new advisors and new competition. You should always listen to each of these sources, but they are data points to be interpreted. The entrepreneur is the only one who can layer in the complexity of strategic vision, corporate mission and values to the product development process. The more talented your team, the harder this is, but the most successful CEOs are able to filter the signal from the noise and say, “No” when they need to.

The resources required to build and test continue to shrink. While this allows more iterations, it also makes saying “No” harder because it gets easier to test than not to test and the cumulative effect on focus is harder to see. If you have effective strategies for filtering out the noise and maintaining focus in your product development cycles, it would be great to discuss it 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.

One of the benefits of being part of a seed-stage fund is that we often get to see the next big trends before they become widely known.  For example, Josh has a widely known thesis on data-exhaust and the implicit web where he identifies the value of the data trail we all leave behind. This thesis supported multiple investments including our investment in Mint.

In the 200 milliseconds it takes you to draw your gun, my algorithmic gun slinger could make 39 profit maximizing ad insertions and shoot you dead

I believe we are now seeing a change in data processing and decision-making that will be equally significant for investors and entrepreneurs.

Historically, data analysis and computation was done on log files and stored data pools.  In these types of businesses, the data decisioning was done “out of band” — or not in real-time.  However, we’ve now started to see a whole series of applications and businesses where data analysis and decisioning is happening “in band” on streams of data.  In these applications, milliseconds matter.  Massive data analysis and computation are being performed in real-time — and the user’s experience is affected by this analysis.

This is a fundamental change.  Humans do not operate in milliseconds. For the real time web to function, the human decisions have to occur before the clock starts. We need to focus on predictive analysis and algorithms that make rule based decisions for us informed by the data stream.

The Facebook Newsfeed (already has machine intervention) and the Twitter Stream are the most frequently noted “data streams”, but the auto-generated data created by every consumer action, ad impression and click are orders of magnitude larger.  Including the data streams generated by CDNs and ISP’s you can see the exponential nature of the decision requirements in this new streaming data world.

The first vertical to move to real-time is advertising (Spark Cpaital’s Mo Koyfman has a nice summary of the shift in on-line advertising on his blog). It is not surprising that advertising is the first industry to move in this direction. It is most similar to the financial markets and over the past ten years the percentage of equity trades on US exchanges driven by algorithms has grown to over 70%. This was the insight behind Appnexus and Invite Media and may explain why some of the first guys to envision a transparent market for display inventory and real-time bidding came out of a finance school.

In our portfolio I see the power of operating in stream. Ad insertion order compliance can now happen in real-time based on contextual data streams analyzed by Double Verify.  VigLink can identify un-affiliated links across the web and not only append the link with an affiliate code, but choose the profit maximizing link in each instance, in real-time. Knewton’s testing platform is able to provide each student with a customized and personalized test-prep experience, based on their real-time adaptive education platform.  Aggregate Knowledge automatically produces personalized and dynamic creative for advertisements by using real-time algorithms.  In milliseconds Monetate applies a specific set of merchandising rules to individual consumer data streams. The result is a unique shopping experience for each visitor to an e-commerce site.

As we move from a world of data pools to data streams and processing power is distributed to the edge, what other changes will take place now that milliseconds matter? Will infrastructure changes take place as well? Will the real-time web increase the value of a millisecond enough to force companies to co-locate their algorithms at the CDN site or even the end-point device level?

I would love to discuss it in the comments, @phineasb or phin@firstround.com

Alignment with your investors is crucial. Adjustments are available if you ask questions before you sign the term sheet

When you are fund-raising, your job becomes getting cash into your company. However, the best entrepreneurs don’t just get funded, but find funding alignment with their investors in terms of values, vision and approach. Since joining First Round Capital I have met with hundreds of entrepreneurs and many of them never ask me any questions about our process or our approach to working with our portfolio.

I know the fund-raising process is really, really hard. It is an emotional roller-coaster. It demands 100% of your energy, your time and your heart but you should be asking questions, interviewing your potential investors, and choosing your investors.

It is important to know you have alignment in terms of financial interests and that you are not only working toward the same outcome but also have agreement on how to get there. If you do this, you will experience many of the commonly listed benefits of chiropractic treatment:

1. It is completely safe

There should be no penalty for asking questions and if there is, you probably don’t want to work with those guys anyway.

2. Allows better sleep

The fundraising process is hard for many reasons, but the thing I hated most was being evaluated over and over in a process where I felt I had little to no control. Asking questions about your investor’s expectations and approach put you in the driver’s seat and will help you feel comfortable when you accept the term sheet.

3. Corrects the cause of pain rather than treating the symptoms

Treating the symptoms of misaligned exit expectations or disagreements around strategic vision is always painful to you and to the company. Don’t set yourself up to suffer through the distraction and pain of on-going treatment of symptoms. Correct the cause of the problem by asking questions prior to accepting the investment.

