Last fall, I was recovering from a startup that almost touched the sun, but like Icarus, took a nasty fall. I still had a burning desire to create a great company, but I  knew that it was time that *I* chose what was right and wrong, rather than work for someone else.  If I was going to chart my own path again, I needed to find a better way to do entrepreneurship.

It might sound hokey, but the last 9 months have been empowering. I have taken my startup scars and successes, mapped them against the ideas of people like Steve Blank, Eric Ries, and Sean Ellis, and become a significantly better entrepreneur for it.

Next Friday, I will give a talk on Aprizi’s approach to customer development.  In thinking through that talk, I could not help but think through how I got here. Below are peeks – my personal interpretations — into 4 startups I worked for.

Trilogy: Sell, Build, Design
Trilogy was an enterprise software company run by a smart, aggressive guy named Joe Liemandt. I joined straight out of college back in 1994 around the 75th employee mark.  My colleagues and I used to joke that the company ethos at that point was “sell, build, design”.  In some ways, the approach had commonalities to today’s lean startup advice, where you prove market demand first, get something crude out, and then improve it over time.

The big downside to the “sell, build, design” approach is the painful period during which you have unhappy customers who bought into a big vision, but are stuck using an immature product.  At the time, Trilogy liked the “big sale” with a large ticket price, and that meant making a lot of promises. Unfortunately, overselling caused customer support headaches and brand reputation problems.

There was a lot Trilogy did right, but I was left with the opinion that a little more balance would drive better customer satisfaction and one would come out ahead.

Epilogue: I left the company at the end of 1995 to learn finance at an M&A boutique, and did not get to observe how Trilogy fixed these issues. The company ended up having some high-flying days, growing to one of the biggest privately-held software companies in the world, but I don’t have a good sense of how it is doing today.

Envive: Fake It Till You Make It
I joined Envive in 1997, which made systems management software for SAP installations, around the 20 employee mark.  Envive was a classic VC fumble.  It checked off some VC favorites: the founding team had consulted for SAP (credibility and domain knowledge), had special access to SAP source code (unique technical edge), and a high-vision, reality-distortion-field founder (who unfortunately was not the best operator). It raised a bundle of money from two top-notch Valley VCs with big promises, and started expanding the team to build and launch the product. When the VCs realized they had backed a little too much promise and not enough reality, they retaliated by pulling the founder from the CEO slot.

I joined (originally to lead product marketing) just after this happened, foolishly discovering all this too late. Information flow was less efficient back then, but the real problem was my youthful naivete assuming that I could bank on the due diligence of first class VCs.

Envive talked to lots of prospects and had a good set of beta customers, so they didn’t entirely fail on the customer development side. However, it was  a pretty classic “4 Steps to the Epiphany” example of scaling too early. There were too many employees for its stage, and it wasted a lot of money on expensive direct sales guys who could not translate their success at “big software co” to an early-stage product. I was one of the few people who could close business because I came from the product side, was close to the developers, and showed the depth and flexibility needed to build trust with early customers.

Epilogue: Envive ended up creating some innovations that led to the assets of the business being acquired, although not for a fortune. The company faced serious platform risk from SAP itself, who had their own lightweight product and caused a lot of customers to sit on the fence, but I believe that with a more controlled burn rate, it might have been able to forge a path to better markets. That would have depended on the board’s support for risky pivots and putting product-market fit ahead of growth.

Ithority: Design, Build, Launch
Ithority was the first business I co-founded and ran; Aprizi today being the second. We started it on the side in 1998, with the mission of creating an online marketplace for freelancers and services, and then pivoted downstream to focus on information. Our mistake was swinging *too far* from the Trilogy approach.

We were frustrated with the half-baked products of previous companies and wanted to make something really good. While we “got out of the building” talking to customers, it took us far too long to get a working product in the hands of customers.  We failed to produce what people now call an MVP (minimum viable product) and that was a mistake — it could have made a big difference for us.  Then again, it was a strange, irrational time.

Startup quality in 1999 was largely determined by how much money you could raise and how quickly you could spend it.  I don’t miss those times at all, and I don’t think the bubble makes for very interesting case studies because it was so warped.  My co-founder and I both got our starts at Trilogy, where the CEO respected operational cash flow, and we didn’t want to play that raise-and-spend game.  We bootstrapped the business with a little friends-and-family money until being acquired by a company called Opus360. Opus360 was one of the last companies to go public before the crash, and we watched, not terribly surprised, as much of our stock evaporated (thankfully, we had negotiated some price protection and didn’t walk away completely empty handed).

Epilogue: I worked at Opus for a while to try to right the ship after the bubble burst, which meant firing a lot of people and trying to restructure inherited, badly structured bizdev deals. Opus eventually sold to a larger company, but in a highly dilutive deal. I still wish they had voluntarily de-listed, hunkered down with the not-insignificant cash they had remaining, and fought on with a small but hard core team.

The Electric Sheep Company: Tripling Down on the Wrong Vision
I joined ESC in early 2006 as employee 5 or 6. ESC created virtual worlds and VW marketing experiences, and my job was to build the Second Life practice. 2006 and 2007 were busy years — SL was growing like gangbusters and we built an incredible brand, working with many of the top media, CPG, advertising and technology companies. ESC’s founder/CEO then raised $7M, built around a vision and strategy that Second Life could become a “metaverse” — a 3D layer on top of the Web.

The problem quickly became one of focus. We still had the consulting arm (which had ballooned in size). I was leading a team creating applications on top of Second Life (ecommerce, search and a new client UI). We had another team creating a virtual world ad network, and yet another team investing in AI technology to drive a new form of game play.  That is 4 divisions for a young company in a high-growth but still-unproven space.  Hiring quality slipped. Management was spread too thin. And of course, the underlying platform bet on Second Life turned out to be wrong.

