What It’s Like Being a COO at a Startup, with Jason Sew Hoy of 99designs


Engineers get a lot of coverage in the tech world (as they should) but I’ve been interested in other pieces of the startup puzzle. For example, I’ve always wondered what it’s like being a Chief Operating Office (COO) at a startup. Jason Sew Hoy was gracious enough to give me some of his time to share about his experience as COO of 99designs.com.

99designs.com is a marketplace for crowd-sourced graphic design. It connects designers from around the globe with customers seeking quality, affordable design services.

In this interview Jason walks us through his day to day life, what’s the biggest challenge he has to face, and the role creativity takes in a startup’s life. You don’t want to miss this.

What’s a typical day like for you?

My role at 99designs.com involves a lot of multi-tasking so what I do from one day to the next can be very different.

To give you a rough idea though, today my morning started off with our weekly marketing meeting, a 3-way conference call with staff from Melbourne, San Francisco and one of our founders in Vancouver. After this I made a coffee on our espresso machine and then spent the rest of the morning working through emails and yammer updates, as well as checking the performance of the business via our dashboard.

At midday I went down the road for pizza with managers from several other web startups in our building, including SitePoint.com, Flippa.com and Learnable.com. Given we’re all born out of SitePoint, we share the same culture and have a vested interest in seeing each other do well – it’s a very unique situation and awesome to be part of a group where knowledge sharing is an everyday occurrence.

After lunch, I attended an Agile sprint review with the development team. A core part of my role is overseeing product development in Melbourne, so I have several key meetings with the team during the week to ensure they have everything they need to keep moving with key projects. Today’s job was to review several demos from our engineers and approve features to be deployed to the live site.

Soon after this a customer called with questions about our design service, so I spoke to her briefly on the phone and answered her questions before getting back to prioritizing feature stories for our next sprint.

About mid-afternoon I then sat down with our Design team to review videos from the Guerrilla user-testing sessions conducted that morning to get feedback on a key part of the site. We then brainstormed ways to improve the design by making things simpler for customers to understand. Making notes, drawing on the whiteboard… it’s easy to get carried away with stuff like this and by the time we finished we were well into the evening.

What’s the difference between your role and the role of your CEO?


In general, my role as COO is to focus more on making sure our teams are executing our business priorities well and operating as smoothly as possible. Our CEO, Patrick Llewellyn is mainly focused on long-term strategy as well as pursuing sales & marketing opportunities. There’s some overlap of course but it’s no coincidence that our main points of focus also correlate with the location of our teams, with Pat leading the sales and support teams based in San Francisco while I head up our product development team based here in Melbourne.

What’s the most challenging part of your job?

One of the biggest challenges is building and maintaining a passionate, high-performing team, which isn’t easy in a fast-growing startup. Regardless of how badly we need a vacancy filled, we’re very fussy about who we hire. We look for individual brilliance and a passion for technology, as well as a strong cultural fit. Because we work with such new technologies, lack of direct experience isn’t always a deal breaker, but attitude and passion are extremely important to us. Sometimes it’s a hard call, but the principle we go by is that if it’s not a resounding yes, then it’s a no. It also helps when candidates are into coffee, foosball and Macbooks!

What’s the most exciting/enjoyable part of your job?

Without a doubt, the most enjoyable part of my job is hearing stories directly from customers and designers on how we’ve impacted their lives. From customers who’ve used 99designs to launch their business, to designers who now make a living off us after being laid off from their jobs, it’s the real people and the real stories behind our service that constantly inspire us to keep improving our service.

Imagine being a winning designer and being flown from Paris to the US by your customer, so that you can hand-paint your custom design on the wall of their office. Or being called by a high-profile design company and being offered an internship purely based on the strength of your 99designs portfolio. Or being able to maintain your livelihood as a talented designer recovering at home from a long-term illness.

Looking at the numbers, we’ve paid out over $20,000,000 in total to our designers and we’re currently awarding another $1,000,000 every month. It’s a huge amount of opportunity, but often it’s the individual stories that really capture the heart and give us that warm and fuzzy feeling inside.

How does one become a COO of a startup?

Good question. I think the thing about startups is that you have to be a jack of all trades, especially in non-technical positions. Drawing from my own background, I think the key skills that help me in my role are: high-level technical knowledge, an analytical metrics-driven approach to solving problems, ability to communicate well, a passion for business and a little sales experience. One other vital thing that a COO needs is a strong willingness to take ownership – in a lot of cases the buck stops with you!

