OnStartups

Startups: How To Build A Barrier To Entry With Inbound Marketing

Dharmesh Shah — Tue, 20 Oct 2009 08:16:00 GMT

I’ve been doing a fair amount of speaking lately. It’s partly driven by my recently released book, Inbound Marketing: Get Found Using Google, Social Media and Blogs (which is doing exceptionally well -- more below on this). The topics I usually speak on are startups (surprise) and marketing (surprise, surprise). And, when I’m really on a roll and feeling adventurous, I talk about startup marketing.

First off, a quick confession. I’m not really a marketer, and I don’t play one on TV. I’ve never had the word marketing in my job title, ever. The closest I’ve come to any formal academic training in marketing are two marketing classes I took in grad school. Neither of them were really about marketing a startup (they were about pricing and branding and other high falutin’ stuff). So, much of what I’ve learned about startup marketing has been through (gasp!) actually doing it.

Now, I want to lead with the fundamental premise of this article:

Exceptional marketing can be a formidable barrier to entry.

For those of you that are new to the investor game (which is usually where the phrase turns up), “barrier to entry” is loosely defined as that thing which makes it hard for competitors to enter your market and reduce your profits. In most cases, when VCs ask a startup about barriers to entry, the response usually falls into one of two categories:

Type 1: We’re doing something that is so hard to do that few others can do it. This is usually manifests in the form of some intellectual property (IP) like source code.

Type 2: We’ve got exclusive/proprietary access to some important resource that others can’t get to. This could be in the form of some product integration partnership (like bit.ly has with Twitter).

Of course, there are other types of barriers to entry, but the above two types capture most of what you’re likely to hear — and software entrepreneurs are often focused on the first one (i.e. "lets build a kick-ass product that’s really hard and others can’t replicate because we’re just so freakin’ awesome"). Nothing wrong with that. I’m a big fan of doing really hard things that you’ve got a rare talent for and others can’t easily emulate. However, it’s entirely possible that late at night, when you’re talking to yourself, you might say “Self, I know my application is cool and all, but honestly, I don’t think it’s that hard to build.” Be comforted in the knowledge that most software being built is not particularly hard to recreate. So, the question is, if it’s not the software that’s going to be your barrier to entry, and you’re not fortunate enough to have a lock on some proprietary resource, what do you do? My advice: Get phenomenally good at acquiring customers efficiently. The emphasis is on the word “efficiently”.

So, here are some thoughts and insights on how I think you can build a barrier to entry with marketing:

How To Build A Barrier To Entry With Inbound Marketing

1. Getting good at spending money doesn’t count. Your strategy shouldn’t be “go raise a bunch of money, then use that money to go buy your way to some customers. Then, make it up in volume.” Though that can certainly work, that’s not a defensible barrier to entry. Just about anyone can spend money (some smarter than others). You need to focus on creativity, not cash. More on this later.

2. PPC (Pay-Per-Click) can be effective, but will not protect you. One of the popular forms of marketing today is pay-per-click advertising through programs like Google AdWords. I’ve seen entrepreneurs get really, really good at figuring out just the right bidding strategy and figuring out precisely how much they can afford to spend on a given word based on their conversion rate and lifetime value of the customer. This is all fine and good, except for one thing. PPC programs like AdWords run as a real-time auction. She who pays gets the clicks. It’s easier to describe why this is a problem with an example: Let’s say that you’re building a web-based app for home theatre installers (random example that I just made up). Let’s also say that over time, and with some maniacal focus and PPC bidding ninja skills, you figure out that you can afford to pay up to about $2.76 a click based on the traffic that these clicks generate, how many clicks lead to purchases, and the value of each purchase. Life is good. For every $1 you put in to the PPC machine, something > $1 comes out. This goes on for weeks/months. Then, all of a sudden, you wake up one morning, check your analytics and discover that for some reason, the price for your most important keyword went up. Way up. Enough that your morning coffee comes shooting out your nose. After some poking around on the Interwebs, you find out that some lame startup on the other coast just raised $5 million from some lame VC. They just emerged from the shower freshly sprinkled with a new round of funding, hired a VP of Marketing who then went out and started buying AdWords. Your AdWords. The real tragedy with this story is that this competitor is not all that bright. They don’t know that they can’t really afford to pay that much for a click and make profits (they’re not thinking about profits — they just raised a bunch of money). Your problem is not that they’re super-smart, it’s that they’re super-ignorant. And that’s the thing with PPC. You’re basically at the mercy of the stupidest market entrant. Call me simple-minded, but that doesn’t sound like a particularly effective barrier to entry when someone can just come along and drive your cost of customer acquisition (COCA) up. And, it doesn’t happen overnight — it happens immediately.

3. Get spectacularly good at search engine optimization (SEO). Instead of becoming really, really good at PPC, invest in the time and energy to become an SEO-ninja instead. The first reason for this is that SEO is cheaper. Not free (generally), but free on a marginal basis. Here’s why: In PPC, each additional click costs you money (based on the cost-per-click). Want 1,000 more clicks? You pay for all of them. For SEO, once you’re ranking well and getting traffic, the clicks don’t cost you anything. It’s going to take some time/energy to rank in the first place, but once you do, life is good. Further, unlike PPC, SEO does not reward the stupidest market entrant. Someone that’s new to the game can’t just walk right in and snatch your #1 ranking. Granted, they can spend some money and eventually get there, but it’s not going to be immediate and you’ll probably see it coming. (All you have to do is watch the search engine results for your favorite keywords and see who’s creeping up on you). So, unlike PPC, the presence and skills you build in SEO-land are much more sustainble and defensible. In fact, if you’re out raising money, being able to demonstrate that you’ve got strong rankings for traffic-generating keywords is a major, major plus.

4. Create content that kicks butt. It’s really simple. If you produce things that are useful/interesting to your target customers — you win. You win by drawing people in to your business not because you had the largest marketing budget, but because you created something of value. The kind of stuff that people tweet about, link to in their blogs and and share with their friends. That’s magical. The type of content can be varied. At my startup HubSpot, we’ve tried lots of different things: “normal” blog articles, music videos, parody videos, songs, cartoons — and of course, free marketing tools. For most startups, if you took every dollar you would have spent on advertising to try and beat your prospects over the head in the hopes that they’ll buy from you and instead spent that dollar on actually producing useful content, you’d win. Seriously win. This worked so well for us that almost all of our increase in marketing spend is allocated towards hiring people that can produce content. They make videos, write blogs, create research reports and develop software tools. The beauty of this content is that long after you’ve invested in creating it, it’ll continue to generate traffic and leads. To this day, some of the early articles I wrote for our marketing blog drive consistent cash into our bank account. We don’t have to spend a penny for those leads. I’ll summarize again in four words: Create content. It works.

So, I want you to imagine this: Imagine that you’ve got a business that is exceptionally good at pulling customers in by the truck-load. Not by spending money on outbound marketng (like advertising, spam, telemarketing and direct mail), but organically because they think the stuff you have to say is just so freakin’ awesome. People are shouting from the virtual twitter rooftops about how great you are. They’re so mind-bogglingly happy that they’re writing entire blog articles talking about your company and your product. And you don’t have to pay them a penny. Now imagine that some competitor emerges, raises money from Sequoia and comes after you. Do you think it’ll be easy for them to reproduce that magic that you’ve built? Nope. It’s hard. And that, my friends, is what I call a bonafide barrier to entry.

On a closing note, I’m going to ask you a favor. It has been less than 36 hours since my book, Inbound Marketing has been available in bookstores nationwide. Today was the big “release” day. Already, it’s in the Amazon Top 100 business books list, and the #6 book on marketing (if you helped make that happen, thanks!) The entire book is about pulling customers in. I wrote it not to make money (it’s near impossible to make money writing a book), but to try and convince more people — especially startup founders, that inbound marketing is a better way to go. So, you should buy the book. To make it easier for you, I’ll give you my personal, one-question asked, money-back guarantee. If you buy the book and don’t find it useful, just tweet me @dharmesh and I’ll send you $25 via PayPal. (The only question I’ll ask you is “what should I do to make it useful so people that read the next edition don’t waste their time?”).

Oh, and for whatever reason, if you owe me a favor (or $25), this is a great karmic-loop way to pay me back. For some reason, even though the money made is miniscule, I get some emotional gratification from seeing the book do well. And, $25 is a small price to pay for my emotional betterment, don’t you think? OK, that’s enough guilt for one blog article. Go buy the book on Amazon. Then, copy-and paste this message into twitter — “I let @dharmesh talk me into buying his book (http://InboundMarketingBook.com). You should too".

Or, just click here to tweet it.

Thanks a bunch for your support and apologies for the shameless promotion this time (I don't do it that often). I promise to get back to my regular shameful promotion next week, once the newness of being a first-time author has worn off.

Oh, and what do you think about exceptional marketing being a barrier to entry? Agree or disagree that this could work?

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

Holy Crap! HubSpot Has Now Raised A Total Of $33 Million

Dharmesh Shah — Mon, 19 Oct 2009 09:12:00 GMT

It has been a little over a year since I announced the news that my marketing software startup closed it’s Series B round of funding. The article, “Insanity? Why A Bootstrap Entrepreneur Raised $17 Million in Venture Funding”, was a candid glimpse into the rationale for raising what seemed like a huge amount of money to me at the time (it seemed huge, because it was — at least to me).

Today, we’ve released news that HubSpot has just closed on another $16 million funding round (our Series C) bringing our total capital raised to a whopping $33 million.

As I write this, I’m a bit worried that this article is going to come off as arrogant and/or self-indulgent. I promise that’s not my intent. I’m just going to let you “inside my brain” in the hopes that some of you will find the excursion interesting, amusing or useful. Although not all of you are out raising money (thank goodness!), I thought you might want an insider’s view on why an otherwise rational and pragmatic entrepreneur would make this kind of leap. I promise, the decision to raise this kind of money wasn’t as crazy as you might think.

The Story Of How I Ended Up Raising $33 Million In Funding

1. Did we need the cash? No, we didn’t need the cash. We had over $6 million in the bank. But, if I’ve learned one thing about VC fund-raising it’s that not needing to raise money helps a lot.