4. Relieves stress and tension

Alignment with your investors on values, vision and approach allows you to build trust and treat your investors as partners with no hidden agenda. You will get much more strategic value as you work to build your business and steer your company to success if you are not fighting the people who backed you along the way. It will also be much more fun and probably more successful.

5. Improves posture

Your investors will become one of the most powerful signals about your position in a market, your prospects for the future and the overall quality of the operations of your business. Alignment of interests will create a powerful posture for your business and insure you are all pulling in the same direction when it becomes time to get back on the roller-coaster and raise your next round.

The benefits of Chiropractic treatment are touted by some and dismissed by others, but when it comes to raising money, I am a believer. Take your VC to the chiropractor and find alignment or keep looking for other sources of capital.

If you have benefited from alignment with your investors or have suffered through the opposite, I would love to discuss it in the comments.

Ryan Graves wrote a great piece on why Foursquare is his ride of choice. Worth a read as an overview of the check-in space>

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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:

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.

My friend Dave Knox just added a piece on his blog that looks at this issue through the lens of business development and sales. It is a great perspective on B2B deals.

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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.

Get ready to lace ‘em up tight and get your gameface on for 2010. It’s going to be a year full of highlights, and with every highlight, there is someone dunking and someone getting dunked on.
When the top 10 lists come out for next year, will you be hanging on the rim or looking into someone’s wasteband?

We’ve been waiting all year for 2010. So glad it is right around the corner!
Happy Holidays,

SneakerheadVC @phineasb

I want to meet this NYC kid when she starts a company

Michael Karnjanaprakorn wrote a great piece on the NYC start-up scene and included a list (growing through the comments) of all the great things happening in the city where I spend most of my days for First Round. He says, “I believe that NYC tech start-ups have a better eye for design, user experience, business models, and creating companies that solve real problems (and not launching more “me-too” companies).  And the icing on the cake?  The companies coming out of NYC right now are just… sexy.  There’s no other way to explain it.”

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

there are always (at least) two paths...

The 20+ inches of snow outside have me remembering bits and pieces of Robert Frost and thinking about choices at 5:45am on a Sunday:

“Two roads diverged in a wood, and I–I took the one less traveled by,
And that has made all the difference.”

Recently I had the opportunity to introduce two current MBA students from top 3 schools to a company that is looking for smart people to help them do some market research. Each student spoke to the founder and then their paths diverged like the roads in the woods.

One student took the opportunity to respond with a thank you and an outline of the project already written-up as an independent study project. He also included the comments from the professor who would be sponsoring him in the research. He asked the founder to comment on the proposed project so he could make any required changes and expressed his excitement about the company. He concluded with an offer to do the work with or without the academic credit and mentioned his ability to engage full-time during school vacations. Compensation never came up.

The other responded as follows:

“The firm you are starting seems viable but I do have some questions and would like to
cover a few items. Most of the points are to clarify the agreement between us so we are both clear about how this could work…

My desire is to join the company as part of the founding team, not just an intern…

I can commit to a maximum of 15 hours per week, but to do so would require me dropping my other commitments that I have worked hard to cultivate…

I would want to be compensated $3,000 a month…

I truly believe that I can deliver real value to your venture and I think that you will find me to be a good team member that will help build your vision…

Let me know your thoughts…

The founder could have responded with this:

“The woods are lovely, dark and deep.
But I have promises to keep,
And miles to go before I sleep,
And miles to go before I sleep.”

I had lunch with a friend and entrepreneur, Spencer Fry from Carbonmade, and over a great burger we discussed the importance of not only giving your customer a voice in the product development process, but making sure you are listening to the best customers.  He wrote about our conversation on his blog today and got some great comments. I am adding my sneakerheadVC view here and hope to get a couple comments as well.

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.

A mentor and friend that will be dearly missed

I spent yesterday at a memorial service for one of the great men I have had the opportunity to call a friend. Greg was the spirit of Haverford College and he was a mentor to me, to most of my friends and to my wife. You can read more about him here.

When I was at Haverford, Greg was the Director of Athletics and I got to know him because I played hoops and my roommate played baseball. However, my fondest memory of Greg has nothing to do with sports. He helped me figure out how to answer the question, “What if…?” and I will never forget it. Spring of my senior year I was trying to decide if working for AND 1 made sense or if I should go to Wall Street. I needed advice so I went to Greg’s office about once a week for a month. Finally, a little frustrated with my inability to decide, Greg said something like, “Look, there are probably 1 million people out there who could have made me happy for the rest of my life. I was lucky enough to meet one and grab the chance to marry her. I am happy. You will not be happy if you worry about what if but you will be happy if when you find something that brings you joy, you grab it.”