How much involvement do you have with the other departments in your company — sales, customer service, engineering, marketing, etc.?

If I’m doing my job well, then I see myself being the glue that joins all the departments together. It’s crucial that we maintain a big picture view of what’s going on across the company so that we can provide the best possible experience to our customers and designers. It isn’t always easy with our staff being spread across different countries but frequent communication is the key!

How important do you think non-engineers are to technology startups? Do you find that there’s tension between engineers and non-engineers?

Engineers are great at building stuff, but they typically don’t like marketing and selling stuff or talking to our customers for hours on end – they usually just want to get on with it. That’s where the rest of our team comes in to back them up – everything from designers to marketing experts, to sales & support staff – and they’re a critical part of our ability to execute. Because we work so closely together, we don’t get any real buildup of tension – that all gets left on the foosball table!

What role does creativity play in your day-to-day job?

Creativity exhibits itself in many forms and it’s what our entire team strives for on an everyday basis. From product design, to thinking up new marketing angles, to planning our long-term roadmap, I find there’s always a creative way to approach every task. If it feels like an idea or a solution isn’t quite right then I push to come up with something better – in my mind that’s what being creative is all about.

For example, when we were nominated for a Webby Award in 2010 we had to think of a creative way to get our community to vote for us, so we promised them we’d make a video of us singing in the street if we won. Sure enough, our community loved the idea. They voted in spades and we ended up taking out the award despite some intense competition. I’ll always remember this as an example of how a little bit of extra creativity can go a long way… and what followed was one of the most entertaining days I’ve ever had at work. Check out our performance here!

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This is a guest post written by Steven. Steven is the creator of forlue.com – a community news website about business (aka Hacker News for Business News). Email: contact@forlue.com

 

For more startup news, follow us on Twitter @startupfoundry or on Facebook.

Pitching your startup: Learn how to use a “Hook” to get press.


News articles are all about stories. A great article creates a personification of raw data into digestible, story-sized bites. For example, a headline that read “Precipitation levels dropped 10%” wouldn’t be nearly as interesting as “Fearing drought, farmers resort to watering crops by hand”.

Data by itself isn’t interesting. It’s the story that the data tells that’s important.

These same principles apply when you’re pitching your startup for coverage. You should always have a “Hook” ready. Wikipedia defines a “Hook” as:

“a musical idea, often a short riff, passage, or phrase, that is used in popular music to make a song appealing and to ‘catch the ear of the listener’.”

When I’m trying to figure out what startups I want to write about on TSF, I look for a solid hook I can work from. For example, when I interviewed Tim O’Reilly, I knew that he had a fantastic story on bootstrapping his company. This gave me a specific angle to leverage and helped me to know what sort of questions I should ask.

One of the easiest ways you can get noticed by writers (via email) is to have your hook be in the subject line. Let’s say you’re startup works with financial management. Instead of having a nondescript subject line like: “New web app launching soon”, you should write “How my startup allowed 10 users to retire 2 years early”. The second subject line provides a fantastic hook, and helps the writer know what sort of questions to ask you. Having a solid hook is crucial in making your startup stand out.

Stories with a good hook are incredibly easy to write about, are entertaining, and memorable. If you have a great product, data, and a solid hook, writers will be salivating to write about you.

For more startup news, follow us on Twitter @startupfoundry or on Facebook.

How a band got into Y Combinator. The Earbits story (YC W11).


Earbits is a Y Combinator backed company that’s looking to replace Pandora for your music streaming needs. Unlike Pandora, users are completely free to skip songs, change channels, listen for hours on end, and even share tracks with their friends. Earbits has none of the same restrictions that Pandora has, and then on top of that there are no commercials. Earbits hasn’t signed the major labels yet, but they’re gaining traction. Earbits makes its money by letting labels, bands and concert promoter buy airtime, and display their own relevant ads during the broadcast.   If you’re listening to a band on Earbits, you’ll only be shown relevant ads by someone with a vested interest in that artist getting more exposure. For example, you might be shown an ad for an upcoming show that the band is playing. Essentially, Earbits is to music, as Google Adwords is to advertising.

I had the privilege of interviewing a co-founder of Earbits, Joey Flores. In this interview we talked about how Earbits identified a problem, their big turning point, and how his band made it into Y Combinator. You don’t want to miss their story.

Tell TSF how you got started.