2. Why raise money at all? As the company has evolved, we’ve learned a lot about the mechanics of our business. We have gotten pretty good not just at predicting our growth path — but actually solving for it. There’s no better way to illustrate this than with the graph below:

This graph shows the number of customers (people that pay us money) over time. Note that our revenue curve is even better than this (because the average revenue per customer has steadily gone up over the same period). In short, things have been going pretty well. As we’ve gotten more visibility into the business, we’ve gotten good metrics around the drivers in the business. The two most important are: COCA (cost of customer acquisition) and LTV (lifetime value). We’ve worked hard to ensure that COCA < LTV. And, this margin is getting better over time. Given that we’ve got a decent handle on things, it made sense to further invest in the business so that we can continue to scale it. Once we found a model that works, we figured it would be a good idea to iterate, execute and scale it. As I’ve noted here in the past, we’re swinging for the fences with HubSpot and have not backed off of that position one iota.

3. Should we raise now or wait? OK, fine that we decided to raise money, but why now? Given the state of the economy over the past year, some thought we were raising too early. The business has been growing exceptionally well. The question was: “Why not wait until the economy improves, the business is even further along, and raise at better terms?” That was a good question. Our primary argument was that we didn’t want to wait too long, because the longer we waited, the less leverage we would have (see #1 above). It was not a particularly easy decision. We’ve been fortunate to have great investors in the company (General Catalyst and Matrix Partners) who have been exceptionally supportive. We were reasonably confident that had we waited until next year, we would likely have had no issue raising funds. But, even during our best times, we’re cautiously optimistic at HubSpot. A few factors we were pondering: 1) Would the economy really improve? If so how, when, how much, and for how long? 2) Even if the economy improved, what would the VC industry look like next year? (We had already witnessed a fair amount of shake-out and expected more). 3) Even if things did get better, how much better would the deal be then vs. now? How much should we discount back for risk? 4) How would a “wait until later” approach impact our decision-making in the business right now? Would we take appropriate levels of risk or as time passed, would we start to act with increasingly more conservatism?

After all was said and done, we decided that there was a price (or more accurately a “set of terms”) at which we’d be willing to do a deal now, instead of waiting until later. We were able to beat that “minimum bar” (by a relatively large margin), so it made sense to do something now. Of course, in these situations, it’s never “knowable” as to whether we made the right decision or not. But, we’re relatively comfortable that we at least made a pretty thoughtful decision.

4. Did you really need to raise that much? Not really. Our model and plan called for significantly less than this. But, the other important thing I’ve learned about venture fund-raising is that you should always raise more than you think you need to get to the next milestone. We had a model and plan in place that would make this the last venture round we’d need. But, given the terms on the table, it made sense to leave ourselves some wiggle room and buffer. This increased the probability that we’d be able to get to where we wanted — even if things didn’t quite go precisely as planned (which they rarely do). And, it’s painful to go through the fund-raising process, so if you can condense things into fewer rounds, it saves a lot of pain and agony. We had the opportunity to raise more than we needed, with pretty “entrepreneur friendly” terms — so we took it.

5. What are you going to do with all that money? Well, we’ve always been pretty capital efficient. One quick calculation I’ve been doing in my head since the early days of starting the company is this: Figure out your run-rate annual recurring revenue. Multiply this by some conservative industry multiple (somewhere around 3X). Then, make sure that the total money you’ve “consumed” is less than this number. When it is, you’re basically operating on an “accretive” basis (i.e. the actual enterprise value built — even if sold to a conservative financial buyer — is greater than the amount of money used to build that value). In our case, we’ve been accretive from the early, early days. And, despite our torrid growth, we’re still accretive now (revenues and associated “enterprise value” is growing faster than our rate of capital consumption). So, back to what we’re planning to do with the money: #1 product. #2 product. #3 customer acquisition. We have a backlog of ideas that’s both uplifting and depressing at the same time. There are so many great ideas for how we can deliver more value to our customers. We plan to pick the best of these and execute on them maniacally.

We are out to build the next-generation marketing platform.

6. So what’s next? We’re also on to what we think is a massive opportunity that helps organizations capitalize on the major tectonic shift in the marketing industry. It’s a really, really big deal. But, with radical change comes the need for radical education. And that kind of education takes committment — and capital. We’ve got a burning passion to help people figure out how to better reach their potential customers by pulling them in. This is what caused me to devote most of the Summer to write Inbound Marketing (a book that captures a lot of what I’ve learned about marketing by helping startups and small companies figure out how to “get found”). But, enough about me. Let’s talk abut you. You’re likely in the startup game because you perceive something fundamentally wrong with the world that you know you can make better. I know how you feel. My advice is to dig in, understand the problem as well as you can — and go fix it.

OK, so reading back through the article, it came off as more self-indulgent than I had planned. But, it’s 2:00 a.m. here in Boston and I’m not sure investing more time is going to make the article much better. Such is life sometimes. I trust you’ll forgive me for this lapse. It’s a big day for me and my team at HubSpot. We’ve now got even higher expectations for ourselves than we had before. Like you, we’ll be working hard to live up to those expectations. I’ll close (once again) with my definition of success:

Success = Making those that believed in you look brilliant.

What do you think? Did I do the right thing in raising all this funding or am I just rationalizing my behavior decision? What would you have done?

Oh, and if you're a blogger/journalist/media type and are curious about details or want to write a story, feel free to email me at dshah {@} onstartups.com. Would be happy to chat.

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

Answers.OnStartups: Community Q&A For Startup Entrepreneurs

Dharmesh Shah — Thu, 08 Oct 2009 22:14:00 GMT

I’m a big fan of a site called Stack Overflow. It’s a surprisingly useful Q&A site for posting programming questions, and getting answers from the community. The site has been immensely successful and is now often the first place I go to find answers to those vexing questions. One of the things I like most about it is that both the questions and answers get voted on by the community. As a result, the best stuff surfaces to the top. You have to really use it to appreciate it.

In any case, I’m a big fan of the site. So, I was thrilled when Joel Spolsky (who, along with Jeff Atwood of Coding Horror) decided to make the software that powers Stack Overflow available to others. I immediately reached out to Joel to see if I could get early access to the software. (I’m speaking at Joel’s Business of Software conference coming up in San Francisco, so we had communicated recently anyways).

I got access to the software a little while ago and am pleased to announce that a new collaborative Q&A site for entrepreneurs is now launched and ready for your use.

Here's the link: Answers.OnStartups.com

I have a long list of exceptional entrepreneurs I know well enough to arm-twist into participating in the community. Here's a sample (in no specific order):

1) Adam Smith, Xobni

2) Drew Houston, DropBox

3) Jay Meattle, Shareaholic

4) Mike McDerment, FreshBooks

5) Neil Davidson, RedGate Software, Business of Software

6) Jeff Bennett, NameMedi a

7) Brian Shin, Visible Measures

8) Sachin Agarwal, Posterous

9) Peldi Guilizonni, Balsamiq

10) David Cancel, Compete.com, Performable

11) Brian Halligan, HubSpot

12) Alexis Ohanian, Reddit

13) Andy Payne, angel investor

14) Rand Fishkin, SEOmoz

15) Don Dodge, Microsoft

16) Nivi, VentureHacks

I've got many more, but you get the idea. I know, I'm name-dropping a bit here, but I promise I will do my best into guilting these people to share their experience and insights.

Here’s the link again: http://answers.onstartups.com

Hope you’ll find it a useful resource. If you have ideas on how we might make it better, please let me know.

Meanwhile, please help me spread the word. The early days of a community like this are always the hardest (in a “chicken and egg” sort of way).

Thanks for your support.

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

12 Facts About Entrepreneurs That Will Likely Surprise You

Dharmesh Shah — Mon, 21 Sep 2009 09:29:00 GMT

I have a picture in my head of what the average entrepreneur is like. I’d guess pretty young (think Facebook, Twitter, Google, etc.) living the red beans and rice lifestyle and working 80+ hours a week and sleeping under their desk. On some parts, I’m probably right — but on many, I’m flat-out wrong. This is demonstrated by a recent report from the Kauffman foundation for entrepreneurship. The report is titled “The Anatomy of an Entrepreneur”. It’s based on a survey of 549 company founders across a variety of industries (that’s my first mistake, as it turns out entrepreneurs start companies other than Internet software companies — who knew?)

In any case, here are some of the points from the report that I found the most interesting.

1. The average and median age of company founders when they started their current companies was 40.

2. 95.1 percent of respondents themselves had earned bachelor’s degrees, and 47 percent had more advanced degrees.

3. Less than 1 percent came from extremely rich or extremely poor backgrounds

4. 15.2% of founders had a sibling that previously started a business.

5. 69.9 percent of respondents indicated they were married when they launched their first business. An additional 5.2 percent were divorced, separated, or widowed.

6. 59.7 percent of respondents indicated they had at least one child when they launched their first business, and 43.5 percent had two or more children.

7. The majority of the entrepreneurs in the sample were serial entrepreneurs. The average number of businesses launched by respondents was approximately 2.3.

8. 74.8 percent indicated desire to build wealth as an important motivation in becoming an entrepreneur.

9. Only 4.5 percent said the inability to find traditional employment was an important factor in starting a business.

10. Entrepreneurs are usually better educated than their parents.

11. Entrepreneurship doesn’t always run in the family. More than half (51.9 percent) of respondents were the first in their families to launch a business.

12. The majority of respondents (75.4 percent) had worked as employees at other companies for more than six years before launching their own companies.

Which of the above surprises you the most and alters your mental model of what entrepreneurs are like?

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

Why Raising Venture Capital Requires Helmets and Shovels [cartoon]

Dharmesh Shah — Fri, 18 Sep 2009 12:16:00 GMT

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

SaaS Startups: Knobs and Dials And Other Insights

Dharmesh Shah — Fri, 11 Sep 2009 11:12:00 GMT

If you're building a SaaS (Software as a Service) startup you're in great company. Most software entrepreneurs today are taking this approach -- including me. Below are some simple insights that I've learned in the process of being in the trenches with my own startup.

Insights On SaaS Startups

1. You are financing your customers. Most SaaS businesses are subscription-based (there’s usually no big upfront payment). As a result, sales and marketing costs are front-loaded, but revenue comes in over time. This can create cash-flow issues. The higher your sales growth, the larger the gap in cash-flows. This is why fast-growing SaaS companies often raise large amounts of capital. My marketing software company is an example.

