If you’re building an internet site and don’t know about usertesting.com you’re not seeing the entire picture. A few months ago Dan Martell was in town and showed it to me and I was blown away.
If you’re a startup you have no excuses. Just use it. (And no I don’t have stock in the company or even know the founders.). Its just that good.
I love data. It’s hard to imagine entreprenuers building anything meaningful without a steady stream of good data. It’s the key to measuring what works and what doesn’t, and tells you how to iterate your product into a compelling business. After all, the data doesn’t lie… but it is often misunderstood.
Here are some tests that I apply before using data to make any decisions in business (or probably any other area of life) Hopefully they can help you too.
- Instincts are smart. Reconcile the conclusions you make against your them. If it doesn’t feel quite right, don’t just accept it, find out why. Obviously, the reverse argument can be made, and is probably made more often for good reason. Entreprenuers often trust their gut too much. The point is that either your gut or the data should calibrated before you should feel comfortable making any decisions.
- By definition, data is a view of the past, and usually you’re trying to use it to make a decision about what to do in the future. Past behaviour doesn’t always predict future results. This is especially true in areas of fast paced change — like the Internet industry. It’s easy to fall into this trap, since we use this system in all aspects of society, from using grades to get into university, your credit rating to get a loan, or choosing where to invest money. The problem is that it’s not enough data to make an informed decision. You need to add up anecdotal evidence and do your best to predict where you think the future will be and then compare that against your results.
- The third test is to question how was the data interpreted? Trusting someone’s analysis of data is easy. It’s usually logical, and packed with facts that are impossible for anyone to refute. I’m not suggesting that you become a contrarian, just stay objective and look for ways to poke holes in the logic. Looking at the same raw data and concluding something entirely different is one thing that separates followers from the leaders.
The next time your faced with a big decision, or are presented with compelling data from a research firm, or your VP of marketing, try to challenge the information you’re getting using the three tests above. Doing so should catch some mistakes before they happen. Good luck!
Wave 1 - The rise of the Seed Accelerator and Super Angel
Within the past 5 years, the cost of starting an internet company hit a floor. There is no cyclical effect here. It will not go back up. Today, all founders need to get a company off the ground is a roof over their head, food, internet access, a laptop and a whole lot of passion. That massive drop in costs has caused a tsunami, which has been ripping its way through the VC industry ever since. In it’s wake, Seed Accelerators, Super-Angels, and a new crop of Series A VCs, operated by former entrepreneurs, have emerged as the benefactors. Seed Accelerators like YCombinator, TechStars, and us at Bootup Labs are investing between $10k-$100k per startup. Super Angels invest between $10k-$250k, and reinvented Series A VCs invest as low as $250k-$2M per startup. Most are making healthy returns with more frequent exits in the range of $10M-100M in less than 5 years.
From my observations, regions with a higher concentration of super angels and/or seed accelerators, such as Boulder, New York and San Francisco have completed this transformation, While other areas including Boston, Seattle, LA and Austin are next, and Vancouver will get there in about 9 more months.
This wave took about 5 years to subside, and has changed some of the definitions of the words we use to communicate. So, before we talk about the next wave, we have to reconcile our nomenclature. For the sake of this post, let’s assume that $250k-$2m is no longer called a “Seed” round, and is the new “Series A.”
Wave 2 - Take it to the Bank!
The ripple effects are continuing to run it’s way through the VC eco-system, and are now challenging the economics of series Series B VCs. If Seed money is used to test if the market wants something, and Series A is to identify and mature user acquisition channels, then all we need Series B investment for is to grow an already proven business, right?
Take this for example: If I prove that google adwords produces 1,000,000 clicks of a certain keyword, and those clicks convert at 2% at a cost of $1.25 per click, and the lifetime value of those conversions is $113 each, with a churn rate of 5% per month, then the company should net about $2.2M over 20 months, and you can take that to the bank — quite literally. (here’s the model) It’s conceivable that banks (yes, banks) will get confortable that acquiring users has the same level of risk as collecting receivables. These banks will loan money (or factor) against individual acquisition channels, which have shown statistical significance. If you’ve been in the Internet industry as long as I have, you know that acquiring users becomes as predictable in terms of revenue generation as a signed PO from an enterprise customer.