My co-founder Yotam and I met in 2005 when he moved to L.A. from Boston and posted an ad for drum lessons.  At the time, I was Director of Marketing for Experian after they had acquired an affiliate network I worked at.  A few months after I started taking drum lessons from Yotam I told him that I had been performing slam poetry a lot and wanted to start a band where I would rap over jazz and funk.

We ended up putting a band together and deciding to record an album. Yotam said that he would produce the album, which he had done before, but that I had to market it. I was managing about $60M a year in performance marketing at Experian, so marketing an album sounded pretty easy.

When did you realize there was a problem?

Our album got great reviews and we could fill up smaller clubs here in L.A. We got invited to open for Grammy winners Arrested Development and it seemed like we had a product people liked. However, after about $20,000 in various marketing and touring expenses, we realized that for all the buzz about how easy it is to be a musician in the age of the internet, all of the services out there either help you sell products to fans you don’t really have, or claim to help you get fans but they really just rely on you to spam Twitter or otherwise try to achieve some viral effect.

Where did the idea come from?

One day, Yotam and I were in the car on the way to San Diego and I was complaining about how miserable I was marketing products I don’t care about – mortgage leads, etc. And Yotam says, “How do we do what you do, but for music?”

We kicked around some terrible ideas until finally he says, “The problem with marketing music online is that nobody can tell what you sound like from an ad. Give them 10 seconds of listening to you and they’ll know if they like you or not.”

Within about 10 minutes, we were rabid talking about turning radio into a performance “ad network”, with affiliate stations on hundreds of music sites, and good artists could just buy airtime like you would with Google Adwords.

It becomes painfully obvious that there is a problem when you explain to people that, in the age of the internet, bands still hand out fliers.  Fliers cost about $0.15 a piece.  Meanwhile, all you’re hoping for as a band is that someone actually takes that flier home and goes online to listen to you.

What was the big turning point for Earbits?

If you consider that Pandora tries to make $0.05 per hour in ads and commercials, and there are 15 songs played every hour, then we can introduce a band to a new listener for $0.01 and make 3 times what Pandora does, while providing massive value to artists.

Once we started telling that story, we got advisors on board from Google, EMI Music, and Yahoo! Music. We raised a bit of money from friends and family, started getting traction with bands and labels, and closed a partnership to power a country music channel for Nashville.com.

What was the Y Combinator interview like?

With these partnerships under our belt, I talked to a lot of the Y Combinator alumni to see whether YC was a good fit for us. They all assured us it was. I believe the quote was, “If you think you might need Y Combinator, you need it. If you’re not sure, you need it. If you’re positive you don’t need it, you probably still need it, but maybe not.”

We decided to apply and we got an interview. We walked in to the interview room, and I think it was Jessica immediately asked how long I had been growing my hair.  There were 7 of them on the other side of the table, and Ben, Yotam and myself on the other.  We all shook hands and started the interview.

A good YC interview is just a brainstorming session with about 6 questions thrown at you every minute in an excited flurry, where you’re trying really hard to answer them well but being cut off about 5 words into every sentence. If that’s happening and the tone is friendly, it means everyone is excited to be talking about your idea.

That being said, you have to wrangle in the conversation, especially if you want to demo your product. So someone would ask me a question and I would say, “Let me show you.” and they would keep going, and finally I just turned the computer toward them and said, “Let me show you.”

When we showed them Nashville.com’s country station, that pretty much sealed the deal.  They understood how we would solve the marketplace problem, and it made the whole thing very clear to anyone how excited country musicians would be to have their music on something like that.

We left and went to hang out at Yotam’s brother’s place in Redwood City. Ironically, I wasn’t at all nervous headed into the interview, but the next few hours were unnerving. Finally, Harj called us, said they wanted to fund us, we feebly tried to negotiate with them, and then took the deal.

What’s the biggest challenge you have going forward?

We’re solving a marketplace problem. We need content so that we can get listeners, and listeners so that artists want to work with us. I’m very happy with our progress in that regard. We have some big distribution deals coming up, and more and more labels are actually reaching out to us. So, I think we have plenty of struggles looking forward. Acquiring more mainstream music is just one of them.

For more startup news, follow us on Twitter @startupfoundry or on Facebook.

Hacker News and drive by traffic: How to make the most of your startups launch


“How are you going to market this?” I asked Entrepreneur X after being being thoroughly impressed by a demo of his startup. “I’m going to hit the front page of Hacker News.” he eagerly replied.

It was an unusually cold April day, and I slowly sipped my coffee while waiting for him to finish explaining his marketing plan.

A curious silence fell over our conversation so I gently prodded “And then what are you going to do?”

More silence.