We got caught up in the hectic task of keeping up with our own success, which turned out to be a sleight of hand. We also allowed ourselves to be pulled off of good business fundamentals by the reality-distortion field of a great vision.

This all sounds terrible, but the truth is only about 9 months passed between raising money, pushing into all these areas, and deciding that we needed to fundamentally change course (around November 2007).  That should have been completely recoverable.  If the company had stayed focused, small, and restrained, we would have been left with lots more of two critical assets: money in the bank, and credibility with the investors. However, the vision had been built up too big, the bets too bold, the platform risk too extreme, and so the fall was correspondingly painful.

We sold a lot of customers, but I only wish I had “lean startup” top of mind during those days.

Epilogue: After the early-2008 restructuring, the company focused on the services arm, nurturing a hope of giving another go at a product. Today, the remaining team is working on a new product in the music space, and I hope they can create something amazing.

My lessons from this one are many, but here are a few: choose and validate *one* critical business; tread carefully where platform risk is high; work with early stage investors who understand “pivot” (even if they hate the over-used word); don’t take strategic money early; don’t try to do products and services under the same roof.

Which Brings Us to Today
It can be a little painful to look back on these years, but I am stronger for it. I can take theory from folks like Eric Ries and Sean Ellis, ground it in reality and fit it to my current context. We still have a lot of work to do at Aprizi, but it feels great to approach business with more deliberation and a sounder process than ever before.

I should note that these are my own personal impressions, and my intention is not to point fingers but rather to focus on learning. If it has been useful in helping you think through your own startup, then the post has been worth it to share.

(Awesome photo at top by Romeo66, Creative Commons on Flickr)

This post is about dancing with the devil (i.e. consulting) as you pursue your dreams and try to pay the bills.  I believe that it is near impossible to build a successful software product while maintaining a services business. (UPDATE: I should clarify that I am talking about the period *before* you have a successful product on your hands)

Keep it separate
First, what does this mean for a young, bootstrapping startup with visions of an exciting product?  Consulting work can be enticing.  While it is an unfortunate distraction from your startup, I completely understand needing to pay the bills.  My advice is to keep your consulting work completely separate from your startup. Freelance or incorporate a new S corp or LLC. It will be much more complicated to separate your product and services businesses later.

Focus
I’ll get this one out of the way although it’s a recurring theme. The basics: building a great product startup is incredibly hard and takes enormous dedication and focus.  Any distractions away from your mission slow you down and hurt your prospects.  If you can avoid doing consulting work, you will be better off. If you can’t, hopefully this post will be helpful in avoiding problems.

It is hard to turn down money
Business success can take on a life of its own, and not everyone agrees with me that there is such a thing as destructive revenue. If you are successful selling consulting projects, well you’re earning money, and as a business you’re supposed to make money right?  So let’s talk about making that money.  You need staff to both sell, execute and interface with the client on those projects.  Use contractors? Your profitability will be squeezed and quality will be spotty, leading to upset clients. Outsourcing works better in theory than reality.

Instead, resources are either going to come from your product efforts or new hires.  Actually, you need some additional skills like direct sales and project managers, neither of which can be effectively contracted out, which points towards hiring.  You also realize you need to implement new work processes to do the consulting effectively.  All this is steering you away from your core, and turning you into a different kind of business.

Conflicting Team Goals
You didn’t turn down that work because you wanted the cash, so now you’ve hired some new people.  However these new employees were hired to help with consulting work, and that’s where their skill set lies.  When you start talking about the glorious future of the business (i.e. the product), these hires start to question, “wait a minute, am I irrelevant to this future?”  That doesn’t help morale. Unfortunately, the math is simple — you’ve bloated the business with too many bodies for a lean, mean product startup machine.  Now you have extra pressure to feed the beast — a self-perpetuating problem.

Further, you have a problem in your incentive structure.  Your business is structured like a product company, with a focus on equity, but you now have a business unit which should be structured like a services company, i.e. focused on cash flow.

You also have a morale problem.  You’ve recruited people with glorious product visions, but now some of them are working for clients. Guess what, they hate working for clients.  The client staff is jealous of the product team, further worsening morale.

Skewed Priorities
Some folks think: “maybe we can build our product by doing consulting work and keep the IP?”  First, you have to negotiate keeping that IP, which probably means terrible economics.  But it doesn’t matter — you are still building a product for *a client*.  That client (the big brand you are so proud you sold) has special needs. That client wants *their* product. They are paying you; they want what they want, not what the general market needs.  If they are letting you keep the IP, they expect *even more* from you.  There is no product-market fit, only product-client fit. A glorious market of one.

(Note: one circumstance where you might be able to get away with this is when your “client” is a government organization which only cares about seeing the tech built not bossing you around on the details.)

Distraction to Death
You’ve sold these projects, so you need to make the clients happy.  However, there will inevitably be change orders, custom requests, changing client priorities, fad-of-the-day, and all sorts of little complications.  Your people end up working later and longer.

A fire drill hits and you need to complete a milestone.  With your own product, you just swallow hard and either cut features or add time. Well, you can’t do that with a client.  You promised to ship version X in three weeks and are way behind.  If you slip, at best you have an upset client and at worst you won’t get paid.  What do you do? You pull the engineers and designers working on your product onto the client gig and try to save the day.  Product? What product?  Morale? What morale?

Client services work is difficult.  If you’ve ever outsourced a software project, you know how hard it is to be happy with the results.  Do you really want to put yourself and your business on the other side of that deal? With clients demanding fixed priced work?  But again, if you have to do it, I recommend consulting as an individual or under a separate corporate entity.

The wrong investors
Sophisticated early-stage tech investors are usually turned off by services revenue.  They want a scalable business, not one that requires an hour of work to get an hour of pay.  So you end up with a different kind of investor. These new folks probably do fewer deals in tech, but they are excited about your space, the blue chip brands you are working for, and they appreciate the fact that you have revenue coming in the door (not the right revenue, but they don’t necessarily know that).