2. You’ve got operating costs. In the shrinkwrapped software business, you shipped disks/CDs/DVDs (or made the software available to download). There were very few infrastructure costs. To deliver software as a service, you need to invest in infrastructure — including people to keep things running. Services like Amazon’s EC2 help a lot (in terms of having flexible scalability), but it still doesn’t obviate the need to have people that will manage the infrastructure. For a startup, the people cost to manage the IT stuff can be significant (since the team is very small). So, even though hardware and infrastrucutre are cheap, managing it can take a significant percentage of the startup’s time.

3. It Pays To Know Your Funnel: One of the central drivers in the business will be understanding the shape of your marketing/sales funnel. What channels are driving prospects into your funnel? What’s the conversion rate of random web visitors to trial? Trial to purchase? Purchase to delighted customer? As a SaaS startup grows, a lot of leverage can be found by understanding the shape of the funnel and removing the “leaks” (i.e. where are you losing business)? For example, if a lot of people are signing up for the trial, but very few convert to paying customers, you should dig into what the early usage pattern is. Are people logging on at all? If so, where are they getting stuck? Remove the friction that is keeping customers from getting value and you’ll unlock some revenue. Do this at all stages of the funnel (focusing on the easy stuff first).

4. Install Knobs and Dials In The Business: One of the great things about the SaaS business is you have lots of aspects of the business you can tweak (examples include pricing, packaging/features and trial duration). It’s often tempting to tweak and optimize the business too early. In the early days, the key is to install the knobs and dials and build gauges to measure as much as you can (without driving yourself crazy). Get really good at efficient experimentation (i.e. I can turn this knob and see it have this effect). As with most experiments, don’t change too much at the same time (even though you think several different things will all have positive effects). The reason is simple: If you change more than one thing, you won’t really know what really happened. Unless you have lots of data points, simple tests are usually better.

5. Value the Visibility: One of the big benefits of SaaS businesses is that they often operate on a shorter feedback cycle. You’re dealing in days/weeks/months not in quarters/years/lifetimes. What this means is that when bad things start to happen (as many experienced during the start of the current economic downturn), you’ll notice it sooner. This is a very good thing. It’s like driving a fast car. Good breaks allow you to go faster (because you know you can slow down if conditions require). But, great visibility helps too — you can better see what’s happening around you, and what’s coming. The net result is that the risk of going faster is mitigated.

Running a SaaS startup is a lot of fun. There are so many more things under your control than the traditional shrink-wrapped business. Use this to your advantage. Keep your feedback cycles short, maniacally track the data and invest in continual (but cheap) experimentation. In the long term, these things will give you a huge advantage.

What have you learned while building your SaaS startup?

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

7 Things Your Startup SHOULD Copy From 37signals

Dharmesh Shah — Mon, 31 Aug 2009 11:33:00 GMT

A little while ago, we had a great guest post here by Jason Cohen titled “Why Your Startup Shouldn’t Copy 37Signals or Fog Creek”. In it, Jason makes some great arguments on why you shouldn’t copy successful startups like 37signals. I (mostly) agree with Cohen. Blind copying just doesn’t work for reasons Jason Fried (CEO of 37signals) outlines in a follow-up article.

Here’s what Fried had to say:

“Here’s the problem with copying: Copying skips understanding. Understanding is how you grow. You have to understand why something works or why something is how it is. When you copy it, you miss that. You just repurpose the last layer instead of understanding all the layers underneath.”

I (mostly) agree with Jason Fried too. When you copy, you do miss a lot of what made what you are copying successful. But, although copying specific things is ill-advised, drawing inspiration from and copying certain practices can often work quite well.

Here are the things I think you should copy from 37signals:

1. Share your expertise. Whatever it is you are passionate about or an expert in — share your information. Contribute to the community. Help others learn. Blog, podcast, speak — whatever works for you. Jason and the 37signals team are phenomenally good at this. They blog, they speak, they wrote a fantastically practical book.

2. Be your own customer. Try (if you can) to eat your own cooking. A product works out much better when you use it yourself. Solve your own problems. Fix the things that annoy you the most. Beyond just 37signals, there are lots of examples where people built software that succeeded in part because they use it themselves. GMail comes to mind.

3. Minimize unused inventory. Don’t write a bunch of code that not a lot of people are going to care about and you don’t need today. We have a tendency to “design for the future” and add features or architectural elements with the expectation that they’ll be useful someday. Wait for that day. You might “overpay” if/when you do get around to needing it (because it’s more expensive to add things later), but on average, you’ll be better off not writing that code that you don’t need just yet. This is not an excuse for poorly designed software — it’s an argument for being selective as to where you design in future expansion.

4. Take a stand. Have an opinion and take a stand. 37signals does a great job with their “less is more” stance. They have a passionate position and are willing to defend and debate it. You don’t have to take extreme positions on everything, but there should be something you feel passionately about that you don’t just pick a happy, non-controversial middle-ground. Ideally, it’s this particular idea that your startup is centered around.

5. Charge early, charge often. There is no shame in putting a price on your product. Doesn’t matter how early it is. Just give customers an easy way out. Let them decide whether your product is worth paying for. If not, keep cranking. Too many startups feel like they need to have the “perfect” product before they can begin charging for it. That’s almost always a mistake. Charge early. Once you start charging money, all sorts of good things start to happen (for example, customer feedback starts to happen, because you actually have customers). Then, try to charge as often as possible. Instead of “big chunks” of money changing hands, try to move to smaller, recurring chunks. Many SaaS businesses function this way (with some sort of subscription or “pay by the drink” model). It works.

6. Contribute Some Bits Back: As you know, David Heinemeier Hansson, a partner at 37signals is responsible for the phenomenally successful Ruby on Rails. This benefits them more than the “positive karmic loop” thing. By contributing to the open source community, they’re able to leverage the power of that community and make the platform they use for their own stuff much better. But, please don’t misunderstand me. I’m not suggesting you should go out and try to build some platform/framework. In fact, please don’t try and go do that (99.9% of us should not be obsessing over building platforms/frameworks — particularly folks like you and me). Just find ways to contribute back — even if they’re small ways. It’ll help in at least two ways: You’ll develop better stuff and you’ll attract better people.

7. Build A Community: Software companies these days are about more than just the product — they’re about the people around the product. This includes both those that built the product’s users. Invest the time and energy to foster a vibrant community that connects the people that care about you, the company and the products. Allow customers to engage with each other. This is useful not just from a “more value in the software” perspective — but it also helps with respect to competition. If a big, 900–pound competitor comes after you some day, it might be easy for them to build some of your product features, but it will be much harder for them to steal your community.

Are you a 37signals fan? Did you read “Getting Real”? If so, what other practices or philosophies do you think they use that most other startups should emulate?

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Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

Burning Cash Is For Toasting Marshmallows [cartoon]

Dharmesh Shah — Mon, 10 Aug 2009 10:00:00 GMT

I’m going to go on a bit of a rant here.

I’m miffed that the industry term for the process whereby startups invest in building their businesses is called “burning cash”. If your startup is burning cash (as shown in the cartoon above), you’re doing it wrong. You should’t be burning money, you should be investing money — with the goal of growing your business.

I find it interesting that when venture capitalists (VCs) take money from their limited partners (LPs), they don’t say: Hey, we’re going to take your money and go burn it on a bunch of different startups. Why? Because that’s not what they do (not the good ones anyways). What they do is invest the cash in the hopes of generating a good return.

So, I’m going to ask that all startups that have raised funding to no longer use the term “burn rate”. Instead, lets call it what it is (or should be): An investment rate. As in "our startup has an investment rate of about $400k/month".

Oh, and if you really are burning cash, please start using smaller bills.

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Building Startup Sales Teams: Tips For Founders

Dharmesh Shah — Mon, 03 Aug 2009 12:48:00 GMT

First off, just to be clear, I’ve never been a sales person. I’ve never even played a sales person on TV. All the points below have been pulled from startup sales teams that I think work pretty well (including the team at my marketing software startup).

Building Startup Sales Teams

1. Don’t hire sales people too early. In the early days, the founders should be able to sell (and should be selling).

2. You don’t need sales people, you need sales. Don’t think VP of Sales — think “Revenue Engineer”. (Not the greatest analogy, but just like you won’t hire a development “manager” as one of the first 5 people in a startup, you shouldn’t hire a sales “manager” either). Don’t get caught up in fancy titles — focus on dollars in the door.

3. Don’t hire several sales people at once. Your goal is to figure out the “pattern” of what kinds of people are best based on what you’re selling and who you’re selling it to. You need some feedback from the system so you can continue to iterate on your hires.

4. If you’ve never hired or been around sales people before, be prepared for a bit of a shock to the system. They’re not bad people, they’re just different. If you're an introverted geek like me, it's helpful to remember that your startup needs to sell stuff.

5. Resist the temptation to create complicated compensation plans. If it requires a spreadsheet to figure out the commission, it’s too hard. You’ll have plenty of time to confuse sales people later — start simple.

6. Agile methodologies can work in sales as well. Iterate! Refine your demo script, your slides, and any other collateral information. Capture the lessons learned by the best-performing people and spread it to the rest.

7. Sales people will generall act in mostly rational (but often surprising) ways based on incentives. The rules of the game defines the behavior of the players. You were warned.

8. ALWAYS connect incentives somehow to ultimate customer happiness. If you reward just “deals getting done”, you’ll get deals — but at too high a price. You might get push-back that sales people don’t control/influence customer happiness, but they do. They “pick” customers, they set expectations, they control the degree of “convincing” applied.

9. Make sure you understand the economics of your business. Figure out your total COCA (Cost of Customer Acquisition). This includes sales people, marketing people and marketing campaigns. Quick example: Lets say you paid a sales person $10k, a marketing person $10k and you spent $5k on Google AdWords (for a total of $25k) last month. If you sold 10 customers last month, your COCA is about $2,500. Different businesses have different needs in terms of sales vs. marketing spend. Make sure neither is too far out of whack.

10. Your life-time-value (how much revenue you expect to generate per customer) should be higher than your COCA. No, I did not need a degree from MIT to figure that out. Once your LTV is a multiple of your COCA, you’re ready to start turning the knob and scaling the business a bit (hiring more sales people). But, if your LTV is way lower than your COCA, proceed with caution. If there is no hope for LTV getting higher than COCA, you’ve got a problem. Don’t try to hire additional sales people until the economics sort of make sense. If the car is pointed towards a brick wall, hitting the accelerator is not a good idea.