What does this mean for the Series B/C/D investors? A lot. There is already a lot of competition for Series B investments, which makes sense; Risks are low, quality deals are scarce, and great upside potential. On top of that, when the first wave hit, the risk tolerance and economics for the incumbent Sereis A VCs forced them to higher ground, aka Series B. Over the next few years, I predict that specialty lenders or venture debt, and some progressive banks will provide some interesting options for founders of Internet companies. I’m just glad I’m not managing a VC fund over $50M. If I’m right, life is going to get tougher than it already is, and, as far as Internet investing is concerned, it’s never coming back. In fact, if I was in that position, I’d stick to biotech, cleantech, or any other capital intensive tech industry.
Wave 3 – Lights, Laptops, Launch
I don’t believe anyone can predict the future more than 3 years out but it doesn’t stop me from thinking about it. I’ll describe my admittedly “out-there” vision for what will happen when the 3rd, and final wave hits in another post.
I would be grateful for any comments and of course, criticism and counter-arguments are welcome.
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- What I *Would Have* Said at TechCrunch Disrupt (bothsidesofthetable.com)
- The segmentation of the venture industry (cdixon.org)
- Entrepreneurs Dislike Signaling; VCs Dislike Free Riders (feld.com)
- Greylock Gives Super Angel-Turned-VC Reid Hoffman A $20 Million Seed Fund (techcrunch.com)
Over the past few years, the way we describe funds and funding rounds has become a bit ambiguous. I believe that this has been caused by what Fred Wilson calls Two Venture Capital Industries diverging from each other. In my opinion, most miscommunications can be avoided if we just use the same words to describe things. I really don’t care what the words are, as long as we can all agree on the meaning.
Specifically, I’d like to focus on the word “Series” as a way to define a round of financing. Depending on who you talk to this word is way “overloaded.” Some funds use it to describe the size of their fund, while other investors may use it to define a range of how much they invest in each company and lawyers use it to define a class of stock. For instance, when I purchase shares in a company, I’m usually purchasing shares in successive “series” of rounds; Each round defined using the next subsequent letter in the alphabet. So, if an angel purchases $50k worth of equity in a startup, the equity is usually labeled “Series A Preferred Shares” and the next round the angel invests would be labeled “Series B Preferred Shares.” Despite that the proper definition of the term “Series” is a legal definition of a round of stock, everyone else would consider the angel’s $50K investment a “seed” round and the following investment, the company’s “A” round. Culturally, “Series” is used to describe the *stage* of company that a fund invests in, which I think trumps the legal definition.
As you’ve heard over and over, Internet companies are more capital efficient then they were five years ago, which in my opinion, is the fundamental cause of this ambiguity. I believe that the name of each stage (Seed, Series A/B/C/D, Mezz, PE, IPO etc.) should be a function of the risk associated with the investment. For example: If I grow my company organically for 2 years, and it’s now generating revenues of $10M/year, then the first money I take will probably be from “Series B Investors.” It’s a function of price and risk tolerance. Keeping all these things in mind, here’s what I propose the rough definitions of the stages should be for Internet investing:
- Seed – Test an idea with the market; See if it sticks. Angels, Super-Angels, Seed Accelerators usually invest $10k-$100k in lots of deals, which means lots of failed tests, but an increasingly higher hit rate at the same time. If technology and user risk (ie: can they build it and do people want it?) is eliminated, then the company qualifies for the next level.
- Series A – Invest in successfully tested ideas from the seed stage, pressure-test the previously identified user acquisition channels, and refine the user experience. Today, series A investors typically invest $250k-$2m. If market risk (ie: can you grow it?) is eliminated, then they qualify for the next level.
- Series B+ – Once the site/app is built, customers are using it, revenues are flowing, user acquisition channels have been quantified, it’s time to put the pedal to the medal and grow! This requires capital, but selling equity may not be the founders first choice if they have other options.