I worked at AND 1, traveled all over the world, I married my college girlfriend, we moved to Portland, OR, started a company, killed the company, moved back to Philly, my wife started a company (her second), I got an MBA and took a new job in a new career. Over the 11 years since school I have been happy the whole time except for the times when I have spent more time on “what if?” than on grabbing happiness. No surprise, Greg was right and always will be.

When you know it, you know. Have the strength to follow your instincts and when you are compelled to do something, do it with all your heart. Happiness will follow.

Friends this fall

Yesterday I wrote about how names matter and told the story of the AND 1 ToChillin. Here is a quick video that does a nice job of making the same point about the value of understanding your audience when you create your marketing messages and product positioning–

To me, this is about knowing your audience and creating messages that will motivate the desired action from the targeted segment. I would appreciate links to other images/short clips that make this same point — if you have a favorite, leave it in the comments.

What's in a name?

I was talking with an entrepreneur today about messaging and his frustration with having a great product that some customers are struggling to understand reminded me of some kicks I built.

When I was the creative director for footwear at AND 1, Ballers were walking around in soccer slides with socks on before and after games, to the mall, to the B-B-Q and to school. Not a good look, not that functional and your socks get ruined. We wanted to create a slip-on shoe that could be worn before and after games and generally enter the casual athletic market. We built the shoe you see here and called it “the slide.”Comfortable, affordable and way better looking than soccer slides with socks.

I took it up to 155th and 8th to test it. Everyone hated it. I took it to West 4th, they hated it. At playgrounds and malls across the country, everyone hated “the slide.” We tested different colors and fabrics and nothing worked. Kids said we should stick to lace-ups or make a soccer slide.

The shoe was a failed experiment until our audience helped us with the messaging.

On my last testing stop before heading back to Asia to finalize the line I was at the Northline Mall in Houston, TX and didn’t notice the kid holding The Slide until the argument started. 30ish high school kids, boys and girls, surrounded the shoes and 29 of them were laughing at the one holding the shoe. He argued with them with no success until he said, “No, stupid. It’s not to hoop-in yo, it’s to-chill-in.” The other kids were silent. Then, one by one, they agreed. In this group “the slide” was the best shoe.

I delayed my trip to Asia by a week and went back to all the other places we tested product, but this time I did not bring “The Slide” I brought the “Tochillin.” It tested off the charts and we included it to the line. Within 12 months we had a $50M Tochillin business with multiple styles and the original Tochillin Low went on to sell over a million pairs in 3 years.

The name of a product or service or how it is positioned through marketing and customer messaging can determine its success or failure. Don’t assume to know your audience, listen to the market to discover the right message. If you have an example of messaging changes that drove significant changes in consumer acceptance I would love to read it in the comments. If you own a pair of ToChillin’s, post it here or on twitter with the #todayskicks tag.

As the creative director for AND 1, I managed a design team where everyone but me held an industrial design degree. We would often make the distinction between art and design – where creative effort for the benefit of the artist was art and creative effort for the benefit of the purchaser was design. An example of my thinking on creativity and innovation is available in the second half of this post.

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.

Use the powermat to provide power to a wire...Really?

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

The PowerBox ... Click here to learn how to build your own

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.

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.

If it is "Deal or No Deal" it will be Dismal

Since reading Fred’s post on meetings (after running into him at the Coffee Shop) I have been thinking a lot about my own meetings. Like Fred I have between 7 and 10 meetings a day in person or by phone and feel that more than 2/3rd are really good. These meetings are not all with entrepreneurs, and those that are will only rarely (less than 1%, really) result in funding.

I do my best to prepare for every meeting (I have written about this before here) and to learn from everyone I meet. I want to engage with the ideas, not the deal because a career that is focused on getting to an answer that is “no” 99% of the time is going to suck. Saying “no” sucks almost as much as being told “no.” When VC’s focus on “The Deal” they make it dismal for everyone, one meeting at a time.

Glenn Kelman’s piece on TechCrunch recently confirmed that good questions can help move a business forward regardless of the investment that follows. You know when these moments occur in a meeting, the moments that add value for all involved. A statement that sparks a new thought in a founder or investor; some pushback on an assumption that exposes a dependency before it hurts the company or shows an investor the new dynamics of a market; a question that feels like it might have an obvious answer but turns out to surface a key gap in the logic of a product design or go to market plan all represent opportunity.

The fact that I get paid to meet incredibly smart people who are working on amazing projects is genius. The ability to engage in the business and learn about the challenges, offer advice and help an entrepreneur iterate is awesome. I have the opportunity to do this in EVERY meeting – as many as 10 times a day so long as I do three things:

• Prepare and focus on the idea, not the deal
• Ask tough questions that may not have immediate answers
• Be transparent and never waste an entrepreneur’s time

If I can engage in the business, connect with the entrepreneur and add value to their process 70% of the time that will be far from dismal. This is my goal and it dictates how I approach my meetings. If we get the chance to meet, I hope you will see this in action and if you don’t, I hope you will call me on it.