11. Track data maniacally (even if it’s just in a spreadsheet). Information you will want includes: What was sold, who sold it, when, for how much, etc. This data will be invaluable later as you start to scale. For example, you should be able to answer the question: We had 14 customers cancel last month — who sold those customers? Is there a pattern? In the early days, you likely won’t have the volume (or the time) to analyze the data — but you should at least capture it for future use.

12. Your pricing should be in line with your sales structure. For example, you can’t expect to have an outside salesforce (that meets with customers in person) if your average deal size is only $10,000. The math won’t work.

13. Once you get beyond three or so people, running your sales in a spreadsheet will become painful. Start looking at CRM systems (like Salesforce.com).

14. Start watching the shape of your “funnel” as early as possible. How many leads are you getting a month? How many turn into opportunities? How many of those convert into paying customers? Once you understand your funnel, you can slowly start tweaking your system to fix the “leaks”.

That’s all I’ve got for now. For those of you that have built early-stage sales teams, what are your ideas and insights?

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Speaking At Startup Idol Conference

Dharmesh Shah — Tue, 21 Jul 2009 00:33:00 GMT

Just a quick note that I'll be speaking at the Startup Idol Conference in Redwood City, CA this Thursday (July 23, 2009).

Registration is free: http://bit.ly/cMGnH

Looks like there are over 450 people already registered, so should be a fun event (and the agenda is unsurprisingly packed with lots of startupy goodness).

Please leave a comment if you're going to be at the event (and definitely stop by and say hello).

Hope to see you there.

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

37 Pithy Insights From Street-Smart Entrepreneurs

Dharmesh Shah — Fri, 17 Jul 2009 12:02:00 GMT

The response to an earlier article “Startups: 10 Things MBA Schools Won’t Teach You” has been overwhelmingly positive. The article has now received about 150 comments across various websites (on the OnStartups.com site, in the OnStartups LinkedIn group, etc.) Unsurprisingly, many of the comments are much better than anything I could have ever come up with on my own.

So, to further the conversation and discussion, I decided to collect, edit and share some of the fantastic insights from reader comments.

Thanks to all of those that contributed such great insights. Sorry I could not include them all.

Enjoy.

37 Pithy Insights From Street-Smart Entrepreneurs

1. Infect employees with pride of ownership. If the employees feel like they are part of something bigger than themselves, then they'll work that way.

2. Every company has "idiotsyncracies." Some crazy thing they do that works for them but would never work anywhere else. Trying to “correct” that ends up destroying what makes the company special.

3. You pour your heart and soul into a startup. Someone who hasn't done it won't understand the effort until they go through it.

4. Most start ups should start selling the product before they think they should.

5. Ritualize the work atmosphere -- everytime a contract comes in, ring a bell or gong and let everyone celebrate. There's a reason Survivor has rituals.

6. Competitors & customers can, do, and will do irrational things. Neither care about your title, your education, your pedigree, your investors, or your SAT scores.

7. Customers are defined as people or organizations who pay more for something than it costs you to make it. The relationship should be arms-length (which is why your dad is not a real customer).

8. A lack of competitors is almost always a bad thing because it means the market you entered doesn't interest anybody else.

9. Your core founding team needs to be smart, energetic and committed. It helps if they can fill multiple roles at the same time (sell, write software, deliver services and invoice).

10. Leave your ego at the door and hire people without big egos that can understand how to look at a problem and be open to solutions no matter where they come from. Keep those people.

11. Get exposure to potential customers as cheaply as possible and then make sure that all the information is there for them to make a decision.

12. If prospects won't open their wallets for the beta or prototype, then no amount spent on marketing or sales will matter.

13. No matter how great your service or product, there will always be very smart people who's advice you trust telling you that your service or product is crazy and will never sell.

14. S**t happens, but it's usually not as bad as it first seems.

15. It's tragic when good products never make it to market because they were never properly sold. If no one in your company knows how to find qualified leads for your product, you are in big trouble.

16. Take care of the people with integrity

17. Startup entrepreneurs need a handful of trusted, objective advisors who will share their perceptions of what's so - no matter what.

18. How are you continuing to invest in your customers and their experience after they have purchased your product? Value relates to the entire customer experience.

19. No one deal or opportunity should be worth damaging a long term relationship (business or otherwise).

20. The most successful businesses are ones where a group of friends help each other succeed.

21. Ultimately, the CEO's position is to simultaneously lead and serve others.

22. You never know when you will be working with people from your past, so always be respectful, and professional. Paths cross when and where we least expect them.

23. It is important that you like your customers. If you do not like your customers you will by design not do the best you can for them because they annoy you.

24. As any entrepreneur knows, you are pretty much selling all the time to everyone, whether VCs, prospective clients, employees or significant others.

25. Life will happen. Your best employee will quit to do something else..that doesn't mean that they don't care, just that it's their time to move on.

26. Keep doing good without being able to sight an immediate reward. The reward often comes unexpectedly.

27. A startup mentor is really like a therapist, if you think about it…

28. Tough times never last, tough people do.

29. The "iasm" in enthusiasm stands for I Am Sold Myself.

30. A bad decision is often better than no decision at all.

31. There's no better way to research a market than just launching a product.

32. Often you can start selling something simpler, to more customers, sooner than you think.

33. There are three primary ways to get cash in: 1) Customers 2) Financing 3) Sale/Disposal of Assets. Great businesses figure out #1 so they don’t have to worry about the others.

34. Just because you’re an Internet company doesn’t mean you are or should be a global company.

35. Distribution and channel partners don’t want to sell your product. They want to take orders and make money.

36. Startups have many diseconomies of scale: The more people, features, markets, products, business models, investors, etc. — the harder it is.

37. Be objective. Learn to listen to what the world is telling you (and often beating you over the head with).

Thanks to everyone who has contributed to the conversation so far. It’s great to see such energy, enthusiasm and experience from the entrepreneurial community.

Any of the above insights strike a particular chord with you? Which one is your favorite?

By the way, to get more of this kind of stuff, you should follow me on twitter here.

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

Dharmesh Speaking At Business of Software: Why You Should Go Anyways

Dharmesh Shah — Mon, 13 Jul 2009 11:10:00 GMT

Sorry about the title of this article. I don’t usually talk about myself in the third-person but in this case I made an exception. If I had made the title of this article “I Am Speaking…” as the article made the rounds on Twitter, Facebook and elsewhere, nobody would know who the hell I was talking about. This way, at least 10 people will recognize the name.

In any case, on with the article.

I accept a limited number of speaking engagements a year. The reason is very simple — it takes a lot out of me (I’m not a professional speaker and no matter how much I do it, I find that the days and weeks leading up to a speaking gig, I get monumentally stressed out). Last year, I got invited to speak at the “Business of Software” conference (which just happened to be in Boston). I had a great time. It’s on the list of top 10 conferences I’ve ever been too. Well organized, great speakers, great content and most importantly — great attendees.

That’s why I’m thrilled I’m going to get to speak again at the Business of Software Conference this year. The conference is in San Francisco (right in the heart of the city, at the Westin on Market street). And, although Neil Davison (organizer of the conference and an exceptional software entrepreneur) was likely caught in a weak moment when he added me to the list. Despite Neil’s lack of judgment inviting me (again!), I think you should attend the Business of Software conference anyways.

Here’s why:

1. Even though I’m speaking, I represent a small fraction of the total agenda. And, even though I was as nervous as a long-tailed cat in a room full of rocking chairs last year, I managed to string together some words into sentences and say some semi-useful things. If you’re a glutton for punishment, you can watch the video of my session from last year. I promise that this year, I’ll do my best to make my presentation better.

2. Geoffrey Moore will be keynoting the conference. Many of us in the software business learned much of what we know about technology marketing and strategy from Geoffrey’s landmark book “Crossing The Chasm”. If you haven’t read it yet, you need to stop what you’re doing right now and go get it.

3. Paul Graham, hackepreneur extraordinaire will be at the conference. Paul’s officially on my list of most brilliant people I’ve met. He really groks the whole startup thing (which he should, given his experience with Y Combinator). He’s insightful and articulate. If you’re even thinking about starting a software company some day, you need to learn from him. Good stuff.

3. I can’t remember how long I’ve been reading Rands in Repose. What I can remember is when my wife Kirsten (who is an artist and does not geek-out for a living) approached me one day and said “Have you ever heard of this Rands In Repose guy? He wrote this Nerd Handbook thing. He’s soooo right.” And, she was right. It’s scary accurate. But, I digress. One thing I didn’t know is that the ingenious mind behind the blog is Michael Lopp. I’m really looking forward to meeting Michael and seeing what he’s like in real life.

4. I’ve never actually met Ryan Carson in person, but I’ve followed him online for a while. He’s the real deal when it comes to being an internet entrepreneur. He hosts some fabulous events too. If I had to risk my emotional well being by speaking at one additional conference next year, the “Future Of Web Apps” would be high on my list.

5. One of the skills I do not have is design. I can use things. I can tell (for the most part) good design from bad design, but I can’t actually produce it. This is despite exposing myself to a bunch of reading (and listening) on the topic. There are some things that are perhaps just not meant to be (for me, there are lots of things not meant to be, but such is life). However, you should not give up too easily. If you’re looking to create more usable products that make people happy, Don Norman is your guy. He wrote “Design Of Everyday Things”. I rest my case.

6. I have at least three of Kathy Sierra’s books sitting in my house right now. This does not include those that I gave away to friends and family along the way. She’s the master-mind behind the “Head First” series of books. She’s exceptionally good at injection passion into a product. We all need more of that.

7. Paul Kenny is not going to like reading this, but when I saw him on the agenda last year I found myself asking two questions: “Who is this guy?” and “Why the heck would I want to suffer through a presentation about sales?” I hate selling stuff. But, Paul’s presentation was absolutely phenomenal. He’s a real pro. He gets the whole “resistance to sales” thing and makes cogent points. He’s definitely worth listening to. Even if you don’t like sales. In fact, especially if you don’t like sales. And, if you’ve got the whole sales thing figure out, he’s worth watching simply because he’s a great presenter.

8. Joel Spolsky needs no introduction. His presentation last year was off-beat and funny. Look forward to seeing what he has up his sleeve this year.