- Factoring – Banks love to lend money to companies based on receivables. The smartest companies I know borrow as much as they can against these uncollected sales contracts in order to put as much money to work as quickly as they can.
- Private Equity - You might want to acquire another company, or buy equity held by an exiting management team. (Note: There are lots of reasons why you might raise money from a PE firm, but not the scope of this post)
- IPO – A lot of CEOs forget that an IPO is a way to raise money. Obviously, it provides liquidation for their stock, but if that’s the only thing that you’re after, there are other ways to achieve it.
I was debating this with a colleague of mine today, and his argument was that there’s a an entire “culture” built around the term, and to just accept that it’s flawed. – Maybe I should, but hopefully at least we’ll be talking the same language.
Our nation faces many threats: From wild fires, oil spills, the threat of nuclear war, to terrorism and industrial espionage. But there is one silent group of war mongers who isn’t given enough credit for the damage they cause within our own borders, and it’s time to take them down. Take aim at the NON-BELIEVER!
It’s tragically ironic that our very way of life was founded by some of the bravest entreprenuers the world has ever seen. Virtually every convenience we enjoy, from democracy to the iPhone, started as a thought in an entrepreneur’s mind. In fact, it is not being over dramatic to suggest that our very survival as humans on this earth is in the hands of Entreprenuers. It’s this special elite task force who are currently inventing new ways to find world peace (via increased communication technology that leads to understanding and tolerance of the world’s cultures), improve our health (bio-tech technologies to stop the worlds sicknesses and, hopefully, reverse my baldness) and clean our environment (clean technologies that will save us from ourselves).
Don’t get me wrong. Not all ideas are good ones, but no single person is EVER capable of making that judgement on their own. Only the benefactors of that idea can make that call. I assert that if you open your mouth and tell someone that you don’t like their idea, you are committing nothing less than High Treason - you’re declaring war on your own country.
The good news is that these people are easy to identify. They walk among us. When you pitch your idea to them, they usually respond with “You’ll never pull that off,” or “Forget it, you’re totally underestimating how hard that is.” They work hard to persuade you to stop innovating, give up, stop taking risks, and just stop thinking about how to make a better world all together. Just the other day, someone told me that the job ahead of me is too big to be accomplished and that I was being naive. I was shaken up a bit, because I couldn’t imagine anyone would want to knock the idea down even though they had nothing to gain by doing so. I took some time to think about it, and realized that yes, my idea was audacious, and for me to accomplish it, I will have to be tenacious. – In other words, I would have to be an Entrepreneur.
What was the idea? To make Vancouver the absolute best place to start an Internet company in the world. Do you believe?
There isn’t a single regional area that I know of who isn’t desperate to building an internet technology industry in their city. When my wife and I decided to stay in Vancouver to raise our children, we made a commitment to do whatever we can to make Vancouver the best place to start an Internet company in the world. Lofty goal, yes, but hey, I’m an entrepreneur, and we’re a group who is plagued with unbridled optimism.
I’m not going to get into what mistakes most cities make, but I will say this: If you’re building an incubation/acceleration/mentor program first, and staffing it second, you’re doing it wrong. Each city has slightly different characteristics and what works for one probably means it wont work for another. The biggest of these differences is THE PEOPLE. Find the right people, empower them, and get out of their way.
For the first time in the last two years, since I have been working at building the eco-system in Vancouver, I feel like I finally have clarity about how to communicate the stages building and Internet Startup Eco-System, which I’m sure could be applied to any city:
Stage 1: Inspire
- About: This is the top of the funnel. There are many many people who have an interest of starting a company but just don’t think they can, or think they can afford it, or are worried about what might happen if they fail. At the same time, they probably can’t get thought of it out of their mind either. These people are entrepreneurs in making. They just need a little inspiration.
- Goal: 1) Reach new founders and encourage them to learn more about what it takes to start an Internet company, 2) create opportunities for them to meet co-founders and 3) convince them to quit their day job to start the company.