In this situation, you’ve just pulled in an investor with a very different risk profile to your dreams. You can’t do a bait and switch. When the time comes and you want to focus the business entirely on your product, you might find them to be a serious roadblock: “Wait, you want to just drop our lower-risk revenue, bet it all on an unproven product, and risk complete failure?” (of course the irony is that consulting revenue is not always that much lower risk!)

God forbid you might, like most startups, need to pivot.  These aren’t investors who understand “pivot”. You’re already in the doghouse because you want to turn down money, slim down and focus all resources on a product, but now, even worse, you’re a bozo who can’t even get the product right.  It’s not even their fault; it’s yours, because you chose the wrong investors.

final thoughts…

So a consulting business can’t create a product?
That is indeed my argument: a consulting business has the wrong structure, processes, priorities and people involved to pull off a great new product.  However, a consulting business can be fertile ground for good *ideas*, because you are exposed to lots of client pain points.  If you want to be effective at creating that idea (or whatever it pivots into) and bringing it to market , you are better off spinning out a new company with a small, dedicated, product-experienced team right at the start.

But there are lots of product businesses with strong services arms!
Lots of companies built services revenue streams on top of a product — a successful product — but I cannot think of many examples where it happened the other way around.

If you have seen examples where a services business built a great product business, please let me know.

UPDATE: great response from Scott Francis

(image from this awesome BT ad)

A reader named Eric asked a question about customer validation / development on my “Bull doesn’t build” post, and I thought I would answer with a post.  Eric’s question was:

“You talk about your ‘focus right now is on building a solid foundation of product-market fit.’
At what point do you spend more time focusing on product-market fit then on actually developing the product? I’m finding myself torn as to when do i decide to commit? how developed should my idea, or product, be before i go out and get actual market feedback about it…”

Short answer:

1. Start learning from customers right away (and research competitors). Unless you’ve been working in a space for years or your idea is incredibly simple to prototype, assume that you don’t know enough to start designing without first learning.
2. Write down all of your hypotheses and assumptions about the problem, your solution, and your hoped-for economics (i.e. how you make money), and try to discover the truth behind those assumptions. Review this list regularly because it will change.
3. When you talk to people, start with open-ended questions and then get reactions to specific ideas.  Ask about problems and/or behavior before suggesting your ideas for solutions. Listen, don’t talk.
4. Talk to people.  You can do a survey and try techniques like “SEM to a mock up page” to test interest,  but nothing beats looking someone in the eye and reading their body language. (Link: great Steve Blank post)
5. In our case (a new consumer Internet application), I connected with ~100 people first while my technical co-founder did some technology investigations. Once we felt confident that we were on to something, we committed.  We are building our first prototype now and in the meantime I am designing UI mockups to do 1-on-1 and multi-person paper tests, and continuing to learn, learn, learn.

I’ll add that with some things, like game design, you really can just jump right into crude paper testing and go from there.  A long answer is after the fold…

Long answer:

My new company, Aprizi, is now only about 5-6 weeks old, and I’ll walk you through a bit of our process so far.

After the light bulb moment, I started by calling on two types of folks: 1. potential customers, and 2. some smart entrepreneurs and investors I knew.  The goal with the first group was to figure out whether people would actually want my service.  The goal with the second was to see gut-reactions to the idea, reality-check the technology concepts, network to folks with domain knowledge who could advise me, and discover previous attempts or current competitors which I had not discovered.

Potential customers – Since my concept is a consumer play, I needed to cast a wide net.  I either met with or spoke on the phone with people of both genders, a mix of ages, living in city / suburbia / country, and who knew me by various degrees (and asked for introductions to folks who didn’t know me).  I started with people I knew would give me honest, blunt answers, and always started a conversation stating that I needed honesty, not kindness.

I also ran a survey with Google forms, which was interesting but at this ephemeral stage I find surveys to be most useful for gathering facts rather than subjective/opinion declarations.  In many cases, I found subjective survey responses to conflict with what I then heard in an in-person interview, and I believe the latter.

Remember that your goal is maximum honesty, not to have someone tell you what you hope to hear.  Press people about whether your idea sounds like a must-have or a nice-to-have.  Frankly, if no one is saying the latter (or worse), then you are probably doing something wrong in your approach (nothing is loved by *everyone*).  Be prepared to be wrong about what the market wants, and iterate to something better.  However, there are no one-size-fits-all rules about startups — if you are doing something truly disruptive, you might have to buckle down, believe in yourself, and bull your way through a lot of initial “you are crazy”.

Investors — Knowing that we will eventually need to raise some seed capital around this, I also have been talking to a few VC and angel investors.  One of the many differences between today and the first time I started a company (am I starting to feel old?) is that I have some great folks who are willing to let me call them with an undefined idea.  VCs have a different thought process, and you can get a feel for key trigger points that cause excitement or red flags.

If you do this, be clear about how early you are, and steer your conversation away from feeling like a pitch.  If you don’t have relationships where you can bring a half-baked idea, there are early-stage firms out there that love to stay in tune with new ideas and startup activity, and might be willing to talk to you (in New York, Charlie O’Donnell with FRC, is very open to this).  As a rule with investors, you will be better off if you can get introduced by a mutual acquaintance.

Experts – While I continually examine assumptions and try to spot gaps in my knowledge, I have been networking to knowledgeable people who can provide insights.  A lot of people find startups interesting, like rooting for the new guy on the block, and are quite open to talking.

Two side notes:
1. I find it very useful to create a financial model even at this early stage because it will reveal your assumptions, knowledge gaps, and can point out flaws and pressure points in your ideas on how to make money;

2. I don’t believe that you are helped by keeping your idea secret, although there are instances where I will hold off approaching someone too early if competitive risk feels very strong.What’s Next?