This is just a partial list of some of the speakers that will be there. Check out the full list of speakers.

Ok, so you might be thinking, that’s all great and all, but $1,995 (wow! That’s like $2,000!) is way too much to spend on a conference. And it’s fair of you to think that. I got the memo about the whole economic downturn thing too. I have two things I’d like to counter with:

1. Right now, early registration for Business of Software is $1,695 (expires July 31^st) . But, this expires on July 31^st.

2. This is unlike most of the conferences we normally go to. Sure, you could find some conference that’s “cheaper” and spend $1,000. But, it’s not the same. At BoS you won’t have to endure semi-veiled sales pitches every other session or panels where a group of semi-random people got thrown together because their suggested topics had some of the same words in them.

And, to be clear, I don’t get paid anything for convincing you to go. My only motivation is that I want as many smart software people there as possible, so I can sponge as much information off of them as possible. I’m selfish that way.

What do you think? If you were able to attend last year’s conference, please share your (candid) thoughts and help out others that are considering going this year make their decision.

Hope to see you there!

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

New Google Chrome OS Runs On Your Car Bumper [cartoon]

Dharmesh Shah — Fri, 10 Jul 2009 10:02:00 GMT

Did you like the cartoon? Tweet it to your friends.

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

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Startups: 10 Things MBA Schools Won't Teach You

Dharmesh Shah — Wed, 08 Jul 2009 10:40:00 GMT

Now that 3 years have passed since I got my graduate degree (and the founding of my current startup), I think I can make fun of it a bit. [Note: Only a moderate amount of harm was inflicted on MBAs — and investment bankers, in the making of this article].

10 Things Most MBA Schools Won’t Teach You About Startups

1. No amount of strategic planning will ever substitute for managing your cash flow. Financial statements are great. The most important one is your bank account statement.

2. There are always more things to do than there is time to do them. Startups are a continuous exercise in deciding what not to do. You can sometimes win by just not doing things faster than your competition.

3. Sleep is that time you’re working on startup problems with your eyes closed.

4. It helps not to call people “human resources”. They’re people. And, as it turns out, people like to be treated like people. Go figure.

5. No amount of academic theories on efficient pricing will prepare you completely for what people will actually do. Finding the “optimal” price is really hard. In the meantime, remember that a sub-optimal price is a lot better than no price at all.

6. Price discrimination (in an economic sense) is a wonderful thing. Except that it often ignores the real costs in terms of organizational complexity. Every time you add a new product or product option a small part of your company dies.

7. There are an infinite number of ways to spend money on marketing. You have no idea what’s actually going to work. The idea is to experiment broadly and learn lessons cheaply. On a related note, no amount of MBA marketing classes will prepare you for the day that you have to produce leads in order to close sales. As it turns out, marketing is about more than product feature matrices and the right shade of blue for your logo.

8. To recruit the best people, fair compensation and equity are only a start. Company culture and a demonstrated passion for your vision is hugely important. (Oh, and your vision should be on the larger path to truth, justice and overall goodness). Your vision should not involve harming kittens. They’re adorable. [insert gratuitious kitten photo here]

9. There’s a lot of value to being likable. Good things happen when people like you. When people like you, bad things have less of a chance of being fatal. I advise being likable. That’s why I advise against being an investment banker after getting an MBA. (I also advise against being an investment banker before getting an MBA).

10. Advanced game theory is exceptionally useful. Basic game theory is dangerous — because it assumes that you’re dealing with a bunch of rational “players”. It’s like trying to design a real car that’s going to be driven on a theoretically frictionless surface, with no air resistance and no idiots on the road.

What are your top startup lessons learned that even the top MBA schools don't teach?

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Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

6 Quick Tips For Landing That Startup Dream Job

Dharmesh Shah — Mon, 29 Jun 2009 09:13:00 GMT

My startup, HubSpot, has done a fair amount of recruiting/hiring over the past year (the team has grown by over 100%, despite the down-turn in the economy). Along the way, I’ve found some “patterns” to the recruiting that we do and the kind of people that end up joining us.

I’m going to stay away from the overly obvious stuff (mostly because I have no idea what the obvious stuff actually is). I’m also going to assume that you’re already smart and passionate and all the other trimmings of a star candidate.

Tips For Landing That Startup Dream Job

1. Match the culture: Remember that advice about dressing one level above the job you’re hiring into? Or the “it’s better to be over-dressed” advice? Forget that. Dress so that you’ll fit in. Dress as if you’re already on the team. Any startup you’d want to work for is not going to hold it against you for not dressing up. They wouldn’t expect you to wear something to an interview that they wouldn’t wear themselves into work.

2. Convey A Passion For Startups: If you’ve worked for startups before — talk about them. Talk about what it was like. Especially talk about the painful parts. They want to know that you know what it’s like to be on a startup team. We want to know that you’ve got that weird genetic flaw that causes you to want to take on that special kind of pain that only entrepreneurial people understand. If you haven’t worked for a startup before, come up with some really convincing reasons as to why you want to start now. And it can’t just be because you got laid off from some Fortune 500 company last week. Remember that startups are not in the business of creating jobs, they’re in the business of creating value. Help them understand how you’re going to be able to help them create value that nobody else can.

3. Read, Read, Read: Many startups today have a pretty wide footprint on the web. Does the CEO tweet? Does the CTO write a blog? Read them. You don’t have to be able to write a graduate thesis on their work, but you should be a wee bit familiar with their thoughts and leanings. Oh, and most startups will have you meet the founder/CEO/CTO before you are made an offer and they’re all human. They write for a reason — one of which is to be read; and maybe even understood.

4. Join The Conversation: Find out where the startup team is hanging out and chatting on the web. For HubSpot, for example, we have a relatively active group of people on Twitter. (Just do a Twitter search on “HubSpot” and you’ll see what I mean). Get to know some of the faces/names and find out the tone of the conversations happening around the startup you’re looking to join.

5. Connect Online: Chances are, whoever you talk to on the startup team is going to do a quick scan for you online (LinkedIn, Facebook, Twitter, blogosphere, etc.). Why not be more proactive, learn about them and connect with them online first? Another advantage to this approach? You could ask (without being too pushy or aggressive) some of the “insiders” you connect to what it’s like to work there. The idea is to convey that you care, you’re doing your homework and are savvy enough to make sure you want to work there first. Startup recruiting is a two-way street (the company should bring a lot to you, just like you’re going to be bringing a lot to them).

6. Emphasize That You “Get Stuff Done”: The single most important attribute that many startups look for in recruits is that they get stuff done. You can be the most brilliant engineer/marketer/whatever on the planet, but if you don’t have a tendency to get a lot of stuff done, you’re not an attractive recruit. The reason is obvious and simple — but I’ll tell you anyways. Startups are a grand exercise in resource-deprivation. There’s always too much work and not enough people. If the startup team hires you, they want to know that you’re going to put a dent in their workload — not just come up with great ideas for other people to work on.

What do you think? If you’ve got your own startup, what would sway you? If you’ve interviewed at startups, what’s worked and what hasn’t? Would love to hear your thoughts in the comments.

By the way, if you’re a fan of this blog, please join us on Facebook. The LinkedIn group has 75,000+ members, but the Facebook community is falling behind. Hope to see you there.

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Angel Investor Non-Admissons: 10 Things They Won't Say

Dharmesh Shah — Mon, 15 Jun 2009 10:34:00 GMT

As a tribute to the very funny VC Non-Admissions and the follow-up Founder Non-Admissions, I offer to you my own take on this — from an angel investor perspective. Sorry that mine aren’t in a cool presentation form with pictures and such. I don’t have that kind of talent.

10 Things An Angel Investor Will Never Say

1. I really want to support entrepreneurs — but just those that are going to make me money.

2. I dread having to explain your business idea to my spouse (who can veto any deal).

3. I don’t really have enough stake in your company to spam my network on your behalf.

4. I was lying when I said that some of my best friends were VCs. Even VCs aren’t best friends with VCs.

5. I have no idea what the hell you’re talking about 50% of the time. What’s a socially-semantic mobile platform for non-virtual currency mean? (Oh, it’s an iPhone/Facebook payment app).

6. The other 50% of the time, you have no idea what you’re talking about. Anti-dilution provisions in a termsheet are not about beer.

7. How the public market did last week does impact my decision making.

8. I like to invest in cool startups because it helps make up for high school.

9. I don’t understand what half the things in the funding agreement mean either, but I’m betting that most of them are to protect me, not you.

10. I really didn’t put the check in the mail the day I said I did. I was golfing that day. I sucked.

11. I’m in it to mostly have fun. If I wanted to do unpleasant work, I’d have my own startup.

—-

Feel free to add your best ones in the comments section, or if you prefer, you can tweet me @dharmesh.

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

Flat Is The New Up: Introducing Hockey Stick 2.0 [cartoon]

Dharmesh Shah — Thu, 28 May 2009 11:02:00 GMT

Did this tickle your funny bone? Please tweet it.

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Is Your Startup Practicing Inward Facing Dog?

Dharmesh Shah — Fri, 15 May 2009 10:24:00 GMT

For those curious about the title, it’s a reference to “downward facing dog” (one of the most widely reognized yoga poses).

Is your startup practicing inward facing dog? That is, are you overly focused on things going inside the company with too little attention on what might be going on outside the company?

Signs That Your Startup Is Practicing Inward Facing Dog

1. More than a few days go by and you haven’t talked to a customer other than to provide support or try to sell them something.

2. When people bring up things like “Did you hear about X (a direct competitor) doing Y?” most of the time, you hadn’t heard the news and some of the times, you didn’t even know who X was. Note: I don’t advocate being obsessed about your competition — and I particularly don’t advise following them (i.e. X did Y, so I have to do Y…). But, I think there’s a lot that can be learned simply by observing your competitors.

3. You haven’t located 5 people in your industry whose blogs you think are worth reading regularly. I don’t care what industry you’re in, there are bloggers out there writing things you should be reading. Even if you disagree with them. Even if you think your industry is “broken” and you’re out to transform it. In fact, especially if you think your industry is broken. Read, read, read.

4. You haven’t been to an industry conference in a couple of years (or ever). Yes, budgets are tight, and most of the content from these things makes it onto the web anyways, but it’s not about the content. Yes, it’s unlikely you’re going to get a lot of customer leads. But, it’s not about those those things. It’s about learning. It’s about the real-time, in-person conversations. (This coming from an introvert — who hates real-time conversations).