If you have examples of great questions, great meetings or the opposite, please leave them in the comments.

Is more dangerous to dance with this guy or to sit out?

In Tim O’Reilly’s latest post, he says, “But perhaps most threatening of all are the natural monopolies created by Web 2.0 network effects.”

He is referencing the social web and its proclivity to spawns systems that are designed to increase in the value offered to each user as more users join the network – as more value is available more users will join…ending, of course, in a monopoly where everyone uses one system in a single, massive network. His fear arises from the prediction that the major players, Facebook, Google, Apple, must continue the push to own customers and the result will be a silo structured web – one where these large systems do not offer interoperability.

I think Tim’s fear is misplaced because of the power of the consumer and the ability for the consumer to drive innovation when they cannot find what they are looking for in the market. The bar is higher when large networks deliver experiences we can love, but when they don’t, innovation will occur and consumers will migrate.

The web 2.0 monopolies have allowed the smaller players to touch the consumer and to own elements of the consumer experience in ways the classic monopolies in the past did not.  It is true that,

“we’ve grown used to a world with one dominant search engine, one dominant online encyclopedia, one dominant online retailer, one dominant auction site, one dominant online classified site, and we’ve been readying ourselves for one dominant social network.” (I would say we are there on the social network dominance as well…)

As an investor and entrepreneur I view these business as infrastructure, not monopolies. There is tremendous opportunity to deliver new services on top of these platforms and to extend the consumer experience by listening and responding as only a start-up can.

The platforms have allowed the small service providers to own the consumer relationship and to deeply integrate into the user experience of the platform itself. We see this in auto updates to the major networks and the emerging dominance of the open API as two way street — both pushing “big data” out and pulling “small data” in. In many ways through this inclusion big businesses are increasingly dependent on the entrepreneurs to deliver the magic that builds customer loyalty, to deliver what consumers love through innovation. Owning the customer is the fastest path to accruing enterprise value and somewhere in the ecosystems of each of these platforms, the seed of the next big business that will dominate the world is growing.

As Chris Brogan said at web 2.0 expo in NYC today, “Gate jumping and making new paths is where the opportunities are.” If you are working on either side of this equation or about to jump a fence and strike out on a new path, let me know how you think about this issue 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.

Know what you are fishing for...

Following the recent meme on sources of seed funds with contributions from Chris Dixon, Charlie O’Donnell, Mark Suster and Brad Feld and the related topic of We need to own baloney from Fred Wilson and Josh Kopelman has reminded me of some advice I got after my first company failed.

A good friend and the founder of AND 1 told me you get to make three choices as an entrepreneur:

1. You get to choose your idea
2. You get to choose your business partners
3. You get to choose your investors

I happened to be one for three because I did not invest the time to do more than a cursory reference check on my business partner and my investors. Everything that I discovered as my business disintegrated, was discoverable prior to building and funding my business. I just didn’t ask the questions.

There is no recipe for success in these choices, but learning as much as you can about your prospects is a good start.

To be clear, when you decide to take on outside investment, you are bringing a new partner into your business. Their business model and approach will have a significant impact on your business, your strategies and your prospects for success. No matter how many times Fred “calls bullshit” on VC’s who say they “need to own x percent,” fund math is real and there will always be investors who push out value added syndicate partners in order to “own enough” even though they hurt the entrepreneur (and the business — including their investment) in the process.

Mark and Brad offer excellent perspective on seed investing in their posts (links above). The type of questions Brad encourages founders to ask of their investors and the diligence Mark recommends (including contacting existing portfolio CEO’s) are exactly right and I wish I had this advice years ago. This process is difficult, but crucial because for each entrepreneur, there is a different ideal investor. For some, taking seed money from a large fund and the “freedom” that comes with a passive investment may be ideal. For others an extremely active angel who does not plan to participate in later financing may be a perfect source of guidance and capital. For many the balance lies somewhere in between and future participation is based on meeting specific milestones that should be well understood by both sides of the table.

I don’t believe is possible to say one funding path is superior to another, but I do believe your choice of funding is one of the most important decisions you will make and you should know what you are signing up for prior to signing the term sheet. Investors should be chosen based on their alignment with your interests and vision for the company. It is critical to understand the investor’s expectations and ability to assist you in living up to these expectations prior to accepting funding and allowing them to join you as a partner. You should ask each investor you meet with to articulate their investment model, their ability to add value to your business and force them to pitch you on accepting their money and their advice. Similar to choosing your business partners, complete reference checks and look at their past actions in both successes and failures. If you sense that you do not share a vision or an approach to managing your business, as hard as it is, keep looking for other sources of funding.