I am lucky to have an amazing technical partner, and since no one can effectively code without uninterrupted time, I’m trying to let her stay focused on the prototype while I continue to learn from the market and just give her updates (and wear every hat *other* than coder).  Our prototype functionality is so stripped down that, at this point, the first version won’t really change much based on what I’m doing.

Customers — my immediate goal while we work on prototype v.1 is finishing UI mockups of different features we need to prioritize and using those for more 1-on-1 conversations as well as focus groups.  My goal with the focus groups is to primarily include people who do not know me (although I will be networking to them via people who do).  Once we have a prototype up, we will start a closed alpha/beta process and I might also take advantage of this cool user testing service, usertesting.com (which I just discovered thanks to Chris Carella).

Investors — at this point, I’ve gathered my initial data points and reactions, so I’m pausing this effort save for a few folks where I just want to get Aprizi on their radar.

Experts & Partners — I continue to network to people that can increase my knowledge and answer key questions.  I’m also having very preliminary conversations with potential partners who could be useful for distribution or other synergies.  At this point, my primary goal is not a deal but rather to understand what those partners care about — i.e. what can I bring to the table that interests them, and how does this affect my design decisions?

Startup Blogosphere — I’m also talking to other entrepreneurs and listening to the “lean startup” crowd on the Web to pick up ideas and methods that I either haven’t thought about, haven’t prioritized appropriately, or have simply forgotten.  There are lots of great ideas out there.

I hope this post has been useful — I’m sure I’ve left stuff out but it’s back to the hustle for me.  What do you think I’ve forgotten?

Andrew Chen tweeted a link this morning to a post called “Twitter used to be a crappy idea – 3 lessons learned“.  I agree with many of Henrik’s core messages, such as staying lean and building products you love, but I got stuck on two sentences. They both tie back to the title of this post: don’t confuse crossing the chasm to mainstream adoption with product-market fit.

1. Henrik leads with the statement that “it’s fair to assume that the [Twitter] traffic was flat from 2006-2008.“  The implied message is that Twitter experienced a binary dynamic — no growth, and then huge growth.  I disagree.  The curve on Henrik’s graph looks flat because of the time frame and the massive growth of 2009.  From where I stood, Twitter saw pretty good growth throughout, steadily expanding from social media insiders to a broader audience.

In May 2007, Biz Stone told Kottke, “We have been doubling the number of active users about every three weeks for a sustained period of months.”  This post reported that Twitter grew from 250K to 650K users in the second half of 2007, and Compete.com reported that Twitter then grew to almost 4.5 million by the end of 2008 (via Mashable).

I feel like there are skewed perceptions out there as to how long it takes to truly get a startup off the ground.  We quickly forget, but if you go back and look at the ramp-up time for today’s success stories, you might be surprised at how long it took for them to turn “mainstream”.

2. Henrik writes, “Had Jack Dorsey read Steven Gary Blank’s book he might have attempted to change the product into something that had more ‘market-fit’.”

I don’t think Steve Blank and Eric Ries are suggesting that if you don’t find immediate mainstream adoption, you should be pivoting your product.  Actually, one of Blank’s biggest problems with the classic tech adoption curve, popularized in Crossing the Chasm, is that it makes entrepreneurs focus on solving mainstream adoption issues when they haven’t yet solved early-adopter issues.  One step at a time.  The key is getting strong, positive signals from the marketplace that you are delivering something people want, and not scaling your business expenses ahead of those signals.

You want to see growth commensurate with your company’s stage, but don’t lose your head if you don’t have millions of users overnight.  Just make sure that your confidence in getting to millions is based on real market feedback and adoption.

My wife dragged me to a cocktail party last night tied to my daughter’s school and I met “that guy.”   That guy (or gal) is someone who hears you have a new startup and wants to play venture capitalist. Not an interested, supportive pretend-VC, but a judgmental, “I’m smarter than you and let me show you how” pretend-VC.  Over the years, I’ve met plenty of “that guys” at social events, but thankfully they remain a small percentage of the population.

The actual question — on my customer growth strategy, I believe — was innocuous in words but not in delivery.  At this point, my brain presented me with two responses.  One choice had me blazing his puny i-banker brain with brilliant marketing and distribution tactics that quite *obviously* will make my startup the next hot tamale.  The other answer was the honest and straightforward one: being only weeks into this startup, I do not know yet.  I have many, many tactics I need try and see what sticks. My focus right now is on building a solid foundation of product-market fit.

Not surprisingly, I chose the latter, but it got me thinking about entrepreneur psychology.

• You need to be convinced of many things including the strength of your concept and your ability to pull it off better than anyone;
• You need to be resilient and stubborn and self-sufficient;
• You need to be able to convince others of your vision and sell, sell, sell;
• At the same time, you cannot bullshit yourself about anything.

Years ago, I worked for a founder with an incredible Steve Jobs-like reality distortion field.  He raised a bundle of money by convincing two of the top Silicon Valley VC firms that his vision was amazing and his product was solid.  Shortly after the investment they realized that 50% was hot air, and chucked the founder from the CEO spot (of course, I only found out about this after accepting the job offer).  The founder completely believed his own hype, which made him convincing, but also made him a terrible, terrible operator.

Bullshit doesn’t build companies (or relationships).  It can get you funded and win a customer or two, but it’s not a solid foundation.

One of the things I like most about the whole lean-startup meme going around is that it stresses the notion that you have to aggressively challenge your own hypotheses.  You go out of your way to let potential customers tell you things you don’t want to hear.  You poke hard, because you want to fail early and find a better path while it is still possible.

As for “that guy” at a party, as an entrepreneur, you don’t need to feel like you have all the answers early on. The important thing is busting your ass to get them.

I was reading Fred Destin’s post on why entrepreneurs hate VCs, when a quote caught my eye: “Learning from mistakes is far less useful than emulating success.“  It’s a message that 37Signals likes to harp on as well.  I’d argue that you have an equal shot at learning from mistakes or successes, as long as you take the time to objectively dissect the facts.