5. You’re not watching the news about VC financings, acquisitions and IPOs in your market (or adjacent markets). Even if you don’t plan on raising funding. Even if your startup is going to crush everyone else, getting a sense of how the money is flowing in your industry is important to know. What kinds of companies are getting funded? Who is funding them? What other deals have they done? Who is getting bought? You don’t need to get obsessed with this, but just a quick scan once a week is well worth it.

6. You don’t meet with other startup founders that are at your stage — or beyond. Though we founders like to believe that our situations are unique and nobody else can possibly have the same kinds of challenges and problems we do — it’s just not true. There are many, many patterns that continually reoccur in startups. Even weird things that you think are too arcane to be common.

What other signs do you think there are that a startup is too inward focused? What do you do to make sure you stay in touch with what’s going on outside your four walls?

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

The Attention Economy vs. The Wallet Economy

Dharmesh Shah — Fri, 08 May 2009 10:18:00 GMT

The attention economy has been all the rage for startups for a while.

Here’s the general line of reasoning with the attention economy:

1. Grab user’s attention.

2. Sell that attention to others.

Like many abstractions, this one is a tad over-simplified, but not so much as to not be useful. A bunch of modern-day startups fall into the above pattern. Get a mass of users to your shiny-new website then monetize that attention through things like advertising (basically reselling that attention).

Why do so many web startups take this approach? I think it’s for two primary reasons: 1) it’s easier and 2) it’s more fun. To understand this better, let’s contrast the attention economy to that other economy: the wallet economy. In the wallet economy, instead of competing for a share of people’s attention, you’re competing for a share of their wallet.

The wallet economy presents one big problem for many entrepreneurs (including me): It involes this unpleasant activity known as selling something. If you’re a software entrepreneur, I’m going to bet that if you had to pick amongst things like writing code, selling stuff and cleaning the office — selling would likely be at the bottom of your list. So, entrepreneurs will prefer doing (almost) anything other than selling. Enter AdSense, stage left. “I’ll just put AdSense on my site”. If the entrepreneur is not completely delusional, she’ll add statements like: “Yes, it’s only pennies, but you have to start somewhere, and we’ll grow the traffic over time.”

What’s really nice about the whole attention economy is that you can become a revenue-generating company today (revenue-generating is becoming fashionable again). And, because there are advertising networks out there like AdSense, you’re not dependent on all that selling muckiness. You get to avoid that whole “convincing customers to pay business”.

But, I have a few issuese with the attention economy, from a software perspective (I’ve written about this before, but I’m going to be a bit crisper this time):

1. Attention Is A Scarce Resource: Attention is a bit limited and fragmented. I’d ague that it’s getting increasingly harder to get people’s attention. The level of attention I can devote to stuff has stayed pretty much the same throughout the years. I might make more money now than I did 10 years ago, but the level of attention I can spend hasn’t gone up much — certainly not proportionally to income.

2. Battle of User and Advertiser: There’s a conflict between getting monetizable attention and solving the user’s problem. Let me explain: Back in the good old days of software, users had a problem, you wrote software that solved that problem, and they paid you for it. Nice and simple. All your incentives were to solve the problem as well as you could for as many people as possible. Now, contrast this with a web application that is monetizing attention. Now, not only do you need to make the user happy (so they’ll visit in the first place), you have to make the advertiser happy as well (because they’re buying that user’s attention). In fact, to make any real money you have to get better and better at interrupting the user well enough so that they pay attention to the ads. Basically, you have to balance the needs of your users and the needs of your advertisers. That’s hard.

3. Advertisers Make Lousy Customers: Even with all the fancy content-matching algorithms that pair up a given ad to a given context, I still don’t like advertising. I really don’t. I can see why it’s important in a lot of industries — but I don’t know that software is one of them. Given the choice between solving a user’s problem (which I understand, and hopefully care about) and an advertiser’s problem — I’d choose solving the user’s problem. There’s more creativity involved. It’s more focused. I can control it better. There’s only so much multi-variant testing you can do to get that CTR from 1.2% to 1.4%.

I’ve never had a business that focused on the attention economy (however, I have built tools like twitter grader that generate lots of traffic), so I may be missing something here. On the other hand, I have built startups that focus on the wallet economy, and I must say, my simple-minded nature likes the notion of solving problems and getting people to pay me to do so. Call me old-fashioned.

What do you think? Have you succeeded with the attention economy (succeeded, as in, you have a decent chance of making in your lifetime?) Has the monetization model changed at all that would make the attention economy more viable? Would love to read your thoughts in the comments.

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

Why Startups Should ALWAYS Compromise When Hiring

Dharmesh Shah — Thu, 23 Apr 2009 12:07:00 GMT

There’s a non-zero chance that you’re reading this because you were thinking: “What the heck is he talking about? Shouldn't startups be hiring the best people possible? What's this about comprimising?”

And, if you were thinking that, you’d be right. Startups should hire the best people possible. But, if you re-read the title, you’ll notice that I’m saying you should always compromise. Why? Because there’s no such thing as the absolutely perfect hire along every possible dimension. If you recruit people that you think were a “no-compromise” hire, you’re deluding yourself with unrealistic expectations. Nobody’s perfect (and if they are, you probably couldn’t recruit or afford them anyways).

Everyone you bring on is a compromise. The trick is to compromise on the right things.

Let me explain. Here are several different attributes or “dimensions of awesomeness” you might seek for your startup recruit:

1. Passion: Are they fired-up?

2. Experience: Have they done this particular job before? Did they succeed at it?

3. Intelligence: Are they smart?

4. Academics: Do they have the right degree? From the right place?

5. Hunger: Are they motivated? Are they ambitious?

6. Risk-Tolerance: Can they share the risk? Or, are they looking to make fair market value?

7. Scrappiness: Can they get by with little? Are they resourceful?

8. Loyalty: Can you get them to commit to your cause? Will they be fiercely loyal?

Those are just a few I thought of off the top of my head. It’s by no means a complete list. I intentionally left out things like “integrity”, because it’s hard to argue in favor of compromising on integrity. That’s just plain stupid.

But just about all of the attributes listed above could be compromised a little in exchange for something else. For example, if you were somehow able to grade a recruit along all these dimensions, you might find that someone scores “average” in the academics dimension — but is off-the-charts smart (happens all the time). So, you might decide that it’s OK for them not to have an ivy league degree. Or, someone might be so smart, passionate and entrepreneurial — but lacking in experience. Perhaps that’s OK too. Or, maybe you really do have to have the absolutely perfect person along every possible dimension, but they’re so good, you’re just not sure you’re going to be able to keep them engaged. Perhaps you’ll have to compromise on the loyalty front.

The point is, like with just about everything related to startups (and lots of things in life), there are tradeoffs. You need to figure out which dimensions are absolutely critical (where you will not give), and which ones you’re willing to compromise a little on. There’s no right answer — it depends on your business, your culture, your values and your instincts.

What do you think? Which attributes of people do you value the most? What would you be willing to compromise on, if you could get almost everything else? What things do you hold inviolate — that you would never compromise on? Please leave a comment.

Or, if you'd prefer, you can take the conversation to twitter. You can find me @dharmesh on twitter.

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

Startup Marketing: Tactical Tips From The Trenches

Dharmesh Shah — Tue, 07 Apr 2009 10:50:00 GMT

I’m speaking at the Inbound Marketing Summit later this month in San Francisco. There are some really great speakers lined up (David Meerman Scott, Chris Brogan, Charlene Li, Paul Gillin and others). If you’re looking to learn more about inbound marketing and how to get found in Google, social media and blogs, this should be a great event. If you decide to attend, use the code HUB200 for a special $200 discount. Drop me a note if you’re going to be there, would love to meet-up.

My session’s going to be called “Startup Marketing: Tips From The Trenches”. As I get my thoughts together for this, I started making a list of all of the things I’d advise a new startup to do to get things kicked off with a limited budget. As it turns out, there are a lot of tactical steps that individually don’t do much, but in aggregate start laying the foundation for much bigger things. So, I thought I’d share some of these things with you. This list is not intended to be a comprehensive “here are all the things you should do”, but more of a “if I were starting a company today, here’s what I would do in the first 10 days…” It’s written in a short, punchy style. I’ll likely revise it in the future as I add more things, but I wanted to get “Version 1.0” out there for you and see what you think.

Tactical Tips for Startup Marketing

1. Pick a name that works. Needs to be simple, memorable and unambiguous. The “.com” domain should be available without playing tricks with the name (like dropping vowels or adding dashes). Also, just because there’s no website on a domain doesn’t mean it’s “available”. Available means something you can register immediately, or that has a price that you’re willing to pay attached to it. Don’t wander down the rabbit hole of finding the perfect name if you have no indication that it’s for sale. This will waste a bunch of your time.

2. Put a simple website up. Doesn’t have to be fancy. The goal is to put enough content on the site to start the Google sandbox clock. Don’t worry about the site not saying much (nobody’s going to be looking at it anyways). Make sure to use a decent content management system (CMS) and not Dreamweaver or (shudder) FrontPage. Just because you can hand-craft HTML doesn’t mean you should for your startup website. The structure and features of a CMS are going to be important someday. Trust me.

3. Get some links into the new startup website. If you have a personal website, link to it from there. If you have friends/associates/family with websites, cash in some favor chips and get them to link to it. The goal is to get the Google crawler to start indexing your site. You only need one decent link to get things going. To check whether your site is being indexed by Google, do a search like site:yoursite.com (not perfect, but good enough).

4. Setup a twitter account. Name of the account should match your company/domain name. Link to your twitter account from your main site and to your main site from your twitter account. (Note: If you have a natural skepticism of the value of twitter, you are welcome to this skepticism. But, go ahead and grab your twitter account anyways. You can resume your skepticism after you do that).

5. Add e-mail subscription. Let people sign-up to get an email when you’re ready to show them the product. A simple email signup form is sufficient.

6. Get a nice logo. Run a quick contest on CrowdSpring or 99Designs and you’ll wind up with something decent enough. Make sure you get the vector file (Illustrator or EPS file) as part of the final deliverable. If you've got design skills yourself, or know somebody really good that can do it, even better.