At that moment it occurred to me that some entrepreneurs believe you only have one big day of traffic to make it big. Here’s the ugly truth:

Hacker News doesn’t create sustained traffic.

Look at the graph to the left. This is what a typical Hacker News traffic spike looks like. Notice how quickly the traffic drops off after a day or two.

Hacker News is fantastic for gaining general exposure quickly, but because it isn’t specifically focused on your niche, most of your traffic will be “drive by traffic”. It’s a nice, temporary traffic bump but it should just be the beginning of your marketing efforts. Find where your (specific) customers are and focus your time there. Traffic won’t be nearly as high, but your conversion rates will be astronomically higher.

This doesn’t mean you should completely ignore Hacker News, it’s just important that you understand it’s place.

The dates have been changed by my source’s request.

Capitalize on hitting the front page.

Ask yourself this question. “If I were a first time visitor, would I have any reason to tell my friends about this site?”

Since most visitors coming from Hacker News won’t be in your target market, you need to develop a “stadium pitch”. Chet Holmes describes a stadium pitch as a way to “Offer prospects something of value outside your product or service . Something important to THEM.”

By doing this you are getting your claws in visitors that might not initially be interested in your product and you’re giving them something interesting to share. A great example of this is Mint. Mint did a fantastic job of providing value to potential customers even if they weren’t interested in signing up yet. They had a fantastic blog that was pumping out interesting financial information consistently. If you cared about money at all, you wanted to read their blog (even if you didn’t use Mint yet). You can read more about this in Mint’s Marketing Plan.

I’m a big fan of Hacker News, it’s just not the end all for marketing your startup.

For more startup news, follow us on Twitter @startupfoundry or on Facebook.

Why Carbonmade decided to bootstrap and go freemium

When I was studying design a few years ago, I discovered many of my peers were struggling to get a portfolio online. Many of them didn’t have the required technical knowledge to properly showcase their work. Some of them hired friends in the Computer Science division but their portfolios would grow stale because they didn’t know how to update them.

Carbonmade is attempting to solve that problem by taking care of the technical details while letting artists focus on their work. I had the chance to catch up with a co-founder of Carbonmade, Spencer Fry, to talk about the early days. In this interview we cover how Carbonmade identified a problem, how they determined pricing, and why the “freemium” model is working for them.

Were you bootstrapped or funded?

We bootstrapped Carbonmade because it’s all we know. I’d started a company previously called TypeFrag. Bootstrapped that as well. For me, it just makes sense to collect revenue from the start of your business and if you can’t collect enough of it then you shouldn’t be in business. It’s just a natural progression. Can’t sell enough of what you’re trying to sell? Then you’ve got to shutdown and try something else.

There are companies that can’t be built this way such as Facebook, Tumblr or Twitter where you need a large engaged group of users before you can make any money. To bootstrap you typically need a single user to be able to benefit from the service without having to connect with anyone else. That’s Carbonmade. A user can sign up and create their own online portfolio without needing other people in the system to benefit from it.

We get plenty of offers from investors to talk, but we’re doing well and not having a $5 million check has never held us back from doing what we want. If money is ever the thing holding us back then we might re-consider taking outside investment.

What problem are you solving?

Carbonmade solves a really basic problem. There are millions of creative people in the world, but many of them either don’t have the skills required to design their own online portfolio or the time. Using Carbonmade means they spend less time fussing around with their portfolio and more time focused on developing their artwork.

What’s the biggest challenge you’ve overcome while building Carbonmade?

The biggest challenge for us and for all companies for the most part is hiring. We’re very selective in who we hire. We’re looking for specific individuals that are self-starters, independent workers that don’t need constant handholding, and have built or designed web applications before.

We hired our first people in August 2010. Up until then the three of us worked on Carbonmade for nearly four years. We’re now eight and excited to continue to build out the nucleus of our team.

How did you identify that there was a market for an online portfolio?

We stumbled upon the online portfolio market. Dave and Jason created the first version of Carbonmade back in December 2005 as a tool for Dave to update his own portfolio. He was tired of having to manually update his portfolio every time he created something new. Together they built it ‒ without a sign up page at first ‒ and Dave’s friends bugged him to open it up for them.

I came on about a year later, but we still weren’t working on it full-time. We were consulting and working on other apps, but Carbonmade kept slowly gaining traction. Starting around early 2010 we were able to stop taking on new client jobs and focus our time and energy on developing and supporting Carbonmade. That’s when Carbonmade really started to blow up.