However, all this misses the real point.  No matter what you are learning from, the key is to correctly translate it to your new context.

People will preach, “this is what worked for me, so it will work for you.”  Just don’t swallow it whole.

I don’t care what philosophy or framework you are interested in — whether the Blank/Ries lean startup approach or 37Signals ethos — don’t get religious.  Tech startups share huge commonalities, yet the devil is in the details and you need to filter everything for your details — your team, your timing, your product, your competition, your market noise, your financial resources, etc.

When it comes to marketing, definitely study your and others’ successes, but remember that you are not alone.  Lately, I’ve been looking at Mint.com’s trajectory, but so is everyone else (a VC friend of mine said he’s getting tired of hearing, “We’re the Mint.com of X”).  Mint lived in its context.  Some of their strategies will work for my startup, and some won’t.  In my new context, I have to decide where copycat marketing noise will degrade effectiveness. (here’s a long post on tactics)

So two messages:

1. It doesn’t matter whether you won or lost, don’t fight the last war.
2. When you get a piece of advice, use your brain and make it your own.

“What is your growth strategy?” It is a classic question from VCs to early-stage consumer Internet companies, and one often difficult to answer at such an early point in a company’s life cycle because you have not yet seen which specific tactics work best.  There is usually no silver bullet answer, just a lot of hard work ahead.

This post, targeted at early stage Internet companies, tries to put some structure around that question, and provides some tactical ideas. I’ll preface with two caveats: 1. Internet marketing is a constantly evolving battleground and some tactics lose their usefulness; 2. this article does not cover important marketing topics like product-market fit, figuring out your target demographic or great customer support.

I’ll tee it off with three statements:

• your marketing strategy should be iterative just like your product and business strategy
• you can’t spend your way to product success on the Web (you can just fake it for a while)
• you can lay out an initial game plan by thinking through tactics across four different areas:

1. Viral marketing
   1. product design
   2. word of mouth
   3. pricing
2. Active marketing/outreach
   1. Advertising
   2. PR (broadly defined)
   3. Direct outreach
3. Distribution partnerships
4. Design optimization

1. Virality

VCs hate the term “viral” when it is waved around like a magic wand, however they respond well if you’ve got concrete drivers of behavior.  There are multiple ways to encourage virality and I’ll break it into three sub-sections.

• Product design
• Word of mouth
• Pricing

1.1 Product design :: Some products are well suited for virality — Hotmail was the big example in Web 1.0 with their simple email footer, and today the reigning champions are probably the social games. Playfish and Zynga have designed human motivators like competition, teamwork, pride, and generosity directly into the user experience to get people to interact and spread the word.

Take a step back from your product, think about touch points between people, and examine whether you can strengthen or encourage social interaction, and thus word of mouth, through your functionality, starting with the sign-up process all the way through.   Remember that your design has a huge influence over a customer’s behavior.  Viral triggers work best when integrated into an experience.

1.2 Word of mouth :: Take a look at successful companies that are similar to yours and analyze their marketing practices.  In particular, try to study their latest tricks because their previous tricks are probably so copied that the noise level is overwhelming to consumers. If nothing else, this might help you get creative.

One simple approach is to enable “shout-outs” to sites like Facebook, Twitter, etc. but the key here is making sure you place these links where customers have a legitimate reason to shout out. Don’t think about what *you* want them to do, but rather focus on what they will want to do — and test it!

Again, don’t get so overzealous that you are causing a spam problem, because that will backfire.  If you are on Facebook, you’ll want to examine how successful social game companies are adapting to the FB redesign and policy changes, and pay attention to Justin Smith’s analyses on Inside Facebook and Inside Social Games.

Don’t overlook more traditional methods.  Blog widgets have gone a little bit out of style, but that might make them attractive again.  Email marketing can be incredibly effective.  For example, Mint.com was not a naturally viral application but they had incredibly passionate users.  In one instance, they ran an email marketing campaign asking their users to spread the word and more than 10 percent of the email recipients invited an average of 5 others to join, resulting in one new user signing up per 2.6 invitations (see case study).

Lastly, I’ll note that anything related to charitable giving always gets faster word of mouth than things purely commercial, but it must feel genuine.

1.3 Pricing :: don’t forget that you have an incentive structure in the form of pricing.  A few ideas: you can reward users with discounts for inviting others (or gift cards but just don’t kill your cash flow), offer group discounts to get teams to join in unison, and offer lifetime memberships in the early days.

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2. Active Marketing / Outreach

For Active Marketing, I want to hit on three areas:

• Advertising
• PR (which I define very broadly)
• Direct outreach
  

I believe that most Internet successes came about because of a great product, not advertising.   I loved this recent quote from Sean Ellis:

It’s taken years for me to realize that our growth was less a function of clever marketing tactics than beginning with something that customers truly needed.  Some growth would have been automatic; the marketing team simply accelerated this growth.

Mint.com spent only about $50K on search terms. Pandora spent about $100K on search in the early days, but stopped that approach and founder Tim Westergren says “he’s not interested in traditional marketing” (source). Evernote hit 1.4 million registered users with no advertising, and EventBrite says growth has been primarily through word of mouth.  Social games company Playfish did no advertising, although I would be remiss to not point out that competitor Zynga advertises heavily on top of viral designs and admittedly has grown faster.

This does not mean that you should sit back and passively wait for organic growth to appear for your highly-iterated, agile-developed product.  Even without advertising, Mint.com says they spent ~$2 million on marketing in the two years prior to Intuit’s acquisition, which primarily went towards a marketing staff of 5 people and consultants like a PR agency and email marketing partner.

2.1 Advertising :: I think most early stage companies would be foolish to forecast significant spend on advertising. Google Search is no longer an affordable growth mechanism.  However, I do think you should experiment with advertising in small doses.  Folks seem to be increasingly turning to Facebook and possibly even StumbleUpon for more affordable, targeted campaigns.