7. Setup a Facebook business page (known as a “fan” page) for your startup. You’re not going to get many fans in the early days. That’s OK. Just get something out there. Add a simple description of your startup, link back to your main website. The usual stuff.

8. Create a clean Facebook URL. Facebook doesn’t allow simple/vanity URLs (unless you're big and established). So, to make things easier on yourself (and your users), setup a sub-domain and redirect it to your Facebook page. For example, here’s what I did: facebook.hubspot.com (notice that when you visit this link, it takes you automatically to the ugly Facebook URL). Setting up this sub-domain is free and usually pretty easy (it’s done through whoever your registrar is for your domain).

9. Kick off a blog. You can use one of the free hosting tools (like WordPress.com), but don’t use their domain name. Put your blog on blog.yourcompany.com — or if you’re proficient and can install WP locally, make it yourcompany.com/blog. Do NOT make it yourcompany.wordpress.com. The reason is that you want to control all the SEO authority for your blog and channel it towards your main website. And, chances are, WordPress.com doesn’t need your help on the SEO front.

10. Write a blog article that describes how you got to this point. What problem you’re hoping to solve. Why you picked this problem. It should feel a little uncomfortable revealing what you’re revealing. If you have tendencies towards being in “Stealth Mode”, read “Stealth Mode, Schmealth Mode”. With inbound marketing, you’re going to need to get used to revealing things that might be uncomfortable. Get over it.

11. Setup Google Alerts for at least the following: Your company name, link:yourdomain.com and “industry term”. Try to find a good balance for your industry term so you don’t get flooded with alerts that you simply will start ignoring. This may take some iteration and refining. (Oh, and use the “As It Happens” option in Google Alerts so you’re not waiting around for new alerts to show up).

12. Find three closest competitors. Pretend like someone is paying you $10,000 for locating each competitor. Really try hard. Barely managed to find three? Take a lot of effort? Great. Now find 3 more. Of these 6, pick the two that you think are the most marketing savvy. They should have a Website Grade > 90, a blog with some readers, a website that you can envision people using, a twitter account that they actually post to, etc. These are the competitors that you’re going to start “tracking”. Add their names and websites to your Google Alerts.

13. Update your LinkedIn profile (you do have a LinkedIn profile, right)? Mention your new startup, and add a link to your startup website to one of the three slots for this purpose. Make sure you specify the anchor text. Don’t go with the default of “My Website”. The anchor text should be your startup name and maybe a couple of words of what it does. You can look at my profile to get a sense: http://www.linkedin.com/in/dharmesh (note: I don't accept LinkedIn invites from people I don't know. If you're looking to get to know me, follow me on twitter @dharmesh).

14. Get business cards printed. Don’t go overboard, but don’t use a “free” option (because it’s not really free, it’s just subsidized). I don’t believe much in business cards, but you need them to simply avoid the 30 seconds of discussion as to why you don’t have a card when people ask you for one at conferences and meetings and such. They’re worth the price to avoid that uncomfortableness.

15. Use the Twitter Grader search feature to find high-impact twitter users in your industry. Start following them. You want to start forging relationships. Start building your twitter network. Resist the temptation to mass-follow a bunch of random people or play other games just to get your follower count up. That’s not going to matter. Get some high quality relationships going. If you’re really serious, start using an app like TweetDeck so you can more easily monitor the needed conversations.

16. Create a StumbleUpon account. Specify your areas of interest (part of registration). Spend 10 minutes a day (no more!) stumbling and voting things up/down. Start befriending those that are submitting sites that are relevant and interesting for your startup. Don’t submit your own stuff — just start contributing.

17. Subscribe to the LinkedIn Answers category that best fits your area of interest. Answer one question a day that you feel like you’ve got some expertise in. Don’t self-promote. You’re seeking to build credibility and trust — not sell anything.

18. Find the bloggers that are writing about your topic area. Subscribe to their feed, and read their stuff regularly. Leave valuable comments and participate in the conversation. (Do not spam them or write “fluff” comments. If you don’t have something useful to add to the conversation, don’t comment).

19. Start building some contacts on Facebook. Organize your users into groups (one for your business and another for friends/family). This will come in handy later. Don’t spam people and ask them to visit your website. At this point, your website is still probably not worth visiting.

20. Grade your website on Website Grader. Fix the basic things. You should be able to get a 50+ just by doing the simple things it suggests. [Disclaimer: I wrote Website Grader].

21. Get Some Analytics: Install some web analytics software and start watching your traffic. Where is it coming from? How is it growing? What keywords are people using to find you? What content are they looking at? It's ok to get a bit maniacal and obssessed about it at first. Many of us do that (and some of us never get over it).

If you liked this article, you'll probably love the Inbound Marketing book that I co-authored. It includes similar practical advice for getting found in Google, social media and blogs.

If you’re interested in startups, you can follow me on twitter @dharmesh.

What have I missed? What ideas do you have on tactical things for startup marketing? What do you do?

Update: Oh, and by the way, if you liked this article, you will love my recently released book, Inbound Marketing: Getting Found Using Google, Social Media and Blogs. The book is a practical guide to marketing on the web and has been an Amazon Top 100 book since the day of it's release.

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

Startup Conversations With Myself: What Should I Work On?

Dharmesh Shah — Mon, 23 Mar 2009 10:40:00 GMT

Entrepreneurs (particularly bootstrapped ones) have a tough life. In the early days, things can get lonely. So many decisions, so many challenges, so much to do — and very little by way of clear answers.

This is a somewhat light-hearted episode in perhaps a series of articles that I’m calling “Conversations With Myself”. I’d like to think that I’m not alone in my strangeness in that I actually have these kinds of debates going on inside my head (often after 3:00 a.m.). My guess is that some of you have variations of these kinds of conversations yourself. If not, then I guess I’m just weird.

Conversations With Myself: What Should I Work On?

Me: Self, I’ve been thinking a bit about things.

My Self: Are you you sure you’re not just procrastinating? Don’t you have bugs to fix in the product or some other real work to do? Thinking is for smart people. Get back to work.

Me: That’s just it, there’s just way too much work, and the list of things to get done seems to get bigger every day — even though I’m staying up later and working harder.

My Self: So, what’s your point? It’s a startup, that’s the way it’s supposed to be. If you don’t have 10X as many ideas as you have time to do them, you don’t have enough ideas. Quit being a whiny-assed pansy. Nobody said it would be easy.

Me: Yes, yes, I get that. I know startups are hard with the 80–hour weeks and all that. What I’m saying is that there are several items in the backlog that must get done. And, as the product gets bigger and more users come on board, more and more time is taken up keeping the system running, responding to user issues and a bunch of other stuff. When will the new stuff ever get done?

My Self: Ok, so define “MUST get done”. What happens if you don’t do some of those things? The planet stops spinning? You lose some users? Your ego gets bruised? You watch one more episode of “The Office”?

Me: Ok, fair point. I guess not all of those things are technically “must-dos”.

My Self: Well, it actually goes beyond that. Not only are most of the things on your list not “must-dos”, a lot of them are probably “shouldn’t dos” .

Me: So, how do I go about figuring out what I should get done?

My Self: That’s a great question. Unfortunately, we share the same brain, so I don’t have a great answer. But, here are some things to consider.

Simple Tips For Deciding What To Work On

1. Are you tracking all of the bugs and enhancement ideas (however crazy) somewhere? If not, that’s step 1. You need a central list. Not this list and that list, but THE list The One True List.

2. Decide on a simple and semi-objective approach to classifying each item on the list. Scales of 1–10 work reasonably well. Some high level dimensions could be:

a) This will help make customers happy (0–10)

b) This will help me sell more customers (0–10)

c) This will reduce costs of keeping customers happy (0–10)

d) This will give me and my team joy and happiness (0–10)

e) How much effort will this take (0=Several lifetimes. 10=Hardly any work at all.)

Of course you don’t need to have those specific attributes, but you get the idea. Here’s why this is more useful than simply trying to assign a “priority” to an item. First off, many items in the backlog often have more or less the same priority. It’s hard to decide between them. Second, priorities change as things happen. You might wake up one month and need to focus as much as possible on getting new customers. Another month the priority might be to take your existing customers and make them happier (so they stay customers). By assigning the above attributes to each backlog item, you can “sub-sort”. The key is to remain flexible, while remaining mindful of the costs of task-switching when you change your mind. Maintain a steady velocity and keep cranking away at the items that are important.

Item (d) above is interesting. Why should you care whether a given task on the backlog will create internal joy and happiness. Shouldn’t we all be maniacally focused on customers and make money? Sure. But, startups are hard work and trying to continuously perfectly optimize is sub-optimal. Every now and then, you need to do some things that might not make sense, but might delight users or delight yourself or just plain allow you to sleep better at night. It’s worth the investment simply to keep spirits and energy up.

3. Try to build a rhythm for getting stuff done. It’s a great feeling when you can “feel” the forward progress (however small). If you get stuck on some project, put it aside and crank some of the other ones out. Don’t go too far down the rabbit hole for any particular project or task.

4. You should try to balance the kinds of tasks and projects that you select. Don’t work just on new features that will help sell the product. Or just work on things that make the UI/UX better. Or just work on system optimizations that make your costs lower. It’s important to pick a variety of tasks (with emphasis on whatever seems to be the bottleneck in the business right now).

So, what are your clever little tips and tricks to make sure you’re working on the right things? Do you struggle with trying to decide what to do?

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

Startup Lessons From The Underpants Gnomes: PROFIT!

Dharmesh Shah — Fri, 27 Feb 2009 12:22:00 GMT

Are you building a profitable business? I’m not asking whether or not your business is profitable now, but whether it will ever be profitable? More importantly, does future profitability enter into your current decision-making? If not, you’re doing your business and yourself a disservice.

Leave the “no profits” model to the not-for-profits — they’re much better at it.

For some reason, many startups treat profit as a 4 letter word. The common argument goes something like this: “We’re going to create something so fantastically wonderful that millions of people are going to flock to our site, and then we’re going to be fantastically successful. Just like YouTube. Or Facebook. Or Twitter”

This reminds me of one of my favorite Southpark episode about the Underpants Gnomes.

Watch this clip if you haven’t seen it yet (or haven’t seen it recently).

The business strategy for the Underpants Gnomes goes like this:

Phase 1: Collect underpants

Phase 2: ?