How did you determine pricing?

We experimented with having two pricing points early on: $9 and $15. We found that nearly everyone was choosing the $9 plan and the $15 plan was being neglected. There weren’t enough features to warrant having two paid plans, so we settled on $12, because we thought that $9 was too low.

The question you want to ask yourself is: “What would I pay for this?” $12 felt right to us at the time. The product has improved significantly since then, which makes us happy that the value of our product has risen, but the price has remained the same.

Have you had success with your freemium model?

People generally ask me about our freemium business model. I believe that giving away a taste for free is a great marketing strategy. With Carbonmade, the free model works for many users in the beginning but as their career develops and they start getting more work, they need to upgrade to take advantage of our paid plan features. We’ve had dozens of people upgrade after 1,000 days which is a significant figure. Forcing them to pay on day one may have kept them from signing up in the first place.

What’s difficult about having a freemium business model is determining where to set the restrictions. The free plan needs to be good enough that it doesn’t feel crippled, but not so good they see no reason to upgrade to the paid plan.

If you need to showcase your work, be sure to checkout Carbonmade.

For more startup news, follow us on Twitter @startupfoundry or on Facebook.

Why two engineers left Apple to build a Flash alternative: The Hype (YC W11) story


Hype is an HTML5 Animation Builder for Mac OS X. It allows you to build interactive sites in HTML5 that rivals Flash. Hype launched last Friday and they are already the top grossing app on the mac app store.

Earlier today I had a chance to catchup with one of the cofounders, Jonathan Deutsch, to talk about his experience leaving a safe job at Apple to launch a startup, where his inspiration came from for Hype, and his experience with Y Combinator.

Where did the idea for Hype come from?

At one point after a trip to Europe, I wanted to make a photo website that would be as nice as a beautifully bound photo album, and use lots of effects.  Coding this with HTML5 would have been a nightmare.  There had to be a better way, and that’s how the idea for Hype was born.  It stuck with me, and eventually I realized this was going to be a great opportunity for a business.

Where did you work prior to launching your own startup?

I worked at Apple. I was the engineering manager for the Mail.app back end (Mac OS X), but also worked on software updates, automation technology, SJ keynote demos, and other engineering projects.

I met Ryan at Apple as well, celebrating after a successful WWDC kickoff. He was working as an engineering project manager for Mac OS X. It was a really central role; he (and the team he was on) were responsible for coordinating the entire release of Mac OS X. Sometimes at bars we’d run into people who were Apple or ex-Apple, and Ryan would introduce himself, and they’d reply, “Oh, I’ve gotten emails from you!”

What made you decide to leave a “safe job” at Apple and build a risky startup?

I had always wanted to have my own company; I suppose its “in the blood.”  It was getting to be pretty clear that there was a new wave coming to the web, much like “Web 2.0” but instead of it being called “Web 3.0” it was called HTML5.  It’s a marketing term really, generally referring to new HTML5 tags, CSS3 styles/animations, and better JavaScript performance.  It also refers to being able to have the full web on your phone.  It was always in the back of my mind that for any technology shift you’d need tools to help out.  I’m really a tools guy, though we tend to call them “apps” nowadays.

I was faced with the decision of continuing to work with the great people on my team on a clearly high impact project, living with the “what if” syndrome, or trying to forge my own path.  “Regret Minimization” is what should win out in life, so it did.  I had done a lot of different projects at Apple, and felt I made my mark both internally on the company and externally on Mac OS X.

I had established a fair number of relationships at Apple, and felt if my startup failed I could always go back.  At Apple the question is often “how many times have you worked here?”  When you’re hired, you get new hardware… so I like to joke that the worst case is I’d end up with a new Mac Pro out of the deal.

Walking away is bittersweet, and there’s definitely a social and professional net that you leave behind.  That’s one of the main reasons we decided to pursue Y Combinator.  We didn’t want to be on an island by ourselves.

Apple is publicly against Flash. Did this have any influence on your decision to build Hype?

Not specifically.  While Flash enables some really great content on the web, there’s lots of people who aren’t favorable on it due to its lack of accessibility, CPU usage, or crashes.  It isn’t appropriate for mobile.  To Adobe’s credit, they’ve been more active lately in trying to address these issues.

What perhaps had more of an influence is Apple’s driving the web forward.  WebKit is really a great project.  I think a lot of people forget that innovation in the browser was basically dead until Safari.  The canvas tag, while controversial at first,  showed that new standards could be made and adopted by other browsers.  The JavaScript performance wars have moved the world forward.  Now WebKit is on almost every smartphone.  It’s great to see HTML5 as a new platform, and Apple deserves a lot of credit.