Make sure you do two things before you spend much money:

1. understand your cap on customer acquisition cost by guesstimating the “lifetime value” of an average customer (i.e. revenue) and subtracting how much it will cost you to operate your company and service in order to earn that “lifetime value”. Make sure your LTV is conservative, i.e. reasonable customer spend and over a limited time span. (interesting post on LTV)

2. have analytics in place so you can measure results of campaigns (and ideally A/B/n tests of campaigns)

If you are finding that an ad campaign is netting great conversions at affordable prices, then by all means continue! Expect that it will take several weeks to find your sweet spot on bid levels and conversion rates.

2.2 Public Relations :: PR covers not just getting press, but also engagement with the blogosphere and online communities.  If you are running the business end of a seed-stage company, don’t put this off to a PR firm — not only is it expensive but frankly, no one can explain your product and company as well as you.

With the media, don’t actively chase PR too early (wait until you are confident of product-market fit), but learn about the journalists who cover your space and try to build your own relationships even before you are asking for a story.  Be willing to share concrete metrics — that always increases the odds of getting a story.  Look for PR help when you are hitting more of a growth stride. You can hire a firm, or look for independent PR people/boutiques in your industry who offer better rates and might be more likely to understand your product.

With the blogosphere, you can’t market *at* the community — you have to join and support the community.  Find bloggers with content you respect and an audience that is relevant, and participate on their sites. Make comments and engage in a dialogue with them — not about your company but about the relevant topics you both love (otherwise you wouldn’t be doing a startup around it, and they wouldn’t be blogging about it).  Again, you are building relationships.  Having a blog of your own helps here.

Look for online forums with a match to your target demographic, and again participate with rather than market at. I heard that Microsoft generated some of its best early growth for Office Live by participating in SMB discussion sites.  Building up a reputation takes time but not a lot of direct cash, and as you grow, is something that can be passed on to bright, young (thus less-expensive) employees.

Create your own touch points, such as a blog, a Twitter account, and a Facebook page.  Put in the time to make these actually useful and interesting, i.e. think about adding value through interesting content, not just sending out the online version of press releases. You should also examine whether YouTube videos or knowledge sharing through Slideshare, Scribd, or Docstoc could be useful.

2.3 Direct Outreach :: Finally, don’t stop getting out there and selling individuals, especially (but not exclusively) those you consider influencers.  As you grow, don’t let customer interactions get captured by customer support, the marketing team, and HCI testing, but rather keep those sales skills honed.  The insights you will get from these discussions are invaluable. It battle-tests your ability to effectively message your product and company. It keeps you grounded in the marketplace rather than the la-la land of ivory tower thinking which has cratered so many startups.

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3. Distribution Partnerships

This is always a doozy for me.  Sadly, many partnership deals are more useful for how they impress VCs than for what they actually do for your business.  Over 15 years, I’ve seen so many deals which looked good on paper deliver completely mediocre results.  Don’t get me wrong — you need to invest time in this area because the sales cycles can be very long (exceptions being partners who are explicitly in the distribution business such as Miniclip), but do not count on quick results.  As an unproven company, it will be tough just to get time and attention.

Ruthlessly prioritize your targets because trying to cut deals with big companies can suck up an enormous amount of time from both bizdev people and developers (what, you thought that mega company wasn’t going to demand new features or some crazy integration?). Make sure you really match up your target demographics with that of your target partner.  Make sure you really believe that results will come and don’t waste time on “press release” partnerships unless you really think it will transform your company’s credibility. For example:

• will that big website really put your message front and center? They know they can’t clutter up their key pages with distractions, and if you can’t get prominent placement, is it worth the bother?  You know that users are used to tuning out distractions on a web page, and minor features/add-ons rarely get clicked. Even if you have a great champion who believes in the synergies, remember that the politics of web placement/design inside a big company can kill you.
• are those VARs or enterprise sales people really going to give a damn about your upsell/add-on product? They are already getting huge pressure from the customer to discount the price on the core money-makers (and as a fledgling startup, you inherently are not yet that).
• Is the technical integration between our two products going to be so complex for either party or for the end user that we’ll never effectively get off the ground?  Does the partner have the resources and urgency to get this done in a timely manner?

If you want access to someone else’s customer base, you are going to need to be prepared to pay in one form or another.  Thankfully, it’s no longer the bubble years where companies like AOL could charge millions up-front for a bullshit placement on a semi-buried page, but you should expect to give up a chunk of the economics and possibly of your company as well. The numbers really range quite widely. Please just don’t forget to negotiate performance metrics and contractual outs for yourself based on poor results (speaking as someone who has inherited deals missing these key elements, and had to attempt to renegotiate — *not fun*).

A wonderful thing for today’s startups is that there are a number of interesting, open platforms where you can get distribute your product without needing a partnership, such as Facebook, iPhone (cough, semi-open), Android, and maybe LinkedIn if they truly are opening up.  However, that kind of distribution takes you out of this section (i.e. those aren’t partnerships) and back into other marketing tactics.

After spending all this time bashing BD deals, would I still spend time on this?  Yes, I definitely would, albeit with a rigorous filter for deals that could truly enable my business. Ask yourself:

• who has an extremely synergistic product to mine?
• who has a user base identical to my target demographic?
• who would be really interested in the assets I’ve built up already (data, relationships, etc)
• who has a track record of doing partnership deals in my general space?
• who would be a good acquirer of my business?

Make sure you also think through competitive risk, but don’t let that cripple you.  Lastly, I will also note that you can achieve shorter sales cycles and possibly better terms if you and your target distribution partner(s) share the same investor. That is one useful criteria for examining which investor you want to work with.