- How: Inspiration from networking and socializing with other members of the community. Events, Co-Founder speed-dating, Meet and study other successful founders and their companies, Universities. Dispel the myth that failure is bad. Trying is good, failure is experience, success is rare.
- Where: Inspiration can occur from many sources including: Universities, Trips to Silicon Valley, PR/Blogs, Industry networking events like co-founder speed dating, Stories from successful exits, Educational seminars.
Stage 2. Hack
- About: Okay, let’s say you’re a founder and you’ve just quit your day job. You love your idea. You may even have a co-founder already. What now? If you guessed that you should test your idea with customers, you’re right! But for god-sake, do it as quickly as possible with the least amount of money. In other words, hack something together, test it live, measure results, and iterate it daily. They’ll be plenty of time for optimizing your code once you find something that people want, but for now, hunt for the perfect user experience. This is NOT the time to raise money, write business plans, give powerpoint presentations, or project your financials performance.
- Goal: 1) Design mockups and develop prototypes, 2) Test ideas with target customers. 3) Run cheap customer development tests, 4) Educate, 5) Build community.
- How: Get a few laptops, fire up a Joyent instance, register a domain, start a blog and twitter account, create a google accounts for apps, analytics and adwords. Build some landing pages and start testing. And most importantly, start the conversation with your potential customers/users, listen to them, iterate.
- Where: I know now that any healthy eco-system requires that founders have access to an open public space to hack. A place with desks, couches, whiteboards, conference rooms, free WiFi, and, of course, the best coffee known to man. The space would give founders access to limited professional services, tons of advice from mentors, advisors and potential future Investors. But most importantly, it would be the focal point for the community. It would have a vibe that can only be created by the collective passion of the few who decide they can change the world with a simple idea in their heads. It would be a place designed by the community, for the community. The space must be subsidized by government, but most importantly, vertically focused on the Internet and operated by passionate members of the startup community.
Stage 3. Seed/Accelerate
- About: Most founders are first-time founders. While extremely intelligent in building products that people want to use, they have a very limited network of people who have been through the experience of successfully starting and exiting a company. It’s these people who will provide the credibility they need, and help the founder prepare the company to raise financing required to grow. It’s clear, raising money is hard. Raising money from people who don’t know you is virtually impossible. Realistically, founders will need a credible introduction to even have a chance. Being accepted into a true seed accelerator is a great start, and the mentors that you work with while in the accelerator complete the picture.
- Goal: 1) Provide seed financing, 2) Measure customer acquisition channels. 3) Develop permanent relationships with mentors, partners, & investors. 4) Develop the investor pitch. 5) Transition from iteration to execution.
- How: There are a few examples of great Seed Accelerators run by even greater people. In my opinion, the team at TechStars, lead by David Cohen, is the leading the way. Seed Accelerators are NOT incubators. Seed Accelerators are unique from Incubators in the following combined ways, 1) Mentorship focused. 2) Provides a small amount of financing in exchange for equity in the startup. 2) Accepts only a small group of companies at a time, 3) Limited time, about 3 months. 4) Have a physical space.
- Where: Bootup, YCombinator, TechStars, Capital Factory, Montreal Startup, Extreme University, Year1Labs, and tons more. You can also emulate this by working your own professional networks to get introduced and invested in by Super-Angels.
Stage 4. Grow
- About: By this stage, founders are finalizing the transition into a working company with the goal of optimizing current user acquisition channels, and discovering more. Although, product iteration never actually ends, it is much more focused on individual feature adds/removes/updates. Another way to put it: you change from searching for a product that works to optimizing one that starting to show traction. This is the time to put the peddel to the metel.
- Goal: 1) Fund the acquisition of new customers as fast as possible in the cheapest way possible 3) develop new acquisition channels 2) Reinvest revenue and/or raise funding.