Phase 3: Profit

Many startups have a business model that’s even sillier than the Underpants Gnomes. Why? Because the Underpants Gnomes are at least thinking about profits!

So, why do startups ignore profitability so often? There are several reasons, some of them pretty good. The most compelling one goes like this:

“We’re designing for high growth. In the early days, we need to be focused completely on getting as wide an audience/reach/user-base as possible. If we think about revenues/profits too early, it will undermine that growth.”

This is a reasonable argument. There’s definitely a tradeoff that occurs between growth and profitability. But, it’s short-sighted. I don’t have an issue making strategic decisions that are solving for growth. That can be fine (based on market opportunity, availability of capital, etc.) but I don’t think it’s wise to ignore profitability.

I’d argue that there’s a big advantage to thinking about profitability from Day 1 of the business. You can still decide to do things that are solving for growth, but you should at least be mindful of profitability.

Here’s what I would do:

Step 1: When looking at ideas for a startup, make sure that you pick one that has a decent chance of being profitable some day. Just because you’re not solving for profitability in the early stages, is no excuse for ignoring the future profitability potential of an idea. It’s going to matter. Trust me.

Step 2: When creating a product, make sure that you design and develop something that has hopes of being profitable some day. This goes to functionality, pricing, positioning, etc. Sure, you might give the product away for free and have zero revenues (like twitter) to start. But, someday, you’re going to need to find a way to make money from the product.

Step 3: When building the business, try to lay the groundwork so that you have hopes of making the business profitable within your lifetime. This often involves getting better at tracking the costs of delivering your offering. Sure, in the early days, it’s common to lose money on each customer (and as the joke goes “we’ll make it up in volume!”). But, your chances of survival/success go up considerably if you can get a better understanding of the economics of the business and what it will take to actually get to a point where you’re making money.

Here’s how we like to think about it at HubSpot. As the business gets built, we keep a very watchful eye on the “time to profitability” number. (This number is based on our level of capitalization and other factors). Then, as we try to make decisions, like what features to add, how fast to hire, what new projects to pursue, etc. we see how that might impact our profitability timeline. Often, we make a conscious choice to work on things that will not improve our profitability timeline — but we do that very deliberately. We try not to take the Underpants Gnomes approach of “we’ll worry about that later”. We invest in growth (vs. profitability all the time). We also make wrong guesses as to what impact certain decisions are likely to have. But it’s been very helpful to have a working hypothesis that can be iterated on.

I’d argue that profitability is important for all startups, all the time (unless you’re a not-for-profit). You can choose to defer it, just don’t ignore it. Particularly in these though times, being mindful of profitability is a good thing.

So, go forth and shoot for the stars in terms of pushing for spectacular growth — just stay mindful that you’ll likely have to get to profitability some day. Not all of us can be a Facebook or a Twitter (and in fact, most of us won’t be). And, there’s nothing wrong with making money. We are, after all, building businesses, aren’t we? AREN’T we?

What’s your take? Do you think about profitability every day? Every month? Never?

Looking for other startup fanatics? Request access to the OnStartups LinkedIn Group. 100,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter here (that's @dharmesh).

Why Your Startup Shouldn't Copy 37signals or Fog Creek

Dharmesh Shah — Fri, 06 Feb 2009 09:29:00 GMT

The following is a guest article by Jason Cohen, founder of Smart Bear Software. He blogs about startups and marketing at http://blog.ASmartBear.com.

I don't know about you, but I'm tired of getting lectured about how my business should be more like Toyota, and like Zappos, how my blog should be more like Joel Spolsky and like Copyblogger, and how my software should be more like 37signals and like Apple.

OK, not "lectured." It's my own fault for reading too many blogs about how to run my company and how to blog and how to write software. But still!

Just because someone has success with a product or strategy doesn't mean you should copy it.

Will my blog be unsuccessful because I don't follow the Copyblogger rules that I should write like a third-grader with titles that look like they came from the cover of Cosmo?

I don't think so.

My discouragement begins with incompatible advice. For example, we're regaled with how Zappos uses Twitter as part of their phenomenal customer service which they cite as the reason for their success. Their embrace of Twitter is so complete, Zappos CEO Tony Hsieh even wrote his own Twitter beginner's tutorial.

All hail Twitter. But wait! Seth Godin, the 12th most popular blogger in the galaxy, says that social networking sites like Twitter are saturated with garbage to the point of uselessness. In fact, Seth doesn't use Twitter at all. Huh.

So which is it? Transformative or useless? Key business strategy or waste of time?

Same with blogging. The top 10 most popular blogs post more than once per day; some have used this as evidence that frequent posting is how to get popular. But when I look at my own list of favorite bloggers, most post once or twice a week at most, and some successful bloggers insist popularity increases when you post less often.

I've gone link-crazy here to illustrate a point -- that this isn't just a few people chatting about pros and cons, these are armies of bloggers, writers, and CEOs vehemently blasting away at each other. What's a little startup owner to do with all this? Who has the free time to study and research all this?

Surely the conclusion is that Twitter won't make or break your business and posting frequency won't make or break your blog.

The root problem is that the so-called "examples" we're supposed to learn from are outliers. An "outlier" is a data point well outside the normal range -- a statistical anomaly.

Malcolm Gladwell, winner of my award for Smartest Carrot-Top Lookalike, just wrote a book about outliers.

Like his other works, it's well-written, entertaining, and often incorrect.

Still, he presents evidence that at very high levels of achievement, no factor can be used to predict the success. For example, Nobel laureates are just as likely to come from unknown schools as from the Ivy Leagues.

I've noticed this in professional sports too. Kids learn the "right way" to throw a baseball, but watch major league pitchers and you'll notice they all do it differently. On a bicycle there's a correct seat height and top tube length to maximize power and prevent injury, but Jan Ulrich won the Tour de France with a short seat.

Because outliers are so far outside the norm, standard rules don't apply.

This "outlier principle" -- that extreme success is not due to simple, controllable factors -- explains the contradictions above. Zappos made over a billion dollars last year because of fantastic customer service while Amazon is the largest online retailer and doesn't even publish a phone number.

Both work because even something as fundamental as how you deal with customer service doesn't explain runaway success.

In fact, if I could pick something that all these companies have in common it's that they aren't afraid to buck conventional wisdom if they think it would be contradictory to their culture.

These companies have redefined "conventional wisdom." Is it your turn to buck the trend?

How much can we learn from outliers? Surely they have something to teach us, but when should we blaze our own trail? Leave a comment and join the conversation!

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Thoughts On The Economics Of Giving It Away

Dharmesh Shah — Sun, 01 Feb 2009 10:11:00 GMT

Chris Anderson has a new article in the WSJ titled “The Economics Of Giving It Away”.

This whole idea of free+premium (freemium) is one I’ve been fascinated by for a while. (See my article about the challenges of the freemium pricing model).

The article was good, but not a bit repetitive in places and didn’t quite have as much richness as other works from Chris. Having said that, there were so many sound bites and quotables that I couldn’t resist just grabbing a few and sharing them.

Here were my favorite bits:

1. “For the Google Generation, the Internet is the land of the free.”

Agreed that Google has trained us to expect things for free — but this makes it no less troubling. Google (at least until recently) had a relatively simple business model: Create the best search engine, make a ton of money on AdWords and do other fun stuff that helps one or the other (or just makes employees happy). They’re reducing some of the “it’s ok if it just makes employees happy” projects, but the core model hasn’t changed much. The troubling part is that you and I are not Google. Google has a reality distortion field that nobody else has. So, though it’s fine for them that they built a generation of people that expect a bunch for free, many of us have to actually figure out how to make money.

2. “The minority of customers who pay subsidize the majority who do not.”

Yep. Subsidize. That’s the right word. The trick is getting the ratio right. At some level, you need to charge a price to paying customers that matches the value being delivered (and is competitive) but that alsos makes sure that there’s enough money to pay for all those other users. Though costs for lots of things (hardware, software, tools) are falling steadily — they’re still not zero. This is one of the things I disagree with Chris on. Though he says the costs are “basically” zero, “basically zero” does not pay the bills. Often, the level of scale required to ensure that costs really are near-zero is high, and most startups will likely never get there.

3. “…when you have no money, $0.00 is a very good price.”

No argument here. In a down economy, people are even more price sensitive.

4. “The Web has become the biggest store in history and everything is 100% off.”

It’s an interesting sound bite, but not entirely accurate. We are sellers more than we are buyers. We’re selling our attention. Or perhaps even more accurately, we’re trading our attention for access to “free” stuff.

5. “The standard business model for Web companies that don't actually have a business model is advertising.”

It has taken a while for us to figure this out (again) but yes indeedy we’re back to a world where business models might actually be fashionable again. Who would’ve thunk it? You and me, that’s who. Let’s get to work.

6. “It's now time for entrepreneurs to innovate, not just with new products, but new business models.”

One of the areas that I was fascinated by, going through grad school, was how many of the tech successes of the past decade were as much about an innovative business model as they were about technology. We’re just starting to figure out how the internet can help us efficiently reach customers, build relationships and (gasp!) make money.

7. “Free is not enough. It also has to be matched with Paid.”

8. “Today's Web entrepreneurs have to not just invent products that people love, but also those that they will pay for.”

9. “Free may be the best price, but it can't be the only one.”

#7, #8, and #9 all say the same thingI could not agree more.

I’ll take this one step further. Just matching free with paid is not enough. You have to get the price that people pay “somewhat right”. The temptation for many is to make the price really low, and assume a certain (high) scale to overcome fixed costs. Don’t rationalize a really low price by assuming really high scale. To some degree, we have some anchoring (“hey, we’re giving a lot of this away for free, so people won’t pay much for the premium product”) — but that’s still no excuse.

Summary: The old strategy of simply getting a bunch of users and expecting that the details will somehow sort themselves out (like with an acquisition) just isn’t going to work right now. Probably not for a little while. Even the really successful folks like Facebook, digg and twitter haven’t figured it out yet. It’s a bit naive to think you’re not only going to get significant scale but that you’re also going to be able to monetize advertising even better. If I were you, I’d get practical and see if you can figure out a way to write software and charge for it. You know, like we used to do back in the good old days.

What do you think? Will many entrepreneurs start shifting back and tackling that highly unpleasant task of generating revenues? What are you going to do?

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