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4. Design Optimization

This is no-brainer stuff, but it is worth remembering that you need a few key things when it comes to design:

1. pay attention to SEO basics (here’s a recent Chris Dixon post on that topic)
2. keep your messaging clear, concise, and compelling whether text or video
3. A/B test both copy, images, and layout to try to find the best combination of the three on your website landing pages and your marketing emails

This stuff is critical for execution, but not really something you would bother talking to a VC about because it is just expected. However, if you have some concrete A/B testing results, they might find that both illuminating from a product/market perspective and see that you really walk the walk.

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Final Thoughts

1. I believe that an early stage company should experiment and iterate, using both qualitative feedback and quantitative analytics to help prioritize, grow or kill various initiatives. This post isn’t meant to be an all-encompassing list of marketing methods but hopefully it has helped with your brainstorming.

2. Remember that marketing tactics need to constantly evolve as effective channels become flooded over time, destroying their usefulness either out of noise or inflated cost.

3. As you think through lots of marketing activities and ideas, remember to bring your mind back to your product and think about how/if favorite concepts can be better integrated into your design.

4. This post talked about types of marketing activities, and if you want to read a great post about timing and priority of activities, check out Sean Ellis’ post Milestones to Startup Success.

5. I am constantly learning and would love to learn from you.  Please let me know your thoughts via comment or direct email to me.

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Additional posts you might find interesting:

• Sean Ellis: Milestones to Startup Success
• Matt Brezina: No one cares about your stupid startup – 5 tips to make them care
• Josh Kopelman: Let’s just add in a little virality (and hopefully his follow-ups)
• Andrew Chen: How to create a profitable freemium startup
• Avinash Kaushik: A Manifesto for Web Marketers and Analysts

Update: you can still download the model if you want and see if there are any pieces you can use, but I am working on a new version that is a little more cash-oriented. Right now, it isn’t explicitly modeling out annual subscriptions but rather averaging a monthly revenue level, and I think that should be fixed.

Mark Suster of GRP just wrote a post on the importance of financial models, and in an effort to be helpful to new entrepreneurs finding their way around Excel, I thought I would post a business model Excel template for anyone to download and customize (bottom of post).  I completely agree with Suster.  The one time I told myself “I don’t need a financial model yet because it will all be made up bullshit,” I completely embarrassed myself a few months later and swore never ever to make that mistake again (seriously, it still hurts years later).

Why must you create a financial model? Beyond the obvious of needing to speak your investor’s language, here are a few reasons:

• it helps you better understand your assumptions and goals
• it helps you better understand your business’ pressure points
• it forces you to  better understand your scaling cost structures
• it forces you to examine the realism of milestones and cash needs
• it gives you a working document to track and structure/focus for your business analytics (like a product, it should be a continually iterative process and tool)
• it gets everyone on the same page as to what the business is shooting for and sets expectations as to what needs to be accomplished and how long it might take. EVEN IF IT IS GUESSWORK, you still need to make sure your team and investors are on the same page when it comes to assumptions, goals and timing!
• hopefully this one isn’t necessary, but it also creates a document everyone can sign off on, which can reduce finger-pointing later if memories become revisionist should things turn sour

Focus your efforts on a model that feels ambitious but doable, but don’t forget to create a conservative “oh shit” version, and if it has to be a sales document, you may need a “$best case ka-ching$” version as well.

I find that with every startup/product I model out, a lot of customization goes into the user acquisition/growth model, the revenue model, and to a slightly lesser extent, the infrastructure/hosting scaling model.  I like building user growth from the bottom up, focusing on active users (someone who uses your product at least once a month).  I don’t much like simplistic “viral multiples” or top-down approaches like market share penetration.

This particular model came out of an exercise for a freemium Web application startup that wanted to monetize through premium subscriptions.  The model takes a “cohort” approach (more information on cohort analysis over at Fred Wilson’s blog) and applies churn and conversion assumptions to each month’s new users over time.  It also allows you to model out the growth of your team by role and employee type (full time vs contractor).  I have zeroed out most of the assumptions and the staffing plan so that you can start with a clean slate.

Every business is different and you’ll no doubt end up ripping some stuff out and adding some stuff in, but I hope the attached model is a useful starting point for some of you out there.

Here are just a few of the things you’ll need to research/guess if you are just starting out:

• comparables on user growth rates, virality, and churn
• customer acquisition / sales methods and costs
• price points and conversion rates for customers, given your business model and sector
• payment processing rates and fraud/chargeback levels
• contractor and salary rates (both “startup discounted” and market) for your hires
• customer support method and costs , and how it scales with customers
• true travel costs (often underestimated)
• expected concurrency rates and visit frequency
• download size per visit
• architecture scaling: owned vs managed hosting vs cloud and how servers and costs scale

Here are a few key things you want to examine out of your model:

• are there any variables where a slight variation makes a massive difference?
• are your fundraising milestones well matched to your product and financial milestones?
• when do you hit monthly breakeven?
• how many users do you need to have acquired / kept to get to breakeven?
• how much money have you spent in total to get to breakeven?
• are you adequately scaling costs to meet the demands of a large user base in later years?
• can you believe any of it!  You can make a model spit out whatever numbers you want, so cross-check, second-guess, and don’t buy too deep into your own assumptions and guesses!

I’ve tried to pepper the model with notes to make it a little easier to understand.  Please let me know your comments on the model, whether they be improvements, corrections, or just a note on if it helped.

Freemium model v1-2.xls

This week saw two interesting and related posts on startups and hiring/careers.  Mark Suster wrote about who you should hire into your startup, and Chris Dixon wrote about the ideal startup career path.

Mark’s message is to hire hungry, smart people who want to get to the next level in their career, not the ones who have already arrived. Chris writes, “if your goal is to start a company, it is mostly a waste of time to work anywhere but a startup – with the possible exception of a short stint in venture capital.”