How did you get into to Y Combinator?

We got in through Y Combinator through the normal interview process. Ryan and I both found the questions from the initial application were great for helping to clarify our business plan, realizing our target markets, and helped ensure the two of us were on the same page. I’ve recommended to everyone I know that even if you’re not going to apply to YC, fill out the application.

What has been your experience with Y Combinator?

YC is definitely worthwhile. The network effects are staggering… it gives any YC company an advantage in making the right contacts, finding investment, and being in a support net with others in the same boat. And if you’re starting a company, why wouldn’t you want every advantage available to you? Paul Graham, Paul Buchheit, and Harj Taggar all give great advice with brilliant ideas sprinkled in. The dinners are fun, and there’s a lot that we learned from the speakers. Most founders would come early before each dinner just to hang out and discuss their startups or demo their products. The atmosphere is electric and contagious.

Y Combinator is also heavily focused around finding additional investment. Startups always need more cash! Finding funding was not a major concern to our us, as our “old school” business plan was to sell Hype from the get-go, and we had confidence it would be able to generate revenue. In that regard, we didn’t take as much advantage of YC as other companies are able to. We did make several strategic connections through investors to other companies and individuals in our space that have already been of benefit.

As an aside, during the YC timeframe we were so focused on developing our product that Paul Graham actually emailed us and was concerned that we hadn’t gone to enough office hours!

Don’t forget to checkout Hype!

For more startup news, follow us on Twitter @startupfoundry or on Facebook.

Weekly reader question: How has your startup “failed faster”?


Yesterday I spent the day in Grand Rapids, Michigan, checking out The Michigan Lean Startup Conference. Eric Ries gave a fantastic talk about building lean startups and how to discover if people actually want what you’re building.

The key principel behind building a lean startup is “failing faster”. Before you spend months building a “perfect system” you should spend a few days on crappy code to prove your concept. The goal is to to learn fast and iterate quickly.

My question for TSF readers, is “How have you applied these principles to “fail faster”? I’d love to hear your stories in the comments or via email (tipbox@thestartupfoundry.com).

Angel Investors Need to Get Their Hands Dirty


This is a guest post by Jason Lorimer. Jason is an entrepreneur @CulturaHQ, advocating on behalf of those with the ambition to do more than just entertain ideas.

“Whenever you find yourself on the side of the majority, it is time to pause and reflect.”
— Mark Twain

The Low Hanging Fruit is Picked Clean

In the post-internet age — out of all the ambitious would-be entrepreneurs in the world, only a small percentage of them are being well served by the early stage venture capital system.
Serving that select few – say 5% (some say less than 1%) of entrepreneurs who have some technical savvy and can clearly communicate their idea — these funding-seekers kept the early stage capital engine running without anyone having to get their hands too dirty. Now, with a number of different early stage investment and incubation vehicles to serve that same small percentage of entrepreneurs, there are simply not enough early stage companies that fit into that mold and too many entities vying for the attention of the relatively few that do. These capital providers are now finding themselves, instead, in the humbling position of having to compete and eventually market themselves to those best packaged investment opportunities.

Instead of competing with each other and with the highly desirable incubators, they should change the hunting game.

Those Damn Incubators

Good for that small, elite percentage of entrepreneurs — and bad for Angels – incubators are cropping up everywhere – becoming the go-to for the savviest of entrepreneurs with refined concepts.

At first, Angels’ knee-jerk reaction to this change inferred that they believed they either were left to watch incubators feed on their game – or compete.

And competing is likely the path of most resistance.

It is difficult for Angels to compete on deal terms with an incubator because they typically are founded by proven entrepreneurs, have large panels of mentors and provide an environment that promotes collaboration.

Incubators are very seductive, if an entrepreneur gets accepted into one of these programs, especially the likes of Y Combinator and Tech Stars, they are going to go regardless of what an Angel is offering. They see their chances for success as greater with an incubator. Whether that is true remains to be seen.

And here Angels made another play.

When it became clear that competing with incubators was futile, Angels moved to position themselves as advocates for these programs. Solid logic here: Let the incubators work with the start up — get a viable product in market and you will be there on graduation day ready to cut a check. This strategy has two flaws, one more significant than the other.

First, not all incubators are created equal. The proliferation of the incubator or accelerator as they are now more fashionably referred to is upon us. There are now hundreds of programs out there. When the smoke clears, all the early stage capital sources are going to be competing to get access to deals from the same handful of these programs.