- How: Need a $20M Series A venture fund to act as a local lead investor. Exits of companies within this fund, will attract additional investment funds to open offices in the region. The fund will invest in the best local companies it can find, but syndicate with highly connected and reputable super-angels and VC firms in Silicon Valley, New York, etc. This will bring investment from more firms into the local area more quickly than starting up new firms. This fund must be able to invest in companies outside the local region in order to be focused on making the highest return possible, but it is also very important to build relationships with well connected and experience firms who consistently get invited to invest in the creme of the crop.
- Where: A modern VC firm in the local area, preferably within the same building that the Seed Accelerator is in.
What’s next? (pick one)
- Series B Financing. Further equity financing for growth. onward to becoming large anchor technology firm.
- Customer Acquisition Factoring. A hypothetical future financing model which I project will be available by the time any company starting today is ready for Series B. This concept deserves it’s own post, but essentially, in the same way banks factor receivables, they will begin to factor user acquisition channels negating the need for Series B VCs.
- Merger/Acquisition. There should NEVER be any strings or attempts made to keep the company in the local region. While the eco-system is ramping up, chances are a higher percentage of companies will sell to US companies, but not ALL of them. Over time, as the eco-system matures, more companies will stay.
- Organic Growth/Bootstrap/Lifestyle.
- IPO (an option, but only in very rare and specific situations)
- Fail - Entrepreneur gains valuable experience – goto Stage 2.
Net benefit to eco-system.
- Higher volume of startups started and a higher success rate.
- More high paying high tech jobs created
- Angels are created and reinvest.
- Increased foreign investment from VCs
- Investor confidence increases.
- Anchor technology companies.
- New entrepreneurs inspired, goto Stage 2.
My hope is that companies will start to feel comfortable regularly communicating which stage their in to each other and investors. Investors should also communicate which stage their interested in investing in. Aligning these two groups will help to eliminate a point of animosity between these two groups. Associations, Governments and Universities should communicate which stage their targeting with their programs. But an eco-system is only actually healthy and functional when all 4 of these stages are fully active, properly funded, and managed by passionate people who care.
One last thought before I anxiously await your comments. I’m sure you can cite specific examples of companies that “made it” by skipping one ore more of these Stages. Please keep in mind that I’m not saying that this is the ONLY way to build ALL companies. However, I am adamant that this is the only way to build a healthy, productive, Internet technology eco-system that produces a high quantity of world-class companies.
- Summify is hiring a web ui designer. Summify is building nothing less than the first usable personalization engine for your news links. I’ve been using it for over a month now and everytime I try something else, I have to go back. Summify is backed by Boris Wertz of W Media Ventures and Boootup Labs.
- If you have any affinity for food (who doesn’t) but also care where your food actually comes from, then check out FoodTree. FoodTree is hiring someone to head up all of web development. Very rare opportunity to join a funded startup at the highest technical position in the company, doing something so big as to map the world’s food sources.
- In fact, Strutta has had an opening for a PHP/Drupal dev for over two months and still hasen’t been able to fill it. (if you are one, please apply, it’s an awesome group of people to work with)
- You may remember that Layerboom was sold to Joyent. Howie is now tasked with hiring enough engineers to fill out their sweet offices overlooking the north shore mountains. If you think you know your way around the cloud then apply now
- Mozzilla Messaging has 3 positions open. Mozilla works with us on the 2nd floor here at 163 W. Hastings, and is headed up by former ActiveState CTO David Ascher. They are one group of crazy smart open source developers.
- I’ve also heard a rumor that NetApp has over opened 100 positions in Vancouver after their acquisition of ByCast. Obviously, I would hope that we can entice anyone intrested to join a startup instead, but if working for one of the worlds largest storage companies is your thing, check them out.
If you’re hiring, feel free to leave a link in the comments below. If you’re looking for a job make sure to review the comments. The perfect job just might be in there.
- Strutta Launches New Contest Builder Software, API (techvibes.com)
- Layerboom Acquired by Joyent (bootuplabs.com)
- Social News-Reader Summify Raises Funds to Solve Information Overload (nytimes.com)
- Open House at Bootup Labs (startupnorth.ca)