These two statements are related. Working for a big company can give your resume “brand power” making you more hireable, and in some cases more fundable, but it will not teach you about startups.*  Even venture capital won’t teach you what it means to be in the trenches.

Their posts got me thinking specifically around startup sales.

Hiring Sales People
If you are a business person (rather than a coder) and want to start a company, I highly recommend getting direct sales experience (I’ve done marketing, bizdev and sales, and usually wear all three hats, but the latter was most transformative for me as an entrepreneur).  Doing this for a big company can be very useful for your career, but doing so for a startup will be more applicable to your entrepreneurial goals (especially if it’s young enough where you can wear a few different hats).

In general, sales people from big companies are used to a different market environment and set of resources behind them.  They are used to coming from an important brand name, not cold calling as a “nobody”.  They are typically used to selling products that have already been fleshed out, have achieved market success, have lots of marketing backup and customer references.  Their sales process itself might be very complex, but the sales person gets to focus mostly on the relationships because the product itself, and everything around it, has already been figured out.

A startup, especially one creating a new market, has none of that.  The product is a moving target, pricing and business model are being defined as you go, the market isn’t always aware it needs your innovation, marketing materials barely exist, customer case studies are only a handful, etc.  In other words, you have a completely un-commoditized product and a sales cycle that is complex on multiple levels.  If you drop a sales person successful with “figured out” products into this new, unstable environment, you risk them quickly becoming incredibly frustrated, consuming vast amount of company resources as “support”, promising the wrong things to prospects, and pointing a lot of fingers.

I agree with Steve Blank that you don’t want to hire much of a classic salesforce before you have product/market fit (instead try to find product marketing or product management people who are scrappy, personable, and aren’t afraid to sell, cold call, etc). Even when you are starting to get confident about product/market fit, be careful with hiring:

• Don’t hire someone who is used to a relatively simple product/ process for a highly technical sale or a complex, multi-step enterprise sale, even if they are really personable.
• Don’t sacrifice hunger for a rolodex. You want someone hungry, determined, ambitious and willing to hit the streets for you.  A rolodex is very useful, but not enough.
• As a startup, you never have as much time to mentor people as you wish, so also be careful with someone completely green.  They can work out beautifully, but only if 1. they love your product, 2. they are smart and willing to listen / apply lessons, 3. they are ready to work really frikkin’ hard.  They don’t yet need to have learned to be a “closer” — as CEO in the early stages, you will be the best at that as long as something is fully teed up. I’d rather have someone green who fits this bill than someone experienced but lazy.
• Don’t overpay for a sexy candidate — by which I mean compensation should be heavily commission based, and if you agree to a high guaranteed commission level for the first 6 or 12 months, give yourself an out in your employment agreement so you can more easily fire them if they end up sitting on their ass collecting that money (which I, sadly, watched happen at an enterprise software company early in my career).
• Take quick action if someone proves ineffective in your environment — both the company and the sales person will be better off parting ways and finding fit elsewhere.

Of course, if you find someone completely awesome that belies standard guidelines, be willing to follow your gut.  Guidelines are by nature generalized, but people are individuals.

Additional Points of Interest on Hiring & Careers
Mark Suster also repeats the saying “A players hire A players, B players hire C players, C players hire D players.”  It’s an expression I heard at my first job 15 years ago at Trilogy, and something I still believe is absolutely true.  I’ve learned to listen to my gut when it comes to hires.  Every time I have been uncertain about a hire and went ahead anyway to meet growth needs, I have come to regret it.

*Greg Battle, an interesting guy I met in college and who I recently rediscovered on the net, also had this to say about careers:

“I’ve been fortunate enough to work in a startup capacity at many big companies, so it’s not necessarily a choice of one or the other. Big companies launch new products, divisions, and lines of business too. Saying you “love startups” isn’t enough either, as there are so many steps in the startup business cycle, from founding, alpha, beta, pre-funding, growth phase, pre-IPO, etc.. When thinking career, you have to consider the nuanced nature of each position, independent of the catch-all bucket you may place it in.“

I think Greg is right to remind everyone not to oversimplify. Every startup I’ve been part of (going on 6 now) has been different, with many different lessons.

Previous thoughts on startup sales: Don’t Be Afraid to Lose

Mark Suster always provides interesting food for thought.  In a recent post “Most Startups Should be Deer Hunters“, he examined whether startups should go for “elephants, deer, or rabbits.”

He is right to warn of elephants.  They can bring in cash, please your investors with a brand name, and put your company on the map in terms of credibility and new waves of public relations. However, you have to be careful about the cost (I discussed this a little in “don’t be afraid to lose“).  I remember one client I was representing at Broadview that had gotten themselves completely beholden to Citibank.  As a customer, Citi gave them a metric ton of money each year, but in turn completely dominated the startup’s product team and dev roadmap. They ended up with a 1-company market, and struggled to sell the business.

By concentrating your revenue on one or two really large customers, you also embrace very unhealthy operational risk.  If a large customer changes its mind (and this can happen for many reasons: your champion is restructured away from the scene, they get acquired, they face a business crisis of some kind, etc), excessive dependence can turn into a nasty spiral of layoffs and collapsed morale.

However, don’t be afraid of the enterprise market IF it suits your business model and product.  Not every large company will act like an overpowering elephant, or at least, they might try, but you can certainly try to hold your ground.  You need to be willing to pass/lose on a big, but bad, deal (and in this case, it helps to have investors who have been entrepreneurs themselves).

The deer market isn’t necessarily easier to attack, however.  This could be seen in the later stages of the client/server ERP market.  SAP and Oracle had strongly penetrated the Fortune 500, so were looking at growth from the mid-market where a set of smaller ERP competitors played.  They soon realized that the sales cycles in the mid-market could be as long and as complex as going after the Fortune 1000, but the revenue reward at the end was considerably lower.  It was still a decent market to chase (albeit with a different cost structure), but a lot of pre-conceptions were dashed against the rocks.