Second, instead of working together to hedge your risk and share deals, Angels are forced into competing with one another because of a shortage of what have to date been considered viable deals to invest in. While this may bode well for the entrepreneur in the short term, over time, what will essentially become a price war is bad for the entire system of early stage capital.

One need only look at the announcement that Yuri Milner, Managing Partner of Digital Sky Technologies, investors in the likes of Facebook, Groupon and Zynga, to find a case and point
for both of these issues. Mr. Milner, using a separate entity, aptly named the Start Fund with partner Ron Conway, decided to make a blind, blanket investment of $150K into each and every single accepted applicant in this years Y Combinator class. They removed the possibility of having to compete with other funds for the attention and deal flow of the most well-known accelerator in the US.

A lot of people, both within the investment community and outside of it, balked at this idea – seen as a reckless and ultimately unnecessary way to invest. Those people are likely short-sighted and are missing two key points that it would seem the Start Fund fully understands:

1. He who invests first controls the deal going forward.

2. See point #1

Remember, one win pays for all the losses. That is the fundamental model at play in early stage investments and subsequently the logic behind the incubator. One Facebook pays for 9, or in their case, 900 companies that fell flat. The people that invested in the seed round for Facebook are sitting pretty right about now as they were first in line to invest in each subsequent round of capital infusion.

Investor and all around smart guy Chris Yeh has a great guest post on Tech Crunch about how the Yuri Milner/Y Combinator deal affects the ecosystem as a whole. He talks at length about the idea of investing first. I highly recommend giving it a read.

Enter the Big Boys

Adding insult to injury for the average Angel investor is the emergence of the biggest of players like Google and Microsoft into the early stage equation. Without knowing Mr. Milner personally I would also have to guess that the catalyst, at least in part, for making what has been considered such a bold move is the Googles and Microsofts getting aggressive in this space.

These large companies, with the resources to catapult about any entrepreneur into the life they are after, have started to position themselves along side Angels in the deal-flow and they’re offering the accelerator programs perks like exclusive access to certain technologies and customers. These programs in turn using the same to help better position themselves to get applicants from the best of the best start-ups.

For these big organizations, positioning themselves in this fashion is also a way to identify and get their hands on great developers through early acquisition. Development talent being something there is a great shortage of right now.

If You Can’t Join Them — Beat Em’

In the end, there are simply too many of these programs and not enough entrepreneurs that fit the mold investors have come to rely on: technical founders who can not only clearly communicate their idea, but also build the minimum viable product and prove it in market prior to taking on a seed round.

It is likely that we will now begin to see a series of unsustainable strategic partnerships between investors and the accelerator programs. Don’t be surprised if it starts to get gimmicky or, for better or worse, you start to see government subsidies playing a major role.

All of this is a temporary band-aid on what is fundamentally a market problem that only a new model can fix.

A new way of doing things that takes into account the other 95%.

That group is made up of entrepreneurs who may not be able to code and often times are not able to quickly and concisely convey their idea at first. These ambitious, intelligent people make up the largest opportunity for early stage investors to ever come down the pipe. The only catch is that Angels are going to have to get their hands a little dirty. Angel investors who still insist on playing a primarily passive role must evolve or face the fact that like many of the industries they invest in, a fundamental shift is forcing formerly sustainable parties out of the ecosystem in which they are a part.

Don’t Overshoot the Mark

Some individuals are already partnering up with fellow investors and entrepreneurs to form their own accelerator programs. There are seed funds with an advisory board of some kind and space from which entrepreneurs can work. While you will likely see some successful ventures born this way, I would argue this is too short-sighted thinking — skating to where the puck used to be if you will.

These programs still serve the same small percentage of entrepreneurs and leave the largest market untapped. All at a time where cost of entry is nominal and problems to solve using inexpensive technologies are abundant. In terms of opportunities to build products and platforms people can find utility in — to participate in and add value to their own experiences — we are just getting started.

I don’t expect every investor to roll up their sleeves and partner with entrepreneurs to build and run companies in the earliest and most important phases of a start up. It is my position that the next evolution of this industry is in strategic relationships with hybrid development teams. Teams with the ability to cost effectively and efficiently build, incubate and iterate new ventures to a pre-scale position. One where the investors capital is most useful and for that matter — measurable.

Vested Deployment Teams

To be clear, the answer is not in going out and finding a design/development team. Hiring them to work with your entrepreneur(s) will often be throwing money down the drain. A lot of money.

In the end it is not a question of quality, but of motivation. A typical developer or digital agency as the larger ones are being called is in the business of building solutions for their clients and charging more per hour than it costs them — simple math. Some of these companies take on certain side projects on an equity basis but without focus, any start up, no matter how good the idea or the team is doomed. Ideally, the deployment team you work with would, like us, work exclusively in vested relationships.

Create a vested deployment team of your own, employ an incubation staff or call us.
Just make sure you are doing something to get out ahead of the shift in this industry and soon.

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What startups can learn from a LivingSocial marketing misstep.


This is a guest post by Jason Lorimer. Jason is an entrepreneur @CulturaHQ, advocating on behalf of those with the ambition to do more than just entertain ideas.

Recently I was working out of one of my favorite Philadelphia coffee shops and I had the pleasure of meeting a young woman who works for the Adventures vertical of Living Social.
This venture, formerly Urban Escapes out of NYC was acquired by Living Social late last year.

This person who I very much enjoyed meeting and whose anonymity I will preserve herein, overheard me on the phone talking about an upcoming trip up to NYC to visit a client in the “Daily Deal” space. Naturally in working for Living Social, my chatter perked her ears. The conversation began with her asking me if I was running a deal with Groupon and having me explain that I work with early stage companies, some in the social commerce space. The discussion continued focused mainly on the shift towards experiences over discount vouchers and how that is being driven by two main factors:

  • Business owners are being inundated with pitches to host deals from dozens of daily deal companies each month. All of them with virtually identical offerings.
  • The widely held perception of business owners is that those who opt-in for a daily deal are simply discount hounds, never to return. I disagree but this is the perception.

I talked a bit about how I felt the industry was moving towards discount as a secondary motivator with experience as the thing that drives the opt-in. I also spoke of WAAG, a recently launched venture out of NYC that leverages this premise to connect those who wish to network themselves offline with small businesses and brands who want to host events at their locations.

My new friend was very enthused about the adventures Living Social was promoting. She made them sound like good fun. As we were talking, I ran a Google search to find the home page for Living Social Adventures. Clicking around a bit on my laptop, I could not for the life of me find a place to enter my email to be notified. Perplexed, I asked:

Me:
Where do I opt-in to get invited to the adventures?

Anonymous:
You don’t.

Hmmm….It turns out that you have to go to the main site and opt-in to receive the daily deals in order to get the adventures invites.

I have no way of knowing what was on the minds of the executives at Living Social when they acquired Urban Escapes and re-branded it as Adventures but it would seem to me they are missing a huge opportunity to bring new people into the fold. The much larger marketplace of people open to the idea of passively participating by opting-in to receive invites to cool new social experiences but are not so keen on the idea of using a discount voucher at their local pizza shop. Now, certainly the master list of email addresses should be leveraged for Adventures but why not market it separately? Send a few timely emails to all existing users asking them if they wish to receive adventures in their area but focus on driving new membership to adventures specifically and then cross market those people into the more profitable daily deal list.

Living Social trails Groupon, their biggest competitor at almost every turn. The Adventures play  is an opportunity to stand out to the larger portion of the public and businesses, both sick of the daily deal speak. Use some of that advertising budget to really push this new, experience based vertical and take a chunk of new market share in the process.

 

There isn’t a speed limit: Line up customers before you ship


After seeing a fantastic pitch from a startup I asked a simple question. “How many users do you have”? They replied with “We haven’t launched yet”. I reworded my question slightly and asked “How many customers have you talked to?” and they replied with the same line: “We haven’t launched yet.”

This startup was following a broken formula. It’s horribly inefficient and causes companies to fight a needless uphill battle building relationships with customers. The formula is done sequentially and it looks something like this:

1. Build a product.
2. Ship.
3. First contact with customers.
4. Convince customers to sign up.

Why the model is broken

The broken model I just described takes you a step away from your customer. By building your company in this way you’re essentially saying that you know the customer better than they know themself. If you’re not talking with your customers, how are you going to know the best way to position your product?

This is a better model

1. Build relationships with customers.
2. Build a product and convince customers to sign up
3. Ship.

Before you write a line of code, you should have a clear understanding of who your client is. It’s much better to build relationships asynchronously as you’re building your product. These early relationships are instrumental to your success. By talking to your customers early in development, you’re creating a fantastic feedback loop that you can easily leverage and bounce ideas off of.

There isn’t a speed limit, you can (and should) work asynchronously.

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